Unionbancal Corporation - Page 17

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         sales between controlled group members, “If the seller’s loss may            
         not be disallowed to the seller, then of necessity it must                   
         eventually be allowed to the seller, i.e., restored to it.”                  
         Petitioner argues that, as applied to petitioner, the Temporary              
         Regulation impermissibly imposes the loss disallowance rule of               
         section 267(a)(1) and reinstates the gain-reduction rule of                  
         section 267(d).                                                              
              We disagree.  By rendering inapplicable the general rules               
         contained in subsections (a)(1) and (d), section 267(f)(2)(A)                
         simply makes operable the special rules of subsection (f).  Those            
         special rules indicate that when the selling member leaves the               
         controlled group before the loss property is disposed of outside             
         the group, the loss is deferred until such time as may be                    
         prescribed in regulations.                                                   
              The Temporary Regulation does not replicate the loss                    
         disallowance and gain adjustment mechanisms of subsections (a)(1)            
         and (d).  Generally speaking, under subsection (a)(1) the loss is            
         denied absolutely, not only to the seller but to any party.  The             
         gain-reduction adjustment under subsection (d) mitigates the                 
         subsection (a)(1) loss disallowance only where the transferee                
         subsequently resells the loss property at a gain.  By contrast,              
         the Temporary Regulation generally preserves the deferred loss in            
         the controlled group for U.S. income tax purposes by means of a              

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Last modified: May 25, 2011