# Bulletin No. 1996–30

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- **Document type:** Agency decision

## Text

Bulletin No. 1996–30
July 22, 1996

HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be relied
upon as authoritative interpretations.

INCOME TAX
Rev. Rul. 96–36, page 6.
LIFO; price indexes; department stores. The May
1996 Bureau of Labor Statistics price indexes are accepted for use by department stores employing the retail
inventory and last-in, first-out inventory methods for valuing
inventories for tax years ended on, or with reference to,
May 31, 1996.
T.D. 8676, page 4.
FI-59-94, page 23.
Temporary and proposed regulations under section 166 of
the Code relate to the allowance of a deduction for a
partially worthless debt when the terms of a debt instrument have been modified.
T.D. 8677, page 7.
CO-24-96, page 22.
Final, temporary, and proposed regulations under section
1502 of the Code relate to the limitations on the use of
certain losses and deductions on consolidated returns. A
public hearing on the proposed regulations will be held on
October 17, 1996.

Finding Lists begin on page 32.
Announcement of Disbarments and Suspensions begins on page 29.

IA–26–94, page 24.
Proposed regulations under section 1202 of the Code
relate to the 50-percent exclusion for gain from certain
small business stock. A public hearing will be held on
October 3, 1996.

EXEMPT ORGANIZATIONS
Announcement 96–67, page 26.
A list is given of organizations now classified as private
foundations.

Mission of the Service
The purpose of the Internal Revenue Service is to
collect the proper amount of tax revenue at the least
cost; serve the public by continually improving the

quality of our products and services; and perform in a
manner warranting the highest degree of public
confidence in our integrity, efficiency and fairness.

Statement of Principles
of Internal Revenue
Tax Administration
The Service also has the responsibility of applying
and administering the law in a reasonable,
practical manner. Issues should only be raised by
examining of ficers when they have merit, never
arbitrarily or for trading purposes. At the same
time, the examining officer should never hesitate
to raise a meritorious issue. It is also important
that care be exercised not to raise an issue or to
ask a court to adopt a position inconsistent with
an established Service position.

The function of the Internal Revenue Service is to
administer the Internal Revenue Code. Tax policy
for raising revenue is determined by Congress.
With this in mind, it is the duty of the Service to
carry out that policy by correctly applying the laws
enacted by Congress; to determine the reasonable
meaning of various Code provisions in light of the
Congressional purpose in enacting them; and to
perform this work in a fair and impartial manner,
with neither a government nor a taxpayer point of view.

Administration should be both reasonable and
vigorous. It should be conducted with as little
delay as possible and with great cour tesy and
considerateness. It should never try to overreach,
and should be reasonable within the bounds of law
and sound administration. It should, however, be
vigorous in requiring compliance with law and it
should be relentless in its attack on unreal tax
devices and fraud.

At the heart of administration is interpretation of the
Code. It is the responsibility of each person in the
Service, charged with the duty of interpreting the
law, to try to find the true meaning of the statutory
provision and not to adopt a strained construction in
the belief that he or she is ‘‘protecting the revenue.’’
The revenue is properly protected only when we ascertain and apply the true meaning of the statute.

2

Introduction
The Internal Revenue Bulletin is the authoritative instrument of the Commissioner of Internal Revenue for
announcing official rulings and procedures of the Internal Revenue Service and for publishing Treasury Decisions, Executive Orders, Tax Conventions, legislation,
court decisions, and other items of general interest. It is
published weekly and may be obtained from the Superintendent of Documents on a subscription basis. Bulletin
contents of a permanent nature are consolidated semiannually into Cumulative Bulletins, which are sold on a
single-copy basis.

court decisions, rulings, and procedures must be considered, and Service personnel and others concerned are
cautioned against reaching the same conclusions in
other cases unless the facts and circumstances are
substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on
provisions of the Internal Revenue Code of 1986.

It is the policy of the Service to publish in the Bulletin all
substantive rulings necessary to promote a uniform
application of the tax laws, including all rulings that
supersede, revoke, modify, or amend any of those
previously published in the Bulletin. All published rulings
apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management
are not published; however, statements of internal
practices and procedures that affect the rights and
duties of taxpayers are published.

Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows:
Subpart A, Tax Conventions, and Subpart B, Legislation
and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and
Subparts. Also included in this part are Bank Secrecy
Act Administrative Rulings. Bank Secrecy Act Administrative Rulings are issued by the Department of the
Treasury’s Office of the Assistant Secretary (Enforcement).

Revenue rulings represent the conclusions of the Service on the application of the law to the pivotal facts
stated in the revenue ruling. In those based on positions
taken in rulings to taxpayers or technical advice to
Service field offices, identifying details and information
of a confidential nature are deleted to prevent unwarranted invasions of privacy and to comply with statutory
requirements.

Part IV.—Items of General Interest.
With the exception of the Notice of Proposed Rulemaking and the disbarment and suspension list included in
this part, none of these announcements are consolidated in the Cumulative Bulletins.

Rulings and procedures reported in the Bulletin do not
have the force and effect of Treasury Department
Regulations, but they may be used as precedents.
Unpublished rulings will not be relied on, used, or cited
as precedents by Service personnel in the disposition of
other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations,

The first Bulletin for each month includes an index for
the matters published during the preceding month.
These monthly indexes are cumulated on a quarterly and
semiannual basis, and are published in the first Bulletin
of the succeeding quarterly and semi-annual period,
respectively.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents U.S. Government Printing Office, Washington, D.C. 20402.

3

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 166.—Bad Debts
26 CFR 1.166–3T: Partial or total worthlessness
(temporary).

T.D. 8676
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Modifications of Bad Debts and
Dealer Assignments of Notional
Principal Contracts
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Temporary regulations.
SUMMARY: This document contains
temporary regulations relating to the
allowance of a deduction for a partially
worthless debt when the terms of a debt
instrument have been modified. The
temporary regulations provide guidance
to certain taxpayers that modify the
terms of a debt instrument after deducting an amount for partial worthlessness.
This document also contains temporary
regulations relating to certain assignments of notional principal contracts by
dealers in those contracts. The temporary regulations provide guidance to
taxpayers relating to consequences of
these assignments. The text of these
temporary regulations also serves as the
text of the proposed regulations set forth
in FI–59–94 on page 23 in this issue of
the Bulletin.
DATES: These regulations are effective
September 23, 1996.
FOR FURTHER INFORMATION
CONTACT: Concerning the modifications of bad debts, Craig R. Wojay,
Office of Assistant Chief Counsel (Financial Institutions and Products), (202)
622–3920 (not a toll-free number), and
concerning dealer assignments of notional principal contracts, Thomas J.
Kelly, Office of the Assistant Chief
Counsel (Financial Institutions and
Products), (202) 622– 3940 (not a tollfree number).
SUPPLEMENTARY
INFORMATION:

57034 [FI–31–92, 1992–2 C.B. 683]) a
notice of proposed rulemaking that set
forth proposed income tax regulations
(26 CFR part 1) under section 1001 of
the Internal Revenue Code (Code). Under § 1.1001–3(a) of the proposed regulations, a significant modification of a
debt instrument is deemed to result in
an exchange of the original debt instrument for a modified instrument that
differs materially either in kind or in
extent. This rule is retained in the final
regulations under § 1.1001–3, published
in TD 8675, 1996–29 I.R.B. 50. Thus,
when a debt is significantly modified, a
taxpayer (holder) is required to recognize gain or loss based on the difference
between the issue price of the significantly modified debt and the taxpayer’s
adjusted issue price in the original instrument.
Prior to finalizing the § 1.1001–3
regulations, the IRS and Treasury received comments that gain recognized
as the result of a significant modification of a debt instrument often is attributable to the fact that the taxpayer
previously claimed a deduction for partial worthlessness with respect to the
debt. According to the commentators,
the modification does not alter the fact
that a portion of the debt remains uncollectible. Thus, the commentators suggested that, in this situation, a taxpayer
should be permitted to offset the gain
with a corresponding bad debt deduction.
The IRS and Treasury also received
comments that the assignment by a
dealer in notional principal contracts of
its position in a contract to another
dealer should not result in a deemed
exchange under section 1001. Although
the dealer will recognize gain or loss on
the disposition of its position, treating
the transaction as a deemed exchange
would force the counterparty to realize
the gain or loss on the contract even
though the counterparty is maintaining
its position. The commentators argued
that dealer-to-dealer assignments are a
common business practice and that these
assignments have relatively little significance to the dealers’ counterparties.
Explanation of Provisions

Background
On December 2, 1992, the IRS published in the Federal Register (57 FR

Section 166(a)(2) and § 1.166–3(a)
provide that a deduction for a partially
worthless debt is allowed only to the

4

extent the debt is charged off in the
taxable year. The charge-off requirement
is also contained in § 1.166–2(d)(1) and
(3), which provides for a conclusive
presumption of worthlessness under certain circumstances.
In general, the amount of a deduction
on account of partial worthlessness is
the amount by which the adjusted basis
of a debt (as determined under section
1011) exceeds the amount recoverable
on the debt. The amount of the deduction, however, may not exceed the
amount charged off during the taxable
year. The charge-off requirement is satisfied for a debt when a portion of the
debt is removed from a taxpayer’s
books and records. This generally is
accomplished by reducing the debt’s
book basis. Thus, when an amount has
been deducted for partial worthlessness,
there is generally a reduction of both the
book basis and tax basis of a debt.
When a taxpayer is required to recognize gain under section 1001 because of
a modification of a debt instrument, the
taxpayer’s tax basis in the debt is increased by the amount of gain recognized. Commentators on the proposed
§ 1.1001–3 regulations have indicated,
however, that regulatory and general
accounting principles generally would
not permit a corresponding increase in
the book basis of the debt. Because the
prior charge-off is not restored (that is,
the book basis of the debt is not increased), there is no opportunity for the
taxpayer to take a new charge-off for
pre-existing worthlessness. Thus, the
charge-off requirement of section
166(a)(2) can never be satisfied with
respect to the amount by which the
debt’s tax basis exceeds its book basis
as a result of the modification, and the
excess would not be allowed as a deduction until the debt becomes totally
worthless.
The temporary regulations contained
in this document set forth limited circumstances under which a taxpayer will
be permitted to deduct an amount on
account of a partially worthless debt
even though no amount has been
charged off within the taxable year. The
purpose of these temporary regulations
is to preserve the portion of a taxpayer’s
bad debt deduction with respect to a
partially worthless debt that corresponds
to the amount the taxpayer would have
been entitled to deduct for partial worthlessness with respect to the modified

debt if the book basis of the modified
debt were increased to the same extent
as the tax basis of that debt. Thus, these
temporary regulations apply only if all
of the following conditions are satisfied.
First, a significant modification of a
debt instrument (within the meaning of
§ 1.1001–3) must result in a taxpayer’s
recognition of gain under § 1.1001–
1(a). In addition, the debt must have
been previously charged off and deducted by the taxpayer, and the prior
charge-off and deduction must have satisfied the requirements of § 1.166–
3(a)(1) and (2). If these conditions are
satisfied, then a modified debt is
deemed to have been charged off in the
year in which gain is recognized. The
amount of the charge-off, however, is
limited to the difference between the tax
basis of the debt and the greater of the
book basis or the fair market value of
the debt.
Both the proposed and the final regulations under § 1.1001–3 deal only with
modifications of debt instruments. In
response to comments on the proposed
regulations, however, the temporary
regulations contained in this document
provide a limited rule dealing with a
dealer’s assignment of its position in an
interest rate or commodity swap, or
other notional principal contract to another dealer. If the assignment is permitted by the terms of the contract, the
assignment will not be treated as a
deemed exchange by the nonassigning
party of the original contract for a new
contract that differs materially either in
kind or in extent. Thus, an assignment
to which the rule applies does not
trigger gain or loss to the dealer’s
counterparty. No inference is intended
with respect to whether an assignment
of rights by one party to other types of
bilateral contracts results in an exchange
or other disposition under section 1001
by the nonassigning party.
Effective Dates
The temporary regulations apply to
significant modifications of debt instruments and assignments of interest rate
swaps, commodity swaps, and other notional principal contracts occurring on or
after September 23, 1996.
Special Analyses
It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 12866.
Therefore, a regulatory assessment is not
required. It also has been determined

that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) and
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) do not apply to these regulations, and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant
to section 7805(f) of the Internal Revenue Code, these temporary regulations
will be submitted to the Chief Counsel
for Advocacy of the Small Business
Administration for comment on their
impact on small business.
Drafting Information
The principal author of the regulations concerning the modification of bad
debts is Craig R. Wojay, Office of the
Assistant Chief Counsel (Financial Institutions and Products), IRS. The principal author of the regulations concerning
the dealer assignments of certain notional principal contracts is Thomas J.
Kelly, Office of the Assistant Chief
Counsel (Financial Institutions and
Products), IRS. However, other personnel from the IRS and Treasury Department participated in their development.
*

*

*

*

*

Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.166–3T is added to
read as follows:
§ 1.166–3T Partial or total worthlessness (temporary).
(a)(1) and (2) [Reserved]. For guidance, see § 1.166– 3(a)(1) and (2).
(3) Significantly modified debt—(i)
Deemed charge-off. If a significant
modification of a debt instrument
(within the meaning of § 1.1001–3) during a taxable year results in the recognition of gain by a taxpayer under
§ 1.1001–1(a), and if the requirements
of paragraph (a)(3)(ii) of this section are
met, there is a deemed charge-off of the
debt during that taxable year in the
amount specified in paragraph (a)(3)(iii)
of this section.
(ii) Requirements for deemed chargeoff. A debt is deemed to have been
charged off only if—
(A) The taxpayer (or, in the case of a
debt that constitutes transferred basis

