Regulations Under Section 1502 of the Internal Revenue Code of 1986; Limitations on Net Operating Loss Carryforwards and Certain Built-in Losses and Credits Following an Ownership Change of a Consolidated Group
Federal RegisterJul 2, 1999
Ask Donna
What actually matters in this document.
Text
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 8824]
RIN 1545-AU32
Regulations Under Section 1502 of the Internal Revenue Code of
1986; Limitations on Net Operating Loss Carryforwards and Certain
Built-in Losses and Credits Following an Ownership Change of a
Consolidated Group
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
-----------------------------------------------------------------------
SUMMARY: This document contains final regulations regarding the
operation of sections 382 and 383 of the Internal Revenue Code of 1986
(relating to limitations on net operating loss carryforwards and
certain built-in losses and credits following an ownership change) with
respect to consolidated groups. The regulations include rules for
determining whether a loss group or a loss subgroup has an ownership
change, for computing a consolidated section 382 limitation or subgroup
section 382 limitation, and for applying sections 382 and 383 to
corporations that join or leave a group. The rules are necessary to
provide guidance to such groups on the use of certain of their tax
attributes.
DATES: Effective Dates: These regulations are effective June 25, 1999.
Applicability Dates: For dates of application and special effective
date rules, see Effective Dates under SUPPLEMENTARY INFORMATION.
FOR FURTHER INFORMATION CONTACT: Lee A. Kelley at (202) 622-7550 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information in these final regulations has been
reviewed and, pending receipt and evaluation of public comments,
approved by the Office of Management and Budget (OMB) under 44 U.S.C.
3507 and assigned control number 1545-1218.
The collections of information in this regulation are in
Secs. 1.1502-20(g)(4), 1.1502-95(e)(8), 1.1502-95(f), and 1.1502-96(e).
This information is required to assure that a section 382 limitation is
properly determined and applied in cases of corporations that become or
cease to be members of a consolidated group. The collection of
information in Sec. 1.1502-98(e)(8) is mandatory. The other collections
of information are required to obtain a benefit. The likely respondents
are business or other for-profit institutions.
Comments on the collection of information should be sent to the
Office of Management and Budget, Attn: Desk Officer for the Department
of the Treasury, Office of Information and Regulatory Affairs,
Washington, DC 20503, with copies to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC 20224.
Comments on the collection of information should be received by August
31, 1999.
Comments are specifically requested concerning:
Whether the collection[s] of information is necessary for the
proper performance of the functions of the Internal Revenue Service,
including whether the information will have practical utility;
The accuracy of the estimated burden associated with the collection
of information (see below);
How the quality, utility, and clarity of the information to be
collected may be enhanced;
How the burden of complying with the collection[s] of information
may be minimized, including through the application of automated
collection techniques or other forms of information technology; and
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of service to provide information.
Estimated total annual reporting burden: 662 hours.
The estimated annual burden per respondent varies from 15 to 25
minutes, depending on individual circumstances, with an estimated
average of 20 minutes.
Estimated number of respondents: 12,054.
Estimated annual frequency of responses: On occasion.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget.
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.
[[Page 36117]]
Background
On February 4, 1991, the IRS and Treasury issued three notices of
proposed rulemaking, C0-132-87 (56 FR 4194), CO-077-90 (56 FR 4183),
and CO-078-90 (56 FR 4228), setting forth rules regarding the
application of sections 382 and 383 by consolidated groups and by
controlled groups, and regarding the use of built-in deductions and net
operating losses and capital losses, including the carryover and
carryback of separate return limitation year (SRLY) losses of members
of consolidated groups. A public hearing regarding the three sets of
proposed regulations was held on April 8, 1991.
On June 27, 1996, the IRS and Treasury published temporary
regulations (TD 8678, 61 FR 33335) setting forth rules regarding the
application of section 382 to affiliated groups of corporations filing
consolidated returns. These regulations were substantially identical to
the proposed regulations. A notice of proposed rulemaking cross-
referencing the temporary regulations was published in the Federal
Register on the same day (CO-026-96, 61 FR 33391) and the proposed
regulations published in 1991 were withdrawn. The IRS and Treasury also
published temporary regulations regarding the SRLY limitation (TD 8677,
61 FR 33321), and controlled group losses (TD 8679, 61 FR 33313).
Notices of proposed rulemaking cross-referencing these temporary
regulations were published on the same day (CO-025-96, 61 FR 33395 and
CO-024-96, 61 FR 33393) and the proposed regulations published in 1991
were withdrawn.
