CCA 201013039: IRS illustrates stock-loss limits under section 1.337(d)-2

Plain-English summary

Chief Counsel advice provided a hypothetical example of applying section 1.337(d)-2 and the disconformity method in Notice 2004-58 to a consolidated group subsidiary stock sale. In the initial example, the smallest of the three relevant factors was zero, so the parent could claim its entire stock loss. The advice then assumed that the subsidiary distributed an appreciated asset before the sale, which increased the relevant gain and net positive adjustment. Under that revised example, the disallowance amount equaled the full stock loss, so none of the loss could be claimed.

Ruling snapshot

• Question: How can a pre-sale asset distribution affect the amount of a subsidiary stock loss disallowed under section 1.337(d)-2?
• Outcome: Advice given
• Key authorities: IRC §§ 311(b) and 1502-32; Treas. Reg. § 1.337(d)-2; Notice 2004-58

Full text (IRS public release)

ID: CCA_2010022417050016 Number: 201013039
Release Date: 4/2/2010
Office: --------------
UILC: 337.00-00

From: -------------------
Sent: Wednesday, February 24, 2010 5:05:05 PM
To: -------------------
Cc: -------------------------------------------
Subject: Your question about 1.337(d)-2

Hi, ------- -- as discussed, here is a brief (and necessarily general) summary of the application of 1.337(d)-2 to a hypothetical set of facts:

Basic facts:
M, a member of a consolidated group, holds all the stock of S with an aggregate basis of $10. M sells the S stock to an unrelated party for $8 (recognizing a loss of $2). The stock loss is subject to 1.337(d)-2 and M will use the disconformity method in Notice 2004-58 to determine its allowable loss.

Under Notice 2004-58, subsidiary stock loss is disallowed to the extent of the smallest of the following three factors:

1. the gain amount (total gains recognized by S on the disposition of assets while in the
   group)

2. the disconformity amount (the excess, if any, of M's basis in S stock over S's net
   asset basis -- basically S's net built-in gain), and

3. the net positive adjustment (the greater of: the total investment adjustments applied
   to M's basis in S under 1.1502-32, excluding any adjustments for distributions, and zero
   -- basically the net amount M's basis was increased by -32 adjustments excluding the effect of any distributions).

M first computed its Notice 2004-58 factors as:

1. Gain amount = $2
2. Disconformity amount = $4, and
3. Net positive adjustment = $0. (The total adjustments under 1.1502-32 actually
   totaled a negative $1, so the disconformity amount is zero, the greater of $0 and negative $1).

Using these factors, M's disallowance amount would be $0 (the smallest of the three factors) and M would be allowed to claim its entire $2 stock loss.

However, if it is determined that, prior to the stock sale, S distributed an asset with a basis of $0 and a value of $3, S would recognize a $3 gain under section 311(b) and M's Notice 2004-58 computations would be revised as follows: 2

Stock basis: $10 + $3 gain recognized - $3 distribution (the value of the property distributed) = $10 Stock loss: $2 (note: the parties would have no reason to change the purchase price b/c the original $8 purchase price/value already reflected the fact that S no longer held the distributed property)

Revised Notice 2004-58 factors:

1. Gain amount: original $2 + $3 gain recognized on distribution of property = $5

2. Disconformity amount: $4 (there would be no change because the gain realized and
   amount distributed would move the inside and outside bases in tandem), and

3. Net positive adjustment: $2 (the greater of zero and $2, the total investment
   adjustments under 1.1502-32, exclusive of distributions: the sum of the original negative
   $1 and the positive $3 from the 311(b) gain on the distribution)

Using these factors, M's disallowance amount is $2 (the smallest of the three factors) and M is entitled to claim none of its $2 stock loss.

Please let me know if you have any further questions on the application of 1.337(d)-2 or Notice 2004-58. Thanks.