[Federal Register Volume 61, Number 125 (Thursday, June 27, 1996)]
[Rules and Regulations]
[Pages 33321-33335]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-15823]
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DEPARTMENT OF THE TREASURY
26 CFR Parts 1 and 602
[TD 8677]
RIN 1545-AU35
Consolidated Returns--Limitations on the use of Certain Losses
and Deductions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
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SUMMARY: This document contains final and temporary amendments to the
consolidated return regulations relating to deductions and losses of
members. The temporary amendments concern the method for computing the
limitations with respect to separate return limitation year (SRLY)
losses. They also concern the rules relating to carryover and carryback
of losses to consolidated and separate return years and to the built-in
deduction rules. Final amendments are made amending definitions and
redesignating sections displaced by temporary regulations. 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 amendments 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).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in the 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 1545-1237. Section 1.1502-21T(b)(3)
requires a response from certain consolidated groups. The IRS requires
the information to assure that an election to relinquish a carryback
period is properly documented. Reponses to this collection of
information are required to obtain a benefit (relating to the carryover
of losses which would otherwise be carried back).
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 published in the Federal
Register a notice of proposed rulemaking (CO-078-90, 56 FR 4228)
setting forth amendments to the rules regarding the net operating
losses, built-in deductions, and capital losses of consolidated groups,
including rules regarding the carryover and carryback of losses to
consolidated and separate return years. Some of the amendments are
clarifying, and some change the existing rules. The principal changes
related to losses arising in (or carried to) SRLY years. The preamble
to the proposed amendments explains the proposed changes in detail. The
IRS and Treasury also published Notice 91-27 (1991-2 C.B. 629) to
advise of intended modifications to the proposed amendments.
Generally, section 1503(a) requires that a consolidated group
determine its tax in accordance with the regulations under section 1502
prescribed before the last day prescribed by law for the filing of its
tax return. Many of the proposed amendments have proposed effective
dates of January 29, 1991, and other transitional rules for their
application. Because of this effective date, consolidated groups have
been uncertain whether the existing rules or the proposed rules (if
adopted) will determine their use of losses for consolidated return
years ending on or after January 29, 1991.
To address the uncertainty, the IRS and Treasury are issuing this
Treasury decision to adopt temporary amendments to the rules regarding
a consolidated group's losses, including the carryover and carryback of
SRLY losses. The temporary amendments are substantially identical to
the rules proposed on January 29, 1991. A more detailed discussion of
the effective dates of the temporary amendments, including special
transitional rules, is set forth below under Effective Dates.
These temporary amendments primarily address the uncertainty
created by the proposed effective dates. They do not address the
comments on the proposed amendments. Many of these comments are still
under consideration.
As companions to this Treasury decision, the IRS and Treasury also
issue two other sets of temporary regulations under sections 382 and
383
[[Page 33322]]
concerning the use of losses and deductions by consolidated groups and
by members of controlled groups. See TD 8678 and TD 8679 published
elsewhere in this issue of the Federal Register.
Effective Date
The temporary amendments are generally effective for consolidated
return years beginning on or after January 1, 1997. However, two
important changes are made to the effective date provisions set forth
in the proposed rules.
As proposed, the amendments generally applied to consolidated
return years ending on or after January 29, 1991, without regard to the
year in which the losses arose and without regard to whether the losses
are subject to the SRLY rules. An exception to the general effective
date rules was made for the proposed SRLY rules and built-in deduction
rules, which generally applied only to losses and deductions of
corporations that became members (and acquisitions occurring) on or
after January 29, 1991, without regard to when they arose. Thus, the
proposed amendments required the losses and deductions of members
acquired before January 29, 1991, to remain subject to the existing
SRLY limitations.
The temporary amendments revise this treatment. Losses and
deductions of a member (including SRLY losses) carried to consolidated
return years beginning on or after January 1, 1997, are governed by the
temporary amendments, regardless of the year in which the loss or
deduction was recognized, and regardless of when the member with the
SRLY loss became a member of the group.
The temporary amendments also contain rules relating to
consolidated return years ending on or after January 29, 1991, and
beginning before January 1, 1997. Specifically, a consolidated group
may apply the temporary amendments to those consolidated return years
provided that three principal conditions are met: (1) all the temporary
amendments must be applied consistently on the group's final return
(original or amended return) for each such year for which the statute
of limitations does not preclude the filing of an amended return on
January 1, 1997; (2) the temporary amendments relating to the treatment
of built-in deductions and SRLY losses must be applied with respect to
the losses and deductions of those corporations that became members of
the group, and to acquisitions occurring, on or after January 29, 1991,
and only with respect to such losses and deductions; and (3)
appropriate adjustments must be made in the earliest subsequent open
year to reflect any inconsistency in a year for which the statute of
limitations precludes the filing of an amended return on January 1,
1997. Until consolidated return years beginning on or after January 1,
1997, the rules of the existing regulations relating to the treatment
of built-in deductions and SRLY losses continue to apply to
corporations that became members before, and to acquisitions occurring
before, January 29, 1991. See Sec. 1.1502-21T(g)(3).
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 is hereby certified that
these regulations do not have a significant economic impact on a
substantial number of small entities. This certification is based on
the fact that these regulations will primarily affect affiliated groups
of corporations that have elected to file consolidated returns, which
tend to be larger businesses. Therefore, a Regulatory Flexibility
Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) 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 these 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 in part
by adding citations in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1502-0 also issued under 26 U.S.C. 1502. * * *
Section 1.1502-1T also issued under 26 U.S.C. 1502.
Section 1.1502-2 also issued under 26 U.S.C. 1502. * * *
Section 1.1502-15T also issued under 26 U.S.C. 1502. * * *
Section 1.1502-21T also issued under 26 U.S.C. 1502.
Section 1.1502-22T also issued under 26 U.S.C. 1502.
Section 1.1502-23T also issued under 26 U.S.C. 1502. * * *
Section 1.1502-79T also issued under 26 U.S.C. 1502.
Section 1.1502-15A also issued under 26 U.S.C. 1502.
Section 1.1502-21A also issued under 26 U.S.C. 1502.
Section 1.1502-22A also issued under 26 U.S.C. 1502.
Section 1.1502-23A also issued under 26 U.S.C. 1502.
Section 1.1502-41A also issued under 26 U.S.C. 1502.
Section 1.1502-79A also issued under 26 U.S.C. 1502.* * *
Par. 2. In the list below, for each section indicated in the left
column, remove the wording indicated in the middle column, and add the
wording indicated in the right column.
------------------------------------------------------------------------
Affected section Remove Add
------------------------------------------------------------------------
1.469-1(h)(2)................... 1.1502-21 1.1502-21T (Net
(consolidated net operating losses
operating loss), (temporary)), and
and 1.1502-22 1.1502-22T
(consolidated net (consolidated net
capital gain or capital gain and
loss). loss
(temporary)).
1.597-2(c)(5), first sentence... Secs. 1.1502-15, Secs. 1.1502-15T,
1.1502-21, and 1.1502-21T, and
1.1502-22. 1.1502-22T (or
Secs. 1.1502-15A
, 1.1502-21A, and
1.1502-22A, as
appropriate).
1.597-2(c)(5), second sentence.. Secs. 1.1502-15, Secs. 1.1502-15T,
1.1502-21 or 1.1502-21T or
1.1502-22. 1.1502-22T (or
Secs. 1.1502-15A
, 1.1502-21A or
1.1502-22A, as
appropriate).
1.597-4(g)(3), fifth sentence... Secs. 1.1502-15, Secs. 1.1502-15T,
1.1502-21 and 1.1502-21T and
1.1502-22. 1.1502-22T (or
Secs. 1.1502-15A
, 1.1502-21A and
1.1502-22A, as
appropriate).
[[Page 33323]]
1.597-4(g)(3), sixth sentence... Secs. 1.1502-15, Secs. 1.1502-15T,
1.1502-21, or 1.1502-21T, or
1.1502-22. 1.1502-22T (or
Secs. 1.1502-15A
, 1.1502-21A, or
1.1502-22A, as
appropriate).
1.904(f)-3(a)................... (or Secs. 1.1502- (or Sec. 1.1502-
21(b) and 1.1502- 21T(b) (or Secs.
79(a)). 1.1502-21A(b) and
1.1502-79A(a), as
appropriate)).
1.904(f)-3(b)................... (or Secs. 1.1502- (or Sec. 1.1502-
22 and 1.1502- 22T(b) (or Secs.
79(b). 1.1502-22A and
1.1502-79A(b), as
appropriate)).
1.1341-1(f)(2)(i)............... Sec. 1.1502-2A... Sec. 1.1502-2A
(as contained in
the 26 C.F.R.
edition revised
as of April 1,
1996).
1.1502-9(a), seventh sentence... Sec. 1.1502-79... Sec. 1.1502-21T(b
)(2) (or Sec.
1.1502-79A, as
appropriate).
1.1502-9(a), eighth sentence.... Sec. 1.1502-79... Sec. 1.1502-21T(b
)(1) (or Sec.
1.1502-79A, as
appropriate).
1.1502-9(f) Example 5(ii)....... Sec. 1.1502-21(c) Sec. 1.1502-21A(c
)
1.1502-11(a)(2)................. Sec. 1.1502-21... Secs. 1.1502-21T
(or 1.1502-21A,
as appropriate).
1.1502-11(a)(3)................. Sec. 1.1502-22... Secs. 1.1502-22T
(or 1.1502-22A,
as appropriate).
1.1502-11(a)(4)................. Sec. 1.1502-23... Secs. 1.1502-23T
(or 1.1502-23A,
as appropriate).
1.1502-11(b)(2)(iii) Example Sec. 1.1502-79... Sec. 1.1502-21T
1(c). (or Sec. 1.1502-
79A, as
appropriate).
1.1502-11(b)(2)(iii) Example Sec. 1.1502-79... Secs. 1.1502-21T
2(d). and 1.1502-22T,
respectively (or
Sec. 1.1502-79A,
as appropriate).
1.1502-11(b)(2)(iii) Example Sec. 1.1502-79... Sec. 1.1502-21T
3(e). (or Sec. 1.1502-
79A, as
appropriate).
1.1502-12(b).................... Sec. 1.1502-15 Secs. 1.1502-15A
shall be taken or 1.1502-15T
into account as shall be taken
provided in that into account as
section. provided in those
sections.
1.1502-13(c)(7)(ii) Example Sec. 1.1502-21(c) Sec. 1.1502-21T(c
10(d). ).
1.1502-13(g)(5) Example 4(b).... Sec. 1.1502-15... Sec. 1.1502-15T
(or Sec. 1.1502-
15A, as
appropriate).
1.1502-13(h)(2), Example 1(a)... Sec. 1.1502-21(c) Sec. 1.1502-21T(c
).
1.1502-13(h)(2), Example 1(b)... Sec. 1.1502-21(c) Sec. 1.1502-21T(c
).
1.1502-13(h)(2), Example 2(a)... Sec. 1.1502-15... Sec. 1.1502-15T.
1.1502-13(h)(2), Example 2(b)... 1.1502-22......... 1.1502-22T.
1.1502-15(a)(1), first sentence. Sec. 1.1502-21(c) Sec. 1.1502-21A(c
).
1.1502-15(a)(1), first sentence. Sec. 1.1502-22(c) Sec. 1.1502-22A(c
).
1.1502-15(a)(1), second sentence Under Secs. Under Secs.
1.1502-21, 1.1502- 1.1502-21A,
22, and 1.1502-79. 1.1502-22A, and
1.1502-79A (or
Secs. 1.1502-21T
and 1.1502-22T,
as appropriate).
