Welcome clarity for consolidated groups
On Oct. 16, 2026, the Department of the Treasury and the IRS published final regulations (T.D. 10059, 91 Fed. Reg. 65683), effective the same day, addressing certain nuances around the non-applicability of section 357(c) to consolidated groups. The final regulations clarify that, in certain transfers between members of a consolidated group, a transferee’s assumption of liabilities described in section 357(c)(3)(A), but not section 357(c)(3)(B), does not reduce the transferor’s basis in the transferee stock received in the transfer.
Background: The section 357(c) gain trigger
A company can generally transfer property to a controlled corporation for stock without recognizing gain under section 351. If the receiving corporation assumes liabilities, section 357(c) can require gain when the assumed liabilities exceed the tax basis of the transferred property. In simple terms, the rule prevents a taxpayer from transferring low-basis assets and more debt than basis without recognizing the excess. Section 358(d) addresses the related stock basis result. Liabilities assumed by the receiving corporation are generally treated as cash received and reduce the transferor's basis in the stock it receives.
However, section 357(c)(3)(A) generally excludes liabilities whose payment would produce a tax deduction, as well as certain partnership-related payments, from the section 357(c) calculation. This can include accrued operating expenses that have not yet been deducted. The exclusion does not apply to a liability that is also described in section 357(c)(3)(B), which generally covers a liability connected with property whose basis already reflects the liability.
Section 358(d)(2) coordinates the basis rule with this exclusion. As a general matter, a qualifying liability excluded under section 357(c)(3) also does not reduce the basis of the stock received in the transfer.
Intercompany transactions: uncertainty for transfers within a consolidated group
For transfers between members of the same consolidated group, Reg. section 1.1502-80(d) historically has turned off section 357(c) when the transaction was subject to the intercompany transaction rules, avoiding immediate gain when assumed liabilities exceeded the basis of the transferred assets. However, section 358(d)(1) generally still treated the assumed liabilities as money received, reducing the transferor’s stock basis and potentially creating an excess loss account.
The uncertainty concerned liabilities described in section 357(c)(3), which ordinarily are excluded from the stock basis reduction under section 358(d)(2). Because section 357(c) itself did not apply to the intragroup transaction, it was unclear whether those qualifying liabilities remained protected by section 358(d)(2) or instead reduced stock basis at the time of the transfer.
The final regulations clarify the treatment of section 357(c)(3) liabilities
The new final regulations expressly preserve the favorable basis rule. In determining the transferor's basis under section 358(a), liabilities described in section 357(c)(3)(A) (and not section 357(c)(3)(B)) are excluded from the liabilities treated as cash received under section 358(d)(1).
The practical result is straightforward: Turning off section 357(c) for an intragroup transaction does not cause a qualifying deductible liability to reduce stock basis. Treasury describes the change as clarifying the timing of a single basis reduction, rather than creating a new substantive benefit. An example, found in the final regulations, provides a helpful illustration:
Example. A subsidiary (S) transfers assets with a $30 tax basis to a newly formed group member (Newco). Newco assumes $40 of liabilities. Of that amount, $5 consists of qualifying section 357(c)(3)(A) liabilities, and $35 consists of other liabilities. S does not recognize section 357(c) gain because the transfer is covered by the consolidated return rule. For stock basis purposes, only the $35 reduces basis ($40 - $5). The transferor therefore has a $5 excess loss account ($30 - $35), rather than a $10 excess loss account.
Consolidated groups should consider the final regulations when planning internal incorporations, legal entity simplifications and other section 351 restructurings involving accrued expenses or similar liabilities. The key diligence point is to identify which liabilities qualify under section 357(c)(3)(A) and whether any are also described in section 357(c)(3)(B).
