Bulletin No. 2020–47

HIGHLIGHTS

OF THIS ISSUE





Bulletin No. 2020–47

November 16, 2020

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.

ADMINISTRATIVE

Announcement 2020-19, page 1070.

The Office of Professional Responsibility (OPR) announces recent disciplinary sanctions involving attorneys, certified public accountants, enrolled agents, enrolled actuaries, enrolled

retirement plan agents, and appraisers. These individuals are

subject to the regulations governing practice before the Internal Revenue Service (IRS), which are set out in Title 31, Code

of Federal Regulations, Part 10, and which are published in

pamphlet form as Treasury Department Circular No. 230.

The regulations prescribe the duties and restrictions relating

to such practice and prescribe the disciplinary sanctions for

violating the regulations.

Notice 2020-76, page 1058.

This notice extends the due dates under sections 6055 and

6056 from January 31, 2021, to March 2, 2021, for insurers, self-insuring employers, applicable large employers, and

certain other providers of minimum essential coverage to

furnish to individuals the 2020 Form 1095-B, Health Coverage, and the 2020 Form 1095-C, Employer-Provided Health

Insurance Offer and Coverage. Additionally, this notice provides that the IRS will not impose a penalty under section

6722 for failures to furnish a Form 1095-B to responsible

individuals and also provides a final extension of transitional

good-faith relief from section 6721 and 6722 penalties to

the 2020 information reporting requirements under sections

6055 and 6056.

EMPLOYEE PLANS

Notice 2020-80, page 1060.

This notice requests comments on the application of the

annuity and spousal rights provisions of section 205 of the

Finding Lists begin on page ii.

Employee Retirement Income Security Act of 1974, P.L. 93406, 88 Stat. 829, as amended (ERISA), in connection with

a distribution of an individual custodial account (ICA) in kind

from a terminating § 403(b) plan. Although no § 403(b) plans

are subject to the annuity and spousal rights provisions of

§§ 401(a)(11) and 417 of the Internal Revenue Code (Code),

some § 403(b) plans that are subject to ERISA (such as a

plan of a non-church tax-exempt employer that provides for

matching contributions) are subject to the parallel annuity and

spousal rights provisions of section 205 of ERISA. Revenue

Ruling 2020-23, 2020-47 I.R.B., issued contemporaneously

with this notice, provides guidance regarding termination of

a § 403(b) plan that is funded through the use of § 403(b)

(7) custodial accounts and distribution of an ICA in kind to

a participant or beneficiary of the plan. The revenue ruling

does not, however, address the application of the annuity

and spousal rights provisions under section 205 of ERISA in

connection with a distribution of an ICA in kind as part of a

plan termination.

Rev. Rul. 2020-23, page 1028.

Under the situations in the revenue ruling, the plan is terminated in accordance with the rules of § 1.403(b)-10(a).

Distribution of an individual custodial account (ICA) in kind to

a participant or beneficiary is not includible in gross income

until amounts are actually paid to the participant or beneficiary out of the ICA, so long as the ICA maintains its status as a

§ 403(b)(7) custodial account. Any other amount distributed

from a custodial account to a participant or beneficiary to

effectuate plan termination is includible in gross income, except to the extent the amount is rolled over to an IRA or other

eligible retirement plan by a direct rollover or by a transfer

made within 60 days.

INCOME TAX

REG-119890-18, page 1063.

These proposed regulations set forth guidance on the average income test under § 42(g)(1)(C) of the Internal Revenue

Code for purposes of the low-income housing credit.

T.D. 9927, page 1031.

This document contains final regulations under section 1502

of the Internal Revenue Code (the Code). The final regulations

would update existing regulations under section 1.1502-21

to reflect statutory changes made to section 172 of the

Code by the Tax Cuts and Jobs Act, P.L. 115-97 (Dec. 22,

2017) and the Coronavirus Aid, Relief, and Economic Security Act, P.L. 116-36 (Mar. 27, 2020). The final regulations

affect taxpayers that file consolidated returns.

The IRS Mission

Provide America’s taxpayers top-quality service by helping

them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.

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.

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.

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.

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,

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.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions and Other Related Items, 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).

Part IV.—Items of General Interest.

This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index

for the matters published during the preceding months. These

monthly indexes are cumulated on a semiannual basis, and are

published in the last Bulletin of each semiannual period.

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.

November 16, 2020 

Bulletin No. 2020–47

Part I

Distribution of individual

custodial accounts in kind

upon termination of a

§ 403(b) plan.

Rev. Rul. 2020-23

ISSUES

Whether a § 403(b) retirement plan

funded through the use of § 403(b)(7)

custodial accounts that takes the actions

described in this revenue ruling has been

terminated in accordance with the rules of

§ 1.403(b)-10(a), and whether distributions made to participants or beneficiaries

in connection with termination of the plan

are includible in gross income.

FACTS

Situation 1. Plan A is a defined contribution plan that includes both nonelective employer contributions and elective

deferrals. Section 205 of the Employee

Retirement Income Security Act of 1974,

P.L. 93-406, 88 Stat. 829, as amended

(ERISA), applies neither to Plan A generally nor to any participant under Plan

A.1 Plan A satisfies the requirements

of § 403(b) and §§ 1.403(b)-2 through

1.403(b)-10. Plan A permits benefits

to be paid only after termination from

employment or upon plan termination.

Plan A is funded solely through the use

of § 403(b)(7) custodial accounts maintained under individual agreements.2 All

amounts held under Plan A are attributable to employer contributions, including elective deferrals as defined in

§ 1.403(b)‑2(b)(7), and no amounts held

under Plan A are attributable to designated Roth contributions or after-tax contributions. Neither the sponsoring employ-

er, nor any other entity that is treated

as the same employer under § 414(b),

(c), (m), or (o) on the date of plan termination, makes contributions to any

§ 403(b) contract that is not part of Plan

A, including during the period beginning

on January 1, 2021, and ending on the

date that is 12 months after distribution

of all assets from Plan A.

On January 1, 2021, the employer

sponsoring Plan A takes action to terminate Plan A. That action includes the

employer executing a binding resolution

to cease future contributions to custodial

accounts under Plan A and to terminate

Plan A, effective January 1, 2021 (the date

of plan termination). The resolution also

provides that all benefits held under Plan

A are fully vested and nonforfeitable as of

January 1, 2021, and directs that all benefits be distributed as soon as practicable

thereafter. Participants and beneficiaries

in Plan A are notified of the plan termination.

Distributions pursuant to the terms

of Plan A and the termination resolution

are made as soon as administratively

practicable after the date of plan termination. For a participant or beneficiary

who affirmatively elects to receive a distribution, depending on the participant’s

or beneficiary’s election, a distribution

equal to that participant’s or beneficiary’s account balance is made either to

that participant or beneficiary, or to an

individual retirement account or annuity under § 408 (an IRA) established for

that participant or beneficiary, or another

eligible retirement plan (in accordance

with the rules of § 1.403(b)-7(b)(1) under which an eligible rollover distribution may be made to an IRA established

for the participant or beneficiary or to

another eligible retirement plan). Each

custodial account provider permits any

distribution that is an eligible rollover

distribution (as described in § 402(c)

(4)) to be paid by a direct transfer to an

IRA or other eligible retirement plan (as

defined in § 401(a)(31)(E)) in a manner

that satisfies § 401(a)(31), including to

an IRA established by the same provider

that permits investment in the same mutual funds in which the participant’s or

beneficiary’s custodial account is or may

be invested. The plan administrator provides a notice to each participant describing the participant’s rollover rights, as

required by § 402(f) and § 1.403(b)‑7(b)

(3), withholds in accordance with § 3405

and § 1.403(b)-7(g), and reports the distribution on Form 1099-R, Distributions

From Pensions, Annuities, Retirement

or Profit-Sharing Plans, IRAs, Insurance

Contracts, etc., as required by § 6047(d).

For a participant or beneficiary who

does not affirmatively elect to receive a

distribution, so that a distribution of the

participant’s or beneficiary’s account

balance is not made as described in the

preceding paragraph, a distribution pursuant to the terms of Plan A and the termination resolution is made as soon as

administratively practicable after the

date of plan termination and is effectuated by the distribution of an individual

custodial account (ICA) in kind to the

participant, beneficiary who is an alternate payee, or beneficiary of a deceased

participant.

As part of the process of distributing

an ICA in kind to a participant or beneficiary, the plan administrator notifies the

participant or beneficiary that, after the

distribution of the ICA in kind, the custodial account is being maintained as an

ICA of the participant or beneficiary and

is no longer part of Plan A. The distributed

ICA is maintained by the custodian as a

§ 403(b)(7) custodial account that adheres

to the requirements of § 403(b) in effect

at the time of the distribution of the ICA

Section 205 of ERISA includes annuity and spousal rights provisions that are parallel to the annuity and spousal rights provisions under §§ 401(a)(11) and 417 of the Internal Revenue

Code. Section 205(a) of ERISA generally provides that a distribution must be provided either as a qualified joint and survivor annuity in the case of a participant who does not die before the

annuity starting date, or as a qualified preretirement survivor annuity in the case of a participant who dies before the annuity starting date. Because section 205 of ERISA does not apply to

Plan A generally or to any participant under Plan A, this revenue ruling does not address any annuity and spousal rights issues that may arise under section 205 of ERISA in connection with

distributions of individual custodial accounts in kind. Notice 2020-80, 2020‑47 I.R.B., issued contemporaneously with this revenue ruling, requests comments relating to these annuity and

spousal rights issues.

2

Pursuant to § 8 of Rev. Proc. 2007-71, 2007-51 I.R.B. 1184, certain contracts issued before 2009 are not required to be covered by the terms of a § 403(b) plan document. This revenue ruling

does not apply to those contracts.

1

November 16, 2020

1028

Bulletin No. 2020–47

until amounts are actually paid to the participant or beneficiary. Additionally, the

employer has no material retained rights

under the distributed ICA after it has been

distributed.

Situation 2. The facts are the same as

in Situation 1, except that Plan A is funded

not only by custodial accounts maintained

under individual agreements, but also

by custodial accounts maintained under

group agreements. With respect to custodial accounts maintained under individual

agreements, the facts are the same as in

Situation 1.

With respect to custodial accounts

maintained under group agreements, distributions pursuant to the terms of Plan A

and the termination resolution are made as

soon as administratively practicable after

the date of plan termination. For a participant or beneficiary who affirmatively

elects to receive a distribution, depending

on the participant’s or beneficiary’s election, a distribution equal to the participant’s or beneficiary’s account balance is

made either to the participant or beneficiary or to an IRA established for the participant or beneficiary or another eligible

retirement plan (in accordance with the

rules of § 1.403(b)-7(b)(1)).

For a participant or beneficiary whose

account balance is held all or in part in

custodial accounts maintained under a

group agreement and who does not affirmatively elect to receive a distribution

described in the prior paragraph, a distribution of an amount from the custodial

accounts maintained under the group

agreement is made as soon as administratively practicable after the date of

plan termination and is effectuated by

the distribution of an ICA in kind to each

participant, beneficiary who is an alternate payee, or beneficiary of a deceased

participant in the custodial accounts

maintained under a group agreement.

Distribution of an ICA in kind from the

custodial accounts maintained under a

group agreement is accomplished by distributing a document that evidences the

ICA, including the accumulated nonforfeitable value of the participant’s or beneficiary’s interest in the custodial accounts

maintained under a group agreement, and

associated rights and responsibilities of

the participant or beneficiary and custodian. A distributed ICA is maintained by

Bulletin No. 2020–47

the custodian as a § 403(b)(7) custodial

account that adheres to the requirements

of § 403(b) in effect at the time of the

distribution of the ICA until amounts are

actually paid to the participant or beneficiary. Additionally, the employer has no

material retained rights under an ICA after it has been distributed.

LAW

Section 403(b) – In General

Section 403(b) applies to contributions made for employees who are performing services for a public school

of a State or a local government or for

employees of employers that are tax-exempt organizations under § 501(c)(3).

Section 403(b) also applies to contributions made for certain ministers. Under

§ 403(b)(1), (7), and (9), contributions

are excluded from gross income only if

made to one or more of the following

funding arrangements: (1) contracts issued by an insurance company qualified

to issue annuities in a State that includes

payment in the form of an annuity, (2)

custodial accounts that are exclusively

invested in stock of a regulated investment company (as defined in § 851(a)

relating to mutual funds), or (3) retirement income accounts for employees of

a church-related organization (as defined

in § 1.403(b)-2) (collectively referred to

as § 403(b) contracts). Additionally, under § 403(b)(1)(C), an employee’s rights

under the § 403(b) contract must be nonforfeitable.

Final regulations under § 403(b) (TD

9340) were published in the Federal Register (72 FR 41128) on July 26, 2007. Subject to a number of special applicability

date rules, § 1.403(b)-11(a) provides that

those final regulations generally apply for

taxable years beginning after December

31, 2008.

Freezing and Terminating § 403(b)

Plans

Section 1.403(b)-10(a) provides that an

employer may amend its § 403(b) plan to

eliminate future contributions for existing

participants or to limit participation to existing participants and employees (to the

extent consistent with § 1.403(b)-5). A

1029

§ 403(b) plan also may include provisions

that provide for plan termination and that

allow accumulated benefits to be distributed on plan termination.

Under § 1.403(b)-10(a), in the case of

a § 403(b) contract that is subject to the

distribution restrictions in § 1.403(b)6(c) or (d) (relating to custodial accounts

and § 403(b) elective deferrals), termination of a § 403(b) plan and distribution

of accumulated benefits is permitted only

if the employer (taking into account all

entities that are treated as the same employer under § 414(b), (c), (m), or (o) on

the date of termination) does not make

contributions to any § 403(b) contract

that is not part of the plan (these contracts

are referred to in this revenue ruling as

“another § 403(b) plan”). For rules relating to entities that are treated as the same

employer under § 414(c), see § 1.414(c)5; for controlled group rules relating to

governmental entities, see Notice 89‑23

(1989-1 CB 654), as modified by Rev.

Rul. 2009-18, 2009-2 C.B. 1; and, for

special rules applicable to church plans

for entities under common control, see

§ 414(c)(2).

For purposes of the requirement that,

after plan termination, the employer make

no contributions to any other § 403(b)

plan, the employer makes contributions to

another § 403(b) plan only if the employer

makes contributions to a § 403(b) contract

during the period beginning on the date of

plan termination and ending 12 months

after distribution of all assets from the

terminated plan. However, if at all times

during the period beginning 12 months

before the plan termination and ending

12 months after distribution of all assets

from the terminated plan, fewer than two

percent of the employees who were eligible under the terminating § 403(b) plan as

of the date of plan termination are eligible under another § 403(b) plan, that other

§ 403(b) plan is disregarded. To the extent

a contract fails to satisfy the nonforfeitability requirement of § 1.403(b)-3(a)

(2) as of the date of plan termination, the

contract is not, and cannot later become, a

§ 403(b) contract.

For a § 403(b) plan to be terminated

under § 1.403(b)-10(a), all accumulated

benefits under the plan must be distributed to all participants and beneficiaries as

soon as administratively practicable after

November 16, 2020

termination of the plan.3 For this purpose, delivery of a fully paid individual

insurance annuity contract is treated as a

distribution. The mere provision for, and

making of, benefit distributions to participants or beneficiaries upon plan termination does not cause a contract to cease to

be a § 403(b) contract. Section 1.403(b)‑7

provides rules regarding the tax treatment

of benefit distributions, including rules in

§ 1.403(b)-7(b)(1) under which an eligible rollover distribution is not included in

gross income if paid in a direct rollover

to an eligible retirement plan or if transferred to an eligible retirement plan within

60 days.

Rev. Rul. 2011-7, 2011‑10 I.R.B. 534,

provides that a plan may be terminated in

accordance with the rules of § 1.403(b)10(a) by the delivery to participants or

beneficiaries of a fully paid individual

annuity contract or an individual certificate evidencing fully paid benefits under a

group annuity contract. Rev. Rul. 2011-7

further provides that the delivery of a fully

paid individual annuity contract to a participant or beneficiary, or of an individual

certificate evidencing fully paid benefits

under a group annuity contract, is not included in gross income until amounts are

actually paid to the participant or beneficiary out of the contract, so long as the

contract maintains its status as a § 403(b)

contract. Finally, Rev. Rul. 2011-7 provides that any other distribution to a participant or beneficiary to effectuate plan

termination is included in gross income,

except to the extent the amount is rolled

over to an IRA or other eligible retirement

plan by a direct rollover or by a transfer

made within 60 days.

Section 110 of the SECURE Act

Section 110 of Division O of the Further Consolidated Appropriations Act,

2020, Pub. L. 116-94, 133 Stat. 2534

(2019) known as the Setting Every Community Up for Retirement Enhancement

Act of 2019 (SECURE Act), provides that

the Secretary of the Treasury shall issue

guidance providing that, if an employer

terminates a plan under which amounts

are contributed to a custodial account under § 403(b)(7), the plan administrator or

custodian may distribute an ICA in kind to

a participant or beneficiary of the plan. It

also provides that the distributed custodial

account will be maintained by the custodian on a tax-deferred basis as a § 403(b)(7)

custodial account, similar to the treatment

of fully paid individual annuity contracts

under Rev. Rul. 2011‑7, until amounts are

actually paid to the participant or beneficiary. The legislation further directs that

the guidance provide (1) that the § 403(b)

(7) status of the distributed custodial account generally is maintained if the custodial account thereafter adheres to the requirements of § 403(b) that are in effect at

the time of the distribution of the account,

and (2) that a custodial account is not considered distributed to the participant or

beneficiary if the employer has any material retained rights under the account (but

the employer is not treated as retaining

material rights merely because the custodial account was originally opened under

a group contract). Finally, the legislation

directs that the guidance be retroactively

effective for taxable years beginning after

December 31, 2008.4

ANALYSIS

The employer in Situation 1 adopts

a resolution to cease contributions and

terminate the plan at a specified date, including full vesting for all benefits as of

that date. Because the plan satisfies the

applicable requirements under § 403(b)

and the employer takes action to fully vest any participants with respect to

amounts not otherwise fully vested as of

the date of plan termination, all custodial accounts under the plan are § 403(b)

contracts upon plan termination. See

§ 1.403(b)-10(a)(1).

