[Federal Register Volume 64, Number 154 (Wednesday, August 11, 1999)]
[Rules and Regulations]
[Pages 43613-43618]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-20242]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 8833]
RIN 1545-AW08
Consolidated Returns--Consolidated Overall Foreign Losses and
Separate Limitation Losses
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
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SUMMARY: This document contains final consolidated return regulations
relating to the treatment of overall foreign losses and separate
limitation losses in the computation of the foreign tax credit
limitation. The regulations replace existing guidance with respect to
overall foreign losses and provide guidance with respect to separate
limitation losses. These regulations affect consolidated groups that
compute the foreign tax credit limitation or that dispose of property
used in a foreign trade or business.
DATES: Effective Date: These regulations are effective August 11, 1999.
Applicability Dates: For dates of applicability of these
regulations, see Secs. 1.1502-9A(a)(1) and (b)(1) and 1.1502-9(e).
FOR FURTHER INFORMATION CONTACT: Trina Dang of the Office of Associate
Chief Counsel (International), (202) 622-3850 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations
has been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507)
under the control number 1545-1634. Responses to this collection of
information are mandatory.
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.
The estimated annual burden per respondent is 1.5 hours.
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be sent to the Internal
Revenue Service, Attn: IRS Reports Clearance Officer, OP:FS:FP,
Washington, DC 20224, and 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.
Books or records relating to a collection of information must be
retained so 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
On December 29, 1998, the IRS and Treasury published in the Federal
Register (REG-106902-98, 63 FR 71589) a notice of proposed rulemaking
modifying the rules relating to the
[[Page 43614]]
treatment of overall foreign loss (OFL) accounts, and providing new
rules relating to the treatment of separate limitation loss (SLL)
accounts. The regulations proposed to replace the notional account
method for allocating a group's consolidated OFL (COFL) account to a
departing member of a group with an asset-based method for allocating
both OFLs and SLLs. The regulations also proposed to modify the section
904(f)(3) and (5)(F) disposition rules in the case of intercompany
transactions, and to provide computational rules and nomenclature for
SLLs as well as OFLs.
A public hearing was held on February 17, 1999, and two written
comments were received. One commentator recommended the retention of
the notional account method because the asset-based method can result
in the allocation of a portion of the COFL account to a departing
member that did not contribute to the COFL account, a result that the
commentator views as arbitrary. To alleviate the tension between the
interest allocation and COFL rules, the commentator suggested amending
the interest allocation rules instead of the COFL rules.
Treasury and the IRS recognize that, under the asset-based method,
a portion of a COFL account can under certain circumstances be
allocated to a member that did not directly contribute to the COFL
account (because, for example, it was not a member of the group at the
time the OFL arose). However, as noted in the preamble to regulations
issued in January 1998 that eliminated the limitation on OFL recapture
and foreign tax credit utilization with respect to separate return
limitation years, any single member's economic ``contribution'' to a
COFL account is difficult to measure since the expense allocation rules
require interest and certain other expenses to be allocated to a
member's income in separate limitation categories on the basis of the
group's assets.
An asset-based method is not arbitrary because it associates a COFL
account with assets that will produce income subject to recapture,
thereby ensuring the recapture of the COFL account. As explained in the
preamble to the proposed regulations, Treasury and the IRS believe that
the asset-based method for allocating a COFL account harmonizes the
COFL rules with the interest allocation provisions. Those provisions,
as required by statute, are designed to prevent corporations from
borrowing in ways that inappropriately minimize the amount of interest
expense allocated against foreign-source income (thereby inflating the
amount of foreign-source income that can be sheltered from U.S. tax by
foreign tax credits).
The commentator also criticized the asset-based method for
allocating COFL accounts as creating uncertainty and administrative
burdens in determining the proper amount of a selling group's COFL
account to be apportioned to a departing member at the time a member is
acquired. Treasury and the IRS recognize that the asset-based method
may result in greater uncertainty under certain circumstances. It is
anticipated that a taxpayer acquiring a member of a consolidated group
may address any uncertainties as to the proper allocation of a COFL
account by entering into a tax indemnity or similar agreement. It is
also noted that, even under the notional account method, a COFL account
apportioned to a departing member cannot be determined with certainty
at the time of the acquisition because the apportionment is made at the
end of the taxable year during which the member departs the group.
