Corporate Tax | Just Tax

Intercompany Transactions (Reg. § 1.1502-13)

This checklist applies Treas. Reg. § 1.1502-13 to match the timing and attributes of transactions between members of a consolidated group, including the matching rule, the acceleration rule, and the redetermination rules. Use it whenever one member sells, licenses, leases, or lends to another during a consolidated return year.

Step 1. The Single-Entity Principle and Regulatory Framework

"This section provides rules for taking into account items of income, gain, deduction, and loss of members from intercompany transactions. The purpose of this section is to provide rules to clearly reflect the taxable income (and tax liability) of the group as a whole by preventing intercompany transactions from creating, accelerating, avoiding, or deferring consolidated taxable income (or consolidated tax liability)." (§ 1.1502-13(a)(1))

• The dual framework. Members are treated as separate entities for some purposes but as divisions of a single corporation for other purposes. (§ 1.1502-13(a)(2))
  • Separate entity treatment applies to determine the amount and location of intercompany items and corresponding items. S computes its gain or loss on a sale of property to B on a separate entity basis, and B takes a cost basis in the property.
  • Single entity treatment applies to redetermine the timing, character, source, and other attributes of intercompany items and corresponding items to produce the effect of transactions between divisions of one corporation.
  • EXAMPLE. S holds land with basis of $70 and sells it to B for $100. Under separate entity treatment, S has $30 gain and B has $100 cost basis. Under single entity treatment, S does not take its $30 gain into account until B sells the land to a nonmember. (§ 1.1502-13(a)(2))
• The principal rules. (§ 1.1502-13(a)(6)(i))
  • The matching rule (§ 1.1502-13(c)) is the principal rule. S and B are generally treated as divisions of a single corporation for purposes of taking into account their items from intercompany transactions.
  • The acceleration rule (§ 1.1502-13(d)) takes items into account when the effect of treating S and B as divisions cannot be achieved, such as when S or B becomes a nonmember.
  • Definitions are in § 1.1502-13(b). Simplifying rules are in § 1.1502-13(e). Stock and obligation rules are in § 1.1502-13(f) and (g). Anti-avoidance is in § 1.1502-13(h). Successor rules are in § 1.1502-13(j).
• Timing rules as a method of accounting. The timing rules of § 1.1502-13 constitute a method of accounting for intercompany transactions, applied by each member in addition to the member's other methods of accounting. (§ 1.1502-13(a)(3)(i))
  • To the extent the timing rules are inconsistent with a member's otherwise applicable methods of accounting, the timing rules control.
  • CAUTION. If S sells property to B in exchange for B's note, the timing rules of § 1.1502-13 apply instead of the installment sale rules of § 453. S must take its intercompany gain into account under the matching rule, not under § 453. (§ 1.1502-13(a)(3)(i))
  • Automatic consent under § 446(e) is granted for changes in method of accounting necessary solely by reason of the timing rules, effected on a cut-off basis. (§ 1.1502-13(a)(3)(ii))
• Application of other rules of law. (§ 1.1502-13(a)(4))
  • § 1.1502-13 applies in addition to other applicable law, including §§ 267(f) (losses between controlled group members), 269 (acquisitions to evade or avoid income tax), and 482 (transfer pricing among commonly controlled taxpayers).
  • An item taken into account under § 1.1502-13 can still be deferred, disallowed, or eliminated under other applicable law, including § 1091 (wash sale losses).
  • § 1.1502-80(a) provides for the general applicability of other rules of law with a limitation on duplicative adjustments.
• Regulatory history and effective date. The current regulations were adopted in Treasury Decision 8597, published July 7, 1995 (60 FR 34831), and comprehensively revised the prior mechanical rules into broad, principle-based rules grounded in the single entity concept. (§ 1.1502-13(l)(1))
  • The regulations apply to transactions occurring in taxable years beginning on or after July 12, 1995.
  • If both the current regulations and prior law apply to a transaction (or neither applies) with the result that items may be duplicated, omitted, or eliminated, prior law applies to the transaction. (§ 1.1502-13(l)(1))
  • Anti-avoidance for pre-effective date transactions applies to transactions engaged in or structured on or after April 8, 1994 with a principal purpose to avoid the new rules. (§ 1.1502-13(l)(2))

Step 2. Intercompany Transaction Identification

"An intercompany transaction is a transaction between corporations that are members of the same consolidated group immediately after the transaction. S is the member transferring property or providing services, and B is the member receiving the property or services." (§ 1.1502-13(b)(1)(i))

• The two-prong membership test. A transaction qualifies as an intercompany transaction only if both prongs are satisfied. (§ 1.1502-13(b)(1)(i))
  • Prong one. The parties must be members of the same consolidated group at the time of the transaction.
  • Prong two. The parties must remain members of the same consolidated group immediately after the transaction.
  • TRAP. A transaction between two corporations that join the same consolidated group immediately after the transaction is an intercompany transaction. But if one party leaves the group immediately after the transaction, the transaction is not intercompany and the acceleration rule may trigger immediate gain or loss recognition for the departing member. See Step 6 for acceleration rule analysis.
• The four categories of intercompany transactions. (§ 1.1502-13(b)(1)(i)(A) through (D))
  • Category A. Intercompany sales of property. S's sale of property (or other transfer, such as an exchange or contribution) to B, whether or not gain or loss is recognized. This includes sales of inventory, depreciable property, capital assets, land, and intangible property.
  • Category B. Intercompany services. S's performance of services for B, and B's payment or accrual of its expenditure for S's performance. This includes management services, professional services, and cost-sharing arrangements.
  • Category C. Licensing, rentals, and loans. S's licensing of technology, rental of property, or loan of money to B, and B's payment or accrual of its expenditure. Each payment or accrual of interest on a loan is a separate intercompany transaction.
  • Category D. Stock distributions. S's distribution to B with respect to S stock. These are treated as intercompany distributions under § 1.1502-13(f)(2).
• Selling member (S) and buying member (B) designations. (§ 1.1502-13(b)(1)(ii))
  • S is the member transferring property or providing services. B is the member receiving the property or services.
  • If two members exchange property, each member is S with respect to the property it transfers and B with respect to the property it receives. (§ 1.1502-13(b)(1)(iii))
  • In a stock distribution context, the distributing corporation is S and the distributee member is B.
• Each transaction is analyzed separately. (§ 1.1502-13(b)(1)(iii))
  • If S simultaneously sells two properties to B, one at a gain and the other at a loss, each property is treated as sold in a separate transaction. The gain and loss cannot be offset or netted against each other for purposes of § 1.1502-13.
  • CAUTION. Do not net intercompany gains and losses across separate transactions when applying the matching rule. Each property, each service, and each payment is analyzed independently.

Step 3. Intercompany Items, Corresponding Items, and Recomputed Corresponding Items

"S's income, gain, deduction, and loss from an intercompany transaction are its intercompany items." (§ 1.1502-13(b)(2)(i)) "B's income, gain, deduction, and loss from an intercompany transaction, or from property acquired in an intercompany transaction, are its corresponding items." (§ 1.1502-13(b)(3)(i)) "The recomputed corresponding item is the corresponding item that B would take into account if S and B were divisions of a single corporation and the intercompany transaction were between those divisions." (§ 1.1502-13(b)(4))

• Intercompany items (S's items). S's income, gain, deduction, and loss from an intercompany transaction are its intercompany items. (§ 1.1502-13(b)(2))
  • An item is an intercompany item whether it is directly or indirectly from an intercompany transaction.
  • Related costs and expenses incurred by S in connection with the intercompany transaction are also intercompany items. (§ 1.1502-13(b)(2)(ii))
  • Amounts not yet recognized (such as unrecognized gain on a nonrecognition transfer) are intercompany items. (§ 1.1502-13(b)(2)(iii))
  • EXAMPLE. S holds land with basis of $70 and sells it to B for $100. S's $30 gain is an intercompany item. B's $100 cost basis is determined on a separate entity basis. (§ 1.1502-13(c)(7)(ii)(A))
• Corresponding items (B's items). B's income, gain, deduction, and loss from an intercompany transaction, or from property acquired in an intercompany transaction, are its corresponding items. (§ 1.1502-13(b)(3))
  • Corresponding items include amounts that are permanently disallowed or permanently eliminated, whether directly or indirectly. This includes expenses disallowed under § 265, nonrecognition under §§ 311(a), 332, or 355(c). (§ 1.1502-13(b)(3)(ii))
  • Corresponding items do NOT include amounts not recognized in transactions where B receives successor assets (e.g., § 1031 like-kind exchanges with nonmembers).
  • EXAMPLE. S sells land to B for $100. B later sells to nonmember X for $110. B's $10 gain on the resale to X is a corresponding item. If B instead distributed the land to its shareholders in a § 311(a) transaction recognizing no loss, the eliminated loss would still be a corresponding item triggering S's intercompany gain. (§ 1.1502-13(b)(3)(ii))
• Recomputed corresponding items (the hypothetical). The recomputed corresponding item is the hypothetical item that B would have if S and B were divisions of a single corporation. (§ 1.1502-13(b)(4))
  • Compute the recomputed item as if B actually took it into account, using reasonable and consistently applied assumptions.
  • EXAMPLE. S sells property ($70 basis) to B for $100. B later sells to X for $90. B's corresponding item is a $10 loss ($90 sale price minus $100 cost basis). The recomputed corresponding item is a $20 gain ($90 sale price minus $70 carryover basis that B would have had as a division). The difference between B's $10 loss taken into account and the $20 recomputed gain is $30, which triggers S's $30 intercompany gain to be taken into account. (§ 1.1502-13(c)(7)(ii)(A)(5))
• Attributes defined. The attributes of an intercompany item or corresponding item are all of the item's characteristics, except amount, location, and timing, necessary to determine the item's effect on taxable income (and tax liability). (§ 1.1502-13(b)(6))
  • Attributes include character (capital vs. ordinary), source (U.S. vs. foreign), treatment as excluded from gross income, and treatment as a noncapital, nondeductible amount.
  • The IRS confirmed in CCA 202240017 that attributes include "treatment as a noncapital, nondeductible amount," which was central to the holding that increased depreciation deductions from § 743(b) adjustments on intercompany partnership interest transfers were redetermined to be noncapital, nondeductible amounts.
• The six-step matching framework. The matching rule operates through the following analytical sequence. (§ 1.1502-13(c)(2))
  • Step A. Identify S's intercompany items on a separate entity basis.
  • Step B. Identify B's corresponding items on a separate entity basis.
  • Step C. Compute the recomputed corresponding item as if S and B were divisions.
  • Step D. Determine the difference for the year between B's corresponding items actually taken into account and the recomputed corresponding item.
  • Step E. S takes its intercompany items into account to reflect that difference.
  • Step F. Redetermine the attributes of S's and B's items to the extent necessary to produce single entity treatment. (§ 1.1502-13(c)(1)(i))

