[Code of Federal Regulations]
[Title 26, Volume 1]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.267(f)-1]

[Page 583-589]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.267(f)-1  Controlled groups.

    (a) In general--(1) Purpose. This section provides rules under 
section 267(f) to defer losses and deductions from certain transactions 
between members of a controlled group (intercompany sales). The purpose 
of this section is to prevent members of a controlled group from taking 
into account a loss or deduction solely as the result of a transfer of 
property between a selling member (S) and a buying member (B).
    (2) Application of consolidated return principles. Under this 
section, S's loss or deduction from an intercompany sale is taken into 
account under the timing principles of Sec. 1.1502-13 (intercompany 
transactions between members of a consolidated group), treating the 
intercompany sale as an intercompany transaction. For this purpose:
    (i) The matching and acceleration rules of Sec. 1.1502-13 (c) and 
(d), the definitions and operating rules of Sec. 1.1502-13 (b) and (j), 
and the simplifying rules of Sec. 1.1502-13(e)(1) apply with the 
adjustments in paragraphs (b) and (c) of this section to reflect that 
this section--
    (A) Applies on a controlled group basis rather than consolidated 
group basis; and
    (B) Generally affects only the timing of a loss or deduction, and 
not it's attributes (e.g., its source and character) or the holding 
period of property.
    (ii) The special rules under Sec. 1.1502-13(f) (stock of members) 
and (g) (obligations of members) apply under this section only to the 
extent the transaction is also an intercompany transaction to which 
Sec. 1.1502-13 applies.
    (iii) Any election under Sec. 1.1502-13 to take items into account 
on a separate entity basis does not apply under this section. See Sec. 
1.1502-13(e)(3).
    (3) Other law. The rules of this section apply in addition to other 
applicable law (including nonstatutory authorities). For example, to the 
extent a loss or deduction deferred under this section is from a 
transaction that is also an intercompany transaction under Sec. 1.1502-
13(b)(1), attributes of the loss or deduction are also subject to 
recharacterization under Sec. 1.1502-13. See also, sections 269 
(acquisitions to evade or avoid income tax) and 482 (allocations among 
commonly controlled taxpayers). Any loss or deduction taken into account 
under this section can be deferred, disallowed, or eliminated under 
other applicable law. See, for example, section 1091 (loss eliminated on 
wash sale).
    (b) Definitions and operating rules. The definitions in Sec. 
1.1502-13(b) and the operating rules of Sec. 1.1502-13(j) apply under 
this section with appropriate adjustments, including the following:
    (1) Intercompany sale. An intercompany sale is a sale, exchange, or 
other transfer of property between members of a controlled group, if it 
would be an intercompany transaction under the principles of Sec. 
1.1502-13, determined by treating the references to a consolidated group 
as references to a controlled group and by disregarding whether any of 
the members join in filing consolidated returns.
    (2) S's losses or deductions. Except to the extent the intercompany 
sale is also an intercompany transaction to which Sec. 1.1502-13 
applies, S's losses or deductions subject to this section are determined 
on a separate entity basis. For example, the principles of Sec. 1.1502-
13(b)(2)(iii) (treating certain amounts not yet recognized as items to 
be taken into account) do not apply. A loss or deduction is from an 
intercompany sale whether it is directly or indirectly from the 
intercompany sale.
    (3) Controlled group; member. For purposes of this section, a 
controlled group is defined in section 267(f). Thus, a controlled group 
includes a FSC (as defined in section 922) and excluded members under 
section 1563(b)(2), but does not include a DISC (as defined in section 
992). Corporations remain members of a controlled group as long as

