[Federal Register Volume 61, Number 125 (Thursday, June 27, 1996)]
[Rules and Regulations]
[Pages 33313-33321]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-15825]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 8679]
RIN 1545-AU37
Regulations Under Section 382 of the Internal Revenue Code of
1986; Application of Section 382 in Short Taxable Years and With
Respect to Controlled Groups
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
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SUMMARY: This document contains final and temporary regulations
relating to limitations on net operating loss carryforwards and certain
built-in losses following an ownership change and comply with the
statutory direction under section 382(m) of the Internal Revenue Code
to prescribe regulations concerning short taxable years and controlled
groups. This document also contains amendments relating to the end of
separate tracking of the stock ownership of loss corporations that
cease to exist following a merger or similar transaction. The text of
these temporary regulations also serves as the text of the proposed
regulations set forth in the notice of proposed rulemaking on this
subject in the Proposed Rules section of this issue of the Federal
Register.
DATES: These regulations are effective June 27, 1996.
For dates of application and special transition rules, see
Effective Dates under SUPPLEMENTARY INFORMATION.
FOR FURTHER INFORMATION CONTACT: David B. Friedel at (202) 622-7550
(not a toll-free number).
[[Page 33314]]
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these temporary
regulations has been reviewed and approved by the Office of Management
and Budget in accordance with the Paperwork Reduction Act (44 U.S.C.
3507) under the control number 1545-1434. Section 1.382-8T(h) requires
a response from certain corporations that are members of controlled
groups. The IRS requires this information to assure compliance with
section 382(m)(5) so that the value of a loss corporation that is a
member of a controlled group is not taken into account more than once
in computing a section 382 limitation. Responses to this collection of
information are required to obtain a benefit (relating to the
restoration of value for section 382 purposes).
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number.
For further information concerning this collection of information,
and where to submit comments on the collection of information and the
accuracy of the estimated burden, and suggestions for reducing this
burden, please refer to the preamble to the cross-referencing notice of
proposed rulemaking published in the Proposed Rules section of this
issue of the Federal Register.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any Internal Revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background and Explanation of Provisions
On February 4, 1991, the IRS and Treasury issued three notices of
proposed rulemaking, CO-132-87 (56 FR 4194), CO-077-90 (56 FR 4183),
and CO-078-90 (56 FR 4228), setting forth rules regarding the
application of sections 382 and 383 by consolidated groups and by
controlled groups, and the carryover and carryback of losses to
consolidated and separate return years.
For reasons explained in the preamble to TD 8678 (published
elsewhere in this issue of the Federal Register), the IRS and Treasury
are issuing temporary amendments concerning the limitations on net
operating loss carryforwards and certain built-in losses and credits
following an ownership change of a consolidated group. The temporary
regulations contained in this Treasury decision complement those other
temporary regulations. They assure that the members of a controlled
group cannot duplicate value in computing their respective section 382
limitations, a result not permitted to members of a group filing
consolidated returns. See Sec. 1.1502-93T.
These temporary regulations are substantially identical to the
rules proposed on January 29, 1991. One provision (relating to the
effects of successive ownership changes) was moved from the
consolidated return regulations to the section 382 regulations to
clarify that it is applicable to all corporations. These temporary
amendments do not address the numerous comments on the proposed
regulations. Many of these comments are still under consideration.
Effective Dates
The temporary amendments are generally effective as of January 1,
1997. The final rules relating to the value of stock added to
Sec. 1.382-2(a)(3)(i) and the temporary rules in Sec. 1.382-
2T(f)(1)(ii) (relating to the end of separate tracking of certain loss
corporations) are generally effective as of January 29, 1991. The
temporary rules in Sec. 1.382-5T (relating generally to short taxable
years and successive ownership changes) generally apply to loss
corporations that have an ownership change to which section 382(a), as
amended by the Tax Reform Act of 1986, applies.
Special Analysis
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It has also been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to
these regulations, and, therefore, a Regulatory Flexibility Analysis is
not required. Pursuant to section 7805(f) of the Internal Revenue Code,
the notice of proposed rulemaking preceding these regulations were sent
to the Small Business Administration for comment on their impact on
small business.
Drafting Information: The principal author of the temporary
regulations is David B. Friedel of the Office of Assistant Chief
Counsel (Corporate), IRS. Other personnel from the IRS and Treasury
participated in their development.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602 are amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for Part 1 is amended by
removing the entries for ``1.382-2'' and ``1.382-2T'' and adding
entries in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.382-2 also issued under 26 U.S.C. 382(k)(1), (l)(3),
(m), and 26 U.S.C. 383.