Step 4. The Matching Rule - Timing

"For each consolidated return year, S takes its intercompany item into account under the matching rule to reflect the difference for the year between B's corresponding item taken into account and the recomputed corresponding item." (§ 1.1502-13(c)(2))

• Core timing principle. S does not take its intercompany item into account based on S's own events. S takes it into account based on B's events, specifically the difference between what B actually took into account and what B would have taken into account as a division of the same corporation. (§ 1.1502-13(c)(2))
  • If B has not yet taken any corresponding item into account, and the recomputed corresponding item is also zero, S takes nothing into account.
  • As B takes corresponding items into account over time, S takes its intercompany items into account to reflect the cumulative difference.
  • EXAMPLE (land sale to nonmember). S holds land ($70 basis), sells to B for $100 on January 1, Year 1. On July 1, Year 3, B sells to X for $110. S takes no gain in Years 1 and 2 (B's $0 taken into account equals $0 recomputed). In Year 3, S takes $30 gain (the difference between B's $10 gain and the $40 recomputed gain). The group's total $40 gain is taken into account in Year 3. (§ 1.1502-13(c)(7)(ii)(A))
• Inventory sales and the resale trigger. When S sells inventory to B at a gain, S's intercompany gain is deferred until B resells the inventory to a nonmember (or another triggering event occurs). (§ 1.1502-13(c)(2)(ii))
  • B takes a cost basis in the inventory on a separate entity basis.
  • S does not take its gain into account until B's corresponding items (COGS or gain on resale) are taken into account.
  • CAUTION. If B holds the inventory at year-end, S must not take any gain into account merely because the taxable year has closed. The gain remains deferred until B's resale or another acceleration event.
• The depreciation element for depreciable property. When S sells depreciable property to B at a gain, the matching rule operates annually as B takes depreciation deductions. (§ 1.1502-13(c)(7)(ii)(D))
  • B's depreciation deductions are corresponding items.
  • Each year, S takes intercompany gain into account to reflect the difference between B's actual depreciation and the recomputed depreciation (the depreciation B would have taken if it had succeeded to S's adjusted basis).
  • EXAMPLE. S sells depreciable property to B. S's adjusted basis was $60 and B's cost basis is $100. B takes $15 of depreciation annually. On a single-entity basis, B would have taken only $10 of depreciation based on S's $60 basis. Each year, S takes $5 of gain into account (the $15 actual depreciation minus $10 recomputed depreciation). The $5 of B's depreciation deduction offsets S's $5 intercompany gain, so B's depreciation attributes control and S's gain is ordinary income. (§ 1.1502-13(c)(7)(ii)(D))
• Simplifying rules for inventory. For dollar-value LIFO inventory, § 1.1502-13(e)(1) provides several aggregate methods. (§ 1.1502-13(e)(1))
  • Cost method. S takes intercompany items into account based on B's cost of goods sold.
  • Absorption method. S takes items into account based on its comparable profit multiple or its costs incurred.
  • Increment averaging method. S's deferred amount equals S's intercompany income multiplied by the ratio of the LIFO value of B's current-year costs of its layer of increment to B's total inventory costs incurred for the year. (§ 1.1502-13(e)(1)(ii)(B))
  • Increment valuation method. Similar to increment averaging but uses the ratio to B's total inventory costs incurred in the "appropriate period." (§ 1.1502-13(e)(1)(ii)(C))
  • Other reasonable method. A method is reasonable 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. (§ 1.1502-13(e)(1)(v))
  • S's deferred intercompany income is layered based on B's LIFO inventory layers. When B has a decrement in a subsequent year, S takes into account the intercompany income/loss layers in the same manner and proportion as B takes into account its inventory decrements.
• Installment sale override. The timing rules of § 1.1502-13 apply instead of the installment sale rules of § 453. (§ 1.1502-13(a)(3)(i))
  • Even if S sells property to B in an installment sale, S must take its intercompany gain into account under the matching rule based on B's subsequent events, not under § 453 based on B's note payments.
  • EXAMPLE. S sells land to B for B's $110 note, payable $55 in Year 4 and $55 in Year 5. B later sells the land to X for X's $110 note. S's intercompany gain is taken into account under the matching rule based on B's resale to X, not under § 453 based on B's note payments. (§ 1.1502-13(c)(7)(ii)(E))
  • TRAP. If S sells B's installment note to a third party, S's intercompany gain is NOT accelerated. S continues to track the gain based on subsequent events involving the property. (§ 1.1502-13(c)(7)(ii)(F))
• Capitalized depreciation. If B capitalizes depreciation into inventory or another asset under § 263A, S's gain is not taken into account as the depreciation is capitalized. (§ 1.1502-13(j)(3))
  • Instead, S's gain is taken into account when the inventory (or other asset) is sold or as that asset is depreciated.
  • This rule prevents S's gain from being recognized prematurely merely because B has capitalized costs into an asset under § 263A.

Step 5. The Matching Rule - Attribute Redetermination and Character

"The separate entity attributes of S's intercompany items and B's corresponding items are redetermined to the extent necessary to produce the same effect on consolidated taxable income (and consolidated tax liability) as if S and B were divisions of a single corporation, and the intercompany transaction were a transaction between divisions." (§ 1.1502-13(c)(1)(i))

• Attribute redetermination principle. The separate entity attributes of S's intercompany items and B's corresponding items are redetermined to produce the same effect on consolidated taxable income as if S and B were divisions. (§ 1.1502-13(c)(1)(i))
  • This is a broad, principle-based rule rather than a mechanical rule. The preamble to the 1995 regulations explains that "the proposed regulations rely less on mechanical rules and, instead, provide broad rules of general application based on the underlying principles of the regulations."
  • IRS CCA 202240017 applied this broad principle to hold that § 1.1502-13 redetermines a buying member's increased depreciation deductions from § 743(b) adjustments on intercompany partnership interest transfers to be noncapital, nondeductible amounts, because under single entity treatment those adjustments would not exist.
• Offsetting items. B's attributes control. To the extent S's intercompany item and B's corresponding item offset each other in amount (without regard to items from prior years), the attributes of B's corresponding item control the attributes of S's intercompany item. (§ 1.1502-13(c)(4)(i)(A))
  • EXAMPLE (depreciable property). S buys 10-year recovery property for $100, depreciates it for 2 years ($10 per year), and sells to B for $130 on January 1, Year 3. S has $50 intercompany gain. B takes $15 depreciation ($10 on the $80 portion representing S's adjusted basis, plus $5 on the $50 excess portion). On a single-entity basis, B would succeed to S's $80 adjusted basis and take only $10 depreciation. Each year, S takes $5 gain into account (the difference between B's $15 actual depreciation and $10 recomputed depreciation). The $5 of B's depreciation deduction offsets S's $5 intercompany gain in amount, and B's depreciation attributes control. Therefore, S's $5 gain each year is ordinary income (not capital gain), even though the property was a capital asset in S's hands. (§ 1.1502-13(c)(7)(ii)(D))
  • CAUTION. S's capital gain can become ordinary income if B's corresponding item (such as depreciation) is ordinary in character. Always trace the character of B's corresponding items that offset S's intercompany items.
• Non-offsetting items. Reasonable allocation. To the extent S's intercompany item and B's corresponding item do not offset each other in amount, the attributes redetermined under § 1.1502-13(c)(1)(i) are allocated to S's and B's items in a reasonable manner, taking into account all the facts and circumstances (including the purposes of § 1.1502-13). (§ 1.1502-13(c)(4)(ii))
  • EXAMPLE (§ 1245 and 1231 allocation). S sells a machine to B for $100, recognizing $100 of § 1245 recapture gain (all ordinary). B holds as inventory. In Year 2, the machine produces $20 of depreciation that B capitalizes into inventory under § 263A. In Year 3, B sells the inventory for a $40 gross profit (which would have been $60 without the capitalized depreciation). The $40 of B's gain is § 1245 gain and $10 is § 1231 gain. Under a reasonable allocation, all $10 of § 1231 gain is allocated to S, and S's remaining $30 and B's $10 are § 1245 gain. (§ 1.1502-13(c)(7)(ii)(D)(5))
  • The reasonable allocation standard is intentionally broad. The preamble to the 1995 regulations explains that the regulations "rely less on mechanical rules and, instead, provide broad rules of general application based on the underlying principles of the regulations."
  • IRS CCA 202240017 applied the reasonable allocation rule to redetermine a buying member's increased depreciation deductions from § 743(b) adjustments as noncapital, nondeductible amounts, because under single entity treatment those adjustments would not exist.
• Holding period aggregation. The holding period of property transferred in an intercompany transaction is the aggregate of the holding periods of S and B. (§ 1.1502-13(c)(1)(ii))
  • If the basis of the property is determined by reference to the basis of other property, the holding period is determined by reference to the other property.
  • EXAMPLE. S holds land for investment with $70 basis for 3 years, sells to B for $100, and B holds for 2 more years before selling to X for $110. The group's entire $40 gain ($30 from S plus $10 from B) is long-term capital gain because S's and B's holding periods are aggregated for a total of 5 years. (§ 1.1502-13(c)(7)(ii)(A))
• Character redetermination from activities of both members. Under single entity treatment, the activities of both S and B affect the character of the items. (§ 1.1502-13(c)(1)(i))
  • EXAMPLE (dealer activity). S holds land for investment ($70 basis) and sells to B for $100. B develops the land as residential real estate and sells lots to customers for $110. Because S's and B's activities together mean the property was effectively held for sale to customers in the ordinary course of business, both S's $30 intercompany gain and B's $10 corresponding gain are ordinary income, not capital gain. (§ 1.1502-13(c)(7)(ii)(B))
  • EXAMPLE (§ 351 transfer). S holds land ($70 basis) for sale to customers. S transfers the land to B in a § 351 exchange. S has no gain under § 351(a). B's basis is $70. B holds for investment and later sells to X for $100. B's $30 gain is treated as ordinary income because of S's dealer activities under single entity treatment. S had no intercompany item because § 351(a) applied. (§ 1.1502-13(c)(7)(ii)(C))
• Limitation on excluding intercompany income from gross income. Notwithstanding the general attribute redetermination rule, S's intercompany income or gain is redetermined to be excluded from gross income only under limited circumstances. (§ 1.1502-13(c)(6)(ii))
  • S's intercompany income or gain is excluded from gross income only to the extent that B's corresponding item is a deduction or loss and, in the taxable year the item is taken into account under § 1.1502-13, it is permanently and explicitly disallowed under another provision of the Internal Revenue Code or regulations.
  • Stock elimination exception. Intercompany gain may be excluded from gross income if the successor member's basis reflecting the gain is eliminated without recognition of gain or loss, the group has not derived and will not derive any Federal income tax benefit from the basis, and the effects have not previously been reflected on the group's consolidated return. (§ 1.1502-13(c)(6)(ii)(C))
  • CAUTION. Do not assume intercompany gain is excluded from gross income merely because B's corresponding item is eliminated in a nonrecognition transaction. The gain is excluded only if the stringent conditions of § 1.1502-13(c)(6)(ii) are satisfied. See Step 10 for stock elimination analysis.
  • TRAP. If S sells property ($70 basis) to B for $100 and the property later depreciates to $80, B may distribute it to shareholders at no gain or loss under § 311(a). The group derived a $10 tax benefit from the basis step-up (B avoided a $10 excess loss account or deficiency at distribution). Under § 1.1502-13(c)(6)(ii)(C), only $20 of S's $30 gain is excluded. The remaining $10 remains taxable capital gain. (§ 1.1502-13(c)(7)(ii)(Q))