Distributions of accumulated benefits

under the plan in Situation 1 are made either (1) by payment to the participant or

beneficiary, or to an IRA established by

the participant or beneficiary or another eligible retirement plan (in accordance with

§ 1.403(b)-7(b)); or (2) by distribution of

an ICA in kind to each participant or ben-

eficiary as soon as administratively practicable after the date of plan termination.

Because the plan is funded solely through

custodial accounts maintained under individual agreements, no further action is

required to be taken in order to distribute

the ICA in kind. In addition, neither the

sponsoring employer nor any other entity

that is treated as the same employer under § 414(b), (c), (m), or (o) on the date

of plan termination makes contributions

to any § 403(b) contract that is not part of

Plan A, including during the period beginning on the date of plan termination and

ending 12 months after distribution of all

assets from the terminated plan. Accordingly, the employer’s actions to terminate

the plan and distribute accumulated benefits satisfy the requirements of § 403(b)

and § 1.403(b)-10(a) for plan termination.

Following termination of the plan, a participant or beneficiary who holds an ICA

is entitled to payments in accordance with

the terms of the ICA (which may permit

single-sum payments in connection with

plan termination).

In Situation 2, the same actions are taken, except that the employer distributes

an ICA in kind to a participant or beneficiary whose accumulated benefits are

funded by a custodial account maintained

under a group agreement by providing a

document to the participant or beneficiary that evidences the ICA, including the

accumulated nonforfeitable value of the

participant’s or beneficiary’s interest in

the custodial accounts maintained under

the group agreement, and associated rights

and responsibilities of the participant or

beneficiary and custodian. The distribution of the ICA in kind to the participant

or beneficiary constitutes a distribution

of the participant’s or beneficiary’s accumulated benefit in the custodial accounts

maintained under a group agreement for

purposes of § 1.403(b)‑10(a).

In both Situation 1 and Situation 2, the

employer has no material retained rights

under an ICA after it has been distributed (and the employer is not treated as retaining material rights merely because the

ICA was originally opened under a group

contract). Accordingly, with respect to

For rules relating to the requirement that distributions to all participants and beneficiaries be made as soon as administratively practicable after plan termination in the case of a plan qualified

under § 401(a), see Rev. Rul. 89-87, 1989-2 C.B. 81.

4

Because SECURE Act section 110 provides that the guidance is retroactively effective only for taxable years beginning after December 31, 2008, this revenue ruling does not apply to any

action that occurred in taxable years beginning on or before December 31, 2008.

3

November 16, 2020

1030

Bulletin No. 2020–47

Situation 1 and Situation 2, the distribution of an ICA in kind to a participant or

beneficiary is not immediately includible

in gross income, but rather amounts are

includible in income only when actually

paid to the participant or beneficiary from

the custodial account, so long as the ICA

maintains its status as a § 403(b)(7) custodial account; the § 403(b)(7) custodial account status of the ICA generally is

maintained if the ICA continues to adhere

to the requirements of § 403(b) that are in

effect at the time of the distribution of the

ICA. Any other amount paid to a participant or beneficiary, such as a single-sum

payment, is includible in the gross income

of the participant or beneficiary, except to

the extent the amount is rolled over to an

IRA or other eligible retirement plan by a

direct rollover or by a transfer made within 60 days.

HOLDING

In Situation 1 and Situation 2, Plan A is

terminated in accordance with the rules of

§ 1.403(b)-10(a). Distribution of an ICA in

kind to a participant or beneficiary is not

includible in gross income until amounts

are actually paid to the participant or beneficiary out of the ICA, so long as the

ICA maintains its status as a § 403(b)(7)

custodial account. Any other amount distributed from a custodial account to a participant or beneficiary to effectuate plan

termination is includible in gross income,

except to the extent the amount is rolled

over to an IRA or other eligible retirement

plan by a direct rollover or by a transfer

made within 60 days.

EFFECT ON OTHER REVENUE

RULINGS

Rev. Rul. 2011-7 is modified.

DRAFTING INFORMATION

The principal author of this revenue

ruling is Patrick T. Gutierrez of the Office

of Associate Chief Counsel, Employee

Benefits, Exempt Organizations, and Employment Taxes. For further information

regarding this revenue ruling, please contact Patrick T. Gutierrez at (202) 317-4148

(not toll-free).

Bulletin No. 2020–47

26 CFR 1.1502-21: Net Operating Losses

T.D. 9927

DEPARTMENT OF THE

TREASURY

Internal Revenue Service

26 CFR Part 1

Consolidated Net Operating

Losses

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations under sections 1502 and 1503

of the Internal Revenue Code (Code).

These regulations provide guidance implementing recent statutory amendments

to section 172 of the Code relating to the

absorption of consolidated net operating

loss (CNOL) carryovers and carrybacks.

These regulations also update regulations

applicable to consolidated groups that

include both life insurance companies

and other companies to reflect statutory

changes. These regulations affect corporations that file consolidated returns.

DATES: Effective Date: These regulations are effective on December 28, 2020.

Applicability Date: For dates of applicability, see §§1.1502-1(l), 1.1502-21(h)

(10), 1.1502-47(n), and 1.1503(d)-8(b)(8).

FOR FURTHER INFORMATION

CONTACT: Justin O. Kellar at (202)

317-6720, Gregory J. Galvin at (202) 3173598, or William W. Burhop at (202) 3175363.

SUPPLEMENTARY INFORMATION:

Background

This Treasury decision amends the

Income Tax Regulations (26 CFR part

1) under section 1502 of the Code. Section 1502 authorizes the Secretary of

the Treasury or his delegate (Secretary)

to prescribe regulations for an affiliated

1031

group of corporations that join in filing

(or that are required to join in filing) a

consolidated return (consolidated group)

to reflect clearly the Federal income tax

liability of the consolidated group and

to prevent avoidance of such tax liability. See § 1.1502-1(h) (defining the term

“consolidated group”). For purposes of

carrying out those objectives, section

1502 also permits the Secretary to prescribe rules that may be different from

the provisions of chapter 1 of the Code

that would apply if the corporations

composing the consolidated group filed

separate returns. Terms used in the consolidated return regulations generally are

defined in § 1.1502-1.

On July 8, 2020, the IRS published a

notice of proposed rulemaking (REG125716-18) in the Federal Register (85

FR 40927) under section 1502 of the Code

(proposed regulations). The proposed regulations provided guidance implementing

recent statutory amendments to section

172, relating to net operating loss (NOL)

deductions, and withdrew and re-proposed certain sections of proposed guidance issued in prior notices of proposed

rulemaking relating to the absorption of

CNOL carryovers and carrybacks. In addition, the proposed regulations updated

regulations applicable to consolidated

groups that include both life insurance

companies and other companies to reflect

statutory changes.

In connection with the proposed regulations, the IRS published on the same

date temporary regulations under section

1502 (TD 9900) in the Federal Register

(85 FR 40892) (temporary regulations).

The temporary regulations permit consolidated groups that acquire new members

that were members of another consolidated group to elect to waive all or part of

the pre-acquisition portion of an extended

carryback period under section 172 for

certain losses attributable to the acquired

members. The text of the temporary regulations also serves as the text of §1.150221(b)(3)(ii)(C) and (D) of the proposed

regulations.

The IRS received seven comments

in response to the proposed regulations.

Copies of the comments received are

available for public inspection at http://

www.regulations.gov or upon request.

No public hearing was requested or held.

November 16, 2020

This Treasury decision adopts the proposed regulations, other than proposed

§1.1502-21(b)(3)(ii)(C) and (D), as final

regulations with the changes described in

the following Summary of Comments and

Explanation of Revisions. The Treasury

Department and the IRS expect to finalize

proposed §1.1502-21(b)(3)(ii)(C) and (D)

at a later date and welcome further comments on these provisions.

Summary of Comments and

Explanation of Revisions

I. Comments on and Changes to

Proposed §1.1502-21

A. Overview of section 172

These final revisions implement certain statutory amendments to section 172

made by Public Law 115-97, 131 Stat.

2054 (December 22, 2017), commonly

referred to as the Tax Cuts and Jobs Act

(TCJA), and by the Coronavirus Aid, Relief, and Economic Security Act (CARES

Act), Public Law 116-136, 134 Stat. 281

(March 27, 2020). See generally the Background section of the preamble to the proposed regulations. As amended, section

172(a)(2) allows an NOL deduction for a

taxable year beginning after December 31,

2020, in an amount equal to the sum of (A)

the aggregate amount of pre-2018 NOLs

that are carried to such taxable year, and

(B) the lesser of (i) the aggregate amount

of post-2017 NOLs that are carried to such

taxable year, or (ii) the “80-percent limitation.” The 80-percent limitation is equal to

80 percent of the excess (if any) of (I) taxable income computed without regard to

any deductions under sections 172, 199A,

and 250 of the Code, over (II) the aggregate amount of pre-2018 NOLs carried to

the taxable year. See section 172(a)(2)(B)

(ii). For purposes of the foregoing computation, the term “pre-2018 NOLs” refers

to NOLs arising in taxable years beginning before January 1, 2018, and the term

“post-2017 NOLs” refers to NOLs arising

in taxable years beginning after December

31, 2017.

The 80-percent limitation does not apply to the offset of income by NOLs in

taxable years beginning before January 1,

2021. Section 172(a)(1). The 80-percent

limitation also does not apply to limit the

November 16, 2020

use of pre-2018 NOLs. Section 172(a)(2)

(A).

Moreover, the 80-percent limitation

does not apply to insurance companies

other than life insurance companies (nonlife insurance companies). Section 172(f).

Therefore, the taxable income of nonlife

insurance companies may be fully offset by NOL deductions. In addition, under section 172(b)(1)(C) and (b)(1)(D)

(i), losses of nonlife insurance companies arising in taxable years beginning

after December 31, 2020, may be carried

back two years and carried over 20 years.

In contrast, losses (aside from farming

losses) of other taxpayers arising in such

taxable years may not be carried back but

may be carried forward indefinitely. Section 172(b)(1). Thus, nonlife insurance

companies are subject to special rules under section 172 both with respect to the

amount of taxable income that may be offset by NOL deductions and with respect

to the taxable years to which NOLs may

be carried.

B. Overview of the proposed approach

and the alternative approach

To implement the special rules under

section 172 for nonlife insurance companies for a consolidated return year beginning after December 31, 2020, the

proposed regulations provided that the

application of the 80-percent limitation

within a consolidated group to post-2017

NOLs depends on the status of the member that generated the income being offset.

The proposed regulations further provided

that the amount of post-2017 CNOLs that

may be absorbed by one or more members

of the group in such a consolidated return

year (post-2017 CNOL deduction limit)

is determined by applying the 80-percent

limitation, section 172(f) (that is, the special rule for nonlife insurance companies),

or both, to the group’s consolidated taxable income (CTI) for that year. See proposed §1.1502-21(a)(2)(ii)(A) and (B).

For consolidated groups comprised

of both nonlife insurance companies and

other members for a consolidated return year beginning after December 31,

2020, the proposed regulations adopted

a two-factor computation (proposed approach). In general, under the proposed

approach, the post-2017 CNOL deduc-

1032

tion limit for such a group equals the sum

of two amounts. The first amount, which

relates to the income of those members

that are not nonlife insurance companies (residual income pool), is subject

to the 80-percent limitation. The second

amount, which relates to the income of

those members that are nonlife insurance

companies (nonlife income pool), is not

subject to the 80-percent limitation. See

proposed §1.1502-21(a)(2)(iii)(C). Thus,

the proposed approach divides a consolidated group’s nonlife insurance companies and its other members into two separate “pools” for purposes of determining

the amount of CTI that is available to be

offset by post-2017 CNOLs after applying the 80-percent limitation.

In formulating the proposed regulations, the Treasury Department and the

IRS considered another approach (alternative approach). This alternative approach

would have required a group to first offset income and loss items within a pool of

nonlife insurance companies and a pool of

other members for all purposes of section

172 applicable to taxable years beginning

after December 31, 2020. In other words,

the alternative approach would have applied a pooling concept beyond merely

determining the group’s post-2017 CNOL

deduction limit, but would have required

a group’s CTI to be allocated between the

operations of its nonlife insurance company members, which can be offset fully by

CNOL deductions, and the operations of

its other members subject to the 80-percent limitation. This alternative approach

would also have applied similar rules to

allocate CNOLs within groups including

both nonlife insurance companies and

other members to consistently identify the

portions of CNOLs allocable to nonlife

insurance company members, which are

subject to different carryover rules than

those of other members.

The alternative approach would have

contrasted with the historical application

of §1.1502-21(b)(2)(iv)(B), under which a

CNOL for a taxable year is attributed pro

rata to all members of a group that produce net loss, without first netting among

entities of the same type. In the preamble

to the proposed regulations, the Treasury

Department and the IRS requested comments regarding both the proposed approach and the alternative approach.

Bulletin No. 2020–47

C. Comments on the proposed approach

and the alternative approach

In response to the request for comments, the Treasury Department and the

IRS received comments that uniformly

approved the proposed approach. For example, two commenters commended the

proposed regulations as implementing the

statutory amendments to section 172 in a

reasonable manner that is consistent with

both the statute and consolidated return

principles. Specifically, both commenters

supported the proposed regulations’ approach to computing a group’s post-2017

CNOL deduction limit as well as the proposed regulations’ retention of the historical pro rata approach under §1.1502-21(b)

(2)(iv)(B) to determine the amount of

nonlife insurance company losses that can

be carried to other taxable years.

In support of the proposed regulations,

one commenter asserted that the proposed

approach is more consistent with the treatment of CNOLs as consolidated items and

with the current CNOL use and absorption

rules in §1.1502-21 than the alternative

approach. The commenter further asserted that, because the alternative approach

would depart from the general pro rata

rules of §1.1502-21 by first netting income and loss among entities of the same

type within a consolidated group, the alternative approach could result in computational and compliance complications

in circumstances that may be difficult to

anticipate.

In response to the comments received,

these final regulations retain the proposed

approach to computing a consolidated

group’s post-2017 CNOL deduction limit.

D. Application of the proposed approach

to life-nonlife groups

One commenter recommended that,

for consolidated groups with both nonlife

insurance companies and life insurance

companies, the amounts of the residual

income pool and the nonlife income pool

in proposed §1.1502-21(a)(2)(iii)(C)(2)

and (3) be clarified to refer only to the

items of income, gain, deduction, or loss

of members of the nonlife subgroup (as

defined in §1.1502-47(b)(9) of these final

regulations). The commenter further recommended that, in making this clarifica-

Bulletin No. 2020–47

tion, the Treasury Department and the IRS

should not prevent nonlife CNOLs from

offsetting life subgroup income where

permitted by the Code and §1.1502-47.

The commenter noted that this outcome

appears to be the intent of the cross-reference to §1.1502-47 in proposed §1.150221(b)(2)(iv)(E), but the commenter indicated that clarification would be useful.

The Treasury Department and the IRS

agree with the commenter regarding the

purpose of the cross-reference to §1.150247 in proposed §1.1502-21(b)(2)(iv)(E)

and have revised the regulations to more

clearly confirm this outcome.

E. Consolidated capital gain net income

Section 1.1502-11(a)(3) provides that

the CTI for a consolidated return year is

determined by taking into account, among

other enumerated items, any consolidated capital gain net income. See generally

§1.1502-22(a) (providing rules for determining consolidated capital gain net

income). Under §1.1502-22(a), the determinations for a consolidated group under

section 1222, including capital gain net

income, are not made separately. Instead,

such consolidated amounts are determined

for the group as a whole.

Section 1.1502-11 does not provide

explicit rules for allocating consolidated

capital gain net income among members.

Thus, one commenter requested that the

final regulations clarify that, for groups

that include nonlife insurance companies,

consolidated capital gain net income under §1.1502-11(a)(3) is allocated to the

residual income pool and the nonlife income pool using a pro rata method based

on the principles of §1.1502-21(b)(2)(iv),

as reflected in the general rule in §1.150221(b)(1), for the use and absorption of

CNOLs.

Section 1.1502-11 also does not provide explicit rules for determining the

amount of each member’s income that is

offset by losses (whether incurred in the

current year or carried over or back as a

part of a CNOL or consolidated net capital

loss). However, the Treasury Department

and the IRS understand that, in the absence of express rules, consolidated return

practitioners generally apply the principles of §1.1502-21(b)(2)(iv) to make such

determinations. The methodology for

1033

computing a consolidated group’s post2017 CNOL deduction limit is intended

to implement the changes made to section

172(a) by the TCJA and the CARES Act

in a manner that is flexible for taxpayers to

apply and administrable for the IRS. The

Treasury Department and the IRS have determined that specific rules regarding the

allocation of consolidated capital gain net

income to the residual income pool and

the nonlife income pool under §1.150221(a)(2)(iii)(C)(2) and (3) would exceed

the scope of these final regulations. Accordingly, the Treasury Department and

the IRS continue to reflect on the commenter’s recommendation but have not

incorporated that recommendation into

the final regulations.

F. Example 6 in proposed §1.1502-21(b)

(2)(v)(F)

Proposed §1.1502-21(b)(2)(v)(F) (Example 6) contains an example that illustrates the application of section 172 to a

CNOL incurred by a consolidated group

(P group) that includes P, an includible

corporation under section 1504(b) of a

type other than a nonlife insurance company, and PC1, a nonlife insurance company. Both P and PC1 were incorporated

in Year 1, a year beginning after December 31, 2020. In Year 1, the P group has

$45 of CTI, $20 of which is attributable to

P and $25 of which is attributable to PC1.

In Year 2, the P group incurs a $16 CNOL

that is attributable to PC1 and that is carried back to Year 1 under section 172(b)

(1)(C)(i).

