The IRS ruled in a private letter ruling (PLR 201828006
) that the net profit of a corporation in a consolidated group was excluded under Treas. Reg. Sec. 1.1502-13.
In the ruling, a corporation (Parent), was a publicly traded holding company and the common parent of a consolidated group. Parent owned all of the stock of a corporation (Sub). Parent made public offerings of preferred stock and such offerings were underwritten by Sub through a directly owned entity of Sub that was disregarded for U.S. federal tax purposes. Parent paid Sub underwriting fees with respect to the offerings and Sub incurred expenses with respect to underwriting the offerings. Parent represented that it has not and will not claim a deduction with respect to the underwriting fees paid to Sub.
Treas. Reg. Sec. 1.1502-13 governs intercompany transactions between members of a consolidated group. The regulations refer to “S” as the member providing services, and “B” as the member receiving services. S’s income, gain, deduction, and loss from an intercompany transaction are its intercompany items, and B’s income, gain, deduction, and loss from an intercompany transaction are its corresponding items.
Under Treas. Reg. Sec. 1.1502-13(c)(1), the separate attributes of S’s intercompany items and B’s corresponding items are re-determined 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 was a transaction between divisions. The regulations, and Treas. Reg. Sec. 1.1502-13(c)(6), further provide that S’s intercompany items might be re-determined to be excluded from gross income under certain specific circumstances, and also provide that the Commissioner may determine that S’s intercompany items may be excluded if they are consistent with the purposes of the regulations.
The IRS ruled in the PLR that Sub’s net profit (the underwriting fees received from Parent less Sub’s expenses with respect to underwriting the offerings) was determined to be excluded from Sub’s gross income under Treas. Reg. Sec. 1.1502-13(c)(6)(ii). Presumably, because Parent was not claiming a deduction for the underwriting fees, Sub’s intercompany items were determined to be excluded in order to produce the same effect as if Parent and Sub were divisions of a single corporation.
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