# These synopses are intended only as aids to the reader in > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Airs%3A84cbc6a905d39632 ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text 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 sto [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3A84cbc6a905d39632. Public record. Not legal advice.