Bulletin No. 1996–31

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Text

July 29, 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. 96–35, page 4.

Low-income housing tax credit. Assistance provided by

the Federal Emergency Management Agency to the owner

of property that is damaged by a disaster will not result in

a reduction of the eligible basis of the property under

section 42(d)(5), or the recharacterization of the property

under section 42(i)(2) as federally subsidized.

T.D. 8678, page 11.

CO–25–96, page 30.

Temporary and proposed regulations under section 1502

of the Code relate to the limitations on net operating loss

carryforwards and certain built-in losses and credits following an ownership change. A public hearing on the proposed regulations will be held on October 17, 1996.

T.D. 8679, page 4.

CO–26–96, page 31.

Final, temporary, and proposed regulations under section

382 of the Code relate to limitations on net operating loss

carryforwards and certain built-in losses following an ownership change in short taxable years and with respect to

controlled groups. A public hearing on the proposed

regulations will be held on October 17, 1996.

FI–28–96, page 33.

Proposed regulations under section 148 of the Code relate

to the arbitrage restrictions applicable to tax-exempt bonds

Finding Lists begin on page 49.

Announcement of Disbarments and Suspensions begins on page 47.

issued by state and local governments. A public hearing

will be held on October 24, 1996.

FI–48–95, page 36.

Proposed regulations under section 171 of the Code relate

to the federal tax treatment of bond premium and bond

issuance premium. A public hearing will be held on October

23, 1996.

EMPLOYEE PLANS

Notice 96–38, page 29.

Guidelines are set forth for determining for July 1996 the

weighted average interest rate and the resulting permissible range of interest rates used to calculate current

liability for purposes of the full funding limitation of section

412(c)(7) of the Code as amended by the Omnibus Budget

Reconciliation Act of 1987 and by the Uruguay Round

Agreements Act (GATT).

EXEMPT ORGANIZATIONS

Announcement 96–68, page 45.

A list is given of organizations now classified as private

foundations.

ADMINISTRATIVE

Notice 96–37, page 29.

This notice explains the procedure for claiming a refund

based on United States v. IBM, 64 U.S.L.W. 4419 (1996).

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.

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.

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 42.—Low-Income Housing

Credit

Low-income housing tax credit. Assistance provided by the Federal Emergency Management Agency to the

owner of property that is damaged by a

disaster will not result in a reduction of

the eligible basis of the property under

section 42(d)(5), or the recharacterization of the property under section

42(i)(2) as federally subsidized.

Rev. Rul. 96–35

ISSUES

(1) If a qualified low-income building

is damaged by a disaster and a belowmarket loan is provided by the Federal

Emergency

Management

Agency

(FEMA) to the owner of the building to

repair, reconstruct, or restore the building

to its pre-casualty condition, does the

loan cause the building to be characterized as federally subsidized under

§ 42(i)(2) of the Internal Revenue Code?

(2) If a qualified low-income building

is damaged by a disaster and a grant is

provided by FEMA to the owner of the

building to repair, reconstruct, or restore

the building to its pre-casualty condition, does the grant require the owner to

reduce the building’s eligible basis under § 42(d)(5) to the extent of the

FEMA grant?

FACTS

Taxpayer, T, owns and operates a new

qualified low-income building (as defined in § 42(c)(2)) that qualified for

the 70-percent present value credit under

§ 42(b)(2)(B)(i). The building was partially destroyed by a hurricane during

the building’s 15-year compliance period

(as defined in § 42(i)(1)). The President

declared the area affected by the hurricane a major disaster area, making

available assistance through FEMA. T

received a FEMA below-market loan

and a grant that T used to restore the

building to its pre-casualty condition.

LAW AND ANALYSIS

Section 42 provides a tax credit for

investment in qualified low-income

buildings placed in service after December 31, 1986. For any taxable year in a

10-year credit period, the amount of

credit is equal to the applicable percentage of the qualified basis of each qualified low-income building.

For a qualified low-income building

placed in service after 1987, the term

‘‘applicable percentage’’ means the percentage that will yield over a 10-year

period amounts of credit that have a

present value equal to: (i) 70 percent of

the qualified basis of new buildings that

are not federally subsidized for the

taxable year (70-percent present value

credit), and (ii) 30 percent of the qualified basis of existing buildings, and of

new buildings that are federally subsidized for the taxable year (30-percent

present value credit).

Under § 42(i)(2)(A), a new building

is federally subsidized for any taxable

year if, at any time during the taxable

year or any prior taxable year, there is

or was outstanding any below-market

federal loan, the proceeds of which were

used (directly or indirectly) for the

building or its operation.

Under § 42(c), the qualified basis of

any qualified low-income building for

any taxable year is an amount equal to

the applicable fraction (defined in

§ 42(c)(1)(B)) of the eligible basis of the

building. Section 42(d)(5) provides that

if, during any taxable year of the compliance period, a federal grant is used for a

building or its operation, the eligible

basis of the building for the taxable year

and all succeeding taxable years is reduced to the extent of the federal grant.

The rules of § 42(i)(2) and § 42(d)(5)

limit the low-income housing credit if

federally subsidized loans or federal

grants are used to finance a building or

meet the operating costs of the building.

If a building is damaged in a federally

declared disaster, however, FEMA assistance does not substitute for funds that

were used to determine the building’s

basis nor is it used to meet operating

costs of the building. Rather, FEMA

funds merely help to restore the status of

the building to its pre-casualty condition.

FEMA funds provide no additional federal benefit to taxpayers that § 42(i)(2)

and § 42(d)(5) were intended to limit.

Furthermore, reducing the amount of the

credit available under § 42 would place

the owner of a qualified low-income

building at a disadvantage compared with

other building owners using FEMA funds.