5

property within the meaning of section
7701(a)(43), a transferor taxpayer) has
claimed a deduction for partial worthlessness of the debt in any prior taxable
year; and
(B) Each prior charge-off and deduction for partial worthlessness satisfied
the requirements of paragraphs (a)(1)
and (2) of this section.
(iii) Amount of deemed charge-off.
The amount of the deemed charge-off, if
any, is the amount by which the tax
basis of the debt exceeds the greater of
the fair market value of the debt or the
amount of the debt recorded on the
taxpayer’s books and records reduced as
appropriate for a specific allowance for
loan losses. The amount of the deemed
charge-off, however, may not exceed the
amount of recognized gain described in
paragraph (a)(3)(i) of this section.
(iv) Effective date. This paragraph
(a)(3) is effective September 23, 1996.
(b) [Reserved]. For further guidance,
see § 1.166–3(b).
Par. 3. Section 1.1001–4T is added to
read as follows:
§ 1.1001–4T Modifications of certain
notional principal contracts.
(a) Dealer assignments. For purposes
of § 1.1001–1(a), the substitution of a
new party on an interest rate or commodity swap, or other notional principal
contract (as defined in § 1.446–3(c)(1))
is not treated as a deemed exchange by
the nonassigning party of the original
contract for a modified contract that
differs materially either in kind or in
extent if—
(1) The party assigning its rights and
obligations under the contract and the
party to which the rights and obligations
are assigned are both dealers in notional
principal contracts, as defined in
§ 1.446–3(c)(4)(iii); and
(2) The terms of the contract permit
the substitution.
(b) Effective date. This section is effective September 23, 1996.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved May 31, 1996.
Leslie Samuels,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on
June 24, 1996, 8:45 a.m., and published in the
issue of the Federal Register for June 25, 1996, 61
F.R. 32653)

Section 472.—Last-in, First-out
Inventories
26 CFR 1.472–1: Last-in, first-out inventories.

LIFO; price indexes; department
stores. The May 1996 Bureau of Labor
Statistics price indexes are accepted for
use by department stores employing the
retail inventory and last-in, first-out inventory methods for valuing inventories
for tax years ended on, or with reference
to, May 31, 1996.

Rev. Rul. 96–36
The following Department Store Inventory Price Indexes for May 1996
were issued by the Bureau of Labor
Statistics on June 12, 1996. The indexes
are accepted by the Internal Revenue
Service, under § 1.472–1(k) of the Income Tax Regulations and Rev. Proc.
86–46, 1986–2 C.B. 739, for appropriate
application to inventories of department
stores employing the retail inventory
and last-in, first-out inventory methods

for tax years ended on, or with reference
to, May 31, 1996.
The Department Store Inventory Price
Indexes are prepared on a national basis
and include (a) 23 major groups of
departments, (b) three special combinations of the major groups - soft goods,
durable goods, and miscellaneous goods,
and (c) a store total, which covers all
departments, including some not listed
separately, except for the following:
candy, foods, liquor, tobacco, and contract departments.

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)

Groups

May
1995

May
1996

Percent
Change from
May 1995 to
May 19961

1. Piece Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2. Domestics and Draperies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3. Women’s and Children’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4. Men’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5. Infants’ Wear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6. Women’s Underwear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7. Women’s Hosiery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8. Women’s and Girls’ Accessories . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9. Women’s Outerwear and Girls’ Wear. . . . . . . . . . . . . . . . . . . . . . . . .
10. Men’s Clothing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11. Men’s Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12. Boys’ Clothing and Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13. Jewelry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14. Notions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15. Toilet Articles and Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16. Furniture and Bedding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17. Floor Coverings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18. Housewares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19. Major Appliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20. Radio and Television. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21. Recreation and Education2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22. Home Improvements2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23. Auto Accessories2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

507.4
643.5
635.2
920.2
599.2
529.4
283.1
539.4
437.0
610.4
575.7
483.8
984.9
750.3
857.9
655.3
569.4
775.1
247.3
84.8
114.3
122.3
107.2

545.1
649.3
659.7
906.5
631.2
534.1
286.8
550.8
417.9
626.1
593.3
493.3
1020.1
773.8
883.8
668.0
576.1
803.9
245.1
79.2
112.8
127.2
107.4

7.4
0.9
3.9
21.5
5.3
0.9
1.3
2.1
24.4
2.6
3.1
2.0
3.6
3.1
3.0
1.9
1.2
3.7
20.9
26.6
21.3
4.0
0.2

Groups 1–15: Soft Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

597.1

603.0

1.0

Groups 16–20: Durable Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

465.4

467.6

0.5

114.2

113.7

20.4

552.4

556.3

0.7

2

Groups 21–23: Misc. Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3

Store Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1

Absence of a minus sign before percentage change in this column signifies price increase.
Indexes on a January 1986=100 base.
3
The store total index covers all departments, including some not listed separately, except for the following: candy, foods,
liquor, tobacco, and contract departments.
2

DRAFTING INFORMATION
The principal author of this revenue ruling is Stan Michaels of the Office of Assistant Chief Counsel (Income Tax and
Accounting). For further information regarding this revenue ruling, contact Mr. Michaels on (202) 622–4970 (not a toll-free
call).

6

Section 1502.—Regulations
26 CFR 1.1502–21T: Net operating losses (temporary).

T.D. 8677
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Consolidated Returns—Limitations
on the Use of Certain Losses and
Deductions
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regulations.
SUMMARY: This document contains final and temporary amendments to the
consolidated return regulations relating
to deductions and losses of members.
The temporary amendments concern the
method for computing the limitations
with respect to separate return limitation
year (SRLY) losses. They also concern
the rules relating to carryover and carryback of losses to consolidated and
separate return years and to the built-in
deduction rules. Final amendments are
made amending definitions and redesignating sections displaced by temporary
regulations. The text of these temporary
regulations also serves as the text of the
proposed regulations set forth in CO–
24–96 on page 22 in this issue of the
Bulletin.
DATES: These amendments are effective Thursday, June 27, 1996. For dates
of application and special transition
rules, see Effective Dates under
SUPPLEMENTARY INFORMATION.
FOR FURTHER INFORMATION
CONTACT: David B. Friedel at (202)
622–7550 (not a toll-free number).
SUPPLEMENTARY
INFORMATION:
Paperwork Reduction Act
The collection of information contained in the temporary regulations has
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under the
control number 1545–1237. Section
1.1502–21T(b)(3) requires a response
from certain consolidated groups. The
IRS requires the information to assure
that an election to relinquish a carryback
period is properly documented.

Reponses to this collection of information are required to obtain a benefit
(relating to the carryover of losses
which would otherwise be carried back).
An agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information displays a valid control number.
For further information concerning
this collection of information, and where
to submit comments on the collection of
information and the accuracy of the
estimated burden, and suggestions for
reducing this burden, please refer to the
preamble to the cross-referencing notice
of proposed rulemaking published in
this issue of the Bulletin.
Books or records relating to a collection of information must be retained as
long as their contents may become material in the administration of any Internal Revenue law. Generally, tax returns
and tax return information are confidential, as required by 26 U.S.C. 6103.
Background and Explanation of Provisions
On February 4, 1991, the IRS and
Treasury published in the Federal Register a notice of proposed rulemaking
(CO–078–90, 56 FR 4228) setting forth
amendments to the rules regarding the
net operating losses, built-in deductions,
and capital losses of consolidated
groups, including rules regarding the
carryover and carryback of losses to
consolidated and separate return years.
Some of the amendments are clarifying,
and some change the existing rules. The
principal changes related to losses arising in (or carried to) SRLY years. The
preamble to the proposed amendments
explains the proposed changes in detail.
The IRS and Treasury also published
Notice 91–27 (1991–2 C.B. 629) to
advise of intended modifications to the
proposed amendments.
Generally, section 1503(a) requires
that a consolidated group determine its
tax in accordance with the regulations
under section 1502 prescribed before the
last day prescribed by law for the filing
of its tax return. Many of the proposed
amendments have proposed effective
dates of January 29, 1991, and other
transitional rules for their application.
Because of this effective date, consolidated groups have been uncertain
whether the existing rules or the proposed rules (if adopted) will determine

7

their use of losses for consolidated return years ending on or after January 29,
1991.
To address the uncertainty, the IRS
and Treasury are issuing this Treasury
decision to adopt temporary amendments to the rules regarding a consolidated group’s losses, including the carryover and carryback of SRLY losses.
The temporary amendments are substantially identical to the rules proposed on
January 29, 1991. A more detailed discussion of the effective dates of the
temporary amendments, including special transitional rules, is set forth below
under Effective Dates.
These temporary amendments primarily address the uncertainty created by
the proposed effective dates. They do
not address the comments on the proposed amendments. Many of these comments are still under consideration.
As companions to this Treasury decision, the IRS and Treasury also issue
two other sets of temporary regulations
under sections 382 and 383 concerning
the use of losses and deductions by
consolidated groups and by members of
controlled groups. See TD 8678 and TD
8679 published elsewhere in the Bulletin.
Effective Date
The temporary amendments are generally effective for consolidated return
years beginning on or after January 1,
1997. However, two important changes
are made to the effective date provisions
set forth in the proposed rules.
As proposed, the amendments generally applied to consolidated return years
ending on or after January 29, 1991,
without regard to the year in which the
losses arose and without regard to
whether the losses are subject to the
SRLY rules. An exception to the general
effective date rules was made for the
proposed SRLY rules and built-in deduction rules, which generally applied
only to losses and deductions of corporations that became members (and acquisitions occurring) on or after January
29, 1991, without regard to when they
arose. Thus, the proposed amendments
required the losses and deductions of
members acquired before January 29,
1991, to remain subject to the existing
SRLY limitations.
The temporary amendments revise
this treatment. Losses and deductions of
a member (including SRLY losses) carried to consolidated return years beginning on or after January 1, 1997, are

governed by the temporary amendments,
regardless of the year in which the loss
or deduction was recognized, and regardless of when the member with the
SRLY loss became a member of the
group.
The temporary amendments also contain rules relating to consolidated return
years ending on or after January 29,
1991, and beginning before January 1,
1997. Specifically, a consolidated group
may apply the temporary amendments to
those consolidated return years provided
that three principal conditions are met:
(1) all the temporary amendments must
be applied consistently on the group’s
final return (original or amended return)
for each such year for which the statute
of limitations does not preclude the
filing of an amended return on January
1, 1997; (2) the temporary amendments
relating to the treatment of built-in deductions and SRLY losses must be applied with respect to the losses and
deductions of those corporations that
became members of the group, and to
acquisitions occurring, on or after January 29, 1991, and only with respect to
such losses and deductions; and (3)
appropriate adjustments must be made
in the earliest subsequent open year to
reflect any inconsistency in a year for
which the statute of limitations precludes the filing of an amended return
on January 1, 1997. Until consolidated
return years beginning on or after January 1, 1997, the rules of the existing
regulations relating to the treatment of
built-in deductions and SRLY losses
continue to apply to corporations that

became members before, and to acquisitions occurring before, January 29,
1991. See § 1.1502–21T(g)(3).

Accordingly, 26 CFR parts 1 and 602
are amended as follows:

Paragraph 1. The authority citation
for Part 1 is amended in part by adding
citations in numerical order to read as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1502–0 also issued under 26
U.S.C. 1502.* * *
Section 1.1502–1T also issued under
26 U.S.C. 1502.
Section 1.1502–2 also issued under 26
U.S.C. 1502.* * *
Section 1.1502–15T also issued under
26 U.S.C. 1502.* * *
Section 1.1502–21T also issued under
26 U.S.C. 1502.
Section 1.1502–22T also issued under
26 U.S.C. 1502.
Section 1.1502–23T also issued under
26 U.S.C. 1502.* * *
Section 1.1502–79T also issued under
26 U.S.C. 1502.
Section 1.1502–15A also issued under
26 U.S.C. 1502.
Section 1.1502–21A also issued under
26 U.S.C. 1502.
Section 1.1502–22A also issued under
26 U.S.C. 1502. Section 1.1502–23A
also issued under 26 U.S.C. 1502.
Section 1.1502–41A also issued under
26 U.S.C. 1502.
Section 1.1502–79A also issued under
26 U.S.C. 1502.* * *
Par. 2. In the list below, for each
section indicated in the left column,
remove the wording indicated in the
middle column, and add the wording
indicated in the right column.