The example illustrates that, under

proposed §1.1502-21(a)(2)(iii)(C), the P

group’s post-2017 CNOL deduction limit for Year 1 is $41, which is the sum of

the residual income pool ($16) and the

nonlife income pool ($25), as described

in proposed §1.1502-21(a)(2)(iii)(C)(2)

and (3), respectively. More specifically,

the amount of the residual income pool

equaled the lesser of the aggregate amount

of post-2017 NOLs carried to Year 1 ($16),

or 80 percent of the excess of P’s taxable

income for that year ($20) over the aggregate amount of pre-2018 NOLs allocable

to P ($0), which also was $16 (80 percent

× ($20−$0)). See proposed §1.1502-21(b)

(2)(v)(F)(3). The amount of the nonlife

income pool equaled the excess of PC1’s

November 16, 2020

taxable income for Year 1 ($25) over the

aggregate amount of pre-2018 NOLs allocable to PC1 ($0). Id.

Two commenters requested clarification as to how much taxable income in

each pool is offset by a CNOL carryover

or carryback if each pool has positive taxable income, as in Example 6. Specifically,

commenters contended that a specific absorption rule is needed to determine how

much taxable income in the residual income pool (which is subject to the 80-percent limitation) can be offset by subsequent CNOL carryovers or carrybacks to

the same year. For example, assume the

same facts as in Example 6, but that the

P group also incurs a $30 CNOL in Year

3 that is entirely attributable to PC1 and

that is eligible to be carried back to Year

1. Absent a rule specifying how much

taxable income in each pool was offset

in Year 1 by the $16 Year 2 CNOL carryback, the commenters questioned how

to compute the residual income pool for

purposes of determining how much of the

P group’s Year 3 CNOL carryback could

be absorbed by the P group in Year 1.

As noted in part I.A of this Summary of

Comments and Explanation of Revisions,

the computation in section 172(a)(2)(B)

(ii) is made “without regard to the deductions under [section 172] and sections

199A and 250.” Consistent with the statute, the amount of income in the residual

income pool that is subject to the 80-percent limitation for a particular consolidated return year is not recomputed to reflect

the amount of CNOLs carried over to and

absorbed in that year. See §1.1502-21(a)

(2)(iii)(C)(2) of these final regulations.

Rather, the only component of the post2017 CNOL deduction limit that is subject

to change upon the carryover or carryback

of additional CNOLs to the same consolidated return year is the aggregate amount

of post-2017 CNOLs carried to that year.

See §1.1502-21(a)(2)(iii)(C)(1)(i) of these

final regulations. Determining this amount

does not require an absorption rule.

With regard to Example 6, if the P

group were to incur a $30 CNOL in Year 3

that was eligible to be carried back to Year

1, the P group would redetermine the aggregate amount of the P group’s post-2017

CNOLs that are carried to Year 1, but the

P group would not recompute the amount

of Year 1 income subject to the 80-percent

November 16, 2020

limitation. Thus, an absorption rule is not

needed to determine how much of the P

group’s Year 1 CTI can be offset by subsequent CNOL carrybacks. However, these

final regulations provide additional facts

in Example 6 to illustrate the computation

of the amount of additional CNOL carryovers or carrybacks to the same consolidated return year that can be deducted to

offset income in that year.

G. Split-waiver elections

If a member of one consolidated group

becomes a member of another consolidated group, §1.1502-21(b)(3)(ii)(B) permits

the acquiring group to make an irrevocable election to relinquish, with respect to

all CNOLs attributable to the acquired

corporation, the portion of the carryback

period for which the acquired corporation

was a member of another group (so long

as any other corporation joining the acquiring group that was affiliated with the

acquired corporation immediately before

it joined the acquiring group also is included in the waiver).

A commenter noted that, pursuant to

§1.1502-21(b)(3)(ii)(B), an acquiring

group may make a split-waiver election

only with respect to acquired corporations

that were members of a different consolidated group in a carryback year. The commenter recommended that §1.1502-21(b)

(3)(ii) be expanded to allow a split-waiver

election if the acquired corporation was

not a member of a consolidated group in

the carryback year.

The Treasury Department and the IRS

appreciate the commenter’s suggestion

and will continue to consider it in connection with the future finalization of

the temporary regulations. However, this

comment exceeds the scope of these final

regulations, which adopt the provisions

of the proposed regulations other than

those for which the text was contained in

the temporary regulations (specifically,

§1.1502-21(b)(3)(ii)(C) and (D)). Therefore, the Treasury Department and the IRS

decline to adopt this recommendation in

this Treasury decision.

H. Modification to SRLY rules

The proposed regulations modify the

separate return limitation year (SRLY)

1034

rules in §1.1502-21(c) to take into account

the limitations on NOL deductions under

section 172, as amended by the TCJA and

the CARES Act. See proposed §1.150221(c)(1)(i)(E). A commenter recommended that this modification not apply

for purposes of section 1503(d) (the dual

consolidated loss (DCL) rules). In certain

cases, the extent to which section 1503(d)

restricts the use of a DCL, or requires the

recapture of a DCL (or a related interest

charge), depends on the application of the

SRLY rules in §1.1502-21(c), subject to

certain adjustments. See §§1.1503(d)-4(c)

(3) and 1.1503(d)-6(h)(2). In these cases,

the adjusted SRLY rules are generally intended to ensure that a DCL may be used

only to offset income of the dual resident

corporation or separate unit that incurred

the DCL, such that the use does not result

in a “double dip” of the DCL.

The commenter recommended that

the modification reflected in proposed

§1.1502-21(c)(1)(i)(E) not apply for purposes of the DCL rules because the modification addresses policies specific to the

SRLY rules in §1.1502-21(c) (replicating,

to the extent possible, separate-entity usage of SRLY attributes), which differ from

the policies underlying the DCL rules

(preventing double dipping of losses). In

addition, the commenter asserted that applying the rule in proposed §1.1502-21(c)

(1)(i)(E) for DCL purposes could distort

the determination of whether double dipping could occur.

The Treasury Department and the IRS

agree with the commenter. The final regulations therefore provide that §1.150221(c)(1)(i)(E) does not apply for purposes

of the DCL rules. See §1.1503(d)-4(c)(3)

(v).

I. Clarifying changes to proposed

§1.1502-21

In addition to the foregoing comments,

a commenter recommended clarifying

changes to proposed §1.1502-21. The

Treasury Department and the IRS appreciate these suggested clarifications and have

incorporated many of them into the final

regulations. However, the commenter

also recommended deleting the reference

to section 199A in proposed §§1.150221(a)(2)(iii)(A)(2)(ii) and 1.1502-21(a)

(2)(iii)(C)(2)(ii) on the grounds that the

Bulletin No. 2020–47

deduction under section 199A is available

to only noncorporate taxpayers. Because

section 199A(g) provides a deduction for

specified agricultural or horticultural cooperatives, which (as C corporations) can

be members of a consolidated group, these

references to section 199A have been retained in the final regulations.

The Treasury Department and the IRS

also have made additional clarifying revisions based on further review of the proposed regulations. In particular, the final

regulations contain corrections to scrivener’s errors in the two-factor computation

in proposed §1.1502-21(a)(2)(iii). Specifically, the “lesser of” language in proposed

§1.1502-21(a)(2)(iii)(C)(2), which was

intended to reflect the application of section 172(a)(2)(B) to groups that include

both nonlife insurance companies and

other corporations, was mislocated. To

accurately reflect the comparison required

under section 172(a)(2)(B), the language

at issue has been moved to §1.1502‑21(a)

(2)(iii)(C)(1) of the final regulations.

Additional edits have been made to

enhance the consistency and clarity of the

rules in proposed §1.1502-21(a)(2). For

example, language reflecting the “lesser

of” comparison described in the preceding paragraph has been explicitly integrated into §§1.1502-21(a)(2)(iii)(B) and

1.1502-21(a)(2)(iii)(C)(5)(ii) (concerning

CNOL deductions that offset income of

nonlife insurance company members) of

these final regulations. As discussed in part

II.B of this Summary of Comments and

Explanation of Revisions, the post-2017

CNOL deduction limit equals the maximum amount of post-2017 CNOLs that

can be deducted against taxable income in

a consolidated return year beginning after

December 31, 2020. This amount could

never exceed the total amount of post2017 CNOLs carried to that year. See section 172(f) (providing that, in the case of a

nonlife insurance company, the amount of

the NOL deduction allowed under section

172(a) in any taxable year equals the aggregate of NOL carrybacks and carryovers

to that year).

Likewise, in the absence of any other

limitation, the taxable income of a taxpayer always constitutes a limit on the deductibility of NOLs. See generally section

172(b)(2). Without such limit, the deduction of NOLs in excess of taxable income

Bulletin No. 2020–47

would create an additional NOL. The

Treasury Department and IRS have determined that explicitly providing the respective post-2017 CNOL and taxable income

limitations on the deduction of NOLs to

offset taxable income of nonlife insurance

companies will enhance the clarity of the

final regulations and the consistency of

their application.

II. Comments on and Changes to

Proposed §1.1502-47

The proposed regulations updated the

rules in §1.1502-47 to reflect statutory

changes enacted since these rules were

promulgated. Commenters commended

the Treasury Department and the IRS for

updating these regulations. Additionally,

several commenters expressed their understanding that another guidance project

has been initiated to propose substantive

changes to §1.1502-47 and urged the

Treasury Department and the IRS to give

priority to this effort. These commenters

argued that the objective of that guidance

project should be the elimination of any

provisions that depart from general consolidated return principles in life-nonlife consolidation, except to the extent

non-conforming provisions are necessary

to implement specific provisions of the

Code. In particular, these commenters

expressed concern about the treatment of

consolidated capital gains and losses under §1.1502-47 and requested simplification of the eligibility and tacking rules.

The Treasury Department and the IRS

appreciate the commenters’ input and

welcome further comments regarding

substantive changes to §1.1502-47 for

purposes of potential future guidance.

However, such changes are beyond the

scope of these final regulations.

Additionally, commenters recommended several clarifying changes to proposed

§1.1502-47. Many of these suggested clarifications have been incorporated into the

final regulations. For example, these final

regulations have added a cross-reference

to the definition of “nonlife insurance

company” in §1.1502-1(k). However, one

commenter recommended that §1.150247(g)(3) of these final regulations be modified to more closely parallel §1.150247(f)(3) of these final regulations. The

commenter further requested that para-

1035

graph (d)(5) of these final regulations be

modified to explicitly set forth the various

rules (both statutory and regulatory) that

apply to certain dividends received by an

includible member from another member

of the consolidated group. These comments exceed the scope of these final regulations, but the Treasury Department and

the IRS will continue to consider these

comments for purposes of potential future

guidance regarding §1.1502-47.

Effective/Applicability Dates

The final regulations in §§1.1502-1(k),

1.1502-21(a), (b)(1), (b)(2)(iv), and (c)

(1)(i)(E), 1.1502-47, and 1.1503(d)-8(b)

(8) apply to taxable years beginning after December 31, 2020. However, a taxpayer may choose to apply the rules in

§§1.1502-1(k) and 1.1502-47 of these final regulations to taxable years beginning

on or before December 31, 2020. If a taxpayer makes the choice described in the

previous sentence with regard to the rules

in §1.1502-47, the corporation must apply

those rules in their entirety and consistently with the provisions of the Internal Revenue Code applicable to the years at issue.

Special Analyses

I. Regulatory Planning and Review –

Economic Analysis

Executive Orders 13563, 13771, and

12866 direct agencies to assess costs and

benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize

net benefits (including potential economic, environmental, public health and safety

effects, distributive impacts, and equity).

Executive Order 13563 emphasizes the

importance of quantifying both costs and

benefits, of reducing costs, of harmonizing rules, and of promoting flexibility.

These final regulations have been designated as subject to review under Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018)

between the Treasury Department and the

Office of Management and Budget (OMB)

regarding review of tax regulations. The

Office of Information and Regulatory

Affairs (OIRA) has designated the final

regulations as economically significant

November 16, 2020

under section 1(c) of the Memorandum

of Agreement. Accordingly, OMB has reviewed the final regulations.

A. Background and Need for Regulations

In general, taxpayers whose deductions

exceed their income generate a net operating loss (NOL), calculated under the rules

of section 172. Section 172 also governs

the use of NOLs generated in other years

to offset taxable income in the current year.

Regulations issued under the authority of

section 1502 may be used to govern how

section 172 applies to consolidated groups

of C corporations. In general, a consolidated group generates a combined NOL

at an aggregate level (CNOL), with the

CNOL generally equal to the loss generated from treating the consolidated group

as a single entity. Under regulations promulgated prior to the Tax Cuts and Jobs

Act (TCJA), the allowed CNOL deduction

was equal to the lesser of the CNOL carryover or the combined taxable income of

the group (before the CNOL deduction).

The TCJA and the Coronavirus Aid,

Relief, and Economic Security (CARES)

Act made several changes to section 172.

First, the TCJA and the CARES Act disallowed the carry back of NOLs generated

in taxable years beginning after 2020, except for farming losses and losses incurred

by corporations that are insurance companies other than life insurance companies

(nonlife insurance companies). Second,

the TCJA and the CARES Act limited the

NOL deduction in taxable years beginning

after 2020 for NOLs generated in 2018

or later (post-2017 NOLs) to 80 percent

of taxable income determined after the

deduction for pre-2018 NOLs but before

the deduction for post-2017 NOLs. This

80-percent limitation does not apply to

nonlife insurance companies.

These final regulations implement the

changes to section 172 in the context of

consolidated groups. In particular, regulations are needed to address three issues

related to consolidated groups that were

not expressly addressed in the TCJA or

the CARES Act. First, the final regulations describe how to determine the

80-percent limitation in the case of a

“mixed” group – that is, a consolidated

group containing nonlife insurance companies and other members. Second, the

November 16, 2020

final regulations address the calculation

and allocation of farming losses. Third,

the final regulations implement the

80-percent limitation into existing regulations to determine the CNOL deduction

attributable to losses from a member arising during periods in which that member

was not part of that group. Part I.B of this

Special Analyses describes the manner

by which the final regulations addresses

each of these issues.

Part I.B also describes an alternative

approach that was contemplated by the

Treasury Department and the IRS regarding the allocation of currently generated

losses to nonlife insurance companies and

other members. The Treasury Department

and the IRS elected not to implement this

approach.

B. Overview of the Final Regulations

In this part I.B the following terms are

used. The term “P group” means a consolidated group of which P is the common

parent. The term “P&C member” means a

member of the P group that is a nonlife insurance company. The term “C member”

means a member of the P group that is a C

corporation other than a nonlife insurance

company.

1. Application of 80-percent limitation in

mixed groups

Under the statute, the general rule for

determining the NOL deduction (for a

taxable year beginning after December

31, 2020) effectively proceeds in two

steps. First, the taxpayer deducts pre-2018

NOLs without limit. Second, the taxpayer

deducts post-2017 NOLs up to 80 percent

of the taxpayer’s taxable income (computed without regard to the deductions under

sections 199A and 250) determined after

the deduction of pre-2018 NOLs (but, naturally, before the deduction for post-2017

NOLs). However, this 80-percent limitation does not apply for corporations that

are nonlife insurance companies.

The application of the 80-percent limitation to the P group is straightforward

if (i) there are no pre-2018 NOLs and

(ii) both classes of P&C members and

C members have positive income before

the CNOL deduction. In that case, these

final regulations provide, quite naturally,

1036

that the CNOL limitation is determined by

adding (i) the pre-CNOL income generated by the class of C members (C member

income pool), determined by applying the

80-percent limitation, plus (ii) 100 percent

of the pre-CNOL income generated by the

class of P&C members (P&C member income pool). This latter treatment reflects

the rule in section 172(f) that nonlife insurance companies are not subject to the

80-percent limitation.

One complication arises when the preCNOL C member income pool is positive

and the pre-CNOL P&C income pool is

negative, and the P group has positive

combined pre-CNOL taxable income. In

this case (where the pre-CNOL income is

generated by C members, rather than P&C

members), these final regulations provide

that the post-2017 CNOL deduction limit

is determined by applying the 80-percent

limitation to the income of the P group. If

the situation were reversed, such that the

P group had positive combined taxable

income but the pre-CNOL income is generated by P&C members, rather than the C

members, the post-2017 CNOL deduction

limit is equal to the income of the P group

(that is, determined without regard to the

80-percent limitation). In essence, in these

situations, the amount of the P group’s income able to absorb a post-2017 CNOL

carryover is defined by the member pool

(that is, the C member income pool or the

P&C member income pool) that is generating the income.

The other complication occurs when

there is a pre-2018 NOL. In this situation, it matters whether the pre-2018 NOL

is treated as reducing the amount of the

C member income pool or reducing the

amount of P&C member income pool.

Consider the following example (Example

1). In Example 1, the P group carries $50

in pre-2018 NOLs and $1000 in post-2017

NOLs to 2021. In 2021, the P&C members and the C members, respectively,

earn (pre-CNOL) income of $100. If the

pre-2018 NOL were treated as solely reducing the amount of C member income

pool, then the limitation for the post-2017

CNOL deduction would be $100 plus 80

percent of $50 ($100 minus $50), equal to

$140. If the pre-2018 NOL were treated

as solely reducing the amount of the P&C

member income pool, then the post-2017

CNOL deduction limit for the P group

Bulletin No. 2020–47

would be $50 ($100 minus $50) plus 80

percent of $100, or $130.

These final regulations allocate the pre2018 NOL pro-rata to the C member income pool and the P&C member income

pool in proportion to their current-year income. In Example 1, $25 of the pre-2018

NOL would be allocated to the C member

income pool and $25 to the P&C member

income pool. Therefore, the post-2017

CNOL deduction limit for the P group

would be $75 ($100 minus $25) plus 80

percent of $75 ($100 minus $25), or $135.

2. Farming losses

Section 172 provides that NOLs arising in a taxable year beginning after December 31, 2020, may not be carried back

to prior years, with two exceptions: (1)

farming losses and (2) nonlife insurance

company losses. Section 172(b)(1)(B)

defines a “farming loss” as the smaller

of the actual loss from farming activities

in a given year (that is, the excess of the

deductions in farming activities over income in farming activities) and the total

NOL generated in that year. This statutory

provision means that if a taxpayer incurs

a loss in farming activities but has overall

income in other activities, the farming loss

will be smaller than the loss in farming activities (and can possibly be zero).

