[Federal Register Volume 64, Number 127 (Friday, July 2, 1999)]
[Rules and Regulations]
[Pages 36092-36116]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-16161]
[[Page 36091]]
_______________________________________________________________________
Part III
Department of the Treasury
_______________________________________________________________________
Internal Revenue Service
_______________________________________________________________________
26 CFR Parts 1, 301, and 602
Consolidated Returns--Limitations on the Use of Certain Losses and
Deductions
Regulations Under Section 1502 of the Internal Revenue Code of 1986;
Limitations on Net Operating Loss Carryforwards and Certain Built-in
Losses and Credits Following an Ownership Change of a Consolidated
Group
Regulations Under Section 382 of the Internal Revenue Code of 1986;
Application of Section 382 in Short Taxable Years and With Respect to
Controlled Groups; Final Rules
Federal Register / Vol. 64, No. 127 / Friday, July 2, 1999 / Rules
and Regulations
[[Page 36092]]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 301, and 602
[TD 8823]
RIN 1545-AU31
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 regulations regarding certain
deductions and losses, including built-in deductions and losses, of
members who join a consolidated group. The regulations provide rules
for computing the limitation with respect to separate return limitation
year (SRLY) losses, and the carryover or carryback of losses to
consolidated and separate return years. The regulations also eliminate
the application of the SRLY rules in certain circumstances in which the
rules of section 382 of the Internal Revenue Code also apply.
DATES: Effective Dates: These regulations are effective June 25, 1999.
Applicability Dates: For dates of applicability, see the ``Dates of
Applicability'' portion of this preamble.
FOR FURTHER INFORMATION CONTACT: Jeffrey L. Vogel, or Marie Milnes-
Vasquez at (202) 622-7770 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information in this final rule has been reviewed
and, pending receipt and evaluation of public comments, approved by the
Office of Management and Budget (OMB) under 44 U.S.C. 3507 and assigned
control number 1545-1237.
The collection of information in this regulation is in Sec. 1.1502-
21(b)(3). This information is required to ensure that an election to
relinquish a carryback period is properly documented, and will be used
for that purpose. The collection of information is required to obtain a
benefit (relating to the carryover of losses which would otherwise be
carried back). The likely respondents are consolidated groups.
Comments on the collection of information should be sent to the
Office of Management and Budget, Attn: Desk Officer for the Department
of the Treasury, Office of Information and Regulatory Affairs,
Washington, DC 20503, with copies to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC 20224.
Comments on the collection of information should be received by August
31, 1999.
Comments are specifically requested concerning: Whether the
collection of information is necessary for the proper performance of
the functions of the Internal Revenue Service, including whether the
information will have practical utility; The accuracy of the estimated
burden associated with the collection of information (see below); How
the quality, utility, and clarity of the information to be collected
may be enhanced; How the burden of complying with the collection of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of service to provide information.
Estimated total annual reporting burden: 2,000 hours.
Estimated average annual burden hours per respondent: 15 minutes.
Estimated number of respondents: 8,000.
Estimated annual frequency of responses: On occasion.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget.
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 Treasury and the IRS issued three notices
of proposed rulemaking, C0-132-87 (56 FR 4194), CO-077-90 (56 FR 4183),
and CO-078-90 (56 FR 4228), setting forth amendments to the rules
regarding net operating losses, built-in deductions, and capital losses
of consolidated groups. Those proposed regulations also included rules
regarding the carryover and carryback of losses to consolidated return
years and separate return years, and rules regarding the application of
section 382 and 383 by consolidated groups and by controlled groups. A
public hearing regarding the three sets of proposed regulations was
held on April 8, 1991.
On June 27, 1996, the Treasury and the IRS published temporary
regulations regarding the separate return limitation year (SRLY)
limitation (TD 8677, 61 FR 33321). These regulations were substantially
identical to the proposed regulations. A notice of proposed rulemaking
cross-referencing the temporary regulations, the 1996 proposed SRLY
regulations, was published in the Federal Register on the same day (CO-
024-96, 61 FR 33393), and the proposed regulations published in 1991
were withdrawn. The Treasury and the IRS also published temporary
regulations (TD 8678, 61 FR 33335) setting forth rules regarding the
application of section 382 to affiliated groups of corporations filing
consolidated returns, and controlled group losses (TD 8679, 61 FR
33391). Notices of proposed rulemaking cross-referencing these
temporary regulations were published on the same day (CO-026-96, 61 FR
33395, and CO-025-96, 61 FR 33395), and the earlier proposed
regulations published in 1991 were withdrawn.
On August 10, 1998, the Treasury and the IRS issued Notice 98-38
(1998-32 I.R.B. 4). The Notice requested comments about the
advisability of adopting rules that would replace the existing SRLY
rules with an approach modeled on section 382.
As companions to this Treasury decision, which adopts the 1996
proposed SRLY regulations with certain revisions and modifications, the
Treasury and the IRS are also issuing final regulations relating to the
application of sections 382 and 383 by members of consolidated and
controlled groups. See TD 8824 and TD 8825 published elsewhere in this
issue of the Federal Register.
On January 12, 1998, the Treasury and IRS issued temporary and
proposed regulations governing the use of tax credits of a consolidated
group and its members (TD 8751, 63 FR 1740). The Treasury and IRS
intend to finalize those regulations at a later date.
Operation of the Proposed and Temporary Regulations
The 1991 proposed regulations generally retained the approach of
the prior SRLY regulations in limiting a consolidated group's use of
attributes arising in or attributable to a SRLY, but altered the manner
in which the limitation is computed. While the pre-1991 regulations
determined the limitation separately for each member (fragmentation),
and under a year-by-year approach, the proposed regulations
[[Page 36093]]
introduced two new concepts: subgrouping and the cumulative register.
Subgrouping was added because fragmentation is in many ways
inconsistent with the single entity approach to the use of losses under
the consolidated return regulations. For example, if an entire
consolidated group were acquired by another group, under the
fragmentation approach, none of the losses of a former member of the
target group could be used to offset income of another former member of
the target group. However, had no acquisition occurred, those losses
could have been used to offset income within the target group.
The 1991 proposed regulations also introduced the concept of a
cumulative register to address certain issues resulting from the year-
by-year approach. The prior SRLY regulations based the limitation on
the SRLY member's annual contribution to the group's consolidated
taxable income. The SRLY limitation was computed by taking the
difference between the group's consolidated taxable income ``with'' the
SRLY member and ``without'' the SRLY member. This resulted in certain
anomalies. For example, if a SRLY member produced income in a tax year
but the group as a whole did not have income, the SRLY loss could not
be absorbed in that year. Because the member's contribution to income
was not carried over to later years, the SRLY losses also could not be
absorbed in a later year unless the member also contributed to the
group's taxable income in that year.
The cumulative register, rather than looking to a member's
contribution for the year, includes in the limitation computation a
member's complete income history while it is a member of a consolidated
group. The cumulative register is determined by aggregating a member's
net contribution of income in excess of losses absorbed during the
entire period the member was in the consolidated group. To the extent
that the cumulative register for a member is positive, that member's
SRLY net operating losses can be absorbed in a consolidated return year
(provided the group otherwise has taxable income) even though the
member might not have contributed to taxable income in that year. On
the other hand, if the cumulative register is negative, the absorption
of losses is precluded even though the member might have contributed to
taxable income in that consolidated return year.
Much of the complexity of the SRLY rules results from the subgroup
and cumulative register concepts. In fact, the preamble to the proposed
SRLY regulations acknowledged that the subgrouping approach was more
complex than the fragmentation approach and solicited comments about
whether the benefits provided by subgrouping outweigh and justify the
additional burdens required, and whether the fragmentation approach
should be retained. 1991-1 C.B. 759. No comments received in response
to this request advocated the elimination of subgrouping or the
cumulative register, and it was ultimately decided that these
principles would be retained.
Comments
Comments were received in response to the 1991 proposed
regulations, the 1996 temporary regulations and Notice 98-38. Some
comments addressed whether the SRLY rules should be retained. Other
comments addressed issues about the technical operation of the proposed
rules.
All of the comments were evaluated in finalizing these regulations.
Several suggestions were adopted while others were not. This preamble
describes some of the decisions that were made in finalizing the
regulations.
Elimination or Retention of SRLY
The preliminary issue considered in finalizing these regulations
was the extent, if any, to which the SRLY rules should be retained. The
comments were divided about whether to retain or eliminate SRLY. Some
commentators asserted that the amendment to section 382 in 1986
adequately addressed Congressional concerns regarding loss trafficking.
Therefore, it was argued, the SRLY rules should be eliminated because
they have become superfluous, add unwarranted complexity to the
consolidated return system, and are easily avoided. Other commentators
asserted that the SRLY rules should be retained because in their view,
policing loss trafficking is incidental to SRLY's function of resolving
a single entity/separate entity conflict in applying the consolidated
return regulations. A third group suggested a middle position by urging
the elimination of SRLY only in those circumstances in which the rules
of section 382 also apply.
Arguments for Elimination of SRLY
Some commentators urged elimination of the SRLY rules (either in
whole or in part) because, in their view, section 382 provides
sufficient protection against loss trafficking transactions. They
asserted that the rules of section 382 provide greater precision and
predictability about the consequences of a transfer of tax losses, and
that section 382 promotes neutrality between a buyer and seller of tax
benefits in a more efficient and more equitable way than do the SRLY
rules.
Section 382 and SRLY overlap to a large extent, and the rules
applying section 382 to consolidated groups are even more complex than
the SRLY rules. Thus, these commentators asserted that requiring a
taxpayer to run the SRLY gauntlet in addition to the section 382
gauntlet is unwarranted because any additional revenue that might be
gained from retaining a dual limitation is outweighed by the added
complexity of the SRLY rules.
These commentators argued that the complexity of the SRLY rules is
unwarranted because the impact of the SRLY rules is easily avoided by
various ``self-help'' techniques. For example, taxpayers can contribute
income-producing assets or built-in gain assets to the SRLY member to
minimize the effect of a SRLY limitation. They also argued that the
SRLY rules impose a meaningful limitation only in those cases in which,
for regulatory or other reasons, loss corporations cannot be combined
with other profitable businesses. Some commentators also argued that
the SRLY rules improperly discriminate between stock and asset
acquisitions. Other arguments urging the elimination of SRLY asserted
that section 382 supercedes the SRLY rules as a Congressionally
mandated rule for policing loss trafficking and that the SRLY rules are
inconsistent with treating the consolidated group as a single entity.
Arguments for Retention of SRLY
Notwithstanding the substantial area of overlap between section 382
and SRLY, section 382 does not always apply when SRLY does. In fact,
most commentators expressed concern about loss trafficking through
carryback transactions (to which section 382 does not apply) and
acknowledged the need for a rule to police those transactions. Many
urged retention of the existing SRLY rules at least for that purpose.
Moreover, some commentators speculated that elimination of the SRLY
rules would likely present new unforeseen opportunities for trafficking
in tax benefits.
Those commentators supporting retention of SRLY argued that the
objectives of section 382 and SRLY differ. Section 382, which seeks to
prevent loss trafficking, is based on the notion that the rate of loss
utilization following a change in ownership should be based on the
expected income generated if all of the assets were converted to tax-
exempt debt
[[Page 36094]]
instruments. Accordingly, section 382 permits a fixed amount of income
to be used each year to absorb a loss, regardless of the actual income
contribution of the loss corporation. Moreover, under section 382 and
in the absence of SRLY, the available loss can be used against any
member's income. SRLY, on the other hand, makes actual income
generation by the SRLY member the determinant of loss usage. Thus, SRLY
assures that the loss attributes that arose outside of the consolidated
group are not generally available to the other group members.
These commentators noted that the consolidated return system
combines single and separate entity treatment. The ability to offset
the income of one member with the losses of another member reflects
single entity treatment of the consolidated group. But, when a
corporation becomes a member of a consolidated group, it retains its
separate existence and individual status, its own accounting methods,
and its own separate attributes, including its losses that are carried
from a separate return year to a consolidated return year. These
aspects reflect treatment of each member of a consolidated group as a
separate entity. The carryover of losses from separate return years
reflects separate entity treatment, while the sharing of losses among
the members of a consolidated group reflects single entity treatment.
Thus, there is a conflict between single entity and separate entity
treatment. Single entity treatment in computing consolidated taxable
income is inconsistent with permitting a corporation's losses to
straddle consolidated and separate return years when it enters or
leaves a consolidated group. These commentators argued that the SRLY
rules present a resolution of this conflict and protect the integrity
of the consolidated return system by ensuring that attributes arising
in a separate return year belong to, and remain with, the SRLY member,
and attributes arising in a consolidated return year belong to the
group.
Through these rules, according to these commentators, SRLY seeks to
provide that the manner and extent to which a corporation's separate
tax attributes are absorbed or utilized should not vary based on
whether the corporation is inside or outside a consolidated group.
Unlike in the case of section 382, the policy objectives underlying
these rules do not hinge on whether the ownership of the corporation
changes upon its entrance into or departure from the group.
Moreover, commentators urging the retention of SRLY pointed out
that the rules of section 381 dictate the circumstances under which one
corporation can use the tax attributes of another corporation. In
certain reorganizations, section 381 allows the tax attributes of one
corporation to be used by another corporation after an acquisition, but
in those transactions generally stock basis is also lost. By contrast,
in a taxable stock purchase where the stock takes a cost basis and the
corporation retains its existence, including its underlying attributes,
there is no policy reason for those attributes to be freely available
to the purchaser. In essence, these commentators argued, the SRLY
limitation prevents the benefits provided by section 381 in certain
reorganization transactions from being extended to acquisitions and
restructurings that do not involve the commingling of assets in one
entity that section 381 transactions generally require. A consolidated
group's acquisition of the stock of a corporation should not be treated
the same way as an asset acquisition.
Notice 98-38
Notice 98-38 announced that the Treasury and the IRS were
considering an approach that would model the SRLY limitation on the
mechanism of section 382. One intended advantage of this approach was
to reduce complexity in cases of overlap of the SRLY rules with section
382. In those cases, the SRLY limitation would be the same as the
section 382 limitation, and consolidated groups would not need to make
two computations to determine how much income could be used to absorb a
loss. A second intended advantage was to address concerns that the
impact of a SRLY limitation can be minimized by stuffing transactions
(e.g., transferring income-producing assets to the loss corporation)
which could not be used to affect the section 382 limitation.
Although many commentators favor the elimination of a separate SRLY
limitation in the case where section 382 also applies, commentators did
not favor adoption of the section 382 mechanism in cases where section
382 does not otherwise apply. Commentators argued that imposing a
limitation based on section 382 in a case where section 382 would not
otherwise apply would be inordinately burdensome. Because (absent an
ownership change) the owners of a loss corporation held outside a
consolidated group could engage in a stuffing transaction in order to
increase that corporation's loss absorption, commentators argued that a
SRLY limitation that could not be increased through stuffing
transactions would violate the objective of providing that the extent
of a corporation's loss absorption should not vary based on whether it
is inside or outside a consolidated group.