Therefore, the amount of credit available

to a building will not be affected under

§ 42(i)(2) and § 42(d)(5) by the building

owner’s use of FEMA assistance.

HOLDING

(1) A below-market loan provided by

FEMA to the owner of a qualified

low-income building damaged by a disaster to repair, reconstruct, or restore

the building to its pre-casualty condition

does not result in characterizing the

building as federally subsidized under

§ 42(i)(2).

(2) A grant provided by FEMA to the

owner of a qualified low-income housing building damaged by a disaster does

not cause a reduction of the building’s

eligible basis under § 42(d)(5) to the

extent that the grant funds are used to

repair, reconstruct, or restore the building to its pre-casualty condition.

DRAFTING INFORMATION

The principal author of this revenue

ruling is Christopher J. Wilson of the

Office of Assistant Chief Counsel

(Passthroughs and Special Industries).

For further information regarding this

revenue ruling contact Mr. Wilson on

(202) 622–3040 (not a toll-free call).

Section 382.—Limitations on Net

Operating Loss Carryforwards and

Certain Built-In Losses Following

Ownership Change

26 CFR 1.382–8T: Controlled groups (temporary).

T.D. 8679

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

Regulations Under Section 382 of

the Internal Revenue Code of 1986;

Application of Section 382 in Short

Taxable Years and With Respect to

Controlled Groups

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains final and temporary regulations relating to

limitations on net operating loss carryforwards and certain built-in losses

following an ownership change and

comply with the statutory direction under section 382(m) of the Internal Revenue Code to prescribe regulations concerning short taxable years and

controlled groups. This document also

contains amendments relating to the end

of separate tracking of the stock ownership of loss corporations that cease to

exist following a merger or similar

transaction. The text of these temporary

regulations also serves as the text of the

proposed regulations set forth in CO–

26–96, page 31, in this issue of the

Bulletin.

DATES: These regulations 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 these temporary regulations

has been reviewed and approved by the

Office of Management and Budget in

accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under the

control number 1545– 1434. Section

1.382–8T(h) requires a response from

certain corporations that are members of

controlled groups. The IRS requires this

information to assure compliance with

section 382(m)(5) so that the value of a

loss corporation that is a member of a

controlled group is not taken into account more than once in computing a

section 382 limitation. Responses to this

collection of information are required to

obtain a benefit (relating to the restoration of value for section 382 purposes).

An agency may not conduct or sponsor, and a person is not required to

respond to, a collection of information

unless the collection of information displays a valid control number.

For further information concerning

this collection of information, and where

to submit comments on the collection of

information and the accuracy of the

estimated burden, and suggestions for

reducing this burden, please refer to the

preamble to CO–26–96, page 31, 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 issued three notices of proposed rulemaking, CO–132–87 (56 FR

4194), CO–077–90 (56 FR 4183), and

CO–078–90 (56 FR 4228), setting forth

rules regarding the application of sections 382 and 383 by consolidated

groups and by controlled groups, and

the carryover and carryback of losses to

consolidated and separate return years.

For reasons explained in the preamble

to TD 8678 (page 11 in this issue of the

Bulletin), the IRS and Treasury are

issuing temporary amendments concerning the limitations on net operating loss

carryforwards and certain built-in losses

and credits following an ownership

change of a consolidated group. The

temporary regulations contained in this

Treasury decision complement those

other temporary regulations. They assure

that the members of a controlled group

cannot duplicate value in computing

their respective section 382 limitations,

a result not permitted to members of a

group filing consolidated returns. See

§ 1.1502–93T.

These temporary regulations are substantially identical to the rules proposed

on January 29, 1991. One provision

(relating to the effects of successive

ownership changes) was moved from

the consolidated return regulations to the

section 382 regulations to clarify that it

is applicable to all corporations. These

temporary amendments do not address

the numerous comments on the proposed regulations. Many of these comments are still under consideration.

Effective Dates

The temporary amendments are generally effective as of January 1, 1997.

The final rules relating to the value of

stock added to § 1.382–2(a)(3)(i) and

the temporary rules in § 1.382–

2T(f)(1)(ii) (relating to the end of separate tracking of certain loss corporations) are generally effective as of January 29, 1991. The temporary rules in

§ 1.382–5T (relating generally to short

taxable years and successive ownership

changes) generally apply to loss corporations that have an ownership change

to which section 382(a), as amended by

the Tax Reform Act of 1986, applies.

Special Analysis

chapter 6) do not apply to these regulations, and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant

to section 7805(f) of the Internal Revenue Code, the notice of proposed

rulemaking preceding these regulations

were sent to the Small Business Administration for comment on their impact on

small business.

Drafting Information

The principal author of the temporary

regulations is David B. Friedel of the

Office of Assistant Chief Counsel (Corporate), IRS. Other personnel from the

IRS and Treasury participated in their

development.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 602

are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for Part 1 is amended by removing the

entries for ‘‘1.382–2’’ and ‘‘1.382–2T’’

and adding entries in numerical order to

read as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.382–2 also issued under 26

U.S.C. 382(k)(1), (l)(3), (m), and 26

U.S.C. 383.

Section 1.382–2T also issued under

26 U.S.C. 382(g)(4)(C), (i), (k)(1) and

(6), (l)(3), (m), and 26 U.S.C. 383.* * *

Section 1.382–5T also issued under

26 U.S.C. 382(m).* * *

Section 1.382–8T also issued under

26 U.S.C. 382(m).* * *

Par. 2. Section 1.382–1 is amended

by:

a. Adding an entry for § 1.382–2,

paragraph (a)(1)(iv).

b. Revising the entry for § 1.382–2,

paragraph (a)(3)(i).

c. Adding entries for § 1.382–2T,

paragraphs (f)(1)(i) through (f)(1)(iii).

d. Adding entries for §§ 1.382–5T

and 1.382–8T.

