KPMG PPT - Tax Executives Institute, Inc.

Tax Executives Institute
Corporate and Consolidated
Return Update
Omaha, NE
November 13, 2012
Jeffrey Vogel
KPMG LLP
Washington National Tax

Notice
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED
OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED,
BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE
PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED
ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY MATTERS
ADDRESSED HEREIN.
You (and your employees, representatives, or agents) may disclose to any and all persons, without
limitation, the tax treatment or tax structure, or both, of any transaction described in the associated
materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax
analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are subject to
change. Applicability of the information to specific situations should be determined through
consultation with your tax adviser.
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
2

Built-in Loss on
Subsidiary Stock
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY.

Background
►
Section 332 - No gain or loss will be recognized on the receipt by a
corporation of property distributed in complete liquidation of
another corporation.
►
Section 331 - Amounts received by a shareholder in a distribution
in complete liquidation are treated as in full payment in exchange
for the stock.
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
4

Section 267(f) – Background
P
P
Unrelated Party
100%
(Loss stock)
70%
30%
S
S
► P sells 30 percent of S stock (at a loss) to Unrelated Party. P
recognizes and takes into account the loss on the sold stock.
► S liquidates. Section 331 applies to the liquidation (i.e., P
recognizes and takes into account the loss on its remaining 70
percent of S stock).
► See Granite Trust Co. v. United States, 238 F.2d 670 (1 st Cir. 1956); Commissioner v.
Day & Zimmerman, Inc. 151 F.2d 517 (3 rd Cir. 1945).
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
5

Section 267(f) – Background (Cont’d)
►
►
►
Section 267(a)(1) – Disallows loss on sales between related persons (as
defined in § 267(b)). Does not apply to any loss of the distributing corporation
(or the distributee) in the case of a distribution in complete liquidation.
Section 267(f)(2) – Defers losses from sales between members of the same
controlled group to which § 267(a)(1) would otherwise apply, until the loss is
taken into account under consolidated return principles. Losses under § 267(f)
are generally deferred until they are taken into account under the timing
principles of the matching and acceleration rules of Treas. Reg. §§ 1.1502-
13(c) and (d).
The attribute redetermination rules of Treas. Reg. § 1.1502-13(c) generally do
not apply. Treas. Reg. § 1.267(f)-1(c)(2). However, to the extent S’s (the
selling member’s) loss would be redetermined to be a noncapital,
nondeductible amount under the principles of Treas. Reg. § 1.1502-13, the
loss continues to be deferred and is not taken into account until S and B (the
buying member) are no longer in a controlled group relationship.
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
6

Intercompany Sale of Stock at a Loss Followed by a
Section 332 Liquidation
Example 1
P
P
FMV=$100
AB=$130
S
$100
B
Liquidate
S
B
T
T
►
►
Year 1 – S sells the stock of
T to B for $100 (recognizing
a $30 deferred loss)
Year 2 – T liquidates into B
under § 332
► Under Treas. Reg. § 1.1502-
13(c)(6)(i), S’s intercompany
loss is recharacterized as
noncapital, nondeductible
(see Treas. Reg. § 1.1502-
13(f)(7) Ex. (6)(c))
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
7

Intercompany Sale of Stock at a Loss Followed by a
Section 332 Liquidation
Example 2
30% of
T stock
B
B
cash
T Stock:
AB=$100
FMV=$10
S
T
S
70%
30%
T
►
►
►
►
B, S, and T are members of a consolidated group.
S sells 30 percent of the T stock to B for $3 and S’s $27 loss is deferred.
T later liquidates in a § 332 transaction (before any change in the value of
the T stock).
The attribute redetermination rule of Treas. Reg. § 1.1502-13(c)(1)
recharacterizes S’s intercompany loss to produce the same results to the
group as if S and B were divisions of a single corporation. Thus, S’s
intercompany loss is redetermined to be a noncapital, nondeductible
amount.
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
8

