Regulations Under Section 382 of the Internal Revenue Code of 1986; Application of Section 382 in Short Taxable Years and With Respect to Controlled Groups

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8679]

RIN 1545-AU37

Regulations Under Section 382 of the Internal Revenue Code of

1986; Application of Section 382 in Short Taxable Years and With

Respect to Controlled Groups

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary regulations

relating to limitations on net operating loss carryforwards and certain

built-in losses following an ownership change and comply with the

statutory direction under section 382(m) of the Internal Revenue Code

to prescribe regulations concerning short taxable years and controlled

groups. This document also contains amendments relating to the end of

separate tracking of the stock ownership of loss corporations that

cease to exist following a merger or similar transaction. The text of

these temporary regulations also serves as the text of the proposed

regulations set forth in the notice of proposed rulemaking on this

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

Register.

DATES: These regulations 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).

[[Page 33314]]

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in these temporary

regulations has been reviewed and approved by the Office of Management

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

3507) under the control number 1545-1434. Section 1.382-8T(h) requires

a response from certain corporations that are members of controlled

groups. The IRS requires this information to assure compliance with

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

member of a controlled group is not taken into account more than once

in computing a section 382 limitation. Responses to this collection of

information are required to obtain a benefit (relating to the

restoration of value for section 382 purposes).

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

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

information displays a valid control number.

For further information concerning this collection of information,

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

accuracy of the estimated burden, and suggestions for reducing this

burden, please refer to the preamble to 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 issued three notices of

proposed rulemaking, CO-132-87 (56 FR 4194), CO-077-90 (56 FR 4183),

and CO-078-90 (56 FR 4228), setting forth rules regarding the

application of sections 382 and 383 by consolidated groups and by

controlled groups, and the carryover and carryback of losses to

consolidated and separate return years.

For reasons explained in the preamble to TD 8678 (published

elsewhere in this issue of the Federal Register), the IRS and Treasury

are issuing temporary amendments concerning the limitations on net

operating loss carryforwards and certain built-in losses and credits

following an ownership change of a consolidated group. The temporary

regulations contained in this Treasury decision complement those other

temporary regulations. They assure that the members of a controlled

group cannot duplicate value in computing their respective section 382

limitations, a result not permitted to members of a group filing

consolidated returns. See Sec. 1.1502-93T.

These temporary regulations are substantially identical to the

rules proposed on January 29, 1991. One provision (relating to the

effects of successive ownership changes) was moved from the

consolidated return regulations to the section 382 regulations to

clarify that it is applicable to all corporations. These temporary

amendments do not address the numerous comments on the proposed

regulations. Many of these comments are still under consideration.

Effective Dates

The temporary amendments are generally effective as of January 1,

1997. The final rules relating to the value of stock added to

Sec. 1.382-2(a)(3)(i) and the temporary rules in Sec. 1.382-

2T(f)(1)(ii) (relating to the end of separate tracking of certain loss

corporations) are generally effective as of January 29, 1991. The

temporary rules in Sec. 1.382-5T (relating generally to short taxable

years and successive ownership changes) generally apply to loss

corporations that have an ownership change to which section 382(a), as

amended by the Tax Reform Act of 1986, applies.

Special Analysis

It has been determined that this Treasury decision is not a

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

regulatory assessment is not required. It has also been determined that

section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)

and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to

these regulations, and, therefore, a Regulatory Flexibility Analysis is

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

the notice of proposed rulemaking preceding these regulations were sent

to the Small Business Administration for comment on their impact on

small business.

Drafting Information: The principal author of the temporary

regulations is David B. Friedel of the Office of Assistant Chief

Counsel (Corporate), IRS. Other personnel from the IRS and Treasury

participated in their development.

Adoption of Amendments to the Regulations

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

PART 1--INCOME TAXES

Paragraph 1. The authority citation for Part 1 is amended by

removing the entries for ``1.382-2'' and ``1.382-2T'' and adding

entries in numerical order to read as follows:

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

Section 1.382-2 also issued under 26 U.S.C. 382(k)(1), (l)(3),

(m), and 26 U.S.C. 383.