§ 1.382–1 Table of contents.

It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 12866.

Therefore, a regulatory assessment is not

required. It has also been determined

that section 553(b) of the Administrative

Procedure Act (5 U.S.C. chapter 5) and

the Regulatory Flexibility Act (5 U.S.C.

§ 1.382–2 General rules for ownership

change.

(a) * * *

(1) * * *

(iv) End of separate accounting for

losses and credits of distributor or

transferor loss corporation.

§ 1.382–2T Definition of ownership

change under section 382, as amended

by the Tax Reform Act of 1986 (temporary).

(f) * * *

(1) * * *

(i) In general.

(ii) End of separate accounting for

losses and credits of distributor or

transferor loss corporation.

(iii) Application to other successor

corporations.

§ 1.382–5T Section 382 limitation (temporary).

(a) Scope.

(b) Computation of value.

(d) Successive ownership changes

and absorption of a section 382 limitation.

(1) In general.

(2) Recognized built-in gains and

losses.

(3) Effective date.

(e) Controlled groups.

(f) Effective date.

§ 1.382–8T Controlled groups (temporary).

(a) Introduction.

(b) Controlled group loss and controlled group with respect to a controlled group loss.

(1) Reduction in value.

(2) Restoration of value.

(3) Reduction in value by the amount

restored.

(4) Appropriate adjustments.

(5) Certain reductions in the value of

members of a controlled group.

(d) No double reduction.

(e) Definitions and nomenclature.

(1) Definitions in Section 382 and the

regulations thereunder.

(2) Controlled group.

(3) Component member.

(4) Predecessor and successor corporation.

(f) Coordination between consolidated groups and controlled groups.

(g) Examples.

(h) Time and manner of filing election to restore.

(1) Statement required.

(2) Revocation of election.

(3) Filing by component member.

(i) [Reserved]

(j) Effective date.

(1) In general.

(2) Transition rule.

(i) In general.

(ii) Special transition rules for controlled groups that had ownership

changes before January 29, 1991.

(3) Amended returns.

Par. 3. Section 1.382–2 is amended as

follows:

a The first sentence of paragraph

(a)(1)(iii) is amended by removing the

language ‘‘Pre-change losses’’ and adding ‘‘Except as provided in § 1.382–

2T(f)(1)(ii), pre-change losses’’ in its

place.

b Paragraph (a)(1)(iv) is added.

c The text of § 1.382–2T(f)(18)(i) is

redesignated as the text of § 1.382–

2(a)(3)(i).

d Newly designated paragraph

(a)(3)(i) is amended by adding three

sentences at the end.

The additions read as follows:

§ 1.382–2 General rules for ownership

change.

(a) * * *

(1) * * *

(iv) End of separate accounting for

losses and credits of distributor or

transferor loss corporation. For further

guidance, see § 1.382–2T(f)(1)(ii).

(3) * * * (i) * * * Solely for

purposes of determining the percentage

of stock owned by a person, each share

of all the outstanding shares of stock

that have the same material terms is

treated as having the same value. Thus,

for example, a control premium or

blockage discount is disregarded in determining the percentage of stock owned

by any person. The previous two sentences of this paragraph (a)(3)(i) apply

to any testing date occurring on or after

January 29, 1991.

Par. 4. Section 1.382–2T is amended

as follows:

(a) Paragraph (e)(2)(iv) Example (1)

is amended by removing the last sentence.

(b) Paragraph (e)(2)(iv) Example

(2)(ii) is amended by adding a sentence

at the end.

(2)(iii) is amended by removing the

language ‘‘, but must be separately

accounted for under § 1.382–2(a)(1)(iii)

of this section’’ from the last sentence.

(d) The text following the heading of

paragraph (f)(1) is designated as paragraph (f)(1)(i) and a heading for newly

designated paragraph (f)(1)(i) is added.

(e) Paragraphs (f)(1)(ii) and (f)(1)(iii)

are added.

(f) Paragraph (f)(4) is amended by

removing the word ‘‘loss’’ and by adding two sentences at the end.

(g) Paragraph (f)(5) is amended by

adding two sentences at the end.

(h) A sentence is added after the

heading of paragraph (f)(18)(i).

(i) Paragraph (h)(2)(i)(A) is amended

by adding the language ‘‘and solely for

the purposes of determining whether a

loss corporation has an ownership

change’’ immediately after ‘‘except as

otherwise provided in this section,’’.

The additions read as follows:

§ 1.382–2T Definitions of ownership

change under section 382, as amended

by the Tax Reform Act of 1986 (temporary).

(e) * * *

(2) * * *

(iv) * * *

Example (2) * * *

(ii) * * * See paragraph (f)(1)(ii) of

this section for rules that end separate

accounting for L1’s pre-change losses on

any testing date occurring on or after

January 29, 1991.

