[Code of Federal Regulations]
[Title 26, Volume 12]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.1502-31]

[Page 376-379]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1502-31  Stock basis after a group structure change.

    (a) In general--(1) Overview. If one corporation (P) succeeds 
another corporation (T) under the principles of Sec. 1.1502-75(d) (2) 
or (3) as the common parent of a consolidated group in a group structure 
change, the basis of members in the stock of the former common parent 
(or the stock of a successor) is adjusted or determined under this 
section. See Sec. 1.1502-33(f)(1) for the definition of group structure 
change. For example, if P owns all of the stock of another corporation 
(S), and T merges into S in a group structure change that is a 
reorganization described in section 368(a)(2)(D) in which P becomes the 
common parent of the T group, P's basis in S's stock must be adjusted to 
reflect the change in S's assets and liabilities. The rules of this 
section coordinate with the earnings and profits adjustments required 
under Sec. 1.1502-33(f)(1), generally conforming the results of 
transactions in which the T group continues under Sec. 1.1502-75 with P 
as the common parent. By preserving in P the relationship between T's 
earnings and profits and asset basis, these adjustments limit possible 
distortions under section 1502 (e.g., in the deconsolidation rules for 
earnings and profits under Sec. 1.1502-33(e), and the continued filing 
requirements under Sec. 1.1502-75(a)). This section applies whether or 
not T continues to exist after the group structure change.
    (2) Application of other rules of law. The rules of this section are 
in addition to other rules of law. The provisions of this section and 
other rules of law must not have the effect of duplicating an amount in 
P's basis in S's stock.
    (b) General rules. Except as otherwise provided in this section--
    (1) Asset acquisitions. If a corporation acquires the former common 
parent's assets (and any liabilities assumed or to which the assets are 
subject) in a group structure change, the basis of members in the stock 
of the acquiring corporation is adjusted immediately after the group 
structure change to reflect the acquiring corporation's allocable share 
of the former common parent's net asset basis as determined under 
paragraph (c) of this section. For example, if S acquires all of T's 
assets in a group structure change that is a reorganization described in 
section 368(a)(2)(D), P's basis in S's stock is adjusted to reflect T's 
net asset basis. If P owned some of T's stock before the group structure 
change, the results would be the same because P's basis in the T stock 
is not taken into account in determining P's basis in S's stock. If T's 
net asset basis is a negative amount, it reduces P's basis in S's stock 
and, if the reduction exceeds P's basis in S's stock, the excess is P's 
excess loss account in S's stock. See Sec. 1.1502-19 for rules treating 
P's excess loss account as negative basis, and treating a reference to 
P's basis in S's stock as including an excess loss account.
    (2) Stock acquisitions. If a corporation acquires stock of the 
former common parent in a group structure change, the

