Consolidated ReturnsLimitations on the use of Certain Losses and Deductions

Federal RegisterJun 27, 1996

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DEPARTMENT OF THE TREASURY

26 CFR Parts 1 and 602

[TD 8677]

RIN 1545-AU35

Consolidated Returns--Limitations on the use of Certain Losses

and Deductions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains final and temporary amendments to the

consolidated return regulations relating to deductions and losses of

members. The temporary amendments concern the method for computing the

limitations with respect to separate return limitation year (SRLY)

losses. They also concern the rules relating to carryover and carryback

of losses to consolidated and separate return years and to the built-in

deduction rules. Final amendments are made amending definitions and

redesignating sections displaced by temporary regulations. The text of

these temporary regulations also serves as the text of the proposed

regulations set forth in the notice of proposed rulemaking on this

subject in the Proposed Rules section of this issue of the Federal

DATES: These amendments are effective June 27, 1996.

For dates of application and special transition rules, see

Effective Dates under SUPPLEMENTARY INFORMATION.

FOR FURTHER INFORMATION CONTACT: David B. Friedel at (202) 622-7550

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in the temporary

regulations has been reviewed and approved by the Office of Management

and Budget in accordance with the Paperwork Reduction Act (44 U.S.C.

3507) under the control number 1545-1237. Section 1.1502-21T(b)(3)

requires a response from certain consolidated groups. The IRS requires

the information to assure that an election to relinquish a carryback

period is properly documented. Reponses to this collection of

information are required to obtain a benefit (relating to the carryover

of losses which would otherwise be carried back).

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

to respond to, a collection of information unless the collection of

information displays a valid control number.

For further information concerning this collection of information,

and where to submit comments on the collection of information and the

accuracy of the estimated burden, and suggestions for reducing this

burden, please refer to the preamble to the cross-referencing notice of

proposed rulemaking published in the Proposed Rules section of this

issue of the Federal Register.

Books or records relating to a collection of information must be

retained as long as their contents may become material in the

administration of any Internal Revenue law. Generally, tax returns and

tax return information are confidential, as required by 26 U.S.C. 6103.

Background and Explanation of Provisions

On February 4, 1991, the IRS and Treasury published in the Federal

setting forth amendments to the rules regarding the net operating

losses, built-in deductions, and capital losses of consolidated groups,

including rules regarding the carryover and carryback of losses to

consolidated and separate return years. Some of the amendments are

clarifying, and some change the existing rules. The principal changes

related to losses arising in (or carried to) SRLY years. The preamble

to the proposed amendments explains the proposed changes in detail. The

IRS and Treasury also published Notice 91-27 (1991-2 C.B. 629) to

advise of intended modifications to the proposed amendments.

Generally, section 1503(a) requires that a consolidated group

determine its tax in accordance with the regulations under section 1502

prescribed before the last day prescribed by law for the filing of its

tax return. Many of the proposed amendments have proposed effective

dates of January 29, 1991, and other transitional rules for their

application. Because of this effective date, consolidated groups have

been uncertain whether the existing rules or the proposed rules (if

adopted) will determine their use of losses for consolidated return

years ending on or after January 29, 1991.

To address the uncertainty, the IRS and Treasury are issuing this

Treasury decision to adopt temporary amendments to the rules regarding

a consolidated group's losses, including the carryover and carryback of

SRLY losses. The temporary amendments are substantially identical to

the rules proposed on January 29, 1991. A more detailed discussion of

the effective dates of the temporary amendments, including special

transitional rules, is set forth below under Effective Dates.

These temporary amendments primarily address the uncertainty

created by the proposed effective dates. They do not address the

comments on the proposed amendments. Many of these comments are still

under consideration.

As companions to this Treasury decision, the IRS and Treasury also

issue two other sets of temporary regulations under sections 382 and

383

[[Page 33322]]

concerning the use of losses and deductions by consolidated groups and

by members of controlled groups. See TD 8678 and TD 8679 published

elsewhere in this issue of the Federal Register.

Effective Date

The temporary amendments are generally effective for consolidated

return years beginning on or after January 1, 1997. However, two

important changes are made to the effective date provisions set forth

in the proposed rules.

As proposed, the amendments generally applied to consolidated

return years ending on or after January 29, 1991, without regard to the

year in which the losses arose and without regard to whether the losses

are subject to the SRLY rules. An exception to the general effective

date rules was made for the proposed SRLY rules and built-in deduction

rules, which generally applied only to losses and deductions of

corporations that became members (and acquisitions occurring) on or

after January 29, 1991, without regard to when they arose. Thus, the

proposed amendments required the losses and deductions of members

acquired before January 29, 1991, to remain subject to the existing

SRLY limitations.

The temporary amendments revise this treatment. Losses and

deductions of a member (including SRLY losses) carried to consolidated

return years beginning on or after January 1, 1997, are governed by the

temporary amendments, regardless of the year in which the loss or

deduction was recognized, and regardless of when the member with the

SRLY loss became a member of the group.

The temporary amendments also contain rules relating to

consolidated return years ending on or after January 29, 1991, and

beginning before January 1, 1997. Specifically, a consolidated group

may apply the temporary amendments to those consolidated return years

provided that three principal conditions are met: (1) all the temporary

amendments must be applied consistently on the group's final return

(original or amended return) for each such year for which the statute

of limitations does not preclude the filing of an amended return on

January 1, 1997; (2) the temporary amendments relating to the treatment

of built-in deductions and SRLY losses must be applied with respect to

the losses and deductions of those corporations that became members of

the group, and to acquisitions occurring, on or after January 29, 1991,

and only with respect to such losses and deductions; and (3)

appropriate adjustments must be made in the earliest subsequent open

year to reflect any inconsistency in a year for which the statute of

limitations precludes the filing of an amended return on January 1,

1997. Until consolidated return years beginning on or after January 1,

1997, the rules of the existing regulations relating to the treatment

of built-in deductions and SRLY losses continue to apply to

corporations that became members before, and to acquisitions occurring

before, January 29, 1991. See Sec. 1.1502-21T(g)(3).

Special Analysis

It has been determined that this Treasury decision is not a

significant regulatory action as defined in EO 12866. Therefore, a

regulatory assessment is not required. It is hereby certified that

these regulations do not have a significant economic impact on a

substantial number of small entities. This certification is based on

the fact that these regulations will primarily affect affiliated groups

of corporations that have elected to file consolidated returns, which

tend to be larger businesses. Therefore, a Regulatory Flexibility

Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is

not required. Pursuant to section 7805(f) of the Internal Revenue Code,

the notice of proposed rulemaking preceding these regulations were sent

to the Small Business Administration for comment on their impact on

small business.

Drafting Information

The principal author of these regulations is David B. Friedel of

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

from the IRS and Treasury participated in their development.

Adoption of Amendments to the Regulations

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

PART 1--INCOME TAXES

Paragraph 1. The authority citation for Part 1 is amended in part

by adding citations in numerical order to read as follows:

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

Section 1.1502-0 also issued under 26 U.S.C. 1502. * * *

Section 1.1502-1T also issued under 26 U.S.C. 1502.

Section 1.1502-2 also issued under 26 U.S.C. 1502. * * *

Section 1.1502-15T also issued under 26 U.S.C. 1502. * * *

Section 1.1502-21T also issued under 26 U.S.C. 1502.

Section 1.1502-22T also issued under 26 U.S.C. 1502.

Section 1.1502-23T also issued under 26 U.S.C. 1502. * * *

Section 1.1502-79T also issued under 26 U.S.C. 1502.

Section 1.1502-15A also issued under 26 U.S.C. 1502.

Section 1.1502-21A also issued under 26 U.S.C. 1502.

Section 1.1502-22A also issued under 26 U.S.C. 1502.

Section 1.1502-23A also issued under 26 U.S.C. 1502.

Section 1.1502-41A also issued under 26 U.S.C. 1502.

Section 1.1502-79A also issued under 26 U.S.C. 1502.* * *

Par. 2. In the list below, for each section indicated in the left

column, remove the wording indicated in the middle column, and add the

wording indicated in the right column.

------------------------------------------------------------------------

Affected section Remove Add

------------------------------------------------------------------------

1.469-1(h)(2)................... 1.1502-21 1.1502-21T (Net

(consolidated net operating losses

operating loss), (temporary)), and

and 1.1502-22 1.1502-22T

(consolidated net (consolidated net

capital gain or capital gain and

loss). loss

(temporary)).

1.597-2(c)(5), first sentence... Secs. 1.1502-15, Secs. 1.1502-15T,

1.1502-21, and 1.1502-21T, and

1.1502-22. 1.1502-22T (or

Secs. 1.1502-15A

, 1.1502-21A, and

1.1502-22A, as

appropriate).

1.597-2(c)(5), second sentence.. Secs. 1.1502-15, Secs. 1.1502-15T,

1.1502-21 or 1.1502-21T or

1.1502-22. 1.1502-22T (or

Secs. 1.1502-15A

, 1.1502-21A or

1.1502-22A, as

appropriate).

1.597-4(g)(3), fifth sentence... Secs. 1.1502-15, Secs. 1.1502-15T,

1.1502-21 and 1.1502-21T and

1.1502-22. 1.1502-22T (or

Secs. 1.1502-15A

, 1.1502-21A and

1.1502-22A, as

appropriate).

[[Page 33323]]

1.597-4(g)(3), sixth sentence... Secs. 1.1502-15, Secs. 1.1502-15T,

1.1502-21, or 1.1502-21T, or

1.1502-22. 1.1502-22T (or

Secs. 1.1502-15A

, 1.1502-21A, or

1.1502-22A, as

appropriate).

1.904(f)-3(a)................... (or Secs. 1.1502- (or Sec. 1.1502-

21(b) and 1.1502- 21T(b) (or Secs.

79(a)). 1.1502-21A(b) and

1.1502-79A(a), as

appropriate)).

1.904(f)-3(b)................... (or Secs. 1.1502- (or Sec. 1.1502-

22 and 1.1502- 22T(b) (or Secs.

79(b). 1.1502-22A and

1.1502-79A(b), as

appropriate)).

1.1341-1(f)(2)(i)............... Sec. 1.1502-2A... Sec. 1.1502-2A

(as contained in

the 26 C.F.R.

edition revised

as of April 1,

1996).

1.1502-9(a), seventh sentence... Sec. 1.1502-79... Sec. 1.1502-21T(b

)(2) (or Sec.

1.1502-79A, as

appropriate).

1.1502-9(a), eighth sentence.... Sec. 1.1502-79... Sec. 1.1502-21T(b

)(1) (or Sec.

1.1502-79A, as

appropriate).

1.1502-9(f) Example 5(ii)....... Sec. 1.1502-21(c) Sec. 1.1502-21A(c

)

1.1502-11(a)(2)................. Sec. 1.1502-21... Secs. 1.1502-21T

(or 1.1502-21A,

as appropriate).

1.1502-11(a)(3)................. Sec. 1.1502-22... Secs. 1.1502-22T

(or 1.1502-22A,

as appropriate).

1.1502-11(a)(4)................. Sec. 1.1502-23... Secs. 1.1502-23T

(or 1.1502-23A,

as appropriate).

1.1502-11(b)(2)(iii) Example Sec. 1.1502-79... Sec. 1.1502-21T

1(c). (or Sec. 1.1502-

79A, as

appropriate).

1.1502-11(b)(2)(iii) Example Sec. 1.1502-79... Secs. 1.1502-21T

2(d). and 1.1502-22T,

respectively (or

Sec. 1.1502-79A,

as appropriate).

1.1502-11(b)(2)(iii) Example Sec. 1.1502-79... Sec. 1.1502-21T

3(e). (or Sec. 1.1502-

79A, as

appropriate).