Step 6. The Acceleration Rule

"S takes its intercompany item into account immediately before the time the effect of treating S and B as divisions of a single corporation cannot be produced. For example, if S becomes a nonmember before the intercompany item is taken into account under paragraph (c) of this section (the matching rule), S takes the intercompany item into account immediately before it becomes a nonmember." (§ 1.1502-13(d)(1))

• The acceleration trigger. S takes its intercompany item into account immediately before the time the effect of single entity treatment cannot be produced. (§ 1.1502-13(d)(1))
  • The most common triggering event is deconsolidation, when either S or B ceases to be a member of the consolidated group.
  • The acceleration rule also applies whenever "the effect of treating S and B as divisions of a single corporation cannot be produced," which includes worthlessness deductions, cancellation of debt events, and § 481 adjustments.
  • S's items are taken into account immediately before the event that makes single entity treatment impossible. This ordering is critical for basis adjustments under § 1.1502-32.
• Deconsolidation of S or B. (§ 1.1502-13(d)(3)(i))
  • If P sells S's stock to X and S becomes a nonmember, S's intercompany gain is taken into account immediately before S becomes a nonmember. The gain is reflected in P's basis in S stock under § 1.1502-32 immediately before P's sale.
  • EXAMPLE. S owns land ($70 basis) and sells it to B for $100 on January 1, Year 1. On July 1, Year 3, P sells 60% of S's stock to X, and S becomes a nonmember. S takes $30 gain into account immediately before becoming a nonmember. P's basis in S stock increases by $30. B continues to take its corresponding items into account under its accounting method. (§ 1.1502-13(d)(3)(i), Example 1)
  • The same result applies if P sells B's stock instead of S's stock. If B becomes a nonmember, S takes its intercompany gain into account immediately before B becomes a nonmember because the effect of single entity treatment cannot be produced once B is no longer in the group.
• Attributes under acceleration. If S's intercompany item is taken into account under the acceleration rule, its attributes are determined by taking into account any remaining corresponding items that B would take into account with respect to the property or services. (§ 1.1502-13(d)(2))
  • S's intercompany item attributes are redetermined as if B had resold the property for an amount equal to B's adjusted basis.
  • If the property is not owned by a nonmember immediately after, the sale is deemed to a nonmember affiliate.
  • S's activities before the intercompany transaction and B's activities after the transaction both affect the character determination.
  • EXAMPLE. S sells land to B. S's gain was long-term capital gain on a separate entity basis. B holds the land as inventory (dealer property). S becomes a nonmember before B sells the land. S's gain is redetermined as ordinary income because B's dealer activities would have affected the character under single entity treatment. (§ 1.1502-13(d)(2)(i)(B))
• B's corresponding items continue after acceleration. (§ 1.1502-13(d)(3)(i)(D))
  • Notwithstanding the acceleration of S's gain, B continues to take its corresponding items into account under its own accounting method.
  • B's items from the property are taken into account based on subsequent events, such as its sale of the property or depreciation deductions.
  • CAUTION. Do not stop tracking B's corresponding items merely because S's intercompany item has been accelerated. B's ongoing items may affect the group's taxable income in subsequent years and may affect the character of S's accelerated items.
• Partial acceleration scenarios. (§ 1.1502-13(d)(2))
  • If only a portion of the single-entity effect is lost, only a proportionate amount of S's intercompany item is accelerated.
  • EXAMPLE. S owns all T stock ($10 basis, $100 value). S sells T stock to P (another member) for $100. T later issues additional stock to the public and becomes a nonmember. S takes a portion of its $90 gain into account when T becomes a nonmember, reflecting the lost single-entity effect. The remainder stays deferred based on subsequent events. (§ 1.1502-13(f)(7)(ii)(E))
• § 351 transfer to nonmember trap. If B transfers intercompany property to a nonmember in a § 351(a) transaction, S's entire intercompany gain is accelerated. (§ 1.1502-13(c)(7)(ii)(A)(9))
  • Although the matching rule produces no difference on the § 351 transfer itself (no gain recognized by B, $0 recomputed), the acceleration rule applies because X, a nonmember, receives the property with a carryover basis under § 362, and the effect of single entity treatment cannot be fully produced.
  • TRAP. A § 351 transfer of intercompany property to a nonmember accelerates all of S's deferred gain immediately. Plan the timing of such transfers carefully.

Step 7. Intercompany Sales of Property

"S's sale of property (or other transfer, such as an exchange or contribution) to B, whether or not gain or loss is recognized." (§ 1.1502-13(b)(1)(i)(A))

• General framework for property sales. S determines its gain or loss on a separate entity basis. B takes a cost basis in the property. The matching rule defers S's gain or loss until B takes corresponding items into account. (§ 1.1502-13(a)(2))
  • S's gain or loss from the sale is an intercompany item.
  • B's basis in the acquired property is B's actual cost basis ("outside basis" for intercompany purposes).
  • For purposes of computing the recomputed corresponding item, the hypothetical basis B would have had as a division is S's carryover basis (the "inside basis").
  • The tracking differential (B's cost basis minus S's carryover basis) equals S's deferred intercompany gain or loss.

Step 7A. Inventory Items

• Basic mechanics. When S sells inventory to B at a gain, S's gain is an intercompany item deferred under the matching rule. S does not take its gain into account until B resells the inventory to a nonmember or another triggering event occurs. (§ 1.1502-13(c)(2)(ii))
  • B takes a cost basis in the inventory on a separate entity basis.
  • When B resells to a nonmember, S takes its intercompany gain into account to reflect the difference between B's corresponding gain and the recomputed corresponding gain (the gain B would have had with S's carryover basis).
• LIFO layer tracking. For dollar-value LIFO inventory, S's deferred intercompany income is layered based on B's LIFO inventory layers. (§ 1.1502-13(e)(1)(ii)(B))
  • When B has an increment, a portion of S's intercompany income is deferred based on the ratio of the LIFO value of B's increment to B's total inventory costs.
  • When B has a decrement in a subsequent year, S takes into account the intercompany income/loss layers in the same manner and proportion as B takes into account its inventory decrements.
  • EXAMPLE. S and B both use double-extension dollar-value LIFO. In Year 2, S sells 100 units to B for $1,150. S's cost is $800. S's intercompany income is $350. B's total inventory costs are $6,000 and the LIFO value of B's increment is $600. The ratio is $600/$6,000 = 10%. Deferred amount is 10% x $350 = $35. S takes $315 into account in Year 2 and defers $35. (§ 1.1502-13(e)(1)(v)(A), Example 1)

Step 7B. Depreciable and Amortizable Property

• Annual depreciation matching. When S sells depreciable property to B at a gain, S's gain is taken into account annually as B takes depreciation deductions. (§ 1.1502-13(c)(7)(ii)(D))
  • Each year, S's gain recognized equals B's actual depreciation minus B's recomputed depreciation (the depreciation B would have taken with S's carryover basis).
  • The character of S's gain each year follows B's depreciation deduction character (ordinary income).
  • If B capitalizes depreciation into inventory under § 263A, S's gain is deferred until the inventory is sold or the asset is depreciated. (§ 1.1502-13(j)(3))
• § 1245 and 1231 attribute allocation. When depreciable property is sold to a nonmember after an intercompany sale, the § 1245 recapture and § 1231 gain attributes must be allocated between S and B. (§ 1.1502-13(c)(4)(ii))
  • To the extent S's intercompany item and B's corresponding item do not offset, attributes are allocated in a reasonable manner considering all facts and circumstances.
  • CAUTION. The allocation of depreciation recapture attributes can significantly affect the group's tax liability because § 1245 gain is ordinary income while § 1231 gain may receive capital gain treatment. Document the allocation methodology.