1.1502-15(a)(1), second sentence In Sec. 1.1502- In Secs. 1.1502-
21(c) or Sec. 21T(c) or 1.1502-
1.1502-22(c) (as 22T(c) (or Secs.
the case may be). 1.1502-21A(c) or
1.1502-22A(c), as
appropriate), as
the case may be.
1.1502-15(a)(3)................. Sec. 1.1502-31A(b Sec. 1.1502-31A(b
)(9). )(9) (as
contained in the
26 C.F.R. edition
revised as of
April 1, 1996).
1.1502-18(f)(1)(ii), (1)(iii), Sec. 1.1502-39A.. Sec. 1.1502-39A
(2)(i), (2)(ii), and (4) (as contained in
Example (i) and (ii). the 26 C.F.R.
edition revised
as of April 1,
1996).
1.1502-18(f)(5)................. Sec. 1.1502-31A(b Sec. 1.1502-31A(b
)(1). )(1) (as
contained in the
26 C.F.R. edition
revised as of
April 1, 1996).
1.1502-20(a)(1)................. 1.1502-15(b)...... 1.1502-11(c).
1.1502-20(c)(4), Example 7(iii). Sec. 1.1502-21... Secs. 1.1502-21A
or 1.1502-21T.
1.1502-20(g)(3), Example 1(i)... Sec. 1.1502-21... Secs. 1.1502-21A
or 1.1502-21T.
1.1502-20(g)(3), Example 2(i)... Sec. 1.1502-21... Secs. 1.1502-21A
or 1.1502-21T.
1.1502-21(b)(1)................. Paragraph (a) of Secs. 1.1502-79A(
Sec. 1.1502-79. a).
1.1502-21(b)(1)................. Sec. 1.1502-15... Sec. 1.1502-15A
(or Sec. 1.1502-
11(c), as
appropriate).
1.1502-21(b)(2)(i).............. Paragraph (a)(4) This paragraph.
of Sec. 1.1502-
79.
1.1502-21(e)(1)(i).............. Paragraph (a)(3) This paragraph.
of Sec. 1.1502-
79.
1.1502-22(a)(1)(ii)............. Sec. 1.1502-23... Secs. 1.1502-23A
or 1.1502-23T.
1.1502-22(a)(3)................. Sec. 1.1502-15... Secs. 1.1502-15A
and 1.1502-11(c).
1.1502-22(b)(1)................. Paragraph (b) of Sec. 1.1502-79A(b
Sec. 1.1502-79. ) (or Sec.
1.1502-22T(b), as
appropriate).
1.1502-23....................... Secs. 1.1502-21(c Secs. 1.1502-21A(
) and 1.1502- c) and 1.1502-
22(c), as 22A(c), as
provided in Sec. provided in Sec.
1.1502-15(a). 1.1502-15A(a) (or
Secs. 1.1502-21T
(c) and 1.1502-
22T(c), as
provided in Sec.
1.1502-15T(a), as
appropriate).
1.1502-26(a)(1)(ii) concluding Paragraph (f) of Secs. 1.1502-21T(
text. Sec. 1.1502-21. e) or 1.1502-
21A(f), as
appropriate.
1.1502-32(b)(5) Example 2(b).... 1.1502-79......... 1.1502-21T(b).
1.1502-41(a).................... Paragraph (a)(1) Sec. 1.1502-22A(a
of Sec. 1.1502- ).
22.
1.1502-41(a).................... Sec. 1.1502-23... Sec. 1.1502-23A.
1.1502-41(b).................... Paragraph (a)(1) Sec. 1.1502-22A(a
of Sec. 1.1502- ).
22.
1.1502-41(b).................... Paragraph (b) of Sec. 1.1502-22A(b
Sec. 1.1502-22. ).
[[Page 33324]]
1.1502-42(f)(4)(i)(A)........... Sec. 1.1502-79(a) Sec. 1.1502-21T(b
(3).. ) (or Sec.
1.1502-79A(a)(3),
as appropriate).
1.1502-42(j) Example 4(b)....... Sec. 1.1502-79(a) Sec. 1.1502-79A(a
(3).. )(3).
1.1502-42(j) Example 4(c)....... Sec. 1.1502-21(b) Sec. 1.1502-21A(b
(3). )(3).
1.1502-42(j) Example 4(c)....... Sec. 1.1502-79(a) Sec. 1.1502-79A(a
(3). )(3).
1.1502-43(b)(2)(iv)............. Sec. 1.1502-21(a) Secs. 1.1502-21T(
a) or 1.1502-
21A(a), as
appropriate.
1.1502-43(b)(2)(v).............. Sec. 1.1502-22(a) Secs. 1.1502-22T(
a) or 1.1502-
22A(a), as
appropriate.
1.1502-43(b)(2)(vi)............. Sec. 1.1502-41(a) Secs. 1.1502-22T(
a) or 1.1502-41A,
as appropriate.
1.1502-43(b)(2)(vi)............. Sec. 1.1502-41(b) Secs. 1.1502-22T(
a) or 1.1502-41A,
as appropriate.
1.1502-43(b)(2)(vii)............ Sec. 1.1502-22(b) Secs. 1.1502-22T(
b) or 1.1502-
22A(b), as
appropriate.
1.1502-43(b)(2)(viii)........... Section 1.1502-15 Sections 1.1502-
(built-in 15A (Limitations
deductions) does. on built-in
deductions not
subject to Sec.
1.1502-15T) and
1.1502-15T (SRLY
limitation on
built-in losses
(temporary)) do.
1.1502-44(b)(2)................. Sec. 1.1502-21... Secs. 1.1502-21T
or 1.1502-21A (as
appropriate).
1.1502-44(b)(3)................. Sec. 1.1502-22... Secs. 1.1502-22T
or 1.1502-22A (as
appropriate).
1.1502-47(h)(2)(i).............. Sec. 1.1502-21... Secs. 1.1502-21T
or 1.1502-21A (as
appropriate).
1.1502-47(h)(2)(ii)............. Sec. 1.1502-21(f) Secs. 1.1502-21(A
)(f) or 1.1502-
21T(e) (as
appropriate).
1.1502-47(h)(2)(iii)............ Sec. 1.1502-21... Secs. 1.1502-21A
or 1.1502-21T (as
appropriate).
1.1502-47(h)(2)(iv)............. Sec. 1.1502-21... Secs. 1.1502-21A
or 1.1502-21T (as
appropriate).
1.1502-47(h)(2)(vii) Example.... Secs. 1.1502-21 Secs. 1.1502-21A
and 1.1502-79. and 1.1502-79A.
1.1502-47(h)(3)(iii)............ Sec. 1.1502-21(c) Secs. 1.1502-21A(
c) or 1.1502-
21T(c) (as
appropriate).
1.1502-47(h)(3)(iv) and (v)..... Sec. 1.1502-21(d) Sec. 1.1502-21A(d
).
1.1502-47(h)(4)(i), first Sec. 1.1502-22... Secs. 1.1502-22T
sentence. or 1.1502-22A (as
appropriate).
1.1502-47(h)(4)(i), second Sec. 1.1502-22(a) Secs. 1.1502-22T
sentence. or 1.1502-22A(a)
(as appropriate).
1.1502-47(h)(4)(ii), first Sec. 1.1502-22... Secs. 1.1502-22A
sentence. or 1.1502-22T.
1.1502-47(h)(4)(ii), first Sec. 1.1502-21... Secs. 1.1502-21T
sentence. or 1.1502-21A (as
appropriate).
1.1502-47(h)(4)(ii), second ``Sec. 1.1502-22( ``Sec. 1.1502-22A
sentence. d)''. (d)''.
1.1502-47(h)(4)(ii), second ``Sec. 1.1502-21( ``Sec. 1.1502-21A
sentence. d)''. (d)''.
1.1502-47(h)(4)(iii)............ Sec. 1.1502-22(b) Secs. 1.1502-22A(
(1). b)(1) or 1.1502-
22T(b).
1.1502-47(k)(5)................. Sec. 1.1502-22... Secs. 1.1502-22T
or 1.1502-22A (as
appropriate).
1.1502-47(l)(3)(i).............. Sec. 1.1502-21... Secs. 1.1502-21T
or 1.1502-21A (as
appropriate).
1.1502-47(m)(2)(ii)............. Sec. 1.1502-21... Secs. 1.1502-21T
or 1.1502-21A (as
appropriate).
1.1502-47(m)(2)(ii)............. Sec. 1.1502-22... Secs. 1.1502-22T
or 1.1502-22A (as
appropriate).
1.1502-47(m)(3)(i).............. Secs. 1.1502-21 Secs. 1.1502-21T
and 1.1502-22. and 1.1502-22T
(or Secs. 1.1502-
21A and 1.1502-
22A, as
appropriate).
1.1502-47(m)(3)(vi)(A), both Sec. 1.1502-79(a) Secs. 1.1502-21T(
instances. (3). b) or 1.1502-
79A(a)(3) (as
appropriate).
1.1502-47(m)(3)(vii)............ Sec. 1.1502-21(b) Sec. 1.1502-21A(b
(3)(ii). )(3)(ii).
1.1502-47(m)(3)(ix)............. Sec. 1.1502-15 Secs. 1.1502-15T
(including the and 1.1502-15A
exceptions in (including
paragraph (a)(4) applicable
thereof). exceptions
thereto).
1.1502-47(m)(5) Example 4....... Sec. 1.1502-15... Sec. 1.1502-15A.
1.1502-47(o)(2)(i).............. Sec. 1.1502-41... Secs. 1.1502-41A
or 1.1502-22T (as
appropriate).
1.1502-47(o)(2)(ii)............. Sec. 1.1502-41... Secs. 1.1502-41A
or 1.1502-22T (as
appropriate).
1.1502-47(q).................... Sec. 1.1502-21(b) Secs. 1.1502-21A(
(3) and Sec. b)(3) and 1.1502-
1.1502-79(a)(3). 79A(a)(3) (or
Sec. 1.1502-21T,
as appropriate).
1.1502-78(a).................... Sec. 1.1502-79 Secs. 1.1502-21T(
(a), (b), or (c). b), 1.1502-
22T(b), or 1.1502-
79(c) (or Secs.
1.1502-79A(a),
1.1502-79A(b), or
1.1502-79(c), as
appropriate).
1.1502-79(a)(1)(i).............. Sec. 1.1502-21... Sec. 1.1502-21A.
1.1502-79(b)(1)................. 1.1502-22......... 1.1502-22A.
[[Page 33325]]
1.1502-79(c)(1)................. Paragraph (a)(1) Sec. 1.1502-21T(b
and (2) of this ) (or Secs.
section. 1.1502-79A(a)(1)
and (2), as
appropriate).
1.1502-79(d)(1)................. Paragraph (a)(1) Sec. 1.1502-21T(b
and (2) of this ) (or Secs.
section. 1.1502-79A(a)(1)
and (2), as
appropriate).
1.1502-79(e)(1)................. Paragraph (a)(1) Sec. 1.1502-21T(b
and (2) of this ) (or Secs.
section. 1.1502-79A(a)(1)
and (2), as
appropriate).
1.1502-80(c).................... Sec. 1.1502-15(b) Sec. 1.1502-11(c)
.
1.1502-100(c)(2)................ Sec. 1.1502-21... Secs. 1.1502-21A
or 1.1502-21T (as
appropriate).
1.1503-2(d)(2)(i)............... Sec. 1.1502-21(c) Secs. 1.1502-21A(
c) or 1.1502-
21T(c), as
appropriate.
1.1503-2(d)(2)(ii).............. Sec. 1.1502-21(c) Secs. 1.1502-21A(
c) or 1.1502-
21T(c), as
appropriate.
1.1503-2(d)(4) Example 1(iv).... 1.1502-22......... 1.1502-22T(c).
