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Guidance Issued for Corporate Equity Reduction Transactions
Almost 23 years after the initial statutory guidance was enacted to limit taxpayers from carrying back losses generated from interest on debt used to acquire equity in a corporation, the proposed regulations finally give more guidance to corporations that have participated in a CERT. Taxand USA discovers what this will mean for large corporations, specifically involving those within consolidated groups.
The issue recently resurfaced because a large number of taxpayers have filed refund claims for losses incurred in 2008 and 2009 containing large interest deductions. The long-awaited regulations address issues such as multi-step plans for acquiring stock being treated as a CERT. These proposed regulations are lengthy and significantly expand the analysis and examples of calculations involving consolidated groups.
The proposed regulations offer guidance on specific issues affecting consolidated groups, including:
- Deconsolidation of members from the consolidated group.
- Single-entity treatment of the consolidated group.
- Excess distributions of the consolidated group.
- Consolidated group's three-year average relevant to calculating the CERIL.
- Other miscellaneous aspects.
Any large corporation that has been part of a corporate equity reduction transaction or has any plans for large equity purchases should understand the new guidance and examples provided in the proposed regulations. Consolidated groups should understand if they have correctly been applying the single-entity approach when calculating their net operating carryback limitation. They will also need to model the election available to them when a member is leaving the group (including taking a worthless stock deduction with respect to a member of the group).