Section 267(f) – Final Regulations
►
►
To the extent S's loss would be redetermined to be a noncapital,
nondeductible amount under the principles of Treas. Reg. § 1.1502-13, but is
not redetermined because of Treas. Reg. § 1.267(f)-1(c)(2) (which generally
renders the attribute redetermination rule inapplicable to sales between
members of a controlled group), S’s loss continues to be deferred…If the loss
is deferred, it is taken into account when S and B (including their successors)
are no longer in a controlled group relationship or to the extent of any
corresponding income or gain recognized by B with respect to the property,
whichever occurs first.
For example, if S sells all of the stock of corporation T to B at a loss (in a
transaction that is treated as a sale or exchange for federal income tax
purposes), and T subsequently liquidates in an unrelated transaction that
qualifies under § 332, S’s loss is deferred until S and B are no longer in a
controlled group relationship. Similarly, if S owns all of the T stock, sells 30
percent of T’s stock to B at a loss (in a transaction that is treated as a sale or
exchange for federal income tax purposes), and T subsequently liquidates into
S and B, S's loss on the sale is deferred until S and B (including their
successors) are no longer in a controlled group relationship.
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
9

Section 267(f) – Final Regulations (Cont’d)
►
►
►
If B recognizes any income or gain on amounts received in a
distribution in complete liquidation of T, S will take into account its
deferred loss on its sale of T stock to the extent of B’s gain.
For purposes of applying Treas. Reg. § 1.267(f)-1(c)(1)(iv), stock
held by S, stock held by B, and stock held by all members of S’s
consolidated group as well as stock held by any member of a
controlled group of which S is a member that was acquired from a
member of S's consolidated group must be taken into account in
determining whether a loss would be determined to be a noncapital,
nondeductible amount under the principles of Treas. Reg. § 1.1502-
13.
Stock issued to a member of the controlled group is taken into
account for determining whether a loss is treated as noncapital,
nondeductible.
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
10

Section 267(f) – Final Regulations Example 3
30% of
T stock
T Stock:
AB=$100
FMV=$10
►
►
B
(Foreign)
S
T
cash
B is foreign. S and T are
members of a consolidated
group.
S sells 30 percent of the T stock
to B for $3 and S’s $27 loss is
deferred under § 267(f).
►
►
►
S
70%
B
(Foreign)
30%
T later liquidates in a taxable transaction
(before any change in the value of the T
stock).
S’s $27 loss continues to be deferred until S
and B (and their successors) are no longer
in a controlled group relationship.
Compare PLR 200812006 (deferred loss is
taken into account at the time of the section
331 liquidation) to PLR 201014002, ILM
201025046, and CCA 200931043 (deferred
loss remains deferred).
T
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
11

Section 267(f) – Final Regulations Example 4
10% of
T stock
B
(Foreign)
B
(Foreign)
S
50%
S
60%
T Stock:
(aggregate)
AB=$100
FMV=$10
50%
T
40%
T
•
►
►
B is foreign. T is solvent.
S sells 10 percent of the T stock
to B for $1. S’s $9 loss is
deferred under § 267(f).
►
►
T liquidates in a taxable
transaction.
Under the final regulations, S’s
$9 loss continues to be deferred
until S and B (and their
successors) are no longer in a
controlled group relationship.
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
12

Worthless Stock Loss
Requirements for a Capital Loss (§ 165(g)(1))
►
A corporation may claim a capital loss with respect to the stock of a
subsidiary (“Loss Co”) under §165(g)(1) if:
– Loss Co’s stock is “worthless” in the tax year that the loss is claimed
– To establish worthlessness, Loss Co must:
» Have had value (liquidating or potential) at some point during the tax
year, but by year end have no liquidating value (i.e., liabilities > FMV
of assets) and no potential value, (with the lack of potential value
generally indicated by an “identifiable event” such as a liquidation),
and,
» If Loss Co is a consolidated subsidiary, meet the consolidated return
timing standards under Treas. Reg. § 1.1502-80(c)
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
13

Worthless Stock Loss
Requirements for an Ordinary Loss (§ 165(g)(3))
►
A domestic corporation may claim an ordinary loss with respect to the
stock of Loss Co under §165(g)(3) if:
– Worthlessness is established for Loss Co’s stock (i.e., the same test as under
§165(g)(1));
– Loss Co is “affiliated” with shareholder (i.e., shareholder must directly own Loss
Co stock that has at least 80% of the total voting power and at least 80% of the
total value of Loss Co); AND
– More than 90% of Loss Co’s aggregate “gross receipts” are from sources other
than royalties, rents, dividends, interest, annuities, and gains from the
disposition of stocks or securities (i.e., passive income)
►
Note that the amount of the worthless stock loss for a consolidated
subsidiary is subject to the unified loss rule under Treas. Reg. § 1.1502-
36
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
14