In light of these concerns, the Treasury and the IRS decided not to
impose a SRLY limitation based on the mechanism of section 382.
The Overlap Rule
The Treasury and the IRS believe that limitations on the extent to
which a consolidated group can use attributes arising in a separate
return limitation year remain necessary. However, the Treasury and the
IRS remain concerned about complexity in applying the current SRLY
rules, particularly with respect to situations where both the SRLY
rules and section 382 apply. As described above, the SRLY limitation is
based on the member's (or subgroup's) actual contribution to
consolidated taxable income. The section 382 limitation is based on the
expected income generation of the member (or subgroup) determined with
reference to its value on the change date. On balance, the Treasury and
the IRS believe that the simultaneous or proximate imposition of a
section 382 limitation reasonably approximates a corresponding SRLY
limitation. Accordingly, these regulations generally eliminate the SRLY
limitation in circumstances in which its application overlaps with that
of section 382.
In the majority of cases, the date on which a corporation becomes a
member of a consolidated group (and thus subject to the SRLY rules) is
also a ``change date'' as defined in section 382(j), determined as a
result of an ownership change as defined in section 382(g). In this
situation, under the temporary regulations, taxpayers must calculate
two separate limitations for loss carryovers--the SRLY limitation and
the section 382 limitation. The final regulations provide an overlap
rule which eliminates the application of the SRLY rules in this
situation. As a result, the final regulations remove the burden of
determining two limitations, and simplify the loss limitation rules
applicable to consolidated groups in most instances in which both the
SRLY and the section 382 limitations would otherwise arise.
To address situations in which not all of an acquisition occurs
simultaneously, the overlap rule also applies if the acquisition
results in a corporation joining the consolidated group on a date other
than the ``change date'', provided the transactions are separated by no
more than six months. Additional rules have been included to prevent
the
[[Page 36095]]
inappropriate operation of the overlap rule in certain cases involving
the acquisition of multiple corporations.
Net Operating Losses
Generally, to qualify for the net operating loss overlap rule, a
corporation must become a member of a consolidated group (a SRLY event)
within six months of the change date of an ownership change that gives
rise to a section 382(a) limitation with respect to that carryover (a
section 382 event). For net operating losses, an overlap also will
generally include situations in which a net operating loss arises in
the maximum six month period after the section 382 event but before the
SRLY event.
For example, if a section 382 event occurs on April 1 and a SRLY
event occurs on September 1, any losses that arise between April 1 and
September 1 would not be subject to a section 382 limitation because
they would be allocable to the post-change period. However, in the
absence of the overlap rule, those losses would be subject to a SRLY
limitation. The overlap rule of the final regulations eliminates the
application of SRLY to those post-change losses. In cases of an
acquisition of a single corporation, the elimination of SRLY has been
determined to be an appropriate result and is a trade-off to promote
simplicity in the consolidated return regulations.
The final regulations provide special overlap rules for subgroups.
In general, the overlap rule applies to the subgroup and not separately
to the members of the subgroup. However, the overlap rule does not
apply unless the SRLY subgroup is coextensive with the section 382 loss
subgroup. This rule is necessary because a section 382 subgroup
limitation that is computed with respect to the expected income
generation of a group of corporations does not reasonably approximate a
limitation that would be based on the actual contribution to
consolidated taxable income by a smaller number of corporations. In the
reverse case, where the SRLY subgroup is larger than any corresponding
section 382 loss subgroup or single new loss member, and particularly
with respect to built-in losses, it is unclear in certain circumstances
how the overlap rule could be applied. To address such circumstances in
which a SRLY subgroup would otherwise be larger than the corresponding
section 382 subgroup or single new loss member, the accompanying final
regulations relating to the application of sections 382 and 383 provide
for an election effectively to expand a newly-formed section 382
subgroup to conform with a SRLY subgroup.
For example, assume that the S consolidated group (composed
entirely of S and T) has a $200 consolidated net operating loss, of
which $100 is attributable to S and $100 is attributable to T. If the M
group acquires the S group, S and T compose both a SRLY subgroup as
well as a section 382 loss subgroup. Because the subgroups are
coextensive, the overlap rule applies to eliminate the application of
SRLY in the M group for the $200 consolidated net operating loss.
The overlap rule will not apply, however, if all the corporations
included in a section 382 loss subgroup are not also included in a SRLY
subgroup. For example, in Year 1, T joins the S group with a net
operating loss carryover in a transaction that is not subject to
section 382, and T does not subsequently have an ownership change.
Under Sec. 1.1502-96 (relating to the end of separate tracking), after
five years, T's net operating loss becomes an attribute of the S group
(also referred to as a ``fold-in'') for section 382 purposes. If the P
group later acquires S in a transaction to which section 382 applies,
the section 382 loss subgroup with respect to the T loss would include
S and T, but for SRLY purposes there would be no subgroup. In this
situation, the overlap rule would not apply, and the limitations under
both SRLY and section 382 would continue to apply.
To preserve the effect of the elimination of SRLY under the overlap
rule as corporations move from group to group, the final regulations
also provide a special rule expanding the definition of SRLY subgroups.
Under this rule, a SRLY subgroup includes a member carrying over a loss
that was subject to the overlap rule in a former group, and all members
of that former group who become a member of the current group at the
same time as the loss member. The effect of this rule is to increase
the number of circumstances in which SRLY subgroups and section 382
subgroups will be coextensive as corporations move from group to group.
However, SRLY and section 382 subgroups may not be coextensive with
respect to losses that were carried into a former group in a
transaction to which the overlap rule does not apply. Subgroups may not
be coextensive, as demonstrated above, if for purposes of section 382,
such losses ``fold-in'' to the former group by virtue of an ownership
change occurring more than six months after the SRLY event or because
the loss member remains a member of the former group for at least five
years.
Operating Rules
If the section 382 event occurs on the same date as the SRLY event
or precedes the SRLY event, the overlap rule, and therefore the
elimination of SRLY, is applicable to the tax year that includes the
SRLY event. If the SRLY event precedes the section 382 event, the
elimination of SRLY is delayed until the first tax year that begins
after the section 382 event. The delay is necessary to ensure that an
adequate limitation is always in effect for a net operating loss
carryover.
For example, for a calendar year consolidated group, if the SRLY
event occurs December 1, Year 1, but the section 382 event occurs on
April 1, Year 2, it is necessary to maintain the application of the
SRLY rules between such dates because otherwise no limitation would be
applicable and the separate attributes could be freely absorbed during
that period.
Built-in Losses
The overlap rule for built-in losses is very similar to the overlap
rule for net operating losses. Generally, to qualify for the built-in
loss overlap rule, a SRLY event must occur within six months of the
change date of an ownership change that gives rise to a section 382(a)
limitation that would apply to recognized built-in losses (a section
382 event). However, the overlap rule does not apply (even with respect
to assets held on the date of the section 382 event) if assets are
transferred to a corporation after the section 382 event and before the
SRLY event that exceed the de minimis threshold of section 382(h). In
that case, both the SRLY rules and the section 382 rules will apply.
Even after the application of the overlap rule, the SRLY rules for
built-in losses apply to asset acquisitions by an acquired corporation
that occur after the latter or the SRLY event or section 382 event.
Special Subgroup Rule for Built-in Losses
The temporary regulations provide that, for purposes of built-in
losses, a SRLY subgroup consists of those members that have been
continuously affiliated for the 60-month period ending immediately
before they become members of the group in which the loss is
recognized. Generally, the final regulations maintain the subgroup rule
provided by the temporary regulations. The final regulations, however,
modify the subgroup rules to take account of the overlap rule. These
modifications, in effect, conform the SRLY subgroup rules to adopt
principles contained in
[[Page 36096]]
Sec. Sec. 1.1502-91 through 1.1502-98 (regarding the application of
section 382 to consolidated groups) where necessary to preserve the
effect of an overlap transaction in a former group and to increase the
number of SRLY and section 382 subgroups that are coextensive and
eligible for future operation of the overlap rule as corporations move
from group to group.
The final regulations provide that after a corporation joins a
group in an overlap transaction, it is deemed to have been affiliated
with the common parent of the acquiring group for 60 consecutive
months. Those corporations that join the group in the same transaction,
but that were not part of a subgroup eligible for the overlap rule,
begin measuring the period of their affiliation immediately after
joining the group, notwithstanding their actual affiliation history.
This rule may prevent some corporations from subsequently qualifying as
a SRLY subgroup, notwithstanding their actual affiliation history. For
example, assume that after four years of affiliation, S and T join the
P group without any net operating loss carryovers. S, which has a net
unrealized built-in loss, and T, which has a net unrealized built-in
gain, would not qualify as a SRLY subgroup with respect to their built-
in items because they do not have the requisite affiliation history.
Therefore, S and T are tested separately under section 382 and
Sec. 1.1502-15. The acquisition results in S becoming subject to
section 382 (but owing to the overlap rule, not to the limitation
contained in Sec. 1.1502-15(a)). T is not subject to either. Because S
joined the P group in a transaction subject to the overlap rule, it is
deemed to have been affiliated with P for 60 consecutive months. T,
however, is required to begin measuring its affiliation with P and S
from the date it joined the group, notwithstanding its historic
affiliation with S.
Other Substantive Changes
Predecessors and Successors
Material Difference Requirement
The temporary regulations provide that a reference to a corporation
or member also includes, as the context may require, a reference to a
successor or predecessor. See, Sec. 1.1502-15T(e) and Sec. 1.1502-
21T(f). The definition of predecessor is provided in Sec. 1.1502-
1(f)(4). In general, a predecessor is any transferor of assets in a
section 381(a) transaction. A predecessor also includes any transferor
of assets in a transaction in which the basis of assets to the
transferee (successor) is determined by reference to the transferor's
basis, but only if there is a ``material difference'' between the basis
and the value of assets. Thus the application of the predecessor rule
to a section 351 transaction is dependent upon the specific assets
transferred, and consequently a transferor in a section 351 transaction
might not qualify as a predecessor. Also, in the case of such a section
351 transaction, the temporary regulations provided that there be a
maximum of one predecessor to, or successor of, any member.
Commentators objected to the ``material difference'' requirement
and suggested that a section 351 transferee should not be excluded from
successor status solely because there was no material difference
between the basis and value of the assets transferred. The final
regulations eliminate both the material difference and the single
predecessor-successor requirements.
CNOL Carrybacks
Section 1.1502-21T(b)(2)(B) of the temporary regulations provides
an offspring rule which generally permits the common parent of a group
to carryback a consolidated net operating loss (CNOL) attributable to a
member that did not exist in the year to which the loss is carried,
provided that the member has been a member of the group continuously
since its organization. In that section, there is also a reference to
the application of the predecessor and successor rule of Sec. 1.1502-
21T(f), which states that a reference to a member also includes
references to a predecessor of the member, as the context may require.
Commentators were concerned that the combination of the predecessor
and successor rule would deny any carryback in the case of a merger
under section 368(a)(1)(A) and (a)(2)(D). For example, assume that P,
the common parent of a consolidated group, forms Newco in Year 2 for
the sole purpose of acquiring T, in a merger with and into Newco. In
Year 3, there is a CNOL all of which is attributable to Newco. Newco
appears to be within the scope of the offspring rule, and therefore a
carryback to P's Year 1 consolidated return, a year before Newco's
existence, would be permitted. However, because the merger is a
transaction to which section 381(a) applies, Newco is also a successor
to T. Under this analysis, Newco would not be considered to have been a
member of the P group continuously since its organization, so a
carryback to the P group's consolidated return year would not be
permitted. Moreover, Newco would not be permitted to carryback the loss
to any year of T. Thus, no carryback of Newco's loss would be
permitted.
The Treasury and the IRS believe that the denial of any carryback
in this situation is inappropriate. In general, a newly-formed group
member should be permitted to carry back its contribution to the
consolidated net operating loss, whether or not it is a successor to a
corporation that was acquired by the group. Moreover, the Treasury and
the IRS believe that rules providing for a carryback within--rather
than outside--the group would be more administrable than rules
requiring taxpayers to trace the assets of a newly-formed member to
determine whether such corporation's contribution to the consolidated
net operating loss should be carried back to the pre-consolidation
years of an acquired corporation or back within the group. The Treasury
and the IRS also considered whether to provide that all consolidated
net operating losses should be carried back within the group, even if
attributable to a corporation that was itself acquired from outside the
group. Whether or not such a rule is appropriate, it was determined
that such a change should not be adopted in final regulations.
Accordingly, the final regulations provide that the offspring rule
applies regardless of whether the newly-formed member is a successor to
any other corporation.
Successor's Income
Section 1.1502-21T(f)(2) of the temporary regulations provides,
``Except as the Commissioner may otherwise determine, any increase in
the taxable income of a SRLY subgroup that is attributable to a
successor is disregarded unless the successor acquires substantially
all of the assets and liabilities of its predecessor and the
predecessor ceases to exist.'' The rule was intended to prevent the
subgroup from inappropriately affecting the determination of its
taxable income either by removing assets that would generate losses or
by bringing into the subgroup income generated by members outside the
subgroup.
Some commentators stated that they did not understand whether the
rule was intended to require the subgroup to disregard all income of
the successor, or only that income of the successor in excess of that
generated by the transferred assets. In the event that all the
successor's income is disregarded, commentators argued that the rule
produced unduly harsh results. A particularly sympathetic case is a
divisive section 351 transaction. For example, if T, a member of a SRLY
subgroup, formed T1, by contributing to it one of its businesses, and
T1 produced net operating losses, those losses would be included in
[[Page 36097]]
determining the taxable income of the subgroup. On the other hand, if
T1 produced taxable income, that income would not be included in the
subgroup's taxable income. If no transfer to T1 had occurred, and the
business had remained in T, all of its income or loss, as the case may
be, would be included in determining the subgroup's taxable income.
The Treasury and the IRS have determined that a broad rule
disregarding all income contributed by the successor is necessary to
avoid an unadministrable requirement that the successor's income be
traced to particular assets, but that the rule should only be applied
in more limited circumstances. Thus, the final regulations provide that
the net positive income attributable to the successor generally is
disregarded, but provide four exceptions to this rule: (A) The
successor acquires substantially all of the assets and liabilities of
its predecessor, and the predecessor ceases to exist; (B) the successor
became a member of the SRLY subgroup at the time the subgroup was
formed (e.g., the successor was organized before it and its affiliates
joined the current group and thus qualifies in its own right as a
subgroup member); (C) 100 percent of the stock of the successor is
owned directly by corporations that were members of the SRLY subgroup
when the subgroup was formed; or (D) the Commissioner determines
otherwise. The IRS might, for example, publish a revenue ruling or
other guidance expanding the list of exceptions if it is later
determined that other circumstances should be excluded from the general
rule. It is also anticipated that through the letter ruling process,
the IRS will evaluate individual cases upon request and determine
whether income attributable to a successor will be included in
determining the subgroup's taxable income. See also Sec. 1.1502-
21(c)(2)(iv) of the regulations (an anti-abuse rule denying SRLY
subgroup treatment in certain circumstances.)