This Treasury decision adopts the 1996 proposed regulations
regarding the application of section 382 to affiliated groups of
corporations filing consolidated returns. The principal changes to
those proposed regulations are described below.
As companions to this Treasury decision, the IRS and Treasury also
are issuing final regulations relating to the application of sections
382 and 383 by members of controlled groups, and relating to the SRLY
limitation. See TD 8823 and TD 8825 published elsewhere in this issue
of the Federal Register.
Explanation of Provisions
A. Overview
1. Sections 382 and 383
Under section 382, if an ownership change occurs with respect to a
loss corporation (as defined in section 382 and the regulations
thereunder), the amount of the loss corporation's taxable income for a
post-change year that may be offset by the net operating losses of the
loss corporation arising before the ownership change is limited by an
amount known as the section 382 limitation. The section 382 limitation
for a taxable year of a loss corporation after an ownership change
generally is equal to the fair market value of the corporation's stock
immediately before the ownership change multiplied by the long-term tax
exempt rate (a rate of return published periodically in the Internal
Revenue Bulletin). See generally sections 382(b), (e), and (f). This
limitation for a taxable year may be increased by certain items, such
as an unused limitation from a prior taxable year and certain built-in
gains recognized during the taxable year. See section 382(b)(2) and
(h).
In general, an ownership change involves an increase of more than
50 percentage points in stock ownership by 5-percent shareholders
during the testing period (usually the 3-year period ending on the date
on which a loss corporation must make a determination whether it has
had an ownership change). In determining whether an ownership change
has occurred, all transactions occurring during the testing period that
affect the stock ownership of any 5-percent shareholder whose
percentage of stock ownership has increased as of the close of the
testing date are taken into account. The determination of the
percentage ownership interest of any shareholder is made on the basis
of the ratio of the fair market value of the loss corporation stock
owned by the shareholder to the total fair market value of the loss
corporation's outstanding stock. Ordinarily, all stock of the loss
corporation, except certain preferred stock described in section
1504(a)(4), is taken into account. These rules are contained in
Secs. 1.382-2 and 1.382-2T and relate to ownership changes of
corporations without regard to whether the corporations file a separate
return or join in filing a consolidated return.
2. General Description of Final Regulations
This document contains two sets of rules. The first set of rules,
set forth in Secs. 1.1502-91 through 1.1502-93, provide the tax
treatment for net operating losses that arise in (and net unrealized
built-in losses with respect to) years that are not separate return
limitation years with respect to a consolidated group. (A separate
return limitation year, or SRLY, generally is a taxable year of a
subsidiary in which the subsidiary was not a member of the group). In
general, these rules adopt a single entity approach to determine
ownership changes and the section 382 limitations with respect to such
losses.
These final regulations also extend the single entity approach to
loss subgroups within consolidated groups. A loss subgroup generally
consists of two or more corporations that continue to be affiliated
with each other after leaving one group and joining another where at
least one of the corporations carries over losses from the first group
to the second group. Thus, the single entity approach under the final
regulations can apply, for example, to a consolidated group's
acquisition of another consolidated group or of a chain of subsidiaries
from another group.
The second set of rules, set forth in Secs. 1.1502-94 and 1.1502-
95, applies to corporations that join or leave a consolidated group
with respect to certain attributes (e.g., attributes other than those
arising in a consolidated return year). In general, section 382 is
applied separately with respect to those attributes because the
attributes cannot be used by other members. Section 1.1502-96 contains
miscellaneous rules.
In general, Sec. 1.1502-98 provides that the rules contained in
Secs. 1.1502-91 through 1.1502-96 also apply for purposes of section
383, with adjustments to reflect that section 383 applies to credits
and net capital losses.