Section 1.382-2T also issued under 26 U.S.C. 382(g)(4)(C), (i),
(k)(1) and (6), (l)(3), (m), and 26 U.S.C. 383.* * *
Section 1.382-5T also issued under 26 U.S.C. 382(m).* * *
Section 1.382-8T also issued under 26 U.S.C. 382(m).* * *
Par. 2. Section 1.382-1 is amended by:
a. Adding an entry for Sec. 1.382-2, paragraph (a)(1)(iv).
b. Revising the entry for Sec. 1.382-2, paragraph (a)(3)(i).
c. Adding entries for Sec. 1.382-2T, paragraphs (f)(1)(i) through
(f)(1)(iii).
d.- Adding entries for Secs. 1.382-5T and 1.382-8T.
Sec. 1.382-1 Table of contents.
* * * * *
Sec. 1.382-2 General rules for ownership change.
(a) * * *
(1) * * *
(iv) End of separate accounting for losses and credits of
distributor or transferor loss corporation.
* * * * *
Sec. 1.382-2T Definition of ownership change under section 382, as
amended by the Tax Reform Act of 1986 (temporary).
* * * * *
(f) * * *
(1) * * *
(i) In general.
(ii) End of separate accounting for losses and credits of
distributor or transferor loss corporation.
(iii) Application to other successor corporations.
* * * * *
Sec. 1.382-5T Section 382 limitation (temporary).
(a) Scope.
(b) Computation of value.
(c) Short taxable year.
(d) Successive ownership changes and absorption of a section 382
limitation.
(1) In general.
(2) Recognized built-in gains and losses.
[[Page 33315]]
(3) Effective date.
(e) Controlled groups.
(f) Effective date.
* * * * *
Sec. 1.382-8T Controlled groups (temporary).
(a) Introduction.
(b) Controlled group loss and controlled group with respect to a
controlled group loss.
(c) Computation of value.
(1) Reduction in value.
(2) Restoration of value.
(3) Reduction in value by the amount restored.
(4) Appropriate adjustments.
(5) Certain reductions in the value of members of a controlled
group.
(d) No double reduction.
(e) Definitions and nomenclature.
(1) Definitions in Section 382 and the regulations thereunder.
(2) Controlled group.
(3) Component member.
(4) Predecessor and successor corporation.
(f) Coordination between consolidated groups and controlled groups.
(g) Examples.
(h) Time and manner of filing election to restore.
(1) Statement required.
(2) Revocation of election.
(3) Filing by component member.
(i) [Reserved]
(j) Effective date.
(1) In general.
(2) Transition rule.
(i) In general.
(ii) Special transition rules for controlled groups that had
ownership changes before January 29, 1991.
(3) Amended returns.
Par. 3. Section 1.382-2 is amended as follows:
(a) The first sentence of paragraph (a)(1)(iii) is amended by
removing the language ``Pre-change losses'' and adding ``Except as
provided in Sec. 1.382-2T(f)(1)(ii), pre-change losses'' in its place.
(b) Paragraph (a)(1)(iv) is added.
(c) The text of Sec. 1.382-2T(f)(18)(i) is redesignated as the text
of Sec. 1.382-2(a)(3)(i).
(d) Newly designated paragraph (a)(3)(i) is amended by adding three
sentences at the end.
The additions read as follows:
Sec. 1.382-2 General rules for ownership change.
(a) * * *
(1) * * *
(iv) End of separate accounting for losses and credits of
distributor or transferor loss corporation. For further guidance, see
Sec. 1.382-2T(f)(1)(ii).
* * * * *
(3) * * * (i) * * * Solely for purposes of determining the
percentage of stock owned by a person, each share of all the
outstanding shares of stock that have the same material terms is
treated as having the same value. Thus, for example, a control premium
or blockage discount is disregarded in determining the percentage of
stock owned by any person. The previous two sentences of this paragraph
(a)(3)(i) apply to any testing date occurring on or after January 29,
1991.
* * * * *
Par. 4. Section 1.382-2T is amended as follows:
(a) Paragraph (e)(2)(iv) Example (1) is amended by removing the
last sentence.
(b) Paragraph (e)(2)(iv) Example (2)(ii) is amended by adding a
sentence at the end.
(c) Paragraph (e)(2)(iv) Example (2)(iii) is amended by removing
the language ``, but must be separately accounted for under Sec. 1.382-
2(a)(1)(iii) of this section'' from the last sentence.