1.1502-12(b).................... Sec. 1.1502-15 Secs. 1.1502-15A

shall be taken or 1.1502-15T

into account as shall be taken

provided in that into account as

section. provided in those

sections.

1.1502-13(c)(7)(ii) Example Sec. 1.1502-21(c) Sec. 1.1502-21T(c

10(d). ).

1.1502-13(g)(5) Example 4(b).... Sec. 1.1502-15... Sec. 1.1502-15T

(or Sec. 1.1502-

15A, as

appropriate).

1.1502-13(h)(2), Example 1(a)... Sec. 1.1502-21(c) Sec. 1.1502-21T(c

1.1502-13(h)(2), Example 1(b)... Sec. 1.1502-21(c) Sec. 1.1502-21T(c

1.1502-13(h)(2), Example 2(a)... Sec. 1.1502-15... Sec. 1.1502-15T.

1.1502-13(h)(2), Example 2(b)... 1.1502-22......... 1.1502-22T.

1.1502-15(a)(1), first sentence. Sec. 1.1502-21(c) Sec. 1.1502-21A(c

1.1502-15(a)(1), first sentence. Sec. 1.1502-22(c) Sec. 1.1502-22A(c

1.1502-15(a)(1), second sentence Under Secs. Under Secs.

1.1502-21, 1.1502- 1.1502-21A,

22, and 1.1502-79. 1.1502-22A, and

1.1502-79A (or

Secs. 1.1502-21T

and 1.1502-22T,

as appropriate).

1.1502-15(a)(1), second sentence In Sec. 1.1502- In Secs. 1.1502-

21(c) or Sec. 21T(c) or 1.1502-

1.1502-22(c) (as 22T(c) (or Secs.

the case may be). 1.1502-21A(c) or

1.1502-22A(c), as

appropriate), as

the case may be.

1.1502-15(a)(3)................. Sec. 1.1502-31A(b Sec. 1.1502-31A(b

)(9). )(9) (as

contained in the

26 C.F.R. edition

revised as of

April 1, 1996).

1.1502-18(f)(1)(ii), (1)(iii), Sec. 1.1502-39A.. Sec. 1.1502-39A

(2)(i), (2)(ii), and (4) (as contained in

Example (i) and (ii). the 26 C.F.R.

edition revised

as of April 1,

1996).

1.1502-18(f)(5)................. Sec. 1.1502-31A(b Sec. 1.1502-31A(b

)(1). )(1) (as

contained in the

26 C.F.R. edition

revised as of

April 1, 1996).

1.1502-20(a)(1)................. 1.1502-15(b)...... 1.1502-11(c).

1.1502-20(c)(4), Example 7(iii). Sec. 1.1502-21... Secs. 1.1502-21A

or 1.1502-21T.

1.1502-20(g)(3), Example 1(i)... Sec. 1.1502-21... Secs. 1.1502-21A

or 1.1502-21T.

1.1502-20(g)(3), Example 2(i)... Sec. 1.1502-21... Secs. 1.1502-21A

or 1.1502-21T.

1.1502-21(b)(1)................. Paragraph (a) of Secs. 1.1502-79A(

Sec. 1.1502-79. a).

1.1502-21(b)(1)................. Sec. 1.1502-15... Sec. 1.1502-15A

(or Sec. 1.1502-

11(c), as

appropriate).

1.1502-21(b)(2)(i).............. Paragraph (a)(4) This paragraph.

of Sec. 1.1502-

79.

1.1502-21(e)(1)(i).............. Paragraph (a)(3) This paragraph.

of Sec. 1.1502-

79.

1.1502-22(a)(1)(ii)............. Sec. 1.1502-23... Secs. 1.1502-23A

or 1.1502-23T.

1.1502-22(a)(3)................. Sec. 1.1502-15... Secs. 1.1502-15A

and 1.1502-11(c).

1.1502-22(b)(1)................. Paragraph (b) of Sec. 1.1502-79A(b

Sec. 1.1502-79. ) (or Sec.

1.1502-22T(b), as

appropriate).

1.1502-23....................... Secs. 1.1502-21(c Secs. 1.1502-21A(

) and 1.1502- c) and 1.1502-

22(c), as 22A(c), as

provided in Sec. provided in Sec.

1.1502-15(a). 1.1502-15A(a) (or

Secs. 1.1502-21T

22T(c), as

provided in Sec.

1.1502-15T(a), as

appropriate).

1.1502-26(a)(1)(ii) concluding Paragraph (f) of Secs. 1.1502-21T(

text. Sec. 1.1502-21. e) or 1.1502-

21A(f), as

appropriate.

1.1502-32(b)(5) Example 2(b).... 1.1502-79......... 1.1502-21T(b).

1.1502-41(a).................... Paragraph (a)(1) Sec. 1.1502-22A(a

of Sec. 1.1502- ).

22.

1.1502-41(a).................... Sec. 1.1502-23... Sec. 1.1502-23A.

1.1502-41(b).................... Paragraph (a)(1) Sec. 1.1502-22A(a

of Sec. 1.1502- ).

22.

1.1502-41(b).................... Paragraph (b) of Sec. 1.1502-22A(b

Sec. 1.1502-22. ).

[[Page 33324]]

1.1502-42(f)(4)(i)(A)........... Sec. 1.1502-79(a) Sec. 1.1502-21T(b

(3).. ) (or Sec.

1.1502-79A(a)(3),

as appropriate).

1.1502-42(j) Example 4(b)....... Sec. 1.1502-79(a) Sec. 1.1502-79A(a

(3).. )(3).

1.1502-42(j) Example 4(c)....... Sec. 1.1502-21(b) Sec. 1.1502-21A(b

(3). )(3).

1.1502-42(j) Example 4(c)....... Sec. 1.1502-79(a) Sec. 1.1502-79A(a

(3). )(3).

1.1502-43(b)(2)(iv)............. Sec. 1.1502-21(a) Secs. 1.1502-21T(

a) or 1.1502-

21A(a), as

appropriate.

1.1502-43(b)(2)(v).............. Sec. 1.1502-22(a) Secs. 1.1502-22T(

a) or 1.1502-

22A(a), as

appropriate.

1.1502-43(b)(2)(vi)............. Sec. 1.1502-41(a) Secs. 1.1502-22T(

a) or 1.1502-41A,

as appropriate.

1.1502-43(b)(2)(vi)............. Sec. 1.1502-41(b) Secs. 1.1502-22T(

a) or 1.1502-41A,

as appropriate.

1.1502-43(b)(2)(vii)............ Sec. 1.1502-22(b) Secs. 1.1502-22T(

b) or 1.1502-

22A(b), as

appropriate.

1.1502-43(b)(2)(viii)........... Section 1.1502-15 Sections 1.1502-

(built-in 15A (Limitations

deductions) does. on built-in

deductions not

subject to Sec.

1.1502-15T) and

1.1502-15T (SRLY

limitation on

built-in losses

(temporary)) do.

1.1502-44(b)(2)................. Sec. 1.1502-21... Secs. 1.1502-21T

or 1.1502-21A (as

appropriate).

1.1502-44(b)(3)................. Sec. 1.1502-22... Secs. 1.1502-22T

or 1.1502-22A (as

appropriate).

1.1502-47(h)(2)(i).............. Sec. 1.1502-21... Secs. 1.1502-21T

or 1.1502-21A (as

appropriate).

1.1502-47(h)(2)(ii)............. Sec. 1.1502-21(f) Secs. 1.1502-21(A

)(f) or 1.1502-

21T(e) (as

appropriate).

1.1502-47(h)(2)(iii)............ Sec. 1.1502-21... Secs. 1.1502-21A

or 1.1502-21T (as

appropriate).

1.1502-47(h)(2)(iv)............. Sec. 1.1502-21... Secs. 1.1502-21A

or 1.1502-21T (as

appropriate).

1.1502-47(h)(2)(vii) Example.... Secs. 1.1502-21 Secs. 1.1502-21A

and 1.1502-79. and 1.1502-79A.

1.1502-47(h)(3)(iii)............ Sec. 1.1502-21(c) Secs. 1.1502-21A(

c) or 1.1502-

21T(c) (as

appropriate).

1.1502-47(h)(3)(iv) and (v)..... Sec. 1.1502-21(d) Sec. 1.1502-21A(d

1.1502-47(h)(4)(i), first Sec. 1.1502-22... Secs. 1.1502-22T

sentence. or 1.1502-22A (as

appropriate).

1.1502-47(h)(4)(i), second Sec. 1.1502-22(a) Secs. 1.1502-22T

sentence. or 1.1502-22A(a)

(as appropriate).

1.1502-47(h)(4)(ii), first Sec. 1.1502-22... Secs. 1.1502-22A

sentence. or 1.1502-22T.

1.1502-47(h)(4)(ii), first Sec. 1.1502-21... Secs. 1.1502-21T

sentence. or 1.1502-21A (as

appropriate).

1.1502-47(h)(4)(ii), second ``Sec. 1.1502-22( ``Sec. 1.1502-22A

sentence. d)''. (d)''.

1.1502-47(h)(4)(ii), second ``Sec. 1.1502-21( ``Sec. 1.1502-21A

sentence. d)''. (d)''.

1.1502-47(h)(4)(iii)............ Sec. 1.1502-22(b) Secs. 1.1502-22A(

(1). b)(1) or 1.1502-

22T(b).

1.1502-47(k)(5)................. Sec. 1.1502-22... Secs. 1.1502-22T

or 1.1502-22A (as

appropriate).

1.1502-47(l)(3)(i).............. Sec. 1.1502-21... Secs. 1.1502-21T

or 1.1502-21A (as

appropriate).

1.1502-47(m)(2)(ii)............. Sec. 1.1502-21... Secs. 1.1502-21T

or 1.1502-21A (as

appropriate).

1.1502-47(m)(2)(ii)............. Sec. 1.1502-22... Secs. 1.1502-22T

or 1.1502-22A (as

appropriate).

1.1502-47(m)(3)(i).............. Secs. 1.1502-21 Secs. 1.1502-21T

and 1.1502-22. and 1.1502-22T

(or Secs. 1.1502-

21A and 1.1502-

22A, as

appropriate).

1.1502-47(m)(3)(vi)(A), both Sec. 1.1502-79(a) Secs. 1.1502-21T(

instances. (3). b) or 1.1502-

79A(a)(3) (as

appropriate).

1.1502-47(m)(3)(vii)............ Sec. 1.1502-21(b) Sec. 1.1502-21A(b

(3)(ii). )(3)(ii).

1.1502-47(m)(3)(ix)............. Sec. 1.1502-15 Secs. 1.1502-15T

(including the and 1.1502-15A

exceptions in (including

paragraph (a)(4) applicable

thereof). exceptions

thereto).

1.1502-47(m)(5) Example 4....... Sec. 1.1502-15... Sec. 1.1502-15A.

1.1502-47(o)(2)(i).............. Sec. 1.1502-41... Secs. 1.1502-41A

or 1.1502-22T (as

appropriate).

1.1502-47(o)(2)(ii)............. Sec. 1.1502-41... Secs. 1.1502-41A

or 1.1502-22T (as

appropriate).

1.1502-47(q).................... Sec. 1.1502-21(b) Secs. 1.1502-21A(

(3) and Sec. b)(3) and 1.1502-

1.1502-79(a)(3). 79A(a)(3) (or

Sec. 1.1502-21T,

as appropriate).

1.1502-78(a).................... Sec. 1.1502-79 Secs. 1.1502-21T(

(a), (b), or (c). b), 1.1502-

22T(b), or 1.1502-

79(c) (or Secs.

1.1502-79A(a),

1.1502-79A(b), or

1.1502-79(c), as

appropriate).