Regulations were needed to clarify two

issues that arise in the context of consolidated groups. First, these regulations clarify that the maximum amount of farming

loss is the CNOL of the group rather than

the NOL of the specific member generating the loss in farming activities. This approach follows closely regulations issued

by the Treasury Department and the IRS

in 2012 in an analogous setting.

Second, given the overlapping categories of carryback-eligible NOLs (farming

losses and nonlife insurance companies),

regulations are needed to allocate the

farming loss to the various members to determine the total amount of CNOL that can

be carried back. Consider the following

example (Example 2). In Example 2, the P

group consists of one C member and one

P&C member. In 2021, the C member’s

only activity is farming and the C member incurs a loss of $30, while the P&C

member incurs a loss of $10. The total

farming loss is $30, since $30 is less than

Bulletin No. 2020–47

the P group CNOL of $40. If this farming

loss were allocated entirely to the C member, then the total amount eligible for carryback would be $40 (that is, $30 for the

farming loss and $10 for the loss incurred

by the P&C member). By contrast, if the

farming loss were allocated entirely to the

P&C member, only $30 would be eligible

to be carried back.

Again, following a similar rule as the

2012 regulations, these final regulations

allocate the farming loss to each member

of the group in proportion with their share

of total losses, without regard to whether

each member actually engaged in farming.

In Example 2, this would allocate $7.50

(that is, one-fourth of $30) of the farming

loss to the P&C member and the remaining $22.50 (that is, three-fourths of $30)

to the C member. Therefore, the P group

would be allowed to carry back $32.50 total (that is, the $10 of loss generated by the

P&C member and the $22.50 of farming

losses allocated to the C member).

3. Separate Return Limitation Year

To reduce “loss trafficking,” existing

regulations under section 1502 limit the

extent to which a consolidated group (that

is, the P group) can claim a CNOL attributable to losses generated by some member (M) in years in which M was not a

member. In particular, existing rules limit

this amount of loss to the amount of the

loss that would have been deductible had

M remained a separate entity; that is, the

rules are designed to preserve neutrality in

loss use between being a separate entity

or a member of a group. Existing rules

operationalize this principle using the

mechanic of a “cumulative register.” The

cumulative register is equal to the (cumulative) amount of M’s income that is taken

into account in the P group’s income. Income earned by M while a member of the

P group increases the cumulative register,

while losses (carried over or otherwise)

taken into account by the group reduce

the cumulative register. In general, the

existing rules provide that M’s pre-group

NOLs cannot offset the P group’s income

when the cumulative register is less than

or equal to zero.

The introduction of the 80-percent

limitation in the TCJA and CARES Act

necessitates an adjustment to this mech-

1037

anism in order to retain this neutrality-in-loss-use property. In particular, these

final regulations provide that any losses

by M that are absorbed by the P group and

subject to the 80-percent limitation cause

a reduction to the register equal to the full

amount of income needed to support that

deduction. The following example (Example 3) demonstrates why this adjustment is necessary. In Example 3, P and S

are each corporations other than nonlife

insurance companies (that is, they are subject to the 80-percent limitation). Suppose

in 2021, S incurs a loss of $800, which is

the only loss ever incurred by S. In 2022,

S incurs income of $400. If S were not a

member of a consolidated group, its 2022

NOL deduction would be limited to $320

(80 percent of $400). Suppose instead that

P acquires S in 2022 and that P has separate income of $600 in 2022, so the consolidated group has $1000 in pre-CNOL

income in 2022. Before claiming any

CNOLs, S’s cumulative register would increase to $400 in 2022. Without any additional rules, the $400 cumulative register

would allow P to claim a CNOL of $400

(bringing the register down to zero), greater than what would have been allowed had

S remained a separate entity. By contrast,

requiring the register to be reduced by 125

percent of the NOL (as under the final regulations) allows P to claim only a $320

CNOL, replicating the result if S were a

separate entity.

4. Allocation of current losses to nonlife

insurance companies

In general, under the TCJA and

CARES Act, taxpayers may not carry

back any losses generated in tax years

beginning after 2020, with the exception

of losses generated by nonlife insurance

companies and farming losses. Existing

regulations clarify that CNOLs are allocated to each member in proportion to the

total loss. This allocation rule can be illustrated by example (Example 4). In Example 4, the C member has a current loss

of $10 (in a tax year beginning in 2021

or later). The P&C members are corporations PC1 and PC2. PC1 has a gain of

$40 and PC2 has a loss of $40. Assume

that the P group does not engage in any

farming activities. The CNOL for the P

group is $10. The $10 of CNOL is allo-

November 16, 2020

cated to the C member and PC2 in proportion to their total losses. The C member has one-fifth of the total loss ($10

divided by $50) and PC2 has four-fifths.

Therefore, under the existing regulations,

the C member is allocated $2 ($10 times

one-fifth) and PC2 is allocated $8 ($10

times four-fifths). In the end, $8 of the

CNOL may be carried back in Example

4. The final regulations do not alter these

existing regulations.

In formulating these final regulations,

the Treasury Department and the IRS

contemplated an alternative approach.

Under this alternative, consolidated

groups would be required to compute

gain and loss by grouping P&C members and C members separately prior to

allocating CNOL to members. The application of this approach can be seen by

revisiting Example 4. Under this alternative approach, because the P&C members

as a whole do not have a loss, no CNOL

would be allocated to any P&C member

regardless of the gain or loss of any of the

individual P&C members. Thus, under

the alternative approach, none of the $10

CNOL would be eligible for carryback in

Example 4.

C. Economic Analysis

1. Baseline

In this analysis, the Treasury Department and the IRS assess the benefits and

costs of the final regulations relative to a

no-action baseline reflecting anticipated

Federal income tax-related behavior in the

absence of these regulations.

2. Summary of economic effects

The final regulations provide certainty and clarity to taxpayers regarding the

treatment of NOLs under section 172 and

the regulations under section 1502. In

the absence of such guidance, the chance

that different taxpayers would interpret

the statute and the regulations differently

would be exacerbated. Similarly situated

taxpayers might interpret those rules differently, with one taxpayer pursuing an

economic opportunity that another taxpayer might decline to make because of

different interpretations of the ability of

losses to offset taxable income. If this sec-

November 16, 2020

ond taxpayer’s activity were more profitable, the resulting economic decisions are

inefficient. Such situations are more likely

to arise in the absence of guidance. While

no guidance can curtail all differential or

inaccurate interpretations of the statute,

the regulations significantly mitigate the

chance for differential or inaccurate interpretations and thereby increase economic

efficiency.

To the extent that the specific provisions of the final regulations result in

the acceleration or delay of the tax year

in which taxpayers deduct an NOL relative to the baseline, those taxpayers may

face a change in the present value of the

after-tax return to new investment, particularly investment that may result in

losses. The resulting changes in the incentives facing the taxpayer are complex and

may lead the taxpayer either to increase,

decrease, or leave unchanged the volume

and risk level of its investment portfolio,

relative to the baseline, in ways that depend on the taxpayer’s stock of NOLs and

the depreciation schedules and income

patterns of investments they would typically consider, including whether the investment is subject to bonus depreciation.

Because these elements are complex and

taxpayer-specific and because the sign of

the effect on investment is generally ambiguous, the Treasury Department and the

IRS have not projected the specific effects

on economic activity arising from the final

regulations.

The Treasury Department and the

IRS project that these regulations will

have annual effects below $100 million

($2020) relative to the baseline. The effects are small because the regulations

apply only to consolidated groups; in

addition, several provisions of the final

regulations apply only to the extent that

a consolidated group contains a mix of

member types. Moreover, the effects are

small because: (i) for provisions of the final regulations that affect the deduction

for pre-2018 NOLs, the effects are limited to the stock of the pre-2018 NOLs;

and (ii) for provisions that affect the allowable rate of loss usage of post-2017

NOLs, the effect arises only from the 20

percentage point differential in the deduction for these NOLs. This latter effect

in particular, to which the bulk of the provisions apply, is too small to substantial-

1038

ly affect taxpayers’ use of NOLs and thus

too small to lead to meaningful changes

in economic decisions.

The Treasury Department and the IRS

did not estimate more precisely the economic effects of these regulations because

(i) the effects are expected to be small and

(ii) data or models that would address the

effects of these regulations are not readily available. In the absence of quantitative estimates, the subsequent discussion

provides qualitative analysis of these economic effects.

The proposed regulations solicited

comments on the economic effects of the

proposed regulations. No such comments

were received.

3. Allocation of CNOLs to specific

members of consolidated groups

The final regulations do not amend existing rules for the allocation of the CNOL

within consolidated groups. The final regulations follow existing rules and allocate

the CNOLs to each member of the group

in proportion to the total loss.

The Treasury Department and the IRS

considered an alternative approach that

would have required groups to compute

gain and loss at the subgroup level prior

to allocating CNOL to members. Recall

Example 4 in which the P&C subgroup

had no gain or loss but the C subgroup

had a loss of $10. Under this alternative

approach, because the P&C subgroup as

a whole does not have a loss, no CNOL

would be allocated to any member in

the P&C group regardless of the gain or

loss of any of the individual members of

PC. Thus, in Example 4, none of the $10

CNOL would be eligible for carryback.

The Treasury Department and the IRS

recognize that as a result of the TCJA and

the CARES Act, the final regulations may

provide groups with an incentive to split

their C members into several corporations

– some with loss and some with gain; this

potential incentive would not exist under the alternative regulatory approach.

In certain circumstances, such a strategy

would effectively enable some share of

the losses generated by the other C members to be carried back. This change in the

business structure of consolidated groups

may entail economic costs because, to the

extent this strategy is pursued, it would

Bulletin No. 2020–47

result from tax-driven rather than market-driven considerations. The Treasury

Department and the IRS project, however,

that the adopted approach will have lower

compliance costs for taxpayers, relative to

the alternative regulatory approach, because it generally follows existing regulatory practice for allocating losses within a

consolidated group.

The Treasury Department and the IRS

have not attempted to estimate the economic consequences of either of these

effects but project them to be small. The

effects are projected to be small because

(i) only a small number of taxpayers are

likely to be affected; (ii) any reorganization that occurs due to the final regulations

will primarily be “on paper” and entail little or no economic loss; and (iii) the compliance burden of loss allocation, under either the final regulations or the alternative

approach, is not high.

No additional substantive alternatives

were raised by the comments.

4. Affected Taxpayers

The Treasury Department and the IRS

project that these regulations will primarily affect consolidated groups that

contain at least one nonlife insurance

member and at least one member that is

not a nonlife insurance company. Based

on data from 2015, the Treasury Department and the IRS calculate that there

were 1,130 such consolidated groups.

Approximately 460 of these groups were

of “mixed loss” status, meaning that at

least one nonlife insurance member had

a gain and one other member had a loss,

or vice versa.

D. Summary

In sum, these regulations clarify the

recent statutory changes to section 172

as they apply to consolidated corporate

groups. The Treasury Department and IRS

project the economic effect of these regulations to be small given that (1) the effect

of NOL usage on investment incentives is

of ambiguous sign, (2) these regulations

are projected to have only a small effect

on NOL usage, and (3) it is expected that

most taxpayers would have come to a similar interpretation of the statute in the absence of these regulations.

Bulletin No. 2020–47

II. Regulatory Flexibility Act

Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby

certified that these final regulations will

not have a significant economic impact

on a substantial number of small entities.

This certification is based on the fact that

these final regulations apply only to corporations that file consolidated Federal

income tax returns, and that such corporations almost exclusively consist of larger businesses. Specifically, based on data

available to the IRS, corporations that file

consolidated Federal income tax returns

represent only approximately two percent

of all filers of Forms 1120 (U.S. Corporation Income Tax Return). However, these

consolidated Federal income tax returns

account for approximately 95 percent of

the aggregate amount of receipts provided

on all Forms 1120. Therefore, these final

regulations would not create additional

obligations for, or impose an economic

impact on, small entities. Accordingly, the

Secretary certifies that the final regulations will not have a significant economic

impact on a substantial number of small

entities.

Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking that preceded these

final regulations was submitted to the

Chief Counsel for the Office of Advocacy

of the Small Business Administration for

comment on its impact on small business.

No comments on the notice were received

from the Chief Counsel for the Office of

Advocacy of the Small Business Administration.

III. Unfunded Mandates Reform Act

Section 202 of the Unfunded Mandates

Reform Act of 1995 requires that agencies

assess anticipated costs and benefits and

take certain other actions before issuing a

final rule that includes any Federal mandate that may result in expenditures in any

one year by a state, local, or tribal government, in the aggregate, or by the private

sector, of $100 million in 1995 dollars,

updated annually for inflation. In 2020,

that threshold is approximately $156 million. This rule does not include any Federal mandate that may result in expenditures by state, local, or tribal governments,

1039

or by the private sector in excess of that

threshold.

IV. Executive Order 13132: Federalism

Executive Order 13132 (entitled

“Federalism”) prohibits an agency from

publishing any rule that has federalism

implications if the rule either imposes substantial, direct compliance costs on state

and local governments, and is not required

by statute, or preempts state law, unless

the agency meets the consultation and

funding requirements of section 6 of the

Executive Order. This rule does not have

federalism implications, does not impose

substantial direct compliance costs on

state and local governments, and does not

preempt state law within the meaning of

the Executive Order.

V. Congressional Review Act

The Administrator of OIRA has determined that this is a major rule for purposes of the Congressional Review Act (5

U.S.C. 801 et seq.) (CRA). Under section

801(3) of the CRA, a major rule takes

effect 60 days after the rule is published

in the Federal Register. Consistent with

this requirement, the effective date of this

Treasury decision is December 28, 2020,

whereas the rules in this Treasury decision

apply for taxable years beginning after

December 31, 2020.

Drafting Information

The principal authors of these regulations are Justin O. Kellar, Gregory J. Galvin, and William W. Burhop of the Office

of Associate Chief Counsel (Corporate).

However, other personnel from the Treasury Department and the IRS participated

in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 1 is amended as follows:

November 16, 2020

PART 1—INCOME TAX

Paragraph 1. The authority citation for

part 1 continues to read in part as follows:

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

Par. 2. Section 1.1502-1 is amended by

adding paragraphs (k) and (l) to read as

follows:

§1.1502-1 Definitions.

*****

(k) Nonlife insurance company. The

term nonlife insurance company means a

member that is an insurance company other than a life insurance company, each as

defined in section 816(a).

(l) Applicability date. Paragraph (k) of

this section applies to taxable years beginning after December 31, 2020. However,

a taxpayer may choose to apply paragraph

(k) of this section to taxable years beginning on or before December 31, 2020.

Par. 3. Section 1.1502-21 is amended:

1. By revising paragraph (a).

2. By revising paragraph (b)(1).

3. By revising paragraph (b)(2)(iv).

4. By revising paragraph (b)(2)(v) introductory text.

5. In paragraph (b)(2)(v), by designating Examples 1 through 3 as paragraphs

(b)(2)(v)(A) through (C), respectively,

and removing the period after each example number in the paragraph headings and

replacing them with a colon.

6. In newly designated paragraphs (b)

(2)(v)(A) through (C), by redesignating

paragraphs (b)(2)(v)(A)(i) and (ii) as paragraphs (b)(2)(v)(A)(1) and (2), paragraphs

(b)(2)(v)(B)(i) and (ii) as paragraphs (b)

(2)(v)(B)(1) and (2), and paragraphs (b)

(2)(v)(C)(i) and (ii) as paragraphs (b)(2)

(v)(C)(1) and (2).

7. By adding paragraphs (b)(2)(v)(D)

through (G).

8. In paragraph (b)(3)(ii)(B), by removing

the text “§ 1.1502-21(b)(3)(ii)(B)(2)” and

adding in its place “§1.1502-21(b)(3)(ii)(B)”.

9. By revising paragraph (b)(3)(ii)(C).

10. By adding paragraph (b)(3)(ii)(D).

11. By revising paragraph (c)(1)(i) introductory text.

12. In paragraph (c)(1)(i)(C)(2), by removing the word “and”.

13. In paragraph (c)(1)(i)(D), by removing the word “account.” and adding in

its place “account; and”.

November 16, 2020

14. By adding paragraph (c)(1)(i)(E).

15. By revising paragraph (c)(1)(iii) introductory text.

16. In paragraph (c)(1)(iii), by designating Examples 1 through 5 as paragraphs (c)(1)(iii)(A) through (E), respectively, and removing the period after each

example number in the paragraph headings and replacing them with a colon.

17. In newly redesignated paragraphs

(c)(1)(iii)(A) through (E), by redesignating

paragraphs (c)(1)(iii)(A)(i) through (iii) as

paragraphs (c)(1)(iii)(A)(1) through (3),

paragraphs (c)(1)(iii)(B)(i) through (vi) as

paragraphs (c)(1)(iii)(B)(1) through (6),

paragraphs (c)(1)(iii)(C)(i) through (iii) as

paragraphs (c)(1)(iii)(C)(1) through (3),

paragraphs (c)(1)(iii)(D)(i) through (iv) as

paragraphs (c)(1)(iii)(D)(1) through (4),

and paragraphs (c)(1)(iii)(E)(i) through (v)

as paragraphs (c)(1)(iii)(E)(1) through (5).

18. By revising newly redesignated

paragraphs (c)(1)(iii)(A)(2) and (c)(1)(iii)

(B)(2) through (6).

19. In newly redesignated paragraph

(c)(1)(iii)(C)(2), by adding the words “,

a taxable year that begins on January 1,

2021” after the words “at the beginning of

Year 4”.

20. By revising newly redesignated

paragraphs (c)(1)(iii)(D)(2) through (4).

21. By adding paragraph (c)(1)(iii)(D)

(5).

22. By revising newly redesignated

paragraphs (c)(1)(iii)(E)(2) through (5).

23. By adding paragraphs (c)(1)(iii)(E)

(6) and (c)(1)(iii)(F).

24. By revising paragraph (c)(2)(v).

25. By revising paragraph (c)(2)(viii)

introductory text,.

26. In paragraph (c)(2)(viii), by designating Examples 1 through 4 as paragraphs

(c)(2)(viii)(A) through (D), respectively,

and removing the period after each example number in the paragraph headings and

replacing them with a colon.