(f) * * *

(1) * * *

(i) In general. * * *

(ii) End of separate accounting for

losses and credits of distributor or

transferor loss corporation. The separate

tracking of owner shifts of the stock of

an acquiring corporation required by

§ 1.382–2(a)(1)(iii) with respect to the

net operating loss carryovers and other

attributes described in § 1.382–

2(a)(1)(ii) ends when a fold-in event

occurs. A fold-in event is either an

ownership change of the distributor or

transferor corporation in connection

with, or after, the transaction to which

section 381(a) applies, or a period of 5

consecutive years following the section

381(a) transaction during which the distributor or transferor corporation has not

had an ownership change. Starting on

the day after the earlier of the change

date (but not earlier than the day of the

section 381(a) transaction) or the last

day of the 5 consecutive year period, the

losses and other attributes of the distributor or transferor corporation are

treated as losses and attributes of the

acquiring corporation for purposes of

determining whether an ownership

change occurs with respect to such

losses. Also, for purposes of determining

the beginning of the acquiring corporation’s testing period, such losses are

considered to arise either in a taxable

year that begins not earlier than the later

of the day following the change date or

the day of the section 381(a) transaction,

or in a taxable year that begins 3 years

before the end of the 5 consecutive year

period. Pre-change losses of a distributor

or transferor corporation that are subject

to a limitation under section 382 continue to be subject to the limitation

notwithstanding the occurrence of a

fold-in event. Any ownership change

that occurs in connection with, or subsequent to, the section 381 transaction

may result in an additional, lesser limitation with respect to such pre-change

losses. This paragraph (f)(1)(ii) applies

to any testing date occurring on or after

January 29, 1991.

(iii) Application to other successor

corporations. Section 1.382–2(a)(1) (relating to the definition of loss corporation) and this paragraph (f)(1) also apply, as the context may require, to

successor corporations other than successors in section 381(a) transactions.

For example, if a corporation receives

assets from the loss corporation that

have basis in excess of value, the recipient corporation’s basis for the assets is

determined, directly or indirectly, in

whole or in part, by reference to the loss

corporation’s basis, and the amount by

which basis exceeds value is material,

the recipient corporation is a successor

corporation subject to § 1.382–2(a)(1)

and this paragraph (f)(1). This paragraph

(f)(1)(iii) applies to any testing date

occurring on or after January 1, 1997.

(4) Successor corporation. * * * A

successor corporation also includes, as

the context may require, a corporation

which receives an asset or assets from

another corporation if the corporation’s

basis for the asset(s) is determined,

directly or indirectly, in whole or in

part, by reference to the other corporation’s basis and the amount by which

basis differs from value is, in the aggregate, material. The previous sentence of

this paragraph (f)(4) applies to any

testing date occurring on or after January 1, 1997.

(5) Predecessor corporation. * * * A

predecessor corporation also includes, as

the context may require, a corporation

which transfers an asset or assets to

another corporation if the transferee’s

basis for the asset(s) is determined,

directly or indirectly, in whole or in

part, by reference to the corporation’s

basis and the amount by which basis

differs from value is, in the aggregate,

material. The previous sentence of this

paragraph (f)(5) applies to any testing

date occurring on or after January 1,

1997.

(18) * * * (i) * * * For further

guidance, see § 1.382–2(a)(3)(i).

Par. 5. Sections 1.382–5T and

1.382–8T are added to read as follows:

§ 1.382–5T Section 382 limitation (temporary).

(a) Scope. Following an ownership

change, the section 382 limitation for

any post-change year is an amount equal

to the value of the loss corporation

multiplied by the long-term tax- exempt

rate that applies with respect to the

ownership change, and adjusted as required by section 382 and the regulations thereunder. See, for example, section 382(b)(2) (relating to the

carryforward of unused section 382

limitation), section 382(b)(3)(B) (relating to the section 382 limitation for the

post-change year that includes the

change date), section 382(m)(2) (relating

to short taxable years), and section

382(h) (relating to recognized built-in

gains and section 338 gains).

(b) Computation of value. [Reserved]

382 limitation for any post-change year

that is less than 365 days is the amount

that bears the same ratio to the section

382 limitation determined under section

382(b)(1) as the number of days in the

post-change year bears to 365. The

section 382 limitation, as so determined,

is adjusted as required by section 382

and the regulations thereunder. This

paragraph (c) does not apply to a 52–53

week taxable year that is less than 365

days unless a return is required under

section 443 (relating to short periods)

for such year.

(d) Successive ownership changes

and absorption of a section 382 limitation—(1) In general. If a loss corporation has two (or more) ownership

changes, any losses attributable to the

period preceding the earlier ownership

change are treated as pre-change losses

with respect to both ownership changes.

Thus, the later ownership change may

result in a lesser (but never in a greater)

section 382 limitation with respect to

such losses. In any case, the amount of

taxable income for any post-change year

that can be offset by pre-change losses

may not exceed the section 382 limitation for such ownership change, reduced

by the amount of taxable income offset

by pre-change losses subject to any

earlier ownership change(s).

(2) Recognized built-in gains and

losses. [Reserved]

(3) Effective date. This paragraph (d)

applies to taxable years of a loss corporation beginning on or after January 1,

1997.

(e) Controlled groups. See § 1.382–

8T for rules for determining the value of

a loss corporation that is a member of a

controlled group.

(f) Effective date. Except as otherwise

provided, this section applies to a loss

corporation that has an ownership

change to which section 382(a), as

amended by the Tax Reform Act of

1986, applies.

§ 1.382–8T Controlled groups (temporary).

(a) Introduction. This section provides rules to adjust the value of a loss

corporation that is a member of a controlled group of corporations on a

change date so that the same value is

not included more than once in computing the limitations under section 382 for

the loss corporations that are members

of the controlled group. In general, the

adjustment is made under paragraph (c)

of this section by reducing the value of

the loss corporation by the value of the

stock of each component member of the

controlled group that the loss corporation owns immediately after the ownership change. The loss corporation’s

value may, however, be increased under

paragraph (c) of this section by any

amount of value that the other member

elects to restore to the loss corporation.