Affected Section

Remove

Add

1.469–1(h)(2)

1.1502–21 (consolidated net operating
loss), and 1.1502–22 (consolidated net
capital gain or loss)

1.1502–21T (Net operating losses (temporary)), and 1.1502–22T (consolidated
net capital gain and loss (temporary))

1.597–2(c)(5), first sentence

§§ 1.1502–15, 1.1502–21, and
1.1502–22

§§ 1.1502–15T, 1.1502–21T, and
1.1502–22T (or §§ 1.1502–15A, 1.1502–
21A, and 1.1502–22A, as appropriate)

1.597–2(c)(5), second sentence

§§ 1.1502–15, 1.1502–21 or 1.1502–22

§§ 1.1502–15T, 1.1502–21T or 1.1502–
22T (or §§ 1.1502–15A, 1.1502–21A or
1.1502–22A, as appropriate)

1.597–4(g)(3), fifth sentence

§§ 1.1502–15, 1.1502–21 and
1.1502–22

§§ 1.1502–15T, 1.1502–21T and
1.1502–22T (or §§ 1.1502–15A, 1.1502–
21A and 1.1502–22A, as appropriate)

1.597–4(g)(3), sixth sentence

§§ 1.1502–15, 1.1502–21, or 1.1502–22 §§ 1.1502–15T, 1.1502–21T, or 1.1502–
22T (or §§ 1.1502–15A, 1.1502–21A, or
1.1502–22A, as appropriate)

1.904(f)–3(a)

(or §§ 1.1502–21(b) and 1.1502–79(a))
(or § 1.1502–21T(b)

SPECIAL ANALYSIS
It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 12866.
Therefore, a regulatory assessment is not
required. It is hereby certified that these
regulations do not have a significant
economic impact on a substantial number of small entities. This certification is
based on the fact that these regulations
will primarily affect affiliated groups of
corporations that have elected to file
consolidated returns, which tend to be
larger businesses. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter
6) is not required. Pursuant to section
7805(f) of the Internal Revenue Code,
the notice of proposed rulemaking preceding these regulations were sent to the
Small Business Administration for comment on their impact on small business.
Drafting Information
The principal author of these regulations is David B. Friedel of the Office
of Assistant Chief Counsel (Corporate),
IRS. Other personnel from the IRS and
Treasury participated in their development.
Adoption of Amendments to the Regulations

8

PART 1—INCOME TAXES

(or §§ 1.1502–21A(b) and 1.1502–
79A(a), as appropriate))

Affected Section

Remove

Add

1.904(f)–3(b)

(or §§ 1.1502–22 and 1.1502–79(b)

(or § 1.1502–22T(b) (or §§ 1.1502–22A
and 1.1502–79A(b), as appropriate))

1.1341–1(f)(2)(i)

§ 1.1502–2A

§ 1.1502–2A (as contained in the 26
C.F.R. edition revised as of April 1,
1996)

1.1502–9(a), seventh sentence

§ 1.1502–79

§ 1.1502–21T(b)(2) (or § 1.1502–79A,
as appropriate)

1.1502–9(a), eighth sentence

§ 1.1502–79

§ 1.1502–21T(b)(1) (or § 1.1502–79A,
as appropriate)

1.1502–9(f) Example 5(ii)

§ 1.1502–21(c)

§ 1.1502–21A(c)

1.1502–11(a)(2)

§ 1.1502–21

§§ 1.1502–21T (or 1.1502–21A, as
appropriate)

1.1502–11(a)(3)

§ 1.1502–22

§§ 1.1502–22T (or 1.1502–22A, as
appropriate)

1.1502–11(a)(4)

§ 1.1502–23

§§ 1.1502–23T (or 1.1502–23A, as
appropriate)

1.1502–11(b)(2)(iii) Example 1(c)

§ 1.1502–79

§ 1.1502–21T (or § 1.1502–79A, as
appropriate)

1.1502–11(b)(2)(iii) Example 2(d)

§ 1.1502–79

§§ 1.1502–21T and 1.1502–22T, respectively (or § 1.1502–79A, as appropriate),

1.1502–11(b)(2)(iii) Example 3(e)

§ 1.1502–79

§ 1.1502–21T (or § 1.1502–79A, as
appropriate)

1.1502–12(b)

§ 1.1502–15 shall be taken into account as provided in that section

§§ 1.1502–15A or 1.1502–15T shall be
taken into account as provided in those
sections

1.1502–13(c)(7)(ii) Example 10(d)

§ 1.1502–21(c)

§ 1.1502–21T(c)

1.1502–13(g)(5) Example 4(b)

§ 1.1502–15

§ 1.1502–15T (or § 1.1502–15A, as
appropriate)

1.1502–13(h)(2), Example 1(a)

§ 1.1502–21(c)

§ 1.1502–21T(c)

1.1502–13(h)(2) Example 1(b)

§ 1.1502–21(c)

§ 1.1502–21T(c)

1.1502–13(h)(2) Example 2(a)

§ 1.1502–15

§ 1.1502–15T

1.1502–13(h)(2) Example 2(b)

1.1502–22

1.1502–22T

1.1502–15(a)(1), first sentence

§ 1.1502–21(c)

§ 1.1502–21A(c)

1.1502–15(a)(1), first sentence

§ 1.1502–22(c)

§ 1.1502–22A(c)

1.1502–15(a)(1), second sentence

under §§ 1.1502–21, 1.1502–22, and
1.1502–79

under §§ 1.1502–21A, 1.1502–22A, and
1.1502–79A (or §§ 1.1502–21T and
1.1502–22T, as appropriate)

1.1502–15(a)(1), second sentence

in § 1.1502–21(c) or § 1.1502–22(c)
(as the case may be)

in §§ 1.1502–21T(c) or 1.1502–22T(c)
(or §§ 1.1502–21A(c) or 1.1502–22A(c),
as appropriate), as the case may be

1.1502–15(a)(3)

§ 1.1502–31A(b)(9)

§ 1.1502–31A(b)(9) (as contained in the
26 C.F.R. edition revised as of April 1,
1996)

1.1502–18(f)(1)(ii), (1)(iii), (2)(i), (2)(ii),
and (4) Example (i) and (ii)

§ 1.1502–39A

§ 1.1502–39A (as contained in the 26
C.F.R. edition revised as of April 1,
1996)

1.1502–18(f)(5)

§ 1.1502–31A(b)(1)

§ 1.1502–31A(b)(1) (as contained in the
26 C.F.R. edition revised as of April 1,
1996)

1.1502–20(a)(1)

1.1502–15(b)

1.1502–11(c)

1.1502–20(c)(4), Example 7(iii)

§ 1.1502–21

§§ 1.1502–21A or 1.1502–21T

9

Affected Section

Remove

Add

1.1502–20(g)(3), Example 1(i)

§ 1.1502–21

§§ 1.1502–21A or 1.1502–21T

1.1502–20(g)(3), Example 2(i)

§ 1.1502–21

§§ 1.1502–21A or 1.1502–21T

1.1502–21(b)(1)

paragraph (a) of § 1.1502–79

§§ 1.1502–79A(a)

1.1502–21(b)(1)

§ 1.1502–15

§ 1.1502–15A (or § 1.1502–11(c), as
appropriate)

1.1502–21(b)(2)(i)

paragraph (a)(4) of § 1.1502–79

this paragraph

1.1502–21(e)(1)(i)

paragraph (a)(3) of § 1.1502–79

this paragraph

1.1502–22(a)(1)(ii)

§ 1.1502–23

§§ 1.1502–23A or 1.1502–23T

1.1502–22(a)(3)

§ 1.1502–15

§§ 1.1502–15A and 1.1502–11(c)

1.1502–22(b)(1)

paragraph (b) of § 1.1502–79

§ 1.1502–79A(b) (or § 1.1502–22T(b),
as appropriate)

1.1502–23

§§ 1.1502–21(c) and 1.1502–22(c), as
provided in § 1.1502–15(a)

§§ 1.1502–21A(c) and 1.1502–22A(c),
as provided in § 1.1502–15A(a) (or
§§ 1.1502–21T(c) and 1.1502–22T(c), as
provided in § 1.1502-15T(a), as appropriate)

1.1502–26(a)(1)(ii) concluding text

paragraph (f) of § 1.1502–21

§§ 1.1502–21T(e) or 1.1502–21A(f), as
appropriate,

1.1502–32(b)(5) Example 2(b)

1.1502–79

1.1502–21T(b)

1.1502–41(a)

paragraph (a)(1) of § 1.1502–22

§ 1.1502–22A(a)

1.1502–41(a)

§ 1.1502–23

§ 1.1502–23A

1.1502–41(b)

paragraph (a)(1) of § 1.1502–22

§ 1.1502–22A(a)

1.1502–41(b)

paragraph (b) of § 1.1502–22

§ 1.1502–22A(b)

1.1502–42(f)(4)(i)(A)

§ 1.1502–79(a)(3)

§ 1.1502–21T(b) (or § 1.1502–
79A(a)(3), as appropriate)

1.1502–42(j) Example 4(b)

§ 1.1502–79(a)(3)

§ 1.1502–79A(a)(3)

1.1502–42(j) Example 4(c)

§ 1.1502–21(b)(3)

§ 1.1502–21A(b)(3)

1.1502–42(j) Example 4(c)

§ 1.1502–79(a)(3)

§ 1.1502–79A(a)(3)

1.1502–43(b)(2)(iv)

§ 1.1502–21(a)

§§ 1.1502–21T(a) or 1.1502–21A(a), as
appropriate

1.1502–43(b)(2)(v)

§ 1.1502–22(a)

§§ 1.1502–22T(a) or 1.1502–22A(a), as
appropriate

1.1502–43(b)(2)(vi)

§ 1.1502–41(a)

§§ 1.1502–22T(a) or 1.1502–41A, as
appropriate

1.1502–43(b)(2)(vi)

§ 1.1502–41(b)

§§ 1.1502–22T(a) or 1.1502–41A, as
appropriate

1.1502–43(b)(2)(vii)

§ 1.1502–22(b)

§§ 1.1502–22T(b) or 1.1502–22A(b), as
appropriate

1.1502–43(b)(2)(vi ii)

Section 1.1502–15 (built-in deductions)
does

Sections 1.1502–15A (Limitations on
built-in deductions not subject to
§ 1.1502–15T) and 1.1502–15T (SRLY
limitation on built-in losses (temporary))
do

1.1502–44(b)(2)

§ 1.1502–21

§§ 1.1502–21T or 1.1502–21A (as
appropriate)

1.1502–44(b)(3)

§ 1.1502–22

§§ 1.1502–22T or 1.1502–22A (as
appropriate)

1.1502–47(h)(2)(i)

§ 1.1502–21

§§ 1.1502–21T or 1.1502–21A (as
appropriate)

10

Affected Section

Remove

Add

1.1502–47(h)(2)(ii)

§ 1.1502–21(f)

§§ 1.1502–21(A)(f) or 1.1502–21T(e)
(as appropriate)

1.1502–47(h)(2)(iii)

§ 1.1502–21

§§ 1.1502–21A or 1.1502–21T (as
appropriate)

1.1502–47(h)(2)(iv)

§ 1.1502–21

§§ 1.1502–21A or 1.1502–21T (as
appropriate)

1.1502–47(h)(2)(vii) Example

§§ 1.1502–21 and 1.1502–79

§§ 1.1502–21A and 1.1502–79A

1.1502–47(h)(3)(iii)

§ 1.1502–21(c)

§§ 1.1502–21A(c) or 1.1502–21T(c) (as
appropriate)

1.1502–47(h)(3)(iv) and (v)

§ 1.1502–21(d)

§ 1.1502–21A(d)

1.1502–47(h)(4)(i), first sentence

§ 1.1502–22

§§ 1.1502–22T or 1.1502–22A (as
appropriate)

1.1502–47(h)(4)(i), second sentence

§ 1.1502–22(a)

§§ 1.1502–22T or 1.1502–22A(a) (as
appropriate)

1.1502–47(h)(4)(ii), first sentence

§ 1.1502–22

§§ 1.1502–22A or 1.1502–22T

1.1502–47(h)(4)(ii), first sentence

§ 1.1502–21

§§ 1.1502–21T or 1.1502–21A (as
appropriate)

1.1502–47(h)(4)(ii), second sentence

‘‘§ 1.1502–22(d)’’

‘‘§ 1.1502–22A(d)’’

1.1502–47(h)(4)(ii), second sentence

‘‘§ 1.1502–21(d)’’

‘‘§ 1.1502–21A(d)’’

1.1502–47(h)(4)(iii)

§ 1.1502–22(b)(1)

§§ 1.1502–22A(b)(1) or 1.1502–22T(b)

1.1502–47(k)(5)

§ 1.1502–22

§§ 1.1502–22T or 1.1502–22A (as
appropriate)

1.1502–47(l)(3)(i)

§ 1.1502–21

§§ 1.1502–21T or 1.1502–21A (as
appropriate)

1.1502–47(m)(2)(ii)

§ 1.1502–21

§§ 1.1502–21T or 1.1502–21A (as
appropriate)

1.1502–47(m)(2)(ii)

§ 1.1502–22

§§ 1.1502–22T or 1.1502–22A (as
appropriate)

1.1502–47(m)(3)(i)

§§ 1.1502–21 and 1.1502–22

§§ 1.1502–21T and 1.1502–22T (or
§§ 1.1502–21A and 1.1502–22A, as
appropriate)

1.1502–47(m)(3)(vi)(A), both instances

§ 1.1502–79(a)(3)

§§ 1.1502–21T(b) or 1.1502–79A(a)(3)
(as appropriate)

1.1502–47(m)(3)(vii)

§ 1.1502–21(b)(3)(ii)

§ 1.1502–21A(b)(3)(ii)

1.1502–47(m)(3)(ix )

§ 1.1502–15 (including the exceptions
in paragraph (a)(4) thereof)

§§ 1.1502–15T and 1.1502–15A (including applicable exceptions thereto)

1.1502–47(m)(5) Example 4

§ 1.1502–15

§ 1.1502–15A

1.1502–47(o)(2)(i)