[[Page 584]]

they remain in a controlled group relationship with each other. For 
example, corporations become nonmembers with respect to each other when 
they cease to be in a controlled group relationship with each other, 
rather than by having a separate return year (described in Sec. 1.1502-
13(j)(7)). Further, the principles of Sec. 1.1502-13(j)(6) (former 
common parent treated as continuation of group) apply to any corporation 
if, immediately before it becomes a nonmember, it is both the selling 
member and the owner of property with respect to which a loss or 
deduction is deferred (whether or not it becomes a member of a different 
controlled group filing consolidated or separate returns). Thus, for 
example, if S and B merge together in a transaction described in section 
368(a)(1)(A), the surviving corporation is treated as the successor to 
the other corporation, and the controlled group relationship is treated 
as continuing.
    (4) Consolidated taxable income. References to consolidated taxable 
income (and consolidated tax liability) include references to the 
combined taxable income of the members (and their combined tax 
liability). For corporations filing separate returns, it ordinarily will 
not be necessary to actually combine their taxable incomes (and tax 
liabilities) because the taxable income (and tax liability) of one 
corporation does not affect the taxable income (or tax liability) of 
another corporation.
    (c) Matching and acceleration principles of Sec. 1.1502-13--(1) 
Adjustments to the timing rules. Under this section, S's losses and 
deductions are deferred until they are taken into account under the 
timing principles of the matching and acceleration rules of Sec. 
1.1502-13(c) and (d) with appropriate adjustments. For example, if S 
sells depreciable property to B at a loss, S's loss is deferred and 
taken into account under the principles of the matching rule of Sec. 
1.1502-13(c) to reflect the difference between B's depreciation taken 
into account with respect to the property and the depreciation that B 
would take into account if S and B were divisions of a single 
corporation; if S and B subsequently cease to be in a controlled group 
relationship with each other, S's remaining loss is taken into account 
under the principles of the acceleration rule of Sec. 1.1502-13(d). For 
purposes of this section, the adjustments to Sec. 1.1502-13 (c) and (d) 
include the following:
    (i) Application on controlled group basis. The matching and 
acceleration rules apply on a controlled group basis, rather than a 
consolidated group basis. Thus if S and B are wholly-owned members of a 
consolidated group and 21% of the stock of S is sold to an unrelated 
person, S's loss continues to be deferred under this section because S 
and B continue to be members of a controlled group even though S is no 
longer a member of the consolidated group. Similarly, S's loss would 
continue to be deferred if S and B remain in a controlled group 
relationship after both corporations become nonmembers of their former 
consolidated group.
    (ii) Different taxable years. If S and B have different taxable 
years, the taxable years that include a December 31 are treated as the 
same taxable years. If S or B has a short taxable year that does not 
include a December 31, the short year is treated as part of the 
succeeding taxable year that does include a December 31.
    (iii) Transfer to a section 267(b) or 707(b) related person. To the 
extent S's loss or deduction from an intercompany sale of property is 
taken into account under this section as a result of B's transfer of the 
property to a nonmember that is a person related to any member, 
immediately after the transfer, under sections 267(b) or 707(b), or as a 
result of S or B becoming a nonmember that is related to any member 
under section 267(b), the loss or deduction 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 section 267(d) if it is from a sale or exchange by B 
(rather than from a distribution).
    (iv) B's item is excluded from gross income or noncapital and 
nondeductible. To the extent S's loss would be redetermined to be a 
noncapital, nondeductible amount under the principles of Sec. 1.1502-13 
but is not redetermined because of paragraph (c)(2) of this section, 
then, if paragraph (c)(1)(iii) of

[[Page 585]]

