The Federal Register tomorrow will carry new intercompany obligation and intercompany insurance regulations under section 1502 (1.1502-13(g) and 1.1502-13(e)), available on BNA at this link.
The preamble to the regulations discusses the consideration of eliminating the deemed satisfaction-deemed reissuance model of the current regulations for intercompany obligations. After consideration of a matching and acceleration model, tax administrators concluded that the deemed satisfaction-reissuance model provides a better approach of minimizing the effects of intercompany obligations on a consolidated group's income and providing mechanisms closer to a single-entity approach. The deemed satisfaction-deemed reissuance model maintains creditor and debtor items at their original site, matches timing , and ensures correspondence between creditor and debtor for future amounts and timing of discount or premium. The acceleration and matching rules, on the other hand, would have required a number of special rules to provide adjustments to the way original issue discount (OID) and other rules work in the consolidated return context.
The new regulations, however, are intended to simplify the mechanisms for satisfaction and reissuance for intragroup and outbound transactions, as follows.
In general, the new model deems the following sequence of events to occur immediately before, and independently of, the actual transaction: (1) the debtor is deemed to satisfy the obligation for a cash amount equal to the obligation’s fair market value; and (2) the debtor is deemed to immediately reissue the obligation to the original creditor for that same cash amount. The parties are then treated as engaging in the actual transaction but with the new obligation.
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The new model operates to trigger all built-in items arising from the obligation, and then reissue the obligation with an issue price equal to its basis (and generally, its fair market value) before the actual transaction. Thus, no further gain, loss, income, or deduction with respect to the obligation will result from the actual transaction.
Unlike the current regulations, however, these regulations determine the amount of the deemed satisfaction and reissuance based on fair market value rather than through application of the OID rules. However, if the transaction is not an intragroup transaction and the creditor's amount realized differs from the fair market value, the amount used will be the amount realized by the creditor.
A number of further special rules are provided, and of course intergroup insurance transactions are treated. This appears to be a regulatory project that both clarifies and simplifies in ways that most taxpayers will find reasonable.
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