§ 1.1502–41

§§ 1.1502–41A or 1.1502–22T (as
appropriate)

1.1502–47(o)(2)(ii)

§ 1.1502–41

§§ 1.1502–41A or 1.1502–22T (as
appropriate)

1.1502–47(q)

§ 1.1502–21(b)(3) and § 1.1502–
79(a)(3)

§§ 1.1502–21A(b)(3) and 1.1502–
79A(a)(3) (or § 1.1502–21T, as appropriate)

1.1502–78(a)

§ 1.1502–79 (a), (b), or (c)

§§ 1.1502–21T(b), 1.1502–22T(b), or
1.1502–79(c) (or §§ 1.1502–79A(a),
1.1502–79A(b), or 1.1502–79(c), as
appropriate)

1.1502–79(a)(1)(i)

§ 1.1502–21

§ 1.1502–21A

1.1502–79(b)(1)

1.1502–22

1.1502–22A

11

Affected Section

Remove

Add

1.1502–79(c)(1)

paragraph (a)(1) and (2) of this section

§ 1.1502–21T(b) (or §§ 1.1502–
79A(a)(1) and (2), as appropriate)

1.1502–79(d)(1)

paragraph (a)(1) and (2) of this section

§ 1.1502–21T(b) (or §§ 1.1502–
79A(a)(1) and (2), as appropriate)

1.1502–79(e)(1)

paragraph (a)(1) and (2) of this section

§ 1.1502–21T(b) (or §§ 1.1502–
79A(a)(1) and (2), as appropriate)

1.1502–80(c)

§ 1.1502–15(b)

§ 1.1502–11(c)

1.1502–100(c)(2)

§ 1.1502–21

§§ 1.1502–21A or 1.1502–21T (as
appropriate)

1.1503–2(d)(2)(i)

§ 1.1502–21(c)

§§ 1.1502–21A(c) or 1.1502–21T(c), as
appropriate

1.1503–2(d)(2)(ii)

§ 1.1502–21(c)

§§ 1.1502–21A(c) or 1.1502–21T(c), as
appropriate

1.1503–2(d)(4) Example 1(iv)

1.1502–22

1.1502–22T(c)

1.1503–2(d)(4) Example 2(iv)

§ 1.1502–21(c)

§ 1.1502–21A(c)

1.1503–2(g)(2)(vii)(B)(1)

§ 1.1502–21(c)

§§ 1.1502–21A(c) or 1.1502–21T(c) (as
appropriate)

1.1503–2(g)(2)(vii)(B)(2)

§ 1.1502–21(c)

§§ 1.1502–21A(c) or 1.1502–21T(c) (as
appropriate)

1.1503–2(g)(2)(vii)(E)

§ 1.1502–21(c)

§§ 1.1502–21A(c) or 1.1502–21T(c) (as
appropriate)

1.1503–2(g)(2)(vii)(G) Example 1

§ 1.1502–21(c)

§§ 1.1502–21A(c) or 1.1502–21T(c), as
appropriate

1.1503–2(g)(2)(vii)(G) Example 2

§ 1.1502–21(c)

§§ 1.1502–21A(c) or 1.1502–21T(c), as
appropriate

1.1503–2(h)(3)

§ 1.1502–21(c)

§§ 1.1502–21A(c) or 1.1502–21T(c) (as
appropriate)

1.1503–2A(f)(1)(i) intro text

§ 1.1502–79(a)(3)

§ 1.1502–21T(b)

1.1503–2A(f)(1)(i)(C)

§ 1.1502–79

§ 1.1502–22T(b)

1.1503–2A(f)(2)(i)

§ 1.1502–21(c)(2)

§§ 1.1502–21A(c)(2) or 1.1502–21T(c)
(as appropriate)

1.1503–2A(f)(2)(ii)

§ 1.1502–21(c)(2)

§§ 1.1502–21A(c)(2) or 1.1502–21T(c)
(as appropriate)

1.1503–2A(f)(4) Example 2(iv), first sen- § 1.1502–21(c)(2)
tence

§ 1.1502–21A(c)(2)

1.1503–2A(f)(4) Example 2(iv), second
sentence

§ 1.1502–21(c)

§ 1.1502–21A(c)

1.1552–1(a)(3)(i)

§ 1.1502–30A

§ 1.1502–30A (as contained in the 26
C.F.R. edition revised as of April 1,
1996)

1.1552–1(b)(1)

§ 1.1502–30A

§ 1.1502–30A (as contained in the 26
C.F.R. edition revised as of April 1,
1996)

301.6402–7(g)(2)(iii)

§ 1.1502–21(b)

§§ 1.1502–21T(b) or 1.1502–21A(b) (as
appropriate)

301.6402–7(g)(3) Example 2, second
sentence

§ 1.1502–21

§ 1.1502–21T

301.6402–7(g)(3) Example 2, third sentence

§ 1.1502–21(c)

§ 1.1502–21T(c)

301.6402–7(h)(1)(ii) Example(B)

1.1502–21(b)

1.1502–21T(b)

301.6402–7(h)(1)(i i) Example(B)

1.1502–22(b)

1.1502–22T(b)

12

(i) To which section 381(a) applies;

§ 1.1501–1 [Removed]
Par. 3. Section 1.1501–1 is removed.
Par. 4. The undesignated centerheading immediately following § 1.1504–4
is revised from ‘‘REGULATIONS APPLICABLE TO TAXABLE YEARS
PRIOR TO JANUARY 1, 1966’’ to
‘‘REGULATIONS APPLICABLE TO
TAXABLE YEARS BEFORE JANUARY 1, 1997’’.
§§ 1.1502–0A through 1.1502–3A,
1.1502–10A through 1.1502–19A and
1.1502–30A through 1.1502–51A [Removed]
Par. 5. Sections 1.1502–0A through
1.1502–3A,
1.1502–10A through
1.1502–19A, and 1.1502–30A through
1.1502–51A are removed.
Par. 6. Section 1.1502–0 is revised to
read as follows:

(a) The regulations under section
1502 are applicable to taxable years
beginning after December 31, 1965, except as otherwise provided therein.
(b) The provisions of §§ 1.1502–0A
through
1.1502–3A,
1.1502–10A
through 1.1502–19A, and 1.1502–30A
through 1.1502–51A (as contained in the
26 CFR part 1 edition revised April 1,
1996) are applicable to taxable years
beginning before January 1, 1966.
Par. 7. Section 1.1502–1 is amended
by revising paragraphs (b), (f)(1), and
(f)(2) introductory text, and adding paragraphs (f)(4) and (j), and reserving paragraph (i) to read as follows:
§ 1.1502–1 Definitions
*

*

*

*

(b) Member. The term member means
a corporation (including the common
parent) that is included in the group, or
as the context may require, a corporation that is included in a subgroup.
*

*

*

*

*

(f) Separate return limitation year—
(1) In general. Except as provided in
paragraphs (f)(2) and (3) of this section,
the term separate return limitation year
(or SRLY) means any separate return
year of a member or of a predecessor of
a member.
(2) Exceptions. The term separate return limitation year (or SRLY) does not
include:
*

*

*

*

(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 only if the
amount by which basis differs from
value, in the aggregate, is material. In
the case of such a transaction, only one
member may be considered a predecessor to or a successor of one other
member.
*

*

*

*

*

(i) [Reserved]
(j) Affiliated. Corporations are affiliated if they are members of a group
with each other.
Par. 8. In § 1.1502–2, paragraph (h)
is revised to read as follows:
§ 1.1502–2 Computation of tax liability.

§ 1.1502–0 Effective dates.

*

or

*

(4) Predecessors and successors. The
term predecessor means a transferor or
distributor of assets to a member (the
successor) in a transaction—

*

*

*

*

*

(h) The tax imposed by section 1201,
instead of the taxes computed under
paragraphs (a) and (g) of this section,
computed by reference to the net capital
gain of the group (see § 1.1502–22T)
(or, for consolidated return years to
which § 1.1502–22T does not apply,
computed by reference to the excess of
the consolidated net long-term capital
gain over the consolidated net shortterm capital loss (see § 1.1502–41A for
the determination of the consolidated net
long-term capital gain and the consolidated net short-term capital loss));
*

*

*

*

*

Par. 9. In § 1.1502–15, paragraph (b)
is redesignated as paragraph (c) of
§ 1.1502–11, and the heading of newly
designated § 1.1502–11, paragraph (c)
is revised to read as follows:
§ 1.1502–11 Consolidated taxable income.
*

*

*

*

*

(c) Disallowance of loss attributable
to pre-1966 distributions. * * *
Par. 10. Section 1.1502–15 is redesignated as § 1.1502–15A; the section
heading of the newly designated
§ 1.1502–15A is revised; and paragraph
(b) is added to read as follows:
§ 1.1502–15A Limitations on the allowance of built-in deductions for consolidated return years beginning before
January 1, 1997.
*

*

*

*

*

(b) Effective date. This section applies to any consolidated return years to

13

which § 1.1502–21T does not apply.
See § 1.1502–21T(g) for effective dates
of that section.
Par. 11. Section 1.1502–15T is added
to read as follows:
§ 1.1502–15T SRLY limitation
built-in losses (temporary).

on

(a) SRLY limitation. Built-in losses
are subject to the SRLY limitation under
§§ 1.1502–21T(c) and 1.1502–22T(c)
(including applicable subgroup principles). Built-in losses are treated as
deductions or losses in the year recognized, except for the purpose of determining the amount of, and the extent to
which the built-in loss is limited by, the
SRLY limitation for the year in which it
is recognized. Solely for such purpose, a
built-in loss is treated as a hypothetical
net operating loss carryover or net capital loss carryover arising in a SRLY,
instead of as a deduction or loss in the
year recognized. To the extent that a
built-in loss is allowed as a deduction
under this section in the year it is
recognized, it offsets any consolidated
taxable income for the year before any
loss carryovers or carrybacks are allowed as a deduction. To the extent not
so allowed, it is treated as a separate net
operating loss or net capital loss carryover or carryback arising in the year
of recognition and, under § 1.1502–
21T(c) or § 1.1502–22T(c), the year of
recognition is treated as a SRLY.
(b) Built-in losses—(1) Defined. If a
corporation has a net unrealized built-in
loss under section 382(h)(3) (as modified by this section) on the day it
becomes a member of the group
(whether or not the group is a consolidated group), its deductions and losses
are built-in losses under this section to
the extent they are treated as recognized
built-in
losses
under
section
382(h)(2)(B) (as modified by this section). This paragraph (b) generally applies separately with respect to each
member, but see paragraph (c) of this
section for circumstances in which it is
applied on a subgroup basis.
(2) Operating rules. Solely for purposes of applying paragraph (b)(1) of
this section, the principles of § 1.1502–
94T(c) apply with appropriate adjustments, including the following:
(i) Ownership change. A corporation
is treated as having an ownership
change under section 382(g) on the day
the corporation becomes a member of a
group, and no other events (e.g., a

subsequent ownership change under section 382(g) while it is a member) are
treated as causing an ownership change.
In the case of an asset acquisition by a
group, the assets and liabilities acquired
directly from the same transferor pursuant to the same plan are treated as the
assets and liabilities of a corporation
that becomes a member of the group
(and has an ownership change) on the
date of the acquisition.
(ii) Recognized built-in gain or loss.
A loss that is included in the determination of net unrealized built-in gain or
loss and that is recognized but disallowed or deferred (e.g., under
§ 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 § 1.1502–21T(c)(2)(iv) through (vi)
apply with appropriate adjustments.
(3) Built-in amounts. Solely for purposes of determining whether the subgroup has a net unrealized built-in loss
or whether it has a recognized built-in
loss, the principles of §§ 1.1502–91T(g)
and (h) apply with appropriate adjustments.
(d) Examples. For purposes of the
examples in this section, unless otherwise stated, all groups file consolidated
returns, all corporations have calendar
taxable years, the facts set forth the only
corporate activity, value means fair market value and the adjusted basis of each
asset equals its value, all transactions

are with unrelated persons, and the
application of any limitation or threshold under section 382 is disregarded.
The principles of this section are illustrated by the following examples:
Example 1. Determination of recognized built-in
loss. (a) P buys all the stock of T during Year 1
for $100, and T becomes a member of the P
group. T has three depreciable assets. Asset 1 has
an unrealized loss of $20 (basis $45, value $25),
asset 2 has an unrealized loss of $25 (basis $50,
value $25), and asset 3 has an unrealized gain of
$25 (basis $25, value $50).
(b) Under paragraph (b)(2)(i) of this section, T
is treated as having an ownership change under
section 382(g) on becoming a member of the P
group. This treatment does not depend on whether
P’s acquisition of the T stock actually constitutes
an ownership change under section 382(g), or
whether T is subject to any limitation under
section 382. Under paragraph (b)(1) of this section, none of T’s $45 of unrealized loss is treated
as a built-in loss unless T has a net unrealized
built-in loss under section 382(h)(3) on becoming
a member of the P group.
(c) Under section 382(h)(3)(A), T has a $20 net
unrealized built-in loss on becoming a member of
the P group (($20) + ($25) + $25 = ($20)).
Assume that this amount exceeds the threshold
requirement in section 382(h)(3)(B). Under section
382(h)(2)(B), the entire amount of T’s $45 unrealized loss is treated as a built-in loss to the extent
it is recognized during the 5-year recognition
period described in section 382(h)(7). Under paragraph (b)(2)(ii) of this section, the restriction
under section 382(h)(1)(B)(ii), which limits the
amount of recognized built-in loss that is treated
as pre-change loss to the amount of the net
unrealized built-in loss, is inapplicable for this
purpose. Consequently, the entire $45 of unrealized loss (not just the $20 net unrealized loss) is
treated under paragraph (b)(1) of this section as a
built-in loss to the extent it is recognized within 5
years of T’s becoming a member of the P group.
Under paragraph (a) of this section, a built-in loss
is subject to the SRLY limitation under § 1.1502–
21T(c)(1).
(d) Under paragraph (b)(2)(i) of this section,
the results would be the same if T transferred all
of its assets and liabilities to a subsidiary of the P
group in a single transaction described in section
351.
Example 2. Actual application of section 382
not relevant. (a) The facts are the same as in
Example 1, except that P buys 55 percent of the
stock of T during Year 1, resulting in an ownership change of T under section 382(g). During
Year 2, P buys the 45 percent balance of the T
stock, and T becomes a member of the P group.
(b) Although T has an ownership change for
purposes of section 382 in Year 1 and not Year 2,
T’s joining the P group in Year 2 is treated as an
ownership change under section 382(g) for purposes of this section. Consequently, for purposes
of this section, whether T has a net unrealized
built-in loss under section 382(h)(3) is determined
as if the day T joined the P group were a change
date. Thus, the results are the same as in Example 1.
Example 3. Determination of a recognized
built-in loss of a subgroup. (a) During Year 1, P
buys all of the stock of S for $100, and S
becomes a member of the P group. M is the
common parent of another group. At the beginning
of Year 7, M acquires all of the stock of P, and P
and S become members of the M group. At the
time of M’s acquisition of the P stock, P has
(disregarding the stock of S) a $10 net unrealized

