(f) Any amount included in income under 1.1502-19 shall be taken into account;

(g) In the computation of the deduction under section 167, property shall not lose its character as new property as a result of a transfer from one member to another member during a consolidated return year if:

(1) The transfer occurs on or before January 4, 1973, or

(2) The transfer occurs after January 4, 1973, and the transfer is a deferred intercompany transaction as defined in § 1.1502-13(a)(2) or the basis of the property in the hands of the transferee is determined (in whole or in part) by reference to its basis in the hands of the transferor;

(h) No net operating loss deduction shall be taken into account;

(i) [Reserved]

(j) No capital gains or losses shall be taken into account;

(k) No gains and losses subject to section 1231 shall be taken into account;

(1) No deduction under section 170 with respect to charitable contributions shall be taken into account;

(m) No deduction under section 922 (relating to the deduction for Western Hemisphere trade corporations) shall be taken into account;

(n) No deductions under section 243(a)(1), 244(a), 245, or 247 (relating to deductions with respect to dividends received and dividends paid) shall be taken into account;

(0) Basis shall be determined under §§ 1.1502-31 and 1.1502-32, and earnings and profits shall be determined under § 1.1502-33; and

(p) The limitation on deductions provided in section 613A shall be taken into account for each member's oil and gas properties as provided in § 1.1502-44.

(q) A thrift institution's deduction under section 593(b)(2) (relating to the addition to the reserve for bad debts of a thrift institution under the percentage of taxable income method) shall be determined under § 1.1502-42. (Secs. 1502 and 7805 of the Internal Revenue Code of 1954 (68A Stat. 637; 917; 26 U.S.C. 1502, 7805))

[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7191, 37 FR 12949, June

30, 1972; T.D. 7246, 38 FR 760, Jan. 4, 1973; T.D. 7725, 45 FR 65561, Oct. 3, 1980; T.D. 7876, 48 FR 11258, Mar. 17, 1983]

§ 1.1502-13 Intercompany transactions. (a) Definitions. For purposes of §§ 1.1502-1 through 1.1502-80:

(1) "Intercompany transaction." (i) Except as provided in subdivision (ii) of this subparagraph, the term "intercompany transaction" means a transaction during a consolidated return year between corporations which are members of the same group immediately after such transaction. Thus, for example, an intercompany transaction would include a sale of property by one member of a group (hereinafter referred to as the "selling member") to another member of the same group ("purchasing member"), the performance of services by one member of a group ("selling member") for another member of the same group ("purchasing member"), or the payment of interest by one member of a group ("purchasing member") to another member of the same group ("selling member"), during a consolidated return year.

(ii) The term "intercompany transaction" does not include a distribution by one member of a group to another member of the same group with respect to the distributing member's stock, or a contribution to capital on which no gain is realized. Thus, for example, dividend distributions, redemptions, and liquidations are not intercompany transactions. The term also does not include sales and other dispositions of, and bad debts with respect to, obligations of other members of the group. See § 1.1502-14, relating to amounts received with respect to stock, bonds, or other obligations of a member of the group.

(2) "Deferred intercompany transaction". The term "deferred intercompany transaction" means:

(i) The sale or exchange of property, (ii) The performance of services in a case where the amount of the expenditure for such services is capitalized (for example, a builder's fee, architect's fee, or other similar cost which is included in the basis of property), or

(iii) Any other expenditure in a case where the amount of the expenditure

is capitalized (for example, prepaid rent, or interest which is included in the basis of property;

in an intercompany transaction.

(b) Treatment of intercompany transactions other than deferred intercompany transactions—(1) General rule. Gain or loss on intercompany transactions (other than deferred intercompany transactions) shall not be deferred or eliminated. Thus, for example, if, during a consolidated return year, a purchasing member makes an interest payment on an indebtedness to a selling member in an intercompany transaction, the purchasing member shall take the deduction for interest into account and the selling member shall take the interest income into account.

