Example 2: The facts are the same as in Example 1, although a significant portion ($375,000) of the total costs associated with the overall contract have been incurred by B and S
, collectively; in B's hands only 4% of the "new" contract's total costs were incurred prior to year end.
The Chicago three-party argument (C3PA) assumes (a) that B and S negotiate efficiently in the bilateral sense, meaning that they agree on exclusivity if and only if doing so increases their joint surplus; (b) that they cannot negotiate a binding product-market price or trading quantity at this stage (so that under exclusivity the product-market price will be the monopoly price); and (c) that E cannot pay B up front to refuse S's exclusivity offer.
(3) If, on the other hand, E is more efficient than S then E will (if allowed) displace S and price at S's cost, (4) giving B and S the same levels of surplus as they would get if S supplied B at cost.
As noted above, in the C3PA's undifferentiated Bertrand model of product-market competition, entry by E hurts S, benefits B by more, and confers a net benefit on S and B jointly, so B and S jointly don't want to discourage entry by E.
The proposed regulations will also alter the allocation of the domestic- and foreign-source income between B and S
in a fashion that has (perhaps unintended) collateral effects on unrelated parties.
Example 1: B and S
are members of a consolidated group.
(as if B and S were divisions of a single corporation) 20 B's corresponding item - (10) S's intercompany item 30
The result is consistent with the result achieved under current law.(33) Under the proposed regulations, however, upon the resale of the property outside the group, the attributes of S's remaining intercompany gain are determined by treating S and B as divisions of a single corporation.(34) Thus, to the extent the group's gain does not exceed the aggregate depreciation claimed by both B and S, recapture under section 1245 is required.
Under the matching rule, as B claims recovery deductions through the partnership in excess of the amount it would have claimed if B and S were divisions of a single corporation, S will take into account a portion of its intercompany gain.
The new note issued by B is not an intercompany obligation and has $50 ($200 stated redemption price at maturity -- $150 issue price) of OID that will be taken into account by B and S
If B's ownership of the lots at the time of sale would control in considering B and S as divisions of a single corporation, the entire $100 gain (including S's deferred gain) would be ordinary income.
1.1502-13(c)(1)(ii) provides that the holding period of property transferred in an intercompany transaction is the aggregate of the holding periods of B and S. An exception is provided when the basis of the property transferred is determined by reference to the basis of other property; the property's holding period is determined by reference to the holding period of the other property.(16) For example, the holding period of T stock distributed in an intercompany distribution to which Sec.