PLR 201149015
HC2
HC1
S1 S2 S3 HC2
P3
HC1
HC2
P
HC1
HC2
S1 S2 S3
S1
S2
S1
Subs
Simplified Facts:
► P, the common parent of a group, owned HC1, HC1 owned HC2, and HC2 owned S1
and other domestic subsidiaries, and they joined in a consolidated return.
► These corporations evolved through prior consolidated groups (as depicted above).
► During its existence, HC2 entered into four types of intercompany transactions in the
various consolidated groups:
– S1 and S2 made § 301(c)(1) distributions to HC2, in cash, property and workforce.
– HC2 provided management services to S1, S2 and S3 for a fee.
– S1 sold certain furniture and fixtures to HC2.
► When S1's last significant asset became worthless, and S1 could not service its
remaining clients, both HC2 and S1 were insolvent, and they dissolved under state law.
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
15

PLR 201149015
HC2
HC1
S1 S2 S3 HC2
P3
HC1
HC2
P
HC1
HC2
S1 S2 S3
S1
S2
S1
Subs
Rulings:
► “Provided that the requirements of § 165(g) (taking into account the provisions of [Treas. Reg. §1.1502-80(c)]) are
satisfied, [HC1 may claim a worthless stock deduction under § 165(g)(3) upon the dissolution of [HC2], subject to the
application of [Treas. Reg. §1.1502-36].”
► “For purposes of the § 165(g)(3)(B) ‘gross receipts’ test, [HC2] will include in its aggregate gross receipts all amounts
of gross receipts received in intercompany transactions that are described in [Treas. Reg. §1.1502-13] (as
effective/applicable on or after July 12, 1995) (‘Intercompany Transactions’), and such amounts from Intercompany
Transactions will be treated as ‘gross receipts from passive sources’ to the extent they are attributable to the
Intercompany Transactions’ counterparty’s ‘gross receipts from passive sources’ (‘Look-Through Approach’). See
[Treas. Reg. §1.1502-13(a), (b) and (c)] (as effective/applicable on or after July 12, 1995).”
► “For purposes of computing [HC2’s] ‘gross receipts’ under § 165(g)(3)(B), [HC2] will take into account the historic
gross receipts of any transferor corporation in a transaction to which § 381(a) applied, provided, however, that [HC2]
will eliminate gross receipts from Intercompany Transactions with any such transferor corporation, as appropriate, to
prevent duplication.”
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
16

PLR 201149015
HC2
HC1
S1 S2 S3 HC2
P3
HC1
HC2
P
HC1
HC2
S1 S2 S3
S1
S2
S1
Subs
Rulings:
► “In applying the Look-Through Approach, for purposes of computing the ‘gross receipts from passive
sources’ of [HC2’s] counterparty in an Intercompany Transaction or any other counterparties in
Intercompany Transactions, the counterparty will include in its aggregate gross receipts all amounts
of gross receipts it received in Intercompany Transactions, and such amounts from Intercompany
Transactions will be treated as ‘gross receipts from passive sources’ to the extent they are
attributable to its counterparty's ‘gross receipts from passive sources.’ In other words, [HC2’s] ‘gross
receipts from passive sources’ is determined by looking at all of [HC2’s] gross receipts from
Intercompany Transactions (even if on its face the Intercompany Transaction appears not to be
"gross receipts from passive sources") and sourcing the gross receipts based on [HC2’s]
counterparty's ‘gross receipts from passive sources.’ Furthermore, [HC2’s] counterparty in
Intercompany Transactions (and [HC2’s] counterparty’s counterparty, and so on until it reaches an
ultimate counterparty) will apply a similar rule.”
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
17

GLAM 2012-006
Basic Facts
Asset 1
$10 Loan to S
AB $10 P
FMV $10 $5
AB $5
FMV $5
S1
AB $10
S
$5
Unwanted
Asset
Wanted Intangible Unwanted Asset
(amortizable)
AB $0 AB $5
FMV $15 FMV $5
►P is the common parent of a consolidated group that includes S1
►On Jan. 1, Year 1, P purchases all of the stock of S for $10
►On Feb. 1, Year 1, S sells Unwanted Asset for $5 and distributes the $5 to P
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
18

GLAM 2012-006
Situation 1
P
$10 debt
Wanted Intangible
P
$10 debt
AB $5
AB $10
AB $5
S1
S
S1
S
WI
Wanted Intangible
AB $0
FMV $15
►On Dec. 31, Year 1, S elects to be disregarded as an entity separate from P
►On the consolidated tax return for Year 1, P claims a worthless stock deduction with respect to
its equity ownership in S
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
19