(2) Special rule. If, in an intercompany transaction (other than a deferred intercompany transaction), one member would otherwise properly take an item of income or a deduction into account for a consolidated return year earlier than the year (whether consolidated or separate) for which another member of the group can properly take into account the corresponding item of income or deduction, then both the item of income and the deduction shall be taken into account for the later year (whether consolidated or separate). On the other hand, if one member properly takes an item of income or a deduction into account for a separate return year earlier than the consolidated return year for which the other member can properly take into account the corresponding item of income or deduction, then such other member shall take the corresponding deduction or item of income into account for such later consolidated return year.

(c) Deferral of gain or loss on deferred intercompany transactions—(1) General rule. (i) To the extent gain or loss on a deferred intercompany transaction is recognized under the Code for a consolidated return year, such gain or loss shall be deferred by the selling member (hereinafter referred to as "deferred gain or loss").

(ii) The following rules apply with respect to the deferral of gain or loss on deferred intercompany transactions:

(a) The selling member may not report gain on the installment method under section 453;

(b) A selling member shall take into account the gain or loss on a deferred intercompany transaction in accordance with the provisions of paragraphs (d), (e), and (f) of this section, notwithstanding that such selling member, under its method of accounting, would not otherwise recognize such gain or loss until a later taxable year. Thus, for example, a selling member must take into account its gain on a deferred intercompany transaction for the first taxable year for which the purchasing member is allowed a deduction for depreciation with respect to the property involved, even though the selling member, under its method of accounting, would not otherwise recognize such gain until a later taxable year.

(iii) See paragraphs (d), (e), and (f) of this section, relating to the time and manner of restoring deferred gain or loss. See paragraph (a) of § 1.150231, relating to basis of property acquired in a deferred intercompany transaction.

(2) Determination of amount of deferred gain or loss. In determining the amount of deferred gain or loss, the cost of property, services, or any other expenditure shall include both direct costs and indirect costs which are properly includible in the cost of goods sold or cost of the services or other expenditure. See § 1.263A-1T for costs properly includible in cost of goods sold.

(3) Election not to defer. A group may elect with the consent of the Commissioner not to defer gain or loss on any deferred intercompany transactions with respect to all property or any class or classes of property. Applications for such consent must be filed with the Commissioner of Internal Revenue, Washington, D.C. 20224, on or before the due date of the consolidated return (not including extensions of time) for the taxable year to which the election is to apply. An election under this subparagraph shall, unless revoked with the consent of the Commissioner, apply to all members of the group for the consolidated return year for which made and all subsequent

consolidated return years ending prior to the first year for which such group does not file a consolidated return.

(4) Character and source of deferred gain or loss. (i) Except as provided in subdivision (ii) of this subparagraph, the character and source of deferred gain or loss on a deferred intercompany transaction shall be determined at the time of the deferred intercompany transaction as if such transaction had not occurred during a consolidated return year.

(ii) Deferred gain or loss taken into account by the selling member under paragraph (d)(1) of this section, or (as a result of abandonment) under paragraph (f) of this section, shall be treated as ordinary income or loss.

(5) Accounting for deferred gain or loss. The amount of deferred gain or loss shall be reflected on permanent records (including work papers). From such permanent records the group must be able to identify the character and source of the deferred gain or loss to the selling member, and must be able to apply the restoration rules of paragraphs (d), (e), and (f) of this section.

(6) Inheritance of deferred gain or loss. If the assets of a selling member are acquired by one or more other members in an acquisition to which section 381(a) applies, the member acquiring the greatest portion of the assets (measured by fair market value) of the selling member shall be subject to the provisions of paragraphs (d), (e), and (f) of this section with respect to the entire remaining balance of the deferred gain or loss. If two or more members acquire the same portion (which is greater than that acquired by any other members), the common parent shall select which such member shall be subject to the provisions of paragraphs (d), (e), and (f) of this section. For purposes of this section, a member which inherits the balance of the deferred gain or loss under this subparagraph shall be treated as the selling member.