B. Amendments to the Proposed Regulations
1. Definition of a Loss Subgroup, Sec. 1.1502-91(d)
Under the proposed regulations, a loss subgroup is composed of
members of one group (the former group) that become members of another
consolidated group. In the case of a net operating loss carryover, the
members of a group compose a loss subgroup if (i) They were affiliated
with each other in another group, (ii) they bear a relationship to each
other described in section 1504(a)(1) immediately after they become
members of the group (the subgroup parent requirement), and (iii) at
least one of the members carries over a net operating loss arising in a
year that is not a SRLY (and is not treated as a SRLY under proposed
Sec. 1.1502-21(c)) with respect to the former group. In the case of a
net unrealized built-in loss (NUBIL), the members of a group compose a
loss subgroup if they (i) Have been continuously affiliated with each
other for the 5 consecutive year period ending immediately before they
become members of the group (the five-year affiliation requirement),
(ii) meet the subgroup parent requirement, and (iii) have, in the
aggregate, a NUBIL. A
[[Page 36118]]
member ceases to be included in a loss subgroup when it files a
separate return, or when a member breaks the relationship described in
section 1504(a)(1) to the loss subgroup parent, regardless of whether
that member leaves the current group or remains in the consolidated
group.
Retention of the Subgroup Percent Requirement in General
Commentators suggested that the final regulations should eliminate
the subgroup parent requirement in order to provide a single subgroup
definition for the SRLY limitation and for the section 382 limitation.
Other commentators recommended eliminating the requirement following an
ownership change of the loss subgroup.
Like a loss group, a loss subgroup has an ownership change if the
loss subgroup parent has an ownership change (the parent change
method). The parent change method, adopted for its administrative
simplicity, looks only to ownership shifts of the parent corporation in
determining whether the consolidated group (or loss subgroup) has an
ownership change. Owner shifts of minority stock of subsidiary members
are not taken into account. Application of the parent change method to
loss subgroups eliminates the administrative burdens associated with a
rule that would mandate separate tracking of the minority stock of each
subgroup member for determining whether an ownership change of the loss
subgroup has occurred.
The IRS and the Treasury have determined that, in circumstances
where owner shifts of a loss subgroup must continue to be tracked, the
parent change method should continue to apply for determining whether a
subgroup has an ownership change. Accordingly, in general, these final
regulations retain the subgroup parent requirement. Also, these final
regulations retain the general rule that a member ceases to be a member
of the loss subgroup on the first day that it ceases to bear a
relationship described in section 1504(a)(1) to the loss subgroup
parent. The final regulations, however, provide an election to treat
the subgroup parent requirement as satisfied, and provide certain
exceptions for ceasing to be a member of a loss subgroup when a member
breaks the relationship described in section 1504(a)(1) to the loss
subgroup parent, but remains within the current consolidated group.
Election to Treat Subgroup Parent Requirement As Satisfied
The subgroup parent requirement may preclude subgroup treatment in
instances where single entity principles make such treatment
conceptually appropriate. For example, brother-sister corporations with
net operating loss carryovers that are not SRLY losses with respect to
the former group are not a loss subgroup even if the same acquirer
acquires both corporations at the same time. However, single entity
principles support treating the brother-sister corporations as a
subgroup because they were affiliated with each other in the former
group and remain affiliated in the current group.
To extend single entity treatment in such cases would require a
mechanism other than the parent change method to track owner shifts of
the loss subgroup. Some commentators suggested permitting the parent of
the current group to designate the subgroup parent. Under this
approach, such designation would be respected unless the designation is
made with a principal purpose of avoiding an ownership change.
The IRS and the Treasury believe that the ability to designate the
subgroup parent presents opportunities for avoiding or lessening the
impact of section 382. Also, a principal purpose standard is not an
effective mechanism for preventing inappropriate designations because
the only purpose of such designation is to apply the ownership change
rules of section 382.