this section does not apply, S's loss continues to be deferred and is 
not taken into account until S and B are no longer in a controlled group 
relationship. For example, if S sells all of the stock of corporation T 
to B at a loss and T subsequently liquidates into B in a transaction 
qualifying under section 332, S's loss is deferred until S and B 
(including their successors) are no longer in a controlled group 
relationship. See Sec. 1.1502-13(c)(6)(ii).
    (v) Circularity of references. References to deferral or elimination 
under the Internal Revenue Code or regulations do not include references 
to section 267(f) or this section. See, e.g., Sec. 1.1502-13(a)(4) 
(applicability of other law).
    (2) Attributes generally not affected. The matching and acceleration 
rules are not applied under this section to affect the attributes of S's 
intercompany item, or cause it to be taken into account before it is 
taken into account under S's separate entity method of accounting. 
However, the attributes of S's intercompany item may be redetermined, or 
an item may be taken into account earlier than under S's separate entity 
method of accounting, to the extent the transaction is also an 
intercompany transaction to which Sec. 1.1502-13 applies. Similarly, 
except to the extent the transaction is also an intercompany transaction 
to which Sec. 1.1502-13 applies, the matching and acceleration rules do 
not apply to affect the timing or attributes of B's corresponding items.
    (d) Intercompany sales of inventory involving foreign persons--(1) 
General rule. Section 267(a)(1) and this section do not apply to an 
intercompany sale of property that is inventory (within the meaning of 
section 1221(1)) in the hands of both S and B, if--
    (i) The intercompany sale is in the ordinary course of S's trade or 
business;
    (ii) S or B is a foreign corporation; and
    (iii) Any income or loss realized on the intercompany sale by S or B 
is not income or loss that is recognized as effectively connected with 
the conduct of a trade or business within the United States within the 
meaning of section 864 (unless the income is exempt from taxation 
pursuant to a treaty obligation of the United States).
    (2) Intercompany sales involving related partnerships. For purposes 
of paragraph (d)(1) of this section, a partnership and a foreign 
corporation described in section 267(b)(10) are treated as members, 
provided that the income or loss of the foreign corporation is described 
in paragraph (d)(1)(iii) of this section.
    (3) Intercompany sales in ordinary course. For purposes of this 
paragraph (d), whether an intercompany sale is in the ordinary course of 
business is determined under all the facts and circumstances.
    (e) Treatment of a creditor with respect to a loan in nonfunctional 
currency. Sections 267(a)(1) and this section do not apply to an 
exchange loss realized with respect to a loan of nonfunctional currency 
if--
    (1) The loss is realized by a member with respect to nonfunctional 
currency loaned to another member;
    (2) The loan is described in Sec. 1.988-1(a)(2)(i);
    (3) The loan is not in a hyperinflationary currency as defined in 
Sec. 1.988-1(f); and
    (4) The transaction does not have as a significant purpose the 
avoidance of Federal income tax.
    (f) Receivables. If S acquires a receivable from the sale of goods 
or services to a nonmember at a gain, and S sells the receivable at fair 
market value to B, any loss or deduction of S from its sale to B is not 
deferred under this section to the extent it does not exceed S's income 
or gain from the sale to the nonmember that has been taken into account 
at the time the receivable is sold to B.
    (g) Earnings and profits. A loss or deduction deferred under this 
section is not reflected in S's earnings and profits before it is taken 
into account under this section. See, e.g., Sec. Sec. 1.312-6(a), 
1.312-7, and 1.1502-33(c)(2).
    (h) Anti-avoidance rule. If a transaction is engaged in or 
structured with a principal purpose to avoid the purposes of this 
section (including, for example, by avoiding treatment as an 
intercompany sale or by distorting the timing of losses or deductions), 
adjustments must be made to carry out the purposes of this section.

[[Page 586]]

    (i) [Reserved]
    (j) Examples. For purposes of the examples in this paragraph (j), 
unless otherwise stated, corporation P owns 75% of the only class of 
stock of subsidiaries S and B, X is a person unrelated to any member of 
the P controlled group, the taxable year of all persons is the calendar 
year, all persons use the accrual method of accounting, tax liabilities 
are disregarded, the facts set forth the only activity, and no member 
has a special status. If a member acts as both a selling member and a 
buying member (e.g., with respect to different aspects of a single 
transaction, or with respect to related transactions), the member is 
referred as to M (rather than as S or B). This section is illustrated by 
the following examples.