Step 7C. Capital Assets

• Holding period aggregation. The holding period of property transferred in an intercompany transaction is the aggregate of S's and B's holding periods. (§ 1.1502-13(c)(1)(ii))
  • If S held the property for 3 years and B held for 2 years before selling to a nonmember, the total holding period is 5 years, producing long-term capital gain treatment for the entire gain.
  • This aggregation applies to all of the group's gain, including both S's deferred intercompany gain and B's corresponding gain.
• Character redetermination from activities. The activities of both S and B affect character under single entity treatment. (§ 1.1502-13(c)(1)(i))
  • If S holds land as a capital asset but B uses it as dealer property (held for sale to customers), S's deferred gain becomes ordinary income when taken into account because the combined activities of S and B treated the property as inventory.
  • If S holds property for sale to customers but B holds for investment, B's gain on resale to a nonmember is ordinary income because of S's dealer activities. (§ 1.1502-13(c)(7)(ii)(C))

Step 7D. Land and Non-Depreciable Property

• Resale to nonmember triggers full recognition. Land and non-depreciable property produce the simplest matching rule result. S's entire deferred gain or loss is taken into account when B sells the property to a nonmember. (§ 1.1502-13(c)(7)(ii)(A))
  • No annual depreciation element exists to create partial recognition.
  • The recomputed corresponding item is simply the gain or loss B would have had with S's carryover basis.
  • S takes its entire intercompany item into account in the year of B's sale to the nonmember.
• § 1031 exchange with nonmember. If B exchanges intercompany property for like-kind property from a nonmember under § 1031, S's gain is not taken into account under the matching rule at the time of the exchange. (§ 1.1502-13(c)(7)(ii)(A)(8))
  • B's gain is preserved in the replacement property.
  • Under the successor asset rule, S's intercompany gain is taken into account by reference to the replacement property (the successor asset) in subsequent transactions.

Step 7E. Successor Asset and Successor Person Rules

• Successor asset rule. Any reference to an asset includes a reference to any other asset the basis of which is determined, directly or indirectly, in whole or in part, by reference to the basis of the first asset. (§ 1.1502-13(j)(1))
  • EXAMPLE. S sells land to M for $90 (S has $70 basis, $20 gain). M transfers the land to B in exchange for all of B's stock in a § 351 transaction. M's basis in B stock is $100 and B's basis in the land is $100. Under the successor asset rule, references to the land include references to M's B stock. S's intercompany gain can be triggered by events involving either the land or M's B stock. (§ 1.1502-13(j)(10)(i), Example 1)
  • The successor asset rule applies to any nonrecognition transaction where basis carries over, including § 351 transfers, § 381 transactions, and § 1031 like-kind exchanges between members.
  • Practitioners must maintain successor asset tracking records showing the chain of basis determination from the original intercompany transaction through each subsequent transfer.
• Successor person rule. If a member's assets are acquired by another member in a § 381 transaction, complete liquidation, or other specified transaction, the successor succeeds to the predecessor's intercompany items. (§ 1.1502-13(j)(2)(ii))
  • The successor person rule ensures that deferred intercompany items do not disappear when a member transfers its assets in a tax-free reorganization or liquidation.
  • Back-to-back intercompany transactions are matched cumulatively under § 1.1502-13(j)(3).

Step 8. Intercompany Services and Licensing

"S's performance of services for B, and B's payment or accrual of its expenditure for S's performance." (§ 1.1502-13(b)(1)(i)(B)) "S's licensing of technology, rental of property, or loan of money to B, and B's payment or accrual of its expenditure." (§ 1.1502-13(b)(1)(i)(C))

• General treatment of services. S's performance of services for B is an intercompany transaction. S's income from the services and its related expenses are both intercompany items. (§ 1.1502-13(b)(2)(ii))
  • Under the matching rule, S's net intercompany income from services is generally taken into account immediately to the extent B deducts or capitalizes the service fees.
  • If B deducts the service fees currently, S takes its income into account currently.
  • If B capitalizes the fees into a depreciable asset, S's income is taken into account as B recovers the capitalized amount through depreciation, amortization, or cost depletion.
• Cost recovery over time. (§ 1.1502-13(c)(7)(ii)(G))
  • EXAMPLE. S performs drilling services for B for $100, with $80 of related expenses. B capitalizes the $100 into a depreciable asset (an oil well) and recovers it through cost depletion over 10 years ($10 per year). In Year 1, S takes into account $80 of income and $80 of expenses immediately. The remaining $20 of intercompany income is taken into account over Years 2 through 11 at $2 per year, reflecting the difference between B's $10 annual cost recovery deduction and the $8 recomputed deduction (if B had S's $80 basis). (§ 1.1502-13(c)(7)(ii)(G), Example 7)
  • S's net intercompany income from services is generally taken into account immediately to the extent B deducts the service fees currently.
  • If B capitalizes the fees into inventory, S's remaining income is taken into account when B sells the inventory to a nonmember.
• Source redetermination for services. When S performs services for B and B capitalizes the fees into inventory sold outside the group, the source of S's intercompany income is redetermined based on single entity treatment. (§ 1.1502-13(c)(7)(ii)(N))
  • EXAMPLE. S earns $10x performing services in the United States for B. B capitalizes the fees into inventory manufactured in the United States and sold to an unrelated person in Country Y, with title passing in Country Y. On a single-entity basis, all $100x of income from the inventory sale would be U.S. source. Therefore, S's $10x service income is redetermined to be U.S. source income, not foreign source income. (§ 1.1502-13(c)(7)(ii)(N), Example 14)
  • CAUTION. Source redetermination can affect foreign tax credit calculations, subpart F inclusions, and FDII computations. Always consider the source implications of intercompany service arrangements.
• § 482 overlap. § 1.1502-13 applies in addition to § 482. § 482 may adjust the transfer price between S and B. (§ 1.1502-13(a)(4))
  • As confirmed in CCA 202240017, § 482 adjustments to intercompany transactions within a consolidated group generally produce no current U.S. tax effect because adjustments result in offsetting amounts of gross income and expense that are deferred under the matching rule.
  • The group's total taxable income is not affected by the transfer price for purely domestic transactions because the intercompany transaction is treated as between divisions.
  • TRAP. § 482 adjustments may have tax effects when the transaction involves a foreign branch or disregarded entity where § 987 currency gain or loss may apply, when the adjustment affects attributes subject to limitation (e.g., SRLY, § 382), or when the intercompany transaction involves a nonmember (such as a controlled foreign corporation).
• Intercompany licensing and royalties. Royalties paid by B to S for licensed technology are intercompany transactions subject to the matching rule.
  • S's royalty income and B's royalty deduction are taken into account under the matching rule to reflect the difference between B's actual deduction and the recomputed deduction (zero, because divisions of a single corporation would not pay royalties to themselves).
  • If B capitalizes the royalties into inventory or a self-constructed asset, S's income is taken into account as B recovers the capitalized amount.

Step 9. Intercompany Obligations

"This paragraph (g) provides rules for obligations of members." (§ 1.1502-13(g)(1))

• Definition and scope. An intercompany obligation is an obligation of a member (debt or security) held by another member. (§ 1.1502-13(g)(1))
  • The special rules of § 1.1502-13(g) apply only for the period during which both the debtor and creditor are members of the same consolidated group.
  • An intercompany nonrecognition transaction is a transaction in which an intercompany obligation is transferred in a nonrecognition transaction.

Step 9A. Interest and Original Issue Discount

• Interest matching. Payments of interest on intercompany obligations are intercompany transactions. (§ 1.1502-13(g)(7)(ii)(A))
  • EXAMPLE. B borrows $100 from S. The note provides for $10 annual interest and repayment of $100 at the end of Year 5. Under the matching rule, S takes its $10 of interest income into account each year to reflect the $10 difference between B's $10 interest expense and the $0 recomputed expense (if divisions of a single corporation, no interest would exist). Both S's income and B's deduction are ordinary items. (§ 1.1502-13(g)(7)(ii)(A), Example 1)
  • The matching applies to each payment or accrual of interest separately. Each interest payment is a separate intercompany transaction. (§ 1.1502-13(b)(1)(i)(C))
  • Both S's interest income and B's interest expense are ordinary items. The character is not redetermined because the items offset in amount and the ordinary character controls.
• Original issue discount. The same matching principles apply to OID on intercompany obligations. (§ 1.1502-13(g)(7)(ii)(A)(3))
  • If B borrows $90 and must repay $100, the $10 of OID is taken into account by S under § 1272 and by B under § 163(e) as it accrues, with S's income matching B's deduction timing.
  • The OID rules ensure that the tax treatment of intercompany debt with original issue discount parallels the treatment of intercompany debt with stated interest.
• § 163(j) exception. Notional principal contracts between members are not subject to the matching rule if § 163(j) would otherwise apply to the payments. (§ 1.1502-13(g)(6))
  • This exception prevents the matching rule from interfering with the consolidated group's § 163(j) business interest expense limitation computation.
  • TRAP. Do not structure intercompany notional principal contracts with a principal purpose of avoiding § 163(j). The anti-avoidance rule in § 1.1502-13(h)(2)(vi) can apply to recharacterize such transactions.