1.1503-2(d)(4) Example 2(iv).... Sec. 1.1502-21(c) Sec. 1.1502-21A(c
).
1.1503-2(g)(2)(vii)(B)(1)....... Sec. 1.1502-21(c) Secs. 1.1502-21A(
c) or 1.1502-
21T(c) (as
appropriate).
1.1503-2(g)(2)(vii)(B)(2)....... Sec. 1.1502-21(c) Secs. 1.1502-21A(
c) or 1.1502-
21T(c) (as
appropriate).
1.1503-2(g)(2)(vii)(E).......... Sec. 1.1502-21(c) Secs. 1.1502-21A(
c) or 1.1502-
21T(c) (as
appropriate).
1.1503-2(g)(2)(vii)(G) Example 1 Sec. 1.1502-21(c) Secs. 1.1502-21A(
c) or 1.1502-
21T(c), as
appropriate.
1.1503-2(g)(2)(vii)(G) Example 2 Sec. 1.1502-21(c) Secs. 1.1502-21A(
c) or 1.1502-
21T(c), as
appropriate.
1.1503-2(h)(3).................. Sec. 1.1502-21(c) Secs. 1.1502-21A(
c) or 1.1502-
21T(c) (as
appropriate).
1.1503-2A(f)(1)(i) intro text... Sec. 1.1502-79(a) Sec. 1.1502-21T(b
(3). ).
1.1503-2A(f)(1)(i)(C)........... Sec. 1.1502-79... Sec. 1.1502-22T(b
).
1.1503-2A(f)(2)(i).............. Sec. 1.1502-21(c) Secs. 1.1502-21A(
(2). c)(2) or 1.1502-
21T(c) (as
appropriate).
1.1503-2A(f)(2)(ii)............. Sec. 1.1502-21(c) Secs. 1.1502-21A(
(2). c)(2) or 1.1502-
21T(c) (as
appropriate).
1.1503-2A(f)(4) Example 2(iv), Sec. 1.1502-21(c) Sec. 1.1502-21A(c
first sentence. (2). )(2).
1.1503-2A(f)(4) Example 2(iv), Sec. 1.1502-21(c) Sec. 1.1502-21A(c
second sentence. ).
1.1552-1(a)(3)(i)............... Sec. 1.1502-30A.. Sec. 1.1502-30A
(as contained in
the 26 C.F.R.
edition revised
as of April 1,
1996).
1.1552-1(b)(1).................. Sec. 1.1502-30A.. Sec. 1.1502-30A
(as contained in
the 26 C.F.R.
edition revised
as of April 1,
1996).
301.6402-7(g)(2)(iii)........... Sec. 1.1502-21(b) Secs. 1.1502-21T(
b) or 1.1502-
21A(b) (as
appropriate).
301.6402-7(g)(3) Example 2, Sec. 1.1502-21... Sec. 1.1502-21T.
second sentence.
301.6402-7(g)(3) Example 2, Sec. 1.1502-21(c) Sec. 1.1502-21T(c
third sentence. ).
301.6402-7(h)(1)(ii) Example (B) 1.1502-21(b)...... 1.1502-21T(b).
301.6402-7(h)(1)(ii) Example (B) 1.1502-22(b)...... 1.1502-22T(b).
------------------------------------------------------------------------
Sec. 1.1501-1 [Removed]
Par. 3. Section 1.1501-1 is removed. -
Par. 4. The undesignated centerheading immediately following
Sec. 1.1504-4 is revised from ``Regulations Applicable to Taxable Years
Prior to January 1, 1966'' to ``Regulations Applicable to Taxable Years
Before January 1, 1997''.
Secs. 1.1502-0A through 1.1502-3A, 1.1502-10A through 1.1502-19A and
1.1502-30A through 1.1502-51A [Removed]
Par. 5. Sections 1.1502-0A through 1.1502-3A, 1.1502-10A through
1.1502-19A, and 1.1502-30A through 1.1502-51A are removed.
Par. 6. Section 1.1502-0 is revised to read as follows:
Sec. 1.1502-0 Effective dates.
(a) The regulations under section 1502 are applicable to taxable
years beginning after December 31, 1965, except as otherwise provided
therein.
(b) The provisions of Secs. 1.1502-0A through 1.1502-3A, 1.1502-10A
through 1.1502-19A, and 1.1502-30A through 1.1502-51A (as contained in
the 26 CFR part 1 edition revised April 1, 1996) are applicable to
taxable years beginning before January 1, 1966.
Par. 7. Section 1.1502-1 is amended by revising paragraphs (b),
(f)(1), and (f)(2) introductory text, adding paragraphs (f)(4) and (j),
and adding and reserving paragraph (i) to read as follows:
Sec. 1.1502-1 Definitions.
* * * * *
(b) Member. The term member means a corporation (including the
common parent) that is included in the group, or as the context may
require, a corporation that is included in a subgroup.
* * * * *
(f) Separate return limitation year--(1) In general. Except as
provided in paragraphs (f)(2) and (3) of this section, the term
separate return limitation year (or SRLY) means any separate return
year of a member or of a predecessor of a member.
(2) Exceptions. The term separate return limitation year (or SRLY)
does not include:
* * * * *
(4) Predecessors and successors. The term predecessor means a
transferor or distributor of assets to a member (the successor) in a
transaction--
(i) To which section 381(a) applies; or
(ii) That occurs on or after January 1, 1997, in which the
successor's basis for the assets is determined, directly or
[[Page 33326]]
indirectly, in whole or in part, by reference to the basis of the
assets of the transferor or distributor, but only if the amount by
which basis differs from value, in the aggregate, is material. In the
case of such a transaction, only one member may be considered a
predecessor to or a successor of one other member.
* * * * *
(i) [Reserved]
(j) Affiliated. Corporations are affiliated if they are members of
a group with each other.
Par. 8. In Sec. 1.1502-2, paragraph (h) is revised to read as
follows:
Sec. 1.1502-2 Computation of tax liability.
* * * * *
(h) The tax imposed by section 1201, instead of the taxes computed
under paragraphs (a) and (g) of this section, computed by reference to
the net capital gain of the group (see Sec. 1.1502-22T) (or, for
consolidated return years to which Sec. 1.1502-22T does not apply,
computed by reference to the excess of the consolidated net long-term
capital gain over the consolidated net short-term capital loss (see
Sec. 1.1502-41A for the determination of the consolidated net long-term
capital gain and the consolidated net short-term capital loss));
* * * * *
Sec. 1.1502-15 [Amended]
Par. 9. In Sec. 1.1502-15, paragraph (b) is redesignated as
paragraph (c) of Sec. 1.1502-11, and the heading of newly designated
Sec. 1.1502-11, paragraph (c) is revised to read as follows:
Sec. 1.1502-11 Consolidated taxable income.
* * * * * -
(c) Disallowance of loss attributable to pre-1966 distributions. *
* *
Sec. 1.1502-15 [Redesignated as Sec. 1.1502-15A]
Par. 10. Section 1.1502-15 is redesignated as Sec. 1.1502-15A; the
section heading of the newly designated Sec. 1.1502-15A is revised; and
paragraph (b) is added to read as follows:
Sec. 1.1502-15A Limitations on the allowance of built-in deductions
for consolidated return years beginning before January 1, 1997.
* * * * * -
(b) Effective date. This section applies to any consolidated return
years to which Sec. 1.1502-21T does not apply. See Sec. 1.1502-21T(g)
for effective dates of that section. -
Par. 11. Section 1.1502-15T is added to read as follows:
Sec. 1.1502-15T SRLY limitation on built-in losses (temporary).
(a) SRLY limitation. Built-in losses are subject to the SRLY
limitation under Secs. 1.1502-21T(c) and 1.1502-22T(c) (including
applicable subgroup principles). Built-in losses are treated as
deductions or losses in the year recognized, except for the purpose of
determining the amount of, and the extent to which the built-in loss is
limited by, the SRLY limitation for the year in which it is recognized.
Solely for such purpose, a built-in loss is treated as a hypothetical
net operating loss carryover or net capital loss carryover arising in a
SRLY, instead of as a deduction or loss in the year recognized. To the
extent that a built-in loss is allowed as a deduction under this
section in the year it is recognized, it offsets any consolidated
taxable income for the year before any loss carryovers or carrybacks
are allowed as a deduction. To the extent not so allowed, it is treated
as a separate net operating loss or net capital loss carryover or
carryback arising in the year of recognition and, under Sec. 1.1502-
21T(c) or Sec. 1.1502-22T(c), the year of recognition is treated as a
SRLY.
(b) Built-in losses--(1) Defined. If a corporation has a net
unrealized built-in loss under section 382(h)(3) (as modified by this
section) on the day it becomes a member of the group (whether or not
the group is a consolidated group), its deductions and losses are
built-in losses under this section to the extent they are treated as
recognized built-in losses under section 382(h)(2)(B) (as modified by
this section). This paragraph (b) generally applies separately with
respect to each member, but see paragraph (c) of this section for
circumstances in which it is applied on a subgroup basis.
(2) Operating rules. Solely for purposes of applying paragraph
(b)(1) of this section, the principles of Sec. 1.1502-94T(c) apply with
appropriate adjustments, including the following:
(i) Ownership change. A corporation is treated as having an
ownership change under section 382(g) on the day the corporation
becomes a member of a group, and no other events (e.g., a subsequent
ownership change under section 382(g) while it is a member) are treated
as causing an ownership change. In the case of an asset acquisition by
a group, the assets and liabilities acquired directly from the same
transferor pursuant to the same plan are treated as the assets and
liabilities of a corporation that becomes a member of the group (and
has an ownership change) on the date of the acquisition. -
(ii) Recognized built-in gain or loss. A loss that is included in
the determination of net unrealized built-in gain or loss and that is
recognized but disallowed or deferred (e.g., under Sec. 1.1502-20 or
section 267) is not treated as a built-in loss unless and until the
loss would be allowed during the recognition period without regard to
the application of this section. Section 382(h)(1)(B)(ii) does not
apply to the extent it limits the amount of recognized built-in loss
that may be treated as a pre-change loss to the amount of the net
unrealized built-in loss.
(c) Built-in losses of subgroups--(1) In general. In the case of a
subgroup, the principles of paragraph (b) of this section apply to the
subgroup, and not separately to its members. Thus, the net unrealized
built-in loss and recognized built-in loss for purposes of paragraph
(b) of this section are based on the aggregate amounts for each member
of the subgroup. -
(2) Members of subgroups. A subgroup is composed of those members
that have been continuously affiliated with each other for the 60
consecutive month period ending immediately before they become members
of the group in which the loss is recognized. A member remains a member
of the subgroup until it ceases to be affiliated with the loss member.
For this purpose, the principles of Sec. 1.1502-21T(c)(2) (iv) through
(vi) apply with appropriate adjustments.
(3) Built-in amounts. Solely for purposes of determining whether
the subgroup has a net unrealized built-in loss or whether it has a
recognized built-in loss, the principles of Secs. 1.1502-91T (g) and
(h) apply with appropriate adjustments.
(d) Examples. For purposes of the examples in this section, unless
otherwise stated, all groups file consolidated returns, all
corporations have calendar taxable years, the facts set forth the only
corporate activity, value means fair market value and the adjusted
basis of each asset equals its value, all transactions are with
unrelated persons, and the application of any limitation or threshold
under section 382 is disregarded. The principles of this section are
illustrated by the following examples:
Example 1. Determination of recognized built-in loss. (a) P buys
all the stock of T during Year 1 for $100, and T becomes a member of
the P group. T has three depreciable assets. Asset 1 has an
unrealized loss of $20 (basis $45, value $25), asset 2 has an
unrealized loss of $25 (basis $50, value $25), and asset 3 has an
unrealized gain of $25 (basis $25, value $50).
