These synopses are intended only as aids to the reader in

HIGHLIGHTS

OF THIS ISSUE





Bulletin No. 2025–4

January 20, 2025

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

ADMINISTRATIVE

Notice 2025-3, page 488.

This notice provides transitional relief from backup withholding tax liability and associated penalties for any DeFi broker

that fails to withhold and pay the backup withholding tax:

(1) for any sale of a digital asset effected by a DeFi broker

during calendar year 2027; and (2) for any sale of a digital

asset effected by a DeFi broker during calendar year 2028

for a customer (payee), if the DeFi broker submits that payee’s name and tax identification number (TIN) combination

to the IRS’s TIN Matching Program and receives a response

that the name and TIN combination matches IRS records.

For sales effected before January 1, 2029, this notice also

provides that (1) a DeFi broker may treat a customer as an

exempt foreign person if the customer has not previously

been classified as a U.S. person by the DeFi broker, and

the information that the DeFi broker has for the customer

includes a residence address that is not a U.S. address

and (2) the IRS will not impose penalties with respect to any

decrease in the value of received digital assets between the

time of the transaction and the time the broker liquidates 24

percent of the received digital assets, provided the broker

immediately liquidates the digital assets.

Rev. Proc. 2025-12, page 512.

On December 30, 2024, Revenue Procedure 2025-1 was

published with an incorrect user fee for requests for tax

treaty limitation of benefits determinations. I.R.B. 2025-1.

This revenue procedure contains the correct user fee for

requests for tax treaty limitation of benefits determinations.

Rev. Proc. 2025-1 is modified.

ADMINISTRATIVE, INCOME TAX

T.D. 10019, page 482.

This document contains final regulations that amend

the definition of “coverage month” and amend certain

Finding Lists begin on page ii.

other rules in existing income tax regulations regarding

the computation of an individual taxpayer’s premium tax

credit. The coverage month amendment generally provides that, in computing a premium tax credit, a month

may be a coverage month for an individual if the amount

of the premium paid, including by advance payments of

the premium tax credit, for the month for the individual’s

coverage is sufficient to avoid termination of the individual’s coverage for that month. The final regulations also

amend the existing regulations relating to the amount of

enrollment premiums used in computing the taxpayer’s

monthly premium tax credit if a portion of the monthly

enrollment premium for a coverage month is unpaid.

Finally, the final regulations clarify when an individual is

considered to be not eligible for coverage under a State’s

Basic Health Program. The final regulations affect taxpayers who enroll themselves, or enroll a family member,

in individual health insurance coverage through a Health

Insurance Exchange and may be allowed a premium tax

credit for the coverage.

EMPLOYMENT TAX

Rev. Proc. 2025-10, page 492.

The Revenue Procedure provides updated guidance, modifying and superseding Rev. Proc. 85-18, to be consistent with

amendments made to section 530, as well as to clarify the

definition of “employee”, the timeliness requirement for filing

required returns, and the application of the reasonable basis

safe haven.

Rev. Rul. 2025-3, page 443.

This Revenue Ruling addresses the application of Section

530 of the Revenue Act of 1978 (section 530), section 3509

rates, and the requirements to issue a Notice of Employment

Tax Determination Under IRC § 7436 (§ 7436 Notice) in several distinct factual situations.

EXCISE TAX

Rev. Proc. 2025-9, page 491.

Section 5000D of the Internal Revenue Code imposes an

excise tax on applicable sales of designated drugs by manufacturers, producers, and importers during statutorily defined

periods. This revenue procedure provides a safe harbor and

safe harbor percentage that manufacturers, producers, and

importers may use to identify applicable sales of designated

drugs made during such periods.

INCOME TAX

REG-134420-10, page 513.

These proposed regulations would amend 26 CFR 1.150280(d) to clarify the non-applicability of section 357(c) to consolidated groups.

Rev. Proc. 2025-11, page 501.

This revenue procedure provides procedural and clarifying

guidance applicable to section 48E(h). This guidance is being

issued simultaneously with final regulations concerning the

technology neutral low-income communities bonus credit program (Program) established pursuant to the Inflation Reduction Act of 2022 as section 48E(h) of the Internal Revenue

Code. Applicants investing in certain clean electricity generation facilities may apply for an allocation of environmental

justice capacity limitation (Capacity Limitation) to increase

the amount of the clean electricity investment credit for the

taxable year in which the facility is placed in service. The

final regulations describe definitions and requirements that

are applicable for the Program. The final regulations affect

applicants seeking allocations of Capacity Limitation to claim

the increased clean electricity investment credit under section 48E for the taxable year in which the facility is placed in

service.

T.D. 10018, page 446.

These final regulations amend consolidated return regulations and controlled group of corporations regulations to

reflect statutory changes, modernize language, and enhance

clarity.

The IRS Mission

Provide America’s taxpayers top-quality service by helping

them understand and meet their tax responsibilities and

enforce the law with integrity and fairness to all.

Introduction

The Internal Revenue Bulletin is the authoritative instrument

of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service

and for publishing Treasury Decisions, Executive Orders, Tax

Conventions, legislation, court decisions, and other items of

general interest. It is published weekly.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application

of the tax laws, including all rulings that supersede, revoke,

modify, or amend any of those previously published in the

Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of

internal practices and procedures that affect the rights and

duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service

on the application of the law to the pivotal facts stated in

the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature are

deleted to prevent unwarranted invasions of privacy and to

comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not have the

force and effect of Treasury Department Regulations, but they

may be used as precedents. Unpublished rulings will not be

relied on, used, or cited as precedents by Service personnel in

the disposition of other cases. In applying published rulings and

procedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,

and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless

the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions and Other Related Items, and Subpart B,

Legislation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to these

subjects are contained in the other Parts and Subparts. Also

included in this part are Bank Secrecy Act Administrative

Rulings. Bank Secrecy Act Administrative Rulings are issued

by the Department of the Treasury’s Office of the Assistant

Secretary (Enforcement).

Part IV.—Items of General Interest.

This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index

for the matters published during the preceding months. These

monthly indexes are cumulated on a semiannual basis, and are

published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

January 20, 2025 

Bulletin No. 2025–4

Part I

I.R.C. Section 3509—Determination of Employer’s Liability for Certain Employment Taxes (Also:

I.R.C. Section 7436 and Section 530 of the Revenue

Act of 1978)

Rev. Rul. 2025-3

ISSUES

1. Whether section 530 of the Revenue Act of 1978, Pub. L. No. 95-600, as

amended (section 530), or the reduced

rates of § 3509 of the Internal Revenue

Code (the Code) apply in the five situations set out below.

2. Whether the Internal Revenue Service (IRS) will issue a Notice of Employment Tax Determination Under IRC

§ 7436 (§ 7436 Notice) in the five situations, set out below.

FACT SITUATIONS

Situation 1. Taxpayer (TP) hires individuals who provide services to TP during

the year. For those services, TP pays

each individual a weekly fixed amount

and a weekly bonus amount. TP does

not withhold or pay federal employment

taxes with regard to any of the payments

and reports the total amount of the fixed

weekly amounts and the weekly bonus

amounts on Form 1099-NEC “Nonemployee Compensation.” During an audit of

TP by the IRS for the year, the IRS determines (1) that TP does not meet the statutory requirements for section 530 relief,

and (2) that the individuals are employees

of TP. The IRS proposes to assess federal

employment taxes on the weekly fixed

amounts and the weekly bonus amounts,

which should have been reported as wages

on Form 941 “Employer’s QUARTERLY

Federal Tax Return,” and Forms W-2

“Wage and Tax Statement.” TP claims

it satisfies the statutory requirements for

section 530 relief and does not agree that

the individuals are its employees.

Situation 2. TP employs individuals

who perform services during the year. TP

treats the individuals as employees for the

services that they perform. For those services, TP pays each individual a weekly

salary and a weekly bonus amount. TP

treats the weekly salary as wages for federal employment tax purposes. TP withholds and pays federal employment taxes

with respect to the weekly salary and

reports the salary and federal employment

taxes on Form 941 and Forms W-2. TP

does not treat the weekly bonus amounts

as wages for federal employment tax purposes. It does not withhold or pay any

federal employment taxes with regard to

the bonus amounts and reports the bonus

amounts on Forms 1099-NEC. During an

audit of TP by the IRS for the year, the

IRS concludes that the bonus amounts are

wages. The IRS proposes to assess federal

employment taxes on the bonus amounts,

which should have been reported as wages

on Form 941 and Forms W-2. TP claims

it satisfies the statutory requirements

for section 530 relief with respect to the

bonus amounts and does not agree that the

bonus amounts are wages.

Situation 3. Same facts as situation

2 except TP does not report the weekly

bonus amounts on Forms 1099-NEC or

any other information return.

Situation 4. Same facts as situation

2 except TP does not report the weekly

bonus amounts on Forms 1099-NEC or

any other information return and does

not claim it satisfies the statutory requirements for section 530 relief with respect to

the bonus amounts.

Situation 5. TP employs individuals

who perform services during the year. TP

enters into a contract with a third party

(3P) to pay each individual a weekly salary, withhold and pay federal employment

taxes, and file federal employment tax

returns.1 3P pays the weekly salaries, withholds, pays federal employment taxes, and

reports the weekly salaries and taxes on

Form 941 and Forms W-2 using its own

employer identification number (EIN).

In December of that same year, TP pays

a year-end bonus amount directly to each

individual for the individual’s services

during the year but does not treat the yearend bonus amounts as wages. TP does not

withhold or pay any federal employment

taxes or report the bonus amounts on any

information return. During an audit of TP

by the IRS for the year, the IRS concludes

that the bonus amounts are wages. The IRS

proposes to assess federal employment

taxes on the bonus amounts, which should

have been reported as wages on Form 941

and Forms W-2. TP claims it satisfies the

statutory requirements for section 530

relief with respect to the bonus amounts

and does not agree the bonus amounts are

wages.

LAW AND ANALYSIS

An employer is liable for federal

employment taxes on wages paid to

employees. Federal employment taxes

include Federal Insurance Contributions

Act (FICA) taxes, Railroad Retirement

Tax Act (RRTA) taxes,2 Federal Unemployment Tax Act (FUTA) taxes, and

the collection of income tax at source on

wages (income tax withholding).

In general, § 3102 of the Code requires

an employer to withhold and pay to the

IRS the employee share of FICA taxes

from wages when paid to the employee.

Furthermore, § 3111 generally also

requires the employer to pay to the IRS the

employer share of FICA taxes at the same

time. Section 3121(a) defines “wages” for

FICA tax purposes as all remuneration for

employment, including the cash value of

1

A taxpayer may choose to enter into an agreement with a third party in which the third party agrees to perform some or all of the employer’s federal employment payment, withholding, and

reporting responsibilities. For purposes of simplicity, this revenue ruling does not address the different variations of third-party payor arrangements, and assumes 3P correctly used its own

EIN. However, depending on the facts and circumstances and the type of arrangement, an employer who uses a third party to perform federal employment tax functions on its behalf may

remain solely liable for federal employment taxes, may become jointly and severally liable for such taxes, or may be relieved of liability for such taxes. This revenue ruling does not address

which party will be ultimately liable for any unpaid employment taxes, as these discussions are beyond the scope of this revenue ruling.

2

For purposes of simplicity, this revenue procedure does not discuss the application of these rules to RRTA. However, rules similar to those discussed with respect to Section 530 apply for

purposes of determining whether a taxpayer will not be liable for RRTA taxes, with respect to an individual or class of workers (though the reduced rates of § 3509 discussed in this revenue

procedure do not apply for purposes of RRTA).

Bulletin No. 2025–4

443

January 20, 2025

all remuneration (including benefits) paid

in any medium other than cash, unless

specifically excepted. Section 3121(b)

generally defines “employment” as any

service, of whatever nature, performed

by an employee for the person employing

him unless a specific exception applies.

Similarly, § 3301 imposes on every

employer an obligation to pay FUTA taxes

on wages as defined in § 3306(b). Section

3306(b) and (c) contain similar definitions

to FICA for “wages” and “employment,”

respectively, for FUTA tax purposes. Section 3402(a) imposes the obligation on an

employer to withhold income taxes from

wages as defined in § 3401(a). Section

3401(a) provides that the term “wages”

means all remuneration for services performed by an employee for his employer

including the cash value of all remuneration (including benefits) paid in any

medium other than cash, unless a specific

exception applies.

The definitions of “wages” and

“employment” for FICA, FUTA, and

income tax withholding purposes are premised on an individual being an employee

and are not applied when an individual

is properly classified as an independent

contractor or has some other non-employee status. If an individual is properly

classified as an independent contractor,

the individual’s earnings are subject to

self-employment tax, which consists of

social security and Medicare taxes, if the

other requirements for reporting self-employment taxes are met. There is no FUTA

tax for self-employed individuals.

For employment tax purposes, an

employee generally is any individual

who, under the usual common law rules

applicable in determining the employer-employee relationship, has the status

of an employee. See §§ 31.3121(d)-1(c),

31.3306(i)-1, and 31.3401(c)-1 of the

Employment Tax Regulations. Generally, an employer-employee relationship

exists when the person for whom services

are performed has the right to direct and

control the individual who performs the

services, not only as to the result to be

accomplished by the work but also as to

the details and means by which that result

is accomplished. That is, an employee is

subject to the direction and control of the

employer not only as to what shall be done

but how it shall be done. Individuals who

are not employees under the common law

rules may still be employees by statute

under certain FICA, FUTA, and income

tax withholding provisions. See, e.g., §

3121(d) and the accompanying regulations.

Section 530 provides that a taxpayer

will not be liable for federal employment taxes, with respect to an individual

or class of workers, if certain statutory

requirements are met.3 Under section 530,

the taxpayer, not the individual worker4,

is entitled to relief from the employment

tax liability that would otherwise apply

under subtitle C of the Code, and any

related interest or penalties attributable to

that employment tax liability. The taxes

imposed by subtitle C include FICA taxes,

RRTA taxes, FUTA taxes, and income tax

withholding.

Section 530 relief applies only if the

taxpayer did not treat the individual as

an employee for federal employment tax

purposes for the period at issue and meets

each of the following requirements for

such period: (1) the taxpayer filed5 all

required federal tax returns, including

information returns, consistent with the

taxpayer’s treatment of the individual as

not being an employee (reporting consistency requirement); (2) the taxpayer did

not treat the individual or any individual

holding a substantially similar position

as an employee (substantive consistency

requirement); and (3) the taxpayer had a

reasonable basis for not treating the individual as an employee (reasonable basis

requirement). A taxpayer will be treated

as having a reasonable basis if the taxpayer’s treatment was in reasonable reliance

on any of the following:

(a) judicial precedent, published rulings, technical advice with respect to the

taxpayer, or a letter ruling to the taxpayer

(judicial precedent);

(b) a past IRS audit of the taxpayer in

which there was no assessment attributable to the treatment (for employment tax

purposes) of the individuals holding substantially similar positions (prior audit);

(c) long-standing recognized practice

of a significant segment of the industry in

which that individual was engaged (industry practice); or

(d) some other reasonable basis for not

treating the individual as an employee.

Section 530 relief applies only to

controversies involving the proper classification of individuals as employees or

non-employees. Section 530 is not applicable when a taxpayer treated an individual as an employee and then paid additional compensation to the employee for

the same services but failed to characterize the payment as wages. This includes

situations where the taxpayer contends

that the payment does not meet the definition of wages because the payment is

a lease payment, bonus, reimbursement,

severance payment, dividend, or other

comparable characterization, but the payment is, in fact, paid solely for the individual’s service as an employee.

Section 530(a)(1)(A) provides that a

taxpayer is entitled to relief if the taxpayer

“did not treat an individual as an employee

for any period” for purposes of employment taxes (emphasis added). Legislative

history demonstrates that section 530

applies exclusively to taxpayers involved

in employment status controversies with

the IRS. The legislative history explains

that the relief measure was for taxpayers

that were “involved in employment tax

status controversies with the [IRS], and

who potentially face large assessments, as

a result of the [IRS’s] proposed reclassifications of workers” and explains that the

bill prevents the IRS from reclassifying as

employees certain individuals whom the

Section 530 (entitled “Controversies Involving Whether Individuals are Employees for Purposes of Employment Taxes”) was originally enacted as a temporary measure to provide relief

for taxpayers who were involved in employment status (worker classification) disputes with the IRS, and who faced large employment tax assessments as a result of the IRS’s proposed

reclassifications of workers. Section 530 was extended indefinitely by the Tax Equity and Fiscal Responsibility Act of 1982. Section 530 is not part of the Internal Revenue Code (Code).

4

Section 530 relief does not extend to individual workers, who remain liable for their personal income taxes and the employee share of FICA taxes.

5

In no event will a return filed after the date on which the IRS first contacts the taxpayer concerning an examination of the period to which the return relates be considered as filed on a basis

consistent with good faith treatment by the taxpayer of an individual as a non-employee. Additionally, section 530 relief is not available for any year and for any worker for whom the taxpayer

did not file the required returns.

3

January 20, 2025

444

Bulletin No. 2025–4

taxpayer has previously treated as independent contractors. S. Rep. No. 95-1263,

at 210 (1978).

In determining whether a taxpayer did

not “treat” an individual as an employee

within the meaning of section 530, Rev.