(d) Restoration of deferred gain or loss for property subject to depreciation, amortization, or depletion—(1) General rule. (i) If property (including a capitalized expenditure for services, or any other capitalized expenditure)

acquired in a deferred intercompany transaction is, in the hands of any member of the group, subject to depreciation, amortization, or depletion, then, for each taxable year (whether consolidated or separate) for which a depreciation, amortization, or depletion deduction is allowed to any member of the group with respect to such property, a portion (as determined under subdivision (ii) of this subparagraph) of the deferred gain or loss attributable to such property shall be taken into account by the selling member.

(ii) The portion of the deferred gain or loss attributable to any property which shall be taken into account by the selling member shall be an amount equal to:

(a) The amount of gain or loss deferred by the selling member at the time of the deferred intercompany transaction (and if a member has transferred the property to another member of the group, the remaining balance at the time of such transfer), multiplied by

(b) A fraction, the numerator of which is the amount of the depreciation, amortization, or depletion deduction with respect to such property allowed to any member of the group for the year (whether consolidated or separate), and the denominator of which is the depreciable basis (i.e., basis reduced by salvage value required to be taken into account, if any) of such property in the hands of such member immediately after such property was transferred to such member.

(2) Multiple asset accounts. In the case of property contained in a multiple asset account (or in single asset accounts for which an average rate is used), for purposes of subparagraph (1)(ii)(b) of this paragraph the depreciation deduction allowed for a particular taxable year shall be determined by reference to the rate and method of depreciation applied to such multiple asset account (or average rate and method of depreciation applied to such single asset accounts). Thus, if property with an estimated useful life of 3 years is placed in a multiple asset account which is depreciated on the straight-line method at a rate of 20 percent, the depreciation de

duction allowed for each taxable year shall be assumed to be 20 percent of the basis of such property (reduced by the salvage value taken into account).

(3) Reduction or deferred gain or loss. The deferred gain or loss shall be reduced by the amount taken into account by the selling member under subparagraph (1) of this paragraph. If the deferred gain includes any ordinary income, the reduction shall first be applied against the ordinary income. Thus, for example, if the selling member has deferred gain of $100, of which $70 is capital gain and $30 is ordinary income, the first $30 taken into account by the selling member under subparagraph (1) of this paragraph shall be applied against the ordinary income, and any additional amounts so taken into account shall be applied against the capital gain.

(e) Restoration of deferred gain or loss for installment obligations and sales-(1) Installment obligations. If an installment obligation (within the meaning of section 453(d)) is transferred in a deferred intercompany transaction, then on each date on which the obligation is satisfied the selling member shall take into account an amount equal to the deferred gain or loss on such transfer, multiplied by a fraction, the numerator of which is the portion of such obligation satisfied on such date, and the denominator of which is the aggregate unpaid installments immediately after the deferred intercompany transaction.

(2) Installment sales. If:

(i) Property acquired in a deferred intercompany transaction is disposed of outside the group, and

(ii) The purchasing member-vendor reports its income on the installment method under section 453,

then on each date on which the purchasing member-vendor receives an installment payment the selling member shall take into account an amount equal to the deferred gain or loss attributable to such property (after taking into account any prior redeductions under paragraph (d)(3) of this section) multiplied by a fraction, the numerator of which is the installment payment received and the denominator of which is the total contract price. If the deferred gain includes any ordi

nary income, the ordinary income shall be taken into account first.

(3) Reduction of deferred gain or loss. The deferred gain or loss shall be reduced by the amount taken into account by the selling member under subparagraph (1) or (2) of this paragraph. If the deferred gain includes any ordinary income, the reduction shall first be applied against the ordinary income.