[[Page 33327]]
(b) Under paragraph (b)(2)(i) of this section, T is treated as
having an ownership change under section 382(g) on becoming a member
of the P group. This treatment does not depend on whether P's
acquisition of the T stock actually constitutes an ownership change
under section 382(g), or whether T is subject to any limitation
under section 382. Under paragraph (b)(1) of this section, none of
T's $45 of unrealized loss is treated as a built-in loss unless T
has a net unrealized built-in loss under section 382(h)(3) on
becoming a member of the P group.
(c) Under section 382(h)(3)(A), T has a $20 net unrealized
built-in loss on becoming a member of the P group
(($20)+($25)+$25=($20)). Assume that this amount exceeds the
threshold requirement in section 382(h)(3)(B). Under section
382(h)(2)(B), the entire amount of T's $45 unrealized loss is
treated as a built-in loss to the extent it is recognized during the
5-year recognition period described in section 382(h)(7). Under
paragraph (b)(2)(ii) of this section, the restriction under section
382(h)(1)(B)(ii), which limits the amount of recognized built-in
loss that is treated as pre-change loss to the amount of the net
unrealized built-in loss, is inapplicable for this purpose.
Consequently, the entire $45 of unrealized loss (not just the $20
net unrealized loss) is treated under paragraph (b)(1) of this
section as a built-in loss to the extent it is recognized within 5
years of T's becoming a member of the P group. Under paragraph (a)
of this section, a built-in loss is subject to the SRLY limitation
under Sec. 1.1502-21T(c)(1).
(d) Under paragraph (b)(2)(i) of this section, the results would
be the same if T transferred all of its assets and liabilities to a
subsidiary of the P group in a single transaction described in
section 351.
Example 2. Actual application of section 382 not relevant. (a)
The facts are the same as in Example 1, except that P buys 55
percent of the stock of T during Year 1, resulting in an ownership
change of T under section 382(g). During Year 2, P buys the 45
percent balance of the T stock, and T becomes a member of the P
group.
(b) Although T has an ownership change for purposes of section
382 in Year 1 and not Year 2, T's joining the P group in Year 2 is
treated as an ownership change under section 382(g) for purposes of
this section. Consequently, for purposes of this section, whether T
has a net unrealized built-in loss under section 382(h)(3) is
determined as if the day T joined the P group were a change date.
Thus, the results are the same as in Example 1.
Example 3. Determination of a recognized built-in loss of a
subgroup. (a) During Year 1, P buys all of the stock of S for $100,
and S becomes a member of the P group. M is the common parent of
another group. At the beginning of Year 7, M acquires all of the
stock of P, and P and S become members of the M group. At the time
of M's acquisition of the P stock, P has (disregarding the stock of
S) a $10 net unrealized built-in gain (two depreciable assets, asset
1 with a basis of $35 and a value of $55, and asset 2 with a basis
of $55 and a value of $45), and S has a $75 net unrealized built-in
loss (two depreciable assets, asset 3 with a basis of $95 and a
value of $10, and asset 4 with a basis of $10 and a value of $20).
(b) Under paragraph (c) of this section, P and S compose a
subgroup on becoming members of the M group because P and S were
continuously affiliated for the 60 month period ending immediately
before they became members of the M group. Consequently, paragraph
(b) of this section does not apply to P and S separately. Instead,
their separately computed unrealized gains and losses are aggregated
for purposes of determining whether and the extent to which any
unrealized loss is treated as built-in loss under this section and
is subject to the SRLY limitation under Sec. 1.1502-21T(c).
(c) Under paragraph (c) of this section, the P subgroup has a
net unrealized built-in loss on the day P and S become members of
the M group determined by treating the day they become members as a
change date. The net unrealized built-in loss is the aggregate of
P's net unrealized built-in gain of $10 and S's net unrealized
built-in loss of $75, or an aggregate net unrealized built-in loss
of $65. (The stock of S owned by P is disregarded for purposes of
determining the net unrealized built-in loss. However, any loss
allowed on the sale of the stock within the recognition period is
taken into account in determining recognized built-in loss.) Assume
that the $65 net unrealized built-in loss exceeds the threshold
requirement under section 382(h)(3)(B).
(d) Under paragraphs (b)(1), (b)(2)(ii), and (c) of this
section, a loss recognized during the 5-year recognition period on
an asset of P or S held on the day that P and S became members of
the M group is a built-in loss except to the extent the group
establishes that such loss exceeds the amount by which the adjusted
basis of such asset on the day the member became a member exceeded
the fair market value of such asset on that same day. If P sells
asset 2 for $45 in Year 7 and recognizes a $10 loss, the entire $10
loss is treated as a built-in loss under paragraphs (b)(2)(ii) and
(c) of this section. If S sells asset 3 for $10 in Year 7 and
recognizes an $85 loss, the entire $85 loss is treated as a built-in
loss under paragraphs (b)(2)(ii) and (c) of this section (not just
the $55 balance of the P subgroup's $65 net unrealized built-in
loss).
(e) The determination of whether P and S constitute a SRLY
subgroup for purposes of loss carryovers and carrybacks, and the
extent to which built-in losses are not allowed under the SRLY
limitation, is made under Sec. 1.1502-21T(c).
Example 4. Computation of SRLY limitation. (a) During Year 1,
individual A forms T by contributing $300 and T sustains a $100 net
operating loss. During Year 2, T's assets decline in value to $100.
At the beginning of Year 3, P buys all the stock of T for $100, and
T becomes a member of the P group with a net unrealized built-in
loss of $100. Assume that $100 exceeds the threshold requirements of
section 382(h)(3)(B). During Year 3, T recognizes its unrealized
built-in loss as a $100 ordinary loss. The members of the P group
contribute the following net income to the consolidated taxable
income of the P group (disregarding T's recognized built-in loss and
any consolidated net operating loss deduction under Sec. 1.1502-21T)
for Years 3 and 4:
------------------------------------------------------------------------
Year 3 Year 4 Total
------------------------------------------------------------------------
P group (without T)....................... $100 $100 $200
T......................................... 60 40 100
-----------------------------
CTI....................................... 160 140 300
------------------------------------------------------------------------
(b) Under paragraph (b) of this section, T's $100 ordinary loss
in Year 3 (not taken into account in the consolidated taxable income
computations above) is a built-in loss. Under paragraph (a) of this
section, the built-in loss is treated as a net operating loss
carryover for purposes of determining the SRLY limitation under
Sec. 1.1502-21T(c).
(c) For Year 3, Sec. 1.1502-21T(c) limits T's $100 built-in loss
and $100 net operating loss carryover from Year 1 to the aggregate
of the P group's consolidated taxable income through Year 3
determined by reference to only T's items. For this purpose,
consolidated taxable income is determined without regard to any
consolidated net operating loss deductions under Sec. 1.1502-21T(a).
(d) The P group's consolidated taxable income through Year 3 is
$60 when determined by reference to only T's items. Under
Sec. 1.1502-21T(c), the SRLY limitation for Year 3 is therefore $60.
(e) Under paragraph (a) of this section, the $100 built-in loss
is treated as a current deduction for all purposes other than
determination of the SRLY limitation under Sec. 1.1502-21T(c).
Consequently, a deduction for the built-in loss is allowed in Year 3
before T's loss carryover from Year 1 is allowed, but only to the
extent of the $60 SRLY limitation. None of T's Year 1 loss carryover
is allowed because the built-in loss ($100) exceeds the SRLY
limitation for Year 3.
(f) The $40 balance of the built-in loss that is not allowed in
Year 3 because of the SRLY limitation is treated as a $40 net
operating loss arising in Year 3 that is carried to other years in
accordance with the rules of Sec. 1.1502-21T(b). The $40 net
operating loss is treated under paragraph (a) of this section and
Sec. 1.1502-21T(c)(1)(ii) as a loss carryover or carryback from Year
3 that arises in a SRLY, and is subject to the rules of Sec. 1.1502-
21T (including Sec. 1.1502-21T(c)) rather than this section.
(g) The facts are the same as in paragraphs (a) through (f) of
this Example 4, except that T also recognizes additional built-in
losses in Year 4. For purposes of determining the SRLY limitation
for these additional losses in Year 4 (or any subsequent year), the
$60 of built-in loss allowed as a deduction in Year 3 is treated
under paragraph (a) of this section as a deduction in Year 3 that
reduces the P group's consolidated taxable income when determined by
reference to only T's items.
Example 5. Built-in loss exceeding consolidated taxable income
in the year recognized. (a) P buys all the stock of T during Year 1,
and T becomes a member of the P group. At the time of acquisition, T
has
[[Page 33328]]
a depreciable asset with an unrealized loss of $45 (basis $100,
value $55), which exceeds the threshold requirements of section
382(h)(3)(B). During Year 2, T sells its asset for $55 and
recognizes the unrealized built-in loss. The P group has $10 of
consolidated taxable income in Year 2, computed by disregarding T's
recognition of the $45 built-in loss and the consolidated net
operating loss deduction, while the consolidated taxable income
would be $25 if determined by reference to only T's items (other
than the $45 loss).
(b) T's $45 loss is recognized in Year 2 and, under paragraph
(b) of this section, constitutes a built-in loss. Under paragraph
(a) of this section and Sec. 1.1502-21T(c)(1)(ii), the loss is
treated as a net operating loss carryover to Year 2 for purposes of
applying the SRLY limitation under Sec. 1.1502-21T(c).
(c) For Year 2, T's SRLY limitation is the aggregate of the P
group's consolidated taxable income through Year 2 determined by
reference to only T's items. For this purpose, consolidated taxable
income is determined by disregarding any built-in loss that is
treated as a net operating loss carryover, and any consolidated net
operating loss deductions under Sec. 1.1502-21T(a). Consolidated
taxable income so determined is $25.
(d) Under Sec. 1.1502-21T(c), $25 of the $45 built-in loss could
be deducted in Year 2. Because the P group has only $10 of
consolidated taxable income (determined without regard to the $45),
the $25 loss creates a consolidated net operating loss of $15. This
loss is carried back or over under the rules of Sec. 1.1502-21T(b)
and absorbed under the rules of Sec. 1.1502-21T(a). This loss is not
treated as arising in a SRLY (see Sec. 1.1502-21T(c)(1)(ii)) and
therefore is not subject to the SRLY limitation under Sec. 1.1502-
21T(c) in any consolidated return year of the group to which it is
carried. The remaining $20 is treated as a loss carryover arising in
a SRLY and is subject to the limitation of Sec. 1.1502-21T(c) in the
year to which it is carried.
(e) Predecessors and successors. For purposes of this section, any
reference to a corporation or member includes, as the context may
require, a reference to a successor or predecessor, as defined in
Sec. 1.1502-1(f)(4).
(f) Effective date--(1) In general. This section applies to built-
in losses recognized in consolidated return years beginning on or after
January 1, 1997.
(2) Application to prior periods. See Sec. 1.1502-21T(g)(3) for
rules generally permitting a group to apply the rules of this section
to consolidated return years ending on or after January 29, 1991, and
beginning before January 1, 1997. A group must treat all corporations
that were affiliated on January 1, 1987, and continuously thereafter as
having met the 60 consecutive month requirement of paragraph (c)(2) of
this section on any day before January 1, 1992, on which the
determination of net unrealized built-in gain or loss of a subgroup is
made.
Par. 12. Section 1.1502-21 is redesignated as Sec. 1.1502-21A; the
heading of the newly designated Sec. 1.1502-21A is revised; and
paragraphs (d)(4), (e)(3) and (h) are added to read as follows:
Sec. 1.1502-21A Consolidated net operating loss deduction generally
applicable for consolidated return years beginning before January 1,
1997.