    Example 1. Matching and acceleration rules. (a) Facts. S holds land 
for investment with a basis of $130. On January 1 of Year 1, S sells the 
land to B for $100. On a separate entity basis, S's loss is long-term 
capital loss. B holds the land for sale to customers in the ordinary 
course of business. On July 1 of Year 3, B sells the land to X for $110.
    (b) Matching rule. Under paragraph (b)(1) of this section, S's sale 
of land to B is an intercompany sale. Under paragraph (c)(1) of this 
section, S's $30 loss is taken into account under the timing principles 
of the matching rule of Sec. 1.1502-13(c) to reflect the difference for 
the year between B's corresponding items taken into account and the 
recomputed corresponding items. If S and B were divisions of a single 
corporation and the intercompany sale were a transfer between the 
divisions, B would succeed to S's $130 basis in the land and would have 
a $20 loss from the sale to X in Year 3. Consequently, S takes no loss 
into account in Years 1 and 2, and takes the entire $30 loss into 
account in Year 3 to reflect the $30 difference in that year between the 
$10 gain B takes into account and its $20 recomputed loss. The 
attributes of S's intercompany items and B's corresponding items are 
determined on a separate entity basis. Thus, S's $30 loss is long-term 
capital loss and B's $10 gain is ordinary income.
    (c) Acceleration resulting from sale of B stock. The facts are the 
same as in paragraph (a) of this Example 1, except that on July 1 of 
Year 3 P sells all of its B stock to X (rather than B's selling the land 
to X). Under paragraph (c)(1) of this section, S's $30 loss is taken 
into account under the timing principles of the acceleration rule of 
Sec. 1.1502-13(d) immediately before the effect of treating S and B as 
divisions of a single corporation cannot be produced. Because the effect 
cannot be produced once B becomes a nonmember, S takes its $30 loss into 
account in Year 3 immediately before B becomes a nonmember. S's loss is 
long-term capital loss.
    (d) Subgroup principles applicable to sale of S and B stock. The 
facts are the same as in paragraph (a) of this Example 1, except that on 
July 1 of Year 3 P sells all of its S and B stock to X (rather than B's 
selling the land to X). Under paragraph (b)(3) of this section, S and B 
are considered to remain members of a controlled group as long as they 
remain in a controlled group relationship with each other (whether or 
not in the original controlled group). P's sale of their stock does not 
affect the controlled group relationship of S and B with each other. 
Thus, S's loss is not taken into account as a result of P's sale of the 
stock. Instead, S's loss is taken into account based on subsequent 
events (e.g., B's sale of the land to a nonmember).
    Example 2. Distribution of loss property. (a) Facts. S holds land 
with a basis of $130 and value of $100. On January 1 of Year 1, S 
distributes the land to P in a transaction to which section 311 applies. 
On July 1 of Year 3, P sells the land to X for $110.
    (b) No loss taken into account. Under paragraph (b)(2) of this 
section, because P and S are not members of a consolidated group, Sec. 
1.1502-13(f)(2)(iii) does not apply to cause S to recognize a $30 loss 
under the principles of section 311(b). Thus, S has no loss to be taken 
into account under this section. (If P and S were members of a 
consolidated group, Sec. 1.1502-13(f)(2)(iii) would apply to S's loss 
in addition to the rules of this section, and the loss would be taken 
into account in Year 3 as a result of P's sale to X.)
    Example 3. Loss not yet taken into account under separate entity 
accounting method. (a) Facts. S holds land with a basis of $130. On 
January 1 of Year 1, S sells the land to B at a $30 loss but does not 
take into account the loss under its separate entity method of 
accounting until Year 4. On July 1 of Year 3, B sells the land to X for 
$110.
    (b) Timing. Under paragraph (b)(2) of this section, S's loss is 
determined on a separate entity basis. Under paragraph (c)(1) of this 
section, S's loss is not taken into account before it is taken into 
account under S's separate entity method of accounting. Thus, although B 
takes its corresponding gain into account in Year 3, S has no loss to 
take into account until Year 4. Once S's loss is taken into account in 
Year 4, it is not deferred under this section because B's corresponding 
gain has already been taken into account. (If S and B were members of a 
consolidated group, S would be treated under Sec. 1.1502-13(b)(2)(iii) 
as taking the loss into account in Year 3.)
    Example 4. Consolidated groups. (a) Facts. P owns all of the stock 
of S and B, and the P group is a consolidated group. S holds land