Section 1.382-2T also issued under 26 U.S.C. 382(g)(4)(C), (i),

(k)(1) and (6), (l)(3), (m), and 26 U.S.C. 383.* * *

Section 1.382-5T also issued under 26 U.S.C. 382(m).* * *

Section 1.382-8T also issued under 26 U.S.C. 382(m).* * *

Par. 2. Section 1.382-1 is amended by:

a. Adding an entry for Sec. 1.382-2, paragraph (a)(1)(iv).

b. Revising the entry for Sec. 1.382-2, paragraph (a)(3)(i).

c. Adding entries for Sec. 1.382-2T, paragraphs (f)(1)(i) through

(f)(1)(iii).

d.- Adding entries for Secs. 1.382-5T and 1.382-8T.

Sec. 1.382-1 Table of contents.

* * * * *

Sec. 1.382-2 General rules for ownership change.

(a) * * *

(1) * * *

(iv) End of separate accounting for losses and credits of

distributor or transferor loss corporation.

* * * * *

Sec. 1.382-2T Definition of ownership change under section 382, as

amended by the Tax Reform Act of 1986 (temporary).

* * * * *

(f) * * *

(1) * * *

(i) In general.

(ii) End of separate accounting for losses and credits of

distributor or transferor loss corporation.

(iii) Application to other successor corporations.

* * * * *

Sec. 1.382-5T Section 382 limitation (temporary).

(a) Scope.

(b) Computation of value.

(c) Short taxable year.

(d) Successive ownership changes and absorption of a section 382

limitation.

(1) In general.

(2) Recognized built-in gains and losses.

[[Page 33315]]

(3) Effective date.

(e) Controlled groups.

(f) Effective date.

* * * * *

Sec. 1.382-8T Controlled groups (temporary).

(a) Introduction.

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

controlled group loss.

(c) Computation of value.

(1) Reduction in value.

(2) Restoration of value.

(3) Reduction in value by the amount restored.

(4) Appropriate adjustments.

(5) Certain reductions in the value of members of a controlled

group.

(d) No double reduction.

(e) Definitions and nomenclature.

(1) Definitions in Section 382 and the regulations thereunder.

(2) Controlled group.

(3) Component member.

(4) Predecessor and successor corporation.

(f) Coordination between consolidated groups and controlled groups.

(g) Examples.

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

(1) Statement required.

(2) Revocation of election.

(3) Filing by component member.

(i) [Reserved]

(j) Effective date.

(1) In general.

(2) Transition rule.

(i) In general.

(ii) Special transition rules for controlled groups that had

ownership changes before January 29, 1991.

(3) Amended returns.

Par. 3. Section 1.382-2 is amended as follows:

(a) The first sentence of paragraph (a)(1)(iii) is amended by

removing the language ``Pre-change losses'' and adding ``Except as

provided in Sec. 1.382-2T(f)(1)(ii), pre-change losses'' in its place.

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

(c) The text of Sec. 1.382-2T(f)(18)(i) is redesignated as the text

of Sec. 1.382-2(a)(3)(i).

(d) Newly designated paragraph (a)(3)(i) is amended by adding three

sentences at the end.

The additions read as follows:

Sec. 1.382-2 General rules for ownership change.

(a) * * *

(1) * * *

(iv) End of separate accounting for losses and credits of

distributor or transferor loss corporation. For further guidance, see

Sec. 1.382-2T(f)(1)(ii).

* * * * *

(3) * * * (i) * * * Solely for purposes of determining the

percentage of stock owned by a person, each share of all the

outstanding shares of stock that have the same material terms is

treated as having the same value. Thus, for example, a control premium

or blockage discount is disregarded in determining the percentage of

stock owned by any person. The previous two sentences of this paragraph

(a)(3)(i) apply to any testing date occurring on or after January 29,

1991.

* * * * *

Par. 4. Section 1.382-2T is amended as follows:

(a) Paragraph (e)(2)(iv) Example (1) is amended by removing the

last sentence.

(b) Paragraph (e)(2)(iv) Example (2)(ii) is amended by adding a

sentence at the end.

(c) Paragraph (e)(2)(iv) Example (2)(iii) is amended by removing

the language ``, but must be separately accounted for under Sec. 1.382-

2(a)(1)(iii) of this section'' from the last sentence.