* * * * *
(d) * * *
(4) Cross-reference. See Sec. 1.1502-21T(d)(1) for the rule that
applies the principles of this paragraph (d) in consolidated return
years beginning on or after January 1, 1997, with respect to a
consolidated return change of ownership occurring before January 1,
1997.
(e) * * *
(3) Effective date. This paragraph (e) disallows or reduces the net
operating loss carryovers of a member as a result of a transaction to
which old section 382 (as defined in Sec. 1.382-2T(f)(21)) applies. See
Sec. 1.1502-21T(d)(2) for the rule that applies the principles of this
paragraph (e) in consolidated return years beginning on or after
January 1, 1997, with respect to such a transaction.
* * * * * -
(h) Effective date. Except as provided in Sec. 1.1502-21T (d)(1),
(d)(2), and (g)(3), this section applies to consolidated return years
beginning before January 1, 1997. -
Par. 13. Section 1.1502-21T is added to read as follows:
Sec. 1.1502-21T Net operating losses (temporary). -
(a) Consolidated net operating loss deduction. The consolidated net
operating loss deduction (or CNOL deduction) for any consolidated
return year is the aggregate of the net operating loss carryovers and
carrybacks to the year. The net operating loss carryovers and
carrybacks consist of-- -
(1) Any CNOLs (as defined in paragraph (e) of this section) of the
consolidated group; and -
(2) Any net operating losses of the members arising in separate
return years. -
(b) Net operating loss carryovers and carrybacks to consolidated
return and separate return years. Net operating losses of members
arising during a consolidated return year are taken into account in
determining the group's CNOL under paragraph (e) of this section for
that year. Losses taken into account in determining the CNOL may be
carried to other taxable years (whether consolidated or separate) only
under this paragraph (b). -
(1) Carryovers and carrybacks generally. The net operating loss
carryovers and carrybacks to a taxable year are determined under the
principles of section 172 and this section. Thus, losses permitted to
be absorbed in a consolidated return year generally are absorbed in the
order of the taxable years in which they arose, and losses carried from
taxable years ending on the same date, and which are available to
offset consolidated taxable income for the year, generally are absorbed
on a pro rata basis. See Example 2 of paragraph (c)(1)(iii) of this
section for an illustration of pro rata absorption of losses subject to
a SRLY limitation. Additional rules provided under the Code or
regulations also apply. See, e.g., section 382(l)(2)(B). -
(2) Carryovers and carrybacks of CNOLs to separate return years--
(i) In general. If any CNOL that is attributable to a member may be
carried to a separate return year of the member, the amount of the CNOL
that is attributable to the member is apportioned to the member
(apportioned loss) and carried to the separate return year. If carried
back to a separate return year, the apportioned loss may not be carried
back to an equivalent, or earlier, consolidated return year of the
group; if carried over to a separate return year, the apportioned loss
may not be carried over to an equivalent, or later, consolidated return
year of the group. For rules permitting the reattribution of losses of
a subsidiary to the common parent when loss is disallowed on the
disposition of subsidiary stock, see Sec. 1.1502-20(g). -
(ii) Special rules--(A) Year of departure from group. If a
corporation ceases to be a member during a consolidated return year,
net operating loss carryovers attributable to the corporation are first
carried to the consolidated return year, and only the amount so
attributable that is not absorbed by the group in that year is carried
to the corporation's first separate return year. -
(B) Offspring rule. In the case of a member that has been a member
continuously since its organization, the CNOL attributable to the
member is included in the carrybacks to consolidated return years
before the member's existence. See paragraph (f) of this section for
applications to predecessors and successors. If the group did not file
a consolidated return for a carryback year, the loss may be carried
back to a separate return year of the common parent under paragraph
(b)(2)(i) of this section, but only if the common parent was not a
member of a different consolidated group or of an
[[Page 33329]]
affiliated group filing separate returns for the year to which the loss
is carried or any subsequent year in the carryback period. Following an
acquisition described in Sec. 1.1502-75(d) (2) or (3), references to
the common parent are to the corporation that was the common parent
immediately before the acquisition. -
(iii) Equivalent years. Taxable years are equivalent if they bear
the same numerical relationship to the consolidated return year in
which a CNOL arises, counting forward or backward from the year of the
loss. For example, in the case of a member's third taxable year (which
was a separate return year) that preceded the consolidated return year
in which the loss arose, the equivalent year is the third consolidated
return year preceding the consolidated return year in which the loss
arose. See paragraph (b)(3)(iii) of this section for certain short
taxable years that are disregarded in making this determination. -
(iv) Amount of CNOL attributable to a member. The amount of a CNOL
that is attributable to a member is determined by a fraction the
numerator of which is the separate net operating loss of the member for
the year of the loss and the denominator of which is the sum of the
separate net operating losses for that year of all members having such
losses. For this purpose, the separate net operating loss of a member
is determined by computing the CNOL by reference to only the member's
items of income, gain, deduction, and loss, including the member's
losses and deductions actually absorbed by the group in the taxable
year (whether or not absorbed by the member). -
(v) Examples. For purposes of the examples in this section, unless
otherwise stated, all groups file consolidated returns, all
corporations have calendar taxable years, the facts set forth the only
corporate activity, value means fair market value and the adjusted
basis of each asset equals its value, all transactions are with
unrelated persons, and the application of any limitation or threshold
under section 382 is disregarded. The principles of this paragraph
(b)(2) are illustrated by the following examples:
Example 1. Offspring rule. (a) P is formed at the beginning of
Year 1 and files a separate return. P forms S on March 15 of Year 2,
and P and S file a consolidated return. P purchases all the stock of
T at the beginning of Year 3, and T becomes a member of the P group.
T was formed in Year 2 and filed a separate return for that year. P,
S, and T sustain a $1,100 CNOL in Year 3 and, under paragraph
(b)(2)(iv) of this section, the loss is attributable $200 to P, $300
to S, and $600 to T. -
(b) Of the $1,100 CNOL in Year 3, the $500 amount of the CNOL
that is attributable to P and S ($200 + $300) may be carried to P's
separate return in Year 1. Even though S was not in existence in
Year 1, the $300 amount of the CNOL attributable to S may be carried
back to P's separate return in Year 1 because S (unlike T) has been
a member of the P group since its organization and P is a qualified
parent under paragraph (b)(2)(ii)(B) of this section. To the extent
not absorbed in that year, the loss may then be carried to the P
group's return in Year 2. The $600 amount of the CNOL attributable
to T is a net operating loss carryback to T's separate return in
Year 2. -
Example 2. Departing members. (a) The facts are the same as in
Example 1. In addition, on June 15 of Year 4, P sells all the stock
of T. The P group's consolidated return for Year 4 includes the
income of T through June 15. T files a separate return for the
period from June 16 through December 31. -
(b) $600 of the Year 3 CNOL attributable to T is apportioned to
T and is carried back to its separate return in Year 2. To the
extent the $600 is not absorbed in T's separate return in Year 2, it
is carried to the consolidated return in Year 4 before being carried
to T's separate return in Year 4. Any portion of the loss not
absorbed in T's Year 2 or in the P group's Year 4 is then carried to
T's separate return in Year 4.
-(3) Special rules--(i) Election to relinquish carryback. A group
may make an irrevocable election under section 172(b)(3) to relinquish
the entire carryback period with respect to a CNOL for any consolidated
return year. The election may not be made separately for any member
(whether or not it remains a member), and must be made in a separate
statement entitled ``THIS IS AN ELECTION UNDER SECTION 1.1502-
21T(b)(3)(i) TO WAIVE THE ENTIRE CARRYBACK PERIOD PURSUANT TO SECTION
172(b)(3) FOR THE [insert consolidated return year] CNOLs OF THE
CONSOLIDATED GROUP OF WHICH [insert name and employer identification
number of common parent] IS THE COMMON PARENT.'' The statement must be
signed by the common parent and filed with the group's income tax
return for the consolidated return year in which the loss arises.
(ii) Special election for groups that include insolvent financial
institutions. For rules applicable to relinquishing the entire
carryback period with respect to losses attributable to insolvent
financial institutions, see Sec. 301.6402-7 of this chapter. -
(iii) Short years in connection with transactions to which section
381(a) applies. If a member distributes or transfers assets to a
corporation that is a member immediately after the distribution or
transfer in a transaction to which section 381(a) applies, the
transaction does not cause the distributor or transferor to have a
short year within the consolidated return year of the group in which
the transaction occurred that is counted as a separate year for
purposes of determining the years to which a net operating loss may be
carried. -
(iv) Special status losses. [Reserved] -
(c) Limitations on net operating loss carryovers and carrybacks
from separate return limitation years--(1) SRLY limitation--(i) General
rule. The aggregate of the net operating loss carryovers and carrybacks
of a member arising (or treated as arising) in SRLYs that are included
in the CNOL deductions for all consolidated return years of the group
under paragraph (a) of this section may not exceed the aggregate
consolidated taxable income for all consolidated return years of the
group determined by reference to only the member's items of income,
gain, deduction, and loss. For this purpose-- -
(A) Consolidated taxable income is computed without regard to CNOL
deductions; -
(B) Consolidated taxable income takes into account the member's
losses and deductions (including capital losses) actually absorbed by
the group in consolidated return years (whether or not absorbed by the
member); -
(C) In computing consolidated taxable income, the consolidated
return years of the group include only those years, including the year
to which the loss is carried, that the member has been continuously
included in the group's consolidated return, but exclude: -
(1) For carryovers, any years ending after the year to which the
loss is carried; and -
(2) For carrybacks, any years ending after the year in which the
loss arose; and -
(D) The treatment under Sec. 1.1502-15T of a built-in loss as a
hypothetical net operating loss carryover in the year recognized is
solely for purposes of determining the limitation under this paragraph
(c) with respect to the loss in that year and not for any other
purpose. Thus, for purposes of determining consolidated taxable income
for any other losses, a built-in loss allowed under this section in the
year it arises is taken into account. -
(ii) Losses treated as arising in SRLYs. If a net operating loss
carryover or carryback did not arise in a SRLY but is attributable to a
built-in loss (as defined under Sec. 1.1502-15T), the carryover or
carryback is treated for purposes of this paragraph (c) as arising in a
SRLY if the built-in loss was not allowed, after application of the
SRLY limitation, in the year it arose. For an
[[Page 33330]]
illustration, see Sec. 1.1502-15T(d), Example 5. -
(iii) Examples. The principles of this paragraph (c)(1) are
illustrated by the following examples:
Example 1. Determination of SRLY limitation. (a) In Year 1,
individual A forms T and T sustains a $100 net operating loss that
is carried forward. P buys all the stock of T at the beginning of
Year 2, and T becomes a member of the P group. The P group has $300
of consolidated taxable income in Year 2 (computed without regard to
the CNOL deduction). Such consolidated taxable income would be $70
if determined by reference to only T's items.
(b) T's $100 net operating loss carryover from Year 1 arose in a
SRLY. See Sec. 1.1502-1(f)(2)(iii). Thus, the $100 net operating
loss carryover is subject to the SRLY limitation in paragraph (c)(1)
of this section. The SRLY limitation for Year 2 is consolidated
taxable income determined by reference to only T's items, or $70.
Thus, $70 of the loss is included under paragraph (a) of this
section in the P group's CNOL deduction for Year 2.