Proc. 2025-10, 2025-4 IRB 492, modifying and superseding Rev. Proc. 85-18,

1985-1 CB 518, provides a list of guidelines used to determine whether there

was “treatment” of an individual as an

employee for a period within the meaning of section 530(a)(1). Among other

actions, with respect to any individual,

the following indicate “treatment” of the

individual as an employee: the withholding of income tax or FICA taxes from any

payments made; the filing of an original

or amended employment tax return; the

filing or issuance of a Form W-2; and the

contracting with a third party to perform

acts required of employers.

In enacting section 530, Congress

looked to the taxpayer’s treatment of the

individual, not to the characterization of

particular payments made to the individual. If an employer treated the individual

as an employee, section 530 relief is not

applicable to a dispute involving characterization of particular payments because

the worker is not being reclassified from

non-employee to employee status.6 Thus,

section 530 does not apply to controversies concerning whether a particular

type of payment made to an employee

constitutes “wages” as defined under the

FICA, FUTA, or income tax withholding provisions, or whether particular services performed by an employee constitute “employment,” as defined under the

FICA, FUTA, or income tax withholding

provisions.

If an employer failed to properly treat

an individual as an employee, and the

employer does not meet the statutory

requirements for section 530 relief, the

employer may be eligible for relief under

§ 3509 of the Code. Section 3509(a)

allows an employer to remit unpaid

taxes at reduced rates if an employer

fails to deduct and withhold income tax

or the employee share of FICA tax with

respect to any of its employees because

the employer treated that employee as a

non-employee. Pursuant to § 3509(c), the

reduced rates do not apply to the determination of the employer’s liability for

income tax withholding or the employee

portion of FICA tax if such liability is due

to the employer’s intentional disregard of

the requirement to deduct and withhold

such taxes.

The concept of “treatment” of an individual as not being an employee in §

3509 is similar to “treatment” in section

530. The legislative history indicates that

§ 3509 of the Code was intended to provide relief for employers in cases in which

a worker treated as a non-employee by

the employer is reclassified by the IRS

as an employee, and to deter employers

from misclassifying employees to avoid

employment taxes.7

Similar to section 530, if an employer

treated an individual as an employee,

§ 3509 of the Code will not apply since

the worker is not being reclassified from

non-employee to employee.8 Thus, §

3509 is not applicable when determining

whether particular payments made to an

employee are “wages” or whether particular services performed by an employee are

“employment” as defined under the FICA,

FUTA, or income tax withholding provisions.

Section 7436 of the Code provides that

the Tax Court may review two types of

employment tax determinations made by

the IRS and the proper amount of employment tax, penalties, and additions to tax

resulting from the determinations.

In order to obtain Tax Court review, the

following elements must be present:

(1) an examination in connection with

the audit of any person;

(2) a determination that –

(a) one or more individuals performing

services for such person are employees of

such person for purposes of subtitle C, or

(b) such person is not entitled to relief

under section 530(a) with respect to such

an individual;

(3) an “actual controversy” involving

the determination as part of an examination; and

(4) the filing of an appropriate pleading

in the Tax Court.

See American Airlines Inc. v. Commissioner, 144 T.C. 24, at 32 (2015). When

the first three elements are met, the IRS

will issue a § 7436 Notice. A taxpayer

will satisfy the fourth element by filing a

timely petition for review of the § 7436

Notice with the Tax Court. Revenue Procedure 2022-13, 2022-6 IRB 477, superseding Notice 2002-5, 2002-1 CB 320,

provides guidance concerning when and

how the IRS will issue a § 7436 Notice

that will document the determination necessary to give the taxpayers the option to

petition for Tax Court review. The IRS

will not issue a § 7436 Notice if the taxpayer has agreed to the employment tax

liabilities. Agreement is generally accomplished using Form 2504-T “Agreement

to Assessment and Collection of Additional Employment Tax and Acceptance

of Overassessment (Employment Tax

Adjustments Subject to IRC 7436).”

HOLDINGS

Holding 1. Section 530 is applicable

to this situation because the TP did not

treat the individuals as employees, and

the IRS is reclassifying the individuals

as employees. Whether TP is entitled to

section 530 relief depends on whether

the TP satisfies the substantive consistency, reporting consistency, and reasonable basis requirements. If section 530

does not apply, § 3509 of the Code may

be applicable because the TP treated the

individuals as non-employees and did not

In unusual cases, an individual may perform services for a taxpayer that are completely separate and distinct from the services giving rise to the employment relationship, and is separately

compensated for those services. To be completely separate and distinct, there must be no interrelation either as to duties or remuneration in the two capacities. Compare Rev. Rul. 58-505,

1958-2 CB 728, with Rev. Rul. 2004-109, 2004-2 CB 958, and Rev. Rul. 2004-110, 2004-2 CB 960. In these circumstances, the status of the individual as an employee or non-employee, and

the application of section 530, will be considered separately with respect to the distinct relationships under which the separate services are provided.

7

See Staff of Joint Committee on Taxation, 97th Cong., General Explanation of the Revenue Provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (JCS-38-82), at 384-86

(Comm. Print 1982); H.R. Rep. No. 97-760, at 650-52 (1982) (Conf. Rep.); S. Rep. No. 97-494, Vol. 1, at 370-72 (1982).

8

As stated in footnote 5, an individual may perform services for a taxpayer that are completely separate and distinct from the services giving rise to the employment relationship, and is

separately compensated for those services. In these circumstances, the status of the individual as an employee or non-employee, and the application of § 3509, will be considered separately

with respect to each of the distinct relationships under which the separate services are provided.

6

Bulletin No. 2025–4

445

January 20, 2025

deduct and withhold federal employment

taxes from the weekly fixed amounts and

bonus amounts that it paid to the individuals, and the IRS is reclassifying the

individuals as employees. Whether TP is

entitled to § 3509 reduced rates depends

on whether it meets the statutory requirements in § 3509. The IRS will issue TP

a § 7436 Notice at the conclusion of the

audit or after Appeals consideration if no

agreement is reached. A § 7436 Notice

will be issued because (1) there was an

examination in connection with an audit,

(2) there were determinations that (a) the

individuals were employees of TP, and (b)

TP was not entitled to relief under section 530 with respect to these individuals9, and (3) the IRS and TP disagree on

the employment status of the workers and

whether the statutory requirements for

section 530 relief have been met (there is

an actual controversy involving the determination as part of the audit).

Holding 2. Section 530 is not applicable to this situation because the IRS

is not reclassifying the individuals as

employees. TP treated the individuals as

employees for the services they performed

and paid additional wages in the form of

bonuses for the same services; there is no

controversy over whether the individuals

are employees or independent contractors with respect to their services.10 The

reduced rates under § 3509 of the Code

are not applicable for the same reason.

The IRS will issue TP a § 7436 Notice

at the conclusion of the audit or after

Appeals consideration if no agreement is

reached. A § 7436 Notice will be issued

because (1) there was an examination in

connection with an audit, (2) a determination was made that TP was not entitled

to relief under section 530 with respect to

the bonuses paid to the individuals, and

(3) the IRS and TP disagree on whether

the statutory requirements for section 530

relief have been met (there is an actual

controversy involving the determination

as part of the audit).

Holding 3. Section 530 and § 3509 of

the Code are not applicable to this situation for the same reasons stated in Holding

2. The IRS will issue TP a § 7436 Notice

at the conclusion of the audit or after

9

Appeals consideration if no agreement is

reached. A § 7436 Notice will be issued

because (1) there was an examination in

connection with an audit, (2) a determination was made that TP was not entitled

to relief under section 530 with respect to

the bonuses paid to the individuals, and

(3) the IRS and TP disagree on whether

the statutory requirements for section 530

relief have been met (there is an actual

controversy involving the determination

as part of the audit).

Holding 4. Section 530 and § 3509 of

the Code are not applicable to this situation for the same reasons stated in Holding 2. The IRS will not issue TP a § 7436

Notice at the conclusion of the audit or

after Appeals consideration if no agreement is reached because TP did not claim

that TP was entitled to relief under section

530 concerning the bonuses paid to the

individuals, and there is no controversy

over whether the individuals are employees or independent contractors.

Holding 5. Section 530 is not applicable to this situation because the IRS

is not reclassifying the individuals as

employees. The year-end bonus amounts

are additional wages for the same services performed by the individuals who

were treated as employees by TP. The

reduced rates under § 3509 of the Code

are not applicable for the same reason.

The IRS will issue TP a § 7436 Notice

at the conclusion of the audit or after

Appeals consideration if no agreement is

reached. A § 7436 Notice will be issued

because (1) there was an examination in

connection with an audit, (2) a determination was made that TP was not entitled to

relief under section 530 with respect to the

year-end bonus amounts paid to the individuals, and (3) the IRS and TP disagree

on whether the statutory requirements for

section 530 relief have been met (there is

an actual controversy involving the determination as part of the audit).

DRAFTING INFORMATION

The principal author of this revenue

ruling is Kelli Cacciotti of the Office of

Associate Chief Counsel (Employee Benefits, Exempt Organizations and Employ-

ment Taxes). For further information

regarding this revenue ruling, contact Ms.

Cacciotti at (202) 317-6798 (not a tollfree number).

T.D. 10018

DEPARTMENT OF THE

TREASURY

Internal Revenue Service

26 CFR Parts 1, 5, 301,

and 602

Revising Consolidated

Return Regulations and

Controlled Group of

Corporations Regulations

to Reflect Statutory

Changes, Modernize

Language, and Enhance

Clarity

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: 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.

DATES: Effective date: These final regulations are effective on December 30,

2024.

Applicability date: For dates of applicability, see §§1.52-1(i), 1.414(c)-6(g),

1.1502-0, 1.1502-5(e), 1.1502-45(f),

1.1552-1(g), 1.1562-1(e), 1.1563-2(d),

and 1.1563-3(e).

If the IRS were to make only one of these determinations, a § 7436 Notice would still be issued.

Compare SECC Corp. v. Commissioner, 142 T.C. 225, 235 (2014) (dispute over “whether petitioner’s workers can serve in a dual capacity”).

10

January 20, 2025

446

Bulletin No. 2025–4

FOR FURTHER INFORMATION

CONTACT: Concerning the regulations

under section 52, Christopher Dellana

of the Office of Associate Chief Counsel

(Employee Benefits, Exempt Organizations, and Employment Taxes) at (202)

317-5500; concerning the regulations

under section 414, Jessica Weinberger

of the Office of Associate Chief Counsel

(Employee Benefits, Exempt Organizations, and Employment Taxes) at (202)

317-4148; concerning the regulations

under all other sections, William W.

Burhop or Kelton P. Frye of the Office

of Associate Chief Counsel (Corporate)

at (202) 317-5363 or (202) 317-6975,

respectively (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Authority

Section 1502 of the Internal Revenue

Code (Code) authorizes the Secretary of

the Treasury or her delegate (Secretary) to

prescribe consolidated return regulations

for an affiliated group of corporations that

join in filing (or that are required to join in

filing) a consolidated return (consolidated

group) to clearly reflect the Federal income

tax liability of the consolidated group and

to prevent avoidance of such tax liability.

See §1.1502-1(h) (defining the term “consolidated group”). For purposes of carrying out those objectives, section 1502 also

permits the Secretary to prescribe rules

that may be different from the provisions

of chapter 1 of the Code (chapter 1) that

would apply if the corporations composing the consolidated group filed separate

returns. Additionally, section 7805(a) of

the Code authorizes the Secretary to “prescribe all needful rules and regulations for

the enforcement of [the Code], including

all rules and regulations as may be necessary by reason of any alteration of law in

relation to internal revenue.”

Background

I. Overview

This Treasury decision contains final

regulations under sections 52, 414, 1502,

1503, 1552, and 1563 of Code. These regulations primarily revise the Income Tax

Regulations (26 CFR part 1) issued under

Bulletin No. 2025–4

section 1502 (consolidated return regulations). Terms used in the consolidated

return regulations generally are defined in

§1.1502-1.

II. 2023 Proposed Regulations

On August 7, 2023, the Department of

the Treasury (Treasury Department) and

the IRS published a notice of proposed

rulemaking (REG-134420-10) in the Federal Register (88 FR 52057) under sections 1502, 1503, 1552, and 1563 (2023

proposed regulations). The 2023 proposed

regulations would revise the consolidated

return regulations (i) to eliminate obsolete

or otherwise outdated provisions, (ii) to

modernize the language and improve the

clarity of the regulations, and (iii) to facilitate taxpayer compliance.

The 2023 proposed regulations also

would revise the consolidated return regulations and the regulations under section

1563 to eliminate antiquated or regressive terminology. For example, the 2023

proposed regulations (i) would replace

gender-specific pronouns and other identifiers with gender-neutral pronouns and

identifiers, and (ii) would identify (A)

American Samoa, (B) the Commonwealth

of the Northern Mariana Islands, (C)

the Commonwealth of Puerto Rico, (D)

Guam, and (E) the U.S. Virgin Islands as

“territories” of the United States rather

than “possessions” in §§1.1502-4(d)(1)

and 1.1503(d)-1(b)(7). These revisions

are consistent with, and in furtherance of,

the Treasury Department’s Equity Action

Plan, as well as Executive Order 13985

of January 20, 2021, Advancing Racial

Equity and Support for Underserved

Communities Through the Federal Government, 86 FR 7009 (January 25, 2021).

The 2023 proposed regulations also

would revise or remove other regulations

under the Code. These regulations are set

forth in (i) the Income Tax Regulations (26

CFR part 1), (ii) the Temporary Income

Tax Regulations under the Revenue Act

of 1978 (26 CFR part 5), (iii) the Regulations on Procedure and Administration (26

CFR part 301), and (iv) the OMB Control

Numbers under the Paperwork Reduction

Act Regulations (26 CFR part 602).

The notice of proposed rulemaking

(NPRM) containing the 2023 proposed

regulations also withdrew or partially

447

withdrew numerous earlier NPRMs,

including: (i) NPRMs that previously had

been incorporated into final regulations in

revised form or that were incorporated into

the 2023 proposed regulations in revised

form; (ii) an NPRM that became obsolete

when proposed regulations provided in a

subsequent, discrete NPRM were adopted

as final regulations; and (iii) NPRMs that

cross-referenced temporary regulations

(the text of which served as the text for

those proposals) that were removed, have

expired, or otherwise have become obsolete. Additionally, the 2023 proposed regulations proposed to withdraw temporary

regulations that (i) no longer have practical applicability to taxpayers, or (ii) would

be replaced by final regulations provided

by this Treasury decision.

Finally, the 2023 proposed regulations

would remove numerous provisions that

cross-reference prior-law editions of the

Code of Federal Regulations (CFR).

III. Correction to 2023 Proposed

Regulations

The 2023 proposed regulations contained amendments to the regulations

under section 1563. A correction to the

2023 proposed regulations was published

in the Federal Register (88 FR 8477002) on December 6, 2023, and provided

an additional opportunity for public comment (2023 correction), to make parallel

amendments to similar regulations under

sections 52 and 414 to avoid creating

inconsistencies.

IV. Comments Received

The Treasury Department and the IRS

requested comments on the 2023 proposed

regulations. The comments received are

described in further detail in the Summary

of Comments and Explanation of Revisions. No public hearing was requested or

held.

Summary of Comments and

Explanation of Revisions

I. Withdrawal of Proposed or Temporary

Regulations

A commenter expressed concern that

the withdrawal or partial withdrawal of

January 20, 2025

old proposed or temporary regulations

in the 2023 proposed regulations could

lead to confusion or uncertainty for consolidated groups if the withdrawn regulations contain substantive provisions

on which consolidated groups continue

to rely. The commenter recommended

either retaining or revising the withdrawn

proposed or temporary regulations or

providing guidance on how to apply the

existing final regulations in light of the

withdrawals.

The Treasury Department and the IRS

are of the view that, with the exception

of the proposed consolidated return regulations under §1.1502-80(d) relating to

the non-applicability of section 357(c)

discussed in part VII of this Summary of

Comments and Explanation of Revisions,

the withdrawn or partially withdrawn

regulations do not contain substantive

provisions on which taxpayers continue

to rely. Accordingly, these final regulations do not adopt the commenter’s recommendation.

II. Section 1.1502-5 (Consolidated

Estimated Tax)

Section 10101 of Public Law 117-169,

136 Stat. 1818 (August 16, 2022), commonly referred to as the Inflation Reduction Act of 2022, amended section 55 of

the Code to impose a new corporate alternative minimum tax (commonly referred

to as the corporate alternative minimum

tax, or CAMT) based on adjusted financial

statement income. To reflect this change,

the 2023 proposed regulations would

modify the definition of the term “tax” in

§1.1502-5(b)(5) by adding a reference to

section 55(a). Because the amount of tax

imposed under section 55 is determined

in part by reference to the amount of tax

imposed under section 59A of the Code

(that is, the base erosion anti-abuse tax,

or BEAT), the 2023 proposed regulations

also would modify the definition of the

term “tax” in §1.1502-5(b)(5) by adding a

reference to section 59A.

A commenter recommended adding the

foregoing references not only in §1.15025(b)(5), but also in other sections of the

consolidated return regulations that use

the word “tax”. However, these changes in

the 2023 proposed regulations were necessary to implement the recently enacted

January 20, 2025

CAMT. The Treasury Department and the

IRS have determined that similar changes

to other provisions in the consolidated

return regulations are beyond the scope

of this guidance. Accordingly, these final

regulations do not adopt the commenter’s

recommendation.