Step 9B. Triggering Transactions and Deemed Satisfaction

• Triggering transactions. A triggering transaction occurs when any of the following events happens with respect to an intercompany obligation. (§ 1.1502-13(g)(3)(i)(A))
  • The creditor realizes an amount of income, gain, deduction, or loss upon a transfer or assignment of the obligation to a nonmember or another member.
  • The obligation ceases to be an intercompany obligation (e.g., S or B becomes a nonmember).
  • The obligation is exchanged for newly issued debt of a member in a debt-for-debt exchange.
  • Anti-avoidance. The assignment was engaged in with a view to shift built-in gain, loss, income, or deduction from the obligation from one member to another to secure a tax benefit the group would not otherwise enjoy.
• Exceptions to triggering. The following are not triggering transactions. (§ 1.1502-13(g)(3)(i)(B))
  • A § 351 exchange in which no gain or loss is recognized.
  • A § 332 liquidation in which no gain or loss is recognized.
  • A complete assumption of the obligation in connection with the sale of a business.
  • An extinguishment where the adjusted issue price equals the creditor's basis.
  • An exchange of intercompany obligations for newly issued intercompany obligations.
• Deemed satisfaction and reissuance. If a triggering transaction occurs (and no exception applies), the intercompany obligation is treated as satisfied by the debtor for cash in an amount equal to its fair market value, and then as having been reissued as a new obligation immediately before the triggering transaction, with a new holding period but otherwise identical terms. (§ 1.1502-13(g)(3)(ii))
  • This preserves built-in gain or loss on the obligation for the matching rule.
  • EXAMPLE. S holds B's note (adjusted issue price $100, FMV $70). S sells the note to X for $70. The triggering transaction causes the note to cease to be intercompany. Under deemed satisfaction, B's note is treated as satisfied for $70. B takes into account $30 of discharge of indebtedness income. On a separate entity basis, S's $30 loss would be capital under § 1271(a)(1). Under the matching rule, B's $30 COD income is ordinary, so S's loss is redetermined to be ordinary loss. (§ 1.1502-13(g)(7)(ii)(B)(2), Example 2)
  • TRAP. The deemed satisfaction and reissuance rule can trigger discharge of indebtedness income or repurchase premium deductions that the group did not anticipate. Always analyze the FMV of intercompany debt before any transfer or assignment to a nonmember.

Step 9C. Worthlessness of Intercompany Debt

• Worthlessness deductions. When an intercompany obligation becomes worthless, B's bad debt deduction is a corresponding item that triggers S's intercompany gain under the matching rule. (§ 1.1502-13(c)(7)(ii)(F))
  • EXAMPLE. S sells X's note (from a prior nonmember sale) to B for $100. X's note later becomes worthless. B has a $100 short-term capital loss under § 165(g) on a separate entity basis. Under holding period aggregation (§ 1.1502-13(c)(1)(ii)), B's holding period for X's note is aggregated with S's holding period, so B's loss is redetermined to be long-term capital loss. S takes its intercompany gain into account in the year of worthlessness to reflect the difference between B's loss taken into account and the recomputed loss. Under attribute redetermination, S's gain is long-term capital gain. (§ 1.1502-13(c)(7)(ii)(F)(3), Example 6)
  • The holding period of the obligation is aggregated under § 1.1502-13(c)(1)(ii). If S held X's note for more than one year before selling it to B, B's worthless deduction is long-term capital loss, not short-term.
  • S's intercompany gain character follows B's loss character. If B's loss is long-term capital loss, S's gain is long-term capital gain.
• Insolvent debtor. If B is insolvent when S sells B's note to P (another member), on a separate entity basis B's COD income might be excluded under § 108(a). (§ 1.1502-13(g)(7)(ii)(C)(4), Example 3)
  • However, under § 1.1502-13(g)(4)(i)(C), § 108(a) does not apply to characterize B's income as excluded from gross income in the intercompany obligation context. The attributes are redetermined in the normal manner.
  • This rule prevents the group from using the insolvency exclusion to avoid the matching rule's attribute redetermination.

Step 9D. Inbound Transactions and Notional Principal Contracts

• Inbound transactions. An intercompany obligation that becomes intercompany in an inbound transaction is treated as satisfied and reissued immediately after it becomes intercompany, with exceptions. (§ 1.1502-13(g)(5))
  • This prevents the group from importing outside basis into the intercompany obligation framework.
  • Exceptions apply where the obligation was already subject to similar rules in the transferor group.
• Notional principal contracts. Payments under notional principal contracts between members are intercompany transactions. (§ 1.1502-13(g)(7)(ii)(K), Example 11)
  • The net income or net deduction is taken into account under the matching rule to reflect the difference between the net deduction taken into account and the $0 recomputed deduction (divisions would not enter into notional principal contracts with themselves).
  • As noted above, NPCs between members are excluded from the matching rule if § 163(j) would otherwise apply. See § 1.1502-13(g)(6).

Step 10. Intercompany Stock Transactions

"This paragraph (f) provides rules for stock of members." (§ 1.1502-13(f)(1))

• Scope of stock rules. In addition to the general intercompany transaction rules, special rules apply to transactions involving stock of members. (§ 1.1502-13(f)(1))
  • These rules address intercompany distributions (§ 1.1502-13(f)(2)), reorganizations (§ 1.1502-13(f)(3)), stock eliminations (§ 1.1502-13(f)(5)), and dispositions of member stock (§ 1.1502-13(f)(6)).
  • The stock rules prevent groups from using stock transactions to generate artificial tax attributes or permanently defer gain that should be recognized.

Step 10A. Intercompany Distributions

• Distributions to which § 301 applies. Distributions of property between members to which § 301 applies are intercompany distributions. (§ 1.1502-13(f)(2)(i))
  • P's dividend income from an intercompany distribution is not included in gross income to the extent it would be eliminated in consolidation under § 1.1502-26. (§ 1.1502-13(f)(2)(ii))
  • EXAMPLE. S owns land ($70 basis, $100 value). S distributes the land to P as a § 301 dividend. S has $30 gain under § 311(b). P takes $100 basis under § 301(d). P's $100 dividend income is not included in gross income. Under the matching rule, S's $30 gain is taken into account when P sells the land to X for $110 in Year 3. (§ 1.1502-13(f)(7)(i))
• Loss property distributions. The principles of § 311(a) apply to losses from intercompany distributions. (§ 1.1502-13(f)(2)(iii))
  • If S distributes loss property to P, P's basis is the fair market value of the property and S does not recognize the loss.
  • S's unrecognized loss is not an intercompany item. P's FMV basis is determined on a separate entity basis.
• Entitlement rule. If P becomes entitled to a distribution from S with respect to S stock before the distribution is made, P is treated as receiving the distribution when P becomes entitled to it, and S is treated as making the distribution when P becomes entitled to it. (§ 1.1502-13(f)(2)(iv))
  • If S becomes a nonmember after entitlement but before actual distribution, S's intercompany gain is taken into account under the acceleration rule immediately before deconsolidation, but the distribution itself is still treated as an intercompany distribution.
  • This rule prevents members from manipulating the timing of distributions by delaying actual delivery after the right to receive has vested.

Step 10B. Reorganization Treatment

• Boot treated as § 301 distribution. If one member (S) merges into another member (B) in a tax-free reorganization, certain reorganizations are treated as § 301 distributions to the extent of boot. (§ 1.1502-13(f)(3))
  • This prevents S's intercompany gain from being permanently deferred when the T stock basis is permanently eliminated in a nonrecognition transaction.
  • The boot is treated as a § 301 distribution received after the merger, preventing § 356 from applying.
  • EXAMPLE. S merges into B. P receives B stock ($350 FMV) and $150 cash. The transaction is treated as (1) P receiving B stock worth $500, and (2) an immediate redemption of $150 worth under § 302(d) as a § 301 distribution. (§ 1.1502-13(f)(7)(iii))

Step 10C. Stock Elimination Transactions

• Netting on § 332 liquidation. When S sells T stock to B at a gain and T later liquidates into B under § 332, S's intercompany gain is taken into account under the matching rule. (§ 1.1502-13(f)(5)(i))
  • The gain is not redetermined to be excluded from gross income under § 1.1502-13(c)(6)(ii), even though the T stock basis is eliminated without recognition in the § 332 liquidation.
  • This is a specific exception to the general limitation on income exclusion. The regulations intentionally require gain recognition on stock eliminations to prevent permanent deferral.
  • If S has both gain and loss on shares of the same corporation with the same material terms, only the excess of gain over loss is subject to this netting limitation.
• Elective relief. Under § 1.1502-13(f)(5)(ii), a group may elect to recharacterize certain § 332 liquidations as reorganizations under § 368(a).
  • The election is available if a new T is formed and substantially all of old T's assets are transferred within 12 months after the timely filing of the group's return.
  • A written plan must be attached to the return.
  • For § 338(h)(10) transactions, relief is provided by treating the deemed liquidation as governed by § 331 instead of § 332, with loss limited to the amount of intercompany gain. (§ 1.1502-13(f)(5)(ii)(C))

Step 10D. Dispositions of Member Stock and Anti-Avoidance

• Dispositions of member stock. Gain or loss taken into account by S or B from an intercompany transaction with respect to stock of a member is treated as gain or loss from the sale of stock of a member. (§ 1.1502-13(f)(6))
  • This rule was designed to prevent the "corporate mixing bowl" strategy, where a group could generate non-stock character (e.g., ordinary loss) on what is economically a stock disposition.
  • Special basis adjustment rules for P stock apply under § 1.1032-3.
• Anti-avoidance for stock eliminations. If S's intercompany item with respect to stock of another member is not taken into account under § 1.1502-13, and a principal purpose for S's transaction, B's transaction, or a related transaction was to avoid taking the item into account, appropriate adjustments are made to reflect the proper timing and attributes of S's item. (§ 1.1502-13(f)(4))
  • TRAP. Do not structure stock transactions with a principal purpose of avoiding intercompany gain recognition. The anti-avoidance rule in § 1.1502-13(f)(4) applies specifically to stock elimination transactions and can recharacterize or accelerate items that would otherwise be deferred.
  • Appropriate adjustments include recharacterizing transactions, accelerating intercompany items, or redetermining attributes to reflect the proper tax treatment.
  • This anti-avoidance rule works in tandem with § 1.1502-13(h)(1) and the stock elimination rules in § 1.1502-13(f)(5) to prevent permanent deferral of intercompany stock gains.