(b) Controlled group loss and controlled group with respect to a controlled group loss. A controlled group

loss is a pre-change loss (or a net

unrealized built-in loss) of a loss corporation that is attributable to a taxable

year of the corporation with respect to

which the corporation is a component

member of a controlled group (as defined by paragraphs (e)(2) and (3) of

this section). The controlled group with

respect to each controlled group loss is

composed of the loss corporation and

each other corporation that is a compo-

nent member of a controlled group that

includes the loss corporation both—

(1) With respect to the taxable year

to which the controlled group loss is

attributable; and

(2) On the date the loss corporation

has an ownership change.

section 382 with respect to each controlled group loss, the value of the stock

of each component member of the controlled group with respect to that loss is

determined immediately before the ownership change, and is adjusted by applying the following rules:

(1) Reduction in value. The value of

the stock of each component member is

reduced by the value (immediately before the ownership change and without

regard to any restoration of value or

other adjustment under this section) of

the stock of any other component member directly owned by the component

member immediately after the ownership change.

(2) Restoration of value. After the

value of the stock of each component

member is reduced pursuant to paragraph (c)(1) of this section, the value of

the stock of each component member is

increased by the amount of value, if

any, restored to the component member

by another component member (the

electing member) pursuant to this paragraph (c)(2). The electing member may

elect to restore value to another component member in an amount that does not

exceed the lesser of—

(i) The sum of—

(A) The value, determined immediately before the ownership change, of

the electing member’s stock (after adjustment under paragraph (c)(1) of this

section and before any restoration of

value under this paragraph (c)(2)); plus

(B) Any amount of value restored to

the electing member by another component member under this paragraph

(c)(2); or

(ii) The value, determined immediately before the ownership change, of

the electing member’s stock (without

regard to any adjustment under this

section) that is directly owned by the

other component member immediately

after the ownership change.

(3) Reduction in value by the amount

restored. The value of the stock of the

electing member is reduced by any

amount of value that the electing member elects to restore under paragraph

(c)(2) of this section to another component member.

(4) Appropriate adjustments. Appropriate additional adjustments consistent

with paragraphs (c)(1), (2), and (3) of

this section must be made to prevent any

duplication of value. Thus, for example,

adjustments must be made to reflect—

(i) Any indirect ownership interest in

another component member;

(ii) Any cross ownership of stock by

component members of the controlled

group with respect to the controlled

group loss; and

(iii) Any value used to determine a

limitation under section 382 with respect

to controlled group losses from the same

period.

(5) Certain reductions in the value of

members of a controlled group. A loss

corporation that has an ownership

change is required to make adjustments

consistent with this paragraph (c) with

respect to its stock if the stock of

another corporation in which it had a

direct or indirect ownership interest was

disposed of before the ownership

change, and;

(i) Both corporations were component

members of a controlled group—

(A) With respect to a taxable year to

which a controlled group loss of the loss

corporation is attributable; and

(B) At any time during the 2 year

period before the ownership change; and

(ii) Both corporations are component

members of a controlled group at any

time during the 2 year period following

the ownership change.

(d) No double reduction. To the extent consistent with the purposes of this

section, section 382 and this section

shall not be applied to duplicate a

reduction in the value of a loss corporation. Thus, for example, if the value of a

loss corporation is reduced under section

382(l)(1) to reflect a capital contribution

of stock of a component member, it is

not again reduced by such amount under

paragraph (c)(1) of this section. If this

paragraph (d) applies to prevent a reduction in value from being duplicated, the

application of the other rules of this

section, such as those relating to the

restoration of value, is correspondingly

limited in a manner consistent with the

principles of this section.

(e) Definitions and nomenclature—

(1) Definitions in section 382 and the

regulations thereunder. Except as otherwise provided, the definitions and nomenclature contained in section 382 and

the regulations thereunder apply to this

section.

(2) Controlled group. Controlled

group has the same meaning as in

section 1563(a), determined by substituting ‘‘50 percent’’ for ‘‘80 percent’’ each

place that it appears, and without regard

to section 1563(a)(4).

(3) Component member. Component

member has the same meaning as in

section 1563(b), determined by substituting ‘‘December 31 (or the change date,

if earlier)’’ for ‘‘December 31’’ each

place it appears, and without regard to

section 1563(b)(2), (b)(3)(C), and (b)(4).

(4) Predecessor and successor corporation. As the context may require, a

reference to a corporation, or component

member includes a reference to a predecessor or successor corporation.

(f) Coordination between consolidated groups and controlled groups.

Some or all of the component members

of a controlled group may also be

members of a consolidated group, and a

controlled group loss may be subject to

a consolidated section 382 limitation or

subgroup section 382 limitation determined under § 1.1502–93T. Except as

otherwise provided in this paragraph (f)

and §§ 1.1502–91T through 1.1502–

99T, § 1.1502–93T applies instead of

this section when both sections, by their

terms, are otherwise applicable. This

section is applicable and may require an

adjustment to value if a member of a

consolidated group, a loss group, or a

loss subgroup (as those terms are defined in §§ 1.1502–1(h) and 1.1502–

91T) is also a component member of a

controlled group with respect to a controlled group loss. Solely for purposes

of applying this section, a consolidated

group, loss group, or loss subgroup is

treated as a single corporation. Thus to

determine the limitation with respect to

any portion of the pre-change consolidated attributes or pre-change subgroup

attributes of the loss group or loss

subgroup that is a controlled group loss,

the consolidated section 382 limitation

or subgroup section 382 limitation is

computed by treating the loss group or

the loss subgroup as a single corporation, and adjusting value in accordance

with paragraph (c) of this section. See

paragraph (g) Example 4 of this section.

(g) Examples. For purposes of the

examples in this section, unless otherwise stated, the nomenclature and assumptions of the examples in § 1.382–

2T(b) apply, all corporations file

separate income tax returns on a calendar year basis, the only 5-percent shareholder of a corporation is a public

group, and the facts set forth the only

owner shifts with respect to the corporations during the testing period.