(d) The text following the heading of paragraph (f)(1) is
designated as paragraph (f)(1)(i) and a heading for newly designated
paragraph (f)(1)(i) is added.
(e) Paragraphs (f)(1)(ii) and (f)(1)(iii) are added.
(f) Paragraph (f)(4) is amended by removing the word ``loss'' and
by adding two sentences at the end.
(g) Paragraph (f)(5) is amended by adding two sentences at the end.
(h) A sentence is added after the heading of paragraph (f)(18)(i).
(i) Paragraph (h)(2)(i)(A) is amended by adding the language ``and
solely for the purposes of determining whether a loss corporation has
an ownership change'' immediately after ``except as otherwise provided
in this section,''.
The additions read as follows:
Sec. 1.382-2T Definitions of ownership change under section 382, as
amended by the Tax Reform Act of 1986 (temporary).
* * * * *
(e) * * *
(2) * * *
(iv) * * *
Example (2) * * *
(ii) * * * See paragraph (f)(1)(ii) of this section for rules that
end separate accounting for L1's pre-change losses on any testing
date occurring on or after January 29, 1991.
(f) * * *
(1) * * *
(i) In general. * * *
(ii) End of separate accounting for losses and credits of
distributor or transferor loss corporation. The separate tracking of
owner shifts of the stock of an acquiring corporation required by
Sec. 1.382-2(a)(1)(iii) with respect to the net operating loss
carryovers and other attributes described in Sec. 1.382-2(a)(1)(ii)
ends when a fold-in event occurs. A fold-in event is either an
ownership change of the distributor or transferor corporation in
connection with, or after, the transaction to which section 381(a)
applies, or a period of 5 consecutive years following the section
381(a) transaction during which the distributor or transferor
corporation has not had an ownership change. Starting on the day after
the earlier of the change date (but not earlier than the day of the
section 381(a) transaction) or the last day of the 5 consecutive year
period, the losses and other attributes of the distributor or
transferor corporation are treated as losses and attributes of the
acquiring corporation for purposes of determining whether an ownership
change occurs with respect to such losses. Also, for purposes of
determining the beginning of the acquiring corporation's testing
period, such losses are considered to arise either in a taxable year
that begins not earlier than the later of the day following the change
date or the day of the section 381(a) transaction, or in a taxable year
that begins 3 years before the end of the 5 consecutive year period.
Pre-change losses of a distributor or transferor corporation that are
subject to a limitation under section 382 continue to be subject to the
limitation notwithstanding the occurrence of a fold-in event. Any
ownership change that occurs in connection with, or subsequent to, the
section 381 transaction may result in an additional, lesser limitation
with respect to such pre-change losses. This paragraph (f)(1)(ii)
applies to any testing date occurring on or after January 29, 1991.
(iii) Application to other successor corporations. Section 1.382-
2(a)(1) (relating to the definition of loss corporation) and this
paragraph (f)(1) also apply, as the context may require, to successor
corporations other than successors in section 381(a) transactions. For
example, if a corporation receives assets from the loss corporation
that have basis in excess of value, the recipient corporation's basis
for the assets is determined, directly or indirectly, in whole or in
part, by reference to the loss corporation's basis, and the amount by
which basis exceeds value is material, the recipient corporation is a
successor corporation subject to Sec. 1.382-2(a)(1) and this paragraph
(f)(1). This paragraph (f)(1)(iii) applies to any testing date
occurring on or after January 1, 1997.
* * * * *
[[Page 33316]]
(4) Successor corporation. * * * A successor corporation also
includes, as the context may require, a corporation which receives an
asset or assets from another corporation if the corporation's basis for
the asset(s) is determined, directly or indirectly, in whole or in
part, by reference to the other corporation's basis and the amount by
which basis differs from value is, in the aggregate, material. The
previous sentence of this paragraph (f)(4) applies to any testing date
occurring on or after January 1, 1997.
(5) Predecessor corporation. * * * A predecessor corporation also
includes, as the context may require, a corporation which transfers an
asset or assets to another corporation if the transferee's basis for
the asset(s) is determined, directly or indirectly, in whole or in
part, by reference to the corporation's basis and the amount by which
basis differs from value is, in the aggregate, material. The previous
sentence of this paragraph (f)(5) applies to any testing date occurring
on or after January 1, 1997.
* * * * *
(18) * * * (i) * * * For further guidance, see Sec. 1.382-
2(a)(3)(i).
* * * * *
Par. 5. Sections 1.382-5T and 1.382-8T are added to read as
follows:
Sec. 1.382-5T Section 382 limitation (temporary).