GLAM 2012-006
Situation 2
AB $5
P
$10 debt
AB $10
Wanted Intangible
AB $5
P
WI
$10 debt
S1
S
S1
S
►On December 31, Year 1, S elects to be disregarded as an entity separate from P
►On the consolidated tax return for Year 1, P claims a worthless stock deduction with respect to
its equity ownership in S
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
20

GLAM 2012-006
Situation 3
P
$10 debt
P
AB $5
AB $10
S1
WI
S
S1
S
Wanted Intangible
►On May 14, Year 2, S transfers Wanted Intangible to S1 in exchange for no consideration and P
cancels S’s liability; the transfer is not reported on the consolidated return
►On December 31, Year 2, S elects to be disregarded as an entity separate from P
►On the consolidated tax return for Year 2, P claims a worthless stock deduction with respect to
its equity ownership in S
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
21

GLAM 2012-006
Situation 4
Asset 1
AB $10
FMV $10
AB $5
P
$10 debt
AB $10
AB $5
P
$10 debt
AB $5
$15
S Stock
Unrelated
S1
S
Asset 1
S1
WI
S
A1
Wanted Intangible
► On May 1, Year 1, P contributes Asset 1 to S
► On Jan. 1, Year 2, S transfers Wanted Intangible to S1 for no consideration; the transfer is not reported on
the consolidated return
► On Jan. 1, Year 7, P sells S to an unrelated person for $15; the group’s consolidated returns do not include
any amortization deduction for S1 with respect to Wanted Intangible or any income for S with respect to
the transfer of Wanted Intangible
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
22

GLAM 2012-003
M
Year 1 Year 2 Year 3
$0 $0 $0
S1
$100 $100 ($200)
CTI/(CNOL) $100 $100 ($200)
Simplified Facts:
► M is a holding company and the common parent of a consolidated group that includes S1.
► The M group incurred a CNOL attributable to S1, and had CTI in the two prior years.
► S1 ceased operations, disposed of its operating assets, and used the proceeds to satisfy certain of
its liabilities, but S1 retained certain assets, including (i) legal claims against directors and officers,
and (ii) an interest in the M group's carryback refund claims.
► The FMV of the retained assets is less than S1's remaining liabilities, and S1 was worthless under §
165(g), without taking into account Treas. Reg. §1.1502-80(c).
Conclusion:
► “A tax refund or other legal claim constitutes an asset in the hands of the subsidiary. Therefore, to
the extent that the value of that claim exceeds state law minimum capital requirements, the stock
cannot meet the requirements for worthlessness under [Treas. Reg. § -19(c)(1)(iii)(A)].”
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
23

GLAM 2012-003
M
Year 1 Year 2 Year 3
$0 $0 $0
S1
$100 $100 ($200)
CTI/(CNOL) $100 $100 ($200)
Analysis:
► There is CTI in carryback years of the M group, available for offset by the CNOL
attributable to S1.
► S1 is entitled to a portion of the M group's refund (eventually cash proceeds), which
constitutes property.
► S1’s director/officer claims are also property.
► The plain language of Treas. Reg. §1.1502-19(c)(1)(iii)(A) requires disposition of all S1
assets (other than corporate charter and state law minimum capitalization) before its
stock may be treated as worthless.
► The S1 stock cannot be treated as worthless.
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
24

Unified Loss Rules
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY.

Unified Loss Rules
Basis
$100
$50
$150
P
S
$100
$(150)
$(50)
FMV $100
> $50
> $100
Basis $50 gain $100
► P purchases S for $100 and they file a C/R
► S owns an asset worth $100 with a tax basis of $50
► S sells the asset for $100 while a member of the P group
► This increases P’s basis in the S stock to $150
► P sells the stock of S for $100 and sustains a $50 loss
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
26

Unified Loss Rules
$100
P
S
FMV $100
Basis $100
$50
$(100)
$(50)
$50
NOL > $50
$50
► P forms S with $100 and they file a C/R
► S sustains a $50 NOL that is not currently utilized in the C/R
or carried back
► P sells S for $50
► The stock loss coupled with S’s $50 carryover is considered
loss duplication
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
27