1.1502-79(a)(1)(i).............. Sec. 1.1502-21... Sec. 1.1502-21A.

1.1502-79(b)(1)................. 1.1502-22......... 1.1502-22A.

[[Page 33325]]

1.1502-79(c)(1)................. Paragraph (a)(1) Sec. 1.1502-21T(b

and (2) of this ) (or Secs.

section. 1.1502-79A(a)(1)

and (2), as

appropriate).

1.1502-79(d)(1)................. Paragraph (a)(1) Sec. 1.1502-21T(b

and (2) of this ) (or Secs.

section. 1.1502-79A(a)(1)

and (2), as

appropriate).

1.1502-79(e)(1)................. Paragraph (a)(1) Sec. 1.1502-21T(b

and (2) of this ) (or Secs.

section. 1.1502-79A(a)(1)

and (2), as

appropriate).

1.1502-80(c).................... Sec. 1.1502-15(b) Sec. 1.1502-11(c)

1.1502-100(c)(2)................ Sec. 1.1502-21... Secs. 1.1502-21A

or 1.1502-21T (as

appropriate).

1.1503-2(d)(2)(i)............... Sec. 1.1502-21(c) Secs. 1.1502-21A(

c) or 1.1502-

21T(c), as

appropriate.

1.1503-2(d)(2)(ii).............. Sec. 1.1502-21(c) Secs. 1.1502-21A(

c) or 1.1502-

21T(c), as

appropriate.

1.1503-2(d)(4) Example 1(iv).... 1.1502-22......... 1.1502-22T(c).

1.1503-2(d)(4) Example 2(iv).... Sec. 1.1502-21(c) Sec. 1.1502-21A(c

1.1503-2(g)(2)(vii)(B)(1)....... Sec. 1.1502-21(c) Secs. 1.1502-21A(

c) or 1.1502-

21T(c) (as

appropriate).

1.1503-2(g)(2)(vii)(B)(2)....... Sec. 1.1502-21(c) Secs. 1.1502-21A(

c) or 1.1502-

21T(c) (as

appropriate).

1.1503-2(g)(2)(vii)(E).......... Sec. 1.1502-21(c) Secs. 1.1502-21A(

c) or 1.1502-

21T(c) (as

appropriate).

1.1503-2(g)(2)(vii)(G) Example 1 Sec. 1.1502-21(c) Secs. 1.1502-21A(

c) or 1.1502-

21T(c), as

appropriate.

1.1503-2(g)(2)(vii)(G) Example 2 Sec. 1.1502-21(c) Secs. 1.1502-21A(

c) or 1.1502-

21T(c), as

appropriate.

1.1503-2(h)(3).................. Sec. 1.1502-21(c) Secs. 1.1502-21A(

c) or 1.1502-

21T(c) (as

appropriate).

1.1503-2A(f)(1)(i) intro text... Sec. 1.1502-79(a) Sec. 1.1502-21T(b

(3). ).

1.1503-2A(f)(1)(i)(C)........... Sec. 1.1502-79... Sec. 1.1502-22T(b

1.1503-2A(f)(2)(i).............. Sec. 1.1502-21(c) Secs. 1.1502-21A(

(2). c)(2) or 1.1502-

21T(c) (as

appropriate).

1.1503-2A(f)(2)(ii)............. Sec. 1.1502-21(c) Secs. 1.1502-21A(

(2). c)(2) or 1.1502-

21T(c) (as

appropriate).

1.1503-2A(f)(4) Example 2(iv), Sec. 1.1502-21(c) Sec. 1.1502-21A(c

first sentence. (2). )(2).

1.1503-2A(f)(4) Example 2(iv), Sec. 1.1502-21(c) Sec. 1.1502-21A(c

second sentence. ).

1.1552-1(a)(3)(i)............... Sec. 1.1502-30A.. Sec. 1.1502-30A

(as contained in

the 26 C.F.R.

edition revised

as of April 1,

1996).

1.1552-1(b)(1).................. Sec. 1.1502-30A.. Sec. 1.1502-30A

(as contained in

the 26 C.F.R.

edition revised

as of April 1,

1996).

301.6402-7(g)(2)(iii)........... Sec. 1.1502-21(b) Secs. 1.1502-21T(

b) or 1.1502-

21A(b) (as

appropriate).

301.6402-7(g)(3) Example 2, Sec. 1.1502-21... Sec. 1.1502-21T.

second sentence.

301.6402-7(g)(3) Example 2, Sec. 1.1502-21(c) Sec. 1.1502-21T(c

third sentence. ).

301.6402-7(h)(1)(ii) Example (B) 1.1502-21(b)...... 1.1502-21T(b).

301.6402-7(h)(1)(ii) Example (B) 1.1502-22(b)...... 1.1502-22T(b).

------------------------------------------------------------------------

Sec. 1.1501-1 [Removed]

Par. 3. Section 1.1501-1 is removed. -

Par. 4. The undesignated centerheading immediately following

Sec. 1.1504-4 is revised from ``Regulations Applicable to Taxable Years

Prior to January 1, 1966'' to ``Regulations Applicable to Taxable Years

Before January 1, 1997''.

Secs. 1.1502-0A through 1.1502-3A, 1.1502-10A through 1.1502-19A and

1.1502-30A through 1.1502-51A [Removed]

Par. 5. Sections 1.1502-0A through 1.1502-3A, 1.1502-10A through

1.1502-19A, and 1.1502-30A through 1.1502-51A are removed.

Par. 6. Section 1.1502-0 is revised to read as follows:

Sec. 1.1502-0 Effective dates.

(a) The regulations under section 1502 are applicable to taxable

years beginning after December 31, 1965, except as otherwise provided

therein.

(b) The provisions of Secs. 1.1502-0A through 1.1502-3A, 1.1502-10A

through 1.1502-19A, and 1.1502-30A through 1.1502-51A (as contained in

the 26 CFR part 1 edition revised April 1, 1996) are applicable to

taxable years beginning before January 1, 1966.

Par. 7. Section 1.1502-1 is amended by revising paragraphs (b),

(f)(1), and (f)(2) introductory text, adding paragraphs (f)(4) and (j),

and adding and reserving paragraph (i) to read as follows:

Sec. 1.1502-1 Definitions.

* * * * *

(b) Member. The term member means a corporation (including the

common parent) that is included in the group, or as the context may

require, a corporation that is included in a subgroup.

* * * * *

(f) Separate return limitation year--(1) In general. Except as

provided in paragraphs (f)(2) and (3) of this section, the term

separate return limitation year (or SRLY) means any separate return

year of a member or of a predecessor of a member.

(2) Exceptions. The term separate return limitation year (or SRLY)

does not include:

* * * * *

(4) Predecessors and successors. The term predecessor means a

transferor or distributor of assets to a member (the successor) in a

transaction--

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

(ii) That occurs on or after January 1, 1997, in which the

successor's basis for the assets is determined, directly or

[[Page 33326]]

indirectly, in whole or in part, by reference to the basis of the

assets of the transferor or distributor, but only if the amount by

which basis differs from value, in the aggregate, is material. In the

case of such a transaction, only one member may be considered a

predecessor to or a successor of one other member.

* * * * *

(i) [Reserved]

(j) Affiliated. Corporations are affiliated if they are members of

a group with each other.

Par. 8. In Sec. 1.1502-2, paragraph (h) is revised to read as

follows:

Sec. 1.1502-2 Computation of tax liability.

* * * * *

(h) The tax imposed by section 1201, instead of the taxes computed

under paragraphs (a) and (g) of this section, computed by reference to

the net capital gain of the group (see Sec. 1.1502-22T) (or, for

consolidated return years to which Sec. 1.1502-22T does not apply,

computed by reference to the excess of the consolidated net long-term

capital gain over the consolidated net short-term capital loss (see

Sec. 1.1502-41A for the determination of the consolidated net long-term

capital gain and the consolidated net short-term capital loss));

* * * * *

Sec. 1.1502-15 [Amended]

Par. 9. In Sec. 1.1502-15, paragraph (b) is redesignated as

paragraph (c) of Sec. 1.1502-11, and the heading of newly designated

Sec. 1.1502-11, paragraph (c) is revised to read as follows:

Sec. 1.1502-11 Consolidated taxable income.

* * * * * -

* *

Sec. 1.1502-15 [Redesignated as Sec. 1.1502-15A]

Par. 10. Section 1.1502-15 is redesignated as Sec. 1.1502-15A; the

section heading of the newly designated Sec. 1.1502-15A is revised; and

paragraph (b) is added to read as follows:

Sec. 1.1502-15A Limitations on the allowance of built-in deductions

for consolidated return years beginning before January 1, 1997.

* * * * * -

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

years to which Sec. 1.1502-21T does not apply. See Sec. 1.1502-21T(g)

for effective dates of that section. -

Par. 11. Section 1.1502-15T is added to read as follows:

Sec. 1.1502-15T SRLY limitation on built-in losses (temporary).

(a) SRLY limitation. Built-in losses are subject to the SRLY

limitation under Secs. 1.1502-21T(c) and 1.1502-22T(c) (including

applicable subgroup principles). Built-in losses are treated as

deductions or losses in the year recognized, except for the purpose of

determining the amount of, and the extent to which the built-in loss is

limited by, the SRLY limitation for the year in which it is recognized.

Solely for such purpose, a built-in loss is treated as a hypothetical

net operating loss carryover or net capital loss carryover arising in a

SRLY, instead of as a deduction or loss in the year recognized. To the

extent that a built-in loss is allowed as a deduction under this

section in the year it is recognized, it offsets any consolidated

taxable income for the year before any loss carryovers or carrybacks

are allowed as a deduction. To the extent not so allowed, it is treated

as a separate net operating loss or net capital loss carryover or

carryback arising in the year of recognition and, under Sec. 1.1502-

21T(c) or Sec. 1.1502-22T(c), the year of recognition is treated as a

SRLY.

(b) Built-in losses--(1) Defined. If a corporation has a net

unrealized built-in loss under section 382(h)(3) (as modified by this

section) on the day it becomes a member of the group (whether or not

the group is a consolidated group), its deductions and losses are

built-in losses under this section to the extent they are treated as

recognized built-in losses under section 382(h)(2)(B) (as modified by

this section). This paragraph (b) generally applies separately with

respect to each member, but see paragraph (c) of this section for

circumstances in which it is applied on a subgroup basis.

(2) Operating rules. Solely for purposes of applying paragraph

(b)(1) of this section, the principles of Sec. 1.1502-94T(c) apply with

appropriate adjustments, including the following:

(i) Ownership change. A corporation is treated as having an

ownership change under section 382(g) on the day the corporation

becomes a member of a group, and no other events (e.g., a subsequent

ownership change under section 382(g) while it is a member) are treated

as causing an ownership change. In the case of an asset acquisition by

a group, the assets and liabilities acquired directly from the same

transferor pursuant to the same plan are treated as the assets and

liabilities of a corporation that becomes a member of the group (and

has an ownership change) on the date of the acquisition. -

(ii) Recognized built-in gain or loss. A loss that is included in

the determination of net unrealized built-in gain or loss and that is

recognized but disallowed or deferred (e.g., under Sec. 1.1502-20 or

section 267) is not treated as a built-in loss unless and until the

loss would be allowed during the recognition period without regard to

the application of this section. Section 382(h)(1)(B)(ii) does not

apply to the extent it limits the amount of recognized built-in loss

that may be treated as a pre-change loss to the amount of the net

unrealized built-in loss.

subgroup, the principles of paragraph (b) of this section apply to the

subgroup, and not separately to its members. Thus, the net unrealized

built-in loss and recognized built-in loss for purposes of paragraph

(b) of this section are based on the aggregate amounts for each member

of the subgroup. -

(2) Members of subgroups. A subgroup is composed of those members

that have been continuously affiliated with each other for the 60

consecutive month period ending immediately before they become members

of the group in which the loss is recognized. A member remains a member

of the subgroup until it ceases to be affiliated with the loss member.