Built-in Losses
Non-Corporate Transferors
Section 1.1502-15T(a) of the temporary regulations provides that
solely for the purpose of determining the amount of, and the extent to
which, a built-in loss is limited by the SRLY rules for the year in
which it is recognized, a built-in loss is treated as a hypothetical
net operating loss carryover or net capital loss arising in a SRLY,
instead of as a deduction or loss in the year recognized.
Some commentators thought the rule was anomalous as applied to
transfers of built-in loss assets by individuals. In their view,
because a SRLY is defined only with respect to corporations (see
Sec. 1.1502-1(f)), it would be inappropriate to view a corporate
transferee as a successor to a non-corporate transferor. Other
commentators asserted that because the built-in loss concept is a
subset of the SRLY limitations, the built-in loss rules should not
apply to transfers by an individual or other non-corporate transferor
to a member of a consolidated group in a section 351 transaction.
The temporary regulation does not base the determination of whether
a corporation has built-in losses on any application of the predecessor
and successor rule. If an asset enters the group with a built-in loss,
in general, the temporary regulation deems the built-in loss to have
arisen in a SRLY without regard to whether the asset was owned by a
corporation when the built-in loss arose. Moreover, Sec. 1.1502-
15T(b)(2)(i) provides that 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 on the
date of the acquisition. That corporation would generally be subject to
the SRLY built-in loss rules when it becomes a member of the
consolidated group. The Treasury and the IRS continue to believe that a
separate tax attribute arising outside the consolidated group should
not be freely absorbed within the group, regardless of where that
separate attribute arose. Accordingly, these final regulations reaffirm
that a built-in loss asset transferred to a group by a non-corporate
transferor is subject to the SRLY rules. An example explains that for
purposes of applying the SRLY limitation to that built-in loss, all of
the items contributed by the acquiring member (and not just items
attributable to that asset) to consolidated taxable income are taken
into account.
Lonely Parent
Under Sec. 1.1502-15T of the temporary regulations, the SRLY
limitation on recognized built-in losses applies to a loss recognized
by the group on an asset the common parent held prior to the formation
of a group. In contrast, net operating loss carryovers of a corporation
that becomes the common parent of a consolidated group are not subject
to a SRLY limitation within the group under the so-called ``lonely
parent'' rule (see Sec. 1.1502-1(f)(2)(i)).
The final regulations conform the built-in loss rules to the net
operating loss rules as applied in conjunction with the lonely parent
rule. Therefore, a loss recognized by any member of the group on an
asset that was held by the corporation that becomes the common parent
when the group is formed is not subject to the SRLY rules. However, a
built-in loss asset acquired by the common parent after the formation
of the group remains subject to the SRLY limitation. An anti-abuse rule
is also provided to apply the SRLY limitation to built-in loss assets
transferred to a corporation prior to and in anticipation of the
corporation becoming the common parent of a group.
For example, in Year 1, P, a stand alone corporation holds Asset 1,
a built-in loss asset. In Year 3, P forms S but retains Asset 1. In
Year 4, P sells Asset 1, recognizing a loss. Section 1.1502-15(f) of
the final regulations provides that the loss is not subject to the SRLY
limitation. Similarly if P transferred Asset 1 with an unrealized
built-in loss to S, the SRLY limitation on built-in losses would not
apply if S sold Asset 1 and recognized the loss. However if, after the
formation of the P/S group, P acquired an asset with an unrealized
built-in loss and sold the asset, recognizing that loss during the
recognition period, a SRLY limitation would apply with respect to that
loss.
Split Election Rule
Section 1.1502-21T(b)(3)(i) of the temporary regulations permits a
consolidated group to waive the entire carryback period provided by
section 172. This irrevocable election is not available on a member by
member basis, but rather requires that the common parent waive the
carryback period for all members of the group.
Some commentators suggested that the election be permitted on a
member-by-member basis. The commentators expressed concern that
requiring the whole group to waive the carryback period makes it
difficult for sellers and purchasers to negotiate who gets the benefit
of a post-acquisition loss. Because section 172 generally requires a
carryback to the earliest year, absent the purchaser's waiver of the
carryback, a seller could be required to disclose confidential tax
information to the purchaser relating to the ability to use the loss
carryback. In situations where such disclosure is a concern, an
election to waive the loss carryback, available on a member by member
basis, could ensure the separation of a particular purchaser and seller
without requiring the group to waive the remaining
[[Page 36098]]
amount of the consolidated net operating loss carryback.
The final regulations permit taxpayers to waive, with respect to
all consolidated net operating losses attributable to a member, the
portion of the carryback period for which the corporation was a member
of another group. If an election is made for any member, all members
acquired from the same group, in the same transaction, are required to
make the election. The election must be made on the timely filed
original return for the year of the acquisition.
Absorption of Losses
Section 1.1502-21T(b)(1) provides general rules concerning the
absorption of losses within a consolidated group. Although the rules
refer to section 382(l)(2)(B), commentators stated that the absorption
rules were ambiguous with respect to establishing the priority of
absorption of multiple losses carried from the same taxable year if
only a portion of the losses were subject to limitation under section
382. The final regulations make clear that the rule of section
382(l)(2)(B) applies, and that losses limited by section 382 are
absorbed before losses from the same taxable year that are not subject
to a section 382 limitation, regardless of whether such losses are
attributable to the same member.
A comment was also received requesting guidance on how to determine
the amount of a subgroup member's net operating loss carryover that was
absorbed so that it can determine how much of the loss it retains when
it leaves the group. In response to this comment, the final regulations
provide that within a subgroup, losses are absorbed on a pro rata
basis. Thus, when a subgroup member leaves the group, its net operating
loss carryover is treated as having been absorbed on a pro rata basis,
determined by comparing its initial net operating loss carryover and
the subgroup's initial net operating loss carryover.
Dates of Applicability
The final regulations generally are applicable for taxable years
for which the due date (without extensions) of the consolidated return
is after June 25, 1999. However, there are several special effective
dates, including an effective date which addresses transitional issues
relating to the adoption of the rule eliminating SRLY in the event of
an overlap with section 382.
Generally, if a particular attribute would not have been subject to
a SRLY limitation as of June 25, 1999 if these final regulations had
always been in effect, and the overlap transaction occurred after the
effective date of section 382 as amended by the 1986 Tax Reform Act,
then the existing SRLY limitation will not apply in taxable years for
which the due date (without extensions) of the consolidated return is
after June 25, 1999 (but will not be eliminated retroactively with
respect to earlier taxable years).
If an existing SRLY limitation for which the cumulative register
began in a taxable year prior to a taxable year for which the due date
(without extensions) of the consolidated return is after June 25, 1999
would not be eliminated by the overlap rule, that SRLY limitation
continues to be applied without regard to the changes applicable to the
definition of SRLY subgroups (so that a member or SRLY subgroup is not
forced to alter the application of a SRLY limitation in midstream).
However, when corporations enter a group in a new SRLY event occurring
in a taxable year for which the due date (without extensions) of the
consolidated return is after June 25, 1999, the regulations apply (with
respect to any overlap transactions occurring after the effective date
of section 382 as amended by the 1986 Tax Reform Act) as if the final
regulations had always been in effect.
Thus, for example, and assuming that all corporations are on a
calendar taxable year, if a corporation S joins the P group in an
overlap transaction in 1996, and the first year for which this final
regulation is effective is 1999, then any losses carried by S into the
P group are subject to a SRLY limitation in 1996, 1997 and 1998.
However, the losses are no longer subject to a SRLY limitation within
the P group starting in 1999.
If, in the above example, the M group had acquired both P and S on
January 1, 1998 in a non-overlap transaction, and S carried into the M
group its losses arising before it joined the P group, then, in 1998,
under the temporary regulations as then in effect, those S losses would
have been subject to a SRLY limitation computed with reference only to
S's cumulative register. Under the special transition rule, the new
regulations would not operate in 1999 or thereafter to cause S and P to
constitute a SRLY subgroup in the M group with respect to those S
losses, even though P and S would otherwise qualify as a SRLY subgroup
with respect to those losses under the new rules. However, if the X
group acquires both P and S from M in or after 1999, P and S would
constitute a SRLY subgroup with respect to those S loss carryovers.
Need for Immediate Guidance
Because the temporary regulations are not applicable for taxable
years ending after June 26, 1999, it is necessary to implement these
final regulations without delay to ensure continuity of treatment of
certain attributes and to ensure that there is no period within which
the treatment of such attributes is inconsistent with the temporary
regulations and these final regulations. See section 7805(e)(2).
Accordingly, it is impracticable and contrary to the public interest to
issue this Treasury decision subject to the effective date limitation
of section 553(d) of title 5 of the United States Code (if applicable).
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. It is hereby
certified that these regulations will not have a significant economic
impact on a substantial number of small entities. This certification is
based on the fact that these regulations principally affect
corporations filing consolidated federal income tax returns that have
carryover or carryback of certain losses from separate return
limitation years. Available data indicates that many consolidated
return filers are large companies (not small businesses). In addition,
the data indicates that an insubstantial number of consolidated return
filers that are smaller companies have loss carryovers or carrybacks
that are subject to the separate return limitation year rules.
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 Code, the notice of proposed rulemaking
preceding these regulations was sent to the Small Business
Administration for comment on its impact on small businesses.
Drafting Information. The principal author of these regulations is
Jeffrey L. Vogel of the Office of Assistant Chief Counsel (Corporate),
IRS. Other personnel from the Treasury and the IRS participated in
their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
[[Page 36099]]
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1, 301, and 602 are amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by
removing the entries for sections 1.1502-15T, 1.1502-21T, 1.1502-22T,
and 1.1502-23T and adding entries in numerical order to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1502-12 also issued under 26 U.S.C. 1502. * * *
Section 1.1502-15 also issued under 26 U.S.C. 1502. * * *
Section 1.1502-22 also issued under 26 U.S.C. 1502.
Section 1.1502-23 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)............... 1.1502-21T (net 1.1502-21 (net
operating losses operating losses),
(temporary)), and and 1.1502-22
1.1502-22T (consolidated net
(consolidated net capital gain and
capital gain and loss).
loss (temporary)).
1.597-2(c)(5), first 1.1502-15T, 1.1502- 1.1502-15, 1.1502-
sentence. 21T, and 1.1502-22T. 21, and 1.1502-22
1.597-2(c)(5), second 1.1502-15T, 1.1502- 1.1502-15, 1.1502-21
sentence. 21T or 1.1502-22T. or 1.1502-22.
1.597-4(g)(3), fifth 1.1502-15T, 1.1502- 1.1502-15, 1.1502-21
sentence. 21T and 1.1502-22T. and 1.1502-22.
1.597-4(g)(3), sixth 1.1502-15T, 1.1502- 1.1502-15, 1.1502-
sentence. 21T, or 1.1502-22T. 21, or 1.1502-22.
1.904(f)-3(a), first (or Sec. 1.1502- (or Sec. 1.1502-
sentence. 21T(b). 21(b).
1.904(f)-3(b), first (or Sec. 1.1502- (or Sec. 1.1502-
sentence. 22T(b). 22(b).
1.1502-2(h)................. 1.1502-22T) (or, for 1.1502-22) (or, for
consolidated return consolidated return
years to which Sec. years to which Sec.
1.1502-22T. 1.1502-22.
1.1502-3T(c)(2)(iii), first 1.1502-21T(c)(2).... 1.1502-21(c)(2).
sentence.
1.1502-3T(c)(2)(iii), second 1.1502-21T(f)....... 1.1502-21(f).
sentence.
1.1502-9(a), seventh Sec. 1.1502-21T(b)( 1.1502-21(b)(2).
sentence. 2).
1.1502-9(a), eighth sentence 1.1502-21T(b)(1).... 1.1502-21(b)(1).
1.1502-11(a)(2)............. Sec. 1.1502-21T.... 1.1502-21.
1.1502-11(a)(3)............. Sec. 1.1502-22T.... 1.1502-22.
1.1502-11(a)(4)............. Sec. 1.1502-23T.... 1.1502-23.
1.1502-11(b)(2)(iii) Example 1.1502-21T.......... 1.1502-21.
1(c), last sentence.
1.1502-11(b)(2)(iii) Example 1.1502-21T and 1.1502-21 and 1.1502-
2(d), last sentence. 1.1502-22T. 22.
1.1502-12(b)................ 1.1502-15T.......... 1.1502-15.
1.1502-13(c)(7)(ii) Example S's net operating P's acquisition of S
10(d), first and second loss carryovers are is not subject to
sentences. subject to the the overlap rule of
separate return Sec. 1.1502-21(g),
limitation year and S's net
(SRLY) rules. See operating loss
Sec. 1.1502-21T(c). carryovers are
subject to the
separate return
limitation year
(SRLY) rules. See
Sec. 1.1502-21(c).
1.1502-13(g)(5) Example 1.1502-15T (or Sec. 1.1502-15 (as
4(b), fourth sentence. 1.1502-15A, as appropriate).
appropriate)
(limitations on the
absorption of built-
in losses).
1.1502-13(h)(2) Example 1.1502-21T(c)....... 1.1502-21(c).
1(a), second sentence.
1.1502-13(h)(2) Example 1.1502-21T(c)....... 1.1502-21(c).
1(b), first sentence.
1.1502-13(h)(2) Example 1.1502-15T.......... 1.1502-15.
2(a), last sentence.
1.1502-13(h)(2) Example 1.1502-22T.......... 1.1502-22.
2(b), second sentence.
1.1502-20(c)(4) Example 1.1502-21T.......... 1.1502-21.
7(iii), first sentence.
1.1502-20(g)(3) Example 1.1502-21T.......... 1.1502-21.
1(i), second sentence.
1.1502-20(g)(3) Example Sec. 1.1502-21A or 1.1502-21A or 1.1502-
2(i), fourth sentence. 1.1502-21T. 21.
1.1502-23A(a), third 1.1502-21T(c) and (1.1502-21T(c) in
sentence. 1.1502-22T(c), as effect prior to
provided in Sec. June 25, 1999, as
1.1502-15T(a). contained in 26 CFR
part 1 revised
April 1, 1999 and
1.1502-22T(c) in
effect prior to
June 25, 1999, as
contained in 26 CFR
part 1 revised
April 1, 1999, as
provided in 1.1502-
15T(a) in effect
prior to June 25,
1999, as contained
in 26 CFR part 1
revised April 1,
1999) or (1.1502-
21(c) and 1.1502-
22(c), as provided
in 1.1502-15(a), as
applicable)).
1.1502-23A(b), first 1.1502-21T(g)....... 1.1502-21(h) or
sentence. 1.1502-21T(g) in
effect prior to
June 25, 1999, as
contained in 26 CFR
part 1 revised
April 1, 1999, as
applicable.
1.1502-23A(b), second 1.1502-21T(g) for 1.1502-21(h) or
sentence. effective dates of 1.1502-21T(g) in
that section. effect prior to
June 25, 1999, as
contained in 26 CFR
part 1 revised
April 1, 1999, as
applicable for
effective dates of
these sections.