Example 1. Controlled group with respect to a

controlled group loss. (a) Public L owns all of the

L stock, L and Public L1 own 30 percent and 70

percent, respectively, of the L1 stock, and L1

owns all of the corporation T stock. L1 has a net

operating loss arising in Year 1 that is carried over

to Year 4. L has a net operating loss arising in

Year 2 that is carried over to Year 4. On August 1,

Year 3, L acquires 30 percent of the stock of L1,

thereby increasing its percentage ownership interest in L1 to 60 percent. On December 1, Year 3,

L1 purchases all of the stock of corporation S

from Public S. On November 1, Year 4, P acquires

all of the L stock. The acquisition by P of all of

the L stock on November 1, Year 4, causes

ownership changes of both L and L1 under the

rules of § 1.382–2T. The following is a graphic

illustration of these facts.

(b)(1) Under paragraph (b) of this section, the

Year 1 net operating loss carryover of L1 is a

controlled group loss because L1 is a component

member of a controlled group with respect to Year

1, the year to which the loss is attributable. L1

and T compose a controlled group with respect to

the net operating loss carryover because L1 and T

are component members of a controlled group

both—

(A) With respect to the taxable year to which

L1’s net operating loss carryover is attributable

(i.e., Year 1); and

(B) On November 1, Year 4, L1’s change date.

Although L and S are component members of L1’s

controlled group on L1’s change date, they are not

component members of the controlled group with

respect to the Year 1 net operating loss carryover

because they were not component members with

respect to the year to which the net operating loss

carryover is attributable.

(2) The value of L1’s stock must therefore be

adjusted in accordance with paragraph (c) of this

section to take into account an adjustment with

respect to the T stock (but not the S stock) in

computing L1’s limitation under section 382 with

respect to its net operating loss carryover.

group composed of L, L1, S, and T on November

1, Year 4, L’s change date, it is not a component

member of a controlled group with respect to Year

2, the taxable year to which its net operating loss

carryover is attributable. Therefore, L’s Year 2 net

operating loss carryover is not a controlled group

loss under paragraph (b) of this section and the

value of L’s stock is not adjusted in accordance

with paragraph (c) of this section to compute L’s

limitation under section 382 with respect to the

Year 2 net operating loss carryover.

Example 2. Adjustments to value of the controlled group members. (a) Since Year 1, A has

owned all of the stock of L, L and B have owned

80 percent and 20 percent, respectively, of the

stock of corporation P, and P and C have owned

75 percent and 25 percent, respectively, of the

stock of L1. L and L1 each has a net operating

loss for the Year 6 taxable year that is carried over

to its respective Year 7 taxable year. On December

1, Year 7, A sells all of the L stock to D. The sale

results in ownership changes of both L and L1.

Immediately before the ownership changes, the

total value of the L1 stock is $40, the total value

of the P stock (including the value of its L1 stock)

is $100, and the total value of the L stock

(including the value of the P stock) is $200. The

following is a graphic illustration of these facts.

(b) Under paragraph (b) of this section, the

Year 6 net operating loss carryovers of each of L

and L1 are controlled group losses because each

of L and L1 is a component member of a

controlled group with respect to Year 6, the year

to which the losses are attributable. L, P, and L1

compose controlled groups with respect to both

Year 6 net operating loss carryovers because L, P,

and L1 are component members of a controlled

group both—

(1) With respect to the taxable years to which

the net operating loss carryovers are attributable

(i.e., Year 6); and

(2) On December 1, Year 7, the change date.

determining its limitation under section 382 with

respect to its net operating loss carryover from

Year 6 is $40. L1 does not elect to restore any

value to P under paragraph (c)(2) of this section.

(d) The value of the stock of P ($100) is

reduced under paragraph (c)(1) of this section by

the value of the stock of L1 that it directly owns,

$30 (75% x $40). Following the adjustment, the

value of the stock of P is $70. P elects to restore

this entire $70 of value to L.

(e) The value of the stock of L, $200, is

reduced under paragraph (c)(1) of this section by

the value of the stock of P it directly owns, i.e.,

$80 (80% x $100), and increased under paragraph

(c)(2) of this section by the amount P elects to

restore to L, i.e., $70. Thus, the value of the L

stock for purposes of determining L’s limitation

under section 382 with respect to its net operating

loss carryover from Year 6 is $190 ($200 2 $80 +

$70).

Example 3. Limitation on restoration of value.

(a) The facts are the same as in Example 2, except

that L1 elects to restore $20 to P. For purposes of

determining L1’s limitation under section 382 with

respect to the Year 6 net operating loss carryover,

the value of the stock of L1 is $20 ($40 2 $20)

because the value of its stock is reduced under

paragraph (c)(3) of this section by the $20 of

value it elects to restore to P.

(b) The value of the stock of P ($100) is

reduced under paragraph (c)(1) of this section by

the value of the L1 stock it directly owns ($30),

and is increased under paragraph (c)(2) of this

section by the value that L1 elects to restore to P

($20). Thus, the value of the P stock is $90 ($100

2 $30 + $20).

(c)(1) P elects to restore to L the maximum

value permitted under this section. The value of

the stock of L, $200, is reduced under paragraph

(c)(1) of this section by the value of the P stock it

directly owns ($80), and is increased by the value

that P elects to restore to L. P may elect to restore

to L the lesser of—

(A) The sum of the value of its stock immediately after adjustment under paragraph (c)(1) of

this section (i.e., $70) plus the value restored to it

by L1 (i.e., $20) (a total of $90); or

(B) The value of the P stock (without regard to

the adjustment required by paragraphs (c)(1) and

(2) of this section) that is directly owned by L

immediately before the ownership change (i.e.,

$80).