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basis of the members in the former common parent's stock immediately 
after the group structure change (including any stock of the former 
common parent owned before the group structure change) is redetermined 
in accordance with the results for an asset acquisition described in 
paragraph (b)(1) of this section. For example, if all of T's stock is 
contributed to P in a group structure change to which section 351 
applies, P's basis in T's stock is T's net asset basis, rather than the 
amount determined under section 362. Similarly, if S merges into T in a 
group structure change described in section 368(a)(2)(E), P's basis in 
T's stock is the basis that P would have in S's stock under paragraph 
(b)(1) of this section if T had merged into S in a group structure 
change described in section 368(a)(2)(D).
    (c) Net asset basis. The former common parent's net asset basis is 
the basis it would have in the stock of a newly formed subsidiary, if--
    (1) The former common parent transferred its assets (and any 
liabilities assumed or to which the assets are subject) to the 
subsidiary in a transaction to which section 351 applies;
    (2) The former common parent and the subsidiary were members of the 
same consolidated group (see Sec. 1.1502-80(d) for the non-application 
of section 357(c) to the transfer); and
    (3) The asset basis taken into account is each asset's basis 
immediately after the group structure change (e.g., taking into account 
any income or gain recognized in the group structure change and 
reflected in the asset's basis).
    (d) Additional adjustments. In addition to the adjustments in 
paragraph (b) of this section, the following adjustments are made:
    (1) Consideration not provided by P. The basis is reduced to reflect 
the fair market value of any consideration not provided by the member. 
For example, if S acquires T's assets in a group structure change 
described in section 368(a)(2)(D), and S provides an appreciated asset 
(e.g., stock of P) as partial consideration in the transaction, P's 
basis in S's stock is reduced by the fair market value of the asset.
    (2) Allocable share--(i) Asset acquisitions. If a corporation 
receives less than all of the former common parent's assets and 
liabilities in the group structure change, the former common parent's 
net asset basis taken into account under paragraph (b)(1) of this 
section is adjusted accordingly.
    (ii) Stock acquisitions. If a corporation owns less than all of the 
former common parent's stock immediately after a group structure change 
described in paragraph (b)(2) of this section, the percentage of the 
former common parent's net asset basis taken into account equals the 
percentage (by fair market value) of the former common parent's stock 
owned immediately after the group structure change. For example, if P 
owns less than all of the former common parent's stock immediately after 
the group structure change, only an allocable part of the basis 
determined under this section is reflected in the shares owned by P (and 
the amount allocable to shares owned by nonmembers has no effect on the 
basis of their shares).
    (3) Allocation among shares of stock. The basis determined under 
this section is allocated among shares under the principles of section 
358. For example, if P owns multiple classes of the former common 
parent's stock immediately after the group structure change, only an 
allocable part of the basis determined under this section is reflected 
in the basis of each share. See Sec. 1.1502-19(d), for special 
allocations with respect to excess loss accounts.
    (4) Higher-tier members. To the extent that the former common parent 
is owned by members other than the new common parent, the basis of 
members in the stock of all subsidiaries owning, directly or indirectly, 
in whole or in part, an interest in the former common parent's assets or 
liabilities is adjusted in accordance with the principles of this 
section. The adjustments are applied in the order of the tiers, from the 
lowest to the highest.
    (e) Waiver of loss carryovers of former common parent --(1) General 
rule. An irrevocable election may be made to treat all or any portion of 
a loss carryover attributable to the common parent as expiring for all 
Federal income tax purposes immediately before the

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group structure change. Thus, if the loss carryover is treated as 
expiring under the election, it will not result in a negative adjustment 
to the basis of P's stock under Sec. 1.1502-32(b).
    (2) Election. The election described in this paragraph (e) must be 
made in a separate statement entitled ``ELECTION TO TREAT LOSS CARRYOVER 
AS EXPIRING UNDER Sec. 1.1502-31(e).'' The statement must be filed with 
the consolidated group's return for the year that includes the group 
structure change, and it must be signed by the former and the new common 
parent. The statement must identify the amount of each loss carryover 
deemed to expire (or the amount of each loss carryover deemed not to 
expire, with any balance of any loss carryovers being deemed to expire).
    (f) Predecessors and successors. For purposes of this section, any 
reference to a corporation includes a reference to a successor or 
predecessor as the context may require. See Sec. 1.1502-32(f) for 
definitions of predecessor and successor.
    (g) Examples. For purposes of the examples in this section, unless 
otherwise stated, all corporations have only one class of stock 
outstanding, the tax year of all persons is the calendar year, all 
persons use the accrual method of accounting, the facts set forth the 
only corporate activity, all transactions are between unrelated persons, 
and tax liabilities are disregarded. The principles of this section are 
illustrated by the following examples.