14

built-in gain (two depreciable assets, asset 1 with
a basis of $35 and a value of $55, and asset 2
with a basis of $55 and a value of $45), and S has
a $75 net unrealized built-in loss (two depreciable
assets, asset 3 with a basis of $95 and a value of
$10, and asset 4 with a basis of $10 and a value
of $20).
(b) Under paragraph (c) of this section, P and S
compose a subgroup on becoming members of the
M group because P and S were continuously
affiliated for the 60 month period ending immediately before they became members of the M
group. Consequently, paragraph (b) of this section
does not apply to P and S separately. Instead, their
separately computed unrealized gains and losses
are aggregated for purposes of determining
whether and the extent to which any unrealized
loss is treated as built-in loss under this section
and is subject to the SRLY limitation under
§ 1.1502–21T(c).
(c) Under paragraph (c) of this section, the P
subgroup has a net unrealized built-in loss on the
day P and S become members of the M group
determined by treating the day they become
members as a change date. The net unrealized
built-in loss is the aggregate of P’s net unrealized
built-in gain of $10 and S’s net unrealized built-in
loss of $75, or an aggregate net unrealized built-in
loss of $65. (The stock of S owned by P is
disregarded for purposes of determining the net
unrealized built- in loss. However, any loss allowed on the sale of the stock within the recognition period is taken into account in determining
recognized built-in loss.) Assume that the $65 net
unrealized built-in loss exceeds the threshold requirement under section 382(h)(3)(B).
(d) Under paragraphs (b)(1), (b)(2)(ii), and (c)
of this section, a loss recognized during the 5-year
recognition period on an asset of P or S held on
the day that P and S became members of the M
group is a built-in loss except to the extent the
group establishes that such loss exceeds the
amount by which the adjusted basis of such asset
on the day the member became a member exceeded the fair market value of such asset on that
same day. If P sells asset 2 for $45 in Year 7 and
recognizes a $10 loss, the entire $10 loss is treated
as a built-in loss under paragraphs (b)(2)(ii) and
(c) of this section. If S sells asset 3 for $10 in
Year 7 and recognizes an $85 loss, the entire $85
loss is treated as a built-in loss under paragraphs
(b)(2)(ii) and (c) of this section (not just the $55
balance of the P subgroup’s $65 net unrealized
built-in loss).
(e) The determination of whether P and S
constitute a SRLY subgroup for purposes of loss
carryovers and carrybacks, and the extent to which
built-in losses are not allowed under the SRLY
limitation, is made under § 1.1502–21T(c).
Example 4. Computation of SRLY limitation. (a)
During Year 1, individual A forms T by contributing $300 and T sustains a $100 net operating loss.
During Year 2, T’s assets decline in value to $100.
At the beginning of Year 3, P buys all the stock of
T for $100, and T becomes a member of the P
group with a net unrealized built-in loss of $100.
Assume that $100 exceeds the threshold requirements of section 382(h)(3)(B). During Year 3, T
recognizes its unrealized built-in loss as a $100
ordinary loss. The members of the P group
contribute the following net income to the consolidated taxable income of the P group (disregarding
T’s recognized built-in loss and any consolidated
net operating loss deduction under § 1.1502–21T)
for Years 3 and 4:

P group
(without T)
T

Year 3

Year 4

Total

$100
60

$100
40

$200
100

CTI
$160
$140
$300.
(b) Under paragraph (b) of this section, T’s
$100 ordinary loss in Year 3 (not taken into
account in the consolidated taxable income computations above) is a built-in loss. Under paragraph (a) of this section, the built-in loss is treated
as a net operating loss carryover for purposes of
determining the SRLY limitation under § 1.1502–
21T(c).
(c) For Year 3, § 1.1502–21T(c) limits T’s
$100 built-in loss and $100 net operating loss
carryover from Year 1 to the aggregate of the P
group’s consolidated taxable income through Year
3 determined by reference to only T’s items. For
this purpose, consolidated taxable income is determined without regard to any consolidated net
operating loss deductions under § 1.1502–21T(a).
(d) The P group’s consolidated taxable income
through Year 3 is $60 when determined by
reference to only T’s items. Under § 1.1502–
21T(c), the SRLY limitation for Year 3 is therefore
$60.
(e) Under paragraph (a) of this section, the
$100 built- in loss is treated as a current deduction
for all purposes other than determination of the
SRLY limitation under § 1.1502–21T(c). Consequently, a deduction for the built-in loss is allowed
in Year 3 before T’s loss carryover from Year 1 is
allowed, but only to the extent of the $60 SRLY
limitation. None of T’s Year 1 loss carryover is
allowed because the built-in loss ($100) exceeds
the SRLY limitation for Year 3.
(f) The $40 balance of the built-in loss that is
not allowed in Year 3 because of the SRLY
limitation is treated as a $40 net operating loss
arising in Year 3 that is carried to other years in
accordance with the rules of § 1.1502–21T(b).
The $40 net operating loss is treated under
paragraph (a) of this section and § 1.1502–
21T(c)(1)(ii) as a loss carryover or carryback from
Year 3 that arises in a SRLY, and is subject to the
rules of § 1.1502–21T (including § 1.1502–
21T(c)) rather than this section.
(g) The facts are the same as in paragraphs (a)
through (f) of this Example 4, except that T also
recognizes additional built-in losses in Year 4. For
purposes of determining the SRLY limitation for
these additional losses in Year 4 (or any subsequent year), the $60 of built-in loss allowed as a
deduction in Year 3 is treated under paragraph (a)
of this section as a deduction in Year 3 that
reduces the P group’s consolidated taxable income
when determined by reference to only T’s items.
Example 5. Built-in loss exceeding consolidated
taxable income in the year recognized. (a) P buys
all the stock of T during Year 1, and T becomes a
member of the P group. At the time of acquisition,
T has a depreciable asset with an unrealized loss
of $45 (basis $100, value $55), which exceeds the
threshold requirements of section 382(h)(3)(B).
During Year 2, T sells its asset for $55 and
recognizes the unrealized built-in loss. The P
group has $10 of consolidated taxable income in
Year 2, computed by disregarding T’s recognition
of the $45 built-in loss and the consolidated net
operating loss deduction, while the consolidated
taxable income would be $25 if determined by
reference to only T’s items (other than the $45
loss).
(b) T’s $45 loss is recognized in Year 2 and,
under paragraph (b) of this section, constitutes a
built-in loss. Under paragraph (a) of this section
and § 1.1502–21T(c)(1)(ii), the loss is treated as a

net operating loss carryover to Year 2 for purposes
of applying the SRLY limitation under § 1.1502–
21T(c).
(c) For Year 2, T’s SRLY limitation is the
aggregate of the P group’s consolidated taxable
income through Year 2 determined by reference to
only T’s items. For this purpose, consolidated
taxable income is determined by disregarding any
built-in loss that is treated as a net operating loss
carryover, and any consolidated net operating loss
deductions under § 1.1502–21T(a). Consolidated
taxable income so determined is $25.
(d) Under § 1.1502–21T(c), $25 of the $45
built-in loss could be deducted in Year 2. Because
the P group has only $10 of consolidated taxable
income (determined without regard to the $45),
the $25 loss creates a consolidated net operating
loss of $15. This loss is carried back or over under
the rules of § 1.1502-21T(b) and absorbed under
the rules of § 1.1502–21T(a). This loss is not
treated as arising in a SRLY (see § 1.1502–
21T(c)(1)(ii)) and therefore is not subject to the
SRLY limitation under § 1.1502–21T(c) in any
consolidated return year of the group to which it is
carried. The remaining $20 is treated as a loss
carryover arising in a SRLY and is subject to the
limitation of § 1.1502–21T(c) in the year to which
it is carried.

(e) Predecessors and successors. For
purposes of this section, any reference
to a corporation or member includes, as
the context may require, a reference to a
successor or predecessor, as defined in
§ 1.1502–1(f)(4).
(f) Effective date—(1) In general.
This section applies to built-in losses
recognized in consolidated return years
beginning on or after January 1, 1997.
(2) Application to prior periods. See
§ 1.1502–21T(g)(3) for rules generally
permitting a group to apply the rules of
this section to consolidated return years
ending on or after January 29, 1991, and
beginning before January 1, 1997. A
group must treat all corporations that
were affiliated on January 1, 1987, and
continuously thereafter as having met
the 60 consecutive month requirement
of paragraph (c)(2) of this section on
any day before January 1, 1992, on
which the determination of net unrealized built-in gain or loss of a subgroup
is made.
Par. 12. Section 1.1502–21 is redesignated as § 1.1502–21A; the heading of
the newly designated § 1.1502–21A is
revised; and paragraphs (d)(4), (e)(3)
and (h) are added to read as follows:
§ 1.1502–21A Consolidated net operating loss deduction generally applicable
for consolidated return years beginning
before January 1, 1997.
*

*

*

*

*

(d) * * *
(4) Cross-reference. See § 1.1502–
21T(d)(1) for the rule that applies the
principles of this paragraph (d) in con-

15

solidated return years beginning on or
after January 1, 1997, with respect to a
consolidated return change of ownership
occurring before January 1, 1997.
(e) * * *
(3) Effective date. This paragraph (e)
disallows or reduces the net operating
loss carryovers of a member as a result
of a transaction to which old section
382 (as defined in § 1.382–2T(f)(21))
applies. See § 1.1502–21T(d)(2) for the
rule that applies the principles of this
paragraph (e) in consolidated return
years beginning on or after January 1,
1997, with respect to such a transaction.
*

*

*

*

*

(h) Effective date. Except as provided
in § 1.1502–21T(d)(1), (d)(2), and
(g)(3), this section applies to consolidated return years beginning before
January 1, 1997.
Par. 13. Section 1.1502–21T is added
to read as follows:
§ 1.1502–21T Net operating losses
(temporary).
(a) Consolidated net operating loss
deduction. The consolidated net operating loss deduction (or CNOL deduction)
for any consolidated return year is the
aggregate of the net operating loss carryovers and carrybacks to the year. The
net operating loss carryovers and carrybacks consist of—
(1) Any CNOLs (as defined in paragraph (e) of this section) of the consolidated group; and
(2) Any net operating losses of the
members arising in separate return
years.
(b) Net operating loss carryovers and
carrybacks to consolidated return and
separate return years. Net operating
losses of members arising during a
consolidated return year are taken into
account in determining the group’s
CNOL under paragraph (e) of this section for that year. Losses taken into
account in determining the CNOL may
be carried to other taxable years
(whether consolidated or separate) only
under this paragraph (b).
(1) Carryovers and carrybacks generally. The net operating loss carryovers
and carrybacks to a taxable year are
determined under the principles of section 172 and this section. Thus, losses
permitted to be absorbed in a consolidated return year generally are absorbed
in the order of the taxable years in
which they arose, and losses carried
from taxable years ending on the same
date, and which are available to offset

consolidated taxable income for the
year, generally are absorbed on a pro
rata basis. See Example 2 of paragraph
(c)(1)(iii) of this section for an illustration of pro rata absorption of losses
subject to a SRLY limitation. Additional
rules provided under the Code or regulations also apply. See, e.g., section
382(l)(2)(B).
(2) Carryovers and carrybacks of
CNOLs to separate return years—(i) In
general. If any CNOL that is attributable to a member may be carried to a
separate return year of the member, the
amount of the CNOL that is attributable
to the member is apportioned to the
member (apportioned loss) and carried
to the separate return year. If carried
back to a separate return year, the
apportioned loss may not be carried
back to an equivalent, or earlier, consolidated return year of the group; if
carried over to a separate return year,
the apportioned loss may not be carried
over to an equivalent, or later, consolidated return year of the group. For rules
permitting the reattribution of losses of
a subsidiary to the common parent when
loss is disallowed on the disposition of
subsidiary stock, see § 1.1502–20(g).
(ii) Special rules—(A) Year of departure from group. If a corporation ceases
to be a member during a consolidated
return year, net operating loss carryovers
attributable to the corporation are first
carried to the consolidated return year,
and only the amount so attributable that
is not absorbed by the group in that year
is carried to the corporation’s first separate return year.
(B) Offspring rule. In the case of a
member that has been a member continuously since its organization, the
CNOL attributable to the member is
included in the carrybacks to consolidated return years before the member’s
existence. See paragraph (f) of this
section for applications to predecessors
and successors. If the group did not file
a consolidated return for a carryback
year, the loss may be carried back to a
separate return year of the common
parent under paragraph (b)(2)(i) of this
section, but only if the common parent
was not a member of a different consolidated group or of an 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
§ 1.1502–75(d)(2) or (3), references to
the common parent are to the corporation that was the common parent immediately before the acquisition.

