Rev. Rul. 83-14
1983-1 C.B. 199, 1983-3 I.R.B. 11.
Internal Revenue Service
Revenue Ruling
CONSOLIDATED RETURNS; LIMITATION ON BUILT-IN DEDUCTIONS; EXCESS LOSS
ACCOUNT
Published: January 17, 1983
SECTION 1502. - -REGULATIONS, 26 CFR 1.1502-15: Limitations of certain deductions
Consolidated returns; limitation on built-in deductions; excess loss account. In determining whether a built-in deduction realized by a corporation is subject to limitation under section 1.1502-15(a)(1) of the regulations, the corporation's excess loss account with respect to the subsidiary's stock reduces the aggregate adjusted basis of the corporation's assets for purposes of computing its aggregate adjusted basis to fair market value ratio under section 1.1502-15(a)(4)(i)(b).
ISSUE
In determining whether a built-in deduction realized by a corporation is subject to limitation under section 1.1502-15(a)(1) of the Income Tax Regulations under the circumstances described below, does the corporation's excess loss account with respect to the stock of a subsidiary reduce the aggregate adjusted basis of the corporation's assets for purposes of computing its aggregate adjusted basis to fair market value ratio under section 1.1502- 15(a)(4)(i)(b)?
FACTS
X and its wholly owned subsidiary, Y, file a consolidated return. X's assets consist of the stock of Y and a building. Because of losses incurred by Y, X's basis in the Y stock has been reduced to zero and there is an excess loss account of 50x dollars with respect to the Y stock. The Y stock has a fair market value of 50x dollars. The building has a basis of 116x dollars and a fair market value of 50x dollars. P acquires all the stock of X in a transaction that does not constitute a reverse acquisition. X files a consolidated return with Y for the short period prior to the acquisition. Subsequent to the acquisition, the resulting PXY group elects to file consolidated returns. During the first consolidated return year of the group, X sells the building to an unrelated purchaser for 50x dollars and realize a loss of $66 x dollars.
LAW AND ANALYSIS
Section 1.1502-15(a)(1) of the regulations provides that the use of built-in deductions in a consolidated return year is subject to the limitation of sections 1.1502-21(c) and 1.1502-22(c), which limit the use of such deductions to that portion of consolidated taxable income attributable to the member generating the built-in deductions.
Section 1.1502-15(a)(2)(i) of the regulations defines the term "built-in deductions" for a consolidated return year as those deductions or losses of a corporation that are recognized in that year, or that are recognized in a separate return year and carried over in the form of a net operating or net capital loss to such year, but that are economically accrued in a separate return limitation year (as defined in section 1.1502-1(f)).
Section 1.1502-15(a)(4)(i)(b) of the regulations provides that the limitation imposed by section 1.1502-15(a)(1) will not apply to built-in deductions with respect to assets acquired by the group by acquiring a new member if immediately before the group acquired the assets the aggregate of the adjusted basis of all assets (other than cash, marketable securities, and goodwill) owned by the new member did not exceed the fair market value of all such assets by more than 15 percent (the "de minimis test").
Section 1.1502-15(a)(4)(ii) of the regulations provides that for purposes of the de minimis test a security is not marketable if immediately before the group acquired the assets (a) the fair market value of the security is less than 95 percent of its adjusted basis, or (b) the new member held the security for at least 24 months, or (c) the security is stock in a corporation at least 50 percent of the fair market value of which is owned by the new member.
Section 1.1502-32(a) of the regulations provides that, as of the end of each consolidated return year, each member owning stock in a subsidiary is required to make certain negative or positive adjustments to the basis of such stock. The excess of the negative adjustment over the positive adjustment, if any, is referred to as the "net negative adjustment."
Section 1.1502-32(e)(1) of the regulations provides that a member owning stock in a subsidiary shall apply its net negative adjustment to reduce its basis for such stock. Any excess of such negative adjustment over the basis of the subsidiary's stock is referred to as an "excess loss account."
Section 1.1502-19(a)(1) of the regulations provides that immediately before the disposition of stock of a subsidiary there shall be included in the income of each member disposing of the stock that member's excess loss account with respect to the stock disposed of.
The purpose of the built-in deduction rules under section 1.1502-15 of the regulations is to insure that deductions and losses economically accrued by a corporation in a separate return limitation year but not recognized until a consolidated return year (or a separate return year that is not a separate return limitation year) are applied only against the income of the corporation generating them. See Rev. Rul. 79-279, 1979-2 C.B. 316. The de minimis test of section 1.1502-15(a)(4)(i)(b), which provides an exception to the limitations on built-in deductions imposed by section 1.1502-15(a)(1), measures a corporation's net economically accrued loss. In measuring this net loss, the aggregate adjusted basis of the corporation's assets (other than cash, marketable securities, and goodwill) and their aggregate fair market value must be calculated. Because, pursuant to section 1.1502-19(a)(1), an excess loss account represents a potential income item, failure to reduce the aggregate adjusted basis of all assets by the amount of the excess loss account would not accurately measure the corporation's net economically accrued loss. To accurately measure the corporation's net economically accrued loss for purposes of the de minimis test, the excess loss account should be treated as a reduction of the aggregate adjusted basis used in determining the basis to fair market value ratio.
In the present situation, since Y is a wholly owned subsidiary of X, the Y stock does not constitute marketable securities within the meaning of section 1.1502-15(a)(4)(ii) of the regulations. To determine whether X satisfies the de minimis test, the aggregate adjusted basis of X's assets (116x dollars) should be reduced by 50x dollars, the amount of the excess loss account. This results in an aggregate adjusted basis of 66x dollars. The aggregate fair market value of X's assets is 100x dollars. Because the aggregate adjusted basis does not exceed the aggregate fair market value, X satisfies the de minimis test. Accordingly, the loss realized by X on the sale of its building will not be subject to the limitations referred to in section 1.1502-15(a)(1).
HOLDING
In determining whether a built-in deduction realized by a corporation is subject to limitation under section 1.1502-15(a)(1) of the regulations, the corporation's excess loss account with respect to the stock of a subsidiary reduces the aggregate adjusted basis of the corporation's assets for purposes of computing its aggregate adjusted basis to fair market value ratio under section 1.1502-15(a)(4)(i)(b).
Rev. Rul. 83-14, 1983-1 C.B. 199, 1983-3 I.R.B. 11.