(a) Scope. Following an ownership change, the section 382
limitation for any post-change year is an amount equal to the value of
the loss corporation multiplied by the long-term tax-exempt rate that
applies with respect to the ownership change, and adjusted as required
by section 382 and the regulations thereunder. See, for example,
section 382(b)(2) (relating to the carryforward of unused section 382
limitation), section 382(b)(3)(B) (relating to the section 382
limitation for the post-change year that includes the change date),
section 382(m)(2) (relating to short taxable years), and section 382(h)
(relating to recognized built-in gains and section 338 gains).
(b) Computation of value. [Reserved]
(c) Short taxable year. The section 382 limitation for any post-
change year that is less than 365 days is the amount that bears the
same ratio to the section 382 limitation determined under section
382(b)(1) as the number of days in the post-change year bears to 365.
The section 382 limitation, as so determined, is adjusted as required
by section 382 and the regulations thereunder. This paragraph (c) does
not apply to a 52-53 week taxable year that is less than 365 days
unless a return is required under section 443 (relating to short
periods) for such year.
(d) Successive ownership changes and absorption of a section 382
limitation--(1) In general. If a loss corporation has two (or more)
ownership changes, any losses attributable to the period preceding the
earlier ownership change are treated as pre-change losses with respect
to both ownership changes. Thus, the later ownership change may result
in a lesser (but never in a greater) section 382 limitation with
respect to such losses. In any case, the amount of taxable income for
any post-change year that can be offset by pre-change losses may not
exceed the section 382 limitation for such ownership change, reduced by
the amount of taxable income offset by pre-change losses subject to any
earlier ownership change(s).
(2) Recognized built-in gains and losses. [Reserved]
(3) Effective date. This paragraph (d) applies to taxable years of
a loss corporation beginning on or after January 1, 1997.
(e) Controlled groups. See Sec. 1.382-8T for rules for determining
the value of a loss corporation that is a member of a controlled group.
(f) Effective date. Except as otherwise provided, this section
applies to a loss corporation that has an ownership change to which
section 382(a), as amended by the Tax Reform Act of 1986, applies.
Sec. 1.382-8T Controlled groups (temporary).
(a) Introduction. This section provides rules to adjust the value
of a loss corporation that is a member of a controlled group of
corporations on a change date so that the same value is not included
more than once in computing the limitations under section 382 for the
loss corporations that are members of the controlled group. In general,
the adjustment is made under paragraph (c) of this section by reducing
the value of the loss corporation by the value of the stock of each
component member of the controlled group that the loss corporation owns
immediately after the ownership change. The loss corporation's value
may, however, be increased under paragraph (c) of this section by any
amount of value that the other member elects to restore to the loss
corporation.
(b) Controlled group loss and controlled group with respect to a
controlled group loss. A controlled group loss is a pre-change loss (or
a net unrealized built-in loss) of a loss corporation that is
attributable to a taxable year of the corporation with respect to which
the corporation is a component member of a controlled group (as defined
by paragraphs (e) (2) and (3) of this section). The controlled group
with respect to each controlled group loss is composed of the loss
corporation and each other corporation that is a component member of a
controlled group that includes the loss corporation both--
(1) With respect to the taxable year to which the controlled group
loss is attributable; and
(2) On the date the loss corporation has an ownership change.
(c) Computation of value. For purposes of computing the limitation
under section 382 with respect to each controlled group loss, the value
of the stock of each component member of the controlled group with
respect to that loss is determined immediately before the ownership
change, and is adjusted by applying the following rules:
(1) Reduction in value. The value of the stock of each component
member is reduced by the value (immediately before the ownership change
and without regard to any restoration of value or other adjustment
under this section) of the stock of any other component member directly
owned by the component member immediately after the ownership change.
(2) Restoration of value. After the value of the stock of each
component member is reduced pursuant to paragraph (c)(1) of this
section, the value of the stock of each component member is increased
by the amount of value, if any, restored to the component member by
another component member (the electing member) pursuant to this
paragraph (c)(2). The electing member may elect to restore value to
another component member in an amount that does not exceed the lesser
of--
(i) The sum of--
(A) The value, determined immediately before the ownership change,
of the electing member's stock (after adjustment under paragraph (c)(1)
of this section and before any restoration of value under this
paragraph (c)(2)); plus
(B) Any amount of value restored to the electing member by another
component member under this paragraph (c)(2); or
(ii) The value, determined immediately before the ownership change,
of the electing member's stock (without regard to any adjustment under
this section) that is directly owned by the other component member
immediately after the ownership change.