1.1502-26(a)(1) concluding 1.1502-21T(e)....... 1.1502-21(e).
text.
1.1502-32(b)(5)(ii) Example 1.1502-21T(b)....... 1.1502-21(b).
2 (b), third sentence.
1.1502-41A(c), first 1.1502-21T(g)....... 1.1502-21(h) or
sentence. 1.1502-21T(g) in
effect prior to
June 25, 1999, as
contained in 26 CFR
part 1 revised
April 1, 1999, as
applicable
[[Page 36100]]
1.1502-41A(c), second 1.1502-21T(g) for 1.1502-21(h) or
sentence. effective dates of 1.1502-21T(g) in
that section. effect prior to
June 25, 1999, as
contained in 26 CFR
part 1 revised
April 1, 1999, as
applicable for
effective dates of
these sections.
1.1502-42(f)(4)(i)(A)....... 1.1502-21T(b)....... 1.1502-21(b).
1.1502-43(b)(2)(iv)......... 1.1502-21T(a)....... 1.1502-21(a).
1.1502-43(b)(2)(v).......... 1.1502-22T(a)....... 1.1502-22(a).
1.1502-43(b)(2)(vi)(A)...... 1.1502-22T(a)....... 1.1502-22(a).
1.1502-43(b)(2)(vii)........ 1.1502-22T(b)....... 1.1502-22(b).
1.1502-43(b)(2)(viii)....... 1.1502-15T) and 1.1502-15) and
1.1502-15T (SRLY 1.1502-15.
limitation on built-
in losses
(temporary)).
1.1502-44(b)(2)............. Sec. 1.1502-21T.... 1.1502-21.
1.1502-44(b)(3)............. Sec. 1.1502-22T.... 1.1502-22.
1.1502-47(h)(2)(i).......... 1.1502-21T.......... 1.1502-21.
1.1502-47(h)(2)(ii)......... 1.1502-21T(e)....... 1.1502-21(e).
1.1502-47(h)(2)(iii),first 1.1502-21T.......... 1.1502-21.
sentence.
1.1502-47(h)(2)(iv), first 1.1502-21T.......... 1.1502-21
sentence.
1.1502-47(h)(3)(iii)........ 1.1502-21T(c)....... 1.1502-21(c).
1.1502-47(h)(4)(i), first 1.1502-22T.......... 1.1502-22.
sentence.
1.1502-47(h)(4)(i), second 1.1502-22T.......... 1.1502-22.
sentence.
1.1502-47(h)(4)(ii), first 1.1502-22T.......... 1.1502-22.
sentence.
1.1502-47(h)(4)(ii), first 1.1502-21T.......... 1.1502-21.
sentence.
1.1502-47(h)(4)(iii)........ 1.1502-22T(b)....... 1.1502-22(b).
1.1502-47(k)(5) introductory 1.1502-22T.......... 1.1502-22.
text.
1.1502-47(l)(3)(i), second 1.1502-21T.......... 1.1502-21.
sentence.
1.1502-47(m)(2)(ii), first 1.1502-21T.......... 1.1502-21.
sentence.
1.1502-47(m)(2)(ii), first 1.1502-22T.......... 1.1502-22.
sentence.
1.1502-47(m)(3)(i), first 1.1502-21T and 1.1502-21 and 1.1502-
sentence. 1.1502-22T. 22.
1.1502-47(m)(3)(vi)(A), 1.1502-21T(b) or 1.1502-21(b)).
second sentence. 1.1502-79A(a)(3)(as
appropriate).
1.1502-47(m)(3)(vi)(A), Sec. 1.1502-21T(b) 1.1502-21(b).
second sentence. or 1.1502-
79A(a)(3)(as
appropriate).
1.1502-47(m)(3)(vii)(A)..... 1.1502-21A(b)(3)(ii) 1.1502-21A(b)(3)(ii)
or 1.1502-21(b).
1.1502-47(m)(3)(ix), last 1.1502-15T.......... 1.1502-15.
sentence.
1.1502-47(q), last sentence. 1.1502-21T.......... 1.1502-21.
1.1502-55T(h)(4)(iii) 1.1502-21T(c)(2).... 1.1502-21(c)(2).
(B)(4), first sentence.
1.1502-55T(h)(4)(iii) 1.1502-21T(f)....... 1.1502-21(f).
(B)(4), second sentence.
1.1502-78(a), first sentence 1.1502-21T(b), 1.1502-21(b), 1.1502-
1.1502-22T(b). 22(b).
1.1502-79(a), second 1.1502-21T(b)....... 1.1502-21(b).
sentence.
1.1502-79(b), second 1.1502-22T(b)....... 1.1502-22(b).
sentence.
1.1502-79(c)(1)............. 1.1502-21T(b)....... 1.1502-21(b).
1.1502-79(d)(1)............. 1.1502-21T(b)....... 1.1502-21(b).
1.1502-79(e)(1)............. 1.1502-21T(b)....... 1.1502-21(b).
1.1502-91T(a)(2), last 1.1502-21T(a)....... 1.1502-21(a) or
sentence. 1.1502-21T(a) in
effect prior to
June 25, 1999, as
contained in 26 CFR
part 1 revised
April 1, 1999, as
applicable.
1.1502-91T(c)(3) Example 1.1502-21T(c)....... 1.1502-21(c) or
(b), first sentence. 1.1502-21T(c) in
effect prior to
June 25, 1999, as
contained in 26 CFR
part 1 revised
April 1, 1999, as
applicable.
1.1502-91T(d)(1)(iii)....... 1.1502-21T(c)....... 1.1502-21(c) or
1.1502-21T(c) in
effect prior to
June 25, 1999, as
contained in 26 CFR
part 1 revised
April 1, 1999, as
applicable.
1.1502-91T(d)(6) Example 1.1502-21T(b)....... 1.1502-21(b) or
1(a), fourth sentence. 1.1502-21T(b) in
effect prior to
June 25, 1999, as
contained in 26 CFR
part 1 revised
April 1, 1999, as
applicable.
1.1502-91T(d)(6) Example 1.1502-21T(b)....... 1.1502-21(b) or
2(a), fourth sentence. 1.1502-21T(b) in
effect prior to
June 25, 1999, as
contained in 26 CFR
part 1 revised
April 1, 1999, as
applicable.
1.1502-91T(f)(2) Example 1.1502-21T(b)....... 1.1502-21(b) or
(a), last sentence. 1.1502-21T(b) in
effect prior to
June 25, 1999, as
contained in 26 CFR
part 1 revised
April 1, 1999, as
applicable.
1.1502-92T(b)(2) Example 1.1502-21T(b)....... 1.1502-21(b) or
3(a), fourth sentence. 1.1502-21T(b) in
effect prior to
June 25, 1999, as
contained in 26 CFR
part 1 revised
April 1, 1999, as
applicable.
1.1502-93T(e)............... 1.1502-21T(c)....... 1.1502-21(c) or
1.1502-21T(c) in
effect prior to
June 25, 1999, as
contained in 26 CFR
part 1 revised
April 1, 1999, as
applicable.
1.1502-94T(a)(1)(i)......... 1.1502-21T(c)....... 1.1502-21(c) or
1.1502-21T(c) in
effect prior to
June 25, 1999, as
contained in 26 CFR
part 1 revised
April 1, 1999, as
applicable.
1.1502-94T(b)(4) Example 1.1502-21T(c)....... 1.1502-21(c) or
1(c), last sentence. 1.1502-21T(c) in
effect prior to
June 25, 1999, as
contained in 26 CFR
part 1 revised
April 1, 1999, as
applicable.
[[Page 36101]]
1.1502-95T(b)(1)(i)......... 1.1502-21T(b)....... 1.1502-21(b) or
1.1502-21T(b) in
effect prior to
June 25, 1999, as
contained in 26 CFR
part 1 revised
April 1, 1999, as
applicable.
1.1502-95T(b)(4) Example 1 1.1502-21T(b)....... 1.1502-21(b) or
(a), sixth sentence. 1.1502-21T(b) in
effect prior to
June 25, 1999, as
contained in 26 CFR
part 1 revised
April 1, 1999, as
applicable.
1.1502-95T(c)(7) Example 1 1.1502-21T(b)....... 1.1502-21(b) or
(a), fifth sentence. 1.1502-21T(b) in
effect prior to
June 25, 1999, as
contained in 26 CFR
part 1 revised
April 1, 1999, as
applicable.
1.1502-96T(a)(1) 1.1502-21T(c)....... 1.1502-21(c) or
introductory text. 1.1502-21T(c) in
effect prior to
June 25, 1999, as
contained in 26 CFR
part 1 revised
April 1, 1999, as
applicable.
1.1502-96T(a)(2), first 1.1502-21T(c)....... 1.1502-21(c) or
sentence. 1.1502-21T(c) in
effect prior to
June 25, 1999, as
contained in 26 CFR
part 1 revised
April 1, 1999, as
applicable.
1.1502-96T(a)(5), first 1.1502-15T and 1.1502-15 and 1.1502-
sentence. 1.1502-21T. 21 (or Sec. 1.1502-
15T in effect prior
to June 25, 1999,
as contained in 26
CFR part 1 revised
April 1, 1999 and
1.1502-21T in
effect prior to
June 25, 1999, as
contained in 26 CFR
part 1 revised
April 1, 1999, as
applicable).
1.1502-96T(b)(2)(ii)(A)..... 1.1502-21T(b)....... 1.1502-21(b) or
1.1502-21T(b) in
effect prior to
June 25, 1999, as
contained in 26 CFR
part 1 revised
April 1, 1999, as
applicable.
1.1502-96T(b)(2)(ii)(B)..... 1.1502-21T(c)....... 1.1502-21(c) or
1.1502-21T(c) in
effect prior to
June 25, 1999, as
contained in 26 CFR
part 1 revised
April 1, 1999, as
applicable.
1.1502-99T(c)(2)(i), fourth 1.1502-21T(c)....... 1.1502-21(c) or
sentence. 1.1502-21T(c) in
effect prior to
June 25, 1999, as
contained in 26 CFR
part 1 revised
April 1, 1999, as
applicable.
1.1502-99T(c)(2)(ii)........ 1.1502-21T(b)....... 1.1502-21(b) or
1.1502-21T(b) in
effect prior to
June 25, 1999, as
contained in 26 CFR
part 1 revised
April 1, 1999, as
applicable.
1.1502-100(c)(2)............ Secs. 1.1502-21A or Sec. 1.1502-21A or
1.1502-21T. 1.1502-21.
1.1503-2(d)(2)(i), last Sec. 1.1502-21A(c) 1.1502-21A(c) or
sentence. or 1.1502-21T(c). 1.1502-21(c).
1.1503-2(d)(2)(ii), last Sec. 1.1502-21A(c) 1.1502-21A(c) or
sentence. or 1.1502-21T(c). 1.1502-21(c).
1.1503-2(d)(4) Example 1 1.1502-22T(c)....... 1.1502-22(c).
(iv), last sentence.
1.1503-2(g)(2)(vii)(B)(1), Sec. 1.1502-21A(c) 1.1502-21A(c) or
second sentence. or 1.1502-21T(c). 1.1502-21(c).
1.1503-2(g)(2)(vii)(B)(2), Sec. 1.1502-21A(c) 1.1502-21A(c) or
first sentence. or 1.1502-21T(c). 1.1502-21(c).
1.1503-2(g)(2)(vii)(G) Sec. 1.1502-21A(c) 1.1502-21A(c) or
Example 1, ninth sentence. or 1.1502-21T(c). 1.1502-21(c).
1.1503-2(g)(2)(vii)(G) Secs. 1.1502-21A(c) Sec. 1.1502-21A(c)
Example 2, last sentence. or 1.1502-21T(c). or 1.1502-21(c).
1.1503-2(h)(3), second Secs. 1.1502-21A(c) Sec. 1.1502-21A(c)
sentence. or 1.1502-21T(c)). or 1.1502-21(c).
1.1503-2A(f)(1)(i) 1.1502-21T(b)....... 1.1502-79A(a)(3).
introductory text.
1.1503-2A(f)(1)(i)(C)....... 1.1502-22T(b)....... 1.1502-22.
1.1503-2A(f)(2)(i), fourth 1.1502-21T(c)....... 1.1502-21(c).
sentence.
1.1503-2A(f)(2)(ii), last 1.1502-21T(c)....... 1.1502-21(c).
sentence.
301.6402-7(g)(2)(iii), first Sec. 1.1502-21T(b). 1.1502-21(b).
sentence.
301.6402-7(g)(3) Example 2, 1.1502-21T.......... 1.1502-21.
second sentence.
301.6402-7(g)(3) Example 2, 1.1502-21T(c)....... 1.1502-21(c).
third sentence.
301.6402-7(h)(1)(ii) Example 1.1502-21T(b) and 1.1502-21(b) and
(b), first sentence. 1.1502-22T(b). 1.1502-22(b).
------------------------------------------------------------------------
Par. 3. Section 1.1502-1 is amended by revising paragraph (f)(4) to
read as follows:
Sec. 1.1502-1 Definitions.
* * * * *
(f) * * *
(4) Predecessor 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 indirectly,
in whole or in part, by reference to the basis of the assets of the
transferor or distributor, but in the case of a transaction that occurs
before June 25, 1999, only if the amount by which basis differs from
value, in the aggregate, is material. For a transaction that occurs
before June 25, 1999, only one member may be considered a predecessor
to or a successor of one other member.
* * * * *
Par. 4. Section 1.1502-15 is added to read as follows:
Sec. 1.1502-15 SRLY limitation on built-in losses.
(a) SRLY limitation. Except as provided in paragraph (f) of this
section (relating to built-in losses of the common parent) and
paragraph (g) of this section (relating to an overlap with section
382), built-in losses are subject to the SRLY limitation under
Secs. 1.1502-21(c) and 1.1502-22(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
[[Page 36102]]
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-
21(c) or 1.1502-22(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. 1.1502-94(c) apply with
appropriate adjustments, including the following:
(i) Stock acquisition. 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.
(ii) Asset acquisition. In the case of an asset acquisition by a
group, the assets and liabilities acquired directly from the same
transferor (whether corporate or non-corporate, foreign or domestic)
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.
(iii) 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. 1.1502-21(c)(2)(iv) through
(vi) apply with appropriate adjustments.
(3) Coordination of 60 month affiliation requirement with the
overlap rule. If one or more corporations become members of a group and
are included in the determination of a net unrealized built-in loss
that is subject to the overlap rule described in paragraph (g)(1) of
this section, then for purposes of paragraph (c)(2) of this section,
such corporations that become members of the group are treated as
having been affiliated for 60 consecutive months with the common parent
of the group and are also treated as having been affiliated with any
other members who have been affiliated or are treated as having been
affiliated with the common parent at such time. The corporations are
treated as having been affiliated with such other members for the same
period of time that those members have been affiliated or are treated
as having been affiliated with the common parent. If two or more
corporations become members of the group at the same time, but this
paragraph (c)(3) does not apply to every such corporation, then
immediately after the corporations become members of the group, and
solely for purposes of paragraph (c)(2) of this section, the
corporations to which this paragraph (c)(3) applies are treated as
having not been previously affiliated with the corporations to which
this paragraph (c)(3) does not apply. If the common parent has become
the common parent of an existing group within the previous five year
period in a transaction described in Sec. 1.1502-75(d)(2)(ii) or (3),
the principles of Secs. 1.1502-91(g)(6) and 1.1502-96(a)(2)(iii) shall
apply.