Treasury and the IRS recognize that the new rules may result in an
increased burden for certain taxpayers, but have concluded that the
possibility of an increased burden is not sufficient to warrant the
retention of the notional account method in light of severe distortions
created by the interaction of the notional account method and the
interest expense allocation provisions.
Another commentator requested a transition rule under which the
notional account method would continue to apply to a group's existing
COFL account that would not be a part of the group's account had the
asset-based allocation method been in effect in prior years. The
commentator argued that a transition rule is necessary because
taxpayers can be adversely affected by the transition from the old
rules to the new rules.
The final regulations do not adopt this transition rule because of
administrative and equity concerns. The rule would be difficult to
administer because a taxpayer would be required to ascertain asset
values of all members that departed the group (on the date that the
member departed) going back a number of years in order to apply the
asset-based allocation method. Additionally, keeping track of the
grandfathered account on a prospective basis and distinguishing it from
non-grandfathered accounts could add significant complexity.
Furthermore, it is not clear whether the commentator's suggested
transition rule generally produces equitable results. Under the
suggested transition rule, no portion of the group's COFL account that
would not be a part of the group's account had the new rules applied in
earlier years would be allocated to a departing member that has foreign
assets but that does not have a notional account. Treasury and the IRS
are not convinced that it would be more equitable for the group to bear
the burden of the COFL account under these circumstances.
A question has been raised regarding whether the asset-based method
for allocating COFL accounts to a departing member also applies to an
affiliated group that does not file a consolidated return. Because the
interest expense allocation rules apply to affiliated groups, these
rules can result under certain circumstances in the creation of OFL
accounts in members with no foreign assets. Section 904(i) is an anti-
abuse rule intended to prevent an affiliated group from circumventing
the consolidated return rules to avoid the foreign tax credit
limitation provisions. Under Sec. 1.904(i)-1, each member of an
affiliated group determines its taxable income for each separate
limitation income category under section 904(d) and then combines those
amounts to determine one amount of income for the group in each income
category. The consolidated return regulations that apply the principles
of sections 904(f) and 907(c)(4) will then be applied to the combined
amounts in each separate category as if all affiliates were members of
a single consolidated group. By reason of the section 904(i)
regulations, the asset-based method for allocating the appropriate
portion of a group's COFL account to a departing member applies to an
affiliated group of corporations that does not file returns on a
consolidated basis.
A question has also been raised as to whether the tax book value of
assets is affected for purposes of COFL apportionment if a member's
departure from a group causes the group to take into account in
computing consolidated taxable income gain or loss on assets
transferred in intercompany transactions. To prevent apportionment of a
disproportionate amount of the COFL account to a departing member,
Sec. 1.1502-9(c)(2)(ii) of the final regulations clarifies that the
computation of the tax book value of assets for purposes of such
apportionment shall be determined without regard to previously deferred
gain or loss that is taken into account as a result of the member's
departure from the group (because, for example, of the acceleration
rule under Sec. 1.1502-13(d)).
After full consideration of all questions and comments, the
proposed
[[Page 43615]]
regulations published in the Federal Register on December 29, 1998
(REG-106902-98, 63 FR 71589) are adopted by this Treasury decision
without substantive amendment.
Special Analyses
It has been determined that this regulation is not a significant
regulatory action as defined in Executive Order 12866. Therefore, a
regulatory impact analysis is not required. 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 overall foreign
losses or separate limitation losses. 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
overall foreign losses or separate limitation losses. Therefore, a
Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5
U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the
Internal Revenue Code, the notice of proposed rulemaking preceding this
regulation was submitted to the Chief Counsel for Advocacy of the Small
Business Administration for comment on its impact on small businesses.
Drafting Information
The principal author of this regulation is Trina Dang of the Office
of Associate Chief Counsel (International), IRS. However, other
personnel from the IRS and Treasury Department 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.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR Parts 1 and 602 are amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by
removing the entry for Sec. 1.1502-9T and by adding entries in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1502-9 also issued under 26 U.S.C. 1502. * * *
Section 1.1502-9A also issued under 26 U.S.C. 1502. * * *
Par. 2. In Sec. 1.1502-3T, paragraph (c)(4), the first sentence is
amended by removing the language ``1.1502-9T(b)(1)(v)'' and adding
``1.1502-9A(b)(1)(v)'' in its place, and revising the last sentence to
read as follows:
Sec. 1.1502-3T Consolidated investment credit (temporary).