The IRS and Treasury recognize, however, that it is appropriate to
extend subgroup treatment to the extent that single entity principles
support such treatment, and to the extent that subgroup treatment does
not compromise the determination whether a subgroup has an ownership
change. Also, the IRS and Treasury recognize that, in certain
circumstances, taxpayers may prefer more stringent ownership change
rules if they can obtain the benefit of subgroup treatment. Finally,
the IRS and Treasury recognize that the ability of brother-sister
corporations to constitute a section 382 subgroup may be necessary in
order for section 382 subgroups to conform with SRLY subgroups, thus
permitting application of the rule that eliminates a separate SRLY
limitation where the application of SRLY and section 382 overlap. See
Secs. 1.1502-15(g), 1.1502-21(g) and 1.1502-22(g).
Accordingly, these final regulations provide that two or more
corporations that become members of a consolidated group at the same
time and that were affiliated with each other immediately before
becoming members of the group are deemed to meet the subgroup parent
requirement immediately after they become members of the group if the
common parent of the acquiring group makes an election under
Sec. 1.1502-91(d)(4) with respect to those members. An election
includes all corporations that become members of the current group at
the same time and that were affiliated with each other immediately
before they become members of the current group. The election applies
solely for purposes of satisfying the subgroup parent requirement, and
does not apply in determining whether members meet the other
requirements for inclusion in a loss subgroup. Although the election
applies solely for purposes of Secs. 1.1502-91 through 1.1502-96 and
Sec. 1.1502-98, the election may affect whether a SRLY limitation
overlaps with application of section 382.
If the common parent makes an election under Sec. 1.1502-91(d)(4),
each of the members with respect to which the election is made (and
that is included in the loss subgroup) is treated as the loss subgroup
parent for purposes of determining if the loss subgroup has an
ownership change on, or after, becoming members of the current group.
If, however, a member with respect to which the election is made has an
ownership change upon (or after) ceasing to be a member of the current
group, that ownership change does not cause an ownership change of a
loss subgroup comprised of one or more of its members that remain
members of the current group.
Exceptions for Ceasing To Be a Member of a Loss Subgroup When a Member
Breaks the Section 1504(a)(1) Relationship With the Loss Subgroup
Parent, Sec. 1.1502-95(d)(1)
In general, under Sec. 1.1502-95(d)(1)(ii), these final regulations
provide that a member ceases to be a member of the loss subgroup on the
first day that it ceases to bear a relationship described in section
1504(a)(1) to the loss subgroup parent. Continued affiliation through a
loss subgroup parent is central to the operation of the parent change
method to loss subgroups.
Under certain circumstances, however, separate tracking of the loss
subgroup parent terminates, eliminating the need for members to
maintain a section 1504(a)(1) relationship through a loss subgroup
parent. Section 1.1502-96(a) provides, in part, that ownership shifts
of a loss subgroup cease to be separately tracked if there is an
ownership change of the loss subgroup
[[Page 36119]]
within six months before, on, or after becoming members of the group,
or if a period of five years elapses after becoming members of group
during which time the loss subgroup does not have an ownership change
(a fold-in event).
Also, an election under Sec. 1.1502-91(d)(4) obviates the need for
a section 1504(a)(1) relationship through a loss subgroup common parent
because each member is separately tracked as if it were the loss
subgroup parent.
In circumstances where the necessity of a section 1504(a)(1)
relationship through a loss subgroup parent is eliminated, the IRS and
the Treasury believe that a subgroup member should not cease to be a
member of the subgroup solely because it ceases to bear such a
relationship. Accordingly, these final regulations provide two
exceptions to the general rule of Sec. 1.1502-95(d)(1)(ii). The first
exception applies to the members of the loss subgroup if an election
under Sec. 1.1502-91(d)(4) applies to them. The second exception
applies to loss subgroup members following a fold-in event.
Members Excluded or Included From a Subgroup With a Principal Purpose
of Avoiding a Limitation, Sec. 1.1502-91(d)(5)
Proposed Sec. 1.1502-91(d)(5) provides that corporations do not
compose a loss subgroup if any one of them is formed, acquired, or
availed of with a principal purpose of avoiding the application of, or
increasing any limitation under, section 382. This rule does not apply
solely because, in connection with becoming members of the group, the
members of a group are rearranged to satisfy the subgroup parent
requirement. The final regulations retain these provisions, and, in
conformity with the anti-abuse rule for SRLY subgroups, provide that
any member excluded from a loss subgroup, if excluded with a principal
purpose of avoiding or increasing a section 382 limitation, is treated
as included in the loss subgroup. This rule does not apply solely
because a group does not rearrange members of a group to satisfy the
subgroup parent requirement.