27. In newly designated paragraphs (c)

(2)(viii)(A) through (D), by redesignating paragraphs (c)(2)(viii)(A)(i) through

(vii) as paragraphs (c)(2)(viii)(A)(1)

through (7), paragraphs (c)(2)(viii)(B)(i)

through (iv) as paragraphs (c)(2)(viii)(B)

(1) through (4), paragraphs (c)(2)(viii)(C)

(i) through (iii) as paragraphs (c)(2)(viii)

(C)(1) through (3), and paragraphs (c)(2)

(viii)(D)(i) and (ii) as paragraphs (c)(2)

(viii)(D)(1) and (2).

1040

28. In newly redesignated paragraphs

(c)(2)(viii)(A)(3) through (7), the first

sentence of each, by adding the words “,

including the limitation under paragraph

(c)(1)(i)(E) of this section” after the words

“under paragraph (c) of this section”.

29. In newly redesignated paragraph

(c)(2)(viii)(B)(1), the first sentence, by

adding the words “, none of which is a

nonlife insurance company” after the text

“S, T, P and M”.

30. In newly redesignated paragraph

(c)(2)(viii)(B)(1), the fourth sentence, by

adding the text “(a taxable year beginning

after December 31, 2020)” after the language “Year 3”.

31. By revising newly designated paragraph (c)(2)(viii)(B)(3).

32. By redesignating newly redesignated paragraph (c)(2)(viii)(B)(4) as paragraph (c)(2)(viii)(B)(5).

33. By adding a new paragraph (c)(2)

(viii)(B)(4).

34. By revising newly redesignated

paragraph (c)(2)(viii)(B)(5).

35. By adding paragraph (c)(2)(viii)(B)

(6).

36. In paragraph (g)(5), by designating

Examples 1 through 9 as paragraphs (g)(5)

(i) through (ix), respectively, and removing the period after each example number

in the paragraph headings and replacing

them with a colon.

37. In newly redesignated paragraphs

(g)(5)(i) through (ix), by redesignating paragraphs (g)(5)(i)(i) through (iv)

as paragraphs (g)(5)(i)(A) through (D),

paragraphs (g)(5)(ii)(i) through (iv) as

paragraphs (g)(5)(ii)(A) through (D),

paragraphs (g)(5)(iii)(i) through (iii) as

paragraphs (g)(5)(iii)(A) through (C),

paragraphs (g)(5)(iv)(i) through (iv) as

paragraphs (g)(5)(iv)(A) through (D),

paragraphs (g)(5)(v)(i) through (iv) as

paragraphs (g)(5)(v)(A) through (D),

paragraphs (g)(5)(vi)(i) through (iv) as

paragraphs (g)(5)(vi)(A) through (D),

paragraphs (g)(5)(vii)(i) through (vi) as

paragraphs (g)(5)(vii)(A) through (F),

paragraphs (g)(5)(viii)(i) through (v) as

paragraphs (g)(5)(viii)(A) through (E),

and paragraphs (g)(5)(ix)(i) through (vii)

as paragraphs (g)(5)(ix)(A) through (G).

38. By revising paragraph (h)(9).

39. By adding paragraph (h)(10).

The revisions and additions read as follows:

Bulletin No. 2020–47

§1.1502-21 Net operating losses.

(a) Consolidated net operating loss

deduction—(1) In general. Subject to

any limitations under the Internal Revenue Code or this chapter (for example,

the limitations under section 172(a)(2)

and paragraph (a)(2) of this section), 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—

(i) Any CNOLs (as defined in paragraph (e) of this section) of the consolidated group; and

(ii) Any net operating losses (or NOLs)

of the members arising in separate return

years.

(2) Application of section 172 for computing net operating loss deductions—(i)

Overview. For purposes of §1.1502-11(a)

(2) (regarding a CNOL deduction), the

rules of section 172 regarding the use of

net operating losses are taken into account

as provided by this paragraph (a)(2) in calculating the consolidated taxable income

of a group for a particular consolidated

return year. More specifically, in computing taxable income for taxable years beginning after December 31, 2020, section

172(a) generally limits the deductibility of net operating losses arising in taxable years beginning after December 31,

2017 (post-2017 NOLs). However, these

limitations do not apply to net operating

losses arising in taxable years beginning

before January 1, 2018 (pre-2018 NOLs).

Therefore, in any particular consolidated return year beginning after December

31, 2020, the group’s CNOL deduction

includes CNOLs arising in taxable years

beginning before January 1, 2018 (pre2018 CNOLs), without limitation under

section 172(a). Following the deduction

of pre-2018 CNOLs, this paragraph (a)(2)

applies to compute the maximum amount

of CNOLs from taxable years beginning

after December 31, 2017 (post-2017

CNOLs), that can be deducted against taxable income in a consolidated return year

beginning after December 31, 2020 (post2017 CNOL deduction limit). See section

172(a)(2)(A) and (B).

(ii) Computation of the 80-percent

limitation and special rule for nonlife in-

Bulletin No. 2020–47

surance companies—(A) Determinations

based on status of group members. If a

portion of a post-2017 CNOL is carried

back or carried over to a consolidated return year beginning after December 31,

2020, whether the members of the group

include nonlife insurance companies, other types of corporations, or both determines whether section 172(a) (including

the limitation described in section 172(a)

(2)(B)(ii) (80-percent limitation)), section

172(f) (providing special rules for nonlife

insurance companies), or both, apply to

the group for the consolidated return year.

(B) Determination of post-2017 CNOL

deduction limit. The post-2017 CNOL

deduction limit is determined under paragraph (a)(2)(iii) of this section by applying section 172(a)(2)(B)(ii) (that is, the

80-percent limitation), section 172(f) (that

is, the special rule for nonlife insurance

companies), or both, to the group’s consolidated taxable income for that year.

(C) Inapplicability of 80-percent limitation. The 80-percent limitation does

not apply to CNOL deductions taken in

taxable years beginning before January

1, 2021, or to CNOLs arising in taxable

years beginning before January 1, 2018

(that is, pre-2018 CNOLs). See section

172(a).

(iii) Computations under sections

172(a)(2)(B) and 172(f). This paragraph

(a)(2)(iii) provides rules for applying sections 172(f) and 172(a)(2)(B) to consolidated return years beginning after December 31, 2020 (that is, for computing the

post-2017 CNOL deduction limit). Section 172(f) applies to income of nonlife

insurance company members, whereas

section 172(a)(2)(B)(ii) applies to income

of members that are not nonlife insurance

companies. Thus, this paragraph (a)(2)(iii)

provides specific rules for groups with no

nonlife insurance company members, only

nonlife insurance company members, or

a combination of nonlife insurance company members and other members. For

groups with both nonlife insurance company members and life insurance company members, see paragraph (b)(2)(iv)(E)

of this section.

(A) Groups without nonlife insurance company members. If no member

of a group is a nonlife insurance company during a particular consolidated return year beginning after December 31,

1041

2020, section 172(a)(2)(B)(ii) (that is, the

80-percent limitation) applies to all income of the group for that year. Therefore,

the post-2017 CNOL deduction limit for

the group for that year is the lesser of—

(1) The aggregate amount of post-2017

NOLs carried to that year; or

(2) The amount determined by multiplying—

(i) 80 percent, by

(ii) Consolidated taxable income for

the group for that year (determined without regard to any deductions under sections 172, 199A, and 250) less the aggregate amount of pre-2018 NOLs carried to

that year.

(B) Groups comprised solely of nonlife

insurance companies. If a group is comprised solely of nonlife insurance companies during a particular consolidated

return year beginning after December 31,

2020, section 172(f) applies to all income

of the group for that year. Therefore, the

post-2017 CNOL deduction limit for the

group for that year equals the lesser of—

(1) The aggregate amount of post-2017

NOLs carried to that year, or

(2) Consolidated taxable income less

the aggregate amount of pre-2018 NOLs

carried to that year.

(C) Groups that include both nonlife

insurance companies and other corporations—(1) General rule. Except as provided in paragraph (a)(2)(iii)(C)(5) of this

section, if a group has at least one member

that is a nonlife insurance company and

at least one member that is not a nonlife

insurance company during a particular

consolidated return year beginning after

December 31, 2020, the post-2017 CNOL

deduction limit for the group for that year

equals the lesser of—

(i) The aggregate amount of post-2017

NOLs carried to that year, or

(ii) The sum of the amounts in the income pools determined under paragraphs

(a)(2)(iii)(C)(2) and (3) of this section.

(2) Residual income pool. The amount

determined under this paragraph (a)(2)

(iii)(C)(2) (residual income pool) is eighty

percent of the excess of—

(i) The consolidated taxable income of

the group for a consolidated return year

beginning after December 31, 2020, determined without regard to any income, gain,

deduction, or loss of members that are

nonlife insurance companies and without

November 16, 2020

regard to any deductions under sections

172, 199A, and 250, over

(ii) The aggregate amount of pre-2018

NOLs carried to that year that are allocated to this income pool under paragraph

(a)(2)(iii)(C)(4) of this section (that is, by

applying the 80-percent limitation). See

section 172(a)(2)(B)(ii).

(3) Nonlife income pool. The amount

determined under this paragraph (a)(2)(iii)

(C)(3) (nonlife income pool) is the consolidated taxable income of the group for a

consolidated return year beginning after

December 31, 2020, determined without

regard to any income, gain, deduction, or

loss of members included in the computation under paragraph (a)(2)(iii)(C)(2) of

this section, less the aggregate amount of

pre-2018 NOLs carried to that year that

are allocated to this income pool under

paragraph (a)(2)(iii)(C)(4) of this section.

See section 172(f).

(4) Pro rata allocation of pre-2018

NOLs between pools of income. For purposes of paragraphs (a)(2)(iii)(C)(2) and

(3) of this section, the aggregate amount of

pre-2018 NOLs carried to any particular

consolidated return year beginning after

December 31, 2020, is prorated between

the residual income pool and the nonlife

income pool based on the relative amounts

of positive income of those two pools. For

example, if $30 of pre-2018 NOLs is carried over to a consolidated return year in

which the residual income pool contains

$75 and the nonlife income pool contains

$150, the residual income pool is allocated $10 of the pre-2018 NOLs ($30 x $75/

($75 + $150), or $30 x 1/3), and the nonlife income pool is allocated the remaining $20 of pre-2018 NOLs ($30 x $150/

($75 + $150), or $30 x 2/3).

(5) Exception. The post-2017 CNOL

deduction limit for the group for a consolidated return year is determined under this

paragraph (a)(2)(iii)(C)(5) if the amounts

computed under paragraphs (a)(2)(iii)(C)

(2) and (3) of this section for that year are

not both positive.

(i) Positive residual income pool and

negative nonlife income pool. This paragraph (a)(2)(iii)(C)(5)(i) applies if the

amount computed under paragraph (a)(2)

(iii)(C)(2) of this section for the residual

income pool is positive and the amount

computed under paragraph (a)(2)(iii)(C)

(3) of this section for the nonlife income

November 16, 2020

pool is negative. If this paragraph (a)(2)

(iii)(C)(5)(i) applies, the post-2017 CNOL

deduction limit for the group for a consolidated return year equals the lesser of

the aggregate amount of post-2017 NOLs

carried to that year, or 80 percent of the

consolidated taxable income of the entire group (determined without regard to

any deductions under sections 172, 199A,

and 250) after subtracting the aggregate

amount of pre-2018 NOLs carried to that

year (that is, by applying the 80-percent

limitation). See section 172(a)(2)(B).

(ii) Positive nonlife income pool and

negative residual income pool. If the

amount computed under paragraph (a)(2)

(iii)(C)(3) of this section for the nonlife

income pool is positive and the amount

computed under paragraph (a)(2)(iii)(C)

(2) of this section for the residual income

pool is negative, the post-2017 CNOL

deduction limit for the group for a consolidated return year equals the lesser of

the aggregate amount of post-2017 NOLs

carried to that year, or the consolidated

taxable income of the entire group less the

aggregate amount of pre-2018 NOLs carried to that year. See section 172(f).

(b) * * *

(1) Carryovers and carrybacks generally. The net operating loss carryovers

and carrybacks to a taxable year are determined under the principles of, and are

subject to any limitations under, 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. In addition, except as otherwise

provided in this section, the amount of any

CNOL absorbed by the group in any year

is apportioned among members based on

the percentage of the CNOL eligible for

carryback or carryover that is attributable

to each member as of the beginning of the

year. The percentage of the CNOL attributable to a member is determined pursuant

to paragraph (b)(2)(iv)(B) of this section.

Additional rules provided under the Internal Revenue Code or regulations also

apply. See, for example, section 382(l)(2)

(B) (if losses are carried from the same

taxable year, losses subject to limitation

1042

under section 382 are absorbed before

losses that are not subject to limitation

under section 382). See paragraph (c)(1)

(iii)(B) of this section, (Example 2), for an

illustration of pro rata absorption of losses

subject to a SRLY limitation.

(2) * * *

(iv) Operating rules. (A) Amount of

CNOL attributable to a member. The

amount of a CNOL that is attributable to

a member equals the product obtained by

multiplying the CNOL and the percentage

of the CNOL attributable to the member.

(B) Percentage of CNOL attributable

to a member—(1) In general. Except as

provided in paragraph (b)(2)(iv)(B)(2) of

this section, the percentage of the CNOL

for the consolidated return year attributable to a member equals the separate net

operating loss of the member for the consolidated return year divided by the sum

of the separate net operating losses for that

year of all members having such losses for

that year. 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 consolidated

return year (whether or not absorbed by

the member).

(2) Recomputed percentage. If, for any

reason, a member’s portion of a CNOL

is absorbed or reduced on a non-pro rata

basis (for example, under §1.1502-11(b)

or (c), paragraph (b)(2)(iv)(C) of this section, §1.1502-28, or 1.1502-36(d), or as

the result of a carryback to a separate return year), the percentage of the CNOL attributable to each member is recomputed.

In addition, if a member with a separate

net operating loss ceases to be a member,

the percentage of the CNOL attributable

to each remaining member is recomputed.

The recomputed percentage of the CNOL

attributable to each member equals the remaining CNOL attributable to the member

at the time of the recomputation divided

by the sum of the remaining CNOL attributable to all of the remaining members at

the time of the recomputation. For purposes of this paragraph (b)(2)(iv)(B)(2), a

CNOL that is permanently disallowed or

eliminated is treated as absorbed.

(C) Net operating loss carryovers and

carrybacks—(1) General rules. Subject to

Bulletin No. 2020–47

the rules regarding allocation of special

status losses under paragraph (b)(2)(iv)

(D) of this section—

(i) Nonlife insurance companies. The

portion of a CNOL attributable to any

members of the group that are nonlife insurance companies is carried back or carried over under the rules in section 172(b)

applicable to nonlife insurance companies.

(ii) Corporations other than nonlife

insurance companies. The portion of a

CNOL attributable to any other members

of the group is carried back or carried over

under the rules in section 172(b) applicable to corporations other than nonlife insurance companies.

(2) Recomputed percentage. For rules

governing the recomputation of the percentage of a CNOL attributable to each

remaining member if any portion of the

CNOL attributable to a member is carried

back under section 172(b)(1)(B) or (C)

and absorbed on a non-pro rata basis, see

paragraph (b)(2)(iv)(B)(2) of this section.

(D) Allocation of special status losses.

The amount of the group’s CNOL that is

determined to constitute a farming loss

(as defined in section 172(b)(1)(B)(ii)) or

any other net operating loss that is subject

to special carryback or carryover rules

(special status loss) is allocated to each

member separately from the remainder of

the CNOL based on the percentage of the

CNOL attributable to the member, as determined under paragraph (b)(2)(iv)(B) of

this section. This allocation is made without regard to whether a particular member actually incurred specific expenses

or engaged in specific activities required

by the special status loss provisions. This

paragraph (b)(2)(iv)(D) applies only with

regard to losses for which the special carryback or carryover rules are dependent

on the type of expense generating the loss,

rather than on the special status of the

entity to which the loss is allocable. See

section 172(b)(1)(C) and paragraph (b)(2)

(iv)(C)(1)(i) of this section (applicable to

losses of nonlife insurance companies).

This paragraph (b)(2)(iv)(D) does not apply to farming losses incurred by a consolidated group in any taxable year beginning after December 31, 2017, and before

January 1, 2021.

(E) Coordination with rules for

life-nonlife groups under §1.1502-47. For

Bulletin No. 2020–47

groups that include at least one member

that is a life insurance company and for

which an election is in effect under section 1504(c)(2), any computation of the

80-percent limitation under paragraph (a)

(2)(iii)(C) of this section is computed only

with respect to items of income, gain, deduction, and loss of the members of the

nonlife subgroup (as defined in §1.150247(b)(9)). For rules regarding the use of

CNOLs of the nonlife subgroup to offset

life insurance company taxable income

of the life subgroup (each as defined in

§1.1502-47(b)), or the use of CNOLs of

the life subgroup to offset consolidated

taxable income of the nonlife subgroup,

see generally section 1503(c)(1) and

§1.1502-47.

(v) Examples. For purposes of the examples in this paragraph (b)(2)(v), unless

otherwise stated, all groups file consolidated returns, all corporations have calendar

taxable years, all losses are farming losses

within the meaning of section 172(b)(1)

(B)(ii), all taxable years begin after December 31, 2020, 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) are illustrated by the

following examples:

*****

(D) Example 4: Allocation of a CNOL

arising in a consolidated return year beginning after December 31, 2020. (1) P

is the common parent of a consolidated

group that includes S. Neither P nor S is

a nonlife insurance company. The P group

also includes nonlife insurance companies

PC1, PC2, and PC3. In the P group’s 2021

consolidated return year, all members except S have separate net operating losses,

and the P group’s CNOL in that year is

$40. No member of the P group engages

in farming activities. See section 172(b)

(1)(B)(ii).

(2) Under paragraphs (b)(1) and (b)(2)

(iv)(B)(1) of this section, for purposes of

carrying losses to other taxable years, the

P group’s $40 CNOL is allocated pro rata

among the group members that have separate net operating losses. Under paragraph

(b)(2)(iv)(C) of this section, those respective portions of the CNOL attributable

1043

to PC1, PC2, and PC3 (that is, members

that are nonlife insurance companies) are

carried back to each of the two preceding

taxable years and then carried over to each

of the 20 subsequent taxable years. See

section 172(b)(1)(C). The portion attributable to P (which is not a nonlife insurance

company) may not be carried back but is

carried over to future years. See section

172(b)(1)(A).

