IRS Finalizes Rules Shielding Consolidated Groups From Section 357(c) Basis Reductions

What the Rule Does

The Treasury Department and the Internal Revenue Service have issued final regulations clarifying that, in certain transfers between members of a consolidated group, a transferee member's assumption of liabilities to which section 357(c) of the Internal Revenue Code applies will not reduce the transferor member's basis in the transferee member's stock received in the transfer. The final regulations revise the Income Tax Regulations at 26 CFR part 1 and affect consolidated groups and their members.

Statutory Authority

The final regulations are issued under the authority of section 1502 of the Code, which authorizes the Secretary of the Treasury to prescribe regulations for an affiliated group of corporations that join in filing a consolidated return — regulations that may differ from the chapter 1 provisions that would apply if those corporations filed separate returns — in order to clearly reflect, and to prevent the avoidance of, the Federal income tax liability of the consolidated group. The regulations are also issued pursuant to section 7805(a) of the Code, which authorizes the Secretary to prescribe all needful rules and regulations for the enforcement of the Code.

Background and Regulatory History

The foundation for these regulations is § 1.1502-80, promulgated on March 18, 1992, which provides rules on the applicability of provisions of law other than the consolidated return regulations to a consolidated group. That section already provided that section 357(c) does not apply to any transaction to which § 1.1502-13 applies, including intragroup section 351 exchanges between members of a consolidated group. Following that rulemaking, however, a question arose regarding the timing of basis reductions under section 358 with respect to liabilities generally excluded from the application of section 357(c) under section 357(c)(3).

To address this question, the Treasury Department and the IRS published a notice of proposed rulemaking (REG-137519-01) on November 14, 2001, which would have clarified that, in intragroup section 351 exchanges, a transferee's assumption of certain liabilities described in section 357(c)(3) would not reduce the transferor's basis in the transferee's stock. That 2001 proposed rulemaking remained pending for more than two decades.

On August 7, 2023, the Treasury Department and the IRS published a broader notice of proposed rulemaking (REG-134420-10) primarily aimed at eliminating obsolete or outdated consolidated return regulation provisions, modernizing regulatory language, and improving clarity to facilitate taxpayer compliance. That 2023 rulemaking also withdrew the long-pending 2001 proposed regulations. To fill the gap left by that withdrawal, on December 30, 2024, the Treasury Department and the IRS published a new notice of proposed rulemaking (REG-134420-10) that reproposed the 2001 approach, clarifying the appropriate timing for the single basis reduction for an assumed liability described in section 357(c)(3)(A).

Adoption and Final Revisions

The Treasury Department and the IRS requested comments on the 2024 proposed regulations. No comments were received, and no public hearing was requested or held. Accordingly, the 2024 proposed regulations are adopted with non-substantive revisions: to clarify the applicability date, and to remove an example that the agency states is no longer relevant following amendments made to section 357(c)(1)(B) by the American Jobs Creation Act of 2004, Public Law 108-357.

What to Watch

The final regulations are effective on October 16, 2026.

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