(2) Thus, $80 is the maximum amount that P

may elect to restore to L. Following the restoration of value by P, the value of the L stock for

purposes of determining L’s limitation under section 382 is $200 ($200 2 $80 + $80).

Example 4. Coordination with consolidated return regulations. (a) P and its wholly owned

subsidiary L file a consolidated return. L owns 79

percent of the outstanding stock of L1. P acquired

the stock of L in Year 1 and L acquired the stock

of L1 in Year 2. The P consolidated group has a

consolidated net operating loss arising in the Year

6 consolidated return year that is carried over to

Year 8. L1 has a net operating loss arising in its

Year 6 taxable year that is also carried over to

Year 8. On January 1, Year 8, the P consolidated

group has an ownership change under § 1.1502–

92T(b)(1)(i) and L1 has an ownership change

under § 1.382–2T.

(b)(1) Under paragraph (b) of this section, the

Year 6 net operating loss carryover of the P group

is a controlled group loss because P, L, and L1 are

component members of a controlled group with

respect to Year 6, the year to which the loss is

attributable. P, L, and L1 compose a controlled

group with respect to the Year 6 net operating loss

carryover of the P loss group because they are

component members of a controlled group both—

(A) With respect to the taxable years to which

the net operating loss carryover is attributable (i.e.,

Year 6); and

(B) On January 1, Year 8, the P group’s change

date. (2) Because P and L compose a loss group

(within the meaning of § 1.1502–91T(c)) with

respect to its Year 6 net operating loss carryover,

the P loss group must compute a consolidated

section 382 limitation with respect to its Year 6

net operating loss carryover as a result of the

ownership change.

limitation under § 1.1502–93T with respect to the

Year 6 net operating loss carryover, the value of

the P stock immediately before the ownership

change is reduced under paragraphs (c)(1) and (f)

of this section by the value immediately before the

ownership change of the L1 stock directly owned

by L immediately after the ownership change. L1

may, however, elect to restore such value to the P

consolidated group to the extent permitted under

paragraph (c)(2) of this section.

Example 5. Appropriate adjustments for indirect

ownership interest. (a) Individual A owns all of

the stock of L, L owns an 80 percent interest in

the capital and profits of partnership PS, and PS

owns 75 percent of the stock of L1. Both L and

L1 have net operating losses for the Year 1 taxable

year that are carried over to their respective Year 2

taxable years. On December 19, Year 2, A sells all

of the L stock to an unrelated individual. The sale

results in an ownership change of L and L1.

(b) Under paragraph (b) of this section, the

Year 1 net operating loss carryovers of each of L

and L1 are controlled group losses because each

of L and L1 is a component member of a

controlled group with respect to Year 1, the year

to which the losses are attributable. L and L1

compose controlled groups with respect to each

corporation’s net operating loss carryovers because

L and L1 are component members of a controlled

group both—

(1) With respect to the taxable years to which

the net operating loss carryovers are attributable

(i.e., Year 1); and

(2) On December 19, Year 2, the change date.

which, under paragraph (c)(4) of this section, must

be taken into account in applying this section. As

a result, the value of the L stock for purposes of

determining its limitation under section 382 with

respect to the Year 1 net operating loss carryover

must be reduced by the value of L’s indirect

ownership interest in the L1 stock (60 percent)

that it owns through PS immediately before the

ownership change, and is increased by the amount

(if any) that L1 elects to restore to L under

paragraph (c)(2) of this section. The value of L1 is

reduced under paragraph (c)(3) of this section to

the extent that L1 elects to restore value to L.

(h) Time and manner of filing election to restore—(1) Statement required.

The election to restore value described

in paragraph (c)(2) of this section must

be in the form set forth below. It must

be signed on behalf of both the electing

member and the corporation to which

such value is restored by persons authorized to sign their respective income tax

returns. (The common parent of a consolidated group must make the election

on behalf of the group.) It must be filed

by the loss corporation with its income

tax return for the taxable year in which

the ownership change occurs (or with an

amended return for such year filed on or

before the due date (including extensions) of the income tax return of any

component member with respect to the

taxable year in which the ownership

change occurs). The statement must provide that: ‘‘THIS IS AN ELECTION

UNDER § 1.382– 8T OF THE INCOME TAX REGULATIONS TO RESTORE ALL OR PART OF THE

VALUE OF [insert name and E.I.N. of

the electing member] TO [insert name

and E.I.N. of the corporation to which

value is restored]. The statement must

also—

(i) Identify the change date for the

loss corporation in connection with

which the election is made;

(ii) State the value of the electing

member’s stock (without regard to any

adjustment under paragraph (c) of this

section) immediately before the ownership change;

(iii) State the amount of any reduction required under paragraph (c)(1) of

this section with respect to stock of the

electing member that is owned directly

or indirectly by the corporation to which

value is restored;

(iv) State the amount of value that

the electing member elects to restore to

the corporation; and

(v) State whether the value of either

component member’s stock was adjusted

pursuant to paragraph (c)(4) of this

section.

(2) Revocation of election. An election made under this section is revocable only with the consent of the

Commissioner.

(3) Filing by component member. An

electing member must attach a copy of

the statement described in paragraph

(h)(1) of this section to its income tax

return (or amended return) for the taxable year which includes the change

date in connection with which the election is made.

(i) [Reserved]

(j) Effective date—(1) In general.

This section applies to a loss corporation that has an ownership change with

respect to a controlled group loss on or

after January 1, 1997.

(2) Transition rule—(i) In general.