[[Page 587]]

for investment with a basis of $130. On January 1 of Year 1, S sells the 
land to B for $100. B holds the land for sale to customers in the 
ordinary course of business. On July 1 of Year 3, P sells 25% of B's 
stock to X. As a result of P's sale, B becomes a nonmember of the P 
consolidated group but S and B remain in a controlled group relationship 
with each other for purposes of section 267(f). Assume that if S and B 
were divisions of a single corporation, the items of S and B from the 
land would be ordinary by reason of B's activities.
    (b) Timing and attributes. Under paragraph (a)(3) of this section, 
S's sale to B is subject to both Sec. 1.1502-13 and this section. Under 
Sec. 1.1502-13, S's loss is redetermined to be an ordinary loss by 
reason of B's activities. Under paragraph (b)(3) of this section, 
because S and B remain in a controlled group relationship with each 
other, the loss is not taken into account under the acceleration rule of 
Sec. 1.1502-13(d) as modified by paragraph (c) of this section. See 
Sec. 1.1502-13(a)(4). Nevertheless, S's loss is redetermined by Sec. 
1.1502-13 to be an ordinary loss, and the character of the loss is not 
further redetermined under this section. Thus, the loss continues to be 
deferred under this section, and will be taken into account as ordinary 
loss based on subsequent events (e.g., B's sale of the land to a 
nonmember).
    (c) Resale to controlled group member. The facts are the same as in 
paragraph (a) of this Example 4, except that P owns 75% of X's stock, 
and B resells the land to X (rather than P's selling any B stock). The 
results for S's loss are the same as in paragraph (b) of this Example 4. 
Under paragraph (b) of this section, X is also in a controlled group 
relationship, and B's sale to X is a second intercompany sale. Thus, S's 
loss continues to be deferred and is taken into account under this 
section as ordinary loss based on subsequent events (e.g., X's sale of 
the land to a nonmember).
    Example 5. Intercompany sale followed by installment sale. (a) 
Facts. S holds land for investment with a basis of $130x. On January 1 
of Year 1, S sells the land to B for $100x. B holds the land for 
investment. On July 1 of Year 3, B sells the land to X in exchange for 
X's $110x note. The note bears a market rate of interest in excess of 
the applicable Federal rate, and provides for principal payments of $55x 
in Year 4 and $55x in Year 5. Section 453A applies to X's note.
    (b) Timing and attributes. Under paragraph (c) of this section, S's 
$30x loss is taken into account under the timing principles of the 
matching rule of Sec. 1.1502-13(c) to reflect the difference in each 
year between B's gain taken into account and its recomputed loss. Under 
section 453, B takes into account $5x of gain in Year 4 and in Year 5. 
Therefore, S takes $20x of its loss into account in Year 3 to reflect 
the $20x difference in that year between B's $0 loss taken into account 
and its $20x recomputed loss. In addition, S takes $5x of its loss into 
account in Year 4 and in Year 5 to reflect the $5x difference in each 
year between B's $5x gain taken into account and its $0 recomputed gain. 
Although S takes into account a loss and B takes into account a gain, 
the attributes of B's $10x gain are determined on a separate entity 
basis, and therefore the interest charge under section 453A(c) applies 
to B's $10x gain on the installment sale beginning in Year 3.
    Example 6. Section 721 transfer to a related nonmember. (a) Facts. S 
owns land with a basis of $130. On January 1 of Year 1, S sells the land 
to B for $100. On July 1 of Year 3, B transfers the land to a 
partnership in exchange for a 40% interest in capital and profits in a 
transaction to which section 721 applies. P also owns a 25% interest in 
the capital and profits of the partnership.
    (b) Timing. Under paragraph (c)(1)(iii) of this section, because the 
partnership is a nonmember that is a related person under sections 
267(b) and 707(b), S's $30 loss is taken into account in Year 3, but 
only to the extent of any income or gain taken into account as a result 
of the transfer. Under section 721, no gain or loss is taken into 
account as a result of the transfer to the partnership, and thus none of 
S's loss is taken into account. Any subsequent gain recognized by the 
partnership with respect to the property is limited under section 
267(d). (The results would be the same if the P group were a 
consolidated group, and S's sale to B were also subject to Sec. 1.1502-
13.)
    Example 7. Receivables. (a) Controlled group. S owns goods with a 
$60 basis. In Year 1, S sells the goods to X for X's $100 note. The note 
bears a market rate of interest in excess of the applicable Federal 
rate, and provides for payment of principal in Year 5. S takes into 
account $40 of income in Year 1 under its method of accounting. In Year 
2, the fair market value of X's note falls to $90 due to an increase in 
prevailing market interest rates, and S sells the note to B for its $90 
fair market value.
    (b) Loss not deferred. Under paragraph (f) of this section, S takes 
its $10 loss into account in Year 2. (If the sale were not at fair 
market value, paragraph (f) of this section would not apply and none of 
S's $10 loss would be taken into account in Year 2.)
    (c) Consolidated group. Assume instead that P owns all of the stock 
of S and B, and the P group is a consolidated group. In Year 1, S sells 
to X goods having a basis of $90 for X's $100 note (bearing a market 
rate of interest in excess of the applicable Federal rate, and providing 
for payment of principal in Year 5), and S takes into account $10 of 
income in Year 1. In Year 2, S sells the receivable to B for its $85 
fair market value. In Year 3, P sells 25% of B's stock to X. Although 
paragraph (f) of this section provides that $10 of S's loss (i.e., the 
extent to which S's $15 loss