For this purpose, the principles of Sec. 1.1502-21T(c)(2) (iv) through

(vi) apply with appropriate adjustments.

(3) Built-in amounts. Solely for purposes of determining whether

the subgroup has a net unrealized built-in loss or whether it has a

recognized built-in loss, the principles of Secs. 1.1502-91T (g) and

(h) apply with appropriate adjustments.

(d) Examples. For purposes of the examples in this section, unless

otherwise stated, all groups file consolidated returns, all

corporations have calendar taxable years, the facts set forth the only

corporate activity, value means fair market value and the adjusted

basis of each asset equals its value, all transactions are with

unrelated persons, and the application of any limitation or threshold

under section 382 is disregarded. The principles of this section are

illustrated by the following examples:

Example 1. Determination of recognized built-in loss. (a) P buys

all the stock of T during Year 1 for $100, and T becomes a member of

the P group. T has three depreciable assets. Asset 1 has an

unrealized loss of $20 (basis $45, value $25), asset 2 has an

unrealized loss of $25 (basis $50, value $25), and asset 3 has an

unrealized gain of $25 (basis $25, value $50).

[[Page 33327]]

(b) Under paragraph (b)(2)(i) of this section, T is treated as

having an ownership change under section 382(g) on becoming a member

of the P group. This treatment does not depend on whether P's

acquisition of the T stock actually constitutes an ownership change

under section 382(g), or whether T is subject to any limitation

under section 382. Under paragraph (b)(1) of this section, none of

T's $45 of unrealized loss is treated as a built-in loss unless T

has a net unrealized built-in loss under section 382(h)(3) on

becoming a member of the P group.

built-in loss on becoming a member of the P group

(($20)+($25)+$25=($20)). Assume that this amount exceeds the

threshold requirement in section 382(h)(3)(B). Under section

382(h)(2)(B), the entire amount of T's $45 unrealized loss is

treated as a built-in loss to the extent it is recognized during the

5-year recognition period described in section 382(h)(7). Under

paragraph (b)(2)(ii) of this section, the restriction under section

382(h)(1)(B)(ii), which limits the amount of recognized built-in

loss that is treated as pre-change loss to the amount of the net

unrealized built-in loss, is inapplicable for this purpose.

Consequently, the entire $45 of unrealized loss (not just the $20

net unrealized loss) is treated under paragraph (b)(1) of this

section as a built-in loss to the extent it is recognized within 5

years of T's becoming a member of the P group. Under paragraph (a)

of this section, a built-in loss is subject to the SRLY limitation

under Sec. 1.1502-21T(c)(1).

(d) Under paragraph (b)(2)(i) of this section, the results would

be the same if T transferred all of its assets and liabilities to a

subsidiary of the P group in a single transaction described in

section 351.

Example 2. Actual application of section 382 not relevant. (a)

The facts are the same as in Example 1, except that P buys 55

percent of the stock of T during Year 1, resulting in an ownership

change of T under section 382(g). During Year 2, P buys the 45

percent balance of the T stock, and T becomes a member of the P

group.

(b) Although T has an ownership change for purposes of section

382 in Year 1 and not Year 2, T's joining the P group in Year 2 is

treated as an ownership change under section 382(g) for purposes of

this section. Consequently, for purposes of this section, whether T

has a net unrealized built-in loss under section 382(h)(3) is

determined as if the day T joined the P group were a change date.

Thus, the results are the same as in Example 1.

Example 3. Determination of a recognized built-in loss of a

subgroup. (a) During Year 1, P buys all of the stock of S for $100,

and S becomes a member of the P group. M is the common parent of

another group. At the beginning of Year 7, M acquires all of the

stock of P, and P and S become members of the M group. At the time

of M's acquisition of the P stock, P has (disregarding the stock of

S) a $10 net unrealized built-in gain (two depreciable assets, asset

1 with a basis of $35 and a value of $55, and asset 2 with a basis

of $55 and a value of $45), and S has a $75 net unrealized built-in

loss (two depreciable assets, asset 3 with a basis of $95 and a

value of $10, and asset 4 with a basis of $10 and a value of $20).

(b) Under paragraph (c) of this section, P and S compose a

subgroup on becoming members of the M group because P and S were

continuously affiliated for the 60 month period ending immediately

before they became members of the M group. Consequently, paragraph

(b) of this section does not apply to P and S separately. Instead,

their separately computed unrealized gains and losses are aggregated

for purposes of determining whether and the extent to which any

unrealized loss is treated as built-in loss under this section and

is subject to the SRLY limitation under Sec. 1.1502-21T(c).

net unrealized built-in loss on the day P and S become members of

the M group determined by treating the day they become members as a

change date. The net unrealized built-in loss is the aggregate of

P's net unrealized built-in gain of $10 and S's net unrealized

built-in loss of $75, or an aggregate net unrealized built-in loss

of $65. (The stock of S owned by P is disregarded for purposes of

determining the net unrealized built-in loss. However, any loss

allowed on the sale of the stock within the recognition period is

taken into account in determining recognized built-in loss.) Assume

that the $65 net unrealized built-in loss exceeds the threshold

requirement under section 382(h)(3)(B).

(d) Under paragraphs (b)(1), (b)(2)(ii), and (c) of this

section, a loss recognized during the 5-year recognition period on

an asset of P or S held on the day that P and S became members of

the M group is a built-in loss except to the extent the group

establishes that such loss exceeds the amount by which the adjusted

basis of such asset on the day the member became a member exceeded

the fair market value of such asset on that same day. If P sells

asset 2 for $45 in Year 7 and recognizes a $10 loss, the entire $10

loss is treated as a built-in loss under paragraphs (b)(2)(ii) and

recognizes an $85 loss, the entire $85 loss is treated as a built-in

loss under paragraphs (b)(2)(ii) and (c) of this section (not just

the $55 balance of the P subgroup's $65 net unrealized built-in

loss).

(e) The determination of whether P and S constitute a SRLY

subgroup for purposes of loss carryovers and carrybacks, and the

extent to which built-in losses are not allowed under the SRLY

limitation, is made under Sec. 1.1502-21T(c).

Example 4. Computation of SRLY limitation. (a) During Year 1,

individual A forms T by contributing $300 and T sustains a $100 net

operating loss. During Year 2, T's assets decline in value to $100.

At the beginning of Year 3, P buys all the stock of T for $100, and

T becomes a member of the P group with a net unrealized built-in

loss of $100. Assume that $100 exceeds the threshold requirements of

section 382(h)(3)(B). During Year 3, T recognizes its unrealized

built-in loss as a $100 ordinary loss. The members of the P group

contribute the following net income to the consolidated taxable

income of the P group (disregarding T's recognized built-in loss and

any consolidated net operating loss deduction under Sec. 1.1502-21T)

for Years 3 and 4:

------------------------------------------------------------------------

Year 3 Year 4 Total

------------------------------------------------------------------------

P group (without T)....................... $100 $100 $200

T......................................... 60 40 100

-----------------------------

CTI....................................... 160 140 300

------------------------------------------------------------------------

(b) Under paragraph (b) of this section, T's $100 ordinary loss

in Year 3 (not taken into account in the consolidated taxable income

computations above) is a built-in loss. Under paragraph (a) of this

section, the built-in loss is treated as a net operating loss

carryover for purposes of determining the SRLY limitation under

Sec. 1.1502-21T(c).

and $100 net operating loss carryover from Year 1 to the aggregate

of the P group's consolidated taxable income through Year 3

determined by reference to only T's items. For this purpose,

consolidated taxable income is determined without regard to any

consolidated net operating loss deductions under Sec. 1.1502-21T(a).

(d) The P group's consolidated taxable income through Year 3 is

$60 when determined by reference to only T's items. Under

Sec. 1.1502-21T(c), the SRLY limitation for Year 3 is therefore $60.

(e) Under paragraph (a) of this section, the $100 built-in loss

is treated as a current deduction for all purposes other than

determination of the SRLY limitation under Sec. 1.1502-21T(c).

Consequently, a deduction for the built-in loss is allowed in Year 3

before T's loss carryover from Year 1 is allowed, but only to the

extent of the $60 SRLY limitation. None of T's Year 1 loss carryover

is allowed because the built-in loss ($100) exceeds the SRLY

limitation for Year 3.

(f) The $40 balance of the built-in loss that is not allowed in

Year 3 because of the SRLY limitation is treated as a $40 net

operating loss arising in Year 3 that is carried to other years in

accordance with the rules of Sec. 1.1502-21T(b). The $40 net

operating loss is treated under paragraph (a) of this section and

Sec. 1.1502-21T(c)(1)(ii) as a loss carryover or carryback from Year

3 that arises in a SRLY, and is subject to the rules of Sec. 1.1502-

21T (including Sec. 1.1502-21T(c)) rather than this section.

(g) The facts are the same as in paragraphs (a) through (f) of

this Example 4, except that T also recognizes additional built-in

losses in Year 4. For purposes of determining the SRLY limitation

for these additional losses in Year 4 (or any subsequent year), the

$60 of built-in loss allowed as a deduction in Year 3 is treated

under paragraph (a) of this section as a deduction in Year 3 that

reduces the P group's consolidated taxable income when determined by

reference to only T's items.

Example 5. Built-in loss exceeding consolidated taxable income

in the year recognized. (a) P buys all the stock of T during Year 1,

and T becomes a member of the P group. At the time of acquisition, T

has

[[Page 33328]]

a depreciable asset with an unrealized loss of $45 (basis $100,

value $55), which exceeds the threshold requirements of section

382(h)(3)(B). During Year 2, T sells its asset for $55 and

recognizes the unrealized built-in loss. The P group has $10 of

consolidated taxable income in Year 2, computed by disregarding T's

recognition of the $45 built-in loss and the consolidated net

operating loss deduction, while the consolidated taxable income

would be $25 if determined by reference to only T's items (other

than the $45 loss).

(b) T's $45 loss is recognized in Year 2 and, under paragraph

(b) of this section, constitutes a built-in loss. Under paragraph

(a) of this section and Sec. 1.1502-21T(c)(1)(ii), the loss is

treated as a net operating loss carryover to Year 2 for purposes of

applying the SRLY limitation under Sec. 1.1502-21T(c).

group's consolidated taxable income through Year 2 determined by

reference to only T's items. For this purpose, consolidated taxable

income is determined by disregarding any built-in loss that is

treated as a net operating loss carryover, and any consolidated net

operating loss deductions under Sec. 1.1502-21T(a). Consolidated

taxable income so determined is $25.

(d) Under Sec. 1.1502-21T(c), $25 of the $45 built-in loss could

be deducted in Year 2. Because the P group has only $10 of

consolidated taxable income (determined without regard to the $45),

the $25 loss creates a consolidated net operating loss of $15. This

loss is carried back or over under the rules of Sec. 1.1502-21T(b)

and absorbed under the rules of Sec. 1.1502-21T(a). This loss is not

treated as arising in a SRLY (see Sec. 1.1502-21T(c)(1)(ii)) and

therefore is not subject to the SRLY limitation under Sec. 1.1502-

21T(c) in any consolidated return year of the group to which it is

carried. The remaining $20 is treated as a loss carryover arising in

a SRLY and is subject to the limitation of Sec. 1.1502-21T(c) in the

year to which it is carried.

(e) Predecessors and successors. For purposes of this section, any

reference to a corporation or member includes, as the context may

require, a reference to a successor or predecessor, as defined in

Sec. 1.1502-1(f)(4).

