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The Treasury Department and IRS finalized regulations clarifying how liability assumptions affect certain transfers between members of a consolidated federal income tax group. Under Treasury Decision 10059, section 357(c) does not apply to a transaction covered by 26 CFR §1.1502-13, and specified section 357(c)(3)(A) liabilities are excluded from the money-received calculation that can reduce the transferor’s basis in the stock received. The final rules are effective October 16, 2026, with an applicability date tied to the consolidated return’s unextended due date.
What did the IRS finalize for liability transfers inside a corporate group?
Treasury Decision 10059 finalizes amendments to the consolidated-return regulations under Internal Revenue Code section 1502. The operative change is in 26 CFR §1.1502-80(d): for an eligible intragroup transaction, assuming certain liabilities does not trigger section 357(c) gain and does not reduce the transferor’s basis in the transferee stock through the section 358(d)(1) money-received rule.
The rule affects consolidated groups and their members. It adopts the 2024 proposed regulations with non-substantive revisions that clarify the applicability date and remove an obsolete example. The Federal Register reports that no comments or hearing requests were received.
How does section 357(c) apply to an intragroup section 351 exchange?
For a section 351 transfer covered by §1.1502-13, section 357(c) does not apply. Section 358(d)(2) also excludes liabilities described in section 357(c)(3)(A) from the money-received computation, unless those liabilities are also described in section 357(c)(3)(B).
Liabilities that receive the special exclusion
The exclusion is limited to the statutory category in section 357(c)(3)(A), and it does not extend to liabilities that also fall within section 357(c)(3)(B). Liabilities outside the exclusion can still affect the stock-basis calculation under the ordinary rules. The exact classification therefore matters more than the fact that a liability was assumed in an intragroup transfer.
What the rule does not cover
The regulation does not apply when the transferor or transferee becomes a nonmember as part of the same plan or arrangement. A transaction that includes a planned departure from the consolidated group must be analyzed under the applicable nonmember rules rather than assuming this intragroup protection remains available.
When do the new consolidated-group liability regulations apply?
The final regulations are effective October 16, 2026. Paragraphs (d)(1) and (d)(3) apply to transactions occurring in consolidated-return years for which the return due date, without extensions, is after October 16, 2026. Earlier taxable years continue to use the prior version of §1.1502-80(d).
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| Situation | Applicable treatment |
|---|---|
| Transaction in a consolidated-return year whose unextended return due date is after October 16, 2026 | Apply paragraphs (d)(1) and (d)(3) of the final regulations. |
| Earlier taxable year under the prior applicability rule | Use the prior version of §1.1502-80(d). |
| Transferor or transferee leaves the group under the same plan or arrangement | The final intragroup rule does not apply. |
| Transaction not covered by §1.1502-13 | Analyze section 357(c), section 358, and other applicable provisions under their ordinary terms. |
Does assuming liabilities reduce stock basis in a consolidated-group transfer?
Not for the specified section 357(c)(3)(A) liabilities in a transaction covered by §1.1502-13, provided the nonmember limitation is not triggered. Those liabilities are excluded from the section 358(d)(1) money-received calculation under §358(d)(2), so they do not reduce the transferor’s basis in the transferee stock on that account.
This does not mean every assumed liability is ignored. Amounts outside the statutory exclusion can remain relevant, and the group must still apply the consolidated-return matching and intercompany rules to the transaction as a whole.
What does the final regulation’s example show?
The Federal Register example uses parent P, existing subsidiary S1, and newly formed subsidiary S2. S1 transfers assets with a total fair-market value of $100 and an aggregate basis of $30; S2 assumes $40 of liabilities.
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- Classify the liabilities. Five dollars are section 357(c)(3)(A) liabilities that are not also described in section 357(c)(3)(B). The remaining $35 are outside that category.
- Apply section 357(c). Because the transfer is covered by §1.1502-13, section 357(c) does not cause S1 to recognize gain.
- Apply section 358(d)(2). The $5 qualifying amount is excluded from the section 358(d)(1) money-received calculation.
- Compute the stock basis result. The regulation states that S1’s basis in the S2 stock is a $5 excess loss account.
The example illustrates why liability classification and basis arithmetic must be performed separately: the absence of section 357(c) gain does not eliminate every stock-basis adjustment.
What should a tax team check before filing?
The regulation supplies the governing rule; the following workflow is practical implementation guidance for applying it to a specific transaction.
- Confirm group status: document that the transferor and transferee are members of the same consolidated group for the relevant period.
- Identify the operative provision: determine whether the transfer is a section 351 exchange covered by §1.1502-13.
- Inventory each liability: classify amounts under section 357(c)(3)(A) and test whether any are also described in section 357(c)(3)(B).
- Check the exit condition: determine whether either entity becomes a nonmember as part of the same plan or arrangement.
- Determine the timing rule: identify the consolidated return year and the return due date without extensions, then select the final or prior version of §1.1502-80(d).
- Reconcile basis schedules: calculate stock basis, any excess loss account, and intercompany items consistently with the final liability classification.
Why did the Federal Register say the rule has limited small-entity impact?
The IRS stated that consolidated corporations represent approximately 2 percent of all Form 1120 filers and approximately 95 percent of the aggregate receipts reported on those forms, using 2026 IRS data. The Federal Register used those figures to explain why the regulations are not expected to have a significant impact on a substantial number of small entities. These percentages describe the population and receipts cited in the rulemaking document; they are not a measure of any individual company’s tax liability.
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What happens if a subsidiary leaves the consolidated group as part of the transaction?
The final rule’s protection is unavailable when the transferor or transferee becomes a nonmember under the same plan or arrangement. The transaction should then be separated into its relevant steps and evaluated under the rules governing the departure, including any section 357(c) and section 358 consequences that apply outside the protected intragroup setting.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Frequently Asked Questions
Does the October 16, 2026 effective date automatically apply to every 2026 transfer?
No. The operative applicability test looks to the consolidated-return year and the return due date without extensions. A 2026 transaction can therefore fall under different versions of §1.1502-80(d) depending on that timing.
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No. The exclusion is limited to liabilities described in section 357(c)(3)(A) that are not also described in section 357(c)(3)(B). Other liabilities may still affect the stock-basis computation.
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What records support the liability classification?
Keep the transfer agreement, liability-level schedules, statutory classification analysis, group-membership records, and the return-calendar calculation showing which applicability rule was selected. Those records connect the legal conclusion to the numbers reported on the consolidated return.
Why can an excess loss account appear when no section 357(c) gain is recognized?
Gain recognition and stock-basis computation are separate steps. In the regulation’s example, excluding the qualifying $5 liability from the money-received calculation leads to a $5 excess loss account even though section 357(c) itself produces no gain.
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