(3) Reduction in value by the amount restored. The value of the
stock of the electing member is reduced by any
[[Page 33317]]
amount of value that the electing member elects to restore under
paragraph (c)(2) of this section to another component member.
(4) Appropriate adjustments. Appropriate additional adjustments
consistent with paragraphs (c)(1), (2), and (3) of this section must be
made to prevent any duplication of value. Thus, for example,
adjustments must be made to reflect--
(i) Any indirect ownership interest in another component member;
(ii) Any cross ownership of stock by component members of the
controlled group with respect to the controlled group loss; and
(iii) Any value used to determine a limitation under section 382
with respect to controlled group losses from the same period.
(5) Certain reductions in the value of members of a controlled
group. A loss corporation that has an ownership change is required to
make adjustments consistent with this paragraph (c) with respect to its
stock if the stock of another corporation in which it had a direct or
indirect ownership interest was disposed of before the ownership
change, and;
(i) Both corporations were component members of a controlled
group--
(A) With respect to a taxable year to which a controlled group loss
of the loss corporation is attributable; and
(B) At any time during the 2 year period before the ownership
change; and
(ii) Both corporations are component members of a controlled group
at any time during the 2 year period following the ownership change.
(d) No double reduction. To the extent consistent with the purposes
of this section, section 382 and this section shall not be applied to
duplicate a reduction in the value of a loss corporation. Thus, for
example, if the value of a loss corporation is reduced under section
382(l)(1) to reflect a capital contribution of stock of a component
member, it is not again reduced by such amount under paragraph (c)(1)
of this section. If this paragraph (d) applies to prevent a reduction
in value from being duplicated, the application of the other rules of
this section, such as those relating to the restoration of value, is
correspondingly limited in a manner consistent with the principles of
this section.
(e) Definitions and nomenclature--(1) Definitions in section 382
and the regulations thereunder. Except as otherwise provided, the
definitions and nomenclature contained in section 382 and the
regulations thereunder apply to this section.
(2) Controlled group. Controlled group has the same meaning as in
section 1563(a), determined by substituting ``50 percent'' for ``80
percent'' each place that it appears, and without regard to section
1563(a)(4).
(3) Component member. Component member has the same meaning as in
section 1563(b), determined by substituting ``December 31 (or the
change date, if earlier)'' for ``December 31'' each place it appears,
and without regard to section 1563 (b)(2), (b)(3)(C), and (b)(4).
(4) Predecessor and successor corporation. As the context may
require, a reference to a corporation, or component member includes a
reference to a predecessor or successor corporation.
(f) Coordination between consolidated groups and controlled groups.
Some or all of the component members of a controlled group may also be
members of a consolidated group, and a controlled group loss may be
subject to a consolidated section 382 limitation or subgroup section
382 limitation determined under Sec. 1.1502-93T. Except as otherwise
provided in this paragraph (f) and Secs. 1.1502-91T through 1.1502-99T,
Sec. 1.1502-93T applies instead of this section when both sections, by
their terms, are otherwise applicable. This section is applicable and
may require an adjustment to value if a member of a consolidated group,
a loss group, or a loss subgroup (as those terms are defined in
Secs. 1.1502-1(h) and 1.1502-91T) is also a component member of a
controlled group with respect to a controlled group loss. Solely for
purposes of applying this section, a consolidated group, loss group, or
loss subgroup is treated as a single corporation. Thus to determine the
limitation with respect to any portion of the pre-change consolidated
attributes or pre-change subgroup attributes of the loss group or loss
subgroup that is a controlled group loss, the consolidated section 382
limitation or subgroup section 382 limitation is computed by treating
the loss group or the loss subgroup as a single corporation, and
adjusting value in accordance with paragraph (c) of this section. See
paragraph (g) Example 4 of this section.
(g) Examples. For purposes of the examples in this section, unless
otherwise stated, the nomenclature and assumptions of the examples in
Sec. 1.382-2T(b) apply, all corporations file separate income tax
returns on a calendar year basis, the only 5-percent shareholder of a
corporation is a public group, and the facts set forth the only owner
shifts with respect to the corporations during the testing period.
-Example 1. Controlled group with respect to a controlled group
loss. (a) Public L owns all of the L stock, L and Public L1 own 30
percent and 70 percent, respectively, of the L1 stock, and L1 owns
all of the corporation T stock. L1 has a net operating loss arising
in Year 1 that is carried over to Year 4. L has a net operating loss
arising in Year 2 that is carried over to Year 4. On August 1, Year
3, L acquires 30 percent of the stock of L1, thereby increasing its
percentage ownership interest in L1 to 60 percent. On December 1,
Year 3, L1 purchases all of the stock of corporation S from Public
S. On November 1, Year 4, P acquires all of the L stock. The
acquisition by P of all of the L stock on November 1, Year 4, causes
ownership changes of both L and L1 under the rules of Sec. 1.382-2T.
