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Firm Comments on Elimination of Ratable Allocation Election

JAN. 23, 2017

Firm Comments on Elimination of Ratable Allocation Election

DATED JAN. 23, 2017
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January 23, 2017

 

 

Mr. Thomas C. West

 

Acting Assistant Secretary (Tax Policy)

 

Department of the Treasury

 

1500 Pennsylvania Avenue, NW

 

Washington, DC 20220

 

 

Dear Sirs and Madam:

The preamble to the Notice of Proposed Rulemaking, issued in March 2015, that proposes to amend Reg. § 1.1502-76, specifically requested comments as to whether the ratable allocation election under Reg. § 1.1502-76(b)(2)(ii) should be eliminated. This comment suggests that the election should be eliminated for some circumstances, but nonetheless should be retained for others.

As I understand the rationale for the proposed elimination of the election, the Treasury Department and IRS are concerned that the parties to the sale of a subsidiary's stock could use the election solely as a means to minimize the tax liabilities of the parties. As a general business practice, when a selling group disposes of its stock in a subsidiary, the subsidiary's books are closed. The selling group, understandably, has no desire for the subsidiary's post-disposition activities, over which the selling group has no control, to affect the tax position of the selling group. In some cases, however (such as the case of the sale of a retail subsidiary), the seasonal nature of the subsidiary's earnings might cause the parties to depart from the general business practice. For example, if either the buying group or the selling group has a consolidated net operating loss or loss carryover, a ratable allocation election could be used by the parties to maximize the reporting of income in the group with the loss. Merely reducing the overall tax liabilities of the parties was not the objective of allowing the election, and therefore the government believes it would be appropriate to eliminate it.

The sale of a subsidiary's stock to an unrelated party is a case in which the election may be expendable. Nevertheless, in other circumstances the election serves as an opportunity for the target company to avoid huge accounting expenses. If, for example, a calendar group buys a stand-alone corporation or the common parent of another calendar group on a day other than December 31, the target or target group must close its taxable year. In such a case, the acquiring corporation has the responsibility to file the return of the target for both the pre-acquisition and post-acquisition periods and has the tax liability associated with the target's activities for both periods. Without the ratable allocation election, auditors must do a hard close on the acquisition date, or at best use the mid-month election procedure. The ratable election avoids the costs associated with a full, mid-year hard closing of the books.

Accordingly, even if the Treasury Department and IRS believe that there are situations in which the ratable allocation election should not be available, I suggest that there are others in which the election saves substantial nontax expenses, and for those situations, the election should be retained. For convenience, the regulations could continue to allow use of the election when an entire group is acquired by cross-reference to Reg. § 1.1502-13(j)(5), or to a case in which a stand-alone corporation is acquired by a consolidated group.

Respectfully submitted,

 

 

Lawrence M. Axelrod

 

Senior Partner

 

Ivins, Phillips & Barker

 

Washington, DC
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