(c) The facts are the same as in paragraph (a) of this Example
1, except that such consolidated taxable income (computed without
regard to the CNOL deduction and by reference to only T's items) is
a loss (a CNOL) of $370. Because the SRLY limitation may not exceed
the consolidated taxable income determined by reference to only T's
items, and such items aggregate to a CNOL, T's $100 net operating
loss carryover from Year 1 is not allowed under the SRLY limitation
in Year 2. Moreover, if consolidated taxable income (computed
without regard to the CNOL deduction and by reference to only T's
items) did not exceed $370 in Year 3, the carryover would still be
restricted under Sec. 1.1502-21T(c) in Year 3, because the aggregate
consolidated taxable income for all consolidated return years of the
group computed by reference to only T's items would not be a
positive amount.
Example 2. Net operating loss carryovers. (a) In Year 1,
individual A forms P and P sustains a $40 net operating loss that is
carried forward. P has no income in Year 2. Unrelated corporation T
sustains a net operating loss of $50 in Year 2 that is carried
forward. P buys the stock of T during Year 3, but T is not a member
of the P group for each day of the year. P and T file separate
returns and sustain net operating losses of $120 and $60,
respectively, for Year 3. The P group files consolidated returns
beginning in Year 4. During Year 4, the P group has $160 of
consolidated taxable income (computed without regard to the CNOL
deduction). Such consolidated taxable income would be $70 if
determined by reference to only T's items. These results are
summarized as follows:
----------------------------------------------------------------------------------------------------------------
Separate
Separate Separate affiliated Consolidated
year 1 year 2 year 3 year 4
----------------------------------------------------------------------------------------------------------------
P....................................................... $(40) $0 $(120) $90
T....................................................... 0 (50) (60) 70
-------------------------------------------------------
CTI..................................................... ............ ............ ............ 160
----------------------------------------------------------------------------------------------------------------
(b) P's Year 1, Year 2, and Year 3 are not SRLYs with respect to
the P group. See Sec. 1.1502-1(f)(2)(i). Thus, P's $40 net operating
loss arising in Year 1 and $120 net operating loss arising in Year 3
are not subject to the SRLY limitation under paragraph (c) of this
section. Under the principles of section 172, paragraph (b) of this
section requires that the loss arising in Year 1 be the first loss
absorbed by the P group in Year 4. Absorption of this loss leaves
$120 of the group's consolidated taxable income available for offset
by other loss carryovers.
(c) T's Year 2 and Year 3 are SRLYs with respect to the P group.
See Sec. 1.1502-1(f)(2)(ii). Thus, T's $50 net operating loss
arising in Year 2 and $60 net operating loss arising in Year 3 are
subject to the SRLY limitation. Under paragraph (c)(1) of this
section, the SRLY limitation for Year 4 is $70, and under paragraph
(b) of this section, T's $50 loss from Year 2 must be included under
paragraph (a) of this section in the P group's CNOL deduction for
Year 4. The absorption of this loss leaves $70 of the group's
consolidated taxable income available for offset by other loss
carryovers.
(d) P and T each carry over net operating losses to Year 4 from
a taxable year ending on the same date (Year 3). The losses carried
over from Year 3 total $180. Under paragraph (b) of this section,
the losses carried over from Year 3 are absorbed on a pro rata
basis, even though one arises in a SRLY and the other does not.
However, the group cannot absorb more than $20 of T's $60 net
operating loss arising in Year 3 because its $70 SRLY limitation for
Year 4 is reduced by T's $50 Year 2 SRLY loss already included in
the CNOL deduction for Year 4. Thus, the absorption of Year 3 losses
is as follows:
Amount of P's Year 3 losses absorbed = $120/($120 + $20) x $70 =
$60.
Amount of T's Year 3 losses absorbed = Sec. 20/($120 + $20) x
$70 = $10.
(e) The absorption of $10 of T's Year 3 loss further reduces T's
SRLY limitation to $10 ($70 of initial SRLY limitation, reduced by
the $60 net operating loss already included in the CNOL deductions
for Year 4 under paragraph (a) of this section).
(f) P carries its remaining $60 Year 3 net operating loss and T
carries its remaining $50 Year 3 net operating loss over to Year 5.
Assume that, in Year 5, the P group has $90 of consolidated taxable
income (computed without regard to the CNOL deduction). The group's
CTI determined by reference to only T's items is a CNOL of $4. For
Year 5, the CNOL deduction includes $60 of P's Year 3 loss but only
$6 of T's Year 3 loss (the aggregate consolidated taxable income for
Years 4 and 5 determined by reference to T's items, or $66, reduced
by T's SRLY losses actually absorbed by the group in Year 4, or
$60).
Example 3. Net operating loss carrybacks. (a)(1) P owns all of
the stock of S and T. The members of the P group contribute the
following to the consolidated taxable income of the P group for
Years 1, 2, and 3:
----------------------------------------------------------------------------------------------------------------
Year 1 Year 2 Year 3 Total
----------------------------------------------------------------------------------------------------------------
P................................................................. $100 $60 $80 $240
S................................................................. 20 20 30 70
T................................................................. 30 10 (50) (10)
---------------------------------------------
CTI............................................................... 150 90 60 300
----------------------------------------------------------------------------------------------------------------
(2) P sells all of the stock of T to individual A at the
beginning of Year 4. For its Year 4 separate return year, T has a
net operating loss of $30.
(b) T's Year 4 is a SRLY with respect to the P group. See
Sec. 1.1502-1(f)(1). T's $30 net operating loss carryback to the P
group from Year 4 is not allowed under Sec. 1.1502-21T(c) to be
included in the CNOL deduction under paragraph (a) of this section
for Year 1, 2, or 3, because the P group's consolidated taxable
income would not be a positive amount if determined by reference to
only T's items for all consolidated return years through Year 4
(without regard to the $30 net operating loss). However, the $30
loss is carried forward to T's Year 5 and succeeding taxable years
as provided under the Code.
-Example 4. Computation of SRLY limitation for built-in losses
treated as net operating loss carryovers. (a) In Year 1, individual
A forms T by contributing $300 and T sustains a $100 net operating
loss. During Year 2, T's assets decline in value by
[[Page 33331]]
$100. At the beginning of Year 3, P buys all the stock of T for
$100, and T becomes a member of the P group. At the time of the
acquisition, T has a $100 net unrealized built-in loss, which
exceeds the threshold requirements of section 382(h)(3)(B). During
Year 3, T recognizes its unrealized loss as a $100 ordinary loss.
The members of the P group contribute the following to the
consolidated taxable income of the P group for Years 3 and 4
(computed without regard to T's recognition of its unrealized loss
and any CNOL deduction under Sec. 1.1502-21T):
------------------------------------------------------------------------
Year 3 Year 4 Total
------------------------------------------------------------------------
P group (without T)....................... $100 $100 $200
T......................................... 60 40 100
-----------------------------
CTI....................................... 160 140 300
------------------------------------------------------------------------
(b) Under Sec. 1.1502-15T(a), T's $100 of ordinary loss in Year
3 constitutes a built-in loss that is subject to the SRLY limitation
under Sec. 1.1502-21T(c). The amount of the limitation is determined
by treating the deduction as a net operating loss carryover from a
SRLY. The built-in loss is therefore subject to a $60 SRLY
limitation for Year 3. The built-in loss is treated as a net
operating loss carryover solely for purposes of determining the
extent to which the loss is not allowed by reason of the SRLY
limitation, and for all other purposes the loss remains a loss
arising in Year 3. Consequently, under paragraph (b) of this
section, the $60 allowed under the SRLY limitation is absorbed by
the P group before T's $100 net operating loss carryover from Year 1
is allowed.
(c) Under Sec. 1.1502-15T(a), the $40 balance of the built-in
loss that is not allowed in Year 3 because of the SRLY limitation is
treated as a $40 net operating loss arising in Year 3 that is
subject to the SRLY limitation because, under Sec. 1.1502-
21T(c)(1)(ii), Year 3 is treated as a SRLY, and is carried to other
years in accordance with the rules of paragraph (b) of this section.
The SRLY limitation for Year 4 is the P group's consolidated taxable
income for Year 3 and Year 4 determined by reference to only T's
items and without regard to the group's CNOL deductions ($60+$40),
reduced by T's loss actually absorbed by the group in Year 3 ($60).
The SRLY limitation for Year 4 is $40.
(d) Under paragraph (c) of this section and the principles of
section 172(b), $40 of T's $100 net operating loss carryover from
Year 1 is included in the CNOL deduction under paragraph (a) of this
section in Year 4.
(2) SRLY subgroup limitation. In the case of a net operating loss
carryover or carryback for which there is a SRLY subgroup, the
principles of paragraph (c)(1) of this section apply to the SRLY
subgroup, and not separately to its members. Thus, the contribution to
consolidated taxable income and the net operating loss carryovers and
carrybacks arising (or treated as arising) in SRLYs that are included
in the CNOL deductions for all consolidated return years of the group
under paragraph (a) of this section are based on the aggregate amounts
of income, gain, deduction, and loss of the members of the SRLY
subgroup for the relevant consolidated return years (as provided in
paragraph (c)(1)(i)(C) of this section). For an illustration of
aggregate amounts during the relevant consolidated return years
following the year in which a member of a SRLY subgroup ceases to be a
member of the group, see paragraph (c)(2)(vii) Example 4 of this
section. A SRLY subgroup may exist only for a carryover or carryback
arising in a year that is not a SRLY (and is not treated as a SRLY
under paragraph (c)(1)(ii) of this section) with respect to another
group (the former group), whether or not the group is a consolidated
group. A separate SRLY subgroup is determined for each such carryover
or carryback. A consolidated group may include more than one SRLY
subgroup and a member may be a member of more than one SRLY subgroup.
Solely for purposes of determining the members of a SRLY subgroup with
respect to a loss:
(i) Carryovers. In the case of a carryover, the SRLY subgroup is
composed of the member carrying over the loss (the loss member) and
each other member that was a member of the former group that becomes a
member of the group at the same time as the loss member. A member
remains a member of the SRLY subgroup until it ceases to be affiliated
with the loss member. The aggregate determination described in
paragraph (c)(1) of this section and this paragraph (c)(2) includes the
amounts of income, gain, deduction, and loss of each member of the SRLY
subgroup for the consolidated return years during which it remains a
member of the SRLY subgroup. For an illustration of the aggregate
determination of a SRLY subgroup, see paragraph (c)(2)(vii) Example 2
of this section.
(ii) Carrybacks. In the case of a carryback, the SRLY subgroup is
composed of the member carrying back the loss (the loss member) and
each other member of the group from which the loss is carried back that
has been continuously affiliated with the loss member from the year to
which the loss is carried through the year in which the loss arises.
(iii) Built-in losses. In the case of a built-in loss, the SRLY
subgroup is composed of the member recognizing the loss (the loss
member) and each other member that was part of the subgroup with
respect to the loss determined under Sec. 1.1502-15T(c)(2) immediately
before the members became members of the group. The principles of
paragraphs (c)(2)(i) and (ii) of this section apply to determine the
SRLY subgroup for the built-in loss that is, under paragraph (c)(1)(ii)
of this section, treated as arising in a SRLY with respect to the group
in which the loss is recognized. For this purpose and as the context
requires, a reference in those paragraphs to a group or former group is
a reference to the subgroup determined under Sec. 1.1502-15T(c)(2).
(iv) Principal purpose of avoiding or increasing a SRLY limitation.
The members composing a SRLY subgroup are not treated as a SRLY
subgroup if any of them is formed, acquired, or availed of with a
principal purpose of avoiding the application of, or increasing any
limitation under, this paragraph (c). Any member excluded from a SRLY
subgroup, if excluded with a principal purpose of so avoiding or
increasing any SRLY limitation, is treated as included in the SRLY
subgroup.