* * * * *
(c) * * *
(4) * * * However, a consolidated group making the election
provided in Sec. 1.1502-9A(b)(1)(vi) (electing not to apply
Sec. 1.1502-9A(b)(1)(v) to years beginning before January 1, 1998) may
nevertheless choose to apply all such paragraphs other than
Sec. 1.1502-9A(b)(1)(v) for all relevant years.
* * * * *
Par. 3. Immediately following Sec. 1.1504-4 an undesignated center
heading is added to read as follows:
Regulations Applicable for Tax Years for Which a Return Is Due on
or Before August 11, 1999.
Par. 4. Section 1.1502-9 is redesignated as Sec. 1.1502-9A and
transferred under the new undesignated center heading set out in Par.
3. above.
Par. 5. Newly designated Sec. 1.1502-9A is amended by:
1. Revising the section heading.
2. Redesignating the paragraph heading and text of paragraph (a) as
the paragraph heading and text of paragraph (a)(2).
3. Adding a new paragraph heading for paragraph (a), and new
paragraphs (a)(1), (b)(1)(v) and (b)(1)(vi).
The revisions and additions read as follows:
Sec. 1.1502-9A Application of overall foreign loss recapture rules to
corporations filing consolidated returns due on or before August 11,
1999.
(a) Scope--(1) Effective date. This section applies only to
consolidated return years for which the due date of the income tax
return (without extensions) is on or before August 11, 1999.
(2) In general. * * *
(b) * * *
(1) * * *
(v) Special effective date for SRLY limitation. Except as provided
in paragraph (b)(1)(vi) of this section, paragraphs (b)(1)(iii) and
(iv) of this section apply only to consolidated return years for which
the due date of the income tax return (without extensions) is on or
before March 13, 1998. For consolidated return years for which the due
date of the income tax return (without extensions) is after March 13,
1998, the rules of paragraph (b)(1)(ii) of this section shall apply to
overall foreign losses from separate return years that are separate
return limitation years. For purposes of applying paragraph (b)(1)(ii)
of this section in such years, the group treats a member with a balance
in an overall foreign loss account from a separate return limitation
year on the first day of the first consolidated return year for which
the due date of the income tax return (without extensions) is after
March 13, 1998, as a corporation joining the group on such first day.
An overall foreign loss that is part of a net operating loss or net
capital loss carryover from a separate return limitation year of a
member that is absorbed in a consolidated return year for which the due
date of the income tax return (without extensions) is after March 13,
1998, shall be added to the appropriate consolidated overall foreign
loss account in the year that it is absorbed. For consolidated return
years for which the due date of the income tax return (without
extensions) is after March 13, 1998, similar principles apply to
overall foreign losses when there has been a consolidated return change
of ownership (regardless of when the change of ownership occurred). See
also Sec. 1.1502-3T(c)(4) for an optional effective date rule
(generally making this paragraph (b)(1)(v) applicable to a consolidated
return year beginning after December 31, 1996, if the due date of the
income tax return (without extensions) for such year is on or before
March 13, 1998).
(vi) Election to defer application of special effective date. A
consolidated group may elect not to apply paragraph (b)(1)(v) of this
section to consolidated return years beginning before January 1, 1998.
To make this election, a consolidated group must write ``Election
Pursuant to Notice 98-40'' across the top of page 1 of an original or
amended tax return for each consolidated return year subject to the
election. For the first consolidated return year to which the overall
foreign loss provisions of paragraph (b)(1)(v) of this section apply
(i.e., the first year beginning on or after January 1, 1998), such
consolidated group must write ``Notice 98-40 Election in Effect in
Prior Years'' across the top of page 1 of the consolidated tax return
for that year. For purposes of applying paragraph (b)(1)(ii) of this
section with respect to such year, any member with a balance in an
overall foreign loss account from a separate return limitation year on
the first day of
[[Page 43616]]
such year shall be treated as joining the group on such first day.