(d) The text following the heading of paragraph (f)(1) is

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

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

(e) Paragraphs (f)(1)(ii) and (f)(1)(iii) are added.

(f) Paragraph (f)(4) is amended by removing the word ``loss'' and

by adding two sentences at the end.

(g) Paragraph (f)(5) is amended by adding two sentences at the end.

(h) A sentence is added after the heading of paragraph (f)(18)(i).

(i) Paragraph (h)(2)(i)(A) is amended by adding the language ``and

solely for the purposes of determining whether a loss corporation has

an ownership change'' immediately after ``except as otherwise provided

in this section,''.

The additions read as follows:

Sec. 1.382-2T Definitions of ownership change under section 382, as

amended by the Tax Reform Act of 1986 (temporary).

* * * * *

(e) * * *

(2) * * *

(iv) * * *

Example (2) * * *

(ii) * * * See paragraph (f)(1)(ii) of this section for rules that

end separate accounting for L1's pre-change losses on any testing

date occurring on or after January 29, 1991.

(f) * * *

(1) * * *

(i) In general. * * *

(ii) End of separate accounting for losses and credits of

distributor or transferor loss corporation. The separate tracking of

owner shifts of the stock of an acquiring corporation required by

Sec. 1.382-2(a)(1)(iii) with respect to the net operating loss

carryovers and other attributes described in Sec. 1.382-2(a)(1)(ii)

ends when a fold-in event occurs. A fold-in event is either an

ownership change of the distributor or transferor corporation in

connection with, or after, the transaction to which section 381(a)

applies, or a period of 5 consecutive years following the section

381(a) transaction during which the distributor or transferor

corporation has not had an ownership change. Starting on the day after

the earlier of the change date (but not earlier than the day of the

section 381(a) transaction) or the last day of the 5 consecutive year

period, the losses and other attributes of the distributor or

transferor corporation are treated as losses and attributes of the

acquiring corporation for purposes of determining whether an ownership

change occurs with respect to such losses. Also, for purposes of

determining the beginning of the acquiring corporation's testing

period, such losses are considered to arise either in a taxable year

that begins not earlier than the later of the day following the change

date or the day of the section 381(a) transaction, or in a taxable year

that begins 3 years before the end of the 5 consecutive year period.

Pre-change losses of a distributor or transferor corporation that are

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

limitation notwithstanding the occurrence of a fold-in event. Any

ownership change that occurs in connection with, or subsequent to, the

section 381 transaction may result in an additional, lesser limitation

with respect to such pre-change losses. This paragraph (f)(1)(ii)

applies to any testing date occurring on or after January 29, 1991.

(iii) Application to other successor corporations. Section 1.382-

2(a)(1) (relating to the definition of loss corporation) and this

paragraph (f)(1) also apply, as the context may require, to successor

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

example, if a corporation receives assets from the loss corporation

that have basis in excess of value, the recipient corporation's basis

for the assets is determined, directly or indirectly, in whole or in

part, by reference to the loss corporation's basis, and the amount by

which basis exceeds value is material, the recipient corporation is a

successor corporation subject to Sec. 1.382-2(a)(1) and this paragraph

(f)(1). This paragraph (f)(1)(iii) applies to any testing date

occurring on or after January 1, 1997.

* * * * *

[[Page 33316]]

(4) Successor corporation. * * * A successor corporation also

includes, as the context may require, a corporation which receives an

asset or assets from another corporation if the corporation's basis for

the asset(s) is determined, directly or indirectly, in whole or in

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

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

previous sentence of this paragraph (f)(4) applies to any testing date

occurring on or after January 1, 1997.

(5) Predecessor corporation. * * * A predecessor corporation also

includes, as the context may require, a corporation which transfers an

asset or assets to another corporation if the transferee's basis for

the asset(s) is determined, directly or indirectly, in whole or in

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

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

sentence of this paragraph (f)(5) applies to any testing date occurring

on or after January 1, 1997.

* * * * *

(18) * * * (i) * * * For further guidance, see Sec. 1.382-

2(a)(3)(i).