The members of a controlled group on

January 1, 1997, that have had an

ownership change with respect to a

controlled group loss before January 1,

1997, must determine the limitations

under section 382 for any post-change

year with respect to controlled group

losses by using a reasonable method to

preclude the value of stock of a component member that was owned directly or

indirectly by another member immediately after an ownership change from

being taken into account more than once

in determining the limitations under section 382 with respect to controlled

group losses. If such a reasonable

method was not used for a post-change

year, subject to the exception in paragraph (j)(3) of this section, the members

of the controlled group described in the

preceding sentence must reduce their

limitations under section 382 for postchange years for which the income tax

return is filed after January 1, 1997, to

recapture, as quickly as possible, any

limitation that members took into account in excess of the amount that

would be allowable under this section.

(ii) Special transition rule for controlled groups that had ownership

changes before January 29, 1991. For

purposes of this section, in the case of

an ownership change occurring before

January 29, 1991, the controlled group

with respect to a controlled group loss

does not include a corporation that is

not a component member of the controlled group on January 29, 1991. Thus,

in the case of an ownership change

occurring before January 29, 1991, paragraph (c) of this section does not require

that a loss corporation that is a component member of a controlled group to

disregard the value of stock of another

corporation directly owned immediately

after the ownership change in determining the value of its own stock unless the

other corporation is a component member of the controlled group on January

29, 1991.

(3) Amended returns. A taxpayer that

has had an ownership change before

January 1, 1997, may file an amended

return for any taxable year to modify

the amount of a limitation under section

382 with respect to a controlled group

loss only if—

(i) The modification complies with

the rules contained in this section for

computing a limitation under section

382;

(ii) Any other component member of

the controlled group with respect to the

controlled group loss who elects to

restore value and whose taxable income

is affected by the election to restore

value also files amended returns that

comply with such rules; and

(iii) Corresponding adjustments are

made in amended returns for all taxable

years ending after December 31, 1986.

PART 602—OMB CONTROL NUMBERS UNDER THE PAPERWORK

REDUCTION ACT

Par. 6. The authority citation for part

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 7. In § 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.

CFR part or section where

identified or described

Current OMB

control No.

1.382.8T . . . . . . . . . . . . . . . . . . 1545–1434

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved May 31, 1996.

Leslie Samuels,

Assistant Secretary of the Treasury.

(Filed by the Office of the Federal Register on

June 26, 1996, 8:45 a.m., and published in the

issue of the Federal Register for June 27, 1996, 61

F.R. 33313)

Section 1502.—Regulations

26 CFR 1.1502–91T: Application of section 382

with respect to a consolidated group (temporary).

T.D. 8678

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

Regulations Under Section 1502 of

the Internal Revenue Code of 1986;

Limitations on Net Operating Loss

Carryforwards and Certain Built-in

Losses and Credits Following an

Ownership Change of a

Consolidated Group

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Temporary regulations.

SUMMARY: This document contains

temporary regulations regarding the operation of sections 382 and 383 of the

Internal Revenue Code of 1986 (relating

to limitations on net operating loss carryforwards and certain built-in losses

and credits following an ownership

change) with respect to consolidated

groups. The regulations include rules for

determining whether a loss group or a

loss subgroup has an ownership change,

for computing a consolidated section

382 limitation or subgroup section 382

limitation, and for applying sections 382

and 383 to corporations that join or

leave a group. The rules are necessary

to provide guidance to such groups on

the use of certain of their tax attributes.

The text of these temporary regulations

also serves as the text of CO–25–96,

page 30, in this issue of the Bulletin.

DATES: These regulations 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 1545–1218. The collection requires a response from certain

consolidated groups. The IRS requires

the information described in § 1.1502–

95T(e) to assure that a section 382

limitation is properly determined in

cases of corporations that cease to be

members of a group. Responses to this

collection of information are required to

obtain a benefit (relating to the section

382 limition applicable to the departing

member(s)).

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 CO–25–96, page 30, in of

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 issued three notices of proposed rulemaking, CO–132–87 (56 FR

4194), CO–077–90 (56 FR 4183), and

CO–078–90 (56 FR 4228), setting forth

rules regarding the application of sections 382 and 383 by consolidated

groups and by controlled groups, and

regarding the use of built-in deductions

and net operating losses and capital

losses, including the carryover and carryback of separate return limitation year

(SRLY) losses of members of consolidated groups. The preambles to the three

proposed regulations explain their rules

in detail. The IRS and Treasury also

published Notice 91–27 (1991–2 C.B.

629) to advise of intended modifications

to the proposed regulations.

For reasons explained in the preamble

to TD 8677 (published in 1996–30

I.R.B. 7), the IRS and Treasury are

issuing temporary amendments concerning the use of built-in deductions and

net operating losses and capital losses of

members of consolidated groups. Some

of the rules in those temporary amendments are closely related to rules regarding the application of section 382 to

members of consolidated groups (for

example, rules relating to built-in deductions and subgroups). Because of the

close relationship, and in order to give

consolidated groups immediate guidance

on the application of sections 382 and

383, the IRS and Treasury are issuing

these temporary amendments. The temporary amendments are substantially

identical to the rules proposed on January 29, 1991.

These temporary amendments do not

address the comments on the proposed

amendments. Many of these comments

are still under consideration.

As a companion to this Treasury

decision, the IRS and Treasury are also

issuing temporary regulations relating to

the application of sections 382 and 383

by members of controlled groups. See

TD 8679 published on page 4 in this

issue of the Bulletin.

Effective Dates.

The temporary regulations are generally effective for testing dates that occur

on or after January 1, 1997. Transition

rules contained in the proposed amendments are retained and made applicable

to testing dates before January 1, 1997.

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 the temporary

regulations is David B. Friedel of the

Office of Assistant Chief Counsel (Corporate), IRS. Other personnel from the

IRS and Treasury participated in their

development.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 602

are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 is amended by adding entries in

numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.1502–91T also issued under