(4) 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 Sec. 1.1502-91(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. (i)
Individual A owns all of the stock of P and T. T has two depreciable
assets. Asset 1 has an unrealized loss of $55 (basis $75, value
$20), and asset 2 has an unrealized gain of $20 (basis $30, value
$50). P acquires all the stock of T from Individual A during Year 1,
and T becomes a member of the P group. P's acquisition of T is not
an ownership change as defined by section 382(g). Paragraph (g) of
this section does not apply because there is not an overlap of the
application of the rules contained in paragraph (a) of this section
and section 382.
(ii) Under paragraph (b)(2)(i) of this section, and solely for
purposes of applying paragraph (b)(1) of this section, T is treated
as having an ownership change under section 382(g) on becoming a
member of the P group. Under paragraph (b)(1) of this section, none
of T's $55 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.
(iii) Under section 382(h)(3)(A), T has a $35 net unrealized
built-in loss on becoming a member of the P group (($55)+$20=($35)).
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
$55 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)(iii) 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 $55 of unrealized loss (not
just the $35 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. 1.1502-21(c)(1).
(iv) Under paragraph (b)(2)(ii) of this section, the built-in
loss would similarly be subject to a SRLY limitation under
Sec. 1.1502-21(c)(1) if T transferred all of its assets and
liabilities to a subsidiary of the P group in a single transaction
described in section 351. To the extent the built-in loss is
recognized within 5 years of T's transfer, all of the items
contributed by the acquiring subsidiary to consolidated taxable
income (and not just the items attributable to the assets and
liabilities transferred by T) are included for purposes
[[Page 36103]]
of determining the SRLY limitation under Sec. 1.1502-21(c)(1).
Example 2. Actual application of section 382 not relevant. (i)
Individual A owns all of the stock of P, and Individual B owns all
of the stock of T. T has two depreciable assets. Asset 1 has an
unrealized loss of $25 (basis $75, value $50), and asset 2 has an
unrealized gain of $20 (basis $30, value $50). P buys 55 percent of
the stock of T in January of Year 1, resulting in an ownership
change of T under section 382(g). During March of Year 2, P buys the
45 percent balance of the T stock, and T becomes a member of the P
group.
(ii) 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) solely 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.
Example 3. Determination of a recognized built-in loss of a
subgroup. (i) Individual A owns all of the stock of P, S, and M. P
and M are each common parents of a consolidated group. During Year
1, P acquires all of the stock of S from Individual A, and S becomes
a member of the P group. P's acquisition of S is not an ownership
change as defined by section 382(g). At the beginning of Year 7, M
acquires all of the stock of P from Individual A, and P and S become
members of the M group. M's acquisitions of P and S are also not
ownership changes as defined by section 382(g). 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).
(ii) 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. 1.1502-21(c).
(iii) 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 loss.) Assume that the
$65 net unrealized built-in loss exceeds the threshold requirement
under section 382(h)(3)(B).
(iv) Under paragraphs (b)(1), (b)(2)(iii), 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)(iii) 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)(iii) and (c) of this section (not just
the $55 balance of the P subgroup's $65 net unrealized built-in
loss).
(v) 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. 1.1502-21(c).
Example 4. Computation of SRLY limitation. (i) Individual A owns
all of the stock of P, the common parent of a consolidated group.
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 acquires all
the stock of T from Individual A, and T becomes a member of the P
group with a net unrealized built-in loss of $100. P's acquisition
of T is not an ownership change as defined by section 382(g). 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. 1.1502-21) 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
------------------------------------------------------------------------
(ii) 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. 1.1502-21(c).
(iii) For Year 3, Sec. 1.1502-21(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. 1.1502-21(a).
(iv) The P group's consolidated taxable income through Year 3 is
$60 when determined by reference to only T's items. Under
Sec. 1.1502-21(c), the SRLY limitation for Year 3 is therefore $60.
(v) 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. 1.1502-21(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.
(vi) 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. 1.1502-21(b). The $40 net
operating loss is treated under paragraph (a) of this section and
Sec. 1.1502-21(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-
21 (including Sec. 1.1502-21(c)) rather than this section. See also
Sec. 1.1502-21(c)(1)(iii) Example 4.
(vii) The facts are the same as in paragraphs (i) through (vi)
of this Example 4, except that T has an additional built-in loss
when it joins the P group which is recognized 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. (i) Individual A owns all of the stock of P
and T. During Year 1, P acquires all the stock of T from Individual
A, and T becomes a member of the P group. P's acquisition of T was
not an ownership change as defined by section 382(g). At the time of
acquisition, T has a noncapital 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).
(ii) 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. 1.1502-21(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. 1.1502-21(c).
(iii) For Year 2, T's SRLY limitation is the aggregate of the P
group's consolidated taxable income through Year 2 determined by
[[Page 36104]]
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. 1.1502-21(a). Consolidated
taxable income so determined is $25.
(iv) Under Sec. 1.1502-21(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 forward under the rules of Sec. 1.1502-21(b)
and absorbed under the rules of Sec. 1.1502-21(a). This loss is not
treated as arising in a SRLY (see Sec. 1.1502-21(c)(1)(ii)) and
therefore is not subject to the SRLY limitation under Sec. 1.1502-
21(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. 1.1502-21(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) Built-in losses recognized by common parent of group--(1)
General rule. Paragraph (a) of this section does not apply to any loss
recognized by the group on an asset held by the common parent on the
date the group is formed. 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.
(2) Anti-avoidance rule. If a corporation that becomes a common
parent of a group acquires assets with a net unrealized built-in loss
in excess of the threshold requirement of section 382(h)(3)(B) (and
thereby increases its net unrealized built-in loss or decreases its net
unrealized built-in gain) prior to, and in anticipation of, the
formation of the group, paragraph (f)(1) of this section does not
apply.
(g) Overlap with section 382--(1) General rule. The limitations
provided in Secs. 1.1502-21(c) and 1.1502-22(c) do not apply to
recognized built-in losses or to loss carryovers or carrybacks
attributable to recognized built-in losses when the application of
paragraph (a) of this section results in an overlap with the
application of section 382.
(2) Definitions--(i) Generally. For purposes of this paragraph (g),
the definitions and nomenclature contained in section 382, the
regulations thereunder, and Secs. 1.1502-90 through 1.1502-99 apply.
(ii) Overlap--(A) An overlap of the application of paragraph (a) of
this section and the application of section 382 with respect to built-
in losses occurs if a corporation becomes a member of a consolidated
group (the SRLY event) within six months of the change date of an
ownership change giving rise to a section 382(a) limitation that would
apply with respect to the corporation's recognized built-in losses (the
section 382 event). Except as provided in paragraph (g)(3) of this
section, application of the overlap rule does not require that the size
and composition of the corporation's net unrealized built-in loss is
the same on the date of the section 382 event and the SRLY event.
(B) For special rules in the event that there is a SRLY subgroup
and/or a loss subgroup as defined in Sec. 1.1502-91(d)(2) with respect
to built-in losses, see paragraph (g)(4) of this section.
(3) Operating rules--(i) Section 382 event before SRLY event. If a
SRLY event occurs on the same date as a section 382 event or within the
six month period beginning on the date of the section 382 event,
paragraph (g)(1) of this section applies beginning with the tax year
that includes the SRLY event. Paragraph (g)(1) of this section does not
apply, however, if a corporation that would otherwise be subject to the
overlap rule acquires assets from a person other than a member of the
group with a net unrealized built-in loss in excess of the threshold
requirement of section 382(h)(3)(B) (and thereby increases its net
unrealized built-in loss) after the section 382 event, and before the
SRLY event.
(ii) SRLY event before section 382 event. If a section 382 event
occurs within the period beginning the day after the SRLY event and
ending six months after the SRLY event, paragraph (g)(1) of this
section applies starting with the first tax year that begins after the
section 382 event. However, paragraph (g)(1) of this section does not
apply at any time if a corporation that otherwise would be subject to
paragraph (g)(1) of this section transfers assets with an unrealized
built-in loss to another member of the group after the SRLY event, but
before the section 382 event, unless the corporation recognizes the
built-in loss upon the transfer.
(4) Subgroup rules. In general, in the case of built-in losses for
which there is a SRLY subgroup and the corporations joining the group
at the time of the SRLY event also constitute a loss subgroup (as
defined in Sec. 1.1502-91(d)(2)), the principles of this paragraph (g)
apply to the SRLY subgroup, and not separately to its members. However,
paragraph (g)(1) of this section applies with respect to built-in
losses only if--
(i) all members of the SRLY subgroup with respect to those built-in
losses are also included in a loss subgroup; and
(ii) all members of a loss subgroup are also members of a SRLY
subgroup with respect to those built-in losses.
(5) Asset acquisitions. Notwithstanding the application of this
paragraph (g), paragraph (a) of this section applies to asset
acquisitions by the corporation that occurs after the latter of the
SRLY event and the section 382 event. See, paragraph (b)(2)(ii) of this
section.
(6) Examples. The principles of this paragraph (g) are illustrated
by the following examples:
Example 1. Determination of subgroup. (i) Individual A owns all
of the stock of P, P1, and S. In Year 1, P acquires all of the stock
of P1, and they file a consolidated return. In Year 3, P acquires
all of the stock of S, and S joins the P group. Individual B,
unrelated to Individual A, owns all of the stock of M and K, each
the common parent of a consolidated group. Individual C, unrelated
to either Individual A or Individual B, owns all of the stock of T.
(ii) At the beginning of Year 7, M acquires all of the stock of
P from Individual A, and, as a result, P, P1, and S become members
of the M group. At the time of M's acquisition of the P stock, P has
a $15 net unrealized built-in loss (disregarding the stock of P1),
P1 has a net unrealized built-in gain of $10, and S has a net
unrealized built-in gain of $5.
(iii) During Year 8, M acquires all of the stock of T, and T
joins the M group. At the time of M's acquisition of the T stock, T
had an unrealized built-in loss of $15. At the beginning of Year 9,
K acquires all of the stock of M from Individual B, and the members
of the M consolidated group including P, P1, S, and T become members
of the K group. At the time of K's acquisition of the M stock, M has
(disregarding the stock of P and T) a $15 net unrealized built-in
loss, P has a $20 net unrealized built-in loss (disregarding the
stock of P1), P1 has a net unrealized built-in gain of $5, S has a
net unrealized built-in loss of $35, and T has a $15 net unrealized
built-in loss.
(iv) M's acquisition of P in Year 7 results in P, P1, and S
becoming members of the M group (the SRLY event). Under paragraph
(c) of this section, P and P1 compose a SRLY built-in loss subgroup
because they have been affiliated for the 60 consecutive month
period immediately preceding joining the M group. S is not a member
of the subgroup because on becoming a member of the M group it had
not been continuously affiliated with P and P1 for the 60 month
period ending immediately before it became a member of the M group.
Consequently, Sec. 1.1502-15 applies to S separately from the P and
P1 subgroup.
(v) Assuming that the $5 net unrealized built-in loss of the P/
P1 subgroup exceeds the threshold requirement under section
382(h)(3)(B), M's acquisition of P resulted in an ownership change
of P and P1 within the
[[Page 36105]]
meaning of section 382(g) that subjects P and P1 to a limitation
under section 382(a) (the section 382 event). Because, with respect
to P and P1, the SRLY event and the change date of the section 382
event occur on the same date and because the loss subgroup and SRLY
subgroup are coextensive, there is an overlap of the application of
the SRLY rules and the application of the section 382.
(vi) S was not a loss corporation because it did not have a net
operating loss carryover, or a net unrealized built-in loss, and
therefore, M's acquisition of P did not result in an ownership
change of S within the meaning of section 382(g). S, therefore is
not subject to the overlap rule of paragraph (g) of this section.
(vii) M's acquisition of T resulted in T becoming a member of
the M group (the SRLY event). Assuming that T's $15 net unrealized
built-in loss exceeds the threshold requirement under section
382(h)(3)(B), M's acquisition of T also resulted in an ownership
change of T within the meaning of section 382(g) that subjects T to
a limitation under section 382(a) (the section 382 event). Because,
with respect to T, the SRLY event and the change date of the section
382 event occur on the same date, there is an overlap of the
application of the SRLY rules and the application of section 382
within the meaning of paragraph (g) of this section.
(viii) K's acquisition of M results in the members of the M
consolidated group, including T, P, P1, and S, becoming members of
the K group (the SRLY event). Because T, P, and P1 were each
included in the determination of a net unrealized built-in loss that
was subject to the overlap rule described in paragraph (g)(1) of
this section when they each became members of the M group, they are
deemed under paragraph (c)(3) of this section to have been
continuously affiliated with M for the 60 month period ending
immediately before becoming a member of the M group, notwithstanding
their actual affiliation history. As a result, M, T, P, and P1
compose a SRLY built-in loss subgroup under paragraph (c)(2) of this
section. K's acquisition of M is not subject to paragraph (g) of
this section because it does not result in a section 382 event.
(ix) S, however, is not a member of the subgroup under paragraph
(c)(2) of this section. Because S was not included in the
determination of a net unrealized built-in loss that was subject to
the overlap rule described in paragraph (g)(1) of this section when
it joined the M group, S is treated as becoming an affiliate of M on
the date it joined the M group. Furthermore, under paragraph (c)(3)
of this section, S is deemed to have begun its affiliation with P
and P1 on the date it joined the M group. Consequently, Sec. 1.1502-
15 applies to S separately to the extent its built-in loss is
recognized with the recognition period.
Example 2. Post-overlap acquisition of assets. (i) Individual A
owns all of the stock of P, the common parent of a consolidated
group. B, an individual unrelated to Individual A, owns all of the
stock of T. T has two depreciable assets. Asset 1 has an unrealized
built-in loss of $25 (basis $75, value $50), and asset 2 has an
unrealized built-in gain of $20 (basis $30, value $50). During Year
3, P buys all of the stock of T from Individual B. On January 1,
Year 4, P contributes $80 cash and Individual A contributes asset 3,
a depreciable asset, with a net unrealized built-in loss of $45
(basis $65, value $20), in exchange for T stock in a transaction
that is described in section 351.
(ii) P's acquisition of T results in T becoming a member of the
P group (the SRLY event) and also results in an ownership change of
T, within the meaning of section 382(g), that gives rise to a
limitation under section 382(a) (the section 382 event).
(iii) Because the SRLY event and the change date of the section
382 event occur on the same date, there is an overlap of the
application of the SRLY rules and the application of section 382.
