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Treasury and the IRS on December 9 released proposed regulations (REG-113839-22) that would amend the regulations under Section 1502 to treat members of a consolidated group as a single US shareholder when ownership of CFC stock changes among group members during a tax year and a CFC makes a distribution described in Section 959(b). The regulations affect the determination of a US shareholder’s pro rata share of subpart F income or tested income with regard to the entire group’s stock ownership for purposes of Section 951(a)(2)(B).

The proposed regulations would treat all members of the consolidated group as a single US shareholder for purposes of Section 951(a)(2)(B). The preamble states that this rule would clearly reflect the US tax liability of the consolidated group and prevent avoidance of tax liability with respect to a CFC. 

The proposed regulations would apply to tax years for which the original consolidated federal income tax return is due (without extensions) after the date final regulations are published in the Federal Register. Thus, if the proposed regulations are published as final in the Federal Register before April 15, 2023, they would apply to consolidated tax years ending on or after December 31, 2022.

Observation: When finalized, these regulations could impact transactions that occurred during 2022 prior to the date on which the proposed regulations were issued.