* * * * *
Par. 6. New Sec. 1.1502-9 is added to read as follows:
Sec. 1.1502-9 Consolidated overall foreign losses and separate
limitation losses.
(a) In general. This section provides rules for applying section
904(f) (including its definitions and nomenclature) to a group and its
members. Generally, section 904(f) concerns rules relating to overall
foreign losses (OFLs) and separate limitation losses (SLLs) and the
consequences of such losses. As provided in section 904(f)(5), losses
are computed separately in each category of income described in section
904(d)(1) (basket). Paragraph (b) of this section defines terms and
provides computational and accounting rules, including rules regarding
recapture. Paragraph (c) of this section provides rules that apply to
OFLs and SLLs when a member becomes or ceases to be a member of a
group. Paragraph (d) of this section provides a predecessor and
successor rule. Paragraph (e) of this section provides effective dates.
(b) Consolidated application of section 904(f). A group applies
section 904(f) for a consolidated return year in accordance with that
section, subject to the following rules:
(1) Computation of CSLI or CSLL and consolidated U.S. source income
or loss. The group computes its consolidated separate limitation income
(CSLI) or consolidated separate limitation loss (CSLL) for each basket
under the principles of Sec. 1.1502-11 by aggregating each member's
foreign-source taxable income or loss in such basket computed under the
principles of Sec. 1.1502-12, and taking into account the foreign
portion of the consolidated items described in Sec. 1.1502-11(a)(2)
through (8) for such basket. The group computes its consolidated U.S.-
source taxable income or loss under similar principles.
(2) Netting CSLLs, CSLIs, and consolidated U.S. source taxable
income or loss. The group applies section 904(f)(5) to determine the
extent to which a CSLL for a basket reduces CSLI for another basket or
consolidated U.S.-source taxable income.
(3) CSLL and COFL accounts. To the extent provided in section
904(f), the amount by which a CSLL for a basket (the loss basket)
reduces CSLI for another basket (the income basket) shall result in the
creation of (or addition to) a CSLL account for the loss basket with
respect to the income basket. Likewise, the amount by which a CSLL for
a loss basket reduces consolidated U.S.-source income will create (or
add to) a consolidated overall foreign loss account (a COFL account).
(4) Recapture of COFL and CSLL accounts. In the case of a COFL
account for a loss basket, section 904(f)(1) and (3) recharacterizes
some or all of the foreign-source income in the loss basket as U.S.-
source income. In the case of a CSLL account for a loss basket with
respect to an income basket, section 904(f)(5)(C) and (F)
recharacterizes some or all of the foreign-source income in the loss
basket as foreign-source income in the income basket. The COFL account
or CSLL account is reduced to the extent amounts are recharacterized
with respect to such account.
(5) Intercompany transactions--(i) Nonapplication of section 904(f)
disposition rules. Neither section 904(f)(3) (in the case of a COFL
account) nor (5)(F) (in the case of a CSLL account) applies at the time
of a disposition that is an intercompany transaction to which
Sec. 1.1502-13 applies. Instead, section 904(f)(3) and (5)(F) applies
only at such time and only to the extent that the group is required
under Sec. 1.1502-13 (without regard to section 904(f)(3) and (5)(F))
to take into account any intercompany items resulting from the
disposition, based on the COFL or CSLL account existing at the end of
the consolidated return year during which the group takes the
intercompany items into account.
(ii) Example. Paragraph (b)(5)(i) of this section is illustrated by
the following examples. The identity of the parties and the basic
assumptions set forth in Sec. 1.1502-13(c)(7)(i) apply to the examples.
Except as otherwise stated, assume further that the consolidated group
recognizes no foreign-source income other than as a result of the
transactions described. The examples are as follows:
Example 1. (i) On June 10, Year 1, S transfers nondepreciable
property with a basis of $100 and a fair market value of $250 to B
in a transaction to which section 351 applies. The property was
predominantly used without the United States in a trade or business,
within the meaning of section 904(f)(3). B continues to use the
property without the United States. The group has a COFL account in
the relevant loss basket of $120 as of December 31, Year 1.
(ii) Because the contribution from S to B is an intercompany
transaction, section 904(f)(3) does not apply to result in any gain
recognition in Year 1. See paragraph (b)(5)(i) of this section.