Step 11. The Anti-Avoidance Rule and Economic Substance

"If a principal purpose of a transaction is to avoid the rules of this section (so that the effect of treating S and B as divisions of a single corporation is not produced), appropriate adjustments are made." (§ 1.1502-13(h)(1))

• The regulatory anti-avoidance rule. If a principal purpose of a transaction is to avoid the application of § 1.1502-13, appropriate adjustments are made to reflect the proper treatment of the intercompany items. (§ 1.1502-13(h)(1))
  • The principal purpose test is objective. The IRS looks at whether the transaction's structure was designed to avoid single entity treatment, not merely whether the taxpayer subjectively intended to avoid tax.
  • Six specific anti-avoidance examples illustrate the scope of § 1.1502-13(h)(2).
    • (i) Sale of partnership interest to avoid intercompany rules.
    • (ii) Transitory status as an intercompany obligation.
    • (iii) Corporate mixing bowl (using intercompany stock transactions to generate artificial tax attributes).
    • (iv) Partnership mixing bowl (similar strategy through partnerships).
    • (v) Sale and leaseback designed to avoid attribute redetermination.
    • (vi) § 163(j) interest limitation avoidance through intercompany transactions.
  • TRAP. The anti-avoidance rule applies broadly. Any transaction structured with a principal purpose of avoiding the matching rule, acceleration rule, or attribute redetermination rules is subject to adjustment. See also § 1.1502-13(f)(4) for specific anti-avoidance rules for stock eliminations.
• The Ilfeld double deduction doctrine. Ilfeld Co. v. Hernandez, 292 U.S. 62 (1934). The Supreme Court held that a parent corporation filing consolidated returns could not deduct losses on the dissolution of subsidiaries where those losses mirrored economic losses the group had already taken. The Court stated that "in the absence of a provision in the Act or regulations that fairly may be read to authorize it, the deduction claimed is not allowable" and that allowing the deduction "would be the practical equivalent of double deduction."
  • The Ilfeld doctrine remains the foundational case for the single entity principle and the prohibition against double deductions in consolidated returns.
  • Thrifty Oil Co. v. Commissioner, 139 T.C. 198 (2012). The Tax Court applied Ilfeld to disallow environmental remediation expense deductions where the same economic loss had previously been claimed as a capital loss on the sale of a subsidiary. The court stated that "absent a clear declaration of intent by Congress, taxpayers are not allowed to deduct the same economic loss more than once."
  • Duquesne Light Holdings, Inc. v. Commissioner, T.C. Memo. 2014-85, aff'd, 861 F.3d 396 (3d Cir. 2017). The Tax Court and Third Circuit applied Ilfeld to disallow $199 million in capital losses where the taxpayer had structured a series of transactions resulting in a double deduction of the same economic loss. The Third Circuit held that it is not enough for the law to authorize deduction A and authorize deduction B. The law must also explicitly say that both deductions may be taken at the same time. This "triple-authorization requirement" creates a demanding standard for taxpayers claiming multiple deductions from the same economic loss.
  • CAUTION. Even if a transaction technically complies with all applicable regulations, courts may disallow deductions under the Ilfeld double deduction doctrine. Always analyze whether the same economic loss is being claimed more than once through different mechanisms.
• Economic substance doctrine in consolidated returns. Coltec Industries, Inc. v. United States, 454 F.3d 1340 (Fed. Cir. 2006), cert. denied, 552 U.S. 827 (2007). The Federal Circuit held that a capital loss of approximately $378.7 million must be disallowed under the economic substance doctrine where an intercompany transaction had no meaningful economic purpose beyond creating tax benefits.
  • The court focused on "the transaction that gave the taxpayer a high basis in the stock and thus gave rise to the alleged benefit upon sale" and held that courts must examine the specific step that produced the tax benefit, not the overall transaction.
  • The court stated that "arrangements with subsidiaries that do not affect the economic interests of independent third parties deserve particularly close scrutiny."
  • ACM Partnership v. Commissioner, 157 F.3d 231 (3d Cir. 1998). The Third Circuit applied the economic substance doctrine to disallow tax benefits from a complex transaction that was "devoid of any meaningful economic consequences" apart from tax benefits.
  • Basic Inc. v. United States, 549 F.2d 740 (Ct. Cl. 1977). The Court of Claims held that courts must focus on the specific intercompany transaction that gave rise to the claimed tax benefit, not the overall business purpose of the larger transaction. If the business purpose of the ultimate sale could justify an unnecessary intercompany transfer, "all manner of intermediate transfers could lay claim to 'business purpose' simply by showing some factual connection, no matter how remote, to an otherwise legitimate transaction existing at the end of the line."
  • TRAP. Intercompany transactions within a consolidated group receive heightened scrutiny under the economic substance doctrine. Courts will focus on the specific step that produced the tax benefit, not the overall legitimate business purpose of the broader transaction. Structure intercompany transactions with genuine economic substance independent of tax benefits.

Step 12. SRLY, Built-In Gain/Loss, and Attribute Limitations

• SRLY limitation interaction. The SRLY (separate return limitation year) rules limit the use of attributes that arose in separate return limitation years. The intercompany transaction rules do not redetermine the SRLY limitation itself. (§ 1.1502-13(c)(7)(ii)(J), Example 10)
  • When a member with a SRLY-limited NOL sells an asset to another member at a gain, the intercompany gain is taken into account when the buying member sells the asset to a nonmember.
  • The attribute of S's intercompany item as it relates to S's SRLY limitation is not redetermined, because the SRLY limitation depends on S's special status as a corporation with losses from separate return limitation years. (§ 1.1502-13(c)(5))
  • CAUTION. While the timing of S's intercompany gain is determined under the matching rule, the SRLY limitation on S's ability to use its NOLs is not affected by the intercompany transaction rules. S's gain may be taken into account in a year when S cannot use its SRLY-limited losses to offset it.
• United Dominion principle on separate NOLs. United Dominion Industries, Inc. v. United States, 532 U.S. 822 (2001). The Supreme Court held that a consolidated group member does not have a separate net operating loss for a consolidated return year unless a specific consolidated return regulation allocates a portion of the consolidated NOL to that member.
  • The Court rejected the government's argument that the consolidated NOL could be apportioned among members for purposes of the product liability loss carryback.
  • The Court stated that the Fourth Circuit had "applied concepts addressing separate return years to a determination for a consolidated return year, without any statutory or regulatory basis for doing so."
  • This principle has been extended to the § 108 context. Marvel Entertainment LLC v. Commissioner, 145 T.C. 69 (2015), aff'd, 842 F.3d 1291 (2d Cir. 2016). The Tax Court and Second Circuit held that when members of a consolidated group have COD income excluded under § 108(a), the entire consolidated NOL of the group is subject to reduction under § 108(b)(2)(A), not just the portion allocated to the members with COD income.
  • In Marvel, four members had $171 million of COD income. The taxpayer allocated the group's CNOL only to the four debtor members. One member had $164 million of COD income but only $82 million of allocated CNOL, so $82 million of COD income "disappeared" (produced no tax benefit). The IRS argued that the entire CNOL was subject to reduction. The courts agreed with the IRS, applying the United Dominion principle.
  • TRAP. A consolidated group member cannot have a separate NOL for a consolidated return year absent a specific regulatory allocation. This means the entire group's CNOL can be reduced when one member has excluded COD income. Plan attribute reduction strategy accordingly.
• Built-in gain and loss on intercompany obligations. Under § 1.1502-91(h)(2), gain or loss recognized on the disposition of an intercompany obligation is treated as recognized built-in gain or loss under § 382(h)(2) only to the extent that the transaction gives rise to aggregate income or loss within the consolidated group.
  • This prevents inappropriate results where, for example, a bad debt deduction is treated as a recognized built-in loss subject to a § 382 limitation, which could prevent the proper offset of COD income against the bad debt deduction.
  • The rule ensures that intercompany obligation transactions that produce no aggregate income or loss for the group do not inappropriately trigger § 382 built-in gain or loss treatment.
• § 108 attribute reduction in consolidated groups. Under § 1.1502-28, when a member realizes excluded COD income, the attributes attributable to the debtor member (including consolidated attributes, SRLY attributes, and asset basis) are first subject to reduction. (§ 1.1502-28)
  • To the extent excluded COD income exceeds the debtor member's attributes, consolidated attributes attributable to other members and SRLY attributes of other members in the same SRLY subgroup are reduced.
  • The "look-through rule" applies if the attribute reduced is the basis of stock of another member. The lower-tier member is treated as a debtor member with excluded COD income in the amount of the stock basis reduction.
  • Basis of subsidiary stock is not reduced below zero.