(iii) Equivalent years. Taxable years
are equivalent if they bear the same
numerical relationship to the consolidated return year in which a CNOL
arises, counting forward or backward
from the year of the loss. For example,
in the case of a member’s third taxable
year (which was a separate return year)
that preceded the consolidated return
year in which the loss arose, the equivalent year is the third consolidated return
year preceding the consolidated return
year in which the loss arose. See paragraph (b)(3)(iii) of this section for certain short taxable years that are disregarded in making this determination.
(iv) Amount of CNOL attributable to
a member. The amount of a CNOL that
is attributable to a member is determined by a fraction the numerator of
which is the separate net operating loss
of the member for the year of the loss
and the denominator of which is the
sum of the separate net operating losses
for that year of all members having such
losses. For this purpose, the separate net
operating loss of a member is determined by computing the CNOL by
reference to only the member’s items of
income, gain, deduction, and loss, including the member’s losses and deductions actually absorbed by the group in
the taxable year (whether or not absorbed by the member).
(v) Examples. For purposes of the
examples in this section, unless otherwise stated, all groups file consolidated
returns, all corporations have calendar
taxable years, the facts set forth the only
corporate activity, value means fair market value and the adjusted basis of each
asset equals its value, all transactions
are with unrelated persons, and the
application of any limitation or threshold under section 382 is disregarded.
The principles of this paragraph (b)(2)
are illustrated by the following examples:
Example 1. Offspring rule. (a) P is formed at
the beginning of Year 1 and files a separate return.
P forms S on March 15 of Year 2, and P and S
file a consolidated return. P purchases all the stock
of T at the beginning of Year 3, and T becomes a
member of the P group. T was formed in Year 2
and filed a separate return for that year. P, S, and
T sustain a $1,100 CNOL in Year 3 and, under
paragraph (b)(2)(iv) of this section, the loss is
attributable $200 to P, $300 to S, and $600 to T.
(b) Of the $1,100 CNOL in Year 3, the $500
amount of the CNOL that is attributable to P and
S ($200 + $300) may be carried to P’s separate
return in Year 1. Even though S was not in
existence in Year 1, the $300 amount of the
CNOL attributable to S may be carried back to P’s
separate return in Year 1 because S (unlike T) has
been a member of the P group since its organization and P is a qualified parent under paragraph

16

(b)(2)(ii)(B) of this section. To the extent not
absorbed in that year, the loss may then be carried
to the P group’s return in Year 2. The $600
amount of the CNOL attributable to T is a net
operating loss carryback to T’s separate return in
Year 2.
Example 2. Departing members. (a) The facts
are the same as in Example 1. In addition, on June
15 of Year 4, P sells all the stock of T. The P
group’s consolidated return for Year 4 includes the
income of T through June 15. T files a separate
return for the period from June 16 through
December 31.
(b) $600 of the Year 3 CNOL attributable to T
is appor- tioned to T and is carried back to its
separate return in Year 2. To the extent the $600 is
not absorbed in T’s separate return in Year 2, it is
carried to the consolidated return in Year 4 before
being carried to T’s separate return in Year 4. Any
portion of the loss not absorbed in T’s Year 2 or in
the P group’s Year 4 is then carried to T’s separate
return in Year 4.

(3) Special rules—(i) Election to relinquish carry-back. A group may make
an irrevocable election under section
172(b)(3) to relinquish the entire carryback period with respect to a CNOL
for any consolidated return year. The
election may not be made separately for
any member (whether or not it remains
a member), and must be made in a
separate statement entitled ‘‘THIS IS
AN ELECTION UNDER SECTION
1.1502–21T(b)(3)(i) TO WAIVE THE
ENTIRE CARRYBACK PERIOD PURSUANT TO SECTION 172(b)(3) FOR
THE [insert consolidated return year]
CNOLs OF THE CONSOLIDATED
GROUP OF WHICH [insert name and
employer identification number of common parent] IS THE COMMON PARENT.’’ The statement must be signed by
the common parent and filed with the
group’s income tax return for the consolidated return year in which the loss
arises.
(ii) Special election for groups that
include insolvent financial institutions.
For rules applicable to relinquishing the
entire carryback period with respect to
losses attributable to insolvent financial
institutions, see § 301.6402–7 of this
chapter.
(iii) Short years in connection with
transactions to which section 381(a)
applies. If a member distributes or transfers assets to a corporation that is a
member immediately after the distribution or transfer in a transaction to which
section 381(a) applies, the transaction
does not cause the distributor or
transferor to have a short year within
the consolidated return year of the group
in which the transaction occurred that is
counted as a separate year for purposes
of determining the years to which a net
operating loss may be carried.

(iv) Special status losses. [Reserved]
(c) Limitations on net operating loss
carryovers and carrybacks from separate return limitation years—(1) SRLY
limitation—(i) General rule. The aggregate of the net opera- ting 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)
actual- ly 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 § 1.1502–
15T of a built-in loss as a hypothetical
net operating loss carryover in the year
recognized is solely for purposes of
determining the limitation under this
paragraph (c) with respect to the loss in
that year and not for any other purpose.
Thus, for purposes of determining consolidated taxable income for any other
losses, a built-in loss allowed under this
section in the year it arises is taken into
account.
(ii) Losses treated as arising in
SRLYs. If a net operating loss carryover
or carryback did not arise in a SRLY but
is attributable to a built-in loss (as
defined under § 1.1502–15T), the carryover or carryback is treated for purposes of this paragraph (c) as arising in
a SRLY if the built-in loss was not
allowed, after application of the SRLY
limitation, in the year it arose. For an
illustration, see § 1.1502–15T(d), Example 5.

(iii) Examples. The principles of this
paragraph (c)(1) are illustrated by the
following examples:
Example 1. Determination of SRLY limitation.
(a) In Year 1, individual A forms T and T sustains
a $100 net operating loss that is carried forward. P
buys all the stock of T at the beginning of Year 2,
and T becomes a member of the P group. The P
group has $300 of consolidated taxable income in
Year 2 (com- puted without regard to the CNOL
deduction). Such consolidated taxable income
would be $70 if determined by reference to only
T’s items.
(b) T’s $100 net operating loss carryover from
Year 1 arose in a SRLY. See § 1.1502–1(f)(2)(iii).
Thus, the $100 net operating loss carryover is
subject to the SRLY limitation in paragraph (c)(1)
of this section. The SRLY limitation for Year 2 is
consolidated taxable income determined by reference to only T’s items, or $70. Thus, $70 of the
loss is included under paragraph (a) of this section
in the P group’s CNOL deduction for Year 2.
(c) The facts are the same as in paragraph (a)
of this Example 1, except that such consolidated
taxable income (computed without regard to the
CNOL deduction and by reference to only T’s
items) is a loss (a CNOL) of $370. Because the
SRLY limitation may not exceed the consolidated
taxable income determined by reference to only
T’s items, and such items aggregate to a CNOL,
T’s $100 net operating loss carryover from Year 1
is not allowed under the SRLY limitation in Year
2. Moreover, if consolidated taxable income (computed without regard to the CNOL deduction and
by reference to only T’s items) did not exceed
$370 in Year 3, the carryover would still be
restricted under § 1.1502–21T(c) in Year 3, because the aggregate consolidated taxable income
for all consolidated return years of the group
computed by reference to only T’s items would
not be a positive amount.
Example 2. Net operating loss carryovers. (a) In
Year 1, individual A forms P and P sustains a $40
net operating loss that is carried forward. P has no
income in Year 2. Unrelated corporation T sustains
a net operating loss of $50 in Year 2 that is
carried forward. P buys the stock of T during Year
3, but T is not a member of the P group for each
day of the year. P and T file separate returns and
sustain net operating losses of $120 and $60,
respectively, for Year 3. The P group files
consolidat- ed returns beginning in Year 4. During
Year 4, the P group has $160 of consolidated
taxable income (computed without regard to the
CNOL deduction). Such consolidated taxable income would be $70 if determined by reference to
only T’s items. These results are summarized as
follows:
Separate/
Separate Separate Affiliated
Year 1
Year 2
Year 3
$(40)
$0
$(120)
0
(50)
(60)

Consolidated
Year 4
P
$90
T
70
CTI
$160.
(b) P’s Year 1, Year 2, and Year 3 are not
SRLYs with respect to the P group. See § 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.

17

(c) T’s Year 2 and Year 3 are SRLYs with
respect to the P group. See § 1.1502–1(f)(2)(ii).
Thus, T’s $50 net operating loss arising in Year 2
and $60 net operating loss arising in Year 3 are
subject to the SRLY limitation. Under paragraph
(c)(1) of this section, the SRLY limitation for Year
4 is $70, and under paragraph (b) of this section,
T’s $50 loss from Year 2 must be included under
paragraph (a) of this section in the P group’s
CNOL deduction for Year 4. The absorption of
this loss leaves $70 of the group’s consolidated
taxable income available for offset by other loss
carryovers.
(d) P and T each carry over net operating losses
to Year 4 from a taxable year ending on the same
date (Year 3). The losses carried over from Year 3
total $180. Under paragraph (b) of this section, the
losses carried over from Year 3 are absorbed on a
pro rata basis, even though one arises in a SRLY
and the other does not. However, the group cannot
absorb more than $20 of T’s $60 net operating
loss arising in Year 3 because its $70 SRLY
limitation for Year 4 is reduced by T’s $50 Year 2
SRLY loss already included in the CNOL deduction for Year 4. Thus, the absorption of Year 3
losses is as follows:
Amount of P’s Year 3 losses
absorbed = $120/($120 + $20) x $70 = $60
Amount of T’s Year 3 losses
absorbed = $ 20/($120 + $20) x $70 = $10.
(e) The absorption of $10 of T’s Year 3 loss
further reduces T’s SRLY limitation to $10 ($70 of
initial SRLY limita- tion, reduced by the $60 net
operating loss already included in the CNOL
deductions for Year 4 under paragraph (a) of this
section).
(f) P carries its remaining $60 Year 3 net
operating loss and T carries its remaining $50 Year
3 net operating loss over to Year 5. Assume that,
in Year 5, the P group has $90 of consolidated
taxable income (computed without regard to the
CNOL deduction). The group’s CTI determined by
reference to only T’s items is a CNOL of $4. For
Year 5, the CNOL deduction includes $60 of P’s
Year 3 loss but only $6 of T’s Year 3 loss (the
aggregate consolidated taxable income for Years 4
and 5 deter- mined by reference to T’s items, or
$66, reduced by T’s SRLY losses actually absorbed by the group in Year 4, or $60).
Example 3. Net operating loss carrybacks.
(a)(1) P owns all of the stock of S and T. The
members of the P group contribute the following
to the consolidated taxable income of the P group
for Years 1, 2, and 3:
P
S
T

Year 1
$100
20
30

Year 2
$60
20
10

Year 3
$80
30
(50)

Total
$240
70
(10)

CTI
$150
$90
$60
$300.
(2) P sells all of the stock of T to individual A
at the beginning of Year 4. For its Year 4 separate
return year, T has a net operating loss of $30.
(b) T’s Year 4 is a SRLY with respect to the P
group. See § 1.1502–1(f)(1). T’s $30 net operating
loss carryback to the P group from Year 4 is not
allowed under § 1.1502–21T(c) to be included in
the CNOL deduction under paragraph (a) of this
section for Year 1, 2, or 3, because the P group’s
consolidated taxable income would not be a
positive amount if determined by reference to only
T’s items for all consolidated return years through
Year 4 (without regard to the $30 net operating
loss). However, the $30 loss is carried forward to
T’s Year 5 and succeeding taxable years as
provided under the Code.
Example 4. Computation of SRLY limitation for
built-in losses treated as net operating loss car-

ryovers. (a) In Year 1, individual A forms T by
contributing $300 and T sustains a $100 net
operating loss. During Year 2, T’s assets decline in
value by $100. At the beginning of Year 3, P buys
all the stock of T for $100, and T becomes a
member of the P group. At the time of the
acquisition, T has a $100 net unrealized built-in
loss, which exceeds the threshold requirements of
section 382(h)(3)(B). During Year 3, T recognizes
its unrealized loss as a $100 or- dinary 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 § 1.1502–21T):
P group
(without T)
T

Year 3
$100

Year 4
$100

Total
$200

60

40

100

CTI
$160
$140
$300.
(b) Under § 1.1502–15T(a), T’s $100 of ordinary loss in Year 3 constitutes a built-in loss that
is subject to the SRLY limitation under § 1.1502–
21T(c). The amount of the limitation is determined
by treating the deduction as a net operating loss
carryover from a SRLY. The built-in loss is
therefore subject to a $60 SRLY limitation for
Year 3. The built-in loss is treated as a net
operating loss carryover solely for purposes of
deter- mining the extent to which the loss is not
allowed by reason of the SRLY limitation, and for
all other purposes the loss remains a loss arising
in Year 3. Consequently, under paragraph (b) of
this section, the $60 allowed under the SRLY
limitation is absorbed by the P group before T’s
$100 net operating loss carryover from Year 1 is
allowed.
(c) Under § 1.1502–15T(a), the $40 balance of
the built- in loss that is not allowed in Year 3
because of the SRLY limi- tation is treated as a
$40 net operating loss arising in Year 3 that is
subject to the SRLY limitation because, under
§ 1.1502–21T(c)(1)(ii), Year 3 is treated as a
SRLY, and is carried to other years in accordance
with the rules of paragraph (b) of this section. The
SRLY limitation for Year 4 is the P group’s consolidated taxable income for Year 3 and Year 4
determined by reference to only T’s items and
without regard to the group’s CNOL deductions
($60 + $40), reduced by T’s loss actually absorbed by the group in Year 3 ($60). The SRLY
limitation for Year 4 is $40.
(d) Under paragraph (c) of this section and the
prin- ciples of section 172(b), $40 of T’s $100 net
operating loss carryover from Year 1 is included in
the CNOL deduction under paragraph (a) of this
section in Year 4.