* * * * *

Par. 5. Sections 1.382-5T and 1.382-8T are added to read as

follows:

Sec. 1.382-5T Section 382 limitation (temporary).

(a) Scope. Following an ownership change, the section 382

limitation for any post-change year is an amount equal to the value of

the loss corporation multiplied by the long-term tax-exempt rate that

applies with respect to the ownership change, and adjusted as required

by section 382 and the regulations thereunder. See, for example,

section 382(b)(2) (relating to the carryforward of unused section 382

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

limitation for the post-change year that includes the change date),

section 382(m)(2) (relating to short taxable years), and section 382(h)

(relating to recognized built-in gains and section 338 gains).

(b) Computation of value. [Reserved]

(c) Short taxable year. The section 382 limitation for any post-

change year that is less than 365 days is the amount that bears the

same ratio to the section 382 limitation determined under section

382(b)(1) as the number of days in the post-change year bears to 365.

The section 382 limitation, as so determined, is adjusted as required

by section 382 and the regulations thereunder. This paragraph (c) does

not apply to a 52-53 week taxable year that is less than 365 days

unless a return is required under section 443 (relating to short

periods) for such year.

(d) Successive ownership changes and absorption of a section 382

limitation--(1) In general. If a loss corporation has two (or more)

ownership changes, any losses attributable to the period preceding the

earlier ownership change are treated as pre-change losses with respect

to both ownership changes. Thus, the later ownership change may result

in a lesser (but never in a greater) section 382 limitation with

respect to such losses. In any case, the amount of taxable income for

any post-change year that can be offset by pre-change losses may not

exceed the section 382 limitation for such ownership change, reduced by

the amount of taxable income offset by pre-change losses subject to any

earlier ownership change(s).

(2) Recognized built-in gains and losses. [Reserved]

(3) Effective date. This paragraph (d) applies to taxable years of

a loss corporation beginning on or after January 1, 1997.

(e) Controlled groups. See Sec. 1.382-8T for rules for determining

the value of a loss corporation that is a member of a controlled group.

(f) Effective date. Except as otherwise provided, this section

applies to a loss corporation that has an ownership change to which

section 382(a), as amended by the Tax Reform Act of 1986, applies.

Sec. 1.382-8T Controlled groups (temporary).

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

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

corporations on a change date so that the same value is not included

more than once in computing the limitations under section 382 for the

loss corporations that are members of the controlled group. In general,

the adjustment is made under paragraph (c) of this section by reducing

the value of the loss corporation by the value of the stock of each

component member of the controlled group that the loss corporation owns

immediately after the ownership change. The loss corporation's value

may, however, be increased under paragraph (c) of this section by any

amount of value that the other member elects to restore to the loss

corporation.

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

controlled group loss. A controlled group loss is a pre-change loss (or

a net unrealized built-in loss) of a loss corporation that is

attributable to a taxable year of the corporation with respect to which

the corporation is a component member of a controlled group (as defined

by paragraphs (e) (2) and (3) of this section). The controlled group

with respect to each controlled group loss is composed of the loss

corporation and each other corporation that is a component member of a

controlled group that includes the loss corporation both--

(1) With respect to the taxable year to which the controlled group

loss is attributable; and

(2) On the date the loss corporation has an ownership change.

(c) Computation of value. For purposes of computing the limitation

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

of the stock of each component member of the controlled group with

respect to that loss is determined immediately before the ownership

change, and is adjusted by applying the following rules:

(1) Reduction in value. The value of the stock of each component

member is reduced by the value (immediately before the ownership change

and without regard to any restoration of value or other adjustment

under this section) of the stock of any other component member directly

owned by the component member immediately after the ownership change.

(2) Restoration of value. After the value of the stock of each

component member is reduced pursuant to paragraph (c)(1) of this

section, the value of the stock of each component member is increased

by the amount of value, if any, restored to the component member by

another component member (the electing member) pursuant to this

paragraph (c)(2). The electing member may elect to restore value to

another component member in an amount that does not exceed the lesser

of--

(i) The sum of--

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

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

of this section and before any restoration of value under this

paragraph (c)(2)); plus

(B) Any amount of value restored to the electing member by another

component member under this paragraph (c)(2); or

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

of the electing member's stock (without regard to any adjustment under

this section) that is directly owned by the other component member

immediately after the ownership change.