(v) Coordination with other limitations. This paragraph (c)(2) does
not allow a net operating loss to offset income to the extent
inconsistent with other limitations or restrictions on the use of
losses, such as a limitation based on the nature or activities of
members. For example, any dual consolidated loss may not reduce the
taxable income to an extent greater than that allowed under section
1503(d) and Sec. 1.1503-2. See also Sec. 1.1502-47(q) (relating to
preemption of rules for life-nonlife groups).
(vi) Anti-duplication. If the same item of income or deduction
could be taken into account more than once in determining a limitation
under this paragraph (c), or in a manner inconsistent with any other
provision of the Code or regulations incorporating this paragraph (c),
the item of income or deduction is taken into account only once and in
such manner that losses are absorbed in accordance with the ordering
rules in paragraph (b) of this section and the underlying purposes of
this section.
(vii) Examples. The principles of this paragraph (c)(2) are
illustrated by the following examples:
Example 1. Members of SRLY subgroups. (a) During Year 1, P
sustains a $50 net operating loss. At the beginning of Year 2, P
buys all the stock of S at a time when the aggregate basis of S's
assets exceeds their aggregate value by $70 (as determined under
Sec. 1.1502-15T). At the beginning of Year 3, P buys all the stock
of T, T has a $60 net operating loss carryover at the time of the
acquisition, and T becomes a member of the P group. During Year 4, S
forms S1 and T forms T1, each by contributing assets with built-in
gains which are, in the aggregate, material. S1 and T1 become
members of the P group. M is the common parent of another group.
During Year 7, M acquires all of the
[[Page 33332]]
stock of P, and the members of the P group become members of the M
group for the balance of Year 7. The $50 and $60 loss carryovers of
P and T are carried to Year 7 of the M group, and the value and
basis of S's assets did not change after it became a member of the
former P group.
(b) Under paragraph (c)(2) of this section, a separate SRLY
subgroup is determined for each loss carryover and built-in loss. In
the P group, P's $50 loss carryover is not treated as arising in a
SRLY. See Sec. 1.1502-1(f). Consequently, the carryover is not
subject to limitation under paragraph (c) of this section in the P
group.
(c) In the M group, P's $50 loss carryover is treated as arising
in a SRLY and is subject to the limitation under paragraph (c) of
this section. A SRLY subgroup with respect to that loss is composed
of members which were members of the P group, the group as to which
the loss was not a SRLY. The SRLY subgroup is composed of P, the
member carrying over the loss, and each other member of the P group
that became a member of the M group at the same time as P. A member
of the SRLY subgroup remains a member until it ceases to be
affiliated with P. For Year 7, the SRLY subgroup is composed of P,
S, T, S1, and T1.
(d) In the P group, S's $70 unrealized loss, if recognized
within the 5-year recognition period after S becomes a member of the
P group, is subject to limitation under paragraph (c) of this
section. See Sec. 1.1502-15T and paragraph (c)(1)(ii) of this
section. Because S was not continuously affiliated with P, T, or T1
for 60 consecutive months prior to joining the P group, these
corporations cannot be included in a SRLY subgroup with respect to
S's unrealized loss in the P group. See paragraph (c)(2)(iii) of
this section. As a successor to S, S1 is included in a subgroup with
S in the P group. Because S did not cease to exist, however, S1's
contribution to consolidated taxable income may not be used to
increase the consolidated taxable income of the P group that may be
offset by the built-in loss. See paragraph (f) of this section.
(e) In the M group, S's $70 unrealized loss, if recognized
within the 5-year recognition period after S becomes a member of the
M group, is subject to limitation under paragraph (c) of this
section. Prior to becoming a member of the M group, S had been
continuously affiliated with P (but not T or T1) for 60 consecutive
months and S1 is a successor that has remained continuously
affiliated with S. Those members had a net unrealized built-in loss
immediately before they became members of the group under
Sec. 1.1502-15T(c). Consequently, in Year 7, S, S1, and P compose a
subgroup in the M group with respect to S's unrealized loss. S1's
contribution to consolidated taxable income may not be used to
increase the consolidated taxable income of the M group that may be
offset by the recognized built-in loss. See paragraph (f) of this
section.
(f) In the P group, T's $60 loss carryover arose in a SRLY and
is subject to limitation under paragraph (c) of this section. P, S,
and S1 were not members of the group in which T's loss arose and
cannot be members of a SRLY subgroup with respect to the carryover
in the P group. See paragraph (c)(2)(i) of this section. As a
successor to T, T1 is included in a SRLY subgroup with T in the P
group; however, because T did not cease to exist, T1's contribution
to consolidated taxable income may not be used to increase the
consolidated taxable income of the P group that may be offset by the
carryover. See paragraph (f) of this section.
(g) In the M group, T's $60 loss carryover arose in a SRLY and
is subject to limitation under paragraph (c) of this section. T and
T1 remain the only members of a SRLY subgroup with respect to the
carryover, but T1's contribution to consolidated taxable income may
not be used to increase consolidated taxable income of the M group
that may be offset by the carryover. See paragraph (f) of this
section.
Example 2. Computation of SRLY subgroup limitation. (a)
Individual A forms S. Individual B forms T. In Year 2, P buys all
the stock of S and T from A and B, and S and T become members of the
P group. For Year 3, the P group has a $45 CNOL, which is
attributable to P, and which P carries forward. M is the common
parent of another group. At the beginning of Year 4, M acquires all
of the stock of P and the former members of the P group become
members of the M group.
(b) P's year to which the loss is attributable, Year 3, is a
SRLY with respect to the M group. See Sec. 1.1502-1(f)(1). However,
P, S, and T compose a SRLY subgroup with respect to the Year 3 loss
under paragraph (c)(2)(i) of this section because Year 3 is not a
SRLY (and is not treated as a SRLY) with respect to the P group. P's
loss is carried over to the M group's Year 4 and is therefore
subject to the SRLY subgroup limitation in paragraph (c)(2) of this
section.
(c) In Year 4, the M group has $10 of consolidated taxable
income (computed without regard to the CNOL deduction for Year 4).
However, such consolidated taxable income would be $45 if determined
by reference to only the items of P, S, and T, the members included
in the SRLY subgroup with respect to P's loss carryover. Therefore,
the SRLY subgroup limitation under paragraph (c)(2) of this section
for P's net operating loss carryover from Year 3 is $45. Because the
M group has only $10 of consolidated taxable income in Year 4,
however, only $10 of P's net operating loss carryover is included in
the CNOL deduction under paragraph (a) of this section in Year 4.
(d) In Year 5, the M group has $100 of consolidated taxable
income (computed without regard to the CNOL deduction for Year 5).
Neither P, S, nor T has any items of income, gain, deduction, or
loss in Year 5. Although the members of the SRLY subgroup do not
contribute to the $100 of consolidated taxable income in Year 5, the
SRLY subgroup limitation for Year 5 is $35 (the sum of SRLY subgroup
consolidated taxable income of $45 in Year 4 and $0 in Year 5, less
the $10 net operating loss carryover actually absorbed by the M
group in Year 4). Therefore, $35 of P's net operating loss carryover
is included in the CNOL deduction under paragraph (a) of this
section in Year 5.
Example 3. Inclusion in more than one SRLY subgroup. (a) At the
beginning of Year 1, S buys all the stock of T, and T becomes a
member of the S group. For Year 1, the S group has a CNOL of $10,
all of which is attributable to S and is carried over to Year 2. At
the beginning of Year 2, P buys all the stock of S, and S and T
become members of the P group. For Year 2, the P group has a CNOL of
$35, all of which is attributable to P and is carried over to Year
3. At the beginning of Year 3, M acquires all of the stock of P and
the former members of the P group become members of the M group.
(b) P's and S's net operating losses arising in SRLYs with
respect to the M group are subject to limitation under paragraph (c)
of this section. P, S, and T compose a SRLY subgroup for purposes of
determining the limitation for P's $35 net operating loss carryover
arising in Year 2 because, under paragraph (c)(2)(i) of this
section, Year 2 is not a SRLY with respect to the P group.
Similarly, S and T compose a SRLY subgroup for purposes of
determining the limitation for S's $10 net operating loss carryover
arising in Year 1 because Year 1 is not a SRLY with respect to the S
group.
(c) S and T are members of both the SRLY subgroup with respect
to P's losses and the SRLY subgroup with respect to S's losses.
Under paragraph (c)(2) of this section, S's and T's items cannot be
included in the determination of the SRLY subgroup limitation for
both SRLY subgroups for the same consolidated return year; paragraph
(c)(2)(vi) of this section requires the M group to consider the
items of S and T only once so that the losses are absorbed in the
order of the taxable years in which they were sustained. Because S's
loss was incurred in Year 1, while P's loss was incurred in Year 2,
the items will be added in the determination of the consolidated
taxable income of the S and T SRLY subgroup to enable S's loss to be
absorbed first. The taxable income of the P, S, and T SRLY subgroup
is then computed by including the consolidated taxable income for
the S and T SRLY subgroup less the amount of any net operating loss
carryover of S that is absorbed after applying this section to the S
subgroup for the year.
Example 4. Corporation ceases to be affiliated with a SRLY
subgroup. (a) P and S are members of the P group and the P group has
a CNOL of $30 in Year 1, all of which is attributable to P and
carried over to Year 2. At the beginning of Year 2, M acquires all
of the stock of P, and P and S become members of the M group. P and
S compose a SRLY subgroup with respect to P's net operating loss
carryover. For Year 2, consolidated taxable income of the M group
determined by reference to only the items of P (and without regard
to the CNOL deduction for Year 2) is $40. However, such consolidated
taxable income of the M group determined by reference to the items
of both P and S is a loss of $20. Thus, the SRLY subgroup limitation
under paragraph (c)(2) of this section prevents the M group from
including any of P's net operating loss carryover in the CNOL
deduction under paragraph (a) of this section in Year 2, and P
carries the loss to Year 3.
[[Page 33333]]
(b) At the end of Year 2, P sells all of the S stock and S
ceases to be a member of the M group and, in turn, ceases to be
affiliated with the P subgroup. For Year 3, consolidated taxable
income of the M group is $50 (determined without regard to the CNOL
deduction for Year 3), and such consolidated taxable income would be
$10 if determined by reference to only items of P. However, the
limitation under paragraph (c) of this section for Year 3 for P's
net operating loss carryover still prevents the M group from
including any of P's loss in the CNOL deduction under paragraph (a)
of this section. The limitation results from the inclusion of S's
items for Year 2 in the determination of the SRLY subgroup
limitation for Year 3 even though S ceased to be a member of the M
group (and the P subgroup) at the end of Year 2. Thus, the M group's
consolidated taxable income determined by reference to only the SRLY
subgroup members' items for all consolidated return years of the
group through Year 3 (determined without regard to the CNOL
deduction) is not a positive amount.
(d) Coordination with consolidated return change of ownership
limitation and transactions subject to old section 382--(1)
Consolidated return changes of ownership. If a consolidated return
change of ownership occurred before January 1, 1997, the principles of
Sec. 1.1502-21A(d) apply to determine the amount of the aggregate of
the net operating losses attributable to old members of the group that
may be included in the consolidated net operating loss deduction under
paragraph (a) of this section. For this purpose, Sec. 1.1502-1(g) is
applied by treating that date as the end of the year of change.
(2) Old section 382. The principles of Sec. 1.1502-21A(e) apply to
disallow or reduce the amount of a net operating loss carryover of a
member as a result of a transaction subject to old section 382.
(e) Consolidated net operating loss. Any excess of deductions over
gross income, as determined under Sec. 1.1502-11(a) (without regard to
any consolidated net operating loss deduction), is also referred to as
the consolidated net operating loss (or CNOL).