The following is a graphic illustration of these facts.
BILLING CODE 4830-01-U
[[Page 33318]]
[GRAPHIC] [TIFF OMITTED] TR27JN96.000
BILLING CODE 4830-01-C
[[Page 33319]]
(b)(1) Under paragraph (b) of this section, the Year 1 net
operating loss carryover of L1 is a controlled group loss because L1
is a component member of a controlled group with respect to Year 1,
the year to which the loss is attributable. L1 and T compose a
controlled group with respect to the net operating loss carryover
because L1 and T are component members of a controlled group both--
(A) With respect to the taxable year to which L1's net operating
loss carryover is attributable (i.e., Year 1); and
(B) On November 1, Year 4, L1's change date. Although L and S
are component members of L1's controlled group on L1's change date,
they are not component members of the controlled group with respect
to the Year 1 net operating loss carryover because they were not
component members with respect to the year to which the net
operating loss carryover is attributable.
(2) The value of L1's stock must therefore be adjusted in
accordance with paragraph (c) of this section to take into account
an adjustment with respect to the T stock (but not the S stock) in
computing L1's limitation under section 382 with respect to its net
operating loss carryover.
(c) Although L is a member of a controlled group composed of L,
L1, S, and T on November 1, Year 4, L's change date, it is not a
component member of a controlled group with respect to Year 2, the
taxable year to which its net operating loss carryover is
attributable. Therefore, L's Year 2 net operating loss carryover is
not a controlled group loss under paragraph (b) of this section and
the value of L's stock is not adjusted in accordance with paragraph
(c) of this section to compute L's limitation under section 382 with
respect to the Year 2 net operating loss carryover.
Example 2. Adjustments to value of the controlled group members.
(a) Since Year 1, A has owned all of the stock of L, L and B have
owned 80 percent and 20 percent, respectively, of the stock of
corporation P, and P and C have owned 75 percent and 25 percent,
respectively, of the stock of L1. L and L1 each has a net operating
loss for the Year 6 taxable year that is carried over to its
respective Year 7 taxable year. On December 1, Year 7, A sells all
of the L stock to D. The sale results in ownership changes of both L
and L1. Immediately before the ownership changes, the total value of
the L1 stock is $40, the total value of the P stock (including the
value of its L1 stock) is $100, and the total value of the L stock
(including the value of the P stock) is $200. The following is a
graphic illustration of these facts.
BILLING CODE 4830-01-U
[GRAPHIC] [TIFF OMITTED] TR27JN96.001
BILLING CODE 4830-01-C
(b) Under paragraph (b) of this section, the Year 6 net
operating loss carryovers of each of L and L1 are controlled group
losses because each of L and L1 is a component member of a
controlled group with respect to Year 6, the year to which the
losses are attributable. L, P, and L1 compose controlled groups with
respect to both Year 6 net operating loss carryovers because L, P,
and L1 are component members of a controlled group both-- -
(1) With respect to the taxable years to which the net operating
loss carryovers are attributable (i.e., Year 6); and
(2) On December 1, Year 7, the change date.
(c) The value of the stock of L1 for purposes of determining its
limitation under section 382 with respect to its net operating loss
carryover from Year 6 is $40. L1 does not elect to restore any value
to P under paragraph (c)(2) of this section.
(d) The value of the stock of P ($100) is reduced under
paragraph (c)(1) of this section by the value of the stock of L1
that it directly owns, $30 (75% x $40). Following the adjustment,
the value of the stock of P is $70. P elects to restore this entire
$70 of value to L.
(e) The value of the stock of L, $200, is reduced under
paragraph (c)(1) of this section by the value of the stock of P it
directly owns, i.e., $80 (80% x $100), and increased under paragraph
(c)(2) of this section by the amount P elects to restore to L, i.e.,
$70. Thus, the value of the L stock for purposes of determining L's
limitation under section 382 with respect to its net operating loss
carryover from Year 6 is $190 ($200-$80+$70).
Example 3. Limitation on restoration of value. (a) The facts are
the same as in Example 2, except that L1 elects to restore $20 to P.
For purposes of determining L1's limitation under section 382 with
respect to the Year 6 net operating loss carryover, the value of the
stock of L1 is $20 ($40-$20) because the value of its stock is
reduced under paragraph (c)(3) of this section by the $20 of value
it elects to restore to P.