Step 13. § 1.1502-36 Attribute Reduction and Intercompany Loss Duplication

"This section provides rules that prevent a consolidated group from obtaining a double benefit from a loss on the disposition of stock of a subsidiary." (§ 1.1502-36(a)(1))

• The three-tier ordering rule. When a member transfers a loss share of subsidiary stock, three rules apply in sequence. (§ 1.1502-36(a)(3)(ii))
  • Tier 1. Basis redetermination (§ 1.1502-36(b)). Redetermines members' bases in subsidiary stock by reallocating § 1.1502-32 investment adjustments. Applied first, starting at the lowest tier and working up. Purpose is to eliminate disproportionate reflection of gains and losses in the bases of common shares.
  • Tier 2. Basis reduction (§ 1.1502-36(c)). Reduces members' bases in transferred loss shares, but not below value. Reduction amount equals the lesser of (i) the share's disconformity amount (stock basis minus subsidiary's net inside attribute amount allocable to the share), and (ii) the net positive adjustment applied to the share. Applied after basis redetermination, also starting at the lowest tier.
  • Tier 3. Attribute reduction (§ 1.1502-36(d)). Applied if the share is still a loss share after Tiers 1 and 2. Attribute reduction amount equals the lesser of (i) net stock loss (aggregate basis minus aggregate value of transferred shares), and (ii) the subsidiary's aggregate inside loss (net inside attribute amount minus value of all outstanding shares). Attributes are reduced in the following order. Category A (capital loss carryovers), Category B (NOL carryovers), Category C (deferred deductions), Category D (basis of assets other than Class I assets under § 1.338-6(b)(1)). Applied from highest tier down to lowest tier.
• Application to intercompany stock sales. § 1.1502-36 applies and has effect immediately upon the transfer of a loss share, even if the loss is deferred, disallowed, or otherwise not taken into account under § 1.1502-13. (§ 1.1502-36(a)(4))
  • However, § 1.1502-36(e)(3) defers the application of the attribute reduction rules until the intercompany loss is actually taken into account under § 1.1502-13.
  • This means the Unified Loss Rules apply to intercompany stock sales, but the timing of the adjustment is deferred until the matching rule or acceleration rule triggers the loss.
  • CAUTION. Do not assume that deferring a stock loss under § 1.1502-13 avoids § 1.1502-36 entirely. The attribute reduction computation must still be performed and applied when the loss is ultimately taken into account.
• Election to reduce loss duplication. Under § 1.1502-36(d)(6), the common parent may elect to (A) reduce members' bases in transferred loss shares of S stock, (B) reattribute S's attributes to the extent they would otherwise be reduced, or (C) any combination. (§ 1.1502-36(d)(6))
  • The election is irrevocable.
  • It is made in a statement titled "§ 1.1502-36 Statement" included on or with the group's timely filed return for the taxable year of the transfer (or for intercompany transfers, the year the intercompany item is taken into account). (§ 1.1502-36(e)(5))
  • The election allows the group to preserve valuable attributes (such as NOL carryovers) by reattributing them to other members rather than having them reduced at the subsidiary level.
  • EXAMPLE. S has one share outstanding. M's basis in S stock is $100. S has Asset 1 with $10 basis. S sells Asset 1 and recognizes $60 gain (S now has $70 cash plus Asset 2 with $80 basis). M's basis in S stock increased to $160 under § 1.1502-32. M sells S stock to M1 for $90. Under Tier 1, no adjustment applies (one share, no disparity). Under Tier 2, basis is reduced by the lesser of $20 disconformity and $60 net positive adjustment, producing a $20 reduction to $140. Under Tier 3, attribute reduction amount equals the lesser of $50 net stock loss and $50 aggregate inside loss, so S's basis in Asset 2 is reduced by $50 (from $80 to $30). M takes $10 intercompany stock loss into account, and M1 recognizes $40 loss. (§ 1.1502-36(e)(3)(iii), Example 5)
• Tier-down of attribute reduction. If S holds stock of a lower-tier subsidiary (S1), the attribute reduction amount allocated to S1 stock becomes an attribute reduction amount of S1, subject to a conforming limitation. (§ 1.1502-36(d)(5)(v)(B))
  • The reduction of S1's attributes is limited to the excess of the portion of S1's net inside attribute amount allocable to all S1 shares held by members over the sum of any direct S1 attribute reduction amount plus the aggregate basis of non-transferred S1 shares after reduction.
  • The conforming limitation prevents the tier-down from reducing S1's attributes below the amount that would be appropriate given the remaining members' stock basis in S1.
  • This limitation ensures that attribute reduction at a lower tier does not exceed the economic loss inherent in the group's investment in that subsidiary.

Step 14. Earnings and Profits, Basis Tracking, and Record-Keeping

"Intercompany items and corresponding items are not reflected in earnings and profits before they are taken into account under § 1.1502-13." (§ 1.1502-33(c)(2))

• Deferred items not reflected in E&P. A gain, loss, deduction, or income deferred under § 1.1502-13 is not reflected in S's earnings and profits before it is taken into account under the matching rule or acceleration rule. (§ 1.1502-33(c)(2))
  • EXAMPLE. S sells land ($70 basis) to B for $100. S's $30 gain is deferred. Under §§ 1.1502-32 and 1.1502-33, P's basis in S stock and the earnings and profits of S and P do not reflect S's $30 gain until the gain is taken into account. (§ 1.1502-13(c)(7)(ii)(A)(4))
  • When the intercompany item is taken into account, the item is reflected in S's E&P and tiers up to P under § 1.1502-33.
  • This same principle applies to losses deferred under § 267(f). A loss deferred under § 267(f) is not reflected in S's E&P before it is taken into account. (§ 1.267(f)-1(g))
• Excluded gain not treated as tax-exempt income. If intercompany gain is redetermined to be excluded from gross income under § 1.1502-13(c)(6)(ii), the excluded gain is not taken into account as earnings and profits of any member and is not treated as tax-exempt income under § 1.1502-32(b)(2)(ii). (§ 1.1502-13(c)(6)(ii)(D))
  • TRAP. Excluded intercompany gain does not increase E&P or stock basis. Do not treat such gain as tax-exempt income for investment adjustment purposes.
  • This rule prevents groups from using the stock elimination exclusion to generate both elimination of intercompany gain and a stock basis increase through tax-exempt income treatment.
  • The excluded gain does not increase the basis of any member's stock under § 1.1502-32 and does not affect earnings and profits.
• Required tracking records. The regulations do not prescribe specific record-keeping forms, but practitioners must maintain the following for each intercompany transaction. (§ 1.1502-13 generally)
  • The original intercompany transaction details, including S's basis, sale price, gain or loss amount, and character on a separate entity basis.
  • B's basis in the acquired property (B's actual cost basis under separate entity treatment).
  • The recomputed corresponding item (the amount B would have taken into account if S and B were divisions).
  • Annual differences between B's actual corresponding items and recomputed items.
  • Layer tracking for LIFO inventory (each deferred amount tracked to specific LIFO layers).
  • Successor asset and successor person tracking if property moves through multiple intercompany transactions.
  • CAUTION. Failure to maintain adequate records can result in the inability to properly compute the matching rule in future years, leading to incorrect timing of gain or loss recognition. Maintain a separate intercompany transaction log that tracks each transaction from inception through final take-into-account.
• Buyer's outside versus inside basis tracking. Under § 1.1502-13(a)(2), B has a cost basis in the property (outside basis for intercompany purposes). For matching rule purposes, the recomputed item is based on the hypothetical basis B would have had as a division (inside basis, equal to S's carryover basis). (§ 1.1502-13(a)(2))
  • The tracking differential (B's cost basis minus S's carryover basis) equals S's deferred intercompany gain.
  • This differential is reduced over time as depreciation is taken (for depreciable property), amortization is taken, or the property is sold to a nonmember.
  • If B capitalizes costs into inventory under § 263A, the differential tracking must account for the capitalized amounts.
• § 1.1502-32 basis adjustment coordination. S's deferred intercompany items do not affect P's basis in S's stock until they are taken into account under the matching or acceleration rule. (§ 1.1502-13(c)(7)(ii)(A)(4))
  • When S's gain is taken into account, P's basis in S's stock increases under § 1.1502-32.
  • When S's loss is taken into account, P's basis in S's stock decreases.
  • This coordination ensures that stock basis adjustments align with the economic reality of when items affect consolidated taxable income.