(f) Predecessors and successors--(1) In general. For purposes of
this section, any reference to a corporation, member, common parent, or
subsidiary, includes, as the context may require, a reference to a
successor or predecessor, as defined in Sec. 1.1502-1(f)(4).
(2) Limitation on SRLY subgroups. Except as the Commissioner may
otherwise determine, any increase in the consolidated taxable income of
a SRLY subgroup that is attributable to a successor is disregarded
unless the successor acquires substantially all the assets and
liabilities of its predecessor and the predecessor ceases to exist.
(g) Effective date.--(1) In general. This section generally applies
to consolidated return years beginning on or after January 1, 1997.
(2) SRLY limitation. Except in the case of those members (including
members of a SRLY subgroup) described in paragraph (g)(3)(iii) of this
section, a group does not take into account a consolidated taxable year
beginning before January 1, 1997, in determining the aggregate of the
consolidated taxable income under paragraph (c)(1) of this section
(including for purposes of Sec. 1.1502-15T and Sec. 1.1502-22T(c)) for
the members (or SRLY subgroups).
(3) Application to prior periods. A consolidated group may apply
the rules of this section to all consolidated return years ending on or
after January 29, 1991, and beginning before January 1, 1997, provided
that--
(i) The group's tax liability as shown on an original or an amended
return is consistent with the application of the rules of this section
(other than this paragraph (g)) and Secs. 1.1502-15T, 1.1502-22T,
1.1502-23T, 1.1502-91T through 1.1502-96T, and 1.1502-98T for each such
year for which the statute of limitations does not preclude the filing
of an amended return on January 1, 1997;
(ii) Each section described in paragraph (g)(3)(i) of this section
and Sec. 1.1502-1(f)(4)(ii) is applied by substituting ``taxable years
ending on or after January 29, 1991'' for ``taxable years beginning on
or after January 1, 1997'' (and ``before January 29, 1991'' for
``before January 1, 1997'' in the case of consolidated return changes
of ownership) as the context requires.
(iii) The rules of paragraph (c) of this section and Secs. 1.1502-
15T and 1.1502-22T(c) are applied only with respect to the losses and
deductions of those corporations that became members of the group
(including members of a subgroup), and to acquisitions occurring, on or
after January 29, 1991, (and only with respect to such losses and
deductions);
(iv) The rules of Secs. 1.1502-15A, 1.1502-21A(c) and 1.1502-22A(c)
are applied with respect to the losses and deductions of those
corporations that became members of the group, and to acquisitions
occurring, before January 29, 1991; and
(v) Appropriate adjustments are made in the earliest subsequent
open year to reflect any inconsistency in a year for which the statute
of limitations precludes the filing of an amended return on January 1,
1997.
(4) Waiver of carrybacks. Paragraph (b)(3)(i) of this section
(relating to the waiver of carrybacks) applies to net operating losses
arising in a consolidated return year for which the due date of the
income tax return (without regard to extensions) is on or after August
26, 1996.
Par. 14. Section 1.1502-22 is redesignated as Sec. 1.1502-22A; the
heading of the newly designated Sec. 1.1502-22A is revised; and
paragraphs (d)(3) and (e) are added to read as follows:
Sec. 1.1502-22A Consolidated net capital gain or loss generally
applicable for consolidated return years beginning before January 1,
1997.
* * * * *
(d) * * *
(3) Cross-reference. See Sec. 1.1502-22T(d) for the rule that
applies the principles of this paragraph (d) in consolidated return
years beginning on or after January 1, 1997, with respect to a
consolidated return change of ownership occurring before January 1,
1997.
(e) Effective date. This section applies to any consolidated return
years to which Sec. 1.1502-21T(g) does not apply. See Sec. 1.1502-
21T(g) for effective dates of that section.
Par. 15. Section 1.1502-22T is added to read as follows:
Sec. 1.1502-22T Consolidated capital gain and loss (temporary).
(a) Capital gain. The determinations under section 1222, including
capital gain net income, net long-term capital gain, and net capital
gain, with respect to members during consolidated return years are not
made separately. Instead, consolidated amounts are determined for the
group as a whole. The consolidated capital gain net income for any
consolidated return year is determined by reference to--
(1) The aggregate gains and losses of members from sales or
exchanges of capital assets for the year (other than gains and losses
to which section 1231 applies);
(2) The consolidated net section 1231 gain for the year (determined
under Sec. 1.1502-23T); and
(3) The net capital loss carryovers or carrybacks to the year.
(b) Net capital loss carryovers and carrybacks.--(1) In general.
The determinations under section 1222, including net capital loss and
net short-term capital loss, with respect to members during
consolidated return years are not made separately. Instead,
consolidated amounts are determined for the group as a whole. Losses
[[Page 33334]]
included in the consolidated net capital loss may be carried to
consolidated return years, and, after apportionment, may be carried to
separate return years. The net capital loss carryovers and carrybacks
consist of--
(i) Any consolidated net capital losses of the group; and
(ii) Any net capital losses of the members arising in separate
return years.
(2) Carryovers and carrybacks generally. The net capital loss
carryovers and carrybacks to a taxable year are determined under the
principles of section 1212 and this section. Thus, losses permitted to
be absorbed in a consolidated return year generally are absorbed in the
order of the taxable years in which they were sustained, and losses
carried from taxable years ending on the same date, and which are
available to offset consolidated capital gain net income, generally are
absorbed on a pro rata basis. Additional rules provided under the Code
or regulations also apply, as well as the SRLY limitation under
paragraph (c) of this section. See, e.g., section 382(l)(2)(B).
(3) Carryovers and carrybacks of consolidated net capital losses to
separate return years. If any consolidated net capital loss that is
attributable to a member may be carried to a separate return year under
the principles of Sec. 1.1502-21T(b)(2), the amount of the consolidated
net capital loss that is attributable to the member is apportioned and
carried to the separate return year (apportioned loss).
(4) Special rules--(i) Short years in connection with transactions
to which section 381(a) applies. If a member distributes or transfers
assets to a corporation that is a member immediately after the
distribution or transfer in a transaction to which section 381(a)
applies, the transaction does not cause the distributor or transferor
to have a short year within the consolidated return year of the group
in which the transaction occurred that is counted as a separate year
for purposes of determining the years to which a net capital loss may
be carried.
(ii) Special status losses. [Reserved]
(c) Limitations on net capital loss carryovers and carrybacks from
separate return limitation years. The aggregate of the net capital
losses of a member arising (or treated as arising) in SRLYs that are
included in the determination of consolidated capital gain net income
for all consolidated return years of the group under paragraph (a) of
this section may not exceed the aggregate of the consolidated capital
gain net income for all consolidated return years of the group
determined by reference to only the member's items of gain and loss
from capital assets as defined in section 1221 and trade or business
assets defined in section 1231(b), including the member's losses
actually absorbed by the group in the taxable year (whether or not
absorbed by the member). The principles of Sec. 1.1502-21T(c)(including
the SRLY subgroup principles under Sec. 1.1502-21T(c)(2)) apply with
appropriate adjustments for purposes of applying this paragraph (c).
(d) Coordination with respect to consolidated return change of
ownership limitation occurring in consolidated return years beginning
before January 1, 1997. If a consolidated return change of ownership
occurred before January 1, 1997, the principles of Sec. 1.1502-22A(d)
apply to determine the amount of the aggregate of the net capital loss
attributable to old members of the group (as those terms are defined in
Sec. 1.1502-1(g)), that may be included in the net capital loss
carryover under paragraph (b) of this section. For this purpose,
Sec. 1.1502-1(g) is applied by treating that date as the end of the
year of change.
(e) Consolidated net capital loss. Any excess of losses over gains,
as determined under paragraph (a) of this section (without regard to
any carryovers or carrybacks), is also referred to as the consolidated
net capital loss.
(f) Predecessors and successors. For purposes of this section, the
principles of Sec. 1.1502-21T(f) apply with appropriate adjustments.
(g) Effective date--(1) In general. This section applies to
consolidated return years beginning on or after January 1, 1997.
(2) Application to prior periods. See Sec. 1.1502-21T(g)(3) for
rules generally permitting a group to apply the rules of this section
to consolidated return years ending on or after January 29, 1991, and
beginning before January 1, 1997.
Par. 16. Section 1.1502-23 is redesignated Sec. 1.1502-23A; the
section heading of the newly designated Sec. 1.1502-23A is revised; the
current text of the section is designated as paragraph (a), and
paragraph (b) is added to read as follows:
Sec. 1.1502-23A Consolidated net section 1231 gain or loss generally
applicable for consolidated return years beginning before January 1,
1997.
* * * * *
(b) Effective date. This section applies to any consolidated return
years to which Sec. 1.1502-21T(g) does not apply. See Sec. 1.1502-
21T(g) for effective dates of that section.
Par. 17. Section 1.1502-23T is added to read as follows:
Sec. 1.1502-23T Consolidated net section 1231 gain or loss
(temporary).
(a) In general. Net section 1231 gains and losses of members
arising during consolidated return years are not determined separately.
Instead, the consolidated net section 1231 gain or loss is determined
under this section for the group as a whole.
(b) Recapture of ordinary loss. [Reserved]
(c) Effective date--(1) In general. This section applies to gains
and losses arising in the determination of consolidated net section
1231 gain or loss for taxable years beginning on or after January 1,
1997.
(2) Application to prior periods. See Sec. 1.1502-21T(g)(3) for
rules generally permitting a group to apply the rules of this section
to consolidated return years ending on or after January 29, 1991, and
beginning before January 1, 1997.
Par. 18. Section 1.1502-41 is redesignated as Sec. 1.1502-41A; the
section heading of the newly designated Sec. 1.1502-41A is revised; and
paragraph (c) is added to read as follows:
Sec. 1.1502-41A Determination of consolidated net long-term capital
gain and consolidated net short-term capital loss generally applicable
for consolidated return years beginning before January 1, 1997.
* * * * *
(c) Effective date. This section applies to any consolidated return
years to which Sec. 1.1502-21T(g) does not apply. See Sec. 1.1502-
21T(g) for effective dates of that section.
Par. 19. Section 1.1502-79A is added to read as follows:
Sec. 1.1502-79A Separate return years generally applicable for
consolidated return years beginning before January 1, 1997.
(a) through (e) [Reserved]
(f) Effective date. Paragraphs (a) and (b) of this section apply to
losses arising in consolidated return years to which Sec. 1.1502-21T(g)
does not apply. For this purpose net operating loss deductions,
carryovers, and carrybacks arise in the year from which they are
carried. See Sec. 1.1502-21T(g) for effective dates of that section.
Par. 20. In Sec. 1.1502-79, paragraphs (a) and (b) are redesignated
as Sec. 1.1502-79A, paragraphs (a) and (b).
Par. 21. Section 1.1502-79 is amended by adding new paragraphs (a)
and (b) to read as follows:
Sec. 1.1502-79 Separate return years.
(a) Carryover and carryback of consolidated net operating losses to
separate return years. For losses arising
[[Page 33335]]
in consolidated return years beginning before January 1, 1997, see
Sec. 1.1502-79A(a). For later years, see Sec. 1.1502-21T(b).
(b) Carryover and carryback of consolidated net capital loss to
separate return years. For losses arising in consolidated return years
beginning before January 1, 1997, see Sec. 1.1502-79A(b). For later
years, see Sec. 1.1502-22T(b).
* * * * *
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 22. The authority citation for part 602 continues to read in
part as follows:
Authority: 26 U.S.C. 7805.
Par. 23. 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.
------------------------------------------------------------------------
* * * * *
1.1502-21T............................................ 1545-1237
* * * * *
------------------------------------------------------------------------
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: May 31, 1996.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 96-15823 Filed 6-26-96; 8:45 am]
BILLING CODE 4830-01-U