(3) Reduction in value by the amount restored. The value of the

stock of the electing member is reduced by any

[[Page 33317]]

amount of value that the electing member elects to restore under

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

(4) Appropriate adjustments. Appropriate additional adjustments

consistent with paragraphs (c)(1), (2), and (3) of this section must be

made to prevent any duplication of value. Thus, for example,

adjustments must be made to reflect--

(i) Any indirect ownership interest in another component member;

(ii) Any cross ownership of stock by component members of the

controlled group with respect to the controlled group loss; and

(iii) Any value used to determine a limitation under section 382

with respect to controlled group losses from the same period.

(5) Certain reductions in the value of members of a controlled

group. A loss corporation that has an ownership change is required to

make adjustments consistent with this paragraph (c) with respect to its

stock if the stock of another corporation in which it had a direct or

indirect ownership interest was disposed of before the ownership

change, and;

(i) Both corporations were component members of a controlled

group--

(A) With respect to a taxable year to which a controlled group loss

of the loss corporation is attributable; and

(B) At any time during the 2 year period before the ownership

change; and

(ii) Both corporations are component members of a controlled group

at any time during the 2 year period following the ownership change.

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

of this section, section 382 and this section shall not be applied to

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

example, if the value of a loss corporation is reduced under section

382(l)(1) to reflect a capital contribution of stock of a component

member, it is not again reduced by such amount under paragraph (c)(1)

of this section. If this paragraph (d) applies to prevent a reduction

in value from being duplicated, the application of the other rules of

this section, such as those relating to the restoration of value, is

correspondingly limited in a manner consistent with the principles of

this section.

(e) Definitions and nomenclature--(1) Definitions in section 382

and the regulations thereunder. Except as otherwise provided, the

definitions and nomenclature contained in section 382 and the

regulations thereunder apply to this section.

(2) Controlled group. Controlled group has the same meaning as in

section 1563(a), determined by substituting ``50 percent'' for ``80

percent'' each place that it appears, and without regard to section

1563(a)(4).

(3) Component member. Component member has the same meaning as in

section 1563(b), determined by substituting ``December 31 (or the

change date, if earlier)'' for ``December 31'' each place it appears,

and without regard to section 1563 (b)(2), (b)(3)(C), and (b)(4).

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

require, a reference to a corporation, or component member includes a

reference to a predecessor or successor corporation.

(f) Coordination between consolidated groups and controlled groups.

Some or all of the component members of a controlled group may also be

members of a consolidated group, and a controlled group loss may be

subject to a consolidated section 382 limitation or subgroup section

382 limitation determined under Sec. 1.1502-93T. Except as otherwise

provided in this paragraph (f) and Secs. 1.1502-91T through 1.1502-99T,

Sec. 1.1502-93T applies instead of this section when both sections, by

their terms, are otherwise applicable. This section is applicable and

may require an adjustment to value if a member of a consolidated group,

a loss group, or a loss subgroup (as those terms are defined in

Secs. 1.1502-1(h) and 1.1502-91T) is also a component member of a

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

purposes of applying this section, a consolidated group, loss group, or

loss subgroup is treated as a single corporation. Thus to determine the

limitation with respect to any portion of the pre-change consolidated

attributes or pre-change subgroup attributes of the loss group or loss

subgroup that is a controlled group loss, the consolidated section 382

limitation or subgroup section 382 limitation is computed by treating

the loss group or the loss subgroup as a single corporation, and

adjusting value in accordance with paragraph (c) of this section. See

paragraph (g) Example 4 of this section.

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

otherwise stated, the nomenclature and assumptions of the examples in

Sec. 1.382-2T(b) apply, all corporations file separate income tax

returns on a calendar year basis, the only 5-percent shareholder of a

corporation is a public group, and the facts set forth the only owner

shifts with respect to the corporations during the testing period.