Step 15. Elections, Reporting Obligations, and Method of Accounting

• Election for separate entity treatment. The common parent may request IRS consent to take into account on a separate entity basis items from intercompany transactions other than intercompany transactions with respect to stock or obligations of members. (§ 1.1502-13(e)(3)(i))
  • The request must be in the form of a ruling request filed by the due date of the consolidated return (no extensions) for the first year to which it applies. (Rev. Proc. 2009-31, modifying Rev. Proc. 97-49)
  • Consent applies to all subsequent years unless revoked.
  • This election does not apply to losses deferred under § 267(f). (§ 1.267(f)-1(a)(2)(iii))
  • CAUTION. The election for separate entity treatment requires a ruling request, not merely a statement on the return. The request must be filed by the original due date of the return, with no extensions. Plan ahead if the group wants separate entity treatment for inventory or service transactions.
• Inventory method elections. If B uses dollar-value LIFO, the group may elect either the increment averaging method or the increment valuation method for intercompany inventory transactions. (§ 1.1502-13(e)(1))
  • The method must be applied consistently from year to year.
  • The group may also use the cost method, absorption method, or any other reasonable method that does not produce a cumulative deferral significantly greater than the specifically described methods.
• § 332/338(h)(10) relief election. Under § 1.1502-13(f)(5)(ii), a group may elect to recharacterize certain § 332 liquidations. (§ 1.1502-13(f)(5)(ii))
  • The election treats the liquidation as a reorganization under § 368(a) if a new T is formed and substantially all of old T's assets are transferred.
  • The transfer must be completed within 12 months after the timely filing of the group's return, pursuant to a written plan attached to the return.
  • For § 338(h)(10) transactions, relief is provided by treating the deemed liquidation as governed by § 331 instead of § 332, with loss limited to the amount of intercompany gain.
  • TRAP. The written plan must be attached to the timely filed return. Failure to attach the plan can result in the election being invalid, causing the group to recognize intercompany gain that could have been deferred or eliminated.
• § 1.1502-36(d)(6) election. The common parent may elect to reduce loss duplication through stock basis reduction and/or attribute reattribution. (§ 1.1502-36(d)(6))
  • The election is made on the "§ 1.1502-36 Statement" included on or with the group's timely filed return for the taxable year of the transfer (or for intercompany transfers, the year the intercompany item is taken into account). (§ 1.1502-36(e)(5))
  • The election is irrevocable.
  • The election can preserve valuable NOL carryovers and other attributes by reattributing them to other group members rather than having them reduced at the subsidiary level.
• Automatic consent for method changes. Under § 1.1502-13(a)(3)(ii), § 446(e) consent is automatically granted for changes in method of accounting necessary solely by reason of the timing rules of § 1.1502-13.
  • This applies for each member in the first consolidated return year following a separate return year in which it engages in an intercompany transaction.
  • It also applies for each former member in the first separate return year following departure from the group.
  • Changes are effected on a cut-off basis, not by § 481(a) adjustment. (§ 1.1502-13(a)(3)(ii)(B))
  • CAUTION. The automatic consent applies only to changes necessary solely by reason of the § 1.1502-13 timing rules. If other method changes are needed, a separate § 446(e) request may be required.
• Disclosure requirements. While there is no specific disclosure form solely for intercompany transactions, the consolidated return (Form 1120) must properly reflect intercompany eliminations. (§ 1.1502-13 generally)
  • § 1.1502-36 elections require a titled "§ 1.1502-36 Statement."
  • Written plans for § 332 relief under § 1.1502-13(f)(5)(ii) must be attached to the return.
  • Maintain documentation in the permanent file sufficient to support the computation of intercompany items, corresponding items, and recomputed corresponding items for each intercompany transaction.

Step 16. Interaction with Other Code Sections

• § 267(f). Controlled group losses. § 267(f) provides special rules for losses between members of a controlled group, whether or not filing consolidated returns. (§ 1.267(f)-1)
  • § 267(f) losses are taken into account under the timing principles of § 1.1502-13. The matching and acceleration rules of § 1.1502-13(c) and (d), the definitions of § 1.1502-13(b) and (j), and the simplifying inventory rules of § 1.1502-13(e)(1) all apply, with adjustments. (§ 1.267(f)-1(a)(2)(i))
  • § 267(f) generally affects only timing (not attributes or holding periods) of losses. (§ 1.267(f)-1(a)(2)(i)(B))
  • The special rules for stock (§ 1.1502-13(f)) and obligations (§ 1.1502-13(g)) apply under § 267(f) only to the extent the transaction is also an intercompany transaction under § 1.1502-13. (§ 1.267(f)-1(a)(2)(ii))
  • Any election under § 1.1502-13 to take items into account on a separate entity basis does not apply under § 267(f). (§ 1.267(f)-1(a)(2)(iii))
  • If S's loss would be taken into account because B transfers property to a nonmember related to any member under § 267(b) or 707(b), the loss is taken into account but allowed only to the extent of any income or gain taken into account as a result of the transfer. The balance not allowed is treated as a loss referred to in § 267(d). (§ 1.267(f)-1(c)(1)(iii))
  • A loss deferred under § 267(f) is not reflected in S's E&P before it is taken into account. (§ 1.267(f)-1(g))
• § 163(j). Business interest limitation. § 163(j) applies at the consolidated return level. A consolidated group has a single business interest expense limitation. (IRS FAQ § 163(j), Q11)
  • The group's business interest expense and income are the sum of members' amounts. ATI is calculated using the group's taxable income under § 1.1502-11 without regard to § 163(j) carryforwards or disallowances.
  • § 1.1502-13(h)(2)(vi), Example 6 specifically addresses the anti-avoidance scenario where a transaction is structured with a principal purpose to avoid § 163(j) by characterizing what would otherwise be interest expense as a non-interest expense through intercompany transactions. In such cases, § 1.1502-13(h)(1) applies to make appropriate adjustments.
  • Disallowed business interest expense carryforwards are Category C attributes for purposes of § 1.1502-36(d) attribute reduction and can be reattributed by election back to the group under § 1.1502-36(d)(6).
  • CAUTION. Intercompany interest income and intercompany interest expense offset for consolidated § 163(j) purposes, but the character of the payments matters. Structuring intercompany payments to avoid § 163(j) characterization can trigger the anti-avoidance rule.
• § 482. Transfer pricing. § 1.1502-13 applies in addition to § 482. § 482 may adjust the transfer price between S and B. (§ 1.1502-13(a)(4))
  • As confirmed in CCA 202240017, § 482 adjustments to intercompany transactions within a consolidated group generally produce no current U.S. tax effect because adjustments result in offsetting amounts of gross income and expense that are deferred under the matching rule.
  • The group's total taxable income is generally not affected by the transfer price for purely domestic consolidated transactions because the intercompany transaction is treated as between divisions.
  • However, § 482 adjustments may have tax effects when (i) the transaction involves a foreign branch or disregarded entity where § 987 currency gain or loss may apply, (ii) the adjustment affects attributes subject to limitation (e.g., SRLY, § 382), or (iii) the intercompany transaction involves a nonmember such as a controlled foreign corporation.
  • TRAP. Do not assume that § 482 adjustments between consolidated group members are always irrelevant. In cross-border contexts, transfer pricing adjustments can affect the amount of subpart F income, GILTI, foreign tax credits, and § 987 gain or loss.
• § 460. Long-term contracts. § 1.460-4(j) provides that § 1.1502-13 does not apply to income, gain, deduction, or loss from intercompany transactions between members to the extent the transaction benefits another member's long-term contract with a nonmember and both members use the percentage-of-completion method. (§ 1.460-4(j)(1))
  • This exception prevents the matching rule from interfering with the proper accounting for long-term contracts where the intercompany transaction is effectively an internal transfer of contract-related services or materials.
  • Both members must use the percentage-of-completion method for this exception to apply.
  • This exception is necessary because the matching rule would otherwise defer income from intercompany transfers of materials or services used in long-term contracts, distorting the percentage-of-completion accounting.
• § 469. Passive activity losses. § 1.469-1(h) provides special rules for the application of the passive activity loss rules to intercompany transactions. (§ 1.1502-13(k)(5))
  • The passive activity characterization of intercompany items is determined under the general rules of § 469, applied in light of the single entity treatment principles of § 1.1502-13.
  • The passive activity characterization is determined by reference to the group's activities as a whole under the single entity treatment principles.
  • An intercompany transaction does not create passive activity income or loss merely because the consideration moves between members. The underlying character of the activity determines the § 469 treatment.
• § 1.1502-80. Limitation on duplicative adjustments. § 1.1502-80(a) provides for the general applicability of other rules of law with a limitation on duplicative adjustments. (§ 1.1502-80(a))
  • § 1.1502-80(b). § 304 does not apply to transactions between members. This affects stock sale treatment between members of a consolidated group.
  • § 1.1502-80(e). § 163(e)(5) (applicable high yield discount obligations) does not apply to intercompany obligations.
  • § 1.1502-80(f). § 1031 does not apply to intercompany transactions. (However, as noted in Step 7, if B exchanges intercompany property for like-kind property from a nonmember under § 1031, the successor asset rule preserves S's deferred gain in the replacement property.)
• § 108 and attribute reduction. § 1.108-3 provides rules for treating intercompany deductions and losses as subject to attribute reduction under § 108(b). (§ 1.1502-13(k)(1))
  • When a group member has excluded COD income, the entire group's CNOL is subject to reduction under the United Dominion/Marvel principle. See Step 12 for detailed analysis.
  • § 1.108-3 specifically addresses how intercompany deductions and losses interact with the § 108(b) attribute reduction framework.
• § 250 (FDII). The regulations include specific rules for redetermining attributes of intercompany items for purposes of determining foreign-derived intangible income. (§ 1.1502-13(c)(7)(ii)(R), Example 18)
  • Under § 1.1502-50, the group's FDII is computed on a consolidated basis, and intercompany transactions are treated as between divisions for this purpose.
  • CAUTION. The interaction between § 1.1502-13 attribute redetermination and § 250 FDII computations can affect the amount of deductions allocated against foreign-derived deduction eligible income. Analyze this interaction for groups claiming FDII benefits.
• § 263A(f). Interest capitalization. Special rules apply regarding interest from intercompany transactions and interest capitalization under § 263A(f). (§ 1.1502-13(k)(2))
  • Interest expense from intercompany obligations may be subject to the avoided cost rules of § 263A(f) if the proceeds are used to produce designated property.
  • The interaction between § 1.1502-13 and § 263A(f) can affect the timing of both interest capitalization and intercompany item recognition.