Consequently, under paragraph (g) of this section, the limitation
under paragraph (a) of this section does not apply to T's net
unrealized built-in loss when it joined the P group.
(iv) Individual A's Year 4 contribution of a depreciable asset
occurred after T was a member of the P group. Assuming that the
amount of the net unrealized built-in loss exceeds the threshold
requirement of section 382(h)(3)(B), the sale of asset 3 within the
recognition period is subject to the SRLY limitation of paragraphs
(a) and (b)(2)(ii) of this section.
Example 3. Overlap rule. (i) Individual A owns all of the stock
of P, the common parent of a consolidated group. B, an individual
unrelated to Individual A, owns all of the stock of T. T has two
depreciable assets. Asset 1 has an unrealized loss of $55 (basis
$75, value $20), and asset 2 has an unrealized gain of $30 (basis
$30, value $60). On February 28 of Year 2, P purchases 55% of T from
Individual B. On June 30, of Year 2, P purchases an additional 35%
of T from Individual B.
(ii) The February 28 purchase of 55% of T is a section 382 event
because it results in an ownership change of T that gives rise to a
section 382(a) limitation. The June 30 purchase of 35% of T results
in T becoming a member of the P group and is therefore a SRLY event.
(iii) Because the SRLY event occurred within six months of the
change date of the section 382 event, there is an overlap of the
application of the SRLY rules and the application of section 382,
and paragraph (a) of this section does not apply. Therefore, the
SRLY limitation does not apply to any of the $55 loss in asset 1
recognized by T after T joined the P group. See Sec. 1.1502-94 for
rules relating to the application of section 382 with respect to T's
$25 unrealized built-in loss.
Example 4. Overlap rule-Fluctuation in value. (i) The facts are
the same as in Example 3, except that by June 30, of Year 2, asset 1
had declined in value by a further $10. Thus asset 1 had an
unrealized loss of $65 (basis $75, value $10), and asset 2 had an
unrealized gain of $30 (basis $30, value $60).
(ii) Because paragraph (a) of this section does not apply, the
further decrease in asset 1's value is disregarded. Consequently,
the results are the same as in Example 3.
(h) Effective date--(1) In general. This section generally applies
to built-in losses recognized in taxable years for which the due date
(without extensions) of the consolidated return is after June 25, 1999.
However--
(i) In the event that paragraphs (f)(1) and (g)(1) of this section
do not apply to a particular built-in loss in the current group, then
solely for purposes of applying paragraph (a) of this section to
determine a limitation with respect to that built-in loss and with
respect to which the SRLY register (consolidated taxable income
determined by reference to only the member's (or subgroup's) items of
income, gain, deduction or loss) began in a taxable year for which the
due date of the return was on or before June 25, 1999, paragraph (c)(3)
of this section shall not apply; and
(ii) For purposes of paragraph (g) of this section, only an
ownership change to which section 382(a) as amended by the Tax Reform
Act of 1986 applies shall constitute a section 382 event.
(2) Prior periods. For certain taxable years ending on or before
June 25, 1999, see Sec. 1.1502-15T in effect prior to June 25, 1999, as
contained in 26 CFR part 1 revised April 1, 1999, as applicable.
Sec. 1.1502-15T [Removed]
Par. 5. Section 1.1502-15T is removed.
Par. 6. Section 1.1502-21 is added to read as follows:
Sec. 1.1502-21 Net operating losses.
(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
[[Page 36106]]
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. Additional rules provided under the Internal
Revenue Code or regulations also apply. See, e.g., section 382(l)(2)(B)
(if losses are carried from the same taxable year, losses subject to
limitation under section 382 are absorbed before losses that are not
subject to limitation under section 382). 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.
(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. For rules concerning a
member departing a subgroup, see paragraph (c)(2)(vii) of this section.
(B) Offspring rule. In the case of a member that has been a member
continuously since its organization (determined without regard to
whether the member is a successor to any other corporation), the CNOL
attributable to the member is included in the carrybacks to
consolidated return years before the member's existence. 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 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. (i) During Year 1, Individual A forms
P and T, and they each file a separate return. P forms S on March 15
of Year 2, and P and S file a consolidated return. P acquires all
the stock of T from Individual A at the beginning of Year 3, and T
becomes a member of the P group. P's acquisition of T is not an
ownership change within the meaning of section 382. 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.
(ii) 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 1, and if not absorbed in Year 1, then to Year 2.
Example 2. Departing members. (i) 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.
(ii) $600 of the Year 3 CNOL attributable to T is apportioned to
T and is carried back to its separate return in Year 1. To the
extent the $600 is not absorbed in T's separate return in Year 1 or
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 1 or Year 2 or in the P group's Year 4
is then carried to T's separate return in Year 4.
Example 3. Offspring rule following acquisition. (i) Individual
A owns all of the stock of P, the common parent of a consolidated
group. In Year 1, B, an individual unrelated to Individual A, forms
T. P acquires all of the stock of T at the beginning of Year 3, and
T becomes a member of the P group. The P group has $200 of
consolidated taxable income in Year 2, and $300 of consolidated
taxable income in Year 3 (computed without regard to the CNOL
deduction). At the beginning of Year 4, T forms a subsidiary, Y, in
a transaction described in section 351. The P group has a $300
consolidated net operating loss in Year 4, and under paragraph
(b)(2)(iv) of this section, the loss is attributable entirely to Y.
(ii) Even though Y was not in existence in Year 2, $300, the
amount of the consolidated net operating loss attributable to Y, may
be carried back to the P group's Year 2 consolidated return under
paragraph (b)(2)(ii)(B) of this section because Y has been a member
of the P group since its organization. To the extent not absorbed in
that year, the loss may then be carried to the P group's
consolidated return in Year 3.
(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. Except as provided in paragraph (b)(3)(ii)(B) of this
section, the election may not be made separately for any
[[Page 36107]]
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-
21(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 elections--(A) 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.
(B) Acquisition of member from another consolidated group. If one
or more members of a consolidated group becomes a member of another
consolidated group, the acquiring group may make an irrevocable
election to relinquish, with respect to all consolidated net operating
losses attributable to the member, the portion of the carryback period
for which the corporation was a member of another group, provided that
any other corporation joining the acquiring group that was affiliated
with the member immediately before it joined the acquiring group is
also included in the waiver. This election is not a yearly election and
applies to all losses that would otherwise be subject to a carryback to
a former group under section 172. The election must be made in a
separate statement entitled ``THIS IS AN ELECTION UNDER SECTION 1.1502-
21(b)(3)(ii)(B) TO WAIVE THE PRE-[insert first taxable year for which
the member (or members) was not a member of another group] CARRYBACK
PERIOD FOR THE CNOLs attributable to [insert names and employer
identification number of members].'' The statement must be filed with
the acquiring consolidated group's original income tax return for the
year the corporation (or corporations) became a member, and it must be
signed by the common parent and each of the members to which it
applies.
(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. Except as provided in paragraph (g) of this section (relating to
an overlap with section 382), 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. 1.1502-15 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. 1.1502-15), 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 illustration, see
Sec. 1.1502-15(d), Example 5. But see Sec. 1.1502-15(g)(1).
(iii) Examples. The principles of this paragraph (c)(1) are
illustrated by the following examples:
Example 1. Determination of SRLY limitation. (i) Individual A
owns P. In Year 1, Individual A forms T, and T sustains a $100 net
operating loss that is carried forward. P acquires 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.
(ii) T's $100 net operating loss carryover from Year 1 arose in
a SRLY. See Sec. 1.1502-1(f)(2)(iii). P's acquisition of T was not
an ownership change as defined by section 382(g). 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.
(iii) The facts are the same as in paragraph (i) 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) for
Year 2 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 paragraph (c) of this section 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. (i) 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. Individual A also
owns T which sustains a net operating loss of $50 in Year 2 that is
carried forward. P acquires the stock of T from Individual A 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:
[[Page 36108]]
----------------------------------------------------------------------------------------------------------------
Separate Separate Separate/ Consolidated
-------------------------------- affiliated ---------------
----------------
Year 1 Year 2 Year 3 Year 4
----------------------------------------------------------------------------------------------------------------
P............................................... $ (40) $0 $ (120) $90
T............................................... 0 (50) (60) 70
---------------
CTI............................................. .............. .............. .............. 160
----------------------------------------------------------------------------------------------------------------
(ii) 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.
(iii) T's Year 2 and Year 3 are SRLYs with respect to the P
group. See Sec. 1.1502-1(f)(2)(ii). P's acquisition of T was not an
ownership change as defined by section 382(g). 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.
(iv) 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 = $20/($120 + $20) x $70
= $10.
(v) 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).
(vi) 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 is $66, which includes $60 of P's Year 3
loss and $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. (i) 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
----------------------------------------------------------------------------------------------------------------
(ii) 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.
(iii) 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 paragraph (c) of this section
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). The
$30 loss is carried forward to T's Year 5 and succeeding taxable
years as provided under the Internal Revenue Code.
Example 4. Computation of SRLY limitation for built-in losses
treated as net operating loss carryovers. (i) Individual A owns P.
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 $100. At the beginning of Year 3, P acquires all the stock
of T from Individual A, and T becomes a member of the P group in a
transaction that does not result in an ownership change under
section 382(g). 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 this section):
------------------------------------------------------------------------
Year 3 Year 4 Total
------------------------------------------------------------------------
P group (without T).......................... $100 $100 $200
T............................................ 60 40 100
CTI.......................................... 160 140 300
------------------------------------------------------------------------
(ii) Under Sec. 1.1502-15(a), T's $100 of ordinary loss in Year
3 constitutes a built-in loss that is subject to the SRLY limitation
under paragraph (c) of this section. 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.
(iii) Under Sec. 1.1502-15(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 paragraph (c)(1)(ii)
of this section, 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.
(iv) 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.
[[Page 36109]]
Example 5. Dual SRLY registers and accounting for SRLY losses
actually absorbed. (i) In Year 1, T sustains a $ 100 net operating
loss and a $50 net capital loss. At the beginning of Year 2, T
becomes a member of the P group in a transaction that does not
result in an ownership change under section 382(g). Both of T's
carryovers from Year 1 are subject to SRLY limits under this
paragraph (c) and Sec. 1.1502-22(c). The members of the P group
contribute the following to the consolidated taxable income for
Years 2 and 3 (computed without regard to T's CNOL deduction under
this section or net capital loss carryover under Sec. 1.1502-22):
------------------------------------------------------------------------
P T
------------------------------------------------------------------------
Year 1 (SRLY)
------------------------------------------------------------------------
Ordinary.............................................. ....... (100)
Capital............................................... ....... (50)
------------------------------------------------------------------------
Year 2
------------------------------------------------------------------------
Ordinary.............................................. 30 60
Capital............................................... 0 (20)
------------------------------------------------------------------------
Year 3
------------------------------------------------------------------------
Ordinary.............................................. 10 40
Capital............................................... 0 30
------------------------------------------------------------------------
(ii) For Year 2, the group computes separate SRLY limits for
each of T's SRLY carryovers from Year 1. The group determines its
ability to use its capital loss carryover before it determines its
ability to use its ordinary loss carryover. Under section 1212,
because the group has no Year 2 capital gain, it cannot absorb any
capital losses in Year 2. T's Year 1 net capital loss and the
group's Year 2 consolidated net capital loss (all of which is
attributable to T) are carried over to Year 3.
(iii) Under this section, the aggregate amount of T's $100 net
operating loss carryover from Year 1 that may be included in the
CNOL deduction of the group for Year 2 may not exceed $60--the
amount of the consolidated taxable income computed by reference only
to T's items, including losses and deductions to the extent actually
absorbed (i.e., $60 of T's ordinary income for Year 2). Thus, the
group may include $60 of T's ordinary loss carryover from Year 1 in
its Year 2 CNOL deduction. T carries over its remaining $40 of its
Year 1 loss to Year 3.
(iv) For Year 3, the group again computes separate SRLY limits
for each of T's SRLY carryovers from Year 1. The group has
consolidated net capital gain (without taking into account a net
capital loss carryover deduction) of $30. Under Sec. 1.1502-22(c),
the aggregate amount of T's $50 capital loss carryover from Year 1
that may be included in computing the group's consolidated net
capital gain for all years of the group (here Years 2 and 3) may not
exceed $30 (the aggregate consolidated net capital gain computed by
reference only to T's items, including losses and deductions
actually absorbed (i.e., $30 of capital gain in Year 3)). Thus, the
group may include $30 of T's Year 1 capital loss carryover in its
computation of consolidated net capital gain for Year 3, which
offsets the group's capital gains for Year 3. T carries over its
remaining $20 of its Year 1 loss to Year 4. The group carries over
the Year 2 consolidated net capital loss to Year 4.
(v) Under this section, the aggregate amount of T's net
operating loss carryover from Year 1 that may be included in the
CNOL deduction of the group for Years 2 and 3 may not exceed $100,
which is the amount of the aggregate consolidated taxable income for
Years 2 and 3 determined by reference only to T's items, including
losses and deductions actually absorbed (i.e., $60 of ordinary
income in Year 2 plus $40 of ordinary income, $30 of capital gain,
and $30 of SRLY capital losses actually absorbed in Year 3). The
group included $60 of T's ordinary loss carryover in its Year 2 CNOL
deduction. It may include the remaining $40 of the carryover in its
Year 3 CNOL deduction.
(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)(viii) 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), or for a carryover that was subject to the
overlap rule described in paragraph (g) of this section or Sec. 1.1502-
15(g) with respect to another group (the former 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)(viii) 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. 1.1502-15(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 paragraphs (c)(2) (i) and (ii) of this section
to a group or former group is a reference to the subgroup determined
under Sec. 1.1502-15(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
[[Page 36110]]
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 Internal Revenue 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) Corporations that leave a SRLY subgroup. If a loss member
ceases to be affiliated with a SRLY subgroup, the amount of the
member's remaining SRLY loss from a specific year is determined by
multiplying the aggregate of the unabsorbed net operating loss
carryovers of the SRLY subgroup from that year by a fraction, the
numerator of which is the net operating loss carryover for that year
that the member leaving the subgroup had when it became a member of the
group, and the denominator of which is the aggregate of the net
operating loss carryovers of the members of the SRLY subgroup for that
year when they joined the group. The unabsorbed net operating loss
carryovers of the SRLY subgroup are those carryovers that have not been
absorbed by the group as of the end of the taxable year in which the
loss member leaves the group.
(viii) Examples. The principles of this paragraph (c)(2) are
illustrated by the following examples:
Example 1. Members of SRLY subgroups. (i) Individual A owns all
of the stock of P, S, T and M. P and M are each common parents of a
consolidated group. During Year 1, P sustains a $50 net operating
loss. At the beginning of Year 2, P acquires all the stock of S at a
time when the aggregate basis of S's assets exceeds their aggregate
value by $70 and S becomes a member of the P group. At the beginning
of Year 3, P acquires 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. During
Year 7, M acquires all of the 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. None of the transactions
described above resulted in an ownership change under section
382(g).