    Example 1. Forward triangular merger. (a) Facts. P is the common 
parent of one group and T is the common parent of another. T has assets 
with an aggregate basis of $60 and fair market value of $100 and no 
liabilities. T's shareholders have an aggregate basis of $50 in T's 
stock. In Year 1, pursuant to a plan, P forms S and T merges into S with 
the T shareholders receiving $100 of P stock in exchange for their T 
stock. The transaction is a reorganization described in section 
368(a)(2)(D). The transaction is also a reverse acquisition under Sec. 
1.1502- 75(d)(3) because the T shareholders, as a result of owning T's 
stock, own more than 50% of the value of P's stock immediately after the 
transaction. Thus, the transaction is a group structure change under 
Sec. 1.1502-33(f)(1), and P's earnings and profits are adjusted to 
reflect T's earnings and profits immediately before T ceases to be the 
common parent of the T group.
    (b) Analysis. Under paragraph (b)(1) of this section, P's basis in 
S's stock is adjusted to reflect T's net asset basis. Under paragraph 
(c) of this section, T's net asset basis is $60, the basis T would have 
in the stock of a subsidiary under section 358 if T had transferred all 
of its assets and liabilities to the subsidiary in a transaction to 
which section 351 applies. Thus, P has a $60 basis in S's stock.
    (c) Pre-existing S. The facts are the same as in paragraph (a) of 
this Example 1, except that P has owned the stock of S for several years 
and P has a $50 basis in the S stock before the merger with T. Under 
paragraph (b)(1) of this section, P's $50 basis in S's stock is adjusted 
to reflect T's net asset basis. Thus, P's basis in S's stock is $110 
($50 plus $60).
    (d) Excess loss account included in former common parent's net asset 
basis. The facts are the same as in paragraph (a) of this Example 1, 
except that T has two assets, an operating asset with an $80 basis and 
$90 fair market value, and stock of a subsidiary with a $20 excess loss 
account and $10 fair market value. Under paragraph (c) of this section, 
T's net asset basis is $60 ($80 minus $20). See sections 351 and 358, 
and Sec. 1.1502-19. Consequently, P has a $60 basis in S's stock. Under 
section 362 and Sec. 1.1502-19, S has an $80 basis in the operating 
asset and a $20 excess loss account in the stock of the subsidiary.
    (e) Liabilities in excess of basis. The facts are the same as in 
paragraph (a) of this Example 1, except that T's assets have a fair 
market value of $170 (and $60 basis) and are subject to $70 of 
liabilities. Under paragraph (c) of this section, T's net asset basis is 
($10) ($60 minus $70). See sections 351 and 358, and Sec. Sec. 1.1502-
19 and 1.1502-80(d). Thus, P has a $10 excess loss account in S's stock. 
Under section 362, S has a $60 basis in its assets (which are subject to 
$70 of liabilities). (Under paragraph (a)(2) of this section, because 
the liabilities are taken into account in determining net asset basis 
under paragraph (c) of this section, the liabilities are not also taken 
into account as consideration not provided by P under paragraph (d)(1) 
of this section.)
    (f) Consideration provided by S. The facts are the same as in 
paragraph (a) of this Example 1, except that P forms S with a $100 
contribution at the beginning of Year 1, and during Year 6, pursuant to 
a plan, S purchases $100 of P stock and T merges into S with the T 
shareholders receiving P stock in exchange for their T stock. Under 
paragraph (b)(1) of this section, P's $100 basis in S's stock is 
increased by $60 to reflect T's net asset basis. Under paragraph (d)(1) 
of this section, P's basis in S's stock is decreased by $100 (the fair 
market value of the P stock) because the P stock purchased by S and used 
in the

[[Page 379]]