(iii) On January 10, Year 4, B ceases to be a member of the
group. Because S did not recognize gain in Year 1 under section 351,
no gain is taken into account in Year 4 under Sec. 1.1502-13(d).
Thus, no portion of the group's COFL account is recaptured in Year
4. For rules requiring apportionment of a portion of the COFL
account to B, see paragraph (c)(2) of this section.
Example 2. (i) The facts are the same as in paragraph (i) of
Example 1. On January 10, Year 4, B sells the property to X for
$300. As of December 31, Year 4, the group's COFL account is $40.
(The COFL account was reduced between Year 1 and Year 4 due to
unrelated foreign-source income taken into account by the group.)
(ii) B takes into account gain of $200 in Year 4. The $40 COFL
account in Year 4 recharacterizes $40 of the gain as U.S. source.
See section 904(f)(3).
Example 3. (i) On June 10, Year 1, S sells nondepreciable
property with a basis of $100 and a fair market value of $250 to B
for $250 cash. The property was predominantly used without the
United States in a trade or business, within the meaning of section
904(f)(3). The group has a COFL account in the relevant loss basket
of $120 as of December 31, Year 1. B predominately uses the property
in a trade or business without the United States.
(ii) Because the sale is an intercompany transaction, section
904(f)(3) does not require the group to take into account any gain
in Year 1. Thus, under paragraph (b)(5)(i) of this section, the COFL
account is not reduced in Year 1.
(iii) On January 10, Year 4, B sells the property to X for $300.
As of December 31, Year 4, the group's COFL account is $60. (The
COFL account was reduced between Year 1 and Year 4 due to unrelated
foreign-source income taken into account by the group.)
(iv) In Year 4, S's $150 intercompany gain and B's $50
corresponding gain are taken into account to produce the same effect
on consolidated taxable income as if S and B were divisions of a
single corporation. See Sec. 1.1502-13(c). All of B's $50
corresponding gain is recharacterized under section 904(f)(3). If S
and B were divisions of a single corporation and the intercompany
sale were a transfer between the divisions, B would succeed to S's
$100 basis in the property and would have $200 of gain ($60 of which
would be recharacterized under section 904(f)(3)), instead of a $50
gain. Consequently, S's $150 intercompany gain and B's $50
corresponding gain are taken into account, and $10 of S's gain is
recharacterized under section 904(f)(3) as U.S. source to reflect
the $10 difference between B's $50 recharacterized gain and the $60
recomputed gain that would have been recharacterized.
(c) Becoming or ceasing to be a member of a group--(1) Adding
separate accounts on becoming a member. At the time that a corporation
becomes a member of a group (a new member), the group adds to the
balance of its COFL or CSLL account the balance of the new member's
corresponding OFL account or SLL account. A new member's OFL account
corresponds to a COFL account if the account is for the same loss
basket. A new member's SLL account corresponds to a CSLL account if the
account is for the same loss basket
[[Page 43617]]
and with respect to the same income basket. If the group does not have
a COFL or CSLL account corresponding to the new member's account, it
creates a COFL or CSLL account with a balance equal to the balance of
the member's account.
(2) Apportionment of consolidated account to departing member--(i)
In general. A group apportions to a member that ceases to be a member
(a departing member) a portion of each COFL and CSLL account as of the
end of the year during which the member ceases to be a member and after
the group makes the additions or reductions to such account required
under paragraphs (b)(3), (b)(4) and (c)(1) of this section (other than
an addition under paragraph (c)(1) of this section attributable to a
member becoming a member after the departing member ceases to be a
member). The group computes such portion under paragraph (c)(2)(ii) of
this section, as limited by paragraph (c)(2)(iii) of this section. The
departing member carries such portion to its first separate return year
after it ceases to be a member. Also, the group reduces each account by
such portion and carries such reduced amount to its first consolidated
return year beginning after the year in which the member ceases to be a
member. If two or more members cease to be members in the same year,
the group computes the portion allocable to each such member (and
reduces its accounts by such portion) in the order that the members
cease to be members.