III. Revisions to Remove Obsolete or

Outdated References or Terms

As noted in part II of the Background, the 2023 proposed regulations

would make nonsubstantive changes to

the consolidated return regulations and

the regulations under section 1563 to

replace gender-specific pronouns and

other identifiers with gender-neutral

pronouns and identifiers, and to replace

the term “possession” with the defined

term “U.S. territory” in §§1.1502-4(d)

(1) and 1.1503(d)-1(b)(7). A commenter

welcomed the removal of gender-specific pronouns and identifiers but suggested that the gender-neutral pronouns

and identifiers are not entirely clear or

consistent throughout the consolidated

return regulations (for example, some

provisions use “its” as a singular possessive pronoun, whereas others use “their”

as a singular possessive pronoun). The

commenter recommending either using a

consistent set of gender-neutral pronouns

and identifiers throughout the regulations

or providing a glossary or explanation of

these pronouns and identifiers.

The Treasury Department and the IRS

have determined that revising all gender-neutral pronouns throughout the consolidated return regulations and the section 1563 regulations is beyond the scope

of this guidance. However, the Treasury

Department and the IRS will continue to

consider the revision of particular pronouns when modifying the consolidated

return regulations in future guidance.

The commenter also requested clarification that the replacement of the term

“possessions” with the term “territories” is

purely terminological and is not intended

to affect the tax treatment of these jurisdictions under the consolidated return

regulations. The Treasury Department and

the IRS agree with the commenter that this

change was intended to be purely terminological. See https://www.doi.gov/oia/

islands/politicatypes.

448

IV. Revisions to §§1.1502-13, 1.1502-32,

and 1.1502-36

A commenter raised questions about

amendments to §§1.1502-13(c)(2)(ii) and

(c)(6)(ii)(A), 1.1502-32(b)(2)(iv) and (b)

(4)(i), and 1.1502-36(d)(3)(ii)(B) and (d)

(6)(ii)(B) in the 2023 proposed regulations. However, neither the 2023 proposed

regulations nor these final regulations

would amend these provisions. Accordingly, no revisions have been made in

response to this comment.

V. Definition of “Consolidated Return

Regulations”

The 2023 proposed regulations would

add “consolidated return regulations” as a

new defined term in §1.1502-1. As defined

in proposed §1.1502-1(g), this term would

mean the regulations issued under section

1502. A commenter noted that certain consolidated return regulations issued under

the authority of section 1502 were not

actually placed under section 1502 (for

example, see §1.163(j)-4 and §1.385-4).

Accordingly, these final regulations revise

the term “consolidated return regulations”

to mean the regulations issued under the

authority of section 1502. These final

regulations also amend §§1.1502-47(a)

(3), (k), and (l) and 1.1504-3(d)(1)(ii) to

replace the cited range of sections with the

defined term “consolidated return regulations.”

VI. Sections 52 and 414

Sections 52(a) and 414(b) provide

rules for controlled groups of corporations

that incorporate the definitions and rules

in section 1563(a), with modifications.

Sections 52(b) and 414(c)(1) authorize

regulations applying principles similar

to the principles that apply in the case of

sections 52(a) and 414(b), respectively, to

trades or businesses under common control.

A controlled group of corporations

under section 52(a) or section 414(b),

which cross-reference section 1563(a), is

determined based on the constructive ownership rules of section 1563(e), including

section 1563(e)(2) and (3) (but not section

1563(e)(3)(C)). A group of trades or businesses under common control under sec-

Bulletin No. 2025–4

tions 52(b) and 414(c) is determined by

taking into account the constructive ownership rules in §§1.52-1(b) and (c) and

1.414(c)-2(b)(1), respectively, that mirror

the rules under section 1563.

As discussed in the preamble to the

2023 proposed regulations, the 2023 proposed regulations would revise §1.15631(a)(2)(i)(A) and (B) to reflect an amendment to section 1563(d)(1)(B) by the

Technical and Miscellaneous Revenue Act

of 1988, Public Law 100-647, 102 Stat.

3342 (November 10, 1988). That amendment expanded the constructive ownership rules of section 1563(e) that apply for

purposes of section 1563(d)(1) to include

section 1563(e)(2) (relating to attribution

from partnerships) and section 1563(e)

(3) (relating to attribution from estates

or trusts). The 2023 proposed regulations

generally would apply to consolidated

return years for which the due date of the

return (without regard to extensions) is

after the date of publication of the Treasury Decision adopting the regulations as

final regulations in the Federal Register.

The 2023 correction does not specify

an applicability date for the proposed revisions to §§1.52-1(c)(1) and 1.414(c)-2(b)

(1). In addition, the Treasury Department

and the IRS are of the view that applying

the general applicability date in the 2023

proposed regulations to the proposed revisions to §§1.52-1(c)(1) and 1.414(c)-2(b)

(1) may cause confusion, because the

rules in §§1.52-1(c)(1) and 1.414(c)-2(b)

(1) apply to taxpayers who may not file

consolidated returns.

Accordingly, these final regulations

clarify that the amendment to §1.52-1(c)

(1) applies to taxable years beginning

on or after January 1, 2025, and that the

amendment to §1.414(c)-2(b)(1) applies

to plan years beginning on or after January 1, 2025. The final regulations add

new paragraph (i) to §52-1 to provide

that §52-1, as amended by this Treasury

decision, applies to taxable years beginning on or after January 1, 2025. Section

1.414(c)-6, which provides the effective

date and various applicability dates for

the regulations under sections 414(b) and

(c), is amended to reflect the applicability

date of the amendment to §1.414(c)-2(b)

(1); see also the Applicability Date section of this preamble. The amendment to

section 1563(d)(1)(B) by the Technical

Bulletin No. 2025–4

and Miscellaneous Revenue Act of 1988

was not incorporated into the regulations

under sections 52(b) and 414(c)(1) with

respect to taxable years and plan years,

respectively, that began prior to the applicability date for the regulations specified

in this Treasury decision. Accordingly, the

IRS will not challenge the application of

§§1.52-1(c)(1) and 1.414(c)-2(b) as previously in effect or taking into account the

amendment to section 1563(d)(1)(B) with

respect to taxable years that began prior to

January 1, 2025, for the regulations under

section 52(b) or plan years that began

prior to January 1, 2025, for the regulations under section 414(c)(1).

VII. Section 357(c) and §1.1502-80(d)

A commenter raised concerns about

the withdrawal of proposed consolidated

return regulations under §1.1502-80(d)

relating to the non-applicability of section

357(c). The comment has led the Treasury

Department and the IRS to reconsider that

withdrawal. For a discussion of the comment, see the notice of proposed rulemaking published in the Proposed Rules section of this issue of the Federal Register.

VIII. Other Non-Substantive Revisions

To make the reading of these regulations

more user-friendly, these final regulations

generally restate the revised paragraphs

in the regulations under sections 52, 414,

1502, 1503, 1552, and 1563. Additionally,

the formatting changes to the examples in

§1.1502-13(j) in the 2023 proposed regulations were adopted by T.D. 10016, published in the Federal Register on December 11, 2024 (89 FR 100138).

Applicability Date

Pursuant to section 1503(a) of the

Code, the regulations issued under the

authority of section 1502 apply to consolidated return years for which the due date

of the return (without regard to extensions) is after December 30, 2024.

In addition, §1.52-1(c)(1) applies to

taxable years beginning on or after January

1, 2025, and §1.414(c)-2(b)(1) applies to

plan years beginning on or after January 1,

2025. The amendments to §§1.1552-1(g),

1.1562-1(e), 1.1563-2(d), and 1.1563-3(e)

449

apply to taxable years beginning after

December 30, 2024.

Special Analyses

I. Regulatory Planning and Review

Pursuant to the Memorandum of

Agreement, Review of Treasury Regulations under Executive Order 12866 (June

9, 2023), tax regulatory actions issued by

the IRS are not subject to the requirements

of section 6 of Executive Order 12866, as

amended. Therefore, a regulatory impact

assessment is not required.

II. Paperwork Reduction Act

These final regulations update the consolidated return regulations by revising

and removing outdated and obsolete provisions, such as cross-references to temporary regulations, regulations, and statutes

that have been repealed, removed, expired,

renumbered, or otherwise have become

obsolete. Therefore, these final regulations

would not impose an additional reporting

burden beyond what is otherwise required

by existing statutes, regulations, and forms.

The total burden associated with these final

regulations is $0.

III. Regulatory Flexibility Act

Pursuant to the Regulatory Flexibility

Act (5 U.S.C. chapter 6), it is hereby certified that these final regulations would not

have a significant economic impact on a

substantial number of small entities. This

certification is based on the fact that these

final regulations would apply only to corporations that file consolidated Federal

income tax returns, and that such corporations tend to be larger businesses. Specifically, based on data available to the

IRS, corporations that file consolidated

Federal income tax returns represent only

approximately two percent of all filers of

Forms 1120 (U.S. Corporation Income

Tax Return). However, these consolidated

Federal income tax returns account for

approximately 95 percent of the aggregate

amount of receipts reported on all Forms

1120. Therefore, these final regulations

would not create significant additional

obligations for, or impose an economic

impact on, a substantial number of small

January 20, 2025

entities. Accordingly, the Secretary certifies that these final regulations will not

have significant economic impact on a

significant number of small entities.

Pursuant to section 7805(f) of the

Code, the notice of proposed rulemaking

that preceded these final regulations was

submitted to the Chief Counsel for the

Office of Advocacy of the Small Business

Administration for comment on its impact

on small business. No comments were

received from the Chief Counsel for the

Office of Advocacy of the Small Business

Administration.

Information and Regulatory Affairs designated this rule as not a major rule, as

defined by 5 U.S.C. 804(2).

IV. Unfunded Mandates Reform Act

26 CFR Part 1

Section 202 of the Unfunded Mandates

Reform Act of 1995 requires that agencies

assess anticipated costs and benefits and

take certain other actions before issuing a

final rule that includes any Federal mandate that may result in expenditures in

any one year by a State, local, or Tribal

government, in the aggregate, or by the

private sector, of $100 million in 1995

dollars, updated annually for inflation.

[In 2024, that threshold is approximately

$190 million.] These final regulations do

not include any rule that would include

any Federal mandate that may result in

expenditures by State, local, or Tribal

governments, or by the private sector in

excess of that threshold.

Income taxes, Reporting and recordkeeping requirements.

V. Executive Order 13132: Federalism

Executive Order 13132 (Federalism)

prohibits an agency from publishing any

rule that has federalism implications if

the rule either imposes substantial, direct

compliance costs on State and local governments, and is not required by statute,

or preempts State law, unless the agency

meets the consultation and funding

requirements of section 6 of the Executive order. These final regulations do not

propose rules that would have federalism

implications, impose substantial direct

compliance costs on State and local governments, or preempt State law within the

meaning of the Executive order.

VI. Congressional Review Act

Pursuant to the Congressional Review

Act (5 U.S.C. 801 et seq.), the Office of

January 20, 2025

Drafting Information

The principal authors of this document

are Kelton P. Frye and William W. Burhop

of the Office of Associate Chief Counsel

(Corporate). Other personnel from the

Treasury Department and the IRS participated in its development.

List of Subjects

26 CFR Part 5

Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 301

Employment taxes, Estate taxes,

Excise taxes, Gift taxes, Income taxes,

Penalties, Reporting and recordkeeping

requirements.

26 CFR Part 602

Reporting and recordkeeping requirements.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR parts 1, 5, 301,

and 602 are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 is amended by removing the entries

for §§1.1503-2, 1.1502-9A, 1.1502-15A,

1.1502-21A, 1.1502-22A, 1.1502-23A,

1.1502-41A, 1.1502-79A, 1.1502-91A,

1.1502-92A, 1.1502-93A, 1.1502-94A,

1.1502-95A, 1.1502-96A, 1.1502-98A,

and 1.1502-99A to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.52-1 is amended by

revising paragraphs (c)(1)(i) and (ii) and

adding paragraph (i) to read as follows:

450

§1.52-1 Trades or businesses that are

under common control.

*****

(c) * * *

(1) * * *

(i) A controlling interest in each of the

organizations, except the common parent

organization, is owned (directly and with

the application of §1.414(c)-4(b)(1), (2),

and (3)) by one or more of the other organizations; and

(ii) The common parent organization

owns (directly and with the application

of §1.414(c)-4(b)(1), (2), and (3)) a controlling interest in at least one of the other

organizations, excluding, in computing

the controlling interest, any direct ownership interest by the other organizations.

*****

(i) Applicability date. This section

applies to taxable years beginning on or

after January 1, 2025. See 26 CFR 1.52-1,

as revised April 1, 2024, for taxable years

beginning before January 1, 2025.

Par. 3. Section 1.57-1 is amended by

revising paragraph (b)(4)(ii) to read as

follows:

§1.57-1 Items of tax preference defined.

*****

(b) * * *

(4) * * *

(ii) Where the taxpayer acquires property in a transaction to which section 381(a)

applies or from another member of an affiliated group during a consolidated return

year and an “accelerated” method of depreciation as described in section 167(b)(2),

(3), or (4) or section 167(j)(1)(B) or (C) is

permitted (see §1.381(c)(6)-1), the depreciation which would have been allowable

under the straight line method is determined

as if the property had been depreciated

under the straight line method since depreciation was first taken on the property by the

transferor of such property. In such cases,

references in this paragraph to the period

for which the property is held or useful life

of the property are treated as including the

period beginning with the commencement

of the original use of the property.

*****

Par. 4. Section 1.167(c)-1 is amended

by revising paragraph (a)(5) to read as follows:

Bulletin No. 2025–4

§1.167(c)-1 Limitations on methods of

computing depreciation under section

167(b)(2), (3), and (4).

(a) * * *

(5) See §§1.1502-13 and 1.1502-68 for

provisions dealing with depreciation of

property received by a member of an affiliated group from another member of the

group during a consolidated return period.

*****

Par. 5. Section 1.279-6 is amended by

revising and republishing paragraph (d) to

read as follows:

§1.279-6 Application of section 279 to

certain affiliated groups.

*****

(d) Aggregate projected earnings. In the

case of an affiliated group of corporations

(whether or not such group files a consolidated return under section 1501), the

aggregate projected earnings of such group

is computed by separately determining the

projected earnings of each member of such

group under paragraph (d) of §1.279-5, and

then adding together such separately determined amounts, except that—

(1) A dividend (a distribution which is

described in section 301(c)(1) other than

a distribution described in section 243(c)

(1)) distributed by one member to another

member is eliminated;

(2) In determining the earnings and profits of any member of an affiliated group,

there is eliminated any amount of interest

income received or accrued, and of interest

expense paid or incurred, which is attributable to intercompany indebtedness; and

(3) No gain or loss is recognized in any

transaction between members of the affiliated group.

*****

§1.382-8 [Amended]

Par. 6. Section 1.382-8 is amended by

removing and reserving paragraph (i).

Par. 7. Section 1.414(c)-2 is amended

by revising paragraphs (b)(1)(i) and (ii) to

read as follows:

§1.414(c)-2 Two or more trades or

businesses under common control.

*****

Bulletin No. 2025–4

(b) * * *

(1) * * *

(i) A controlling interest in each of the

organizations, except the common parent

organization, is owned (directly and with

the application of §1.414(c)-4(b)(1), (2),

and (3)) by one or more of the other organizations; and

(ii) The common parent organization

owns (directly and with the application of §1.414(c)-4(b)(1), (2), and (3))

a controlling interest in at least one of

the other organizations, excluding, in

computing such controlling interest, any

direct ownership interest by such other

organizations.

*****

Par. 8. Section 1.414(c)-6 is amended

by revising and republishing paragraph (a)

and adding paragraph (g) to read as follows:

§1.414(c)-6 Effective date.

(a) General rule. Except as provided in

paragraph (b), (c), (e), (f), or (g) of this

section, the provisions of §1.414(b)-1 and

§§1.414(c)-1 through 1.414(c)-4 apply for

plan years beginning after September 2,

1974.

*****

(g) Special rule. Notwithstanding

paragraph (a), (b), or (c) of this section,

§1.414(c)-2(b)(1) applies to plan years

beginning on or after January 1, 2025.

Par. 9. Section 1.1502-0 is revised to

read as follows:

§1.1502-0 Effective/applicability dates.

(a) In general. Except as provided in

paragraph (b) of this section, the consolidated return regulations (as defined in

§1.1502-1(g)) are applicable to taxable

years beginning after December 31, 1965.

(b) Exceptions. The applicability date

described in paragraph (a) of this section does not apply to any provision of

the consolidated return regulations with

an applicability or effective date different

than the date provided by paragraph (a) of

this section.

Par. 10. Section 1.1502-1 is amended

by:

a. Adding introductory text;

b. Revising and republishing paragraphs (f)(2) and (3) and (g);

451

c. Redesignating paragraph (l) as paragraph (m); and

d. Adding a new paragraph (l).

The additions and revisions read as follows:

§1.1502-1 Definitions.

For purposes of the consolidated return

regulations (and any provision of this

chapter that refers to the consolidated

return regulations):

*****

(f) * * *

(2) Exceptions. The term separate

return limitation year (or SRLY) does not

include:

(i) A separate return year of the corporation which is the common parent for the

consolidated return year to which the tax

attribute is to be carried (except as provided in §1.1502-75(d)(2)(ii) and paragraph (f)(3) of this section);

(ii) A separate return year of any corporation which was a member of the group

for each day of such year; or

(iii) A separate return year of a predecessor of any member if such predecessor

was a member of the group for each day

of such year.