-Example 1. Controlled group with respect to a controlled group

loss. (a) Public L owns all of the L stock, L and Public L1 own 30

percent and 70 percent, respectively, of the L1 stock, and L1 owns

all of the corporation T stock. L1 has a net operating loss arising

in Year 1 that is carried over to Year 4. L has a net operating loss

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

3, L acquires 30 percent of the stock of L1, thereby increasing its

percentage ownership interest in L1 to 60 percent. On December 1,

Year 3, L1 purchases all of the stock of corporation S from Public

S. On November 1, Year 4, P acquires all of the L stock. The

acquisition by P of all of the L stock on November 1, Year 4, causes

ownership changes of both L and L1 under the rules of Sec. 1.382-2T.

The following is a graphic illustration of these facts.

BILLING CODE 4830-01-U

[[Page 33318]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.000

BILLING CODE 4830-01-C

[[Page 33319]]

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

operating loss carryover of L1 is a controlled group loss because L1

is a component member of a controlled group with respect to Year 1,

the year to which the loss is attributable. L1 and T compose a

controlled group with respect to the net operating loss carryover

because L1 and T are component members of a controlled group both--

(A) With respect to the taxable year to which L1's net operating

loss carryover is attributable (i.e., Year 1); and

(B) On November 1, Year 4, L1's change date. Although L and S

are component members of L1's controlled group on L1's change date,

they are not component members of the controlled group with respect

to the Year 1 net operating loss carryover because they were not

component members with respect to the year to which the net

operating loss carryover is attributable.

(2) The value of L1's stock must therefore be adjusted in

accordance with paragraph (c) of this section to take into account

an adjustment with respect to the T stock (but not the S stock) in

computing L1's limitation under section 382 with respect to its net

operating loss carryover.

(c) Although L is a member of a controlled group composed of L,

L1, S, and T on November 1, Year 4, L's change date, it is not a

component member of a controlled group with respect to Year 2, the

taxable year to which its net operating loss carryover is

attributable. Therefore, L's Year 2 net operating loss carryover is

not a controlled group loss under paragraph (b) of this section and

the value of L's stock is not adjusted in accordance with paragraph

(c) of this section to compute L's limitation under section 382 with

respect to the Year 2 net operating loss carryover.

Example 2. Adjustments to value of the controlled group members.

(a) Since Year 1, A has owned all of the stock of L, L and B have

owned 80 percent and 20 percent, respectively, of the stock of

corporation P, and P and C have owned 75 percent and 25 percent,

respectively, of the stock of L1. L and L1 each has a net operating

loss for the Year 6 taxable year that is carried over to its

respective Year 7 taxable year. On December 1, Year 7, A sells all

of the L stock to D. The sale results in ownership changes of both L

and L1. Immediately before the ownership changes, the total value of

the L1 stock is $40, the total value of the P stock (including the

value of its L1 stock) is $100, and the total value of the L stock

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

graphic illustration of these facts.

BILLING CODE 4830-01-U

[GRAPHIC] [TIFF OMITTED] TR27JN96.001

BILLING CODE 4830-01-C

(b) Under paragraph (b) of this section, the Year 6 net

operating loss carryovers of each of L and L1 are controlled group

losses because each of L and L1 is a component member of a

controlled group with respect to Year 6, the year to which the

losses are attributable. L, P, and L1 compose controlled groups with

respect to both Year 6 net operating loss carryovers because L, P,

and L1 are component members of a controlled group both-- -

(1) With respect to the taxable years to which the net operating

loss carryovers are attributable (i.e., Year 6); and

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

(c) The value of the stock of L1 for purposes of determining its

limitation under section 382 with respect to its net operating loss

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

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

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

paragraph (c)(1) of this section by the value of the stock of L1

that it directly owns, $30 (75% x $40). Following the adjustment,

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

$70 of value to L.

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

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

directly owns, i.e., $80 (80% x $100), and increased under paragraph

(c)(2) of this section by the amount P elects to restore to L, i.e.,

$70. Thus, the value of the L stock for purposes of determining L's

limitation under section 382 with respect to its net operating loss

carryover from Year 6 is $190 ($200-$80+$70).

Example 3. Limitation on restoration of value. (a) The facts are

the same as in Example 2, except that L1 elects to restore $20 to P.

For purposes of determining L1's limitation under section 382 with

respect to the Year 6 net operating loss carryover, the value of the

stock of L1 is $20 ($40-$20) because the value of its stock is

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

it elects to restore to P.