(f) Effective date--(1) In general. This section applies to built-

in losses recognized in consolidated return years beginning on or after

January 1, 1997.

(2) Application to prior periods. See Sec. 1.1502-21T(g)(3) for

rules generally permitting a group to apply the rules of this section

to consolidated return years ending on or after January 29, 1991, and

beginning before January 1, 1997. A group must treat all corporations

that were affiliated on January 1, 1987, and continuously thereafter as

having met the 60 consecutive month requirement of paragraph (c)(2) of

this section on any day before January 1, 1992, on which the

determination of net unrealized built-in gain or loss of a subgroup is

made.

Par. 12. Section 1.1502-21 is redesignated as Sec. 1.1502-21A; the

heading of the newly designated Sec. 1.1502-21A is revised; and

paragraphs (d)(4), (e)(3) and (h) are added to read as follows:

Sec. 1.1502-21A Consolidated net operating loss deduction generally

applicable for consolidated return years beginning before January 1,

1997.

* * * * *

(d) * * *

(4) Cross-reference. See Sec. 1.1502-21T(d)(1) for the rule that

applies the principles of this paragraph (d) in consolidated return

years beginning on or after January 1, 1997, with respect to a

consolidated return change of ownership occurring before January 1,

1997.

(e) * * *

(3) Effective date. This paragraph (e) disallows or reduces the net

operating loss carryovers of a member as a result of a transaction to

which old section 382 (as defined in Sec. 1.382-2T(f)(21)) applies. See

Sec. 1.1502-21T(d)(2) for the rule that applies the principles of this

paragraph (e) in consolidated return years beginning on or after

January 1, 1997, with respect to such a transaction.

* * * * * -

(h) Effective date. Except as provided in Sec. 1.1502-21T (d)(1),

(d)(2), and (g)(3), this section applies to consolidated return years

beginning before January 1, 1997. -

Par. 13. Section 1.1502-21T is added to read as follows:

Sec. 1.1502-21T Net operating losses (temporary). -

(a) Consolidated net operating loss deduction. The consolidated net

operating loss deduction (or CNOL deduction) for any consolidated

return year is the aggregate of the net operating loss carryovers and

carrybacks to the year. The net operating loss carryovers and

carrybacks consist of-- -

(1) Any CNOLs (as defined in paragraph (e) of this section) of the

consolidated group; and -

(2) Any net operating losses of the members arising in separate

return years. -

(b) Net operating loss carryovers and carrybacks to consolidated

return and separate return years. Net operating losses of members

arising during a consolidated return year are taken into account in

determining the group's CNOL under paragraph (e) of this section for

that year. Losses taken into account in determining the CNOL may be

carried to other taxable years (whether consolidated or separate) only

under this paragraph (b). -

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

carryovers and carrybacks to a taxable year are determined under the

principles of section 172 and this section. Thus, losses permitted to

be absorbed in a consolidated return year generally are absorbed in the

order of the taxable years in which they arose, and losses carried from

taxable years ending on the same date, and which are available to

offset consolidated taxable income for the year, generally are absorbed

on a pro rata basis. See Example 2 of paragraph (c)(1)(iii) of this

section for an illustration of pro rata absorption of losses subject to

a SRLY limitation. Additional rules provided under the Code or

regulations also apply. See, e.g., section 382(l)(2)(B). -

(2) Carryovers and carrybacks of CNOLs to separate return years--

(i) In general. If any CNOL that is attributable to a member may be

carried to a separate return year of the member, the amount of the CNOL

that is attributable to the member is apportioned to the member

(apportioned loss) and carried to the separate return year. If carried

back to a separate return year, the apportioned loss may not be carried

back to an equivalent, or earlier, consolidated return year of the

group; if carried over to a separate return year, the apportioned loss

may not be carried over to an equivalent, or later, consolidated return

year of the group. For rules permitting the reattribution of losses of

a subsidiary to the common parent when loss is disallowed on the

disposition of subsidiary stock, see Sec. 1.1502-20(g). -

(ii) Special rules--(A) Year of departure from group. If a

corporation ceases to be a member during a consolidated return year,

net operating loss carryovers attributable to the corporation are first

carried to the consolidated return year, and only the amount so

attributable that is not absorbed by the group in that year is carried

to the corporation's first separate return year. -

(B) Offspring rule. In the case of a member that has been a member

continuously since its organization, the CNOL attributable to the

member is included in the carrybacks to consolidated return years

before the member's existence. See paragraph (f) of this section for

applications to predecessors and successors. If the group did not file

a consolidated return for a carryback year, the loss may be carried

back to a separate return year of the common parent under paragraph

(b)(2)(i) of this section, but only if the common parent was not a

member of a different consolidated group or of an

[[Page 33329]]

affiliated group filing separate returns for the year to which the loss

is carried or any subsequent year in the carryback period. Following an

acquisition described in Sec. 1.1502-75(d) (2) or (3), references to

the common parent are to the corporation that was the common parent

immediately before the acquisition. -

(iii) Equivalent years. Taxable years are equivalent if they bear

the same numerical relationship to the consolidated return year in

which a CNOL arises, counting forward or backward from the year of the

loss. For example, in the case of a member's third taxable year (which

was a separate return year) that preceded the consolidated return year

in which the loss arose, the equivalent year is the third consolidated

return year preceding the consolidated return year in which the loss

arose. See paragraph (b)(3)(iii) of this section for certain short

taxable years that are disregarded in making this determination. -

(iv) Amount of CNOL attributable to a member. The amount of a CNOL

that is attributable to a member is determined by a fraction the

numerator of which is the separate net operating loss of the member for

the year of the loss and the denominator of which is the sum of the

separate net operating losses for that year of all members having such

losses. For this purpose, the separate net operating loss of a member

is determined by computing the CNOL by reference to only the member's

items of income, gain, deduction, and loss, including the member's

losses and deductions actually absorbed by the group in the taxable

year (whether or not absorbed by the member). -

(v) Examples. For purposes of the examples in this section, unless

otherwise stated, all groups file consolidated returns, all

corporations have calendar taxable years, the facts set forth the only

corporate activity, value means fair market value and the adjusted

basis of each asset equals its value, all transactions are with

unrelated persons, and the application of any limitation or threshold

under section 382 is disregarded. The principles of this paragraph

(b)(2) are illustrated by the following examples:

Example 1. Offspring rule. (a) P is formed at the beginning of

Year 1 and files a separate return. P forms S on March 15 of Year 2,

and P and S file a consolidated return. P purchases all the stock of

T at the beginning of Year 3, and T becomes a member of the P group.

T was formed in Year 2 and filed a separate return for that year. P,

S, and T sustain a $1,100 CNOL in Year 3 and, under paragraph

(b)(2)(iv) of this section, the loss is attributable $200 to P, $300

to S, and $600 to T. -

(b) Of the $1,100 CNOL in Year 3, the $500 amount of the CNOL

that is attributable to P and S ($200 + $300) may be carried to P's

separate return in Year 1. Even though S was not in existence in

Year 1, the $300 amount of the CNOL attributable to S may be carried

back to P's separate return in Year 1 because S (unlike T) has been

a member of the P group since its organization and P is a qualified

parent under paragraph (b)(2)(ii)(B) of this section. To the extent

not absorbed in that year, the loss may then be carried to the P

group's return in Year 2. The $600 amount of the CNOL attributable

to T is a net operating loss carryback to T's separate return in

Year 2. -

Example 2. Departing members. (a) The facts are the same as in

Example 1. In addition, on June 15 of Year 4, P sells all the stock

of T. The P group's consolidated return for Year 4 includes the

income of T through June 15. T files a separate return for the

period from June 16 through December 31. -

(b) $600 of the Year 3 CNOL attributable to T is apportioned to

T and is carried back to its separate return in Year 2. To the

extent the $600 is not absorbed in T's separate return in Year 2, it

is carried to the consolidated return in Year 4 before being carried

to T's separate return in Year 4. Any portion of the loss not

absorbed in T's Year 2 or in the P group's Year 4 is then carried to

T's separate return in Year 4.

-(3) Special rules--(i) Election to relinquish carryback. A group

may make an irrevocable election under section 172(b)(3) to relinquish

the entire carryback period with respect to a CNOL for any consolidated

return year. The election may not be made separately for any member

(whether or not it remains a member), and must be made in a separate

statement entitled ``THIS IS AN ELECTION UNDER SECTION 1.1502-

21T(b)(3)(i) TO WAIVE THE ENTIRE CARRYBACK PERIOD PURSUANT TO SECTION

172(b)(3) FOR THE [insert consolidated return year] CNOLs OF THE

CONSOLIDATED GROUP OF WHICH [insert name and employer identification

number of common parent] IS THE COMMON PARENT.'' The statement must be

signed by the common parent and filed with the group's income tax

return for the consolidated return year in which the loss arises.

(ii) Special election for groups that include insolvent financial

institutions. For rules applicable to relinquishing the entire

carryback period with respect to losses attributable to insolvent

financial institutions, see Sec. 301.6402-7 of this chapter. -

(iii) Short years in connection with transactions to which section

381(a) applies. If a member distributes or transfers assets to a

corporation that is a member immediately after the distribution or

transfer in a transaction to which section 381(a) applies, the

transaction does not cause the distributor or transferor to have a

short year within the consolidated return year of the group in which

the transaction occurred that is counted as a separate year for

purposes of determining the years to which a net operating loss may be

carried. -

(iv) Special status losses. [Reserved] -

from separate return limitation years--(1) SRLY limitation--(i) General

rule. The aggregate of the net operating loss carryovers and carrybacks

of a member arising (or treated as arising) in SRLYs that are included

in the CNOL deductions for all consolidated return years of the group

under paragraph (a) of this section may not exceed the aggregate

consolidated taxable income for all consolidated return years of the

group determined by reference to only the member's items of income,

gain, deduction, and loss. For this purpose-- -

(A) Consolidated taxable income is computed without regard to CNOL

deductions; -

(B) Consolidated taxable income takes into account the member's

losses and deductions (including capital losses) actually absorbed by

the group in consolidated return years (whether or not absorbed by the

member); -

return years of the group include only those years, including the year

to which the loss is carried, that the member has been continuously

included in the group's consolidated return, but exclude: -

(1) For carryovers, any years ending after the year to which the

loss is carried; and -

(2) For carrybacks, any years ending after the year in which the

loss arose; and -

(D) The treatment under Sec. 1.1502-15T of a built-in loss as a

hypothetical net operating loss carryover in the year recognized is

solely for purposes of determining the limitation under this paragraph

purpose. Thus, for purposes of determining consolidated taxable income

for any other losses, a built-in loss allowed under this section in the

year it arises is taken into account. -

(ii) Losses treated as arising in SRLYs. If a net operating loss

carryover or carryback did not arise in a SRLY but is attributable to a

built-in loss (as defined under Sec. 1.1502-15T), the carryover or

carryback is treated for purposes of this paragraph (c) as arising in a

SRLY if the built-in loss was not allowed, after application of the

SRLY limitation, in the year it arose. For an

[[Page 33330]]

illustration, see Sec. 1.1502-15T(d), Example 5. -

(iii) Examples. The principles of this paragraph (c)(1) are

illustrated by the following examples:

Example 1. Determination of SRLY limitation. (a) In Year 1,

individual A forms T and T sustains a $100 net operating loss that

is carried forward. P buys all the stock of T at the beginning of

Year 2, and T becomes a member of the P group. The P group has $300

of consolidated taxable income in Year 2 (computed without regard to

the CNOL deduction). Such consolidated taxable income would be $70

if determined by reference to only T's items.