(3) Reverse acquisitions. In the event

of an acquisition to which §1.1502-75(d)

(3) applies, all taxable years of the first

corporation and of each of its subsidiaries

ending on or before the date of the acquisition are treated as separate return limitation years, and the separate return years (if

any) of the second corporation and each

of its subsidiaries are not treated as separate return limitation years (unless they

were so treated immediately before the

acquisition). For example, if corporation P

merges into corporation T, and the persons

who were stockholders of P immediately

before the merger, as a result of owning

the stock of P, own more than 50 percent

of the fair market value of the outstanding

stock of T, then a loss incurred before the

merger by T (even though it is the common parent), or by a subsidiary of T, is

treated as having been incurred in a separate return limitation year. Conversely, a

loss incurred before the merger by P, or by

a subsidiary of P in a separate return year

during all of which such subsidiary was a

member of the group of which P was the

common parent, is treated as having been

January 20, 2025

incurred in a year which is not a separate

return limitation year.

*****

(g) Consolidated return regulations.

The term consolidated return regulations

means the regulations issued under the

authority of section 1502.

*****

(l) U.S. territory. The term U.S. territory means—

(1) American Samoa;

(2) The Commonwealth of the Northern Mariana Islands;

(3) The Commonwealth of Puerto

Rico;

(4) Guam; and

(5) The U.S. Virgin Islands.

*****

§1.1502-3 [Amended]

Par. 11. Section 1.1502-3 is amended

by removing and reserving paragraph (e).

Par. 12. Section 1.1502-4 is amended

by revising paragraph (d)(1) to read as

follows:

§1.1502-4 Consolidated foreign tax

credit.

*****

(d) * * *

(1) Allowance of unused foreign tax

as consolidated carryover or carryback.

The consolidated group’s carryovers

and carrybacks of unused foreign tax (as

defined in §1.904-2(c)(1)) to the taxable

year is determined on a consolidated basis

under the principles of section 904(c)

and §1.904-2 and is deemed to be paid or

accrued to a foreign country or U.S. territory (as defined in §1.1502-1(l)) for that

year. The consolidated group’s unused

foreign tax carryovers and carrybacks to

the taxable year consist of any unused

foreign tax of the consolidated group,

plus any unused foreign tax of members

for separate return years, which may be

carried over or back to the taxable year

under the principles of section 904(c)

and §1.904-2. The consolidated group’s

unused foreign tax carryovers and carrybacks do not include any unused foreign

taxes apportioned to a corporation for a

separate return year pursuant to §1.150279(d). A consolidated group’s unused foreign tax in each separate category is the

January 20, 2025

excess of the foreign taxes paid, accrued

or deemed paid under section 960 by the

consolidated group over the limitation in

the applicable separate category for the

consolidated return year. See paragraph

(c) of this section.

*****

Par. 13. Section 1.1502-5 is revised to

read as follows:

§1.1502-5 Estimated tax.

(a) General rule—(1) Consolidated

estimated tax. If a group files a consolidated return for two consecutive taxable

years, it must make payments of estimated

tax on a consolidated basis for each subsequent taxable year until separate returns

are filed. When filing on a consolidated

basis, the group is generally treated as a

single corporation for purposes of section

6655 (relating to payment of estimated tax

by corporations). If separate returns are

filed by the members for a taxable year,

the amount of any estimated tax payments

made with respect to a consolidated estimated tax for the year is credited against

the separate tax liabilities of the members

in any reasonable manner designated by

the common parent.

(2) First two consolidated return years.

For its first two consolidated return years,

a group may make payments of estimated

tax on either a consolidated or a separate

member basis. The amount of any separate

estimated tax payments is credited against

the consolidated tax liability of the group.

(b) Addition to tax for failure to pay

estimated tax under section 6655—

(1) Consolidated return filed. For its first

two consolidated return years, a group

may compute the amount of the penalty (if

any) under section 6655 on a consolidated

basis or a separate member basis, regardless of the method of payment. Thereafter,

the group must compute the penalty for

any consolidated return year on a consolidated basis.

(2) Computation of penalty on consolidated basis—(i) In general. This paragraph (b)(2) provides rules for computing

the penalty under section 6655 on a consolidated basis.

(ii) Preceding taxable year. The tax

shown on the return for the preceding taxable year referred to in section 6655(d)(1)

(B)(ii) is, if a consolidated return was filed

452

for that preceding year, the tax shown on

the consolidated return for that preceding

year or, if a consolidated return was not

filed for that preceding year, the aggregate

of the taxes shown on the separate returns

of the common parent and any other corporation that was a member of the same

affiliated group as the common parent for

that preceding year.

(iii) Aggregate of payments made by

all members. If estimated tax was not

paid on a consolidated basis, the amount

of the group’s payments of estimated tax

for the taxable year is the aggregate of

the payments made by all members for

the year.

(iv) Required annual payment rule. If

the common parent is otherwise eligible to

use the section 6655(d)(1)(B)(ii) required

annual payment rule, that rule applies only

if the group’s consolidated return, or each

member’s separate return if the group did

not file a consolidated return, for the preceding taxable year was a taxable year of

12 months.

(3) Computation of penalty on separate

member basis. To compute any penalty

under section 6655 on a separate member

basis, for purposes of section 6655(d)(1)

(B)(i), the “tax shown on the return” for

the taxable year is the portion of the tax

shown on the consolidated return allocable to the member under paragraph (b)

(6) of this section. If the member was

included in the consolidated return filed

by the group for the preceding taxable

year, for purposes of section 6655(d)(1)

(B)(ii), the “tax shown on the return” for

the preceding taxable year for any member is the portion of the tax shown on the

consolidated return for the preceding year

allocable to the member under paragraph

(b)(6) of this section.

(4) Consolidated payments if separate

returns filed. If the group does not file a

consolidated return for the taxable year

but makes payments of estimated tax on a

consolidated basis, for purposes of section

6655(b)(1)(B), the “amount (if any) of the

installment paid” by any member is an

amount apportioned to the member in any

reasonable manner designated by the common parent. If a member was included in

the consolidated return filed by the group

for the preceding taxable year, the amount

of the member’s penalty under section

6655 is computed on the separate member

Bulletin No. 2025–4

basis described in paragraph (b)(3) of this

section.

(5) Tax defined. For purposes of this

section, the term tax means the excess

of—

(i) The sum of—

(A) The consolidated tax imposed by

section 11 or subchapter L of chapter 1,

whichever applies;

(B) The tax imposed by section 55(a);

plus

(C) The tax imposed by section 59A;

over

(ii) The credits against tax provided by

part IV of subchapter A of chapter 1 of the

Internal Revenue Code.

(6) Allocation of consolidated tax liability for determining earnings and profits.

For purposes of this section, the tax shown

on a consolidated return is allocated to the

members of the group by allocating any

tax described in paragraph (b)(5)(i) of this

section, net of allowable credits under

paragraph (b)(5)(ii) of this section, under

the method that the group has elected pursuant to section 1552 and §1.1502-33(d).

(c) Examples. The provisions of this

section are illustrated by the following

examples.

(1) Example 1. Corporations P and S1 file a consolidated return for the first time for calendar year

2021. P and S1 also file consolidated returns for calendar year 2022 and calendar year 2023. Under paragraph (a)(2) of this section, for the 2021 and 2022

taxable years, P and S1 may pay estimated tax on

either a separate or consolidated basis. Under paragraph (a)(1) of this section, for the 2023 taxable year,

the group must pay its estimated tax on a consolidated basis. In determining whether P and S1 come

within the exception provided in section 6655(d)(1)

(B)(ii) for 2023, the “tax shown on the return” is the

tax shown on the consolidated return for the 2022

taxable year.

(2) Example 2. Corporations P, S1, and S2 file

a consolidated return for the first time for calendar

year 2021 and file their second consolidated return

for calendar year 2022. S2 ceases to be a member of

the group on September 15, 2023. Under paragraph

(b)(2) of this section, in determining whether the

group (which no longer includes S2) comes within

the exception provided in section 6655(d)(1)(B)(ii)

for 2023, the “tax shown on the return” is the tax

shown on the consolidated return for calendar year

2022.

(3) Example 3. Corporations P and S1 file a

consolidated return for the first time for calendar

year 2021 and file their second consolidated return

for calendar year 2022. Corporation S2 becomes

a member of the group on July 1, 2023, and joins

in the filing of the consolidated return for calendar

year 2023. Under paragraph (b)(2) of this section, in

determining whether the group (which now includes

S2) comes within the exception provided in section

Bulletin No. 2025–4

6655(d)(1)(B)(ii) for 2023, the “tax shown on the

return” is the tax shown on the consolidated return

for calendar year 2022. Any tax of S2 for any separate return year is not included as a part of the “tax

shown on the return” for purposes of applying section 6655(d)(1)(B)(ii).

(4) Example 4. Corporations X and Y file consolidated returns for the calendar years 2021 and

2022 and separate returns for calendar year 2023.

Under paragraph (b)(3) of this section, in determining whether X or Y comes within the exception provided in section 6655(d)(1)(B)(ii) for 2023, the “tax

shown on the return” is the amount of tax shown

on the consolidated return for 2022 allocable to X

and to Y in accordance with paragraph (b)(6) of this

section.

(d) Cross-references—(1) For provisions relating to quick refunds of corporate

estimated tax payments, see §§1.1502-78

and 1.6425-1 through 1.6425-3.

(2) For provisions relating to depositing estimated taxes, see §1.6302-1(b).

(e) Applicability date. This section

applies to any taxable year for which the

due date of the income tax return (without

regard to extensions) is after December

30, 2024. For prior years, see §1.1502-5

(as contained in the 26 CFR edition

revised as of April 1, 2024).

Par. 14. Section 1.1502-6 is amended

by revising paragraph (b) to read as follows:

§1.1502-6 Liability for tax.

*****

(b) Liability of subsidiary after withdrawal. If a subsidiary has ceased to be

a member of the group and in such cessation resulted from a bona fide sale or

exchange of its stock for fair value and

occurred prior to the date upon which any

deficiency is assessed, the Commissioner

may, if the Commissioner believes that

the assessment or collection of the balance of the deficiency will not be jeopardized, make assessment and collection of

such deficiency from such former subsidiary in an amount not exceeding the portion of such deficiency which the Commissioner may determine to be allocable

to it. If the Commissioner makes assessment and collection of any part of a deficiency from such former subsidiary, then

for purposes of any credit or refund of the

amount collected from such former subsidiary the agency of the common parent

under the provisions of §1.1502-77 does

not apply.

*****

453

Par. 15. Section 1.1502-9 is amended

by revising and republishing paragraphs

(a), (b)(1), and (c)(2)(ii) and (iii) to read

as follows:

§1.1502-9 Consolidated overall foreign

losses, separate limitation losses, and

overall domestic losses.

(a) In general. This section provides

rules for applying section 904(f) and (g)

(including its definitions and nomenclature) to a group and its members. Generally, section 904(f) concerns rules relating

to overall foreign losses (OFLs) and separate limitation losses (SLLs) and the consequences of such losses. Under section

904(f)(5), losses are computed separately

in each category of income described in

section 904(d)(1) or §1.904-5(a)(4)(v)

(separate category). Section 904(g) concerns rules relating to overall domestic

losses (ODLs) and the consequences of

such losses. Paragraph (b) of this section

defines terms and provides computational

and accounting rules, including rules

regarding recapture. Paragraph (c) of this

section provides rules that apply to OFLs,

SLLs, and ODLs when a member becomes

or ceases to be a member of a group. Paragraph (d) of this section provides a predecessor and successor rule. Paragraph (e) of

this section provides effective dates.

(b) * * *

(1) Computation of CSLI or CSLL and

consolidated U.S.-source taxable income

or CDL. The group computes its consolidated separate limitation income (CSLI)

or consolidated separate limitation loss

(CSLL) for each separate category under

the principles of §1.1502-11 by aggregating each member’s foreign-source

taxable income or loss in such separate

category computed under the principles

of §1.1502-12, and taking into account the

foreign portion of the consolidated items

described in §1.1502-11(a)(2) through (a)

(6) for such separate category. The group

computes its consolidated U.S.-source

taxable income or consolidated domestic

loss (CDL) under similar principles.

*****

(c) * * *

(2) * * *

(ii) Departing member’s portion of

group’s account. A departing member’s

portion of a group’s COFL, CSLL or

January 20, 2025

CODL account for a loss category is

computed based upon the member’s

share of the group’s assets that generate

income subject to recapture at the time

that the member ceases to be a member. Under the characterization principles of §§1.861-9T(g)(3), 1.861-12,

and 1.861-13, the group identifies the

assets of the departing member and the

remaining members that generate U.S.source income (domestic assets) and

foreign-source income (foreign assets)

in each separate category. The assets are

characterized based upon the income

that the assets are reasonably expected

to generate after the member ceases to

be a member. The member’s portion of

a group’s COFL or CSLL account for

a loss category is the group’s COFL or

CSLL account, respectively, multiplied

by a fraction, the numerator of which is

the value of the member’s foreign assets

for the loss category and the denominator

of which is the value of the foreign assets

of the group (including the departing

member) for the loss category. The member’s portion of a group’s CODL account

for each income category is the group’s

CODL account multiplied by a fraction,

the numerator of which is the value of

the member’s domestic assets and the

denominator of which is the value of the

domestic assets of the group (including

the departing member). The value of

the domestic and foreign assets is determined under the asset valuation rules of

§1.861-9(g)(1) and (2) using either tax

book value or alternative tax book value

under the method chosen by the group

for purposes of interest apportionment

as provided in §1.861-9(g)(1)(ii). For

purposes of this paragraph (c)(2)(ii),

§1.861-9T(g)(2)(iv) (assets in intercompany transactions) applies, but §1.8619T(g)(2)(iii) (adjustments for directly

allocated interest) does not apply. The

member’s portions of COFL, CSLL, and

CODL accounts are limited by paragraph

(c)(2)(iii) of this section. In addition, for

purposes of this paragraph (c)(2)(ii), the

tax book value of assets transferred in

intercompany transactions is determined

without regard to previously deferred

gain or loss that is taken into account by

the group as a result of the transaction in

which the member ceases to be a member. The assets should be valued at the

time the member ceases to be a member,

but values on other dates may be used

unless this creates substantial distortions.

For example, if a member ceases to be a

member in the middle of the group’s consolidated return year, an average of the

values of assets at the beginning and end

of the year (as provided in §1.861-9(g)

(2)) may be used or, if a member ceases

to be a member in the early part of the

group’s consolidated return year, values

at the beginning of the year may be used,

unless this creates substantial distortions.

(iii) Limitation on member’s portion. If

the aggregate of a member’s portions of

COFL and CSLL accounts for a loss category (with respect to one or more income

categories) determined under paragraph (c)

(2)(ii) of this section exceeds 150 percent

Old Paragraphs

(b)(2)(iii)(A)(a), (b), and (c)………………………..

(b)(2)(iii)(B)(a), (b), (c), and (d)……………………

(b)(2)(iii)(C)(a), (b), (c), (d), and (e)……………….

4. Revising newly redesignated paragraphs (b)(2)(iii)(A)(3) and (b)(2)(iii)(B)(4).

5. Revising and republishing paragraph

(c)(7).

The revisions read as follows:

§1.1502-11 Consolidated taxable

income.

(a) In general. The consolidated taxable income (CTI) for a consolidated

January 20, 2025

of the actual fair market value of the member’s foreign assets in the loss category, the

member’s portion of the COFL or CSLL

accounts for the loss category is reduced

(proportionately, in the case of multiple

accounts) by such excess. In addition, if

the aggregate of a member’s portions of

CODL accounts (with respect to one or

more income categories) determined under

paragraph (c)(2)(ii) of this section exceeds

150 percent of the actual fair market value

of the member’s domestic assets, the

member’s portion of the CODL accounts

is reduced (proportionately, in the case of

multiple accounts) by such excess. This

rule does not apply in the case of COFL

or CSLL accounts if the departing member and all other members that cease to be

members as part of the same transaction

own all (or substantially all) the foreign

assets in the loss category. In the case of

CODL accounts, this rule does not apply if

the departing member and all other members that cease to be members as part of the

same transaction own all (or substantially

all) the domestic assets.

*****

Par. 16. Section 1.1502-11 is amended

by:

1. Revising and republishing paragraph

(a).

2. In paragraph (b)(2)(iii), redesignating Examples 1 through 3 as paragraphs

(b)(2)(iii)(A) through (C), respectively.

3. In newly redesignated paragraphs

(b)(2)(iii)(A) through (C), further redesignating the paragraphs in the first column

as the paragraphs in the second column:

New Paragraphs

(b)(2)(iii)(A)(1), (2), and (3)

(b)(2)(iii)(B)(1), (2), (3), and (4)

(b)(2)(iii)(C)(1), (2), (3), (4), and (5),

return year is determined by taking into

account:

(1) The separate taxable income of

each member of the group (see §1.150212 for the computation of separate taxable

income);

(2) Any consolidated net operating loss

(CNOL) deduction (see §1.1502-21 for

the computation of the CNOL deduction);

(3) Any consolidated capital gain net

income (see §1.1502-22 for the compu-

454

tation of consolidated capital gain net

income);

(4) Any consolidated section 1231 net

loss (see §1.1502-23 for the computation

of consolidated section 1231 net loss);

(5) Any consolidated charitable contributions deduction (see §1.1502-24 for the

computation of the consolidated charitable contributions deduction); and

(6) Any consolidated dividends

received deduction (see §1.1502-26 for

Bulletin No. 2025–4

the computation of the consolidated dividends received deduction).