transaction is consideration not provided by P.
    (g) Appreciated asset provided by S. The facts are the same as in 
paragraph (a) of this Example 1, except that P has owned the stock of S 
for several years, and the shareholders of T receive $60 of P stock and 
an asset of S with a $30 adjusted basis and $40 fair market value. S 
recognizes a $10 gain from the asset under section 1001. Under paragraph 
(b)(1) of this section, P's basis in S's stock is increased by $60 to 
reflect T's net asset basis. Under paragraph (d)(1) of this section, P's 
basis in S's stock is decreased by $40 (the fair market value of the 
asset provided by S). In addition, P's basis in S's stock is increased 
under Sec. 1.1502-32(b) by S's $10 gain.
    (h) Depreciated asset provided by S. The facts are the same as in 
paragraph (a) of this Example 1, except that P has owned the stock of S 
for several years, and the shareholders of T receive $60 of P stock and 
an asset of S with a $50 adjusted basis and $40 fair market value. S 
recognizes a $10 loss from the asset under section 1001. Under paragraph 
(b)(1) of this section, P's basis in S's stock is increased by $60 to 
reflect T's net asset basis. Under paragraph (d)(1) of this section, P's 
basis in S's stock is decreased by $40 (the fair market value of the 
asset provided by S). In addition, S's $10 loss is taken into account 
under Sec. 1.1502-32(b) in determining P's basis adjustments under that 
section.
    Example 2. Stock acquisition. (a) Facts. P is the common parent of 
one group and T is the common parent of another. T has assets with an 
aggregate basis of $60 and fair market value of $100 and no liabilities. 
T's shareholders have an aggregate basis of $50 in T's stock. Pursuant 
to a plan, P forms S and S acquires all of T's stock in exchange for P 
stock in a transaction described in section 368(a)(1)(B). The 
transaction is also a reverse acquisition under Sec. 1.1502-75(d)(3). 
Thus, the transaction is a group structure change under Sec. 1.1502-
33(f)(1), and the earnings and profits of P and S are adjusted to 
reflect T's earnings and profits immediately before T ceases to be the 
common parent of the T group.
    (b) Analysis. Under paragraph (d)(4) of this section, although S is 
not the new common parent of the T group, adjustments must be made to 
S's basis in T's stock in accordance with the principles of this 
section. Although S's basis in T's stock would ordinarily be determined 
under section 362 by reference to the basis of T's shareholders in T's 
stock immediately before the group structure change, under the 
principles of paragraph (b)(2) of this section, S's basis in T's stock 
is determined by reference to T's net asset basis. Thus, S's basis in 
T's stock is $60.
    (c) Higher-tier adjustments. Under paragraph (d)(4) of this section, 
P's basis in S's stock is adjusted to $60 (to be consistent with the 
adjustment to S's basis in T's stock).
    (d) Cross ownership. The facts are the same as in paragraph (a) of 
this Example 2, except that S has owned 10% of T's stock for several 
years and, pursuant to the plan, S acquires the remaining 90% of T's 
stock in exchange for P stock. The results are the same as in paragraphs 
(b) and (c) of this Example 2, because S's basis in the initial 10% of 
T's stock is redetermined under this section.
    (e) Allocable share. The facts are the same as in paragraph (a) of 
this Example 2, except that P owns only 90% of S's stock immediately 
after the group structure change. S's basis in T's stock is the same as 
in paragraph (b) of this Example 2. Under paragraph (d)(2) of this 
section, P's basis in its S stock is adjusted to $54 (90% of S's $60 
adjustment).
    Example 3. Taxable stock acquisition. (a) Facts. P is the common 
parent of one group and T is the common parent of another. T has assets 
with an aggregate basis of $60 and fair market value of $100 and no 
liabilities. T's shareholders have an aggregate basis of $50 in T's 
stock. Pursuant to a plan, P acquires all of T's stock in exchange for 
$70 of P's stock and $30 in a transaction that is a group structure 
change under Sec. 1.1502-33(f)(1). P's acquisition of T's stock is a 
taxable transaction. (Because of P's use of cash, the acquisition is not 
a transaction described in section 368(a)(1)(B).)
    (b) Analysis. Under paragraph (b)(2) of this section, P's basis in 
T's stock is adjusted to reflect T's net asset basis. Thus, although P's 
basis in T's stock would ordinarily be a cost basis of $100, P's basis 
in T's stock under this section is $60.

    (h) Effective date--(1) General rule. This section applies to group 
structure changes occurring in consolidated return years beginning on or 
after January 1, 1995.
    (2) Prior law. For prior years, see prior regulations under section 
1502 as in effect with respect to the transaction. See, e.g., Sec. 
1.1502-31T as contained in the 26 CFR part 1 edition revised as of April 
1, 1994.

[T.D. 8560, 59 FR 41683, Aug. 15, 1994]