Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 73-73

1973-1 C.B. 371

Sec. 1071
Sec. 1502

IRS Headnote

Amounts in an "excess loss account" maintained by the common parent of an affiliated group for a subsidiary's stock sold to comply with a change in Federal Communications Commission policies may not be treated as proceeds from an involuntary conversion.

Full Text

Rev. Rul. 73-73

Advice has been requested whether, under the circumstances described below, a taxpayer filing consolidated returns as part of an affiliated group under section 1501 of the Internal Revenue Code of 1954 may treat amounts required to be included in income pursuant to section 1.1502-19(a)(1) of the Income Tax Regulations (excess loss account) as gain arising from the sale or exchange of property made to effectuate a change in policy by the Federal Communications Commission (F.C.C.) within the meaning of section 1071 of the Code.

Since 1968, X corporation has filed consolidated Federal income tax returns on a calendar year basis as the common parent of an affiliated group of corporations as defined in section 1504 of the Code. X owns all of the outstanding stock of Y, a member of X's affiliated group which is engaged in operating a community antenna television (CATV) system in State A. In addition, X owns all of the outstanding stock of Z, a corporation, also a member of X's affiliated group, which owns and operates a radio and television station in State A in an area which overlaps the service area of the CATV system operated by Y. In prior taxable years, Y has suffered net operating losses which has resulted in a substantial balance in X's excess loss account maintained with respect to its Y stock. On May 24, 1970, the F.C.C. adopted a new provision prohibiting the cross-ownership of a CATV system and a radio and television station whose areas of operation are wholly or partially overlapping.

As a result of the adoption of the new F.C.C. provision, X sold all of its stock interests in Y to an unrelated corporation for 175x dollars on December 31, 1970, in order to effectuate the foregoing change in F.C.C. policy. X has received a certification from the F.C.C. that the sale was necessary in accordance with the requirements of section 1071 of the Code and the underlying regulations. X made a timely election under section 1071(a) to treat the sale as an involuntary conversion under section 1033(a) of the Code and within the time period prescribed by section 1033(a)(3)(B) of the Code reinvested the 175x dollars in qualifying replacement property.

Immediately prior to the sale, X had an adjusted basis in the stock of Y of zero and had an excess loss account (as defined in section 1.1502-32(e)(1) of the regulations) with respect to such stock of 100x dollars. The question is whether the 100x dollars reflected in X's excess loss account must be included in X's income immediately prior to disposition of all of its Y stock pursuant to section 1.1502-19(a)(1) of the regulations, or, whether such amount may be treated as part of the proceeds of a sale from an involuntary conversion within the meaning of sections 1033 and 1071 of the Code.

Section 1071 of the Code provides, in general, that a taxpayer may elect to treat the sale or exchange of property (including stock in a corporation) which is certified by the F.C.C. to be necessary or appropriate to effectuate a change in a policy of, or the adoption of a new policy by, the F.C.C., as an involuntary conversion of such property within the meaning of section 1033 of the Code. Section 1033 of the Code provides for nonrecognition of gain upon an involuntary conversion if the amount realized from such involuntary conversion is reinvested in qualified replacement property. The purpose of section 1071 of the Code is to provide relief to taxpayers affected by the F.C.C. policy of eliminating common ownership of certain directly competing communications facilities and is thus applicable to CATV properties. See Senate Finance Committee Report, 1944 C.B. 1013, regarding section 112(m) of the 1939 Code, the predecessor of section 1071 of the 1954 Code.

Section 1.1502-19(a)(1) of the regulations provides, in general, that immediately before the disposition of stock of a subsidiary, there shall be included in the income of each member disposing of such stock that member's excess loss account with respect to the stock disposed of. The purpose of section 1.1502-19(a)(1) of the regulations, in part, is to require the restoration to income of losses availed of by the parent of an affiliated group in excess of its investment in stock of a subsidiary where disposition of such stock results in the departure of the subsidiary from the parent's affiliated group.

Section 1.1502-19(a)(2) of the regulations, relating to the character of income, provides in effect that, with certain exceptions not here relevant, the amount included in income under subparagraph (1) shall be treated as gain from the sale of stock (that is, as capital gain or ordinary income, as the case may be).

Section 1.1502-19(b)(2) of the regulations, relating to dispositions of stock of a member, provides that a disposition of all shares of stock in a subsidiary is deemed to have occurred where the subsidiary ceases to be a member of the group.

The investment adjustment provisions of section 1.1502-32 of the regulations and the excess loss provisions of section 1.1502-19 of the regulations make it clear that an excess loss account with respect to the stock of a member is separate and distinct from the adjusted basis of the stock of the member. Moreover, the disposition provisions of section 1.1502-19(b) of the regulations that cause an excess loss account to be restored to income are not related to or dependent upon other provisions of the Code that determine the recognition or nonrecognition of gain to the parent upon a disposition of the stock of the member.

Accordingly, it is held that in the instant case the gain of 175x dollars that X realized upon the sale of Y stock (i.e., the amount realized of 175x dollars minus the adjusted basis for such stock of zero) is to be treated in accordance with the provisions of sections 1033 and 1071 of the Code. However, the excess loss account of 100x dollars that X had with respect to the Y stock must be included in X's gross income in 1970 in accordance with the provisions of section 1.1502-19(a) of the regulations.