IRS Issues Proposed Regulations on Controlled Group Deferred Losses

On Wednesday, the IRS issued proposed regulations on the time for taking into account deferred losses on the sale or exchange of property between members of a controlled group (REG-118761-09).

Generally, for any loss on the sale or exchange of property between certain related persons, no deduction is allowed, except for losses on the sale or exchange of property between members of a controlled group (IRC § 267(f)(2)). However, such a loss deduction must be deferred until the property is transferred outside of the controlled group and there would be recognition of loss under consolidated return principles.

Under Treas. Reg. § 1.267(f)-1(c)(1)(iv), if an intercompany loss between members of a consolidated group would have been redetermined to be a noncapital, nondeductible amount as a result of the attribute redetermination rule applicable to consolidated groups, but is not redetermined because the sale or exchange occurred between members of a controlled group (to which the attribute redetermination rule does not apply), then the loss will be deferred until the seller and buyer are no longer in a controlled group relationship.

The proposed regulations provide that the determination of whether a loss would be a noncapital, nondeductible amount must take into account stock held by the selling member, stock held by the buying member, and stock held by all members of the seller’s consolidated group, as well as stock held by any member of a controlled group of which the seller is a member that was acquired from a member of the seller’s consolidated group.

Also, under the proposed regulations, certain deferred losses on the sale or exchange of property between members of a controlled group are taken into account upon the occurrence of either of two events: (1) The deferred loss is taken into account to the extent of any corresponding gain that the member acquiring the property recognizes with respect to the property, or (2) the deferred loss is taken into account when the parties to the transaction cease to be in a controlled group relationship.

Comments on the proposed regulations can be submitted at http://www.regulations.gov/ (IRS REG-118761-09).

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