(ii) 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.
(iii) 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.
(iv) 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. 1.1502-15 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, and because 100 percent of S1's stock is owned
directly by corporations that were members of the SRLY subgroup when
the members of the SRLY subgroup became members of the P group, its
net positive income is not excluded from the consolidated taxable
income of the P group that may be offset by the built-in loss. See
paragraph (f) of this section.
(v) 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. 1.1502-15(c). Consequently, in Year 7, S, S1, and P compose a
subgroup in the M group with respect to S's unrealized loss. Because
S1 was a member of the SRLY subgroup when it became a member of the
M group and also because 100 percent of S1's stock is owned directly
by corporations that were members of the SRLY subgroup when the
members of the SRLY subgroup became members of the M group its net
positive income is not excluded from the consolidated taxable income
of the M group that may be offset by the recognized built-in loss.
See paragraph (f) of this section.
(vi) 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 T's
loss carryover was not subject to the overlap rule described in
paragraph (g) of this section with respect to the P group (the
former group). Thus, P, S, and S1 are not members of a SRLY subgroup
with respect to the T 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; and, because 100 percent of
T1's stock is owned directly by corporations that were members of
the SRLY subgroup when the members of the SRLY subgroup became
members of the P group, its net positive income is not excluded from
the consolidated taxable income of the P group that may be offset by
the carryover. See paragraph (f) of this section.
(vii) 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. Because T1 was a member of the SRLY subgroup when it
became a member of the M group and also because 100 percent of T1's
stock is owned directly by corporations that were members of the
SRLY subgroup when the members of the SRLY subgroup became members
of the M group, its net positive income is not excluded from the
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. (i)
Individual A owns all of the stock of S, T, P and M. P and M are
each common parents of a consolidated group. In Year 2, P acquires
all the stock of S and T from Individual A, 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. None of the transactions described
above resulted in an ownership change under section 382(g).
(ii) 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.
(iii) In Year 4, the M group has $10 of consolidated taxable
income (computed without regard to the CNOL deduction for Year 4).
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
[[Page 36111]]
net operating loss carryover is included in the CNOL deduction under
paragraph (a) of this section in Year 4.
(iv) 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. (i)
Individual A owns all of the stock of S, T, P and M. S, P and M are
each common parents of a consolidated group. At the beginning of
Year 1, S acquires all the stock of T from Individual A, 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 acquires 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. None of the transactions described above resulted in an
ownership change under section 382(g).
(ii) 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.
(iii) 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. (i) Individual A owns all of the stock of P and M. 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 Year 1 loss to Year 3.
(ii) 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 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.
(ix) Application to other than loss carryovers. Paragraph (g) of
this section and the phrase ``or for a carryover that was subject to
the overlap rule described in paragraph (g) of this section or
Sec. 1.1502-15(g) with respect to another group (the former group)'' in
paragraph (c)(2) of this section apply only to net operating loss
carryovers and net capital loss carryovers, and not with respect to
other tax attributes, such as credits. Accordingly, as the context may
require, if another regulation references this section and such other
regulation does not concern net operating loss carryovers or net
capital loss carryovers, then such reference does not include a
reference to such paragraph or phrase.
(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--(i) General rule. Except as
provided in paragraph (f)(2)(ii) of this section, if a successor's
items of income and gain exceed the successor's items of deduction and
loss (net positive income), then the net positive income attributable
to the successor is excluded from the computation of the consolidated
taxable income of a SRLY subgroup.
(ii) Exceptions. A successor's net positive income is not excluded
from the consolidated taxable income of a SRLY subgroup if--
(A) The successor acquires substantially all the assets and
liabilities of its predecessor and the predecessor ceases to exist;
(B) The successor was a member of the SRLY subgroup when the SRLY
subgroup members became members of the group;
(C) 100 percent of the stock of the successor is owned directly by
corporations that were members of the SRLY subgroup when the SRLY
subgroup members became members of the group; or
(D) The Commissioner so determines.
(g) Overlap with section 382--(1) General rule. The limitation
provided in paragraph (c) of this section does not apply to net
operating loss carryovers (other than a hypothetical carryover
[[Page 36112]]
described in paragraph (c)(1)(i)(D) of this section and a carryover
described in paragraph (c)(1)(ii) of this section) when the application
of paragraph (c) of this section results in an overlap with the
application of section 382. For a similar rule applying in the case of
net operating loss carryovers described in paragraphs (c)(1)(i)(D) and
(c)(1)(ii) of this section, see Sec. 1.1502-15(g).
(2) Definitions--(i) Generally. For purposes of this paragraph (g),
the definitions and nomenclature contained in section 382, the
regulations thereunder, and Secs. 1.1502-90 through 1.1502-99 apply.
(ii) Overlap. (A) An overlap of the application of paragraph (c) of
this section and the application of section 382 with respect to a net
operating loss carryover occurs if a corporation becomes a member of a
consolidated group (the SRLY event) within six months of the change
date of an ownership change giving rise to a section 382(a) limitation
with respect to that carryover (the section 382 event).
(B) If an overlap described in paragraph (g)(2)(ii)(A) of this
section occurs with respect to net operating loss carryovers of a
corporation whose SRLY event occurs within the six month period
beginning on the date of a section 382 event, then an overlap is
treated as also occurring with respect to that corporation's net
operating loss carryover that arises within the period beginning with
the section 382 event and ending with the SRLY event.
(C) For special rules in the event that there is a SRLY subgroup
and/or a loss subgroup as defined in Sec. 1.1502-91(d)(1) with respect
to a carryover, see paragraph (g)(4) of this section.
(3) Operating rules--(i) Section 382 event before SRLY event. If a
SRLY event occurs on the same date as a section 382 event or within the
six month period beginning on the date of the section 382 event,
paragraph (g)(1) of this section applies beginning with the tax year
that includes the SRLY event.
(ii) SRLY event before section 382 event. If a section 382 event
occurs within the period beginning the day after the SRLY event and
ending six months after the SRLY event, paragraph (g)(1) of this
section applies starting with the first tax year that begins after the
section 382 event.
(4) Subgroup rules. In general, in the case of a net operating loss
carryover for which there is a SRLY subgroup and a loss subgroup (as
defined in Sec. 1.1502-91(d)(1)), the principles of this paragraph (g)
apply to the SRLY subgroup, and not separately to its members. However,
paragraph (g)(1) of this section applies--
(i) With respect to a carryover described in paragraph
(g)(2)(ii)(A) of this section only if--
(A) All members of the SRLY subgroup with respect to that carryover
are also included in a loss subgroup with respect to that carryover;
and
(B) All members of a loss subgroup with respect to that carryover
are also members of a SRLY subgroup with respect to that carryover; and
(ii) With respect to a carryover described in paragraph (g)(2)(ii)
(B) of this section only if all members of the SRLY subgroup for that
carryover are also members of a SRLY subgroup that has net operating
loss carryovers described in paragraph (g)(2)(ii)(A) of this section
that are subject to the overlap rule of paragraph (g)(1) of this
section.
(5) Examples. The principles of this paragraph (g) are illustrated
by the following examples:
Example 1. Overlap--Simultaneous Acquisition. (i) Individual A
owns all of the stock of P, which in turn owns all of the stock of
S. P and S file a consolidated return. In Year 2, B, an individual
unrelated to Individual A, forms T which incurs a $100 net operating
loss for that year. At the beginning of Year 3, S acquires T.
(ii) S's acquisition of T results in T becoming a member of the
P group (the SRLY event) and also results in an ownership change of
T, within the meaning of section 382(g), that gives rise to a
limitation under section 382(a) (the section 382 event) with respect
to the T carryover.
(iii) Because the SRLY event and the change date of the section
382 event occur on the same date, there is an overlap of the
application of the SRLY rules and the application of section 382.
(iv) Consequently, under this paragraph (g), in Year 3 the SRLY
limitation does not apply to the Year 2 $100 net operating loss.
Example 2. Overlap--Section 382 event before SRLY event. (i)
Individual A owns all of the stock of P, which in turn owns all of
the stock of S. P and S file a consolidated return. In Year 1, B, an
individual unrelated to Individual A, forms T which incurs a $100
net operating loss for that year. On February 28 of Year 2, S
purchases 55% of T from Individual B. On June 30, of Year 2, S
purchases an additional 35% of T from Individual B.
(ii) The February 28 purchase of 55% of T is a section 382 event
because it results in an ownership change of T, under section
382(g), that gives rise to a section 382(a) limitation with respect
to the T carryover. The June 30 purchase of 35% of T results in T
becoming a member of the P group and is therefore a SRLY event.
(iii) Because the SRLY event occurred within six months of the
change date of the section 382 event, there is an overlap of the
application of the SRLY rules and the application of section 382.
(iv) Consequently, under paragraph (g) of this section, in Year
2 the SRLY limitation does not apply to the Year 1 $100 net
operating loss.
Example 3. No overlap--Section 382 event before SRLY event. (i)
The facts are the same as in Example 2 except that Individual B does
not sell the additional 35% of T to S until September 30, Year 2.
(ii) The February 28 purchase of 55% of T is a section 382 event
because it results in an ownership change of T, under section
382(g), that gives rise to a section 382(a) limitation with respect
to the T carryover. The September 30 purchase of 35% of T results in
T becoming a member of the P group and is therefore a SRLY event.
(iii) Because the SRLY event did not occur within six months of
the change date of the section 382 event, there is no overlap of the
application of the SRLY rules and the application of section 382.
Consequently, the Year 1 net operating loss is subject to a SRLY
limitation and a section 382 limitation.
Example 4. Overlap--SRLY event before section 382 event. (i) P
and S file a consolidated return. S has owned 40% of T for 6 years.
For Year 6, T has an net operating loss of $500 that is carried
forward. On March 31, Year 7, S acquires an additional 40% of T, and
on August 31, Year 7, S acquires the remaining 20% of T.
(ii) The March 31 purchase of 40% of T results in T becoming a
member of the P group and is therefore a SRLY event. The August 31
purchase of 20% of T is a section 382 event because it results in an
ownership change of T, under section 382(g), that gives rise to a
section 382(a) limitation with respect to the T carryover.
(iii) Because the SRLY event occurred within six months of the
change date of the section 382 event, there is an overlap of the
application of the SRLY rules and the application of section 382
within the meaning of this paragraph (g).
(iv) Under this paragraph (g), the SRLY rules of paragraph (c)
of this section will apply to the Year 7 tax year. Beginning in Year
8 (the year after the section 382 event), any unabsorbed portion of
the Year 6 net operating loss will not be subject to a SRLY
limitation.
Example 5. Overlap--Coextensive subgroups. (i) Individual A owns
all of the stock of S, which in turn owns all of the stock of T. S
and T file a consolidated return beginning in Year 1. B, an
individual unrelated to A, owns all of the stock of P, the common
parent of a consolidated group. In Year 2, the S group has a $200
consolidated net operating loss which is carried forward, of which
$100 is attributable to S, and $100 is attributable to T. At the
beginning of Year 3, the P group acquires all of the stock of S from
Individual A.
(ii) P's acquisition of S results in S and T becoming members of
the P group (the SRLY event). With respect to the Year 2 net
operating loss carryover, S and T compose a SRLY subgroup under
paragraph (c)(2) of this section.
(iii) S and T also compose a loss subgroup under Sec. 1.1502-
91(d)(1) with respect to the Year 2 net operating loss carryover.
P's acquisition also results in an ownership
[[Page 36113]]
change of S, the subgroup parent, within the meaning of section
382(g), that gives rise to a limitation under section 382(a) (the
section 382 event) with respect to the Year 2 carryover.
(iv) Because the SRLY event and the change date of the section
382 event occur on the same date, there is an overlap of the
application of the SRLY rules and the application of section 382
within the meaning of paragraph (g) of this section. Because the
SRLY subgroup and the loss subgroup are coextensive, under paragraph
(g) of this section, the SRLY limitation does not apply to the Year
2 $200 net operating loss.
Example 6. No Overlap--Different subgroups. (i) Individual B
owns all of the stock of P, the common parent of a consolidated
group. P owns all of the stock of S and all of the stock of T.
Individual A owns all of the stock of X, the common parent of
another consolidated group. In Year 1, the P group has a $200
consolidated net operating loss, of which $100 is attributable to S
and $100 is attributable to T. At the beginning of Year 3, the X
group acquires all of the stock of S and T from P and does not make
an election under Sec. 1.1502-91(d)(4) (concerning an election to
treat the loss subgroup parent requirement as having been
satisfied).
(ii) X's acquisition of S and T results in S and T becoming
members of the X group (the SRLY event). With respect to the Year 1
net operating loss, S and T compose a SRLY subgroup under paragraph
(c)(2) of this section.
(iii) S and T do not bear (and are not treated as bearing) a
section 1504(a)(1) relationship. Therefore S and T do not qualify as
a loss subgroup under Sec. 1.1502-91(d)(1). X's acquisition of S and
T results in separate ownership changes of S and T, that give rise
to separate limitations under section 382(a) (the section 382
events) with respect to each of S and T's Year 1 net operating loss
carryovers. See Sec. 1.1502-94.
(iv) The SRLY event and the change dates of the section 382
events occur on the same date. However, paragraph (g)(1) of this
section does not apply because the SRLY subgroup (composed of S and
T) is not coextensive with a loss subgroup with respect to the Year
1 carryovers. Consequently, the Year 1 net operating loss is subject
to both a SRLY subgroup limitation and also separate section 382
limitations for each of S and T.
Example 7. No Overlap--Different subgroups. (i) Individual A
owns all of the stock of T and all of the stock of S, the common
parent of a consolidated group. B, an individual unrelated to
Individual A, owns all of the stock of P, the common parent of
another consolidated group. In Year 1, T has a net operating loss of
$100 that is carried forward. At the end of Year 2, S acquires all
of the stock of T from Individual A. In Year 3, the S group sustains
a $200 consolidated net operating loss that is carried forward. In
Year 8, the P group acquires all of the stock of S from Individual
A.
(ii) S's acquisition of T in Year 1 results in T becoming a
member of the S group. The acquisition, however, did not result in
an ownership change under section 382(g). As a result, T's Year 1
net operating loss is subject to SRLY within the S group. At the end
of Year 7, Sec. 1.1502-96(a) treats T's Year 1 net operating loss as
not having arisen in a SRLY with respect to the S group. Section
1.1502-96(a), however, applies only for purposes of Secs. 1.1502-91
through 1.1502-96 and Sec. 1.1502-98 but not for purposes of this
section. See Sec. 1.1502-96(a)(5).
(iii) P's acquisition of S in Year 8 results in S and T becoming
members of the P group (the SRLY event). With respect to the Year 1
net operating loss, S and T do not compose a SRLY subgroup under
paragraph (c)(2) of this section.
(iv) S and T compose a loss subgroup under Sec. 1.1502-91(d)(1)
with respect to the Year 1 net operating loss carryover. P's
acquisition of S results in an ownership change of the loss
subgroup, within the meaning of section 382(g), that gives rise to a
subgroup limitation under section 382(a) (the section 382 event)
with respect to that carryover.