(b) * * *

(2) * * *

(iii) * * *

(A) * * *

(3) Because $30 of S’s loss is absorbed

in the determination of consolidated taxable income under paragraph (b)(2)(ii)

of this section, P’s basis in S’s stock is

reduced under §1.1502-32(b) from $500

to $470 immediately before the disposition. Consequently, P recognizes a $50

gain from the sale of S’s stock and the

group has consolidated taxable income of

$50 for Year 1 (P’s $30 of ordinary income

and $50 gain from the sale of S’s stock,

less the $30 of S’s loss). In addition, S’s

limited loss of $50 is treated as a separate

net operating loss attributable to S and,

because S ceases to be a member, the loss

is apportioned to S under §1.1502-21 and

carried to its first separate return year.

(B) * * *

(4) Under paragraph (b)(2)(ii) of this

section, S’s $40 ordinary loss from Year

2 that is limited under this paragraph (b)

is treated as a separate net operating loss

arising in Year 2. Similarly, $40 of the

consolidated net capital loss from Year 1

attributable to S is treated as a separate

net capital loss carried over from Year 1.

Because S ceases to be a member, the $40

net operating loss from Year 2 and the $40

consolidated net capital loss from Year 1

are allocated to S under §§1.1502-21 and

1.1502-22, respectively and are carried to

S’s first separate return year.

Rule

(A) Matching rule.

*****

(c) * * *

(7) Effective date. This paragraph (c)

applies to dispositions of subsidiary stock

that occur after March 22, 2005.

*****

Par. 17. Section 1.1502-12 is amended

by:

a. Revising paragraph (b);

b. Removing and reserving paragraphs

(e), (g), and (m);

c. Revising paragraph (n); and

d. Removing and reserving paragraph

(q).

The revisions read as follows:

§1.1502-12 Separate taxable income.

*****

(b) Any deduction that is disallowed

under §1.1502-15 must be taken into

account as provided in that section.

*****

(n) No deduction under section 243(a)

(1) or section 245 (relating to deductions

with respect to dividends received) is

taken into account;

*****

Par. 18. Section 1.1502-13 is amended

by:

a. Revising and republishing paragraphs (a)(3)(i), (a)(6)(ii), (c)(4)(i)(B), (c)

(5), (d)(3), (e)(1)(v), (f)(5)(ii)(B)(2), (f)(5)

(ii)(F), (f)(6)(ii) and (v), (f)(7), and (g)(7)

(ii).b. Redesignating paragraphs (h)(2)(v)

(a) and (b) as paragraphs (h)(2)(v)(A) and

(B).

c. Revising paragraph (l)(6).

General Location

§1.1502-13(c)(7)(ii)

Paragraph

(A)

(B)

(C)

(D)

(E)

(F)

(G)

(H)

(I)

(J)

(K)

Bulletin No. 2025–4

455

d. Adding paragraphs (l)(8) through

(10).

e. Removing paragraph (m).

The revisions and additions read as follows:

§1.1502-13 Intercompany transactions.

(a) * * *

(3) * * *

(i) In general. The timing rules of this

section are a method of accounting for

intercompany transactions, to be applied

by each member in addition to the member’s other methods of accounting. See

§§1.1502-17 and 1.446-1(c)(2)(iii). To

the extent the timing rules of this section

are inconsistent with a member’s otherwise applicable methods of accounting,

the timing rules of this section control.

For example, if S sells property to B in

exchange for B’s note, the timing rules of

this section apply instead of the installment sale rules of section 453. S’s or B’s

application of the timing rules of this

section to an intercompany transaction

clearly reflects income only if the effect

of that transaction as a whole (including,

for example, related costs and expenses)

on consolidated taxable income is clearly

reflected.

*****

(6) * * *

(ii) Table of examples. This section

contains the following examples:

Example

Example 1. Intercompany sale of land followed by sale to a

nonmember.

Example 2. Dealer activities.

Example 3. Intercompany section 351 transfer.

Example 4. Depreciable property.

Example 5. Intercompany sale followed by installment sale.

Example 6. Intercompany sale of installment obligation.

Example 7. Performance of services.

Example 8. Rental of property.

Example 9. Intercompany sale of a partnership interest.

Example 10. Net operating losses subject to section 382 or

the SRLY rules.

Example 11. Section 475.

January 20, 2025

Rule

General Location

Paragraph

(L)

(M)

(N)

(O)

(P)

(Q)

(R)

(B) Acceleration rule.

§1.1502-13(d)(3)

(i)

(ii)

(iii)

(iv)

(C) Simplifying rules—

inventory.

(D) Stock of members.

§1.1502-13(e)(1)(v)

§1.1502-13(f)(7)

(v)

(A)

(B)

(C)

(i)

(ii)

(iii)

(iv)

Example 2. Increment valuation method.

Example 3. Other reasonable inventory methods.

Example 1. Dividend exclusion and property distribution.

Example 2. Excess loss accounts.

Example 3. Intercompany reorganization.

Example 4. All cash intercompany reorganization under

section 368(a)(1)(D).

Example 5. Stock redemptions and distributions.

Example 6. Intercompany stock sale followed by section 332

liquidation.

Example 7. Intercompany stock sale followed by section 355

distribution.

Example 1. Interest on intercompany obligation.

(v)

(vi)

(vii)

(E) Obligations of

members.

§1.1502-13(g)(7)(ii)

(A)

(B)

Example 2. Intercompany obligation becomes

nonintercompany obligation.

Example 3. Loss or bad debt deduction with respect to

intercompany obligation.

Example 4. Intercompany nonrecognition transactions.

Example 5. Assumption of intercompany obligation.

Example 6. Extinguishment of intercompany obligation.

Example 7. Exchange of intercompany obligations.

Example 8. Tax benefit rule.

Example 9. Issuance at off-market rate of interest.

Example 10. Nonintercompany obligation becomes

intercompany obligation.

Example 11. Notional principal contracts.

(C)

(D)

(E)

(F)

(G)

(H)

(I)

(J)

(K)

January 20, 2025

Example

Example 12. Section 1092.

Example 13. [Reserved]

Example 14. Source of income under section 863.

Example 15. Section 1248.

Example 16. Intercompany stock distribution followed by

section 332 liquidation.

Example 17. Intercompany stock sale followed by section

355 distribution.

Example 18. Redetermination of attributes for section 250

purposes.

Example 1. Becoming a nonmember—timing.

Example 2. Becoming a nonmember—attributes.

Example 3. Selling member’s disposition of installment

note.

Example 4. Cancellation of debt and attribute reduction

under section 108(b).

Example 5. Section 481.

Example 1. Increment averaging method.

456

Bulletin No. 2025–4

Rule

(F) Anti-avoidance

rules.

(G) Miscellaneous

operating rules.

General Location

§1.1502-13(h)(2)

Paragraph

(i)

Example

Example 1. Sale of a partnership interest.

§1.1502-13(j)(10)

(ii)

(iii)

(iv)

(v)

(vi)

(i)

Example 2. Transitory status as an intercompany obligation.

Example 3. Corporate mixing bowl.

Example 4. Partnership mixing bowl.

Example 5. Sale and leaseback.

Example 6. Section 163(j) interest limitation.

Example 1. Intercompany sale followed by section 351

transfer to member.

Example 2. Intercompany sale of member stock followed by

recapitalization.

Example 3. Back-to-back intercompany transactions—

matching.

Example 4. Back-to-back intercompany transactions—

acceleration.

Example 5. Successor group.

Example 6. Liquidation—80% distributee.

Example 7. Liquidation—no 80% distributee.

Example 8: Loan by section 987 QBU.

Example 9: Sale of property by section 987 QBU.

(ii)

(iii)

(iv)

(v)

(vi)

(vii)

(viii)

(ix)

*****

(c) * * *

(4) * * *

(i) * * *

(B) B controls unreasonable. To the

extent the results under paragraph (c)(4)

(i)(A) of this section are inconsistent with

treating S and B as divisions of a single

corporation, the attributes of the offsetting

items must be redetermined in a manner

consistent with treating S and B as divisions of a single corporation. To the extent,

however, that B’s corresponding item on

a separate entity basis is excluded from

gross income, is a noncapital, nondeductible amount, or is otherwise permanently

disallowed or eliminated, the attributes of

B’s corresponding item always control the

attributes of S’s offsetting intercompany

item.

*****

(5) Special status. Notwithstanding the

general rule of paragraph (c)(1)(i) of this

section, to the extent an item’s attributes

determined under this section are permitted or not permitted to a member under

the Internal Revenue Code or regulations

by reason of the member’s special status,

the attributes required under the Internal

Revenue Code or regulations apply to that

Bulletin No. 2025–4

member’s items (but not the other member). For example, if S is a bank to which

section 582(c) applies, and sells debt securities at a gain to B, a nonbank, the character of S’s intercompany gain is ordinary

as required under section 582(c), but the

character of B’s corresponding item as

capital or ordinary is determined under

paragraph (c)(1)(i) of this section without the application of section 582(c). For

other special status issues, see, for example, sections 818(b) (life insurance company treatment of capital gains and losses)

and 1503(c) (limitation on absorption of

certain losses).

*****

(d) * * *

(3) Examples. The acceleration rule of

this paragraph (d) is illustrated by the following examples.

(i) Example 1. Becoming a nonmember – timing—(A) Facts. S owns land with a basis of $70. On

January 1 of Year 1, S sells the land to B for $100. On

July 1 of Year 3, P sells 60% of S’s stock to X for $60

and, as a result, S becomes a nonmember.

(B) Matching rule. Under the matching rule,

none of S’s $30 gain is taken into account in Years

1 through 3 because there is no difference between

B’s $0 gain or loss taken into account and the recomputed gain or loss.

(C) Acceleration of S’s intercompany items.

Under the acceleration rule of paragraph (d) of this

457

section, S’s $30 gain is taken into account in computing consolidated taxable income (and consolidated

tax liability) immediately before the effect of treating

S and B as divisions of a single corporation cannot

be produced. Because the effect cannot be produced

once S becomes a nonmember, S takes its $30 gain

into account in Year 3 immediately before becoming

a nonmember. S’s gain is reflected under §1.1502-32

in P’s basis in the S stock immediately before P’s

sale of the stock. Under §1.1502-32, P’s basis in the

S stock is increased by $30, and therefore P’s gain

is reduced (or loss is increased) by $18 (60% of

$30). See also §§1.1502-33 and 1.1502-76(b). (The

results would be the same if S sold the land to B in

an installment sale to which section 453 would otherwise apply, because S must take its intercompany

gain into account under this section.)

(D) B’s corresponding items. Notwithstanding

the acceleration of S’s gain, B continues to take its

corresponding items into account under its accounting method. Thus, B’s items from the land are taken

into account based on subsequent events (for example, its sale of the land).

(E) Sale of B’s stock. The facts are the same as in

paragraph (d)(3)(i)(A) of this section (Example 1),

except that P sells 60% of B’s stock (rather than S

stock) to X for $60 and, as a result, B becomes a

nonmember. Because the effect of treating S and B as

divisions of a single corporation cannot be produced

once B becomes a nonmember, S takes its $30 gain

into account under the acceleration rule immediately

before B becomes a nonmember. (The results would

be the same if S sold the land to B in an installment

sale to which section 453 would otherwise apply,

because S must take its intercompany gain into

account under this section.)

January 20, 2025

(F) Discontinue filing consolidated returns. The

facts are the same as in paragraph (d)(3)(i)(A) of this

section (Example 1), except that the P group receives

permission under §1.1502-75(c) to discontinue filing

consolidated returns beginning in Year 3. Under the

acceleration rule, S takes its $30 gain into account on

December 31 of Year 2.

(G) No subgroups. The facts are the same as in

paragraph (d)(3)(i)(A) of this section (Example 1),

except that P simultaneously sells all of the stock of

both S and B to X (rather than 60% of S’s stock),

and S and B become members of the X consolidated

group. Because the effect of treating S and B as divisions of a single corporation in the P group cannot

be produced once S and B become nonmembers, S

takes its $30 gain into account under the acceleration

rule immediately before S and B become nonmembers. (Paragraph (j)(5) of this section does not apply

to treat the X consolidated group as succeeding to the

P group because the X group acquired only the stock

of S and B.) However, so long as S and B continue

to join with each other in the filing of consolidated

returns, B continues to treat S and B as divisions of

a single corporation for purposes of determining the

attributes of B’s corresponding items from the land.

(ii) Example 2. Becoming a nonmember – attributes—(A) Facts. S holds land for investment with a

basis of $70. On January 1 of Year 1, S sells the land

to B for $100. B holds the land for sale to customers

in the ordinary course of business, and expends substantial resources over a two-year period subdividing, developing, and marketing the land. On July 1 of

Year 3, before B has sold any of the land, P sells 60%

of S’s stock to X for $60 and, as a result, S becomes

a nonmember.

(B) Attributes. Under the acceleration rule, the

attributes of S’s gain are redetermined under the

principles of the matching rule as if B sold the land to

an affiliated corporation that is not a member of the

group for a cash payment equal to B’s adjusted basis

in the land (because the land continues to be held

within the group). Thus, whether S’s gain is capital

gain or ordinary income depends on the activities of

both S and B. Because S and B no longer join with

each other in the filing of consolidated returns, the

attributes of B’s corresponding items (for example,

from its subsequent sale of the land) are redetermined

under the principles of the matching rule as if the S

division (but not the B division) were transferred by

the single corporation to an unrelated person at the

time of P’s sale of the S stock. Thus, B continues to

take into account the activities of S with respect to

the land before the intercompany transaction.

(C) Depreciable property. The facts are the same

as in paragraph (d)(3)(ii)(A) of this section (Example

2), except that the property sold by S to B is depreciable property. Section 1239 applies to treat all of

S’s gain as ordinary income because it is taken into

account as a result of B’s deemed sale of the property to an affiliated corporation that is not a member

of the group (a related person within the meaning of

section 1239(b)).

(iii) Example 3. Selling member’s disposition

of installment note—(A) Facts. S owns land with a

basis of $70. On January 1 of Year 1, S sells the land

to B in exchange for B’s $110 note. The note bears

a market rate of interest in excess of the applicable

Federal rate, and provides for principal payments of

January 20, 2025

$55 in Year 4 and $55 in Year 5. On July 1 of Year 3,

S sells B’s note to X for $110.

(B) Timing. S’s intercompany gain is taken into

account under this section, and not under the rules of

section 453. Consequently, S’s sale of B’s note does

not result in its intercompany gain from the land

being taken into account (for example, under section

453B). The sale does not prevent S’s intercompany

items and B’s corresponding items from being taken

into account in determining the group’s consolidated

taxable income under the matching rule, and X does

not reflect any aspect of the intercompany transaction (X has its own cost basis in the note). S will

take the intercompany gain into account under the

matching rule or acceleration rule based on subsequent events (for example, B’s sale of the land). See

also paragraph (g) of this section for additional rules

applicable to B’s note as an intercompany obligation.

(iv) Example 4. Cancellation of debt and attribute reduction under section 108(b)—(A) Facts. S

holds land for investment with a basis of $0. On January 1 of Year 1, S sells the land to B for $100. B

also holds the land for investment. During Year 3, B

is insolvent and B’s nonmember creditors discharge

$60 of B’s indebtedness. Because of insolvency, B’s

$60 discharge is excluded from B’s gross income

under section 108(a), and B reduces the basis of the

land by $60 under sections 108(b) and 1017.

(B) Acceleration rule. As a result of B’s basis

reduction under section 1017, $60 of S’s intercompany gain will not be taken into account under the

matching rule (because there is only a $40 difference

between B’s $40 basis in the land and the $0 basis the

land would have if S and B were divisions of a single corporation). Accordingly, S takes $60 of its gain

into account under the acceleration rule in Year 3.

S’s gain is long-term capital gain, determined under

paragraph (d)(1)(ii) of this section as if B sold the

land to an affiliated corporation that is not a member

of the group for $100 immediately before the basis

reduction.

(C) Purchase price adjustment. Assume instead

that S sells the land to B in exchange for B’s $100

purchase money note, B remains solvent, and S subsequently agrees to discharge $60 of the note as a

purchase price adjustment to which section 108(e)

(5) applies. Under applicable principles of tax law,

$60 of S’s gain and $60 of B’s basis in the land are

eliminated and never taken into account. Similarly,

the note is not treated as satisfied and reissued under

paragraph (g) of this section.

(v) Example 5. Section 481—(A) Facts. S operates several trades or businesses, including a manufacturing business. S receives permission to change

its method of accounting for valuing inventory for

its manufacturing business. S increases the basis of

its ending inventory by $100, and the related $100

positive section 481(a) adjustment is to be taken into

account ratably over six taxable years, beginning in

Year 1. During Year 3, S sells all of the assets used

in its manufacturing business to B at a gain. Immediately after the transfer, B does not use the same

inventory valuation method as S. On a separate

entity basis, S’s sale results in an acceleration of the

balance of the section 481(a) adjustment to Year 3.

(B) Timing and attributes. Under paragraph (b)

(2) of this section, the balance of S’s section 481(a)

adjustment accelerated to Year 3 is intercompany

458

income. However, S’s $100 basis increase before

the intercompany transaction eliminates the related

difference for this amount between B’s corresponding items taken into account and the recomputed

corresponding items in subsequent periods. Because

the accelerated section 481(a) adjustment will not

be taken into account in determining the group’s

consolidated taxable income (and consolidated tax

liability) under the matching rule, the balance of S’s

section 481 adjustment is taken into account under

the acceleration rule as ordinary income at the time

of the intercompany transaction. (If S’s sale had not

resulted in accelerating S’s section 481(a) adjustment on a separate entity basis, S would have no

intercompany income to be taken into account under

this section.)

