Final Regs Clarify No Basis Reduction for Certain Liabilities in Intragroup Section 351 Transfers
ANALYSIS · October 16, 2026
Slug: non-applicability-section-357-c-consolidated-groups
Package note: This is TD 10059, a final rule issued by the Treasury Department and IRS under 26 CFR Part 1, published in the Federal Register on October 16, 2026 (91 FR 65683). It revises Sec. 1.1502-80(d) to state that section 357(c) does not apply to intragroup transactions under Sec. 1.1502-13, and that liabilities described in section 357(c)(3)(A) (but not 357(c)(3)(B)) are excluded from basis reduction under section 358(d)(1). The rule applies to consolidated return years for which the due date (without extensions) is after October 16, 2026. It does not create new tax liabilities or change reporting requirements.
Primary sources
- Federal Register Documents (October 16, 2026): https://www.federalregister.gov/documents/2026/10/16/2026-21253/non-applicability-of-section-357c-to-consolidated-groups
This document finalizes regulations that prevent a transferee member’s assumption of certain liabilities from reducing the transferor member’s basis in the transferee’s stock in intragroup section 351 exchanges. It adopts the approach first proposed in 2001, withdrawn in 2023, and reproposed in 2024. No comments were received.
Core Tension
The regulations clarify that section 357(c) does not apply to transactions governed by the consolidated return rules under Sec. 1.1502-13, including intragroup section 351 exchanges. Section 358(d)(2) excludes liabilities described in section 357(c)(3)(A) (but not those also described in 357(c)(3)(B)) from the amount treated as money received, so the transferor’s basis in the transferee stock is not reduced by those liabilities. The rule applies only while both parties remain members of the same consolidated group; it does not apply if the transferor or transferee becomes a nonmember as part of the same plan. An example shows a $5 excess loss account results when $5 of qualifying liabilities are excluded from the $40 total assumed. In short, those liabilities are excluded from the section 358 basis computation, so they never reduce the transferor’s basis in the transferee stock.
What the final rule does
| Section / element | Verified text / effect |
|---|---|
| Sec. 1.1502-80(d)(1) | “Section 357(c) does not apply to any transaction to which Sec. 1.1502-13 applies.” For basis under section 358(a), “section 358(d)(2) operates to exclude liabilities described in section 357(c)(3)(A), other than those also described in section 357(c)(3)(B).” |
| Scope limitation | Rule does not apply “if the transferor or transferee becomes a nonmember as part of the same plan or arrangement.” |
| Example in (d)(3) | In a section 351 transfer of assets with $30 basis and $40 liabilities ($5 qualifying under 357(c)(3)(A)), basis in stock received is reduced only by the $35 non-qualifying liabilities, producing a $5 excess loss account. |
| Applicability date | Applies to “consolidated return years for which the due date of the return (without regard to extensions) is after October 16, 2026.” |
Claims check
| Claim | Assessment | Receipt |
|---|---|---|
| Section 357(c) does not apply to intragroup section 351 exchanges within a consolidated group | Verified | Sec. 1.1502-80(d)(1)(i) |
| Transferee’s assumption of liabilities described in section 357(c)(3)(A) will not reduce transferor’s basis in transferee stock | Verified | Sec. 1.1502-80(d)(1)(i) and example in (d)(3) |
| Regulations affect only corporations filing consolidated returns | Verified | Summary and Regulatory Flexibility Act section |
| No additional paperwork burden is imposed | Verified | Paperwork Reduction Act section |
How coverage splits
Not reviewed for this analysis.
Context / what to watch
- October 16, 2026: Effective date of the final regulations.
- Due dates after October 16, 2026: Applicability to consolidated return years.
- Future transactions in which a member leaves the group as part of the same plan: rule does not apply.
Publish-ready ANALYSIS · Kelvic drafter, checked by KVOp against the primary source · 2026-10-16 · for /analysis/non-applicability-section-357-c-consolidated-groups