(E) Example 5: Allocation of a CNOL

arising in a consolidated return year beginning before January 1, 2021. The facts

are the same as in paragraph (b)(2)(v)(D)

(1) of this section, except that the P group

incurred the CNOL during the P group’s

2020 consolidated return year. The allocation among the P group members of the

CNOL described in paragraph (b)(2)(v)

(D)(2) of this section would be the same.

However, those respective portions of the

CNOL attributable to PC1, PC2, and PC3

(that is, members that are nonlife insurance

companies) will be carried back to each of

the five preceding taxable years and then

carried over to each of the 20 subsequent

taxable years. See section 172(b)(1)(C) and

section 172(b)(1)(D)(i). The portion attributable to P (which is not a nonlife insurance

company) will be carried back to each of

the five preceding taxable years and then

carried over to future years. See section

172(b)(1)(A) and section 172(b)(1)(D)(i).

(F) Example 6: CNOL deduction and

application of section 172. (1) P (a type of

corporation other than a nonlife insurance

company) is the common parent of a consolidated group that includes PC1 (a nonlife insurance company). P and PC1 were

both incorporated in Year 1 (a year beginning after December 31, 2020). In Year 1,

P and PC1 have separate taxable income

of $20 and $25, respectively. As a result,

the P group has Year 1 consolidated taxable income of $45. In Year 2, P has separate taxable income of $24, and PC1 has

a separate taxable loss of $40, resulting in

a P group CNOL of $16. Additionally, in

Year 3, P has separate taxable income of

$15, and PC1 has a separate taxable loss

of $45, resulting in a P group CNOL of

$30. No member of the P group engages

in farming activities. See section 172(b)

(1)(B)(ii).

(2) Under paragraph (b)(2)(iv)(B) of

this section, the P group’s Year 2 CNOL

and Year 3 CNOL are entirely attribut-

November 16, 2020

able to PC1, a nonlife insurance company. Therefore, under section 172(b)(1)

(C)(i), the entire amount of each of these

CNOLs is eligible to be carried back to

Year 1.

(3) Under paragraph (a)(2)(ii) of this

section, the amount of the Year 2 CNOL

that may be used by the P group in Year

1 is determined by taking into account

the status (nonlife insurance company or

other type of corporation) of the member

that has separate taxable income composing in whole or in part the P group’s consolidated taxable income. Because the P

group includes both a nonlife insurance

company member and a member that is

not a nonlife insurance company, paragraph (a)(2)(iii)(C) of this section applies to determine the computation of the

post-2017 CNOL deduction limit for the

group for Year 1. Therefore, the 80-percent limitation is applied to the residual

income pool, which consists of the taxable income of P, a type of corporation

other than a nonlife insurance company.

Under the 80-percent limitation, the maximum amount of P’s Year 1 income that

may be offset by the P group’s post-2017

CNOLs is $16, which equals 80 percent

of the excess of P’s taxable income for

Year 1 ($20) over the aggregate amount

of pre-2018 NOLs allocable to P ($0)

(80 percent x ($20 - $0)). See paragraph

(a)(2)(iii)(C)(2) and (a)(2)(iii)(C)(4) of

this section. PC1 is a nonlife insurance

company to which section 172(f), rather

than the 80-percent limitation in section

172(a)(2)(B)(ii), applies. Therefore, the

maximum amount of PC1’s Year 1 income that may be offset by the P group’s

post-2017 CNOLs is $25, which equals

the excess of PC1’s taxable income for

Year 1 ($25) over the aggregate amount

of pre-2018 NOLs allocable to PC1 ($0).

See paragraph (a)(2)(iii)(C)(3) and (4) of

this section.

(4) Based on paragraph (a)(2)(iii)(C)

of this section and the analysis set forth

in paragraph (b)(2)(v)(F)(3) of this section, at the end of Year 2, the P group’s

post-2017 CNOL deduction limit for Year

1 is the lesser of the aggregate amount of

post-2017 NOLs carried to Year 1 ($16),

or $41 ($16 + $25). Therefore, the P group

can offset $16 of its Year 1 income with its

CNOL carryback from Year 2.

(5) When the Year 3 CNOL is carried

back to Year 1, the P group’s post-2017

CNOL deduction limit for Year 1 is the

lesser of $46 (the aggregate amount of

post-2017 NOLs carried to Year 1) or

$41 ($16 + $25; see the computation in

paragraph (b)(2)(v)(F)(3) of this section).

Thus, the total amount of the P group’s

Year 1 income that may be offset by the P

group’s Year 2 and Year 3 CNOLs is $41

($16 from Year 2 + $25 from Year 3). As

a result, the P group reports $4 of income

($45 - $41) in Year 1 that is ineligible for

offset by any other NOLs. The P group

carries over its remaining $5 CNOL ($46

- $41) to future years.

(G) Example 7: Pre-2018 and post2017 CNOLs. (1) P is the common parent

of a consolidated group. No member of the

P group is a nonlife insurance company or

is engaged in a farming business, and no

member of the P group has a loss that is subject to a SRLY limitation. The P group had

the following consolidated taxable income

or CNOL for the following taxable years:

Table 1 to paragraph (b)(2)(v)(G)(1)

2014

$60

2015

$0

2016

$0

(2) Under section 172(a)(1), all $30 of

the P group’s 2018 consolidated taxable

income is offset by the 2017 CNOL carryover without limitation. The remaining

$60 of the P group’s 2017 CNOL is carried over to 2021 under section 172(b)(1)

(A)(ii)(I).

(3) Under section 172(b)(1)(D)(i)(I),

the P group’s $40 2019 CNOL is carried

back to the five taxable years preceding

the year of the loss. Thus, the P group’s

$40 2019 CNOL is carried back to offset

$40 of its 2014 consolidated taxable income.

(4) Under section 172(a)(2) and paragraph (a)(2)(i) of this section, the P

group’s CNOL deduction for 2021 equals

the aggregate amount of pre-2018 NOLs

carried to 2021 plus the group’s post-2017

CNOL deduction limit. The P group has

$60 of pre-2018 NOLs carried to 2021

($90 - $30). Because no member of the

November 16, 2020

2017

($90)

2018

$30

2019

($40)

P group is a nonlife insurance company,

paragraph (a)(2)(iii)(A) of this section

applies to determine the computation of

the group’s post-2017 CNOL deduction

limit for 2021. See also section 172(a)(2)

(B). Therefore, the post-2017 CNOL deduction limit of the P group for 2021 is

$48, which equals the lesser of the aggregate amount of post-2017 NOLs carried

to 2021 ($100), or 80 percent of the excess of the P group’s consolidated taxable

income for that year computed without

regard to any deductions under sections

172, 199A, and 250 ($120) over the aggregate amount of pre-2018 NOLs carried

to 2021 ($60) (that is, 80 percent x $60).

Thus, the P group’s CNOL deduction for

2021 equals $108 ($60 pre-2018 NOLs

carried to 2021 + $48 post-2017 CNOL

deduction limit). See section 172(a)(2)

and paragraph (a)(2)(i) of this section. The

P group offsets $108 of its $120 of 2021

1044

2020

($100)

2021

$120

consolidated taxable income, resulting

in $12 of consolidated taxable income in

2021. The remaining $52 of the P group’s

2020 CNOL ($100 - $48) is carried over

to future taxable years. See section 172(b)

(1)(A)(ii)(II).

(3) * * *

(ii) * * *

(C) Waiver of carryback period for

losses in taxable years to which statutorily amended carryback rules apply. For

further information, see §1.1502-21T(b)

(3)(ii)(C).

(D) Examples. For further information,

see §1.1502-21T(b)(3)(ii)(D).

*****

(c) * * *

(1) * * *

(i) General rule. Except as provided

in paragraph (g) of this section (relating

to an overlap with section 382), the aggregate of the net operating loss carry-

Bulletin No. 2020–47

overs and carrybacks of a member (SRLY

member) arising (or treated as arising) in

SRLYs (SRLY NOLs) 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 (cumulative register). For this

purpose—

*****

(E) If a limitation on the amount of

taxable income that may be offset under

section 172(a) (see paragraph (a)(2) of

this section) applies in a taxable year to a

member whose carryovers or carrybacks

are subject to a SRLY limitation (SRLY

member), the amount of net operating

loss subject to a SRLY limitation that is

available for use by the group in that year

is limited to the percentage of the balance

in the cumulative register that would be

available for offset under section 172(a) if

the SRLY member filed a separate return

and reported as taxable income in that year

the amount contained in the cumulative

register. For example, assume that a consolidated group has a SRLY member that

is a corporation other than a nonlife insurance company, and that the SRLY member

has a SRLY NOL that arose in a taxable

year beginning after December 31, 2017

(post-2017 NOL). The group’s consolidated taxable income for a consolidated

return year beginning after December 31,

2020 is $200, but the cumulative register

has a positive balance of only $120 (and

no other net operating loss carryovers or

carrybacks are available for the year). Because the SRLY limitation would be $96

($120 x 80 percent), only $96 of SRLY

loss may be used, rather than $160 ($200 x

80 percent). In addition, to the extent that

this paragraph (c)(1)(i)(E) applies, the cumulative register is decreased by the full

amount of income required under section

172(a) to support the amount of SRLY

NOL absorption. See, for example, paragraph (c)(1)(iii)(A) and (B) of this section

for examples illustrating the application of

this rule.

*****

(iii) Examples. For purposes of the

examples in this paragraph (c)(1)(iii), no

corporation is a nonlife insurance com-

Bulletin No. 2020–47

pany and, unless otherwise specified, all

taxable years begin after December 31,

2020, and all CNOLs arise in taxable

years beginning after December 31, 2020.

The principles of this paragraph (c)(1) are

illustrated by the following examples:

(A) * * *

(2) T’s $100 net operating loss carryover from Year 1 arose in a SRLY. See

§1.1502-1(f)(2)(iii). P’s acquisition of

T was not an ownership change as defined by section 382(g). Thus, the $100

net operating loss carryover is subject

to the SRLY limitation in paragraph (c)

(1) of this section. The positive balance

of the cumulative register of T for Year

2 equals the consolidated taxable income

of the P group determined by reference

to only T’s items, or $70. However, due

to the 80-percent limitation and the application of paragraph (c)(1)(i)(E) of this

section, the SRLY limitation is $56 ($70

x 80 percent). No losses from equivalent

years are available, and the P group otherwise has sufficient consolidated taxable

income to support the CNOL deduction

($300 x 80 percent = $240). Therefore,

$56 of the SRLY net operating loss is

included under paragraph (a) of this section in the P group’s CNOL deduction for

Year 2. Although only $56 is absorbed,

the cumulative register of T is reduced by

$70, the full amount of income necessary

to support the $56 deduction after taking

into account the 80-percent limitation

($70 x 80 percent = $56).

*****

(B) * * *

(2) 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. Although

the P group has $160 of taxable income

in Year 4, the 80-percent limitation reduces the P group’s net operating loss deduction in that year to $128 ($160 x 80

percent). Under the principles of section

172, paragraph (b) of this section requires

that P’s $40 loss arising in Year 1 be the

first loss absorbed by the P group in Year

4. Absorption of this loss leaves $88 ($128

- $40) of the P group’s Year 4 consolidated

taxable income available for offset by loss

carryovers.

1045

(3) T’s Year 2 and Year 3 are SRLYs with

respect to the P group. See §1.1502-1(f)(2)

(ii). P’s acquisition of T was not an ownership change as defined by section 382(g).

Thus, T’s $50 net operating loss arising in

Year 2 and $60 net operating loss arising in

Year 3 are subject to the SRLY limitation.

The positive balance of the cumulative register of T for Year 4 equals the P group’s

consolidated taxable income determined by

reference to only T’s items, or $70. Under

paragraph (c)(1)(i)(E) of this section, after

taking into account the 80-percent limitation, T’s SRLY limitation is $56 ($70 x 80

percent). Therefore, the P group can absorb

up to $56 of T’s SRLY net operating losses in Year 4. Under the principles of section 172, T’s $50 SRLY net operating loss

from Year 2 is included under paragraph

(a) of this section in the P group’s CNOL

deduction for Year 4. After absorption of

this loss, under paragraph (c)(1)(i) of this

section, $6 of SRLY limit remains in Year

4 ($56 - $50). Further, the total amount of

Year 4 consolidated taxable income available for offset by other loss carryovers under section 172(a) is $38 ($88 - $50).

(4) P and T each carry over net operating losses to Year 4 from a taxable year

ending on the same date (that is, Year 3).

The losses carried over from Year 3 total $180. However, the remaining Year

4 SRLY limit is $6. Therefore, the total

amount of loss available for absorption is

$126 ($120 allocable to P and $6 allocable

to T). Under paragraph (b) of this section,

the losses available for absorption that are

carried over from Year 3 are absorbed on

a pro rata basis, even though one loss arises in a SRLY and the other loss does not.

Thus, $36.19 of P’s Year 3 loss is absorbed

($120/($120 + $6)) x $38 = $36.19. In addition, $1.81 of T’s Year 3 loss is absorbed

($6/($120 + $6)) x $38 = $1.81.

(5) After deduction of T’s SRLY net

operating losses in Year 4, the cumulative

register of T is adjusted pursuant to paragraph (c)(1)(i)(E) of this section. A total of

$51.81 of SRLY net operating losses were

absorbed in Year 4 ($50 + $1.81). After

taking into account the 80-percent limitation, the amount of income necessary to

support this deduction is $64.76 ($64.76

x 80 percent = $51.81). Therefore, the

cumulative register of T is decreased by

$64.76, and $5.24 remains in the cumulative register ($70 - $64.76).

November 16, 2020

(6) P carries its remaining $83.81 ($120

- $36.19) Year 3 net operating loss and T

carries its remaining $58.19 ($60 - $1.81)

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 P group’s consolidated taxable

income determined by reference to only

T’s items is a CNOL of $4. Therefore, the

positive balance of the cumulative register

of T in Year 5 equals $1.24 ($5.24 - $4).

Under paragraph (c)(1)(i)(E) of this section, after taking into account the 80-percent limitation, T’s SRLY limitation is

$0.99 ($1.24 x 80 percent). For Year 5,

the total amount of Year 5 consolidated

taxable income available for offset by loss

carryovers as a result of the 80-percent

limitation is $72 ($90 x 80 percent). Under paragraph (b) of this section, the losses carried over from Year 3 are absorbed

on a pro rata basis, even though one loss

arises in a SRLY and the other loss does

not. Therefore, $71.16 of P’s Year 3 loss

is absorbed (($83.81/($83.81 + $0.99)) x

$72 = $71.16). In addition, $0.84 of T’s

Year 3 losses is absorbed (($0.99/($83.81

+ $0.99)) x $72 = $0.84).

*****

(D) * * *

(2) Under §1.1502-15(a), T’s $100 of

ordinary loss in Year 3 constitutes a builtin loss that is subject to the SRLY limitation under paragraph (c) of this section.

The amount of the limitation is determined by treating the deduction as a net

operating loss carryover from a SRLY.

The built-in loss is therefore subject to

both a SRLY limitation and the 80-percent

limitation for Year 3. The built-in loss is

treated as a net operating loss carryover

solely for purposes of determining the extent to which the loss is not allowed by

reason of the SRLY limitation, and for all

other purposes the loss remains a loss arising in Year 3. See §1.1502-21(c)(1)(i)(D).

Consequently, under paragraph (b) of this

section, the built-in loss is absorbed by

the P group before the net operating loss

carryover from Year 1 is absorbed. The

positive balance of the cumulative register

of T for Year 3 equals the P group’s consolidated taxable income determined by

reference to only T’s items, or $60. Under

paragraph (c)(1)(i)(E) of this section, after

taking into account the 80-percent limita-

November 16, 2020

tion, the SRLY limitation for Year 3 is $48

($60 x 80 percent). Therefore, $48 of the

built-in loss is absorbed by the P group.

None of T’s $100 SRLY net operating loss

carryover from Year 1 is allowed.

(3) After deduction of T’s $48 SRLY

built-in loss in Year 4, the cumulative register of T is adjusted pursuant to paragraph

(c)(1)(i)(E) of this section. After taking

into account the 80-percent limitation, the

amount of income necessary to support

this deduction is $60 ($60 x 80 percent =

$48). Therefore, the cumulative register of

T is decreased by $60, and zero remains in

the cumulative register ($60 - $60).

(4) Under §1.1502-15(a), the $52 balance of the built-in loss that is not allowed

in Year 3 because of the SRLY limitation

and the 80-percent limitation is treated as

a $52 net operating loss arising in Year 3

that is subject to the SRLY limitation because, under paragraph (c)(1)(ii) of this

section, Year 3 is treated as a SRLY. The

built-in loss is carried to other years in accordance with the rules of paragraph (b)

of this section. The positive balance of the

cumulative register of T for Year 4 equals

$40 (zero from Year 3 + $40). Under paragraph (c)(1)(i)(E) of this section, after

taking into account the 80-percent limitation, the SRLY limitation for Year 4 is $32

($40 x 80 percent). Therefore, under paragraph (c) of this section, $32 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.

(5) After deduction of T’s $32 SRLY

net operating loss in Year 4, the cumulative register of T is adjusted pursuant to

paragraph (c)(1)(i)(E) of this section. After taking into account the 80-percent limitation, the amount of income necessary

to support this deduction is $40 ($40 x 80

percent = $32). Therefore, the cumulative

register is decreased by $40, and zero remains in the cumulative register ($40 $40).

(E) * * *

(2) For Year 2, the P group computes

separate SRLY limits for each of T’s

SRLY carryovers from Year 1. The group

determines its ability to use its capital loss

carryover before it determines its ability to

use its ordinary loss carryover. Under section 1212, because the P group has no Year

2 capital gain, it cannot absorb any capital

losses in Year 2. T’s Year 1 net capital loss

1046

and the P group’s Year 2 consolidated net

capital loss (all of which is attributable to

T) are carried over to Year 3.