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

paragraph (c)(1) of this section by the value of the L1 stock it

directly owns ($30), and is increased under paragraph (c)(2) of this

section by the value that L1 elects to restore to P ($20). Thus, the

value of the P stock is $90 ($100-$30+$20).

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

under this section. The value of the stock of L, $200, is reduced

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

it directly owns ($80), and is increased by the value that P elects

to restore to L. P may elect to restore to L the lesser of--

(A) The sum of the value of its stock immediately after

adjustment under paragraph (c)(1) of this section (i.e., $70) plus

the value restored to it by L1 (i.e., $20) (a total of $90); or

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

required by paragraphs (c) (1) and (2) of this section) that is

directly owned by L immediately before the ownership change (i.e.,

$80).

(2) Thus, $80 is the maximum amount that P may elect to restore

to L. Following the restoration of value by P, the value of the L

stock for purposes of determining L's limitation under section 382

is $200 ($200 -$80 + $80).

Example 4. Coordination with consolidated return regulations.

(a) P and its wholly owned subsidiary L file a consolidated return.

L owns 79 percent of the outstanding

[[Page 33320]]

stock of L1. P acquired the stock of L in Year 1 and L acquired the

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

net operating loss arising in the Year 6 consolidated return year

that is carried over to Year 8. L1 has a net operating loss arising

in its Year 6 taxable year that is also carried over to Year 8. On

January 1, Year 8, the P consolidated group has an ownership change

under Sec. 1.1502-92T(b)(1)(i) and L1 has an ownership change under

Sec. 1.382-2T.

(b)(1) Under paragraph (b) of this section, the Year 6 net

operating loss carryover of the P group is a controlled group loss

because P, L, and L1 are component members of a controlled group

with respect to Year 6, the year to which the loss is attributable.

P, L, and L1 compose a controlled group with respect to the Year 6

net operating loss carryover of the P loss group because they are

component members of a controlled group both--

(A) With respect to the taxable years to which the net operating

loss carryover is attributable (i.e., Year 6); and -

(B) On January 1, Year 8, the P group's change date.

(2) Because P and L compose a loss group (within the meaning of

Sec. 1.1502-91T(c)) with respect to its Year 6 net operating loss

carryover, the P loss group must compute a consolidated section 382

limitation with respect to its Year 6 net operating loss carryover

as a result of the ownership change.

(c) In computing the consolidated section 382 limitation under

Sec. 1.1502-93T with respect to the Year 6 net operating loss

carryover, the value of the P stock immediately before the ownership

change is reduced under paragraphs (c)(1) and (f) of this section by

the value immediately before the ownership change of the L1 stock

directly owned by L immediately after the ownership change. L1 may,

however, elect to restore such value to the P consolidated group to

the extent permitted under paragraph (c)(2) of this section.

Example 5. Appropriate adjustments for indirect ownership

interest. (a) Individual A owns all of the stock of L, L owns an 80

percent interest in the capital and profits of partnership PS, and

PS owns 75 percent of the stock of L1. Both L and L1 have net

operating losses for the Year 1 taxable year that are carried over

to their respective Year 2 taxable years. On December 19, Year 2, A

sells all of the L stock to an unrelated individual. The sale

results in an ownership change of L and L1.

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

operating loss carryovers of each of L and L1 are controlled group

losses because each of L and L1 is a component member of a

controlled group with respect to Year 1, the year to which the

losses are attributable. L and L1 compose controlled groups with

respect to each corporation's net operating loss carryovers because

L and L1 are component members of a controlled group both--

(1) With respect to the taxable years to which the net operating

loss carryovers are attributable (i.e., Year 1); and

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

(c) L has an indirect ownership interest in L1 which, under

paragraph (c)(4) of this section, must be taken into account in

applying this section. As a result, the value of the L stock for

purposes of determining its limitation under section 382 with

respect to the Year 1 net operating loss carryover must be reduced

by the value of L's indirect ownership interest in the L1 stock (60

percent) that it owns through PS immediately before the ownership

change, and is increased by the amount (if any) that L1 elects to

restore to L under paragraph (c)(2) of this section. The value of L1

is reduced under paragraph (c)(3) of this section to the extent that

L1 elects to restore value to L.