2. Definition of Loss Subgroup With a NUBIL, Sec. 1.1502-91(d)(2)
Commentators criticized the five-year affiliation requirement for
adding complexity to the regulations. For instance, the five-year
affiliation requirement can cause application of section 382 and SRLY
on a single entity basis with respect to members of a loss subgroup
with a net operating loss carryover that arose within the former group
(because an NOL loss subgroup does not require five years of
affiliation), but on a separate entity basis for those same members
with respect to built-in losses.
The IRS and Treasury have determined, however, that the five-year
affiliation requirement is a necessary feature of the NUBIL subgroup
rules. Just as the NOL subgroup rules apply only to loss carryovers
that arise in (or have folded into) the former group, so should the
NUBIL subgroup rules apply only to built-in losses that accrue within
(or have folded into) the former group. Because an accurate method of
determining economic accrual (e.g., tracing) would present significant
problems for tax administration and for compliance by taxpayers, the
IRS and Treasury believe that the five-year affiliation requirement is
the best available proxy for determining when built-in attributes
arise.
Absent a five-year affiliation requirement, taxpayers could
effectively traffic in net unrealized built-in losses without being
subject to any limitation (other than one imposed under an applicable
``principal purpose'' anti-abuse rule). A selling group could acquire a
new member with a NUBIG and sell both that recently-acquired NUBIG
member and the member containing the desired NUBIL to the prospective
buyer. To the extent that the NUBIG offset the NUBIL and the
corporations were structured to satisfy the requirements for subgroup
treatment, recognized built-in losses would escape any limitation and
could be freely absorbed by the acquiring group.
Furthermore, the absence of a five-year affiliation requirement
could be used to circumvent a SRLY limitation applicable to a NUBIL if
built-in losses are recognized. For instance, if a member comes into a
group with a NUBIL and without an ownership change, recognition of that
NUBIL would be subject to a SRLY limitation during the following five
years and the loss could not be freely absorbed by the income of the
other members of the group. However, if all the members of the group
were included in a NUBIL subgroup upon being acquired by a second group
two years into that five-year period, that member's recognized built-in
losses immediately thereafter would be subject either to a SRLY or
section 382 limitation computed with respect to all the members of the
former group (thus increasing the rate at which such losses can be
utilized) or, in the event that the acquired corporations have an
aggregate NUBIG, to no limitation whatsoever.
Some commentators contended that the five-year affiliation
requirement (and the time period required for a fold-in event under
Sec. 1.1502-96(a)) should be reduced to three years, based on the
duration of the testing period for an ownership change under section
382.
However, a five-year (rather than a three-year) affiliation
requirement is necessary to ensure that taxpayers cannot shorten the
five-year recognition period for the SRLY limitation, as described
above. Also, the IRS and Treasury believe that the five-year
recognition period for the SRLY limitation should be maintained because
it mirrors the statutorily-mandated five-year recognition period of
section 382(h)(7). In general, Treasury and the IRS believe that it is
important to conform the application of section 382 and the SRLY rules
where possible, particularly in the light of the rule eliminating
application of SRLY where its application overlaps with that of section
382.
Moreover, the five-year affiliation requirement is consistent with
Congress' indication in section 384(a) of the point at which it is
appropriate for built-in attributes of a member to be treated as
attributes of the group. Under certain circumstances, section 384(a)
prevents the recognized built-in gain of one corporation from
offsetting preacquisition losses of another corporation, if such gain
is recognized within a five-year period following the acquisition date.
Similarly, section 384(b) provides that section 384(a) does not apply
to prevent the recognized built-in gain of one corporation from
offsetting the preacquisition losses of another corporation if the gain
corporation and the loss corporation were members of the same
controlled group (as defined in section 384(b)(2)) for the five-year
period ending on the acquisition date.