(ii) Departing member's portion of group's account. A departing
member's portion of a group's COFL or CSLL account for a loss basket is
computed based upon the member's share of the group's assets that
generate income subject to recapture at the time that the member ceases
to be a member. Under the characterization principles of Secs. 1.861-
9T(g)(3) and 1.861-12T, the group identifies the assets of the
departing member and the remaining members that generate foreign-source
income (foreign assets) in each basket. The assets are characterized
based upon the income that the assets are reasonably expected to
generate after the member ceases to be a member. The member's portion
of a group's COFL or CSLL account for a loss basket is the group's COFL
or CSLL account, respectively, multiplied by a fraction, the numerator
of which is the value of the member's foreign assets for the loss
basket and the denominator of which is the value of the foreign assets
of the group (including the departing member) for the loss basket. The
value of the foreign assets is determined under the asset valuation
rules of Sec. 1.861-9T(g)(1) and (2) using either tax book value or
fair market value under the method chosen by the group for purposes of
interest apportionment as provided in Sec. 1.861-9T(g)(1)(ii). For
purposes of this paragraph (c)(2)(ii), Sec. 1.861-9T(g)(2)(iv) (assets
in intercompany transactions) shall apply, but Sec. 1.861-9T(g)(2)(iii)
(adjustments for directly allocated interest) shall not apply. If the
group uses the tax book value method, the member's portions of COFL and
CSLL accounts are limited by paragraph (c)(2)(iii) of this section. In
addition, for purposes of this paragraph (c)(2)(ii), the tax book value
of assets transferred in intercompany transactions shall be determined
without regard to previously deferred gain or loss that is taken into
account by the group as a result of the transaction in which the member
ceases to be a member. The assets should be valued at the time the
member ceases to be a member, but values on other dates may be used
unless this creates substantial distortions. For example, if a member
ceases to be a member in the middle of the group's consolidated return
year, an average of the values of assets at the beginning and end of
the year (as provided in Sec. 1.861-9T(g)(2)) may be used or, if a
member ceases to be a member in the early part of the group's
consolidated return year, values at the beginning of the year may be
used, unless this creates substantial distortions.
(iii) Limitation on member's portion for groups using tax book
value method. If a group uses the tax book value method of valuing
assets for purposes of paragraph (c)(2)(ii) of this section and the
aggregate of a member's portions of COFL and CSLL accounts for a loss
basket (with respect to one or more income baskets) determined under
paragraph (c)(2)(ii) of this section exceeds 150 percent of the actual
fair market value of the member's foreign assets in the loss basket,
the member's portion of the COFL or CSLL accounts for the loss basket
shall be reduced (proportionately, in the case of multiple accounts) by
such excess. This rule does not apply if the departing member and all
other members that cease to be members as part of the same transaction
own all (or substantially all) the foreign assets in the loss basket.
(iv) Determination of values of foreign assets binding on departing
member. The group's determination of the value of the member's and the
group's foreign assets for a loss basket is binding on the member,
unless the Commissioner concludes that the determination is not
appropriate. The common parent of the group must attach a statement to
the return for the taxable year that the departing member ceases to be
a member of the group that sets forth the name and taxpayer
identification number of the departing member, the amount of each COFL
or CSLL for each loss basket that is apportioned to the departing
member under this paragraph (c)(2), the method used to determine the
value of the member's and the group's foreign assets in each such loss
basket, and the value of the member's and the group's foreign assets in
each such loss basket. The common parent must also furnish a copy of
the statement to the departing member.
(v) Anti-abuse rule. If a corporation becomes a member and ceases
to be a member, and a principal purpose of the corporation becoming and
ceasing to be a member is to transfer the corporation's OFL account or
SLL account to the group or to transfer the group's COFL or CSLL
account to the corporation, appropriate adjustments will be made to
eliminate the benefit of such a transfer of accounts. Similarly, if any
member acquires assets or disposes of assets (including a transfer of
assets between members of the group and the departing member) with a
principal purpose of affecting the apportionment of accounts under
paragraph (c)(2)(i) of this section, appropriate adjustments will be
made to eliminate the benefit of such acquisition or disposition.