*****

(e) * * *

(1) * * *

(v) Examples. The inventory rules of

this paragraph (e)(1) are illustrated by the

following examples.

(A) Example 1. Increment averaging method—

(1) Facts. Both S and B use a double-extension,

dollar-value LIFO inventory method, and both value

inventory increments using the earliest acquisitions cost valuation method. During Year 2, S sells

25 units of product Q to B on January 15 at $10/

unit. S sells another 25 units on April 15, on July 15,

and on September 15, at $12/unit. S’s earliest cost

of product Q is $7.50/unit and S’s most recent cost

of product Q is $8.00/unit. Both S and B have an

inventory increment for the year. B’s total inventory

costs incurred during Year 2 are $6,000 and the LIFO

value of B’s Year 2 layer of increment is $600.

(2) Intercompany inventory income. Under paragraph (e)(1)(iii) of this section, S must use a reasonable method of allocating its LIFO inventory costs

to intercompany transactions. Because S has an

inventory increment for Year 2 and uses the earliest

acquisitions cost method, a reasonable method of

determining its intercompany cost of goods sold for

product Q is to use its most recent costs. Thus, its

intercompany cost of goods sold is $800 ($8.00 most

recent cost, multiplied by 100 units sold to B), and

its intercompany inventory income is $350 ($1,150

sales proceeds from B minus $800 cost).

(3) Timing. (i) Under the increment averaging

method of paragraph (e)(1)(ii)(B) of this section,

$35 of S’s $350 of intercompany inventory income

is not taken into account in Year 2, computed as follows: LIFO value of B’s Year 2 layer of increment /

B’s total inventory costs for year 2, or $600 / $6,000

= 10%. 10% x S’s $350 intercompany inventory

income = $35.

(ii) Thus, $315 of S’s intercompany inventory

income is taken into account in Year 2 ($350 of total

intercompany inventory income minus $35 not taken

into account).

(4) S incurs a decrement. The facts are the

same as in paragraph (e)(1)(v)(A)(1) of this section

(Example 1), except that in Year 2, S incurs a decrement equal to 50% of its Year 1 layer. Under paragraph (e)(1)(iii) of this section, S must reasonably

allocate the LIFO cost of the decrement to the cost

of goods sold to B to determine S’s intercompany

inventory income.

Bulletin No. 2025–4

(5) B incurs a decrement. The facts are the same

as in paragraph (e)(1)(v)(A)(1) of this section (Example 1), except that B incurs a decrement in Year 2.

S must take into account the entire $350 of Year 2

intercompany inventory income because all 100

units of product Q are deemed sold by B in Year 2.

(B) Example 2. Increment valuation method—(1)

Facts. The facts are the same as in paragraph (e)(1)

(v)(A)(1) of this section (Example 1). In addition, B’s

use of the earliest acquisition’s cost method of valuing its increments results in B valuing its year-end

inventory using costs incurred from January through

March. B’s costs incurred during the year are: $1,428

in the period January through March; $1,498 in the

period April through June; $1,524 in the period July

through September; and $1,550 in the period October through December. S’s intercompany inventory

income for these periods is: $50 in the period January through March ((25 × $10)−(25 × $8)); $100

in the period April through June ((25 × $12)−(25 ×

$8)); $100 in the period July through September ((25

× $12)−(25 × $8)); and $100 in the period October

through December ((25 × $12)−(25 × $8)).

(2) Timing. (i) Under the increment valuation

method of paragraph (e)(1)(ii)(C) of this section, $21

of S’s $350 of intercompany inventory income is not

taken into account in Year 2, computed as follows:

LIFO value of B’s Year 2 layer of increment / B’s

total inventory costs from January through March

of Year 2, or $600 / $1,428 = 42%. 42% x S’s $50

intercompany inventory income for the period from

January through March = $21.

(ii) Thus, $329 of S’s intercompany inventory

income is taken into account in Year 2 ($350 of total

intercompany inventory income minus $21 not taken

into account).

(3) B incurs a subsequent decrement. The facts

are the same as in paragraph (e)(1)(v)(B)(1) of this

section (Example 2). In addition, assume that in

Year 3, B experiences a decrement in its pool that

receives intercompany purchases from S. B’s decrement equals 20% of the base-year costs for its Year

2 layer. The fact that B has incurred a decrement

means that all of its inventory costs incurred for Year

3 are included in cost of goods sold. As a result, S

takes into account its entire amount of intercompany

inventory income from its Year 3 sales. In addition, S

takes into account $4.20 of its Year 2 layer of intercompany inventory income not already taken into

account (20% of $21).

(C) Example 3. Other reasonable inventory

methods—(1) Facts. Both S and B use a dollar-value

LIFO inventory method for their inventory transactions. During Year 1, S sells inventory to B and

to X. Under paragraph (e)(1)(iv) of this section, to

compute its intercompany inventory income and the

amount of this income not taken into account, S computes its intercompany inventory income using the

transfer price of the inventory items less a FIFO cost

for the goods, takes into account these items based

on a FIFO cost flow assumption for B’s corresponding items, and the LIFO methods used by S and B are

ignored for these computations. These computations

are comparable to the methods used by S and B for

financial reporting purposes, and the book methods

and results are used for tax purposes. S adjusts the

amount of intercompany inventory items not taken

into account as required by section 263A.

Bulletin No. 2025–4

(2) Reasonable method. The method used by S

is a reasonable method under paragraph (e)(1)(iv) of

this section if the cumulative amount of intercompany inventory items not taken into account by S is

not significantly greater than the cumulative amount

that would not be taken into account under the methods specifically described in paragraph (e)(1) of

this section. If, for any year, the method results in a

cumulative amount of intercompany inventory items

not taken into account by S that significantly exceeds

the cumulative amount that would not be taken into

account under the methods specifically provided,

S must take into account for that year the amount

necessary to eliminate the excess. The method is

thereafter applied with appropriate adjustments to

reflect the amount taken into account (for example,

to prevent the amount from being taken into account

more than once).

*****

(f) * * *

(5) * * *

(ii) * * *

(B) * * *

(2) Time limitation and adjustments.

The transfer of old T’s assets to new T

qualifies under paragraph (f)(5)(ii)(B)

(1) of this section only if B has entered

into a written plan, on or before the due

date of the group’s consolidated income

tax return (including extensions) for the

tax year that includes the date of old T’s

liquidation, to transfer the old T assets

to new T, and the statement described in

paragraph (f)(5)(ii)(E) of this section is

included on or with a timely filed consolidated income tax return (including

extensions) for the tax year that includes

the date of the liquidation. The transfer

of substantially all of T’s assets to new

T must be completed within 12 months

of the filing of the return. Appropriate

adjustments are made to reflect any events

occurring before the formation of new T

and to reflect any assets not transferred to

new T, or liabilities not assumed by new

T. For example, if B retains an asset of

old T, the asset is treated under paragraph

(f)(3) of this section as acquired by new

T but distributed to B immediately after

the reorganization.

*****

(F) Applicability date. Paragraphs (f)

(5)(ii)(B)(1) and (2) of this section apply

to transactions in which old T’s liquidation into B occurs on or after October 25,

2007.

(6) * * *

(ii) Gain stock. For dispositions of P

stock, see §1.1032-3.

*****

459

(v) Applicability date. This paragraph

(f)(6) applies to gain or loss taken into

account on or after July 12, 1995, and to

transactions occurring on or after July 12,

1995.

(7) Examples – In general. The application of this section to intercompany transactions with respect to stock of members

is illustrated by the following examples.

(i) Example 1. Dividend exclusion and property

distribution—(A) Facts. S owns land with a $70

basis and $100 value. On January 1 of Year 1, P’s

basis in S’s stock is $100. During Year 1, S declares

and makes a dividend distribution of the land to P.

Under section 311(b), S has a $30 gain. Under section 301(d), P’s basis in the land is $100. On July 1

of Year 3, P sells the land to X for $110.

(B) Dividend elimination and stock basis adjustments. Under paragraph (b)(1) of this section, S’s

distribution to P is an intercompany distribution.

Under paragraph (f)(2)(ii) of this section, P’s $100

of dividend income is not included in gross income.

Under §1.1502-32, P’s basis in S’s stock is reduced

from $100 to $0 in Year 1.

(C) Matching rule and stock basis adjustments.

Under the matching rule (treating P as the buying

member and S as the selling member), S takes its $30

gain into account in Year 3 to reflect the $30 difference between P’s $10 gain taken into account and the

$40 recomputed gain. Under §1.1502-32, P’s basis in

S’s stock is increased from $0 to $30 in Year 3.

(D) Loss property. The facts are the same as in

paragraph (f)(7)(i)(A) of this section (Example 1),

except that S has a $130 (rather than $70) basis in

the land. Under paragraph (f)(2)(iii) of this section,

the principles of section 311(b) apply to S’s loss from

the intercompany distribution. Thus, S has a $30 loss

that is taken into account under the matching rule

in Year 3 to reflect the $30 difference between P’s

$10 gain taken into account and the $20 recomputed

loss. (The results are the same under section 267(f).)

Under §1.1502-32, P’s basis in S’s stock is reduced

from $100 to $0 in Year 1, and from $0 to a $30

excess loss account in Year 3. (If P had distributed

the land to its shareholders, rather than selling the

land to X, P would take its $10 gain under section

311(b) into account, and S would take its $30 loss

into account under the matching rule with $10 offset

by P’s gain and $20 recharacterized as a noncapital,

nondeductible amount.)

(E) Entitlement rule. The facts are the same as

in paragraph (f)(7)(i)(A) of this section (Example

1), except that, after P becomes entitled to the distribution but before the distribution is made, S issues

additional stock to the public and becomes a nonmember. Under paragraph (f)(2)(i) of this section,

the determination of whether a distribution is an

intercompany distribution is made under the entitlement rule of paragraph (f)(2)(iv) of this section.

Treating S’s distribution as made when P becomes

entitled to it results in the distribution being an intercompany distribution. Under paragraph (f)(2)(ii) of

this section, the distribution is not included in P’s

gross income. S’s $30 gain from the distribution is

intercompany gain that is taken into account under

the acceleration rule immediately before S becomes

a nonmember. Thus, there is a net $70 decrease in P’s

January 20, 2025

basis in its S stock under §1.1502-32 ($100 decrease

for the distribution and a $30 increase for S’s $30

gain). Under paragraph (f)(2)(iv) of this section,

P does not take the distribution into account again

under separate return rules when received, and P is

not entitled to a dividends received deduction.

(ii) Example 2. Excess loss accounts—(A) Facts.

S owns all of T’s only class of stock with a $10 basis

and $100 value. S has substantial earnings and profits, and T has $10 of earnings and profits. On January

1 of Year 1, S declares and distributes a dividend of

all of the T stock to P. Under section 311(b), S has

a $90 gain. Under section 301(d), P’s basis in the

T stock is $100. During Year 3, T borrows $90 and

declares and makes a $90 distribution to P to which

section 301 applies, and P’s basis in the T stock is

reduced under §1.1502-32 from $100 to $10. During

Year 6, T has $5 of earnings that increase P’s basis

in the T stock under §1.1502-32 from $10 to $15. On

December 1 of Year 9, T issues additional stock to X

and, as a result, T becomes a nonmember.

(B) Dividend exclusion. Under paragraph (f)

(2)(ii) of this section, P’s $100 of dividend income

from S’s distribution of the T stock, and its $10 of

dividend income from T’s $90 distribution, are not

included in gross income.

(C) Matching and acceleration rules. Under

§1.1502-19(b)(1), when T becomes a nonmember

P must include in income the amount of its excess

loss account (if any) in T stock. P has no excess loss

account in the T stock. Therefore P’s corresponding

item from the deconsolidation of T is $0. Treating S

and P as divisions of a single corporation, the T stock

would continue to have a $10 basis after the distribution, and the adjustments under §1.1502-32 for

T’s $90 distribution and $5 of earnings would result

in a $75 excess loss account. Thus, the recomputed

corresponding item from the deconsolidation is $75.

Under the matching rule, S takes $75 of its $90 gain

into account in Year 9 as a result of T becoming a

nonmember, to reflect the difference between P’s

$0 gain taken into account and the $75 recomputed

gain. S’s remaining $15 of gain is taken into account

under the matching and acceleration rules based on

subsequent events (for example, under the matching

rule if P subsequently sells its T stock, or under the

acceleration rule if S becomes a nonmember).

(D) Reverse sequence. The facts are the same

as in paragraph (f)(7)(ii)(A) of this section (Example 2), except that T borrows $90 and makes its $90

distribution to S before S distributes T’s stock to P.

Under paragraph (f)(2)(ii) of this section, T’s $90

distribution to S ($10 of which is a dividend) is not

included in S’s gross income. The corresponding

negative adjustment under §1.1502-32 reduces S’s

basis in the T stock from $10 to an $80 excess loss

account. Under section 311(b), S has a $90 gain from

the distribution of T stock to P. Under section 301(d)

P’s initial basis in the T stock is $10 (the stock’s fair

market value), and the basis increases to $15 under

§1.1502-32 as a result of T’s earnings in Year 6. The

timing and attributes of S’s gain are determined in

the manner provided in paragraph (f)(7)(ii)(C) of this

section (Example 2). Thus, $75 of S’s gain is taken

into account under the matching rule in Year 9 as a

result of T becoming a nonmember, and the remaining $15 is taken into account under the matching and

acceleration rules based on subsequent events.

January 20, 2025

(E) Partial stock sale. The facts are the same as

in paragraph (f)(7)(ii)(A) of this section (Example 2),

except that P sells 10% of T’s stock to X on December 1 of Year 9 for $1.50 (rather than T’s issuing

additional stock and becoming a nonmember). Under

the matching rule, S takes $9 of its gain into account

to reflect the difference between P’s $0 gain taken

into account ($1.50 sale proceeds minus $1.50 basis)

and the $9 recomputed gain ($1.50 sale proceeds

plus $7.50 excess loss account).

(F) Loss, rather than cash distribution. The facts

are the same as in paragraph (f)(7)(ii)(A) of this section (Example 2), except that T retains the loan proceeds and incurs a $90 loss in Year 3 that is absorbed

by the group. The timing and attributes of S’s gain

are determined in the same manner provided in paragraph (f)(7)(ii)(C) of this section (Example 2). Under

§1.1502-32, the loss in Year 3 reduces P’s basis in

the T stock from $100 to $10, and T’s $5 of earnings

in Year 6 increase the basis to $15. Thus, $75 of S’s

gain is taken into account under the matching rule

in Year 9 as a result of T becoming a nonmember,

and the remaining $15 is taken into account under

the matching and acceleration rules based on subsequent events. (The timing and attributes of S’s gain

would be determined in the same manner provided

in paragraph (f)(7)(ii)(D) of this section (Example 2)

if T incurred the $90 loss before S’s distribution of

the T stock to P.)

(G) Stock sale, rather than stock distribution. The

facts are the same as in paragraph (f)(7)(ii)(A) of this

section (Example 2), except that S sells the T stock

to P for $100 (rather than distributing the stock). The

timing and attributes of S’s gain are determined in

the same manner provided in paragraph (f)(7)(ii)

(C) of this section (Example 2). Thus, $75 of S’s

gain is taken into account under the matching rule

in Year 9 as a result of T becoming a nonmember,

and the remaining $15 is taken into account under

the matching and acceleration rules based on subsequent events.

(iii) Example 3. Intercompany reorganization—

(A) Facts. P forms S and B by contributing $200 to

the capital of each. During Years 1 through 4, S and

B each earn $50, and under §1.1502-32 P adjusts its

basis in the stock of each to $250. (See §1.1502-33

for adjustments to earnings and profits.) On January

1 of Year 5, the fair market value of S’s assets and its

stock is $500, and S merges into B in a tax-free reorganization. Pursuant to the plan of reorganization, P

receives B stock with a fair market value of $350 and

$150 of cash.

(B) Treatment as a section 301 distribution. The

merger of S into B is a transaction to which paragraph (f)(3) of this section applies. P is treated as

receiving additional B stock with a fair market value

of $500 and, under section 358, a basis of $250.

Immediately after the merger, $150 of the stock

received is treated as redeemed, and the redemption

is treated under section 302(d) as a distribution to

which section 301 applies. Because the $150 distribution is treated as not received as part of the merger,

section 356 does not apply and no basis adjustments

are required under section 358(a)(1)(A) and (B).

Because B is treated under section 381(c)(2) as

receiving S’s earnings and profits and the redemption

is treated as occurring after the merger, $100 of the

distribution is treated as a dividend under section 301

460

and P’s basis in the B stock is reduced correspondingly under §1.1502-32. The remaining $50 of the

distribution reduces P’s basis in the B stock. Section

301(c)(2) and §1.1502-32. Under paragraph (f)(2)(ii)

of this section, P’s $100 of dividend income is not

included in gross income. Under §1.302-2(c), proper

adjustments are made to P’s basis in its B stock to

reflect its basis in the B stock redeemed, with the

result that P’s basis in the B stock is reduced by the

entire $150 distribution.