(2) SRLY subgroup limitation. In the
case of a net operating loss carryover or
carryback for which there is a SRLY
subgroup, the principles of paragraph
(c)(1) of this section apply to the SRLY
subgroup, and not separately to its members. Thus, the contribution to consolidated taxable income and the net operating loss carryovers and carrybacks
arising (or treated as arising) in SRLYs
that are included in the CNOL deductions for all consolidated return years of
the group under paragraph (a) of this
section are based on the aggregate
amounts of income, gain, deduction, and
loss of the members of the SRLY sub-

group for the relevant consolidated return years (as provided in paragraph
(c)(1)(i)(C) of this section). For an illustration of aggregate amounts during the
relevant consolidated return years following the year in which a member of a
SRLY subgroup ceases to be a member
of the group, see paragraph (c)(2)(vii)
Example 4 of this section. A SRLY
subgroup may exist only for a carryover
or carryback arising in a year that is not
a SRLY (and is not treated as a SRLY
under paragraph (c)(1)(ii) of this section) with respect to another group (the
former group), whether or not the group
is a consolidated group. A separate
SRLY subgroup is determined for each
such carryover or carryback. A consolidated group may include more than one
SRLY subgroup and a member may be a
member of more than one SRLY subgroup. Solely for purposes of determining the members of a SRLY subgroup
with respect to a loss:
(i) Carryovers. In the case of a carryover, the SRLY subgroup is composed
of the member carrying over the loss
(the loss member) and each other member that was a member of the former
group that becomes a member of the
group at the same time as the loss
member. A member remains a member
of the SRLY subgroup until it ceases to
be affiliated with the loss member. The
aggregate determination described in
paragraph (c)(1) of this section and this
paragraph (c)(2) includes the amounts of
income, gain, deduction, and loss of
each member of the SRLY subgroup for
the consolidated return years during
which it remains a member of the SRLY
subgroup. For an illustration of the
aggregate deter- mination of a SRLY
subgroup, see paragraph (c)(2)(vii) Example 2 of this section.
(ii) Carrybacks. In the case of a
carryback, the SRLY subgroup is composed of the member carrying back the
loss (the loss member) and each other
member of the group from which the
loss is carried back that has been continuously affiliated with the loss member from the year to which the loss is
carried through the year in which the
loss arises.
(iii) Built-in losses. In the case of a
built-in loss, the SRLY subgroup is
composed of the member recognizing
the loss (the loss member) and each
other member that was part of the
subgroup with respect to the loss determined under § 1.1502–15T(c)(2) immediately before the members became
members of the group. The principles of

18

paragraphs (c)(2)(i) and (ii) of this section apply to determine the SRLY subgroup for the built-in loss that is, under
paragraph (c)(1)(ii) of this section,
treated as arising in a SRLY with respect to the group in which the loss is
recognized. For this purpose and as the
context requires, a reference in those
paragraphs to a group or former group
is a reference to the subgroup determined under § 1.1502–15T(c)(2).
(iv) Principal purpose of avoiding or
increasing a SRLY limitation. The members composing a SRLY subgroup are
not treated as a SRLY subgroup if any
of them is formed, acquired, or availed
of with a principal purpose of avoiding
the application of, or increasing any
limitation under, this paragraph (c). Any
member excluded from a SRLY subgroup, if excluded with a prin- cipal
purpose of so avoiding or increasing any
SRLY limitation, is treated as included
in the SRLY subgroup.
(v) Coordination with other limitations. This paragraph (c)(2) does not
allow a net operating loss to offset
income to the extent inconsistent with
other limitations or restrictions on the
use of losses, such as a limitation based
on the nature or activities of members.
For example, any dual consolidated loss
may not reduce the taxable income to an
extent greater than that allowed under
section 1503(d) and § 1.1503–2. See
also § 1.1502–47(q) (relating to preemption of rules for life-nonlife groups).
(vi) Anti-duplication. If the same item
of income or deduction could be taken
into account more than once in determining a limitation under this paragraph
(c), or in a manner inconsistent with any
other provision of the Code or regulations incorporating this paragraph (c),
the item of income or deduction is taken
into account only once and in such
manner that losses are absorbed in accordance with the ordering rules in
paragraph (b) of this section and the
underlying purposes of this section.
(vii) Examples. The principles of this
paragraph (c)(2) are illustrated by the
following examples:
Example 1. Members of SRLY subgroups. (a)
During Year 1, P sustains a $50 net operating loss.
At the beginning of Year 2, P buys all the stock of
S at a time when the aggregate basis of S’s assets
exceeds their aggregate value by $70 (as determined under § 1.1502–15T). At the beginning of
Year 3, P buys all the stock of T, T has a $60 net
operating loss carryover at the time of the acquisition, and T becomes a member of the P group.
During Year 4, S forms S1 and T forms T1, each
by contributing assets with built-in gains which
are, in the aggregate, material. S1 and T1 become
members of the P group. M is the common parent

of another group. During Year 7, M acquires all of
the stock of P, and the members of the P group
become members of the M group for the balance
of Year 7. The $50 and $60 loss carryovers of P
and T are carried to Year 7 of the M group, and
the value and basis of S’s assets did not change
after it became a member of the former P group.
(b) Under paragraph (c)(2) of this section, a
separate SRLY subgroup is determined for each
loss carryover and built-in loss. In the P group, P’s
$50 loss carryover is not treated as arising in a
SRLY. See § 1.1502–1(f). Consequently, the carryover is not subject to limitation under paragraph
(c) of this section in the P group.
(c) In the M group, P’s $50 loss carryover is
treated as arising in a SRLY and is subject to the
limitation under paragraph (c) of this section. A
SRLY subgroup with respect to that loss is
composed of members which were members of the
P group, the group as to which the loss was not a
SRLY. The SRLY subgroup is composed of P, the
member carrying over the loss, and each other
member of the P group that became a member of
the M group at the same time as P. A member of
the SRLY subgroup remains a member until it
ceases to be affiliated with P. For Year 7, the
SRLY subgroup is composed of P, S, T, S1, and
T1.
(d) In the P group, S’s $70 unrealized loss, if
recognized within the 5-year recognition period
after S becomes a member of the P group, is
subject to limitation under paragraph (c) of this
section. See § 1.1502–15T and paragraph (c)(1)(ii)
of this section. Because S was not continuously
affiliated with P, T, or T1 for 60 consecutive
months prior to joining the P group, these corporations cannot be included in a SRLY subgroup with
respect to S’s unrealized loss in the P group. See
paragraph (c)(2)(iii) of this section. As a successor
to S, S1 is included in a subgroup with S in the P
group. Because S did not cease to exist, however,
S1’s contribution to consolidated taxable income
may not be used to increase the consolidated
taxable income of the P group that may be offset
by the built-in loss. See paragraph (f) of this
section.
(e) In the M group, S’s $70 unrealized loss, if
recognized within the 5-year recognition period
after S becomes a member of the M group, is
subject to limitation under paragraph (c) of this
section. Prior to becoming a member of the M
group, S had been continuously affiliated with P
(but not T or T1) for 60 consecutive months and
S1 is a successor that has remained continuously
affiliated with S. Those members had a net
unrealized built-in loss immediately before they
became members of the group under § 1.1502–
15T(c). Consequently, in Year 7, S, S1, and P
compose a subgroup in the M group with respect
to S’s unrealized loss. S1’s contribution to consolidated taxable income may not be used to increase
the consolidated taxable income of the M group
that may be offset by the recognized built- in loss.
See paragraph (f) of this section.
(f) In the P group, T’s $60 loss carryover arose
in a SRLY and is subject to limitation under
paragraph (c) of this section. P, S, and S1 were
not members of the group in which T’s loss arose
and cannot be members of a SRLY subgroup with
respect to the carryover in the P group. See
paragraph (c)(2)(i) of this section. As a successor
to T, T1 is included in a SRLY subgroup with T in
the P group; however, because T did not cease to
exist, T1’s contribution to consolidated taxable
income may not be used to increase the consolidated taxable income of the P group that may be
offset by the carryover. See paragraph (f) of this
section.

(g) In the M group, T’s $60 loss carryover
arose in a SRLY and is subject to limitation under
paragraph (c) of this section. T and T1 remain the
only members of a SRLY subgroup with respect to
the carryover, but T1’s contribution to consolidated taxable income may not be used to increase
consolidated taxable income of the M group that
may be offset by the carryover. See paragraph (f)
of this section.
Example 2. Computation of SRLY subgroup
limitation. (a) Individual A forms S. Individual B
forms T. In Year 2, P buys all the stock of S and T
from A and B, and S and T become members of
the P group. For Year 3, the P group has a $45
CNOL, which is attributable to P, and which P
carries forward. M is the common parent of
another group. At the beginning of Year 4, M
acquires all of the stock of P and the former
members of the P group become members of the
M group.
(b) P’s year to which the loss is attributable,
Year 3, is a SRLY with respect to the M group.
See § 1.1502–1(f)(1). However, P, S, and T compose a SRLY subgroup with respect to the Year 3
loss under paragraph (c)(2)(i) of this section
because Year 3 is not a SRLY (and is not treated
as a SRLY) with respect to the P group. P’s loss is
carried over to the M group’s Year 4 and is
therefore subject to the SRLY subgroup limitation
in paragraph (c)(2) of this section.
(c) In Year 4, the M group has $10 of consolidated taxable income (computed without regard to
the CNOL deduction for Year 4). However, such
consolidated taxable income would be $45 if
determined by reference to only the items of P, S,
and T, the members included in the SRLY subgroup with respect to P’s loss carryover. Therefore, the SRLY subgroup limitation under paragraph (c)(2) of this section for P’s net operating
loss carryover from Year 3 is $45. Because the M
group has only $10 of consolidated taxable income
in Year 4, however, only $10 of P’s net operating
loss carryover is included in the CNOL deduction
under paragraph (a) of this section in Year 4.
(d) In Year 5, the M group has $100 of
consolidated taxable income (computed without
regard to the CNOL deduction for Year 5). Neither
P, S, nor T has any items of income, gain,
deduction, or loss in Year 5. Although the members of the SRLY subgroup do not contribute to
the $100 of consolidated taxable income in Year 5,
the SRLY subgroup limitation for Year 5 is $35
(the sum of SRLY subgroup consolidated taxable
income of $45 in Year 4 and $0 in Year 5, less the
$10 net operating loss carryover actually absorbed
by the M group in Year 4). Therefore, $35 of P’s
net operating loss carryover is included in the
CNOL deduction under paragraph (a) of this
section in Year 5.
Example 3. Inclusion in more than one SRLY
subgroup. (a) At the beginning of Year 1, S buys
all the stock of T, and T becomes a member of the
S group. For Year 1, the S group has a CNOL of
$10, all of which is attributable to S and is carried
over to Year 2. At the beginning of Year 2, P buys
all the stock of S, and S and T become members
of the P group. For Year 2, the P group has a
CNOL of $35, all of which is attributable to P and
is carried over to Year 3. At the beginning of Year
3, M acquires all of the stock of P and the former
members of the P group become members of the
M group.
(b) P’s and S’s net operating losses arising in
SRLYs with respect to the M group are subject to
limitation under paragraph (c) of this section. P, S,
and T compose a SRLY subgroup for purposes of
determining the limitation for P’s $35 net operating loss carryover arising in Year 2 because, under