[[Page 588]]

does not exceed its $10 of income) is not deferred under this section, 
S's entire $15 loss is subject to Sec. 1.1502-13 and none of the loss 
is taken into account in Year 2 under the matching rule of Sec. 1.1502-
13(c). See paragraph (a)(3) of this section (continued deferral under 
Sec. 1.1502-13). P's sale of B stock results in B becoming a nonmember 
of the P consolidated group in Year 3. Thus, S's $15 loss is taken into 
account in Year 3 under the acceleration rule of Sec. 1.1502-13(d). 
Nevertheless, B remains in a controlled group relationship with S and 
paragraph (f) of this section permits only $10 of S's loss to be taken 
into account in Year 3. See Sec. 1.1502-13(a)(4) (continued deferral 
under section 267). The remaining $5 of S's loss continues to be 
deferred under this section and taken into account under this section 
based on subsequent events (e.g., B's collection of the note or P's sale 
of the remaining B stock to a nonmember).
    Example 8. Selling member ceases to be a member. (a) Facts. P owns 
all of the stock of S and B, and the P group is a consolidated group. S 
has several historic assets, including land with a basis of $130 and 
value of $100. The land is not essential to the operation of S's 
business. On January 1 of Year 1, S sells the land to B for $100. On 
July 1 of Year 3, P transfers all of S's stock to newly formed X in 
exchange for a 20% interest in X stock as part of a transaction to which 
section 351 applies. Although X holds many other assets, a principal 
purpose for P's transfer is to accelerate taking S's $30 loss into 
account. P has no plan or intention to dispose of the X stock.
    (b) Timing. Under paragraph (c) of this section, S's $30 loss 
ordinarily is taken into account immediately before P's transfer of the 
S stock, under the timing principles of the acceleration rule of Sec. 
1.1502-13(d). Although taking S's loss into account results in a $30 
negative stock basis adjustment under Sec. 1.1502-32, because P has no 
plan or intention to dispose of its X stock, the negative adjustment 
will not immediately affect taxable income. P's transfer accelerates a 
loss that otherwise would be deferred, and an adjustment under paragraph 
(h) of this section is required. Thus, S's loss is never taken into 
account, and S's stock basis and earnings and profits are reduced by $30 
under Sec. Sec. 1.1502-32 and 1.1502-33 immediately before P's transfer 
of the S stock.
    (c) Nonhistoric assets. Assume instead that, with a principal 
purpose to accelerate taking into account any further loss that may 
accrue in the value of the land without disposing of the land outside of 
the controlled group, P forms M with a $100 contribution on January 1 of 
Year 1 and S sells the land to M for $100. On December 1 of Year 1, when 