(C) Depreciated property. The facts are the same

as in paragraph (f)(7)(iii)(A) of this section (Example 3), except that property of S with a $200 basis

and $150 fair market value is distributed to P (rather

than cash of B). As in paragraph (f)(7)(iii)(B) of this

section (Example 3), P is treated as receiving additional B stock in the merger and a $150 distribution

to which section 301 applies immediately after the

merger. Under paragraph (f)(2)(iii) of this section,

the principles of section 311(b) apply to B’s $50 loss

and the loss is taken into account under the matching

and acceleration rules based on subsequent events

(for example, under the matching rule if P subsequently sells the property, or under the acceleration

rule if B becomes a nonmember). The results are the

same under section 267(f).

(D) Divisive transaction. Assume instead that,

pursuant to a plan, S distributes the stock of a lower-tier subsidiary in a spin-off transaction to which

section 355 applies together with $150 of cash. The

distribution of stock is a transaction to which paragraph (f)(3) of this section applies. P is treated as

receiving the $150 of cash immediately before the

section 355 distribution, as a distribution to which

section 301 applies. Section 356(b) does not apply

and no basis adjustments are required under section

358(a)(1) (A) and (B). Because the $150 distribution

is treated as made before the section 355 distribution,

the distribution reduces P’s basis in the S stock under

§1.1502-32, and the basis allocated under section

358(c) between the S stock and the lower-tier subsidiary stock received reflects this basis reduction.

(iv) Example 4. All cash intercompany reorganization under section 368(a)(1)(D)—(A) Facts. P

owns all of the stock of M and B. M owns all of the

stock of S with a basis of $25. On January 1 of Year

2, the fair market value of S’s assets and its stock is

$100, and S sells all of its assets to B for $100 cash

and liquidates. The transaction qualifies as a reorganization described in section 368(a)(1)(D). Pursuant

to §1.368-2(l), B will be deemed to issue a nominal

share of B stock to S in addition to the $100 of cash

actually exchanged for the S assets, and S will be

deemed to distribute all of the consideration to M.

M will be deemed to distribute the nominal share of

B stock to P.

(B) Treatment as a section 301 distribution. The

sale of S’s assets to B is a transaction to which paragraph (f)(3) of this section applies. In addition to the

nominal share issued by B to S under §1.368-2(l),

S is treated as receiving additional B stock with a

fair market value of $100 (in lieu of the $100) and,

under section 358, a basis of $25 which S distributes to M in liquidation. Immediately after the sale,

the B stock (with the exception of the nominal share

which is still held by M) received by M is treated

as redeemed for $100, and the redemption is treated

under section 302(d) as a distribution to which sec-

Bulletin No. 2025–4

tion 301 applies. M’s basis of $25 in the B stock is

reduced under §1.1502-32(b)(3)(v), resulting in an

excess loss account of $75 in the nominal share. (See

§1.302-2(c)). M’s deemed distribution of the nominal share of B stock to P under §1.368-2(l) will result

in M generating an intercompany gain under section

311(b) of $75, to be subsequently taken into account

under the matching and acceleration rules.

(v) Example 5. Stock redemptions and distributions—(A) Facts. Before becoming a member of the

P group, S owns P stock with a $30 basis. On January

1 of Year 1, P buys all of S’s stock. On July 1 of Year

3, P redeems the P stock held by S for $100 in a transaction to which section 302(a) applies.

(B) Gain under section 302. Under paragraph (f)

(4) of this section, P’s basis in the P stock acquired

from S is treated as eliminated. As a result of this

elimination, S’s intercompany item will never be

taken into account under the matching rule because

P’s basis in the stock does not reflect S’s intercompany item. Therefore, S’s $70 gain is taken into

account under the acceleration rule in Year 3. The

attributes of S’s item are determined under paragraph

(d)(1)(ii) of this section by applying the matching

rule as if P had sold the stock to an affiliated corporation that is not a member of the group at no gain

or loss. Although P’s corresponding item from a sale

of its stock would have been excluded from gross

income under section 1032, paragraph (c)(6)(ii) of

this section prevents S’s gain from being treated as

excluded from gross income; instead S’s gain is capital gain.

(C) Gain under section 311. The facts are the

same as in paragraph (f)(7)(v)(A) of this section

(Example 5), except that S distributes the P stock to

P in a transaction to which section 301 applies (rather

than the stock being redeemed), and S has a $70 gain

under section 311(b). The timing and attributes of S’s

gain are determined in the manner provided in paragraph (f)(7)(v)(B) of this section (Example 5).

(D) Loss stock. The facts are the same as in

paragraph (f)(7)(v)(A) of this section (Example 5),

except that S has a $130 (rather than $30) basis in the

P stock and has a $30 loss under section 302(a). The

limitation under paragraph (c)(6)(ii) of this section

does not apply to intercompany losses. Thus, S’s loss

is taken into account in Year 3 as a noncapital, nondeductible amount.

(vi) Example 6. Intercompany stock sale followed by section 332 liquidation—(A) Facts. S owns

all of the stock of T, with a $70 basis and $100 value,

and T’s assets have a $10 basis and $100 value. On

January 1 of Year 1, S sells all of T’s stock to B for

$100. On July 1 of Year 3, when T’s assets are still

worth $100, T distributes all of its assets to B in an

unrelated complete liquidation to which section 332

applies.

(B) Timing and attributes. Under paragraph (b)

(3)(ii) of this section, B’s unrecognized gain or loss

under section 332 is a corresponding item for purposes of applying the matching rule. In Year 3 when

T liquidates, B has $0 of unrecognized gain or loss

under section 332 because B has a $100 basis in the

T stock and receives a $100 distribution with respect

to its T stock. Treating S and B as divisions of a single corporation, the recomputed corresponding item

would have been $30 of unrecognized gain under

section 332 because B would have succeeded to S’s

Bulletin No. 2025–4

$70 basis in the T stock. Thus, under the matching

rule, S’s $30 intercompany gain is taken into account

in Year 3 as a result of T’s liquidation. Under paragraph (c)(1)(i) of this section, the attributes of S’s

gain and B’s corresponding item are redetermined

as if S and B were divisions of a single corporation.

Although S’s gain ordinarily would be redetermined

to be treated as excluded from gross income to reflect

the nonrecognition of B’s gain under section 332,

S’s gain remains capital gain because B’s unrecognized gain under section 332 is not permanently and

explicitly disallowed under the Code. See paragraph

(c)(6)(ii) of this section. However, relief may be

elected under paragraph (f)(5)(ii) of this section.

(C) Intercompany sale at a loss. The facts are

the same as in paragraph (f)(7)(vi)(A) of this section (Example 6), except that S has a $130 (rather

than $70) basis in the T stock. The limitation under

paragraph (c)(6)(ii) of this section does not apply to

intercompany losses. Thus, S’s intercompany loss is

taken into account in Year 3 as a noncapital, nondeductible amount. However, relief may be elected

under paragraph (f)(5)(ii) of this section.

(vii) Example 7. Intercompany stock sale followed by section 355 distribution—(A) Facts. S

owns all of the stock of T with a $70 basis and a $100

value. On January 1 of Year 1, S sells all of T’s stock

to M for $100. On June 1 of Year 6, M distributes

all of its T stock to its nonmember shareholders in a

transaction to which section 355 applies. At the time

of the distribution, M has a basis in T stock of $100

and T has a value of $150.

(B) Timing and attributes. Under paragraph (b)

(3)(ii) of this section, M’s $50 gain not recognized on

the distribution under section 355 is a corresponding

item. Treating S and M as divisions of a single corporation, the recomputed corresponding item would be

$80 of unrecognized gain under section 355 because

M would have succeeded to S’s $70 basis in the T

stock. Thus, under the matching rule, S’s $30 intercompany gain is taken into account in Year 6 as a

result of the distribution. Under paragraph (c)(1)(i)

of this section, the attributes of S’s intercompany

item and M’s corresponding item are redetermined

to produce the same effect on consolidated taxable

income as if S and M were divisions of a single

corporation. Although S’s gain ordinarily would

be redetermined to be treated as excluded from

gross income to reflect the nonrecognition of M’s

gain under section 355(c), S’s gain remains capital

gain because M’s unrecognized gain under section

355(c) is not permanently and explicitly disallowed

under the Code. See paragraph (c)(6)(ii) of this section. Because M’s distribution of the T stock is not

an intercompany transaction, relief is not available

under paragraph (f)(5)(ii) of this section.

(C) Section 355 distribution within the group.

The facts are the same as under paragraph (f)(7)

(vii)(A) of this section (Example 7), except that M

distributes the T stock to B (another member of the

group), and B takes a $75 basis in the T stock under

section 358. Under paragraph (j)(2) of this section, B

is a successor to M for purposes of taking S’s intercompany gain into account, and therefore both M

and B might have corresponding items with respect

to S’s intercompany gain. To the extent it is possible,

matching with respect to B’s corresponding items

produces the result most consistent with treating S,

461

M, and B as divisions of a single corporation. See

paragraphs (j)(3) and (j)(4) of this section. However,

because there is only $5 difference between B’s $75

basis in the T stock and the $70 basis the stock would

have if S, M, and B were divisions of a single corporation, only $5 can be taken into account under

the matching rule with respect to B’s corresponding

items. (This $5 is taken into account with respect

to B’s corresponding items based on subsequent

events.) The remaining $25 of S’s $30 intercompany

gain is taken into account in Year 6 under the matching rule with respect to M’s corresponding item from

its distribution of the T stock. The attributes of S’s

remaining $25 of gain are determined in the same

manner as in paragraph (f)(7)(vii)(B) of this section

(Example 7).

(D) Relief elected. The facts are the same as in

paragraph (f)(7)(vii)(C) of this section (Example 7)

except that P elects relief pursuant to paragraph (f)

(5)(ii)(D) of this section. As a result of the election,

M’s distribution of the T stock is treated as subject to

sections 301 and 311 instead of section 355. Accordingly, M recognizes $50 of intercompany gain from

the distribution, B takes a basis in the stock equal

to its fair market value of $150, and S and M take

their intercompany gains into account with respect to

B’s corresponding items based on subsequent events.

(None of S’s gain is taken into account in Year 6 as a

result of M’s distribution of the T stock.)

*****

(g) * * *

(7) Examples—(i) In general. For purposes of the examples in this paragraph

(g), unless otherwise stated, interest is

qualified stated interest under §1.12731(c), and the intercompany obligations are

capital assets and are not subject to section

475.

(ii) The application of this section to

obligations of members is illustrated by

the following examples:

(A) Example 1. Interest on intercompany obligation—(1) Facts. On January 1 of year 1, B borrows $100 from S in return for B’s note providing

for $10 of interest annually at the end of each year,

and repayment of $100 at the end of year 5. B fully

performs its obligations. Under their separate entity

methods of accounting, B accrues a $10 interest

deduction annually under section 163, and S accrues

$10 of interest income annually under section 61(a)

(4) and §1.446-2.

(2) Matching rule. Under paragraph (b)(1) of this

section, the accrual of interest on B’s note is an intercompany transaction. Under the matching rule, S

takes its $10 of income into account in each of years

1 through 5 to reflect the $10 difference between B’s

$10 of interest expense taken into account and the $0

recomputed expense. S’s income and B’s deduction

are ordinary items. (Because S’s intercompany item

and B’s corresponding item would both be ordinary

on a separate entity basis, the attributes are not redetermined under paragraph (c)(1)(i) of this section.)

(3) Original issue discount. The facts are the

same as in paragraph (g)(7)(ii)(A)(1) of this section

(Example 1), except that B borrows $90 (rather than

$100) from S in return for B’s note providing for

January 20, 2025

$10 of interest annually and repayment of $100 at

the end of year 5. The principles described in paragraph (g)(7)(ii)(A)(2) of this section (Example 1)

for stated interest also apply to the $10 of original

issue discount. Thus, as B takes into account its corresponding expense under section 163(e), S takes

into account its intercompany income under section

1272. S’s income and B’s deduction are ordinary

items.

(4) Tax-exempt income. The facts are the same as

in paragraph (g)(7)(ii)(A)(1) of this section (Example 1), except that B’s borrowing from S is allocable under section 265 to B’s purchase of state and

local bonds to which section 103 applies. The timing

of S’s income is the same as in paragraph (g)(7)(ii)

(A)(2) of this section (Example 1). Under paragraph

(c)(4)(i) of this section, the attributes of B’s corresponding item of disallowed interest expense control

the attributes of S’s offsetting intercompany interest

income. Paragraph (c)(6) of this section does not prevent the redetermination of S’s intercompany item as

excluded from gross income because section 265(a)

(2) permanently and explicitly disallows B’s corresponding deduction and because, under paragraph

(g)(4)(i)(B) of this section, paragraph (c)(6)(ii) of

this section does not apply to prevent any intercompany income from the B note from being excluded

from gross income. Accordingly, S’s intercompany

income is treated as excluded from gross income.

(B) Example 2. Intercompany obligation

becomes nonintercompany obligation—(1) Facts.

On January 1 of year 1, B borrows $100 from S

in return for B’s note providing for $10 of interest

annually at the end of each year, and repayment of

$100 at the end of year 5. As of January 1 of year 3,

B has paid the interest accruing under the note and S

sells B’s note to X for $70, reflecting an increase in

prevailing market interest rates. B is never insolvent

within the meaning of section 108(d)(3).

(2) Deemed satisfaction and reissuance. Because

the B note becomes an obligation that is not an intercompany obligation, the transaction is a triggering

transaction under paragraph (g)(3)(i)(A)(2) of this

section. Under paragraph (g)(3)(ii) of this section,

B’s note is treated as satisfied and reissued for its fair

market value of $70 immediately before S’s sale to

X. As a result of the deemed satisfaction of the note

for less than its adjusted issue price, B takes into

account $30 of discharge of indebtedness income

under §1.61-12. On a separate entity basis, S’s $30

loss would be a capital loss under section 1271(a)(1).

Under the matching rule, however, the attributes of

S’s intercompany item and B’s corresponding item

must be redetermined to produce the same effect as

if the transaction had occurred between divisions of

a single corporation. Under paragraph (c)(4)(i) of

this section, the attributes of B’s $30 of discharge

of indebtedness income control the attributes of S’s

loss. Thus, S’s loss is treated as ordinary loss. B is

also treated as reissuing, immediately after the satisfaction, a new note to S with a $70 issue price, a

$100 stated redemption price at maturity, and a $70

basis in the hands of S. S is then treated as selling the

new note to X for the $70 received by S in the actual

transaction. Because S has a basis of $70 in the new

note, S recognizes no gain or loss from the sale to X.

After the sale, the new note held by X is not an intercompany obligation, it has a $70 issue price, a $100

January 20, 2025

stated redemption price at maturity, and a $70 basis.

The $30 of original issue discount will be taken into

account by B and X under sections 163(e) and 1272.

(3) Creditor deconsolidation. The facts are the

same as in paragraph (g)(7)(ii)(B)(1) of this section

(Example 2), except that P sells S’s stock to X (rather

than S selling B’s note to X). Because the B note

becomes an obligation that is not an intercompany

obligation, the transaction is a triggering transaction under paragraph (g)(3)(i)(A)(2) of this section.

Under paragraph (g)(3)(ii) of this section, B’s note is

treated as satisfied and reissued for its $70 fair market value immediately before S becomes a nonmember. The treatment of S’s $30 of loss and B’s $30 of

discharge of indebtedness income is the same as in

paragraph (g)(7)(ii)(B)(2) of this section (Example

2). The new note held by S upon deconsolidation is

not an intercompany obligation, it has a $70 issue

price, a $100 stated redemption price at maturity,

and a $70 basis. The $30 of original issue discount

will be taken into account by B and S under sections

163(e) and 1272.

(4) Debtor deconsolidation. The facts are the

same as in paragraph (g)(7)(ii)(B)(1) of this section

(Example 2), except that P sells B’s stock to X (rather

than S selling B’s note to X). The results to S and B

are the same as in paragraph (g)(7)(ii)(B)(3) of this

section (Example 2).

(5) Subgroup exception. The facts are the same as

in paragraph (g)(7)(ii)(B)(1) of this section (Example 2), except that P owns all of the stock of S, S

owns all of the stock of B, and P sells all of the S

stock to X, the parent of another consolidated group.

Because B and S, members of an intercompany obligation subgroup, cease to be members of the P group

in a transaction that does not cause either member

to recognize an item with respect to the B note, and

such members constitute an intercompany obligation

subgroup in the X group, P’s sale of S stock is not

a triggering transaction under paragraph (g)(3)(i)

(B)(8) of this section, and the note is not treated as

satisfied and reissued under paragraph (g)(3)(ii) of

this section. After the sale, the note held by S has a

$100 issue price, a $100 stated redemption price at

maturity, and a $100 basis. The results are the same

if the S stock is sold to an individual and the S-B

affiliated group elects to file a consolidated return for

the period beginning on the day after S and B cease

to be members of the P group.

(6) Section 338 election. The facts are the same as

in paragraph (g)(7)(ii)(B)(1) of this section (Example

2), except that P sells S’s stock to X and a section 338

election is made with respect to the stock sale. Under

section 338, S is treated as selling all of its assets to

new S, including the B note, at the close of the acquisition date. The aggregate deemed sales price (within

the meaning of §1.338-4) allocated to the B note is

$70. Because the B note becomes an obligation that

is not an intercompany obligation, the transaction

is a triggering transaction under paragraph (g)(3)(i)

(A)(2) of this section. Under paragraph (g)(3)(ii) of

this section, B’s note is treated as satisfied and reissued immediately before S’s deemed sale to new S

for $70, the amount realized with respect to the note

(the aggregate deemed sales price allocated to the

note under §1.338-6). The results to S and B are the

same as in paragraph (g)(7)(ii)(B)(2) of this section

(Example 2).