(b) The value of the stock of P ($100) is reduced under
paragraph (c)(1) of this section by the value of the L1 stock it
directly owns ($30), and is increased under paragraph (c)(2) of this
section by the value that L1 elects to restore to P ($20). Thus, the
value of the P stock is $90 ($100-$30+$20).
(c)(1) P elects to restore to L the maximum value permitted
under this section. The value of the stock of L, $200, is reduced
under paragraph (c)(1) of this section by the value of the P stock
it directly owns ($80), and is increased by the value that P elects
to restore to L. P may elect to restore to L the lesser of--
(A) The sum of the value of its stock immediately after
adjustment under paragraph (c)(1) of this section (i.e., $70) plus
the value restored to it by L1 (i.e., $20) (a total of $90); or
(B) The value of the P stock (without regard to the adjustment
required by paragraphs (c) (1) and (2) of this section) that is
directly owned by L immediately before the ownership change (i.e.,
$80).
(2) Thus, $80 is the maximum amount that P may elect to restore
to L. Following the restoration of value by P, the value of the L
stock for purposes of determining L's limitation under section 382
is $200 ($200 -$80 + $80).
Example 4. Coordination with consolidated return regulations.
(a) P and its wholly owned subsidiary L file a consolidated return.
L owns 79 percent of the outstanding
[[Page 33320]]
stock of L1. P acquired the stock of L in Year 1 and L acquired the
stock of L1 in Year 2. The P consolidated group has a consolidated
net operating loss arising in the Year 6 consolidated return year
that is carried over to Year 8. L1 has a net operating loss arising
in its Year 6 taxable year that is also carried over to Year 8. On
January 1, Year 8, the P consolidated group has an ownership change
under Sec. 1.1502-92T(b)(1)(i) and L1 has an ownership change under
Sec. 1.382-2T.
(b)(1) Under paragraph (b) of this section, the Year 6 net
operating loss carryover of the P group is a controlled group loss
because P, L, and L1 are component members of a controlled group
with respect to Year 6, the year to which the loss is attributable.
P, L, and L1 compose a controlled group with respect to the Year 6
net operating loss carryover of the P loss group because they are
component members of a controlled group both--
(A) With respect to the taxable years to which the net operating
loss carryover is attributable (i.e., Year 6); and -
(B) On January 1, Year 8, the P group's change date.
(2) Because P and L compose a loss group (within the meaning of
Sec. 1.1502-91T(c)) with respect to its Year 6 net operating loss
carryover, the P loss group must compute a consolidated section 382
limitation with respect to its Year 6 net operating loss carryover
as a result of the ownership change.
(c) In computing the consolidated section 382 limitation under
Sec. 1.1502-93T with respect to the Year 6 net operating loss
carryover, the value of the P stock immediately before the ownership
change is reduced under paragraphs (c)(1) and (f) of this section by
the value immediately before the ownership change of the L1 stock
directly owned by L immediately after the ownership change. L1 may,
however, elect to restore such value to the P consolidated group to
the extent permitted under paragraph (c)(2) of this section.
Example 5. Appropriate adjustments for indirect ownership
interest. (a) Individual A owns all of the stock of L, L owns an 80
percent interest in the capital and profits of partnership PS, and
PS owns 75 percent of the stock of L1. Both L and L1 have net
operating losses for the Year 1 taxable year that are carried over
to their respective Year 2 taxable years. On December 19, Year 2, A
sells all of the L stock to an unrelated individual. The sale
results in an ownership change of L and L1.
(b) Under paragraph (b) of this section, the Year 1 net
operating loss carryovers of each of L and L1 are controlled group
losses because each of L and L1 is a component member of a
controlled group with respect to Year 1, the year to which the
losses are attributable. L and L1 compose controlled groups with
respect to each corporation's net operating loss carryovers because
L and L1 are component members of a controlled group both--
(1) With respect to the taxable years to which the net operating
loss carryovers are attributable (i.e., Year 1); and
(2) On December 19, Year 2, the change date.
(c) L has an indirect ownership interest in L1 which, under
paragraph (c)(4) of this section, must be taken into account in
applying this section. As a result, the value of the L stock for
purposes of determining its limitation under section 382 with
respect to the Year 1 net operating loss carryover must be reduced
by the value of L's indirect ownership interest in the L1 stock (60
percent) that it owns through PS immediately before the ownership
change, and is increased by the amount (if any) that L1 elects to
restore to L under paragraph (c)(2) of this section. The value of L1
is reduced under paragraph (c)(3) of this section to the extent that
L1 elects to restore value to L.
