FUTURE REGS. WILL RESTRICT CONSOLIDATED GROUP ADJUSTMENTS IN STOCK BASIS MADE TO REFLECT INCOME FROM SALE OF BUILT-IN-GAIN ASSETS.

Notice 87-14

The Internal Revenue Service intends to promulgate regulations affecting certain adjustments to the basis of the stock of a subsidiary that is a member of an affiliated group of corporations filing a consolidated return. In general, the adjustments affected are among those made pursuant to the investment adjustment provisions of the consolidated return regulations (section 1.1502-32 of the Income Tax Regulations). The investment adjustment regulations provide for certain positive or negative adjustments to the basis of the stock of a subsidiary based generally on the subsidiary's earnings and profits. The adjustments to stock basis are intended to reflect changes in a group's investment in the stock of a subsidiary, so that income or loss previously included in a group's consolidated taxable income is not reflected a second time on the sale of a subsidiary's stock.

The regulations to be promulgated will affect the adjustment to stock basis in certain cases where one or more members have acquired stock of a target with a built-in-gain asset, that is, an asset that at the time of the acquisition of target stock has a fair market value in excess of its adjusted basis. In general, the adjustment to stock basis will not reflect built-in gains that are recognized by target on sales of or by reason of distributions of, its assets. Thus, in cases where a target's stock is sold, the regulations will prevent recognition of losses that are attributable to the subsidiary's recognition of built-in gains. The regulations will be effective with respect to stock in a target that was acquired after January 6, 1987.