(h) Time and manner of filing election to restore--(1) Statement

required. The election to restore value described in paragraph (c)(2)

of this section must be in the form set forth below. It must be signed

on behalf of both the electing member and the corporation to which such

value is restored by persons authorized to sign their respective income

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

election on behalf of the group.) It must be filed by the loss

corporation with its income tax return for the taxable year in which

the ownership change occurs (or with an amended return for such year

filed on or before the due date (including extensions) of the income

tax return of any component member with respect to the taxable year in

which the ownership change occurs). The statement must provide that:

``THIS IS AN ELECTION UNDER Sec. 1.382-8T OF THE INCOME TAX REGULATIONS

TO RESTORE ALL OR PART OF THE VALUE OF [insert name and E.I.N. of the

electing member] TO [insert name and E.I.N. of the corporation to which

value is restored]. The statement must also--

(i) Identify the change date for the loss corporation in connection

with which the election is made;

(ii) State the value of the electing member's stock (without regard

to any adjustment under paragraph (c) of this section) immediately

before the ownership change;

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

(c)(1) of this section with respect to stock of the electing member

that is owned directly or indirectly by the corporation to which value

is restored;

(iv) State the amount of value that the electing member elects to

restore to the corporation; and

(v) State whether the value of either component member's stock was

adjusted pursuant to paragraph (c)(4) of this section.

(2) Revocation of election. An election made under this section is

revocable only with the consent of the Commissioner.

(3) Filing by component member. An electing member must attach a

copy of the statement described in paragraph (h)(1) of this section to

its income tax return (or amended return) for the taxable year which

includes the change date in connection with which the election is made.

(i) [Reserved] -

(j) Effective date--(1) In general. This section applies to a loss

corporation that has an ownership change with respect to a controlled

group loss on or after January 1, 1997.

(2) Transition rule--(i) In general. The members of a controlled

group on January 1, 1997, that have had an ownership change with

respect to a controlled group loss before January 1, 1997, must

determine the limitations under section 382 for any post-change year

with respect to controlled group losses by using a reasonable method to

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

directly or indirectly by another member immediately after an ownership

change from being taken into account more than once in determining the

limitations under section 382 with respect to controlled group losses.

If such a reasonable method was not used for a post-change year,

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

members of the controlled group described in the preceding sentence

must reduce their limitations under section 382 for post-change years

for which the income tax return is filed after January 1, 1997, to

recapture, as quickly as possible, any limitation that members took

into account in excess of the amount that would be allowable under this

section.

(ii) Special transition rule for controlled groups that had

ownership changes before January 29, 1991. For purposes of this

section, in the case of an ownership change occurring before January

29, 1991, the controlled group with respect to a controlled group loss

does not include a corporation that is not a component member of the

controlled group on January 29, 1991. Thus, in the case of an ownership

change occurring before January 29, 1991, paragraph (c) of this section

does not require that a loss corporation that is a component member of

a controlled group to disregard the value of stock of another

corporation directly owned immediately after the ownership change in

determining the value of its own stock unless the other corporation is

a component member of the controlled group on January 29, 1991.

[[Page 33321]]

(3) Amended returns. A taxpayer that has had an ownership change

before January 1, 1997, may file an amended return for any taxable year

to modify the amount of a limitation under section 382 with respect to

a controlled group loss only if--

(i) The modification complies with the rules contained in this

section for computing a limitation under section 382;

(ii) Any other component member of the controlled group with

respect to the controlled group loss who elects to restore value and

whose taxable income is affected by the election to restore value also

files amended returns that comply with such rules; and

(iii) Corresponding adjustments are made in amended returns for all

taxable years ending after December 31, 1986.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 6. The authority citation for part 602 continues to read as

follows:

Authority: 26 U.S.C. 7805.

Par. 7. In 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.

* * * * *

(c) * * *

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

Current OMB

CFR part or section where identified or described control No.

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

* * * * *

1.382.8T................................................... 1545-1434

* * * * *

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

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: May 31, 1996.

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 96-15825 Filed 6-26-96; 8:45 am]

BILLING CODE 4830-01-U