(h) Time and manner of filing election to restore--(1) Statement
required. The election to restore value described in paragraph (c)(2)
of this section must be in the form set forth below. It must be signed
on behalf of both the electing member and the corporation to which such
value is restored by persons authorized to sign their respective income
tax returns. (The common parent of a consolidated group must make the
election on behalf of the group.) It must be filed by the loss
corporation with its income tax return for the taxable year in which
the ownership change occurs (or with an amended return for such year
filed on or before the due date (including extensions) of the income
tax return of any component member with respect to the taxable year in
which the ownership change occurs). The statement must provide that:
``THIS IS AN ELECTION UNDER Sec. 1.382-8T OF THE INCOME TAX REGULATIONS
TO RESTORE ALL OR PART OF THE VALUE OF [insert name and E.I.N. of the
electing member] TO [insert name and E.I.N. of the corporation to which
value is restored]. The statement must also--
(i) Identify the change date for the loss corporation in connection
with which the election is made;
(ii) State the value of the electing member's stock (without regard
to any adjustment under paragraph (c) of this section) immediately
before the ownership change;
(iii) State the amount of any reduction required under paragraph
(c)(1) of this section with respect to stock of the electing member
that is owned directly or indirectly by the corporation to which value
is restored;
(iv) State the amount of value that the electing member elects to
restore to the corporation; and
(v) State whether the value of either component member's stock was
adjusted pursuant to paragraph (c)(4) of this section.
(2) Revocation of election. An election made under this section is
revocable only with the consent of the Commissioner.
(3) Filing by component member. An electing member must attach a
copy of the statement described in paragraph (h)(1) of this section to
its income tax return (or amended return) for the taxable year which
includes the change date in connection with which the election is made.
(i) [Reserved] -
(j) Effective date--(1) In general. This section applies to a loss
corporation that has an ownership change with respect to a controlled
group loss on or after January 1, 1997.
(2) Transition rule--(i) In general. The members of a controlled
group on January 1, 1997, that have had an ownership change with
respect to a controlled group loss before January 1, 1997, must
determine the limitations under section 382 for any post-change year
with respect to controlled group losses by using a reasonable method to
preclude the value of stock of a component member that was owned
directly or indirectly by another member immediately after an ownership
change from being taken into account more than once in determining the
limitations under section 382 with respect to controlled group losses.
If such a reasonable method was not used for a post-change year,
subject to the exception in paragraph (j)(3) of this section, the
members of the controlled group described in the preceding sentence
must reduce their limitations under section 382 for post-change years
for which the income tax return is filed after January 1, 1997, to
recapture, as quickly as possible, any limitation that members took
into account in excess of the amount that would be allowable under this
section.
(ii) Special transition rule for controlled groups that had
ownership changes before January 29, 1991. For purposes of this
section, in the case of an ownership change occurring before January
29, 1991, the controlled group with respect to a controlled group loss
does not include a corporation that is not a component member of the
controlled group on January 29, 1991. Thus, in the case of an ownership
change occurring before January 29, 1991, paragraph (c) of this section
does not require that a loss corporation that is a component member of
a controlled group to disregard the value of stock of another
corporation directly owned immediately after the ownership change in
determining the value of its own stock unless the other corporation is
a component member of the controlled group on January 29, 1991.
[[Page 33321]]
(3) Amended returns. A taxpayer that has had an ownership change
before January 1, 1997, may file an amended return for any taxable year
to modify the amount of a limitation under section 382 with respect to
a controlled group loss only if--
(i) The modification complies with the rules contained in this
section for computing a limitation under section 382;
(ii) Any other component member of the controlled group with
respect to the controlled group loss who elects to restore value and
whose taxable income is affected by the election to restore value also
files amended returns that comply with such rules; and
(iii) Corresponding adjustments are made in amended returns for all
taxable years ending after December 31, 1986.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 6. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
Par. 7. In Sec. 602.101, paragraph (c) is amended by adding an
entry in numerical order to the table to read as follows:
Sec. 602.101 OMB Control numbers.
* * * * *
(c) * * *
------------------------------------------------------------------------
Current OMB
CFR part or section where identified or described control No.
------------------------------------------------------------------------
* * * * *
1.382.8T................................................... 1545-1434
* * * * *
------------------------------------------------------------------------
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: May 31, 1996.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 96-15825 Filed 6-26-96; 8:45 am]
BILLING CODE 4830-01-U