(b) T's $100 net operating loss carryover from Year 1 arose in a

SRLY. See Sec. 1.1502-1(f)(2)(iii). Thus, the $100 net operating

loss carryover is subject to the SRLY limitation in paragraph (c)(1)

of this section. The SRLY limitation for Year 2 is consolidated

taxable income determined by reference to only T's items, or $70.

Thus, $70 of the loss is included under paragraph (a) of this

section in the P group's CNOL deduction for Year 2.

1, except that such consolidated taxable income (computed without

regard to the CNOL deduction and by reference to only T's items) is

a loss (a CNOL) of $370. Because the SRLY limitation may not exceed

the consolidated taxable income determined by reference to only T's

items, and such items aggregate to a CNOL, T's $100 net operating

loss carryover from Year 1 is not allowed under the SRLY limitation

in Year 2. Moreover, if consolidated taxable income (computed

without regard to the CNOL deduction and by reference to only T's

items) did not exceed $370 in Year 3, the carryover would still be

restricted under Sec. 1.1502-21T(c) in Year 3, because the aggregate

consolidated taxable income for all consolidated return years of the

group computed by reference to only T's items would not be a

positive amount.

Example 2. Net operating loss carryovers. (a) In Year 1,

individual A forms P and P sustains a $40 net operating loss that is

carried forward. P has no income in Year 2. Unrelated corporation T

sustains a net operating loss of $50 in Year 2 that is carried

forward. P buys the stock of T during Year 3, but T is not a member

of the P group for each day of the year. P and T file separate

returns and sustain net operating losses of $120 and $60,

respectively, for Year 3. The P group files consolidated returns

beginning in Year 4. During Year 4, the P group has $160 of

consolidated taxable income (computed without regard to the CNOL

deduction). Such consolidated taxable income would be $70 if

determined by reference to only T's items. These results are

summarized as follows:

----------------------------------------------------------------------------------------------------------------

Separate

Separate Separate affiliated Consolidated

year 1 year 2 year 3 year 4

----------------------------------------------------------------------------------------------------------------

P....................................................... $(40) $0 $(120) $90

T....................................................... 0 (50) (60) 70

-------------------------------------------------------

CTI..................................................... ............ ............ ............ 160

----------------------------------------------------------------------------------------------------------------

(b) P's Year 1, Year 2, and Year 3 are not SRLYs with respect to

the P group. See Sec. 1.1502-1(f)(2)(i). Thus, P's $40 net operating

loss arising in Year 1 and $120 net operating loss arising in Year 3

are not subject to the SRLY limitation under paragraph (c) of this

section. Under the principles of section 172, paragraph (b) of this

section requires that the loss arising in Year 1 be the first loss

absorbed by the P group in Year 4. Absorption of this loss leaves

$120 of the group's consolidated taxable income available for offset

by other loss carryovers.

See Sec. 1.1502-1(f)(2)(ii). Thus, T's $50 net operating loss

arising in Year 2 and $60 net operating loss arising in Year 3 are

subject to the SRLY limitation. Under paragraph (c)(1) of this

section, the SRLY limitation for Year 4 is $70, and under paragraph

(b) of this section, T's $50 loss from Year 2 must be included under

paragraph (a) of this section in the P group's CNOL deduction for

Year 4. The absorption of this loss leaves $70 of the group's

consolidated taxable income available for offset by other loss

carryovers.

(d) P and T each carry over net operating losses to Year 4 from

a taxable year ending on the same date (Year 3). The losses carried

over from Year 3 total $180. Under paragraph (b) of this section,

the losses carried over from Year 3 are absorbed on a pro rata

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

However, the group cannot absorb more than $20 of T's $60 net

operating loss arising in Year 3 because its $70 SRLY limitation for

Year 4 is reduced by T's $50 Year 2 SRLY loss already included in

the CNOL deduction for Year 4. Thus, the absorption of Year 3 losses

is as follows:

Amount of P's Year 3 losses absorbed = $120/($120 + $20) x $70 =

$60.

Amount of T's Year 3 losses absorbed = Sec. 20/($120 + $20) x

$70 = $10.

(e) The absorption of $10 of T's Year 3 loss further reduces T's

SRLY limitation to $10 ($70 of initial SRLY limitation, reduced by

the $60 net operating loss already included in the CNOL deductions

for Year 4 under paragraph (a) of this section).

(f) P carries its remaining $60 Year 3 net operating loss and T

carries its remaining $50 Year 3 net operating loss over to Year 5.

Assume that, in Year 5, the P group has $90 of consolidated taxable

income (computed without regard to the CNOL deduction). The group's

CTI determined by reference to only T's items is a CNOL of $4. For

Year 5, the CNOL deduction includes $60 of P's Year 3 loss but only

$6 of T's Year 3 loss (the aggregate consolidated taxable income for

Years 4 and 5 determined by reference to T's items, or $66, reduced

by T's SRLY losses actually absorbed by the group in Year 4, or

$60).

Example 3. Net operating loss carrybacks. (a)(1) P owns all of

the stock of S and T. The members of the P group contribute the

following to the consolidated taxable income of the P group for

Years 1, 2, and 3:

----------------------------------------------------------------------------------------------------------------

Year 1 Year 2 Year 3 Total

----------------------------------------------------------------------------------------------------------------

P................................................................. $100 $60 $80 $240

S................................................................. 20 20 30 70

T................................................................. 30 10 (50) (10)

---------------------------------------------

CTI............................................................... 150 90 60 300

----------------------------------------------------------------------------------------------------------------

(2) P sells all of the stock of T to individual A at the

beginning of Year 4. For its Year 4 separate return year, T has a

net operating loss of $30.

(b) T's Year 4 is a SRLY with respect to the P group. See

Sec. 1.1502-1(f)(1). T's $30 net operating loss carryback to the P

group from Year 4 is not allowed under Sec. 1.1502-21T(c) to be

included in the CNOL deduction under paragraph (a) of this section

for Year 1, 2, or 3, because the P group's consolidated taxable

income would not be a positive amount if determined by reference to

only T's items for all consolidated return years through Year 4

(without regard to the $30 net operating loss). However, the $30

loss is carried forward to T's Year 5 and succeeding taxable years

as provided under the Code.

-Example 4. Computation of SRLY limitation for built-in losses

treated as net operating loss carryovers. (a) In Year 1, individual

A forms T by contributing $300 and T sustains a $100 net operating

loss. During Year 2, T's assets decline in value by

[[Page 33331]]

$100. At the beginning of Year 3, P buys all the stock of T for

$100, and T becomes a member of the P group. At the time of the

acquisition, T has a $100 net unrealized built-in loss, which

exceeds the threshold requirements of section 382(h)(3)(B). During

Year 3, T recognizes its unrealized loss as a $100 ordinary loss.

The members of the P group contribute the following to the

consolidated taxable income of the P group for Years 3 and 4

(computed without regard to T's recognition of its unrealized loss

and any CNOL deduction under Sec. 1.1502-21T):

------------------------------------------------------------------------

Year 3 Year 4 Total

------------------------------------------------------------------------

P group (without T)....................... $100 $100 $200

T......................................... 60 40 100

-----------------------------

CTI....................................... 160 140 300

------------------------------------------------------------------------

(b) Under Sec. 1.1502-15T(a), T's $100 of ordinary loss in Year

3 constitutes a built-in loss that is subject to the SRLY limitation

under Sec. 1.1502-21T(c). The amount of the limitation is determined

by treating the deduction as a net operating loss carryover from a

SRLY. The built-in loss is therefore subject to a $60 SRLY

limitation for Year 3. The built-in loss is treated as a net

operating loss carryover solely for purposes of determining the

extent to which the loss is not allowed by reason of the SRLY

limitation, and for all other purposes the loss remains a loss

arising in Year 3. Consequently, under paragraph (b) of this

section, the $60 allowed under the SRLY limitation is absorbed by

the P group before T's $100 net operating loss carryover from Year 1

is allowed.

loss that is not allowed in Year 3 because of the SRLY limitation is

treated as a $40 net operating loss arising in Year 3 that is

subject to the SRLY limitation because, under Sec. 1.1502-

21T(c)(1)(ii), Year 3 is treated as a SRLY, and is carried to other

years in accordance with the rules of paragraph (b) of this section.

The SRLY limitation for Year 4 is the P group's consolidated taxable

income for Year 3 and Year 4 determined by reference to only T's

items and without regard to the group's CNOL deductions ($60+$40),

reduced by T's loss actually absorbed by the group in Year 3 ($60).

The SRLY limitation for Year 4 is $40.

(d) Under paragraph (c) of this section and the principles of

section 172(b), $40 of T's $100 net operating loss carryover from

Year 1 is included in the CNOL deduction under paragraph (a) of this

section in Year 4.

(2) SRLY subgroup limitation. In the case of a net operating loss

carryover or carryback for which there is a SRLY subgroup, the

principles of paragraph (c)(1) of this section apply to the SRLY

subgroup, and not separately to its members. Thus, the contribution to

consolidated taxable income and the net operating loss carryovers and

carrybacks arising (or treated as arising) in SRLYs that are included

in the CNOL deductions for all consolidated return years of the group

under paragraph (a) of this section are based on the aggregate amounts

of income, gain, deduction, and loss of the members of the SRLY

subgroup for the relevant consolidated return years (as provided in

paragraph (c)(1)(i)(C) of this section). For an illustration of

aggregate amounts during the relevant consolidated return years

following the year in which a member of a SRLY subgroup ceases to be a

member of the group, see paragraph (c)(2)(vii) Example 4 of this

section. A SRLY subgroup may exist only for a carryover or carryback

arising in a year that is not a SRLY (and is not treated as a SRLY

under paragraph (c)(1)(ii) of this section) with respect to another

group (the former group), whether or not the group is a consolidated

group. A separate SRLY subgroup is determined for each such carryover

or carryback. A consolidated group may include more than one SRLY

subgroup and a member may be a member of more than one SRLY subgroup.

Solely for purposes of determining the members of a SRLY subgroup with

respect to a loss:

(i) Carryovers. In the case of a carryover, the SRLY subgroup is

composed of the member carrying over the loss (the loss member) and

each other member that was a member of the former group that becomes a

member of the group at the same time as the loss member. A member

remains a member of the SRLY subgroup until it ceases to be affiliated

with the loss member. The aggregate determination described in

paragraph (c)(1) of this section and this paragraph (c)(2) includes the

amounts of income, gain, deduction, and loss of each member of the SRLY

subgroup for the consolidated return years during which it remains a

member of the SRLY subgroup. For an illustration of the aggregate

determination of a SRLY subgroup, see paragraph (c)(2)(vii) Example 2

of this section.

(ii) Carrybacks. In the case of a carryback, the SRLY subgroup is

composed of the member carrying back the loss (the loss member) and

each other member of the group from which the loss is carried back that

has been continuously affiliated with the loss member from the year to

which the loss is carried through the year in which the loss arises.

(iii) Built-in losses. In the case of a built-in loss, the SRLY

subgroup is composed of the member recognizing the loss (the loss

member) and each other member that was part of the subgroup with

respect to the loss determined under Sec. 1.1502-15T(c)(2) immediately

before the members became members of the group. The principles of

paragraphs (c)(2)(i) and (ii) of this section apply to determine the

SRLY subgroup for the built-in loss that is, under paragraph (c)(1)(ii)

of this section, treated as arising in a SRLY with respect to the group

in which the loss is recognized. For this purpose and as the context

requires, a reference in those paragraphs to a group or former group is

a reference to the subgroup determined under Sec. 1.1502-15T(c)(2).

(iv) Principal purpose of avoiding or increasing a SRLY limitation.

The members composing a SRLY subgroup are not treated as a SRLY

subgroup if any of them is formed, acquired, or availed of with a

principal purpose of avoiding the application of, or increasing any

limitation under, this paragraph (c). Any member excluded from a SRLY

subgroup, if excluded with a principal purpose of so avoiding or

increasing any SRLY limitation, is treated as included in the SRLY

subgroup.