Unified Loss Rules
In September, 2008, the IRS and Treasury finalized the unified loss
rules under Treas. Reg. §1.1502-36.
► Unified loss rules have three priorities:
►
►
►
Prevent the investment adjustment system from creating noneconomic loss, or
failing to eliminate duplicated loss, when members hold subsidiary stock with
disparate bases;
Prevent the circumvention of General Utilities repeal through the use of the
consolidated return regulations;
Prevent the loss duplication that occurs when an economic loss is reflected in
both a member's basis in subsidiary stock and in the subsidiary's assets or
operations.
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
28

Unified Loss Rules
► Basis redetermination rule:
►
►
Treas. Reg. § 1.1502-36(b);
Adjusts stock basis to prevent the investment adjustment system from creating
noneconomic loss and failing to eliminate duplicated loss.
► Basis reduction rule:
►
►
Treas. Reg. § 1.1502-36(c);
Reduces stock basis to prevent noneconomic losses.
► Attribute reduction rule:
►
►
Treas. Reg. § 1.1502-36(d);
Reduces attributes to prevent the duplication of a loss recognized on, or
preserved in the basis of, transferred stock.
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
29

Unified Loss Rules
Basis Redetermination Rule
► Has no effect on the overall gain or loss on members' basis in
subsidiary stock (e.g., the aggregate basis in all shares remains
unchanged, just reallocated).
► Positive investment adjustments eliminated from the basis of
transferred loss shares (but not below value).
► Negative investment adjustments may be removed from shares that are
not transferred and applied to reduce the loss on the transferred loss
shares.
► Adjustments are generally reallocated and applied:
► First to increase (but not above value) members’ bases in
subsidiary preferred shares.
► Second, remaining adjustments are allocated to members’ common
stock.
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
30

Unified Loss Rules
Basis Redetermination Rule
Basis redetermination rule does not apply if:
► There is no disparity among members’ bases in subsidiary
common stock, and no member owns a share of subsidiary’s
preferred stock with unrecognized gain or loss; or
► All subsidiary shares held by members are transferred to
nonmember(s), become worthless under § 165, or a combination
thereof, in one fully taxable transaction.
► Parent may still elect to apply the basis redetermination rule.
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
31

Unified Loss Rules
Basis Redetermination Rule
Issues arising in connection with the basis redetermination rule:
►
►
►
►
►
►
Additional pressure on maintaining basis records;
Information needed on a block-by-block, year-by-year basis;
For each actually issued block of shares or deemed issued block of
shares (e.g., shares deemed issued as a result of an intragroup
reorganization);
If taxpayer acquired another consolidated group, the taxpayer needs to
know basis information for subsidiary members of that other group;
Consider impact of any intercompany debt recharacterized as equity;
this could create another block and/or class of stock to trace;
Potential need for valuation analysis.
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
32

Unified Loss Rules
Basis Reduction Rule
► Intended to eliminate stock loss that is presumed
noneconomic;
► Only applies if, after the application of the basis
redetermination rule, the transferred share is still
a loss share;
► Does not reduce the basis of a transferred share
below value.
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
33

Unified Loss Rules
Basis Reduction Rule
►
►
►
Amount of the basis reduction is the lesser of:
► The share’s “net positive adjustment” and
► The “disconformity amount.”
Net positive adjustment is the greater of:
► Zero and
► The sum of the stock basis adjustments, other than reductions for
distributions, reflected in the basis of the transferred share.
Disconformity amount is the excess, if any, of
► The basis in the transferred share over
► The share’s allocable portion of the subsidiary’s net inside attribute
amount.
► Net inside attribute amount is generally the sum of the subsidiary’s NOLs and capital loss
carryovers, deferred deductions, money, and basis in assets other than money, reduced by the
amount of the subsidiary’s liabilities.
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
34

Unified Loss Rules
Basis Reduction Rule – Lower Tiers
When subsidiary being disposed of owns lower-tier subsidiary and the lower-tier
subsidiary is not being transferred in the same transaction:
► To determine the disconformity amount:
► Basis in the lower tier subsidiary may be treated as reduced by a tentative
reduction amount.
► The tentative reduction amount is the lesser of the lower-tier subsidiary’s net positive adjustment
and disconformity amount.
► In case of multiple tiers of nontransferred lower tier subsidiaries:
► Generally rules first apply to determine the tentatively reduced basis of
stock of the subsidiary at the lowest tier. Then apply at each tier moving
up the tiers.
► The tentative reductions are treated as noncapital, nondeductible expenses
that tier up under the principles of Treas. Reg. § 1.1502-32.
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
35