(vi) Examples. The following examples illustrate this paragraph
(c):
Example 1. (i) On November 6, Year 1, S, a member of the P
group, a consolidated group with a calendar consolidated return
year, ceases to be a member of the group. On December 31, Year 1,
the P group has a $40 COFL account for the general limitation
basket, a $20 CSLL account for the general limitation basket (i.e.,
the loss basket) with respect to the passive basket (i.e., the
income basket), and a $10 CSLL account for the shipping income
basket (i.e., the loss basket) with respect to the passive basket
(i.e., the income basket). No member of the group has foreign-source
income or loss in Year 1. The group apportions its interest expense
according to the tax book value method.
(ii) On November 6, Year 1, the group identifies S's assets and
its own assets (including S's assets) expected to produce foreign
general limitation income. Use of end-of-the-year values will not
create substantial distortions in determining the relative values of
S's and the group's relevant assets on November 6, Year 1. The group
determines that S's relevant assets have a tax book value of $2,000
and a fair market value of $2,200. Also, the group's relevant assets
(including S's assets) have a tax book value of $8,000. On November
6, Year 1, S has no assets expected to produce foreign shipping
income.
(iii) Under paragraph (c)(2)(ii) of this section, S takes a $10
COFL account for the general limitation basket ($40 x $2000/$8000)
[[Page 43618]]
and a $5 CSLL account for the general limitation basket with respect
to the passive basket ($20 x $2000/$8000). S does not take any
portion of the shipping income basket CSLL account. The limitation
described in paragraph (c)(2)(iii) of this section does not apply
because the aggregate of the COFL and CSLL accounts for the general
limitation basket that are apportioned to S ($15) is less than 150
percent of the actual fair market value of S's general limitation
foreign assets ($2,200 x 150%).
Example 2. (i) Assume the same facts as in Example 1, except
that the fair market value of S's general limitation foreign assets
is $4 as of November 6, Year 1.
(ii) Under paragraph (c)(2)(iii) of this section, S's COFL and
CSLL accounts for the general limitation basket must be reduced by
$9, which is the excess of $15 (the aggregate amount of the accounts
apportioned under paragraph (c)(2)(ii) of this section) over $6 (150
percent of the $4 actual fair market value of S's general limitation
foreign assets). S thus takes a $4 COFL account for the general
limitation basket ($10-($9 x $10/$15)) and a $2 CSLL account for
the general limitation basket with respect to the passive basket
($5-($9 x $5/$15)).
(d) Predecessor and successor. A reference to a member includes, as
the context may require, a reference to a predecessor or successor of
the member. See Sec. 1.1502-1(f).
(e) Effective dates. This section applies to consolidated return
years for which the due date of the income tax return (without
extensions) is after August 11, 1999. However, paragraph (b)(5) of this
section (intercompany transactions) is not applicable for intercompany
transactions that occur before January 28, 1999. A group applies the
principles of Sec. 1.1502-9A(e) to a disposition which is an
intercompany transaction to which Sec. 1.1502-13 applies and that
occurs before January 28, 1999. Also, paragraph (c)(2) of this section
(apportionment of consolidated account to departing member) is not
applicable for members ceasing to be members of a group before January
28, 1999. A group applies the principles of Sec. 1.1502-9A (rather than
paragraph (c)(2) of this section) to determine the amount of a
consolidated account that is apportioned to a member that ceases to be
a member of the group before January 28, 1999 (and reduces its
consolidated account by such apportioned amount) before applying
paragraph (c)(2) of this section to members that cease to be members on
or after January 28, 1999.
Sec. 1.1502-9T [Removed]
Par. 7. Section 1.1502-9T is removed.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 8. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
Par 9. In Sec. 602.101, paragraph (b) is amended in the table by
removing the current entry for 1.1502-9 and adding new entries for
1.1502-9 and 1.1502-9A to read as follows:
Sec. 602.101 OMB Control numbers.
* * * * *
(b) * * *
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control No.
------------------------------------------------------------------------
* * * * *
1.1502-9................................................... 1545-1634
* * * * *
1.1502-9A.................................................. 1545-0121
* * * * *
------------------------------------------------------------------------
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Approved: July 16, 1999.
Donald C. Lubick,
Assistant Secretary of the Treasury.
[FR Doc. 99-20242 Filed 8-10-99; 8:45 am]
BILLING CODE 4830-01-P