(f) Restoration of deferred gain or loss on dispositions, etc.—(1) General rule. The remaining balance (after taking into account any prior reductions under paragraphs (d)(3) and (e)(3) of this section) of the deferred gain or loss attributable to property, services, or other expenditure shall be taken into account by the selling member as of the earliest of the following dates:

(i) The date on which such property is disposed of outside the group (including abandoned) other than in a transaction described in paragraph (e)(2) of this section (but not including a normal retirement, as defined in paragraph (b) of § 1.167(a)-8, from an average-life multiple asset account or from a single asset account for which an average rate is used). If such property is of a kind which would properly be included in the inventory of a member if on hand at the close of its taxable year, such member shall determine whether or not such item of property has been disposed of outside the group by reference to its method of inventory identification (e.g., firstin, first-out, last-in, first-out, or specific identification);

(ii) In the case of a transaction described in paragraph (e)(2) of this section, the date on which the installment debt is written off, satisfied, discharged, or disposed of outside the group or the property sold is repossessed (except as provided in section 1038), whichever occurs earliest;

(iii) Immediately preceding the time when either the selling member or the member which owns the property ceases to be a member of the group;

(iv) In the case of property which is stock in trade or other property of a kind which would be properly included in inventory of the member which owns the property if on hand at the

close of such member's taxable year, or held primarily for sale to customers in the ordinary course of such member's trade or business, the first day of the first separate return year of the selling member or the member which owns the property;

(v) In the case of an obligation (other than an obligation of a member of the group), the date on which such obligation is satisfied or becomes worthless;

(vi) In the case of stock, the date on which such stock is redeemed (whether or not it is canceled, retired, or held as treasury stock) or becomes worthless;

(vii) If consolidated returns are filed by the group for fewer than three consecutive taxable years immediately preceding a separate return year of the common parent, the first day of such separate return year; or

(viii) In the case of inventory, the date on which its value is written down to market (if the lower-of-costor-market method is used by the purchaser), but only to the extent of such write-down.

(2) Exceptions. (i) Subparagraph (1) of this paragraph shall not apply solely because of a termination of the group (hereinafter referred to as the “terminating group”) resulting from:

(a) The acquisition by a nonmember corporation of (1) the assets of the common parent in a reorganization described in subparagraph (A), (C), or (D) (but only if the requirements of subparagraphs (A) and (B) of section 354(b)(1) are met) of section 368(a) (1), or (2) stock of the common parent, or (b) The acquisition (in a transaction to which § 1.1502-75(d)(3) applies) by a member of (1) the assets of a nonmember corporation in a reorganization referred to in (a) of this subdivision or (2) stocked of a nonmember corporation, if all the members of the terminating group (other than such common parent if its assets are acquired) immediately before the acquisition are members immediately after the acquisition of another group (hereinafter referred to as the "succeeding group") which files a consolidated return for the first taxable year ending after the date of acquisition. The members of the succeeding group

shall succeed to any deferred gain or loss of members of the terminating group and to the status of such members as selling or purchasing members. This subdivision shall not apply with respect to acquisitions occurring before August 25, 1971, except that in the case of an acquisition occurring after April 16, 1968, and before August 25, 1971, this subdivision shall apply if the terminating group and the succeeding group elect to apply § 1.150218(c)(4) (notwithstanding the last sentence thereof) with respect to such acquisition. The election shall be made in a joint statement filed by the terminating and succeeding groups on or before March 5, 1973, with the Internal Revenue Service Center or Centers with which the terminating and succeeding groups filed their consolidated returns for the taxable year which includes the date of the acquisition. Such election shall be irrevocable.

(ii) Subparagraph (1)(iii) of this paragraph shall not apply in a case where:

(a) The selling member or the member which owns the property, as the case may be, ceases to be a member of the group by reason of an acquisition to which section 381(a) applies, and the acquiring corporation is a member, or

(b) The group is terminated, and immediately after such termination the corporation which was the common parent (or a corporation which was a member of the affiliated group and has succeeded to and become the owner of substantially all of the assets of such former parent) owns the property involved and is the selling member or is treated as the selling member under paragraph (c)(6) of this section.

Paragraphs (d) and (e) of this section and this paragraph shall apply to such selling member. Thus, for example, subparagraph (1)(iii) of this paragraph does not apply in a case where corporation P, the common parent of a group consisting of P and corporations S and T, sells an asset to S in a deferred intercompany transaction, and subsequently all of the assets of S are distributed to P in complete liquidation of S. Moreover, if, after the liqui