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Consolidated Corporations

Exchange Basics

Consolidated Corporations

C Corporations many times can facilitate 1031 exchanges with third party purchases or sellers by transferring assets within the corporate structure via non-taxable asset transfers, such as property distributions, dividends, and D reorganizations. Inter-Company transactions occurring in consolidated return years after July 12, 1995 are governed by the rules and regulations pursuant to Section 1502.

An Inter-Company transaction is a transaction involving members of the same "consolidated group." Treas. Reg. § 1.1502-13(b)(1). Consolidated group means any affiliated group, which generally means a parent corporation and another corporation in which the parent owns 80% of the voting power of the stock and 80% of the value of the stock of the other corporation. I.R.C. § 1504(a)(1). A consolidated group can also include three (or more) companies, where the parent meets the 80% tests for one corporation, which then meets the 80% tests of another corporation. Id. Consolidated groups do not include tax-exempt corporations, S Corporations, insurance companies taxed under 801, foreign corporations, corporations that have made § 965 (possession tax credit) elections, regulated investment companies and real estate investment trusts subject to tax under subchapter M, and DISCs (as defined in § 992(a)(1)). I.R.C. § 1504(b).

General Rule. The Inter-Company transaction rules generally call items of income, gain, deduction or loss from the selling company "intercompany items." Any income, gain, deduction or loss to the buying company are considered "corresponding items." These items both must be taken into account in the applicable year. However, items that are not recognized, like gains from a 1031 exchange, are also not recognized in Inter-Company transactions, so long as the seller receives a "successor asset" in the transaction. Treas. Reg. § 1.1502-13(b)(3)(ii). Of course, non-recognition would not apply upon a future sale of the exchanged property to an outside third party, where no replacement property is taken.

Successor Asset. A successor asset is any asset whose basis is determined in whole or in part, directly or indirectly, by reference to the basis of the first asset. Treas. Reg. § 1.1502-13(j)(1). Therefore, replacement property would qualify as a successor asset within the meaning of the Inter-Company transaction rules.

 
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