(v) Coordination with other limitations. This paragraph (c)(2) does

not allow a net operating loss to offset income to the extent

inconsistent with other limitations or restrictions on the use of

losses, such as a limitation based on the nature or activities of

members. For example, any dual consolidated loss may not reduce the

taxable income to an extent greater than that allowed under section

1503(d) and Sec. 1.1503-2. See also Sec. 1.1502-47(q) (relating to

preemption of rules for life-nonlife groups).

(vi) Anti-duplication. If the same item of income or deduction

could be taken into account more than once in determining a limitation

under this paragraph (c), or in a manner inconsistent with any other

provision of the Code or regulations incorporating this paragraph (c),

the item of income or deduction is taken into account only once and in

such manner that losses are absorbed in accordance with the ordering

rules in paragraph (b) of this section and the underlying purposes of

this section.

(vii) Examples. The principles of this paragraph (c)(2) are

illustrated by the following examples:

Example 1. Members of SRLY subgroups. (a) During Year 1, P

sustains a $50 net operating loss. At the beginning of Year 2, P

buys all the stock of S at a time when the aggregate basis of S's

assets exceeds their aggregate value by $70 (as determined under

Sec. 1.1502-15T). At the beginning of Year 3, P buys all the stock

of T, T has a $60 net operating loss carryover at the time of the

acquisition, and T becomes a member of the P group. During Year 4, S

forms S1 and T forms T1, each by contributing assets with built-in

gains which are, in the aggregate, material. S1 and T1 become

members of the P group. M is the common parent of another group.

During Year 7, M acquires all of the

[[Page 33332]]

stock of P, and the members of the P group become members of the M

group for the balance of Year 7. The $50 and $60 loss carryovers of

P and T are carried to Year 7 of the M group, and the value and

basis of S's assets did not change after it became a member of the

former P group.

(b) Under paragraph (c)(2) of this section, a separate SRLY

subgroup is determined for each loss carryover and built-in loss. In

the P group, P's $50 loss carryover is not treated as arising in a

SRLY. See Sec. 1.1502-1(f). Consequently, the carryover is not

subject to limitation under paragraph (c) of this section in the P

group.

in a SRLY and is subject to the limitation under paragraph (c) of

this section. A SRLY subgroup with respect to that loss is composed

of members which were members of the P group, the group as to which

the loss was not a SRLY. The SRLY subgroup is composed of P, the

member carrying over the loss, and each other member of the P group

that became a member of the M group at the same time as P. A member

of the SRLY subgroup remains a member until it ceases to be

affiliated with P. For Year 7, the SRLY subgroup is composed of P,

S, T, S1, and T1.

(d) In the P group, S's $70 unrealized loss, if recognized

within the 5-year recognition period after S becomes a member of the

P group, is subject to limitation under paragraph (c) of this

section. See Sec. 1.1502-15T and paragraph (c)(1)(ii) of this

section. Because S was not continuously affiliated with P, T, or T1

for 60 consecutive months prior to joining the P group, these

corporations cannot be included in a SRLY subgroup with respect to

S's unrealized loss in the P group. See paragraph (c)(2)(iii) of

this section. As a successor to S, S1 is included in a subgroup with

S in the P group. Because S did not cease to exist, however, S1's

contribution to consolidated taxable income may not be used to

increase the consolidated taxable income of the P group that may be

offset by the built-in loss. See paragraph (f) of this section.

(e) In the M group, S's $70 unrealized loss, if recognized

within the 5-year recognition period after S becomes a member of the

M group, is subject to limitation under paragraph (c) of this

section. Prior to becoming a member of the M group, S had been

continuously affiliated with P (but not T or T1) for 60 consecutive

months and S1 is a successor that has remained continuously

affiliated with S. Those members had a net unrealized built-in loss

immediately before they became members of the group under

Sec. 1.1502-15T(c). Consequently, in Year 7, S, S1, and P compose a

subgroup in the M group with respect to S's unrealized loss. S1's

contribution to consolidated taxable income may not be used to

increase the consolidated taxable income of the M group that may be

offset by the recognized built-in loss. See paragraph (f) of this

section.

(f) In the P group, T's $60 loss carryover arose in a SRLY and

is subject to limitation under paragraph (c) of this section. P, S,

and S1 were not members of the group in which T's loss arose and

cannot be members of a SRLY subgroup with respect to the carryover

in the P group. See paragraph (c)(2)(i) of this section. As a

successor to T, T1 is included in a SRLY subgroup with T in the P

group; however, because T did not cease to exist, T1's contribution

to consolidated taxable income may not be used to increase the

consolidated taxable income of the P group that may be offset by the

carryover. See paragraph (f) of this section.

(g) In the M group, T's $60 loss carryover arose in a SRLY and

is subject to limitation under paragraph (c) of this section. T and

T1 remain the only members of a SRLY subgroup with respect to the

carryover, but T1's contribution to consolidated taxable income may

not be used to increase consolidated taxable income of the M group

that may be offset by the carryover. See paragraph (f) of this

section.

Example 2. Computation of SRLY subgroup limitation. (a)

Individual A forms S. Individual B forms T. In Year 2, P buys all

the stock of S and T from A and B, and S and T become members of the

P group. For Year 3, the P group has a $45 CNOL, which is

attributable to P, and which P carries forward. M is the common

parent of another group. At the beginning of Year 4, M acquires all

of the stock of P and the former members of the P group become

members of the M group.

(b) P's year to which the loss is attributable, Year 3, is a

SRLY with respect to the M group. See Sec. 1.1502-1(f)(1). However,

P, S, and T compose a SRLY subgroup with respect to the Year 3 loss

under paragraph (c)(2)(i) of this section because Year 3 is not a

SRLY (and is not treated as a SRLY) with respect to the P group. P's

loss is carried over to the M group's Year 4 and is therefore

subject to the SRLY subgroup limitation in paragraph (c)(2) of this

section.

income (computed without regard to the CNOL deduction for Year 4).

However, such consolidated taxable income would be $45 if determined

by reference to only the items of P, S, and T, the members included

in the SRLY subgroup with respect to P's loss carryover. Therefore,

the SRLY subgroup limitation under paragraph (c)(2) of this section

for P's net operating loss carryover from Year 3 is $45. Because the

M group has only $10 of consolidated taxable income in Year 4,

however, only $10 of P's net operating loss carryover is included in

the CNOL deduction under paragraph (a) of this section in Year 4.

(d) In Year 5, the M group has $100 of consolidated taxable

income (computed without regard to the CNOL deduction for Year 5).

Neither P, S, nor T has any items of income, gain, deduction, or

loss in Year 5. Although the members of the SRLY subgroup do not

contribute to the $100 of consolidated taxable income in Year 5, the

SRLY subgroup limitation for Year 5 is $35 (the sum of SRLY subgroup

consolidated taxable income of $45 in Year 4 and $0 in Year 5, less

the $10 net operating loss carryover actually absorbed by the M

group in Year 4). Therefore, $35 of P's net operating loss carryover

is included in the CNOL deduction under paragraph (a) of this

section in Year 5.

Example 3. Inclusion in more than one SRLY subgroup. (a) At the

beginning of Year 1, S buys all the stock of T, and T becomes a

member of the S group. For Year 1, the S group has a CNOL of $10,

all of which is attributable to S and is carried over to Year 2. At

the beginning of Year 2, P buys all the stock of S, and S and T

become members of the P group. For Year 2, the P group has a CNOL of

$35, all of which is attributable to P and is carried over to Year

3. At the beginning of Year 3, M acquires all of the stock of P and

the former members of the P group become members of the M group.

(b) P's and S's net operating losses arising in SRLYs with

respect to the M group are subject to limitation under paragraph (c)

of this section. P, S, and T compose a SRLY subgroup for purposes of

determining the limitation for P's $35 net operating loss carryover

arising in Year 2 because, under paragraph (c)(2)(i) of this

section, Year 2 is not a SRLY with respect to the P group.

Similarly, S and T compose a SRLY subgroup for purposes of

determining the limitation for S's $10 net operating loss carryover

arising in Year 1 because Year 1 is not a SRLY with respect to the S

group.

to P's losses and the SRLY subgroup with respect to S's losses.

Under paragraph (c)(2) of this section, S's and T's items cannot be

included in the determination of the SRLY subgroup limitation for

both SRLY subgroups for the same consolidated return year; paragraph

(c)(2)(vi) of this section requires the M group to consider the

items of S and T only once so that the losses are absorbed in the

order of the taxable years in which they were sustained. Because S's

loss was incurred in Year 1, while P's loss was incurred in Year 2,

the items will be added in the determination of the consolidated

taxable income of the S and T SRLY subgroup to enable S's loss to be

absorbed first. The taxable income of the P, S, and T SRLY subgroup

is then computed by including the consolidated taxable income for

the S and T SRLY subgroup less the amount of any net operating loss

carryover of S that is absorbed after applying this section to the S

subgroup for the year.

Example 4. Corporation ceases to be affiliated with a SRLY

subgroup. (a) P and S are members of the P group and the P group has

a CNOL of $30 in Year 1, all of which is attributable to P and

carried over to Year 2. At the beginning of Year 2, M acquires all

of the stock of P, and P and S become members of the M group. P and

S compose a SRLY subgroup with respect to P's net operating loss

carryover. For Year 2, consolidated taxable income of the M group

determined by reference to only the items of P (and without regard

to the CNOL deduction for Year 2) is $40. However, such consolidated

taxable income of the M group determined by reference to the items

of both P and S is a loss of $20. Thus, the SRLY subgroup limitation

under paragraph (c)(2) of this section prevents the M group from

including any of P's net operating loss carryover in the CNOL

deduction under paragraph (a) of this section in Year 2, and P

carries the loss to Year 3.

[[Page 33333]]

(b) At the end of Year 2, P sells all of the S stock and S

ceases to be a member of the M group and, in turn, ceases to be

affiliated with the P subgroup. For Year 3, consolidated taxable

income of the M group is $50 (determined without regard to the CNOL

deduction for Year 3), and such consolidated taxable income would be

$10 if determined by reference to only items of P. However, the

limitation under paragraph (c) of this section for Year 3 for P's

net operating loss carryover still prevents the M group from

including any of P's loss in the CNOL deduction under paragraph (a)

of this section. The limitation results from the inclusion of S's

items for Year 2 in the determination of the SRLY subgroup

limitation for Year 3 even though S ceased to be a member of the M

group (and the P subgroup) at the end of Year 2. Thus, the M group's

consolidated taxable income determined by reference to only the SRLY

subgroup members' items for all consolidated return years of the

group through Year 3 (determined without regard to the CNOL

deduction) is not a positive amount.

(d) Coordination with consolidated return change of ownership

limitation and transactions subject to old section 382--(1)

Consolidated return changes of ownership. If a consolidated return

change of ownership occurred before January 1, 1997, the principles of

Sec. 1.1502-21A(d) apply to determine the amount of the aggregate of

the net operating losses attributable to old members of the group that

may be included in the consolidated net operating loss deduction under

paragraph (a) of this section. For this purpose, Sec. 1.1502-1(g) is

applied by treating that date as the end of the year of change.

(2) Old section 382. The principles of Sec. 1.1502-21A(e) apply to

disallow or reduce the amount of a net operating loss carryover of a

member as a result of a transaction subject to old section 382.

(e) Consolidated net operating loss. Any excess of deductions over

gross income, as determined under Sec. 1.1502-11(a) (without regard to

any consolidated net operating loss deduction), is also referred to as

the consolidated net operating loss (or CNOL).