(3) The P group’s ability to deduct net

operating losses in Year 2 is subject to

the 80-percent limitation, based on the P

group’s consolidated taxable income for

the year. Thus, the group’s limitation for

Year 2 is $72 ($90 x 80 percent). However, use of the Year 1 net operating loss

also is subject to the SRLY limitation. The

positive balance of the cumulative register of T applicable to SRLY net operating

losses for Year 2 equals the P group’s consolidated taxable income determined by

reference to only T’s items, or $60. Under

paragraph (c)(1)(i)(E) of this section, after

taking into account the 80-percent limitation, the SRLY limitation for Year 2 is $48

($60 x 80 percent). Therefore, only $48 of

T’s Year 1 SRLY net operating loss is absorbed by the P group in Year 2. T carries

over its remaining $52 of its Year 1 loss

to Year 3.

(4) After deduction of T’s SRLY net

operating losses in Year 2, the net operating loss cumulative register is adjusted

pursuant to paragraph (c)(1)(i)(E) of this

section. The P group deducted $48 of

T’s SRLY net operating losses in Year 2.

After taking into account the 80-percent

limitation, the amount of taxable income

necessary to support this deduction is $60

($60 x 80 percent = $48). Therefore, the

net operating loss cumulative register of T

is decreased by $60, and zero remains in

the net operating loss cumulative register

($60 - $60).

(5) For Year 3, the P group again computes separate SRLY limits for each of

T’s SRLY carryovers from Year 1. The

group has consolidated net capital gain

(without taking into account a net capital loss carryover deduction) of $30. Under §1.1502-22(c), the aggregate amount

of T’s $50 capital loss carryover from

Year 1 that is included in computing the

P group’s consolidated net capital gain

for all years of the group (in this case,

Years 2 and 3) may not exceed $30 (the

aggregate consolidated net capital gain

computed by reference only to T’s items,

including losses and deductions actually

absorbed (that is, $30 of capital gain in

Year 3)). Thus, the P group may include

$30 of T’s Year 1 capital loss carryover

in its computation of consolidated net

Bulletin No. 2020–47

capital gain for Year 3, which offsets the

group’s capital gains for Year 3. T carries

over its remaining $20 of its Year 1 capital loss to Year 4. Therefore, the capital

loss cumulative register of T is decreased

by $30, and zero remains in the capital

loss cumulative register ($30 - $30). Further, because the net operating loss cumulative register includes all taxable income

of T included in the P group, as well as

all absorbed losses of T (including capital

items), a zero net increase occurs in the

net operating loss cumulative register.

The P group carries over the Year 2 consolidated net capital loss to Year 4.

(6) The P group’s ability to deduct net

operating losses in Year 3 is subject to

the 80-percent limitation, based on the P

group’s consolidated taxable income for

the year. Thus, the P group’s taxable income for Year 3 that can be offset, before

use of net operating losses, is $40 (80 percent x the sum of zero capital gain, after

use of the capital loss carryover, plus $50

of ordinary income). However, use of the

Year 1 net operating loss also is subject to

the SRLY limitation. The positive balance

of the cumulative register of T applicable

to SRLY net operating losses for Year 3

equals the P group’s consolidated taxable

income determined by reference only to

T’s items, or $40. This amount equals the

sum obtained by adding the zero carryover from Year 2, a net inclusion of zero

from capital items implicated in Year 3

($30 - $30), and $40 of taxable income

in Year 3. Under paragraph (c)(1)(i)(E) of

this section, after taking into account the

80-percent limitation, the SRLY limitation for Year 3 is $32 ($40 x 80 percent).

Therefore, only $32 of the Year 1 net operating loss is absorbed by the P group in

Year 3. T carries over its remaining $20 of

its Year 1 loss to Year 4.

(F) Example 6: Pre-2018 NOLs and

post-2017 NOLs. (1) Individual A owns P.

On January 1, 2017, A forms T. P and T are

calendar-year taxpayers. In 2017, T sustains a $100 net operating loss that is carried over. During 2018, 2019, and 2020,

T deducts a total of $90 of its 2017 net

operating loss against its taxable income,

and T carries over the remaining $10 of its

2017 net operating loss. In 2021, T sustains a net operating loss of $50. On December 31, 2021, P acquires all the stock

of T, and T becomes a member of the P

Bulletin No. 2020–47

group. The P group has $300 of consolidated taxable income in 2022 (computed

without regard to the CNOL deduction).

Such consolidated taxable income would

be $70 if determined by reference to only

T’s items. The P group has no other SRLY

net operating loss carryovers or CNOL

carryovers.

(2) T’s remaining $10 of net operating loss carryover from 2017 and its $50

net operating loss carryover from 2021

are both SRLY losses in the P group.

See §1.1502-1(f)(2)(iii). P’s acquisition

of T was not an ownership change as

defined by section 382(g). Thus, T’s net

operating loss carryovers are subject to

the SRLY limitation in paragraph (c)(1)

of this section. The SRLY limitation for

the P group’s 2022 consolidated return

year is consolidated taxable income determined by reference to only T’s $70 of

items.

(3) Because T’s oldest (2017) carryover was sustained in a year beginning

before January 1, 2018, its use is not subject to limitation under section 172(a)(2)

(B). Therefore, all $10 of T’s 2017 SRLY

net operating loss (that is, a pre-2018

NOL) is included under paragraph (a) of

this section in the P group’s CNOL deduction for 2022. After deduction of T’s

$10 SRLY net operating loss from 2017,

the cumulative register of T is reduced on

a dollar-for-dollar basis, pursuant to paragraph (c)(1)(i) of this section. Therefore,

the cumulative register of T is decreased

by $10, and $60 remains in the cumulative

register ($70 - $10).

(4) The P group’s deduction of T’s

2021 net operating loss is subject to both

a SRLY limitation and the 80-percent

limitation under section 172(a)(2)(B)(ii).

Therefore, the total limitation on the use

of T’s 2021 net operating loss in the P

group is $48 (the remaining cumulative

register of $60 x 80 percent). No losses

from equivalent years are available, and

the P group otherwise has sufficient consolidated taxable income to support the

CNOL deduction ($290 x 80 percent =

$232). Therefore, $48 of T’s 2021 SRLY

net operating loss is included under paragraph (a) of this section in the P group’s

CNOL deduction for 2022. The remaining

$2 of T’s 2021 SRLY net operating loss

($50 - $48) is carried over to the P group’s

2023 consolidated return year.

1047

(5) After deduction of T’s $48 SRLY

NOL in 2022, the cumulative register of

T is adjusted pursuant to paragraph (c)

(1)(i)(E) of this section. After taking into

account the 80-percent limitation, the

amount of income necessary to support

this deduction is $60 ($60 x 80 percent =

$48). Therefore, the cumulative register of

T is decreased by $60, and zero remains in

the cumulative register ($60 - $60).

(2) * * *

(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, a

net operating loss may not offset income

in excess of any limitations under section

172(a) and paragraph (a)(2) of this section. Additionally, any dual consolidated

loss may not reduce the taxable income

to an extent greater than that allowed under section 1503(d) and §§ 1.1503(d)-1

through 1.1503(d)-8. See also §1.150247(k) (relating to preemption of rules for

life-nonlife groups).

*****

(viii) Examples. For purposes of the

examples in this paragraph (c)(2)(viii), no

corporation is a nonlife insurance company or has any farming losses. The principles of this paragraph (c)(2) are illustrated

by the following examples:

*****

(B) * * *

(3) In Year 4, the M group has $10 of

consolidated taxable income (computed

without regard to the CNOL deduction for

Year 4). That consolidated taxable income

would be $45 if determined by reference

only to the items of P, S, and T, the members included in the SRLY subgroup with

respect to P’s loss carryover. Therefore,

the positive balance of the cumulative

register of the P SRLY subgroup for Year

4 equals $45 and, due to the application

of the 80-percent limitation under paragraph (c)(2)(v) of this section, the SRLY

subgroup limitation under this paragraph

(c)(2) is $36 ($45 x 80 percent). However,

the M group has only $10 of consolidated

taxable income in Year 4. Thus, due to the

80-percent limitation and the application

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

M group’s deduction of all net operating

November 16, 2020

losses in Year 4 is limited to $8 ($10 x 80

percent). As a result, the M group deducts

$8 of P’s SRLY net operating loss carryover, and the remaining $37 is carried

over to Year 5.

(4) After deduction of $8 of P’s SRLY

net operating loss in Year 4, the cumulative register of the P SRLY subgroup

is adjusted pursuant to paragraph (c)(1)

(i)(E) of this section. After taking into

account the 80-percent limitation, the

amount of income necessary to support

this deduction is $10 ($10 x 80 percent =

$8). Therefore, the cumulative register of

the P SRLY subgroup is decreased by $10,

and $35 remains in the cumulative register

($45 - $10).

(5) In Year 5, the M group has $100 of

consolidated taxable income (computed

without regard to the CNOL deduction for

Year 5). None of P, S, or T has any items

of income, gain, deduction, or loss in Year

5. Although the members of the P SRLY

subgroup do not contribute to the $100

of consolidated taxable income in Year

5, the positive balance of the cumulative

register of the P SRLY subgroup for Year

5 is $35 and, due to the application of the

80-percent limitation under paragraph (c)

(2)(v) of this section, the SRLY subgroup

limitation under this paragraph (c)(2) is

$28 ($35 x 80 percent). Because of the

80-percent limitation and the application

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

group’s deduction of net operating losses in Year 5 is limited to $80 ($100 x 80

percent). Because the $28 of net operating

loss available to be absorbed is less than

80 percent of the M group’s consolidated

taxable income, $28 of P’s SRLY net operating loss is absorbed in Year 5, and the

remaining $9 ($37 - $28) is carried over

to Year 6.

(6) After deduction of $28 of P’s SRLY

net operating loss in Year 5, the cumulative register of the P SRLY subgroup is adjusted pursuant to paragraph (c)(1)(i)(E)

of this section. After taking into account

the 80-percent limitation, the amount

of income necessary to support this deduction is $35 ($35 x 80 percent = $28).

Therefore, the cumulative register of the P

SRLY subgroup is decreased by $35, and

zero remains in the cumulative register

($35 - $35).

*****

(h) * * *

November 16, 2020

(9) For the applicability dates of paragraphs (b)(3)(ii)(C) and (b)(3)(ii)(D) of

this section, see §1.1502-21T(h)(9).

(10) The rules of paragraphs (a), (b)(1),

(b)(2)(iv), and (c)(1)(i)(E) of this section

apply to taxable years beginning after December 31, 2020.

Par. 4. Section 1.1502-47 is amended:

1. By revising paragraphs (a)(2)(i) and

(ii).

2. By removing paragraph (a)(3).

3. By redesignating paragraph (a)(4) as

paragraph (a)(3).

4. By removing paragraphs (b) and (c).

5. By redesignating paragraph (d) as

paragraph (b).

6. By revising newly redesignated

paragraphs (b)(1), (2), (3), (4), (5), (10),

(11), and (13).

7. In newly redesignated paragraph (b)

(14), by designating Examples 1 through

14 as paragraphs (b)(14)(i) through (xiv),

respectively.

8. In newly redesignated paragraph (b)

(14)(i), by adding a sentence at the end of

the paragraph.

9. By revising newly redesignated

paragraph (b)(14)(ii).

10. By removing newly redesignated

paragraph (b)(14)(xiv).

11. By redesignating paragraph (e) as

paragraph (c).

12. By removing newly redesignated

paragraphs (c)(4) and (5).

13. By redesignating paragraph (c)(6)

as paragraph (c)(4).

14. By redesignating paragraph (f) as

paragraph (d).

15. By revising newly redesignated

paragraph (d)(5).

16. By removing the last sentence of

newly redesignated paragraph (d)(6).

17. By removing newly redesignated

paragraph (d)(7)(ii).

18. By redesignating paragraph (d)(7)

(iii) as paragraph (d)(7)(ii).

19. By revising newly redesignated

paragraph (d)(7)(ii).

20. By redesignating paragraph (g) as

paragraph (e).

21. In newly redesignated paragraph

(e)(2), by removing the language “partial”

everywhere it appears.

22. By removing newly redesignated

paragraph (e)(3).

23. By redesignating paragraph (h) as

paragraph (f).

1048

24. By revising newly redesignated

paragraph (f)(2)(iii).

25. In newly designated paragraph (f)

(2)(v), by removing the word “partial” everywhere it appears.

26. In newly redesignated paragraph (f)

(2)(v), by adding a sentence at the end of

the paragraph.

27. By revising newly redesignated

paragraph (f)(2)(vi) and (vii).

28. By removing newly redesignated

paragraph (f)(3).

29. By redesignating newly redesignated paragraph (f)(4) as paragraph (f)(3).

30. By revising newly redesignated paragraph (f)(3)(ii).

31. By adding a new paragraph (g).

32. By removing paragraphs (j), (k),

and (l).

33. By redesignating paragraph (m)

as paragraph (h), and redesignating paragraph (n) as paragraph (j).

34. In newly redesignated paragraph

(h), by removing the language “partial”

everywhere it appears.

35. In newly redesignated paragraph

(h)(2)(ii), by adding a sentence at the end

of the paragraph.

36. In newly redesignated paragraph

(h)(3)(iv), by adding a sentence at the end

of the paragraph.

37. In newly redesignated paragraph

(h)(3)(viii), by removing the language

“common parent’s election” and adding

in its place “election by the agent for the

group (within the meaning of §1.150277)”.

38. In newly redesignated paragraph

(h)(3)(ix), by removing the last two sentences.

39. By removing newly redesignated

paragraph (h)(4).

40. By redesignating newly redesignated paragraph (h)(5) as paragraph (h)(4).

41. By revising newly redesignated

paragraph (h)(4) introductory text.

42. In newly redesignated paragraph (h)

(4), by redesignating Examples 1 through

6 as paragraphs (h)(4)(i) through (vi).

43. By revising newly redesignated

paragraphs (h)(4)(ii) and (iii).

44. By removing newly redesignated

paragraphs (h)(4)(v) and (vi).

45. By revising redesignated paragraph

(j)(2)(iii).

46. By removing newly redesignated

paragraph (j)(2)(v).

Bulletin No. 2020–47

47. By redesignating newly redesignated paragraph (j)(2)(vi) as paragraph (j)(2)

(v).

48. By revising newly redesignated

paragraph (j)(3).

49. By redesignating paragraphs (q),

(r), and (s) as paragraphs (k), (l), and (m),

respectively.

50. By adding a new paragraph (n).

51. By removing paragraphs (o), (p),

and (t).

Paragraph

1.1502-47(a)(1)

Redesignations

N/A

1.1502-47(a)(1)

N/A

1.1502-47(a)(1)

N/A

1.1502-47(a)(4)

1.1502-47(a)(3)

1.1502-47(a)(4)

1.1502-47(d)(12)(i)(A),

(d)(12)(i)(C), (d)(12)(i)

(D), (d)(12)(iii), (d)(12)

(iv), (d)(12)(v), (d)(12)

(v)(B), (d)(12)(v)(C), (d)

(12)(v)(D), (d)(12)(vi),

(d)(12)(vii), and (d)(12)

(viii)(F)

1.1502-47(d)(12)(iii)

1.1502-47(d)(12)(iv)

1.1502-47(d)(12)(v)(B)

1.1502-47(a)(3)

1.1502-47(b)(12)(i)(A),

(b)(12)(i)(C), (b)(12)(i)

(D), (b)(12)(iii), (b)(12)

(iv), (b)(12)(v), (b)(12)(v)

(B), (b)(12)(v)(C), (b)(12)

(v)(D), (b)(12)(vi), (b)

(12)(vii), and (b)(12)(viii)

(F), respectively

1.1502-47(b)(12)(iii)

subdivision (iii)

1.1502-47(b)(12)(iv)

subdivision (iv)

1.1502-47(b)(12)(v)(B)

(i.e., sections 11, 802,

821, or 831)

1.1502-47(d)(12)(vi)

1.1502-47(d)(12)(vii)

1.1502-47(d)(12)(viii)(A)

1.1502-47(b)(12)(vi)

1.1502-47(b)(12)(vii)

1.1502-47(b)(12)(viii)(A)

subdivision (vi)

return year and even

(i.e., total reserves in

section 801(c))

1.1502-47(d)(12)(viii)(D)

and (F)

1.1502-47(d)(14)

1.1502-47(d)(14)

1.1502-47(d)(14),

Example 1

1.1502-47(b)(12)(viii)(D)

and (F), respectively

1.1502-47(b)(14)

1.1502-47(b)(14)

1.1502-47(b)(14)(i)

Bulletin No. 2020–47

Remove

section 802 or 821

(relating respectively to

life insurance companies

and to certain mutual

insurance companies)

life insurance companies

and mutual insurance

companies may

composition and its

consolidated tax

52. In the following table, for each

section designated or redesignated under

these regulations (as indicated in the second column), removing the language in

the third column and adding the language

in the fourth column with the frequency

indicated in the fifth column:

Add

section 801 (relating to

life insurance companies)

Frequency

Once

life insurance companies

may

Once

composition, its

consolidated taxable

income (or loss), and its

consolidated tax

§§1.1502-0 through

1.1502-100

848

(b)(12)

Once

Once

Once

Once

subdivision (viii)

paragraph (b)(12)(iii)

paragraph (b)(12)(iv)

(for example, section 11,

section 801, or section

831)

paragraph (b)(12)(vi)

return year even

(that is, total reserves

in section 816(c), as

modified by section

816(h))

paragraph (b)(12)(viii)

Illustrations

paragraph (d)

1913

Examples

paragraph (b)

2012

Once

Once

Once

§§ 1.1502-1 through

1.1502-80

844

(d)(12)

1049

Once

Once

Each place it

appears

Once

Once

Once

Once

November 16, 2020

Paragraph

1.1502-47(d)(14),

Examples 2 through 4, 8,

10, and 12

1.1502-47(d)(14),

Examples 1 through 3

1.1502-47(d)(14),

Examples 1 through 5 and

8 through 13

Redesignations

1.1502-47(b)(14)(ii)

through (iv), (viii), (x),

and (xii), respectively

1.1502-47(b)(14)(i)

through (iii), respectively

1.1502-47(b)(14)

(i) through (v) and

(viii) through (xiii),

respectively

1.1502-47(d)(14),

1.1502-47(b)(14)(v)

Examples 5 through 7

through (vii) and (ix),

and 9

respectively

1.1502-47(d)(14),

1.1502-47(b)(14)(ii)

Examples 2 through 5 and through (v) and (viii)

8 through 12

through (xii), respectively

1.1502-47(d)(14),

1.1502-47(b)(14)(ii), (iii),

Examples 2, 3, and 12

and (xii), respectively

1.1502-47(d)(14),

1.1502-47(b)(14)(iii)

Example 3

1.1502-47(d)(14),

1.1502-47(b)(14)(iii)

Example 3

1.1502-47(d)(14),

1.1502-47(b)(14)(v)

Example 5

1.1502-47(d)(14),

1.1502-47(b)(14)(xii)

Example 12

1.1502-47(e)(1)

1.1502-47(c)(1)

Remove

1974

Add

2012

Frequency

Each place it

appears

1980

2018

1982

2020

Each place it

appears

Each place it

appears

1983

2021

Each place it

appears

(d)(12)

(b)(12)

Each place it

appears

stock casualty

nonlife insurance

subparagraph (d)(12)(v)

(B) and (E)

e.g.

paragraph (b)(12)(v)(B)

and (D)

for example

Each place it

appears

Once

i.e.

in other words

Once

casualty

nonlife insurance

Once

life company.