(v) The SRLY event and the change date of the section 382 event
occur on the same date. However, under paragraph (g)(4) of this
section, because the SRLY subgroup and the loss subgroup are not
coextensive, T's Year 1 net operating loss carryover is subject to a
SRLY limitation.
(vi) With respect to the Year 3 net operating loss carryover, S
and T compose both a SRLY subgroup and a loss subgroup under
Sec. 1.1502-91(d)(1). Thus, paragraph (g)(1) of this section applies
and the S group's Year 3 net operating loss carryover is not subject
to a SRLY limitation.
Example 8. SRLY after overlap. (i) Individual A owns all of the
stock of R and M, each the common parent of a consolidated group. B,
an individual unrelated to Individual A, owns all of the stock of D.
In Year 1, D incurs a $100 net operating loss that is carried
forward. At the beginning of Year 3, R acquires all of the stock of
D. In Year 5, M acquires all of the stock of R in a transaction that
did not result in an ownership change of R.
(ii) R's Year 3 acquisition of D results in D becoming a member
of the R group (the SRLY event) and also results in an ownership
change of D, that gives rise to a limitation under section 382(a)
(the section 382 event) with respect to D's net operating loss
carryover.
(iii) Because the SRLY event and the change date of the section
382 event occur on the same date, there is an overlap of the
application of paragraph (c) of this section and section 382 with
respect to D's net operating loss. Consequently, under this
paragraph (g), D's Year 1 $100 net operating loss is not subject to
a SRLY limitation in the R group.
(iv) M's Year 5 acquisition of R results in R and D becoming
members of the M group (the SRLY event), but does not result in an
ownership change of R or D that gives rise to a limitation under
section 382(a). Because there is no section 382 event, the
application of the SRLY rules and section 382 do not overlap.
Consequently, D's Year 1 $100 net operating loss is subject to a
SRLY limitation in the M group.
(v) Because D's Year 1 net operating loss carryover was subject
to the overlap rule of paragraph (g) of this section when it joined
the R group, under Sec. 1.1502-21(c)(2) the SRLY subgroup with
respect to that carryover includes all of the members of the R group
that joined the M group at the same time as D.
Example 9. Overlap--Interim losses. (i) Individual A owns all of
the stock of P and S, each the common parent of a consolidated
group. S owns all of the stock of T, its only subsidiary. B, an
individual unrelated to Individual A, owns all of the stock of M,
the common parent of a consolidated group. In Year 1, the S group
has a $100 consolidated net operating loss. On January 1 of Year 2,
P acquires all of the stock of S from Individual A. On January 1 of
Year 3, M acquires 51% of the stock of P from Individual A. On May
31 of Year 3, M acquires the remaining 49% of the stock of P from
Individual A. The P group, for the Year 3 period prior to June 1 had
a $50 consolidated net operating loss, and under paragraph
(b)(2)(iv) of this section, the loss is attributable entirely to S.
Other than the losses described above, the P group does not have any
other consolidated net operating losses.
(ii) In the P group, S's $100 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 S and T, the members which were members of the S group
as to which the loss was not a SRLY.
(iii) M's January 1 purchase of 51% of P is a section 382 event
because it results in an ownership change of S and T that gives rise
to a section 382(a) limitation (the section 382 event) with respect
to the Year 1 net operating loss carryover. The purchase, however,
does not result in an ownership change of P because it is not a loss
corporation under section 382(k)(1). M's May 31 purchase of 49% of P
results in P, S, and T becoming members of the M group and is
therefore a SRLY event.
(iv) With respect to the Year 1 net operating loss, S and T
compose a SRLY subgroup under paragraph (c)(2) of this section and a
loss subgroup under Sec. 1.1502-91(d)(1). The loss subgroup does not
include P because the only loss at the time of the section 382 event
was subject to SRLY with respect to the P group. See Sec. 1.1502-
91(d)(1).
(v) Because the SRLY event and the change date of the section
382 event occur on the same date and the SRLY subgroup and loss
subgroup are coextensive with respect to the Year 1 net operating
loss carryover, there is an overlap of the application of the SRLY
rules and the application of section 382 within the meaning of
paragraph (g) of this section. Thus, the SRLY limitation does not
apply to that carryover.
(vi) The Year 3 net operating loss, which arose between the
section 382 event and the SRLY event, is a net operating loss
described in paragraph (g)(2)(ii)(B) of this section because it is
the net operating loss of a corporation whose SRLY event occurs
within
[[Page 36114]]
the six month period beginning on the date of a section 382 event.
(vii) With respect to the Year 3 net operating loss, P, S, and T
compose a SRLY subgroup under paragraph (c)(2) of this section.
Because P, a member of the SRLY subgroup for the Year 3 carryover,
is not also a member of a SRLY subgroup that has net operating loss
carryovers described in paragraph (g)(2)(ii)(A) of this section (the
Year 1 net operating loss), the Year 3 carryover is subject to a
SRLY limitation in the M group. See paragraph (g)(4)(ii) of this
section.
(h) Effective date--(1) In general. This section generally applies
to taxable years for which the due date (without extensions) of the
consolidated return is after June 25, 1999. However--
(i) In the event that paragraph (g)(1) of this section does not
apply to a particular net operating loss carryover in the current
group, then solely for purposes of applying paragraph (c) of this
section to determine a limitation with respect to that carryover and
with respect to which the SRLY register (consolidated taxable income
determined by reference to only the member's or subgroup's items of
income, gain, deduction or loss) began in a taxable year for which the
due date of the return was on or before June 25, 1999, paragraph (c)(2)
of this section shall be applied without regard to the phrase ``or for
a carryover that was subject to the overlap rule described in paragraph
(g) of this section or Sec. 1.1502-15(g) with respect to another group
(the former group)''; and
(ii) For purposes of paragraph (g) of this section, only an
ownership change to which section 382(a), as amended by the Tax Reform
Act of 1986, applies shall constitute a section 382 event.
(2) SRLY limitation. Except in the case of those members (including
members of a SRLY subgroup) described in paragraph (h)(3) 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. 1.1502-15 and Sec. 1.1502-22(c)) for
the members (or SRLY subgroups).
(3) Prior retroactive election. A consolidated group that applied
the rules of Sec. 1.1502-21T(g)(3) in effect prior to June 25, 1999, as
contained in 26 CFR part 1 revised April 1, 1999, to all consolidated
return years ending on or after January 29, 1991, and beginning before
January 1, 1997, does not take into account a consolidated taxable year
beginning before January 29, 1991, in determining the aggregate of the
consolidated taxable income under paragraph (c)(1) of this section
(including for purposes of Sec. 1.1502-15 and Sec. 1.1502-22(c)) for
the members (or SRLY subgroups).
(4) Offspring rule. Paragraph (b)(2)(ii)(B) of this section applies
to net operating losses arising in taxable years ending on or after
June 25, 1999.
(5) Waiver of carrybacks. Paragraph (b)(3)(ii)(B) of this section
(relating to the waiver of carrybacks for acquired members) applies to
acquisitions occurring after June 25, 1999.
(6) Prior periods. For certain taxable years ending on or before
June 25, 1999, see Sec. 1.1502-21T in effect prior to June 25, 1999, as
contained in 26 CFR part 1 revised April 1, 1999, as applicable.
Sec. 1.1502-21T [Removed]
Par. 7. Section 1.1502-21T is removed.
Par. 8. Section 1.1502-22 is added to read as follows:
Sec. 1.1502-22 Consolidated capital gain and loss.
(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. 1.1502-23); 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 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
Internal Revenue 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. 1.1502-21(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. 1.1502-21(c) (including
the SRLY subgroup principles under Sec. 1.1502-21(c)(2))
[[Page 36115]]
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. 1.1502-21(f) apply with appropriate adjustments.
(g) Overlap with section 383--(1) General rule. The limitation
provided in paragraph (c) of this section does not apply to net capital
loss carryovers ((other than a hypothetical carryover like those
described in Sec. 1.1502-21(c)(1)(i)(D) and a carryover like those
described in Sec. 1.1502-21(c)(1)(ii)) when the application of
paragraph (c) of this section results in an overlap with the
application of section 383. For a similar rule applying in the case of
net capital loss carryovers like those described in Secs. 1.1502-
21(c)(1)(i)(D) and (c)(1)(ii), see Sec. 1.1502-15(g).
(2) Definitions--(i) Generally. For purposes of this paragraph (g),
the definitions and nomenclature contained in sections 382 and 383, the
regulations thereunder, and Secs. 1.1502-90 through 1.1502-99 apply.
(ii) Overlap. (A) An overlap of the application of paragraph (c) of
this section and the application of section 383 with respect to a net
capital loss carryover occurs if a corporation becomes a member of the
consolidated group (the SRLY event) within six months of the change
date of an ownership change giving rise to a section 382 limitation
with respect to that carryover (the section 383 event).
(B) If an overlap described in paragraph (g)(2)(ii)(A) of this
section occurs with respect to net capital loss carryovers of a
corporation whose SRLY event occurs within the six month period
beginning on the date of a section 383 event, then an overlap is
treated as also occurring with respect to that corporation's net
capital loss carryover that arises within the period beginning with the
section 383 event and ending with the SRLY event.
(C) For special rules in the event that there is a SRLY subgroup
and/or a loss subgroup as defined in Sec. 1.1502-91(d)(1) with respect
to a carryover, see paragraph (g)(4) of this section.
(3) Operating rules--(i) Section 383 event before SRLY event. If a
SRLY event occurs on the same date as a section 383 event or within the
six month period beginning on the date of the section 383 event,
paragraph (g)(1) of this section applies beginning with the tax year
that includes the SRLY event.
(ii) SRLY event before section 383 event. If a section 383 event
occurs within the period beginning the day after the SRLY event and
ending six months after the SRLY event, paragraph (g)(1) of this
section applies starting with the first tax year that begins after the
section 383 event.
(4) Subgroup rules. In general, in the case of a net capital loss
carryover for which there is a SRLY subgroup and a loss subgroup (as
defined in Sec. 1.1502-91(d)(1)), the principles of this paragraph (g)
apply to the SRLY subgroup, and not separately to its members. However,
paragraph (g)(1) of this section applies--
(i) With respect to a carryover described in paragraph
(g)(2)(ii)(A) of this section only if--
(A) All members of the SRLY subgroup with respect to that carryover
are also included in a loss subgroup with respect to that carryover;
and
(B) All members of a loss subgroup with respect to that carryover
are also members of a SRLY subgroup with respect to that carryover; and
(ii) With respect to a carryover described in paragraph
(g)(2)(ii)(B) of this section only if all members of the SRLY subgroup
for that carryover are also members of a SRLY subgroup that has net
capital loss carryovers described in paragraph (g)(2)(ii)(A) of this
section that are subject to the overlap rule of paragraph (g)(1) of
this section.
(h) Effective date--(1) In general. This section generally applies
to taxable years for which the due date (without extensions) of the
consolidated return is after June 25, 1999. However--
(i) In the event that paragraph (g)(1) of this section does not
apply to a particular net capital loss carryover in the current group,
then solely for purposes of applying paragraph (c) of this section to
determine a limitation with respect to that carryover and with respect
to which the SRLY register (consolidated taxable income determined by
reference to only the member's or subgroup's items of income, gain,
deduction or loss) began in a taxable year for which the due date of
the return was on or before June 25, 1999, the principles of
Sec. 1.1502-21(c)(2) shall be applied without regard to the phrase ``or
for a carryover that was subject to the overlap rule described in
paragraph (g) of this section or Sec. 1.1502-15(g) with respect to
another group (the former group)''; and
(ii) For purposes of paragraph (g) of this section, only an
ownership change to which section 383, as amended by the Tax Reform Act
of 1986, applies and which results in a section 382 limitation shall
constitute a section 383 event.
(2) Prior periods. For certain taxable years ending on or before
June 25, 1999, see Sec. 1.1502-22T in effect prior to June 25, 1999, as
contained in 26 CFR part 1 revised April 1, 1999, as applicable.
Sec. 1.1502-22T [Removed]
Par. 9. Section 1.1502-22T is removed.
Par. 10. Section 1.1502-23 is added to read as follows:
Sec. 1.1502-23 Consolidated net section 1231 gain or loss
(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) Example. The following example illustrates the provisions of
this section:
Example. Use of SRLY registers with net gains and net losses
under section 1231. (i) In Year 1, T sustains a $20 net capital
loss. At the beginning of Year 2, T becomes a member of the P group.
T's capital loss carryover from Year 1 is subject to SRLY limits
under Sec. 1.1502-22(c). The members of the P group contribute the
following to the consolidated taxable income for Year 2 (computed
without regard to T's net capital loss carryover under Sec. 1.1502-
22):
------------------------------------------------------------------------
P T
------------------------------------------------------------------------
Year 1 (SRLY)
------------------------------------------------------------------------
Ordinary.............................................. ....... .......
Capital............................................... ....... (20)
------------------------------------------------------------------------
Year 2
------------------------------------------------------------------------
Ordinary.............................................. 10 20
Capital............................................... 70 0
Sec. 1231............................................ (60) 30
------------------------------------------------------------------------
(ii) Under section 1231, if the section 1231 losses for any
taxable year exceed the section 1231 gains for such taxable year,
such gains and losses are treated as ordinary gains or losses.
Because the P group's section 1231
[[Page 36116]]
losses, $(60), exceed the section 1231 gains, $30, the P group's net
loss is treated as an ordinary loss. T's net section 1231 gain has
the same character as the P group's consolidated net section 1231
loss, so T's $30 of section 1231 income is treated as ordinary
income for purposes of applying Sec. 1.1502-22(c). Under
Sec. 1.1502-22(c), the group's consolidated net capital gain
determined by reference only to T's items is $0. None of T's capital
loss carryover from Year 1 may be taken into account in Year 2.
(c) Recapture of ordinary loss. [Reserved]
(d) 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 for which the due date (without
extensions) of the consolidated return is taxable years is after June
25, 1999.
(2) Application to prior periods. See Sec. 1.1502-21(h)(3) for
rules applicable to groups that applied the rules of this section to
consolidated return years ending on or after January 29, 1991, and
beginning before January 1, 1997.
Sec. 1.1502-23T [Removed]
Par. 11. Section 1.1502-23T is removed.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 12. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
Par. 13. In Sec. 602.101, paragraph (b) is amended by removing the
entry for Sec. 1.1502-21T from the table and adding an entry in
numerical order to the table to read as follows:
Sec. 602.101 OMB Control numbers.
* * * * *
(b) * * *
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control No.
------------------------------------------------------------------------
* * * * *
1.1502-21............................................... 1545-1237
* * * * *
------------------------------------------------------------------------
John M. Dalrymple,
Acting Deputy Commissioner of Internal Revenue.
Approved: June 18, 1999.
Donald C. Lubick,
Assistant Secretary of the Treasury.
[FR Doc. 99-16161 Filed 6-25-99; 1:27 pm]
BILLING CODE 4830-01-U