Unified Loss Rules
Basis Reduction Rule
Example
Original Asset
Basis Value
$50 $100
P
PIA
$50*
Discon.
$150-($100+$20)=$30
S
NOL
$20
► P purchases S for $100 and they file a C/R, S has $20 NOL carryover (not
absorbed in the C/R throughout the transactions here);
► S sells the asset for $100 while a member of the P group;
► This increases P’s basis in the S stock to $150;
► P sells the stock of S for $100 and sustains a $50 loss;
► P’s basis in the S stock is reduced by $30 immediately before sale.
*Does not take into account tax sharing payment
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
36

Unified Loss Rules
Attribute Reduction Rule
► Prevent group from recognizing more than one loss with respect to
a single economic loss.
► If there is a stock loss that reflects a subsidiary’s tax attributes,
► The stock loss is allowed, but the subsidiary is required to reduce
its tax attributes;
► Election available to reduce stock basis or reattribute certain
attributes.
► Rule does not apply if aggregate attribute reduction is less than 5
percent of the aggregate value of the transferred shares.
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
37

Unified Loss Rules
Attribute Reduction Rule
►
►
►
►
The attribute reduction is limited to the lesser of
► The net stock loss; and
► The aggregate inside loss.
The net stock loss is
► The excess, if any, of the aggregate basis of all shares of the
subsidiary’s stock transferred by members in the transaction over the
value of those shares.
The aggregate inside loss, with adjustments for lower-tier subsidiaries, is
► The excess, if any, of the subsidiary’s net inside attribute amount over
the value of all outstanding shares of subsidiary stock.
Net attribute amount is the same as in the basis reduction rule.
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
38

Unified Loss Rules
Attribute Reduction Rule
►
►
►
If attribute reduction is required, the reduction is generally made by category of
attribute:
► Capital loss carryovers;
► Net operating loss carryovers;
► Deferred deductions;
► Basis of assets other than, generally, cash and general deposit accounts.
Special rules apply if the subsidiary owns a lower-tier subsidiary.
A favorable reattribution election is available:
► The election permits a reduction in members’ bases in transferred loss
shares of the subsidiary, or a reattribution of the subsidiary’s attributes
other than basis to the extent such attributes would otherwise be subject to
a reduction.
► Election is only available if the subsidiary ceases to be a member of the
selling consolidated group as a result of the transaction.
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
39

Unified Loss Rules
Attribute Reduction Rule
►
►
If the total amount of attribute reduction is lower than the attributes available, the
taxpayer can elect which attributes to reduce.
► If no election is made, the attributes will be reduced by category beginning
with capital loss carryovers.
► Within a category, losses are reduced based on vintage.
► Other reductions are generally reduced proportionally within the category.
If the total amount of attribute reduction is higher than the attributes available, the
remaining reduction amount is suspended to the extent of any liabilities of the
subsidiary (or a lower-tier subsidiary) that have not been taken into account for tax
purposes before the transfer.
► The suspended amount is applied to reduce any amount that would be
deductible or capitalizable as a result of the liability later being taken into
account.
► If the amount of the required attribute reduction exceeds the subsidiary’s
liability, the excess is “black hole.”
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
40

Unified Loss Rules
Attribute Reduction Rule
Example
Asset
Basis Value
$100 $100
NOL
120
P
S
► P owns 100 shares of S (basis $2/share);
► P sells 30 shares of S for $30;
► P reduces attributes by lesser:
► Net stock loss – $100;
► Aggregate inside loss – $120;
► S reduces its NOL by $100.
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
41

Corporate Equity
Reduction Transactions
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY.

CERT Rules
If an “applicable corporation” involved in a “CERT” has an
NOL in a “loss limitation year,” the corporation may not
be permitted under §172(b)(1)(E) to carry back a portion
of the NOL (“CERIL”) to a tax year preceding the year of
the CERT
► The CERT rules only restrict the portion of an NOL
generated by interest deductions attributable to
specified stock acquisitions or distributions
► Rules are intended to limit loss that would have been
avoided if there was no specified stock acquisitions or
distributions
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
43