Once

§1.1502-75(c),

Once

1.1502-47(e)(3)

1.1502-47(c)(3)

1.1502-47(f)(3)

1.1502-47(d)(3)

life company or an

ineligible mutual

company.

§ 1.1502-75(c) and

paragraph (e)(4) of this

section,

1981

1.1502-47(f)(3)

1.1502-47(d)(3)

1982

1.1502-47(f)(3)

1.1502-47(d)(3)

1.1502-47(f)(7)(i)

1.1502-47(f)(7)(i)

1.1502-47(d)(7)(i)

1.1502-47(d)(7)(i)

1.1502-47(g)

1.1502-47(g)(1)

1.1502-47(g)(1)

1.1502-47(g)(1)

1.1502-47(g)(2)

1.1502-47(g)(2)

1.1502-47(g)(2)

1.1502-47(h)(1)

1.1502-47(e)

1.1502-47(e)(1)

1.1502-47(e)(1)

1.1502-47(e)(1)

1.1502-47(e)(2)

1.1502-47(e)(2)

1.1502-47(e)(2)

1.1502-47(f)(1)

applying §§ 1.1502-13,

1.1502-18, and 1.1502-19

paragraph (g)

sections 802(a), 821(a),

and 831(a)

three

paragraph (h)

paragraph (n)

paragraph (g)(1)

paragraph (j)

paragraph (m)

paragraph (g)(2)

paragraph (h)

November 16, 2020

1050

Once

2019

Each place it

appears

2020

Each place it

appears

applying §§1.1502-13 and Once

1.1502-19

paragraph (e)

Once

sections 801(a) and 831(a) Once

two

paragraph (f)

paragraph (j)

paragraph (e)(1)

paragraph (g)(1)

paragraph (h)

paragraph (e)(2)

paragraph (f)

Once

Once

Once

Once

Once

Once

Once

Once

Bulletin No. 2020–47

Paragraph

1.1502-47(h)(1)

Redesignations

1.1502-47(f)(1)

Add

includes insurance

company taxable income

Frequency

Once

§1.1502-21, the rules in

this paragraph (f)(2)

Once

§1.1502-21(e)

Once

year, §1.1502-21

Once

nonlife subgroup loss

paragraph (f)(2)

§1.1502-22

Once

Once

Once

paragraph (f)(3)

§1.1502-22

Once

Once

§1.1502-22(b),

Once

allowed under section

832(c)(5),

Once

1.1502-47(h)

Remove

includes separate mutual

insurance company

taxable income (as

defined in section 821(b))

and insurance company

taxable income

§§ 1.1502-21 or 1.150221A (as appropriate), the

rules in this subparagraph

(2)

§§ 1.1502-21(A)(f)

or 1.1502-21(e) (as

appropriate)

year beginning after

December 31, 1981,

§§ 1.1502-21A or 1.150221 (as appropriate)

nonlife loss

subparagraph (2)

§§ 1.1502-22 or 1.150222A (as appropriate)

subparagraph (4)

§§ 1.1502-22 or 1.150222A(a) (as appropriate)

§§ 1.1502–22A(b)(1) or

1.1502-22(b)

allowed under section

822(c)(6) or section

832(c)(5),

paragraph (g)

1.1502-47(h)(2)(i)

1.1502-47(f)(2)(i)

1.1502-47(h)(2)(ii)

1.1502-47(f)(2)(ii)

1.1502-47(h)(2)(iv)

1.1502-47(f)(2)(iv)

1.1502-47(h)(2)(iv)

1.1502-47(h)(2)(v)

1.1502-47(h)(4)(i)

1.1502-47(f)(2)(iv)

1.1502-47(f)(2)(v)

1.1502-47(f)(3)(i)

1.1502-47(h)(4)(i)

1.1502-47(h)(4)(i)

1.1502-47(f)(3)(i)

1.1502-47(f)(3)(i)

1.1502-47(h)(4)(iii)

1.1502-47(f)(3)(iii)

1.1502-47(h)(4)(iii)(A)

1.1502-47(f)(3)(iii)(A)

1.1502-47(m)

paragraph (e)

1.1502-47(m)

1.1502-47(h)

paragraph (h)

paragraph (f)

1.1502-47(m)

1.1502-47(h)

paragraph (l)

paragraph (g)

1.1502-47(m)

1.1502-47(h)

paragraph (m)

paragraph (h)

1.1502-47(m)(2)(ii)

1.1502-47(h)(2)(ii)

§1.1502-21

1.1502-47(m)(2)(ii)

1.1502-47(h)(2)(ii)

§1.1502-22

Once

1.1502-47(m)(3)(i)

1.1502-47(h)(3)(i)

1.1502-47(h)(3)(i)

But see paragraph (h)(3)

(ix) of this section

arising in separate return

years

Once

1.1502-47(m)(3)(i)

1.1502-47(m)(3)(i)

1.1502-47(h)(3)(i)

§§ 1502-21 or 1.150221A (as appropriate)

§§ 1.1502-22 or 1.150222A (as appropriate)

But see subdivision (ix) of

this paragraph (m)(3)

arising in separate

return years ending after

December 31, 1980,

and 1.1502-22 (or

§§ 1.1502-21A and

1.1502-22A, as

appropriate).

Each place it

appears

Each place it

appears

Each place it

appears

Each place it

appears

Once

and 1.1502-22.

Once

Bulletin No. 2020–47

1051

Once

November 16, 2020

Paragraph

1.1502-47(m)(3)(iii)

Redesignations

1.1502-47(h)(3)(iii)

Remove

consolidated LO

1.1502-47(m)(3)(v)

1.1502-47(m)(3)(v)

1.1502-47(h)(3)(v)

1.1502-47(h)(3)(v)

1.1502-47(m)(3)(vi)(A)

1.1502-47(m)(3)(vii)(A)

1.1502-47(h)(3)(vi)(A)

1.1502-47(h)(3)(vii)(A)

1.1502-47(m)(3)(vii)(A)

1.1502-47(h)(3)(vii)(A)

GO or TII

LICTI (as determined

under paragraph (j) of this

section) for any

subparagraph (3)

notwithstanding § 1.150221A(b)(3)(ii) or 1.150221(b),

taxable income for that

year.

1.1502-47(m)(3)(vii)(B)

1.1502-47(h)(3)(vii)(B)

1.1502-47(m)(3)(viii)

1.1502-47(m)(3)(ix)

1.1502-47(m)(3)(ix)

1.1502-47(h)(3)(viii)

1.1502-47(h)(3)(ix)

1.1502-47(h)(3)(ix)

1.1502-47(m)(3)(x)

1.1502-47(h)(3)(x)

1.1502-47(m)(3)(xii)

1.1502-47(h)(3)(xii)

1.1502-47(m)(3)(xii)

1.1502-47(m)(5),

Examples 1 through 4

1.1502-47(m)(5),

Examples 1 through 4

1.1502-47(m)(5),

Example 1

1.1502-47(m)(5),

Example 1

1.1502-47(h)(3)(xii)

1.1502-47(h)(4)(i)

through (iv), respectively

1.1502-47(h)(4)(i)

through (iv), respectively

1.1502-47(h)(4)(i)

(2) or (4)

1982

1.1502-47(h)(4)(i)

attributable to I (an

ineligible member)

1.1502-47(m)(5),

Example 1

1.1502-47(h)(4)(i)

of this section. The result

would be

1.1502-47(m)(5),

Example 4

1.1502-47(m)(5),

Example 4

1.1502-47(m)(5),

Example 4

1.1502-47(m)(5),

Example 4

1.1502-47(m)(5),

Example 4

1.1502-47(h)(4)(iv)

1.1502-47(h)(4)(iv)

of this section or under

§ 1.1502-15A.

taxable income is $35

1.1502-47(h)(4)(iv)

November 16, 2020

(A) of this subdivision

(vii)

section 172(b)(3)(C)

243(b)(2)

return year ending after

December 31, 1980,

LICTI (as defined in

paragraph (j) of this

section) in the particular

carryback of a

consolidated LO

i.e.

paragraph (d)(13)

Add

life consolidated net

operating loss

taxable income

LICTI for any

Frequency

Once

paragraph (h)(3)

notwithstanding §1.150221(b),

Once

Once

taxable income for that

year, subject to the

limitation in section

172(a).

paragraph (h)(3)(vii)(A)

of this section

section 172(b)(3)

243(b)(3)

return year,

Once

LICTI in the particular

Once

Once

Once

Once

Once

Once

Once

carryback of a life

Once

consolidated net operating

loss

(2) or (3)

Once

2021

Each place it

appears

that is

Each place it

appears

paragraph (b)(13)

Once

attributable to I (an

ineligible member that is

not a nonlife insurance

company)

of this section and section

172(a). The result would

be

of this section.

Once

taxable income is $32.5

Once

30%

35%

Once

1.1502-47(h)(4)(iv)

(15)

(17.5)

Once

1.1502-47(h)(4)(iv)

(65)

(67.5)

Once

1052

Once

Once

Bulletin No. 2020–47

Paragraph

1.1502-47(m)(5),

Example 4

1.1502-47(n)

Redesignations

1.1502-47(h)(4)(iv)

Remove

(85)

Add

(82.5)

Frequency

Once

1.1502-47(j)

consolidated LO

Each place it

appears

1.1502-47(n)(1)

1.1502-47(n)(1)

1.1502-47(j)(1)

1.1502-47(j)(1)

paragraph (g)(1)

paragraph (n)(2) of this

section

1.1502-47(n)(1)

1.1502-47(j)(1)

1.1502-47(n)(2)

1.1502-47(n)(2)

1.1502-47(n)(2)(ii)

1.1502-47(j)(2)

1.1502-47(j)(2)

1.1502-47(j)(2)(ii)

paragraph (f)

paragraphs (h)(2) and (3)

consolidated LICTI

Once

Once

Once

1.1502-47(n)(2)(iv)

1.1502-47(j)(2)(iv)

1.1502-47(k)

1.1502-47(q)

1.1502-47(q)

1.1502-47(k)

1.1502-47(k)

Paragraphs (h)(3)(vi),

(vii), (x), and (xi)

§§1.1502-0 through

1.1502-100

paragraph (h)(3)(vi)

§1.1502-21

Once

1.1502-47(q)

1.1502-47(r)

1.1502-47(l)

consolidated net capital

loss (as determined under

paragraph (l)(4) of this

section).

paragraph (h)

paragraphs (m)(2) and (3)

consolidated partial

LICTI

Paragraphs (m)(3)(vi),

(vii), (x), and (xi)

§ 1.1502-1 through

1.1502-80

paragraph (m)(3)(vi)

§§ 1.1502-21A(b)(3)

and 1.1502-79A(a)

(3) (or § 1.1502-21, as

appropriate)

partial LICTI (or LO)

life consolidated net

operating loss and

consolidated operations

loss carryovers

paragraph (e)(1)

paragraph (j)(2) of this

section, subject to the

rules and limitations in

paragraph (j)(3) of this

section

consolidated net capital

loss.

1.1502-47(r)

1.1502-47(l)

§§ 1.1502-0 - 1.1502-80

1.1502-47(s)(1)(iii)

1.1502-47(m)(1)(iii)

1.1502-47(s)(1)(iv)

1.1502-47(s)(1)(v)

1.1502-47(s)(1)(v)

1.1502-47(m)(1)(iv)

1.1502-47(m)(1)(v)

1.1502-47(m)(1)(v)

paragraphs (g), (m), and

(n)

paragraph (h)

consolidated partial Life

(as defined by paragraph

(d)(3) of this section),

determined under

paragraph (j) of this

section,

Bulletin No. 2020–47

1053

Once

Once

Once

Once

Once

Once

LICTI (or life

Once

consolidated net operating

loss)

§§1.1502-0 through

Once

1.1502-100

paragraphs (e), (h), and (j) Once

paragraph (f)

consolidated Life

or life consolidated net

operating loss

Once

Once

Once

November 16, 2020

The additions and revisions read as follows:

§1.1502-47 Consolidated returns by

life-nonlife groups.

(a) * * *

(2) General method of consolidation—

(i) Subgroup method. The regulations

adopt a subgroup method to determine

consolidated taxable income. One subgroup is the group’s nonlife companies.

The other subgroup is the group’s life insurance companies. Initially, the nonlife

subgroup computes nonlife consolidated

taxable income and the life subgroup computes consolidated LICTI. A subgroup’s

income may in effect be reduced by a loss

of the other subgroup, subject to the limitations in sections 172 and 1503(c). The

life subgroup losses consist of life consolidated net operating loss, consolidated

operations loss carryovers from taxable

years beginning before January 1, 2018

(consolidated operations loss carryovers),

and life consolidated net capital loss. The

nonlife subgroup losses consist of nonlife

consolidated net operating loss and nonlife consolidated net capital loss. Consolidated taxable income is therefore defined

in pertinent part as the sum of nonlife consolidated taxable income and consolidated

LICTI, reduced by life subgroup losses

and/or nonlife subgroup losses.

(ii) Subgroup loss. A subgroup loss

does not actually affect the computation

of nonlife consolidated taxable income

or consolidated LICTI. It merely constitutes a bottom-line adjustment in reaching

consolidated taxable income. Furthermore, the amount of a subgroup’s loss, if

any, that is eligible to be carried back to

a prior taxable year first must be carried

back against income of the same subgroup

before it may be used as a setoff against

the other subgroup’s income in the taxable

year the loss arose. (See sections 172(b)

(1) and 1503(c)(1); see also §1.150221(b)). The carryback of losses from one

subgroup may not be used to offset income

of the other subgroup in the year to which

the loss is to be carried. This carryback of

one subgroup’s loss may “bump” the other

subgroup’s loss that, in effect, previously

reduced the income of the first subgroup.

The subgroup’s loss that is bumped in

appropriate cases may, in effect, reduce

November 16, 2020

a succeeding year’s income of either

subgroup. This approach gives the group

the tax savings of the use of losses, but

the bumping rule assures that, insofar as

possible, life deductions will be matched

against life income and nonlife deductions

against nonlife income.

*****

(b) * * *

(1) Life company. The term life company means a life insurance company as

defined in section 816 and subject to tax

under section 801. Section 816 applies to

each company separately.

(2) Nonlife insurance company. The

term nonlife insurance company has the

meaning provided in §1.1502-1(k).

(3) Life insurance company taxable

income. The term life insurance company

taxable income or LICTI has the meaning

provided in section 801(b).

(4) Group. The term group has the

meaning provided in §1.1502-1(a). Unless otherwise indicated in this section, a

group’s composition is determined without regard to section 1504(b)(2).

(5) Member. The term member has the

meaning provided in §1.1502-1(b). A life

company is tentatively treated as a member for any taxable year for purposes of

determining if it is an eligible corporation

under paragraph (b)(12) of this section

and, therefore, if it is an includible corporation under section 1504(c)(2). If such

a company is eligible and includible (under section 1504(c)(2)), it will actually be

treated as a member of the group.

*****

(10) Separate return year. The term

separate return year has the meaning

provided in §1.1502-1(e). For purposes

of this paragraph (b)(10), the term group

is defined with regard to section 1504(b)

(2) for years in which an election under

section 1504(c)(2) is not in effect. Thus,

a separate return year includes a taxable

year for which that election is not in effect.

(11) Separate return limitation year.

Section 1.1502-1(f)(2) provides exceptions to the definition of the term separate

return limitation year. For purposes of

applying those exceptions to this section,

the term group is defined without regard

to section 1504(b)(2), and the definition

in this paragraph (b)(11) applies separately to the nonlife subgroup in determining

nonlife consolidated taxable income un-

1054

der paragraph (f) of this section and to the

life subgroup in determining consolidated

LICTI under paragraph (g) of this section.

Paragraph (h)(3)(ix) of this section defines

the term separate return limitation year for

purposes of determining whether the losses of one subgroup may be used against

the income of the other subgroup.

*****

(13) Ineligible corporation. A corporation that is not an eligible corporation is

ineligible. If a life company is ineligible,

it is not treated under section 1504(c)(2)

as an includible corporation. Losses of a

nonlife member arising in years when it is

ineligible may not be used under section

1503(c)(2) and paragraph (g) of this section to set off the income of a life member. If a life company is ineligible and is

the common parent of the group (without

regard to section 1504(b)(2)), the election under section 1504(c)(2) may not be

made.

(14) * * *

(i) * * * S2 must file its own separate

return for 2020.

(ii) Example 2. Since 2012, L1 has

been a life company owning all the stock

of L2. In 2018, L1 transfers assets to S1,

a new nonlife insurance company subject to taxation under section 831(a). For

2020, only L1 and L2 are eligible corporations. The tacking rule in paragraph (b)

(12)(v) of this section does not apply i

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