(f) Predecessors and successors--(1) In general. For purposes of

this section, any reference to a corporation, member, common parent, or

subsidiary, includes, as the context may require, a reference to a

successor or predecessor, as defined in Sec. 1.1502-1(f)(4).

(2) Limitation on SRLY subgroups. Except as the Commissioner may

otherwise determine, any increase in the consolidated taxable income of

a SRLY subgroup that is attributable to a successor is disregarded

unless the successor acquires substantially all the assets and

liabilities of its predecessor and the predecessor ceases to exist.

(g) Effective date.--(1) In general. This section generally applies

to consolidated return years beginning on or after January 1, 1997.

(2) SRLY limitation. Except in the case of those members (including

members of a SRLY subgroup) described in paragraph (g)(3)(iii) of this

section, a group does not take into account a consolidated taxable year

beginning before January 1, 1997, in determining the aggregate of the

consolidated taxable income under paragraph (c)(1) of this section

(including for purposes of Sec. 1.1502-15T and Sec. 1.1502-22T(c)) for

the members (or SRLY subgroups).

(3) Application to prior periods. A consolidated group may apply

the rules of this section to all consolidated return years ending on or

after January 29, 1991, and beginning before January 1, 1997, provided

that--

(i) The group's tax liability as shown on an original or an amended

return is consistent with the application of the rules of this section

(other than this paragraph (g)) and Secs. 1.1502-15T, 1.1502-22T,

1.1502-23T, 1.1502-91T through 1.1502-96T, and 1.1502-98T for each such

year for which the statute of limitations does not preclude the filing

of an amended return on January 1, 1997;

(ii) Each section described in paragraph (g)(3)(i) of this section

and Sec. 1.1502-1(f)(4)(ii) is applied by substituting ``taxable years

ending on or after January 29, 1991'' for ``taxable years beginning on

or after January 1, 1997'' (and ``before January 29, 1991'' for

``before January 1, 1997'' in the case of consolidated return changes

of ownership) as the context requires.

(iii) The rules of paragraph (c) of this section and Secs. 1.1502-

15T and 1.1502-22T(c) are applied only with respect to the losses and

deductions of those corporations that became members of the group

(including members of a subgroup), and to acquisitions occurring, on or

after January 29, 1991, (and only with respect to such losses and

deductions);

(iv) The rules of Secs. 1.1502-15A, 1.1502-21A(c) and 1.1502-22A(c)

are applied with respect to the losses and deductions of those

corporations that became members of the group, and to acquisitions

occurring, before January 29, 1991; and

(v) Appropriate adjustments are made in the earliest subsequent

open year to reflect any inconsistency in a year for which the statute

of limitations precludes the filing of an amended return on January 1,

1997.

(4) Waiver of carrybacks. Paragraph (b)(3)(i) of this section

(relating to the waiver of carrybacks) applies to net operating losses

arising in a consolidated return year for which the due date of the

income tax return (without regard to extensions) is on or after August

26, 1996.

Par. 14. Section 1.1502-22 is redesignated as Sec. 1.1502-22A; the

heading of the newly designated Sec. 1.1502-22A is revised; and

paragraphs (d)(3) and (e) are added to read as follows:

Sec. 1.1502-22A Consolidated net capital gain or loss generally

applicable for consolidated return years beginning before January 1,

1997.

* * * * *

(d) * * *

(3) Cross-reference. See Sec. 1.1502-22T(d) for the rule that

applies the principles of this paragraph (d) in consolidated return

years beginning on or after January 1, 1997, with respect to a

consolidated return change of ownership occurring before January 1,

1997.

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

years to which Sec. 1.1502-21T(g) does not apply. See Sec. 1.1502-

21T(g) for effective dates of that section.

Par. 15. Section 1.1502-22T is added to read as follows:

Sec. 1.1502-22T Consolidated capital gain and loss (temporary).

(a) Capital gain. The determinations under section 1222, including

capital gain net income, net long-term capital gain, and net capital

gain, with respect to members during consolidated return years are not

made separately. Instead, consolidated amounts are determined for the

group as a whole. The consolidated capital gain net income for any

consolidated return year is determined by reference to--

(1) The aggregate gains and losses of members from sales or

exchanges of capital assets for the year (other than gains and losses

to which section 1231 applies);

(2) The consolidated net section 1231 gain for the year (determined

under Sec. 1.1502-23T); and

(3) The net capital loss carryovers or carrybacks to the year.

(b) Net capital loss carryovers and carrybacks.--(1) In general.

The determinations under section 1222, including net capital loss and

net short-term capital loss, with respect to members during

consolidated return years are not made separately. Instead,

consolidated amounts are determined for the group as a whole. Losses

[[Page 33334]]

included in the consolidated net capital loss may be carried to

consolidated return years, and, after apportionment, may be carried to

separate return years. The net capital loss carryovers and carrybacks

consist of--

(i) Any consolidated net capital losses of the group; and

(ii) Any net capital losses of the members arising in separate

return years.

(2) Carryovers and carrybacks generally. The net capital loss

carryovers and carrybacks to a taxable year are determined under the

principles of section 1212 and this section. Thus, losses permitted to

be absorbed in a consolidated return year generally are absorbed in the

order of the taxable years in which they were sustained, and losses

carried from taxable years ending on the same date, and which are

available to offset consolidated capital gain net income, generally are

absorbed on a pro rata basis. Additional rules provided under the Code

or regulations also apply, as well as the SRLY limitation under

paragraph (c) of this section. See, e.g., section 382(l)(2)(B).

(3) Carryovers and carrybacks of consolidated net capital losses to

separate return years. If any consolidated net capital loss that is

attributable to a member may be carried to a separate return year under

the principles of Sec. 1.1502-21T(b)(2), the amount of the consolidated

net capital loss that is attributable to the member is apportioned and

carried to the separate return year (apportioned loss).

(4) Special rules--(i) Short years in connection with transactions

to which section 381(a) applies. If a member distributes or transfers

assets to a corporation that is a member immediately after the

distribution or transfer in a transaction to which section 381(a)

applies, the transaction does not cause the distributor or transferor

to have a short year within the consolidated return year of the group

in which the transaction occurred that is counted as a separate year

for purposes of determining the years to which a net capital loss may

be carried.

(ii) Special status losses. [Reserved]

separate return limitation years. The aggregate of the net capital

losses of a member arising (or treated as arising) in SRLYs that are

included in the determination of consolidated capital gain net income

for all consolidated return years of the group under paragraph (a) of

this section may not exceed the aggregate of the consolidated capital

gain net income for all consolidated return years of the group

determined by reference to only the member's items of gain and loss

from capital assets as defined in section 1221 and trade or business

assets defined in section 1231(b), including the member's losses

actually absorbed by the group in the taxable year (whether or not

absorbed by the member). The principles of Sec. 1.1502-21T(c)(including

the SRLY subgroup principles under Sec. 1.1502-21T(c)(2)) apply with

appropriate adjustments for purposes of applying this paragraph (c).

(d) Coordination with respect to consolidated return change of

ownership limitation occurring in consolidated return years beginning

before January 1, 1997. If a consolidated return change of ownership

occurred before January 1, 1997, the principles of Sec. 1.1502-22A(d)

apply to determine the amount of the aggregate of the net capital loss

attributable to old members of the group (as those terms are defined in

Sec. 1.1502-1(g)), that may be included in the net capital loss

carryover under paragraph (b) of this section. For this purpose,

Sec. 1.1502-1(g) is applied by treating that date as the end of the

year of change.

(e) Consolidated net capital loss. Any excess of losses over gains,

as determined under paragraph (a) of this section (without regard to

any carryovers or carrybacks), is also referred to as the consolidated

net capital loss.

(f) Predecessors and successors. For purposes of this section, the

principles of Sec. 1.1502-21T(f) apply with appropriate adjustments.

(g) Effective date--(1) In general. This section applies to

consolidated return years beginning on or after January 1, 1997.

(2) Application to prior periods. See Sec. 1.1502-21T(g)(3) for

rules generally permitting a group to apply the rules of this section

to consolidated return years ending on or after January 29, 1991, and

beginning before January 1, 1997.

Par. 16. Section 1.1502-23 is redesignated Sec. 1.1502-23A; the

section heading of the newly designated Sec. 1.1502-23A is revised; the

current text of the section is designated as paragraph (a), and

paragraph (b) is added to read as follows:

Sec. 1.1502-23A Consolidated net section 1231 gain or loss generally

applicable for consolidated return years beginning before January 1,

1997.

* * * * *

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

years to which Sec. 1.1502-21T(g) does not apply. See Sec. 1.1502-

21T(g) for effective dates of that section.

Par. 17. Section 1.1502-23T is added to read as follows:

Sec. 1.1502-23T Consolidated net section 1231 gain or loss

(temporary).

(a) In general. Net section 1231 gains and losses of members

arising during consolidated return years are not determined separately.

Instead, the consolidated net section 1231 gain or loss is determined

under this section for the group as a whole.

(b) Recapture of ordinary loss. [Reserved]

and losses arising in the determination of consolidated net section

1231 gain or loss for taxable years beginning on or after January 1,

1997.

(2) Application to prior periods. See Sec. 1.1502-21T(g)(3) for

rules generally permitting a group to apply the rules of this section

to consolidated return years ending on or after January 29, 1991, and

beginning before January 1, 1997.

Par. 18. Section 1.1502-41 is redesignated as Sec. 1.1502-41A; the

section heading of the newly designated Sec. 1.1502-41A is revised; and

paragraph (c) is added to read as follows:

Sec. 1.1502-41A Determination of consolidated net long-term capital

gain and consolidated net short-term capital loss generally applicable

for consolidated return years beginning before January 1, 1997.

* * * * *

years to which Sec. 1.1502-21T(g) does not apply. See Sec. 1.1502-

21T(g) for effective dates of that section.

Par. 19. Section 1.1502-79A is added to read as follows:

Sec. 1.1502-79A Separate return years generally applicable for

consolidated return years beginning before January 1, 1997.

(a) through (e) [Reserved]

(f) Effective date. Paragraphs (a) and (b) of this section apply to

losses arising in consolidated return years to which Sec. 1.1502-21T(g)

does not apply. For this purpose net operating loss deductions,

carryovers, and carrybacks arise in the year from which they are

carried. See Sec. 1.1502-21T(g) for effective dates of that section.

Par. 20. In Sec. 1.1502-79, paragraphs (a) and (b) are redesignated

as Sec. 1.1502-79A, paragraphs (a) and (b).

Par. 21. Section 1.1502-79 is amended by adding new paragraphs (a)

and (b) to read as follows:

Sec. 1.1502-79 Separate return years.

(a) Carryover and carryback of consolidated net operating losses to

separate return years. For losses arising

[[Page 33335]]

in consolidated return years beginning before January 1, 1997, see

Sec. 1.1502-79A(a). For later years, see Sec. 1.1502-21T(b).

(b) Carryover and carryback of consolidated net capital loss to

separate return years. For losses arising in consolidated return years

beginning before January 1, 1997, see Sec. 1.1502-79A(b). For later

years, see Sec. 1.1502-22T(b).

* * * * *

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 22. The authority citation for part 602 continues to read in

part as follows:

Authority: 26 U.S.C. 7805.

Par. 23. In Sec. 602.101, paragraph (c) is amended by adding an

entry in numerical order to the table to read as follows:

Sec. 602.101 OMB Control numbers.

* * * * *

------------------------------------------------------------------------

Current OMB

CFR part or section where identified or described control No.

------------------------------------------------------------------------

* * * * *

1.1502-21T............................................ 1545-1237

* * * * *

------------------------------------------------------------------------

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: May 31, 1996.

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 96-15823 Filed 6-26-96; 8:45 am]

BILLING CODE 4830-01-U

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.