19

paragraph (c)(2)(i) of this section, Year 2 is not a
SRLY with respect to the P group. Similarly, S
and T compose a SRLY subgroup for purposes of
determining the limitation for S’s $10 net operating loss carryover arising in Year 1 because Year 1
is not a SRLY with respect to the S group.
(c) S and T are members of both the SRLY
subgroup with respect to P’s losses and the SRLY
subgroup with respect to S’s losses. Under paragraph (c)(2) of this section, S’s and T’s items
cannot be included in the determination of the
SRLY subgroup limitation for both SRLY subgroups for the same consolidated return year;
paragraph (c)(2)(vi) of this section requires the M
group to consider the items of S and T only once
so that the losses are absorbed in the order of the
taxable years in which they were sustained. Because S’s loss was incurred in Year 1, while P’s
loss was incurred in Year 2, the items will be
added in the determination of the consolidated
taxable income of the S and T SRLY subgroup to
enable S’s loss to be absorbed first. The taxable
income of the P, S, and T SRLY subgroup is then
computed by including the consolidated taxable
income for the S and T SRLY subgroup less the
amount of any net operating loss carryover of S
that is absorbed after applying this section to the S
subgroup for the year.
Example 4. Corporation ceases to be affiliated
with a SRLY subgroup. (a) P and S are members
of the P group and the P group has a CNOL of
$30 in Year 1, all of which is attributable to P and
carried over to Year 2. At the beginning of Year 2,
M acquires all of the stock of P, and P and S
become members of the M group. P and S
compose a SRLY subgroup with respect to P’s net
operating loss carryover. For Year 2, consolidated
taxable income of the M group determined by
reference to only the items of P (and without
regard to the CNOL deduction for Year 2) is $40.
However, such consolidated taxable income of the
M group determined by reference to the items of
both P and S is a loss of $20. Thus, the SRLY
subgroup limitation under paragraph (c)(2) of this
section prevents the M group from including any
of P’s net operating loss carryover in the CNOL
deduction under paragraph (a) of this section in
Year 2, and P carries the loss to Year 3.
(b) At the end of Year 2, P sells all of the S
stock and S ceases to be a member of the M
group and, in turn, ceases to be affiliated with the
P subgroup. For Year 3, consolidated taxable
income of the M group is $50 (determined without
regard to the CNOL deduction for Year 3), and
such consolidated taxable income would be $10 if
determined by reference to only items of P.
However, the limitation under paragraph (c) of this
section for Year 3 for P’s net operating loss
carryover still prevents the M group from including any of P’s loss in the CNOL deduction under
paragraph (a) of this section. The limitation results
from the inclusion of S’s items for Year 2 in the
determination of the SRLY subgroup limitation for
Year 3 even though S ceased to be a member of
the M group (and the P subgroup) at the end of
Year 2. Thus, the M group’s consolidated taxable
income determined by reference to only the SRLY
subgroup members’ items for all consolidated
return years of the group through Year 3 (determined without regard to the CNOL deduction) is
not a positive amount.

(d) Coordination with consolidated
return change of ownership limitation
and transactions subject to old section
382—(1) Consolidated return changes

of ownership. If a consolidated return
change of ownership occurred before
January 1, 1997, the principles of
§ 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, § 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
§ 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 § 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 § 1.1502–1(f)(4).
(2) Limitation on SRLY subgroups.
Except as the Commissioner may otherwise determine, any increase in the
consolidated taxable income of a SRLY
subgroup that is attributable to a successor is disregarded unless the successor
acquires substantially all the assets and
liabilities of its predecessor and the
predecessor ceases to exist.
(g) Effective date—(1) In general.
This section generally applies to consolidated return years beginning on or
after January 1, 1997.
(2) SRLY limitation. Except in the
case of those members (including members of a SRLY subgroup) described in
paragraph (g)(3)(iii) of this section, a
group does not take into account a
consolidated taxable year beginning before January 1, 1997, in determining the
aggregate of the consolidated taxable
income under paragraph (c)(1) of this
section (including for purposes of
§ 1.1502–15T and § 1.1502–22T(c)) for
the members (or SRLY subgroups).
(3) Application to prior periods. A
consolidated group may apply the rules
of this section to all consolidated return
years ending on or after January 29,
1991, and beginning before January 1,
1997, provided that—

(i) The group’s tax liability as shown
on an original or an amended return is
consistent with the application of the
rules of this section (other than this
paragraph (g)) and §§ 1.1502–15T,
1.1502–22T, 1.1502–23T, 1.1502–91T
through 1.1502–96T, and 1.1502–98T
for each such year for which the statute
of limitations does not preclude the
filing of an amended return on January
1, 1997;
(ii) Each section described in paragraph (g)(3)(i) of this section and
§ 1.1502–1(f)(4)(ii) is applied by substituting ‘‘taxable years ending on or after
January 29, 1991’’ for ‘‘taxable years
beginning on or after January 1, 1997’’
(and ‘‘before January 29, 1991’’ for
‘‘before January 1, 1997’’ in the case of
consolidated return changes of ownership) as the context requires.
(iii) The rules of paragraph (c) of this
section and §§ 1.1502–15T and 1.1502–
22T(c) are applied only with respect to
the losses and deductions of those corporations that became members of the
group (including members of a subgroup), and to acquisitions occurring, on
or after January 29, 1991, (and only
with respect to such losses and deductions);
(iv) The rules of §§ 1.1502–15A,
1.1502–21A(c) and 1.1502–22A(c) are
applied with respect to the losses and
deductions of those corporations that
became members of the group, and to
acquisitions occurring, before January
29, 1991; and
(v) Appropriate adjustments are made
in the earliest subsequent open year to
reflect any inconsistency in a year for
which the statute of limitations precludes the filing of an amended return
on January 1, 1997.
(4) Waiver of carrybacks. Paragraph
(b)(3)(i) of this section (relating to the
waiver of carrybacks) applies to net
operating losses arising in a consolidated return year for which the due date
of the income tax return (without regard
to extensions) is on or after Monday,
August 26, 1996.
Par. 14. Section 1.1502–22 is redesignated as § 1.1502–22A; the heading of
the newly designated § 1.1502–22A is
revised; and paragraphs (d)(3) and (e)
are added to read as follows:
§ 1.1502–22A Consolidated net capital
gain or loss generally applicable for
consolidated return years beginning before January 1, 1997.
*

*

*

(d) * * *

20

*

*

(3) Cross-reference. See § 1.1502–
22T(d) for the rule that applies the
principles of this paragraph (d) in consolidated return years beginning on or
after January 1, 1997, with respect to a
consolidated return change of ownership
occurring before January 1, 1997.
(e) Effective date. This section applies to any consolidated return years to
which § 1.1502–21T(g) does not apply.
See § 1.1502–21T(g) for effective dates
of that section.
Par. 15. Section 1.1502–22T is added
to read as follows:
§ 1.1502–22T Consolidated
gain and loss (temporary).

capital

(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
§ 1.1502–23T); and
(3) The net capital loss carryovers or
carrybacks to the year.
(b) Net capital loss carryovers and
carrybacks—(1) In general. The determinations under section 1222, including
net capital loss and net short-term capital loss, with respect to members during
consolidated return years are not made
separately.
Instead,
consolidated
amounts are determined for the group as
a whole. Losses included in the consolidated net capital loss may be carried to
consolidated return years, and, after apportionment, may be carried to separate
return years. The net capital loss carryovers and carrybacks consist of—
(i) Any consolidated net capital
losses of the group; and
(ii) Any net capital losses of the
members arising in separate return
years.
(2) Carryovers and carrybacks generally. The net capital loss carryovers and
carrybacks to a taxable year are determined under the principles of section

1212 and this section. Thus, losses permitted to be absorbed in a consolidated
return year generally are absorbed in the
order of the taxable years in which they
were sustained, and losses carried from
taxable years ending on the same date,
and which are available to offset consolidated capital gain net income, generally are absorbed on a pro rata basis.
Additional rules provided under the
Code or regulations also apply, as well
as the SRLY limitation under paragraph
(c) of this section. See, e.g., section
382(l)(2)(B).
(3) Carryovers and carrybacks of
consolidated net capital losses to separate return years. If any consolidated
net capital loss that is attributable to a
member may be carried to a separate
return year under the principles of
§ 1.1502–21T(b)(2), the amount of the
consolidated net capital loss that is
attributable to the member is apportioned and carried to the separate return
year (apportioned loss).
(4) Special rules—(i) Short years in
connection with transactions to which
section 381(a) applies. If a member
distributes or transfers assets to a corporation that is a member immediately
after the distribution or transfer in a
transaction to which section 381(a) applies, the transaction does not cause the
distributor or transferor to have a short
year within the consolidated return year
of the group in which the transaction
occurred that is counted as a separate
year for purposes of determining the
years to which a net capital loss may be
carried.
(ii) Special status losses. [Reserved]
(c) Limitations on net capital loss
carryovers and carrybacks from separate return limitation years. The aggregate of the net capital losses of a
member arising (or treated as arising) in
SRLYs that are included in the determination of consolidated capital gain net
income for all consolidated return years
of the group under paragraph (a) of this
section may not exceed the aggregate of
the consolidated capital gain net income
for all consolidated return years of the
group determined by reference to only
the member’s items of gain and loss
from capital assets as defined in section
1221 and trade or business assets defined in section 1231(b), including the
member’s losses actually absorbed by
the group in the taxable year (whether
or not absorbed by the member). The
principles of § 1.1502–21T(c)(including

the SRLY subgroup principles under
§ 1.1502–21T(c)(2)) apply with appropriate adjustments for purposes of applying this paragraph (c).
(d) Coordination with respect to consolidated return change of ownership
limitation occurring in consolidated return years beginning before January 1,
1997. If a consolidated return change of
ownership occurred before January 1,
1997, the principles of § 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 § 1.1502–
1(g)), that may be included in the net
capital loss carryover under paragraph
(b) of this section. For this purpose,
§ 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 § 1.1502–21T(f) apply with appropriate adjustments.
(g) Effective date—(1) In general.
This section applies to consolidated return years beginning on or after January
1, 1997.
(2) Application to prior periods. See
§ 1.1502–21T(g)(3) for rules generally
permitting a group to apply the rules of
this section to consolidated return years
ending on or after January 29, 1991, and
beginning before January 1, 1997.
Par. 16. Section 1.1502–23 is redesignated § 1.1502–23A; the section heading of the newly designated § 1.1502–
23A is revised; the current text of the
section is designated as paragraph (a)
and paragraph (b) is added to read as
follows:
§ 1.1502–23A Consolidated net section
1231 gain or loss generally applicable
for consolidated return years beginning
before January 1, 1997.
*

*

*

*

*

(b) Effective date. This section applies to any consolidated return years to
which § 1.1502–21T(g) does not apply.
See § 1.1502–21T(g) for effective dates
of that section.
Par. 17. Section 1.1502–23T is added
to read as follows:

21

§ 1.1502–23T Consolidated net section
1231 gain or loss (temporary).
(a) In general. Net section 1231 gains
and losses of members arising during
consolidated return years are not determined separately. Instead, the consolidated net section 1231 gain or loss is
determined under this section for the
group as a whole.
(b) Recapture of ordinary loss. [Reserved]
(c) Effective date—(1) In general.
This section applies to gains and losses
arising in the determination of consolidated net section 1231 gain or loss for
taxable years beginning on or after
January 1, 1997.
(2) Application to prior periods. See
§ 1.1502–21T(g)(3) for rules generally
permitting a group to apply the rules of
this section to consolidated return years
ending on or after January 29, 1991, and
beginning before January 1, 1997.
Par. 18. Section 1.1502–41 is redesignated as § 1.1502–41A; the section
heading of the newly designated
§ 1.1502–41A is revised; and paragraph
(c) is added to read as follows:
§ 1.1502–41A Determination of consolidated net long-term capital gain and
consolidated net short-term capital loss
generally applicable for consolidated return years beginning before January 1,
1997.
*

*

*

*

*

(c) Effective date. This section applies to any consolidated return years to
which § 1.1502–21T(g) does not apply.
See § 1.1502–21T(g) for effective dates
of that section.
Par. 19. Section 1.1502–79A is added
to read as follows:
§ 1.1502–79A Separate return years
generally applicable for consolidated return years beginning before January 1,
1997.
(a) through (e) [Reserved]
(f) Effective date. Paragraphs (a) and
(b) of this section apply to losses arising
in consolidated return years to which
§ 1.1502–21T(g) does not apply. For
this purpose net operating loss deductions, carryovers, and carrybacks arise in
the year from which they are carried.
See § 1.1502–21T(g) for effective dates
of that section.

Par. 20. In § 1.1502–79, paragraphs
(a) and (b) are redesignated as
§ 1.1502–79A, paragraphs (a) and (b).
Par. 21. Section 1.1502–79 is
amended by adding new paragraphs (a)
and (b) to read as follows:
§ 1.1502–79 Separate return years.
(a) Carryover and carryback of consolidated net operating losses to separate return years. For losses arising in
consolidated return years beginning before January 1, 1997, see § 1.1502–
79A(a). For later years, see § 1.1502–
21T(b).
(b) Carryover and carryback of consolidated net capital loss to separate
return years. For losses arising in con-

solidated return years beginning before
January 1, 1997, see § 1.1502–79A(b).
For later years, see § 1.1502–22T(b).
*

*

*

*

*

PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 22. The authority citation for
part 602 continues to read in part as
follows:
Authority: 26 U.S.C. 7805.
Par. 23. In § 602.101, paragraph (c)
is amended by adding an entry in numerical order to the table to read as
follows:
§ 602.101 OMB Control numbers.
*

*

*

22

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*

(c) * * *
CFR part or section where
identified or described

Current OMB
control No.

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1.1502–21T . . . . . . . . . . . . . . . . 1545–1237
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Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved May 31, 1996.
Leslie Samuels,
Assist

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3A03977862f3b4deca. Public record. Not legal advice.