the value of the land has decreased to $90, M sells the land to B for 
$90. On July 1 of Year 3, while B still owns the land, P sells all of 
M's stock to X and M becomes a nonmember. Under paragraph (c) of this 
section, M's $10 loss ordinarily is taken into account under the timing 
principles of the acceleration rule of Sec. 1.1502-13(d) immediately 
before M becomes a nonmember. (S's $30 loss is not taken into account 
under the timing principles of Sec. 1.1502-13(c) or Sec. 1.1502-13(d) 
as a result of M becoming a nonmember, but is taken into account based 
on subsequent events such as B's sale of the land to a nonmember or P's 
sale of the stock of S or B to a nonmember.) The land is not an historic 
asset of M and, although taking M's loss into account reduces P's basis 
in the M stock under Sec. 1.1502-32, the negative adjustment only 
eliminates the $10 duplicate stock loss. Under paragraph (h) of this 
section, M's loss is never taken into account. M's stock basis, and the 
earnings and profits of M and P, are reduced by $10 under Sec. Sec. 
1.1502-32 and 1.1502-33 immediately before P's sale of the M stock.

    (k) Cross-reference. For additional rules applicable to the 
disposition or deconsolidation of the stock of members of consolidated 
groups, see Sec. Sec. 1.337(d)-2T, 1.1502-13(f)(6), and 1.1502-35T.
    (l) Effective dates--(1) In general. This section applies with 
respect to transactions occurring in S's years beginning on or after 
July 12, 1995. If both this section and prior law apply to a 
transaction, or neither applies, with the result that items are 
duplicated, omitted, or eliminated in determining taxable income (or tax 
liability), or items are treated inconsistently, prior law (and not this 
section) applies to the transaction.
    (2) Avoidance transactions. This paragraph (l)(2) applies if a 
transaction is engaged in or structured on or after April 8, 1994, with 
a principal purpose to avoid the rules of this section (and instead to 
apply prior law). If this paragraph (l)(2) applies, appropriate 
adjustments must be made in years beginning on or after July 12, 1995, 
to prevent the avoidance, duplication, omission, or elimination of any 
item (or tax liability), or any other inconsistency with the rules of 
this section.
    (3) Prior law. For transactions occurring in S's years beginning 
before July 12, 1995 see the applicable regulations issued under 
sections 267 and 1502. See, e.g., Sec. Sec. 1.267(f)-1, 1.267(f)-1T, 
1.267(f)-2T, 1.267(f)-3, 1.1502-13, 1.1502-13T, 1.1502-14, 1.1502-14T, 
and 1.1502-31 (as contained

[[Page 589]]

in the 26 CFR part 1 edition revised as of April 1, 1995).

[T.D. 8597, 60 FR 36680, July 18, 1995, as amended by T.D. 8660, 61 FR 
10499, Mar. 14, 1996; 62 FR 12097, Mar. 14, 1997; T.D. 9048, 68 FR 
12290, Mar. 14, 2003]