462

(7) Appreciated note. The facts are the same as

in paragraph (g)(7)(ii)(B)(1) of this section (Example

2), except that S sells B’s note to X for $130 (rather

than $70), reflecting a decline in prevailing market

interest rates. Because the B note becomes an obligation that is not an intercompany obligation, the transaction is a triggering transaction under paragraph (g)

(3)(i)(A)(2) of this section. Under paragraph (g)(3)

(ii) of this section, B’s note is treated as satisfied and

reissued for its fair market value of $130 immediately before S’s sale to X. As a result of the deemed

satisfaction of the note for more than its adjusted

issue price, B takes into account $30 of repurchase

premium under §1.163-7(c). On a separate entity

basis, S’s $30 gain would be a capital gain under

section 1271(a)(1). Under the matching rule, however, the attributes of S’s intercompany item and B’s

corresponding item must be redetermined to produce

the same effect as if the transaction had occurred

between divisions of a single corporation. Under

paragraph (c)(4)(i) of this section, the attributes of

B’s premium deduction control the attributes of S’s

gain. Accordingly, S’s gain is treated as ordinary

income. B is also treated as reissuing, immediately

after the satisfaction, a new note to S with a $130

issue price, $100 stated redemption price at maturity,

and $130 basis in the hands of S. S is then treated as

selling the new note to X for the $130 received by

S in the actual transaction. Because S has a basis of

$130 in the new note, S recognizes no gain or loss

from the sale to X. After the sale, the new note held

by X is not an intercompany obligation, it has a $130

issue price, a $100 stated redemption price at maturity, and a $130 basis. The treatment of B’s $30 of

bond issuance premium under the new note is determined under §1.163-13.

(8) Deferral of loss or deduction with respect to

nonmember indebtedness acquired in debt exchange.

The facts are the same as in paragraph (g)(7)(ii)(B)

(1) of this section (Example 2), except that S sells B’s

note to X for a non-publicly traded X note with an

issue price and face amount of $100 and a fair market

value of $70, and that, subsequently, S sells the X

note for $70. Because the B note becomes an obligation that is not an intercompany obligation, the transaction is a triggering transaction under paragraph (g)

(3)(i)(A)(2) of this section. Under paragraph (g)(3)

(ii) of this section, B’s note is treated as satisfied and

reissued immediately before S’s sale to X for $100,

the amount realized with respect to the note (determined under section 1274). As a result of the deemed

satisfaction, neither S nor B take into account any

items of income, gain, deduction, or loss. S is then

treated as selling the new B note to X for the X note

received by S in the actual transaction. Because S has

a basis of $100 in the new note, S recognizes no gain

or loss from the sale to X. After the sale, the new B

note held by X is not an intercompany obligation,

it has a $100 issue price, a $100 stated redemption

price at maturity, and a $100 basis. S also holds an X

note with a basis of $100 but a fair market value of

$70. When S disposes of the X note, S’s loss on the

disposition is deferred under paragraph (g)(4)(iv) of

this section, until B retires its note (the former intercompany obligation in the hands of X).

(C) Example 3. Loss or bad debt deduction with

respect to intercompany obligation—(1) Facts. On

January 1 of year 1, B borrows $100 from S in return

Bulletin No. 2025–4

for B’s note providing for $10 of interest annually at

the end of each year, and repayment of $100 at the

end of year 5. On January 1 of year 3, the fair market

value of the B note has declined to $60 and S sells

the B note to P for property with a fair market value

of $60. B is never insolvent within the meaning of

section 108(d)(3). The B note is not a security within

the meaning of section 165(g)(2).

(2) Deemed satisfaction and reissuance. Because

S realizes an amount of loss from the assignment of

the B note, the transaction is a triggering transaction under paragraph (g)(3)(i)(A)(1) of this section.

Under paragraph (g)(3)(ii) of this section, B’s note

is treated as satisfied and reissued for its fair market value of $60 immediately before S’s sale to P.

As a result of the deemed satisfaction of the note for

less than its adjusted issue price ($100), B takes into

account $40 of discharge of indebtedness income

under §1.61-12. On a separate entity basis, S’s $40

loss would be a capital loss under section 1271(a)(1).

Under the matching rule, however, the attributes of

S’s intercompany item and B’s corresponding item

must be redetermined to produce the same effect as

if the transaction had occurred between divisions of

a single corporation. Under paragraph (c)(4)(i) of

this section, the attributes of B’s $40 of discharge

of indebtedness income control the attributes of S’s

loss. Thus, S’s loss is treated as ordinary loss. B is

also treated as reissuing, immediately after the satisfaction, a new note to S with a $60 issue price, $100

stated redemption price at maturity, and $60 basis in

the hands of S. S is then treated as selling the new

note to P for the $60 of property received by S in the

actual transaction. Because S has a basis of $60 in

the new note, S recognizes no gain or loss from the

sale to P. After the sale, the note is an intercompany

obligation, it has a $60 issue price and a $100 stated

redemption price at maturity, and the $40 of original

issue discount will be taken into account by B and P

under sections 163(e) and 1272.

(3) Partial bad debt deduction. The facts are the

same as in paragraph (g)(7)(ii)(C)(1) of this section

(Example 3), except that S claims a $40 partial bad

debt deduction under section 166(a)(2) (rather than

selling the note to P). Because S realizes a deduction

from a transaction comparable to an assignment of

the B note, the transaction is a triggering transaction under paragraph (g)(3)(i)(A)(1) of this section.

Under paragraph (g)(3)(ii) of this section, B’s note

is treated as satisfied and reissued for its fair market

value of $60 immediately before section 166(a)(2)

applies. The treatment of S’s $40 loss and B’s $40

of discharge of indebtedness income are the same as

in paragraph (g)(7)(ii)(C)(2) of this section (Example 3). After the reissuance, S has a basis of $60 in

the new note. Accordingly, the application of section

166(a)(2) does not result in any additional deduction

for S. The $40 of original issue discount on the new

note will be taken into account by B and S under sections 163(e) and 1272.

(4) Insolvent debtor. The facts are the same as

in paragraph (g)(7)(ii)(C)(1) of this section (Example

3), except that B is insolvent within the meaning of

section 108(d)(3) at the time that S sells the note to

P. As explained in paragraph (g)(7)(ii)(C)(2) of this

section (Example 3), the transaction is a triggering

transaction and the B note is treated as satisfied and

reissued for its fair market value of $60 immediately

Bulletin No. 2025–4

before S’s sale to P. On a separate entity basis, S’s

$40 loss would be capital, B’s $40 income would be

excluded from gross income under section 108(a),

and B would reduce attributes under section 108(b)

or section 1017 (see also §1.1502-28). However,

under paragraph (g)(4)(i)(C) of this section, section

108(a) does not apply to characterize B’s income as

excluded from gross income. Accordingly, the attributes of S’s loss and B’s income are redetermined in

the same manner as in paragraph (g)(7)(ii)(C)(2) of

this section (Example 3).

(D) Example 4. Intercompany nonrecognition

transactions—(1) Facts. On January 1 of year 1, B

borrows $100 from S in return for B’s note providing

for $10 of interest annually at the end of each year,

and repayment of $100 at the end of year 5. As of

January 1 of year 3, B has fully performed its obligations, but the note’s fair market value is $130, reflecting a decline in prevailing market interest rates. On

January 1 of year 3, S transfers the note and other

assets to a newly formed corporation, Newco, for all

of Newco’s common stock in an exchange to which

section 351 applies.

(2) No deemed satisfaction and reissuance.

Because the assignment of the B note is an exchange

to which section 351 applies and neither S nor B recognize gain or loss, the transaction is not a triggering

transaction under paragraph (g)(3)(i)(B)(1) of this

section, and the note is not treated as satisfied and

reissued under paragraph (g)(3)(ii) of this section.

(3) Receipt of other property. The facts are the

same as in paragraph (g)(7)(ii)(D)(1) of this section

(Example 4), except that the other assets transferred to Newco have a basis of $100 and a fair

market value of $260, and S receives, in addition

to Newco common stock, $15 of cash. Because S

would recognize $15 of gain under section 351(b),

the assignment of the B note is a triggering transaction under paragraph (g)(3)(i)(A)(1) of this section.

Under paragraph (g)(3)(ii) of this section, B’s note

is treated as satisfied and reissued for its fair market

value of $130 immediately before the transfer to

Newco. As a result of the deemed satisfaction of the

note for more than its adjusted issue price, B takes

into account $30 of repurchase premium under

§1.163-7(c). On a separate entity basis, S’s $30 gain

would be a capital gain under section 1271(a)(1).

Under the matching rule, however, the attributes of

S’s intercompany item and B’s corresponding item

must be redetermined to produce the same effect as

if the transaction had occurred between divisions of

a single corporation. Under paragraph (c)(4)(i) of

this section, the attributes of B’s premium deduction control the attributes of S’s gain. Accordingly,

S’s gain is treated as ordinary income. B is also

treated as reissuing, immediately after the satisfaction, a new note to S with a $130 issue price,

$100 stated redemption price at maturity, and $130

basis in the hands of S. S is then treated as transferring the new note to Newco for the Newco stock

and cash received by S in the actual transaction.

Because S has a basis of $130 in the new B note, S

recognizes no gain or loss with respect to the transfer of the note in the section 351 exchange, and S

recognizes $10 of gain with respect to the transfer

of the other assets under section 351(b). After the

transfer, the note has a $130 issue price and a $100

stated redemption price at maturity. The treatment

463

of B’s $30 of bond issuance premium under the new

note is determined under §1.163-13.

(4) Transferee loss subject to limitation. The

facts are the same as in paragraph (g)(7)(ii)(D)(1) of

this section (Example 4), except that T is a member

with a loss from a separate return limitation year that

is subject to limitation under §1.1502-21(c) (a SRLY

loss), and on January 1 of year 3, S transfers the

assets and the B note to T in an exchange to which

section 351 applies. Because the transferee, T, has

a loss that is subject to a limitation, the assignment

of the B note is a triggering transaction under paragraph (g)(3)(i)(A)(1) of this section (the exception

in paragraph (g)(3)(i)(B)(1) of this section does not

apply). Under paragraph (g)(3)(ii) of this section, B’s

note is treated as satisfied and reissued for its fair

market value, immediately before S’s transfer to T.

As a result of the deemed satisfaction of the note

for more than its adjusted issue price, B takes into

account $30 of repurchase premium under §1.1637(c). On a separate entity basis, S’s $30 gain would

be a capital gain under section 1271(a)(1). Under the

matching rule, however, the attributes of S’s intercompany item and B’s corresponding item must be

redetermined to produce the same effect as if the

transaction had occurred between divisions of a

single corporation. Under paragraph (c)(4)(i) of this

section, the attributes of B’s premium deduction control the attributes of S’s gain. Accordingly, S’s gain is

treated as ordinary income. B is also treated as reissuing, immediately after the satisfaction, a new note

to S with a $130 issue price, $100 stated redemption

price at maturity, and $130 basis in the hands of S.

The treatment of B’s $30 of bond issuance premium

under the new note is determined under §1.163-13.

S is then treated as transferring the new note to T

as part of the section 351 exchange. Because T will

have a fair market value basis in the reissued B note

immediately after the exchange, T’s intercompany

item from the subsequent retirement of the B note

will not reflect any of S’s built-in gain (and the

amount of T’s SRLY loss that may be absorbed by

such item will be limited to any appreciation in the B

note accruing after the exchange).

(5) Intercompany obligation transferred in section 332 transaction. The facts are the same as paragraph (g)(7)(ii)(D)(1) of this section (Example 4),

except that S transfers the B note to P in complete

liquidation under section 332. Because the transaction is an exchange to which section 332 and section

337(a) applies, and neither S nor B recognize gain

or loss, the transaction is not a triggering transaction

under paragraph (g)(3)(i)(B)(1) of this section, and

the note is not treated as satisfied and reissued under

paragraph (g)(3)(ii) of this section.

(E) Example 5. Assumption of intercompany

obligation—(1) Facts. On January 1 of year 1, B

borrows $100 from S in return for B’s note providing for $10 of interest annually at the end of each

year, and repayment of $100 at the end of year 5.

The note is fully recourse and is incurred for use in

Business Z. As of January 1 of year 3, B has fully

performed its obligations, but the note’s fair market

value is $110 reflecting a decline in prevailing market interest rates. Business Z has a fair market value

of $95. On January 1 of year 3, B transfers all of the

assets of Business Z and $15 of cash (substantially

all of B’s assets) to member T in exchange for the

January 20, 2025

assumption by T of all of B’s obligations under the

note in a transaction in which gain or loss is recognized under section 1001. The terms and conditions

of the note are not modified in connection with the

sales transaction, the transaction does not result in a

change in payment expectations, and no amount of

income, gain, deduction, or loss is recognized by S,

B, or T with respect to the note.

(2) No deemed satisfaction and reissuance.

Because all of B’s obligations under the B note are

assumed by T in connection with the sale of the

Business Z assets, the assignment of B’s obligations

under the note is not a triggering transaction under

paragraph (g)(3)(i)(B)(2) of this section, and the note

is not treated as satisfied and reissued under paragraph (g)(3)(ii) of this section.

(F) Example 6. Extinguishment of intercompany

obligation—(1) Facts. On January 1 of year 1, B borrows $100 from S in return for B’s note providing for

$10 of interest annually at the end of each year, and

repayment of $100 at the end of year 20. The note is

a security within the meaning of section 351(d)(2).

As of January 1 of year 3, B has fully performed its

obligations, but the fair market value of the B note is

$130, reflecting a decline in prevailing market interest rates, and S transfers the note to B in exchange

for $130 of B stock in a transaction to which both

section 351 and section 354 applies.

(2) No deemed satisfaction and reissuance. As a

result of the satisfaction of the note for more than

its adjusted issue price, B takes into account $30 of

repurchase premium under §1.163-7(c). Although

the transfer of the B note is a transaction to which

both section 351 and section 354 applies, under paragraph (g)(4)(i)(C) of this section, any gain or loss

from the intercompany obligation is not subject to

either section 351(a) or section 354, and therefore,

S has a $30 gain under section 1001. Because the

note is extinguished in a transaction in which the

adjusted issue price of the note is equal to the creditor’s basis in the note, and the debtor’s and creditor’s items offset in amount, the transaction is not

a triggering transaction under paragraph (g)(3)(i)

(B)(5) of this section, and the note is not treated as

satisfied and reissued under paragraph (g)(3)(ii) of

this section. On a separate entity basis, S’s $30 gain

would be a capital gain under section 1271(a)(1).

Under the matching rule, however, the attributes of

S’s intercompany item and B’s corresponding item

must be redetermined to produce the same effect as

if the transaction had occurred between divisions of a

single corporation. Under paragraph (c)(4)(i) of this

section, the attributes of B’s premium deduction control the attributes of S’s gain. Accordingly, S’s gain

is treated as ordinary income. Under paragraph (g)

(4)(i)(D) of this section, section 108(e)(7) does not

apply upon the extinguishment of the B note, and

therefore, the B stock received by S in the exchange

will not be treated as section 1245 property.

(G) Example 7. Exchange of intercompany obligations—(1) Facts. On January 1 of year 1, B borrows

$100 from S in return for B’s note providing for $10

of interest annually at the end of each year, and repayment of $100 at the end of year 20. As of January 1 of

year 3, B has fully performed its obligations and, pursuant to a recapitalization to which section 368(a)(1)

(E) applies, B issues a new note to S in exchange for

the original B note. The new B note has an issue price,

January 20, 2025

stated redemption price at maturity, and stated principal amount of $100, but contains terms that differ sufficiently from the terms of the original B note to cause

a realization event under §1.1001-3. The original B

note and the new B note are both securities (within the

meaning of section 354(a)(1)).

(2) No deemed satisfaction and reissuance.

Because the original B note is extinguished in

exchange for a newly issued B note and the issue

price of the new B note is equal to both the adjusted

issue price of the original B note and S’s basis in the

original B note, the transaction is not a triggering

transaction under paragraph (g)(3)(i)(B)(6) of this

section, and the note is not treated as satisfied and

reissued under paragraph (g)(3)(ii) of this section. B

has neither income from discharge of indebtedness

under section 108(e)(10) nor a deduction for repurchase premium under §1.163-7(c). Although the

exchange of the original B note for the new B note

is a transaction to which section 354 applies, under

paragraph (g)(4)(i)(C) of this section, any gain or

loss from the intercompany obligation is not subject

to section 354. Under section 1001, S has no gain or

loss from the exchange of notes.

(H) Example 8. Tax benefit rule—(1) Facts. On

January 1 of year 1, B borrows $100 from S in return

for B’s note providing for $10 of interest annually at

the end of each year, and repayment of $100 at the end

of year 5. As of January 1 of year 3, B has fully performed its obligations, but the note’s fair market value

has depreciated, reflecting an increase in prevailing

market interest rates. On that date, S transfers the B

note to member T as part of an exchange for T common stock which is intended to qualify for nonrecognition treatment under section 351 but with a view to

sell the T stock at a reduced gain. On February 1 of

year 4, all of the stock of T is sold at a reduced gain.

(2) Deemed satisfaction and reissuance. Because

the assignment of the B note does not occur within

12 months of the sale of T stock, paragraph (g)(3)

(i)(B)(1)(vi) of this section does not apply to treat

the assignment as a triggering transaction. However,

because the assignment of the B note was engaged in

wi

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