CERT
Under §172(h)(3) a CERT is defined as a “major
stock acquisition” or an “excess distribution”
► Major Stock Acquisition (“MSA”):
►
►
►
Acquisition by a corporation of 50% or more (by vote or value) of the
stock in another corporation
Does not include a stock acquisition that includes a § 338 election
May include a tax-free acquisition of stock
► Excess Distribution (“ED”):
►
►
Limited to excess of current year distributions (including redemptions)
over the greater of –
►
►
150 % of the average of such distributions during the 3 taxable years immediately
preceding such taxable year, or
10 % of the fair market value of the stock of such corporation as of the beginning of
such taxable year.
Adjustments made for contributions and vanilla preferred stock
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
44

Applicable Corporations
► An acquiring C corporation in an MSA
► The C corporation acquired in an MSA
► The C corporation making the distribution in an ED
► A successor to an applicable corporation
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
45

Loss Limitation Year
The Loss Occurs in a Loss Limitation Year (“LLY”)
► A LLY is the tax year in which the CERT occurred and,
generally, each of the two following tax years.
►
►
No adjustment was made to the LLY period for the extended
carryback in 2001/2002
If an extended carryback was elected under §172(b)(1)(H), the loss
limitation period was extended to include the year of the CERT
plus one year less than the extended carryback period
► In an MSA the year of the CERT is the year of the
acquisition (c.f., §1.1502-76)
► CERT rules only affect the carryback of a loss from a LLY
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
46

Corporate Equity Reduction Interest Loss
There is a Corporate Equity Reduction Interest Loss
(“CERIL”)
► The CERIL, which is the portion of the NOL that may be
limited for carry back purposes, is generally the portion of a
corporation’s NOL that is generated by interest deductions with
respect to the debt allocated to the CERT
► In determining the allocable interest deductions taken into
account in computing the NOL for any taxable year, taxable
income is computed by taking allocable interest deductions into
account after all other deductions
► UNICAP model – Treas. Reg. § 1.263A-9
► CERIL cannot exceed “3-year average” cap
► De minimis rule
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
47

Consolidated CERT Rules
Under §172(h)(4)(C) consolidated groups are treated as one
taxpayer
► Impact of single entity approach on CERT rules:
► “Applicable corporation” status
► Testing for CERT status
► Computational aspects of MSAs and EDs
► What interest is taken into account for CERIL computation
► CERIL computation
►
►
►
NOL vs. CNOL
Apportionment of CERIL
3-year average computation
► Impact of short taxable years
► Impact of serial CERTs
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
48

Proposed CERT Rules
On September 13, 2012, the IRS and Treasury issued proposed
regulations addressing CERTs
► The proposed regulations address:
►
►
►
General CERT rules
►
►
►
►
►
Identification of CERT costs
Tax-free transactions
Interaction of EDs and MSAs
Limited prior history
Successor rules
Consolidated CERT rules
►
►
►
►
Guidance on single vs. separate entity
Treatment on intercompany transactions
Spread of CERT taint
Allocation of CERT “attributes”
► Interest history
► CERT costs
Carryback Waivers
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
49

Proposed CERT Rules
General CERT rules
►
►
►
►
Identification of CERT costs for CERIL computation
►
►
MSAs:
► FMV of acquired stock and boot
► Amounts paid to acquire stock including capitalized and disallowed amounts
EDs:
► FMV of distribution
► Amounts paid to acquire stock including capitalized and disallowed amounts
► Proportionate allocation of costs
Tax-free transactions
►
Transaction must be tested for CERT status regardless of gain or loss recognition
Interaction of EDs and MSAs
►
►
►
MSAs trump EDs
If part of integrated plan, a distribution will be treated as part of MSA rather than as
an ED
If not an MSA, test as an ED
Limited prior history
►
►
LLY short year rule – prior years are prorated
Short lookback period – Zero is deemed interest incurred in prior years
► Successor rule – Section 381
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
50

Proposed CERT Rules
Consolidated CERT rules – Treas. Reg. §1.1502-72
► Guidance on single vs. separate entity
►
►
►
►
Strong single entity flavor
Location of CERT and interest do not matter
Intercompany transactions are disregarded unless party to transaction leaves group
No separate tracking of CERT
► SRLY CERT of Target infects group
► Reverse acquisition rule
► Allocation of CERT “attributes”
►
►
►
Interest history
CERT costs
Limited CERT status
► Life-Nonlife application
©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
51

Thank you
Jeffrey Vogel – (202) 533-5554
jlvogel@kpmg.com
© 2012 KPMG LLP, a Delaware limited liability partnership and
the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
The KPMG name, logo and “cutting through complexity” are
registered trademarks or trademarks of KPMG International.