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 It adopts the approach first proposed in 2001, withdrawn in 2023, and reproposed in 2024.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.

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