For these reasons, the final regulations do not reduce the duration
of the affiliation requirement from five years to three years.
Commentators requested clarification that an acquiring group takes
into account application of the fold-in rules of Sec. 1.1502-96(a) in
the former group in determining which members are included in a loss
subgroup. A new example under Sec. 1.1502-96(a)(3), and a cross-
reference in a new Sec. 1.1502-91(g)(3) to the fold-in rules, clarifies
this treatment. Thus, a corporation whose NUBIL folded in to a former
group is deemed to have a five-year affiliation with the common parent
of that group (and is deemed to have affiliation histories with other
group members). A special rule provides that the
[[Page 36120]]
corporation is not deemed to have been previously affiliated with
another corporation that joined the former group at the same time, but
was not taken into account in determining a NUBIL limitation, even if
in fact the two corporations were previously affiliated.
3. Members Included--Determination Whether a Consolidated Group Has a
NUBIL, Sec. 1.1502-91(g)(2)(ii)
Proposed Sec. 1.1502-91(g)(2)(i) provides, in part, that the
members included in the determination whether a consolidated group has
a NUBIG or NUBIL are all members of the group on the day the
determination is made, other than a new loss member with a NUBIL, and
members included in a NUBIL subgroup.
The IRS and Treasury have determined that the reasons for applying
a five-year affiliation requirement to subgroups are equally relevant
to groups. Accordingly, these final regulations provide that the
members included in the determination whether a consolidated group has
a NUBIL are the common parent and all other members that have been
affiliated with the common parent for the five consecutive year period
ending on the day that the determination is made.
In certain cases, a member (or loss subgroup) can join a
consolidated group with a NUBIG, but have a NUBIL on the date the
consolidated group determines whether it has a NUBIL. The IRS and
Treasury have determined that, in such cases, it is appropriate for the
built-in attribute of the member to be included in the group's
determination because it is clear that such NUBIL arose when it was a
group member. Accordingly, the final regulations include in the
determination whether a group has a NUBIL any member that has a NUBIL
on the date the determination is made, and that is neither a new loss
member with a NUBIL nor a member of a NUBIL loss subgroup. The final
regulations also include members in the group's determination whether
the group has a NUBIL if such member(s) joined the consolidated group
with a NUBIL, and, in the aggregate, have a NUBIG on the day that such
determination is made.
4. Members Included--Determination Whether a Consolidated Group (or
Loss Subgroup) With a Net Operating Loss Has a NUBIG, Sec. 1.1502-
91(g)(2)(i)
Proposed Sec. 1.1502-93(c) provides that if a loss group (or loss
subgroup) has a NUBIG, any recognized built-in gain of the loss group
(or loss subgroup) is taken into account under section 382(h) in
determining the consolidated section 382 limitation (or subgroup
section 382 limitation) (emphasis added).
Commentators suggested that this provision, considered together
with the five-year affiliation requirement, makes it unclear whether an
NOL loss subgroup with members that do not satisfy the five-year
affiliation requirement can use a NUBIG, if recognized, to increase the
loss subgroup's section 382 limitation.
The IRS and Treasury have determined that the concerns forming the
basis of the five-year affiliation requirement for determining whether
a loss subgroup has a NUBIL do not extend to the determination whether
a net operating loss carryover group (or loss subgroup) has a NUBIG.
For example, unlike a NUBIL that can be eliminated by a NUBIG without
an immediate tax cost, recognized built-in gains exact such a cost and,
therefore, do not present the same planning opportunities. Accordingly,
these final regulations provide that the members included in the
determination whether an NOL loss group (or loss subgroup) has a NUBIG
are all members of the group (or loss subgroup) on the day that the
determination is made.
Section 1.1502-91(g)(2)(v) provides, in part, that in determining
whether an NOL loss group has a NUBIG which, if recognized, increases
the consolidated section 382 limitation, the group includes all of its
members on the day the determination is made. However, for purposes of
determining whether a group has a net unrealized built-in loss, not all
members of the consolidated group may be included. Thus, a consolidated
group may have recognized built-in gains that increase the amount of
consolidated taxable income that may be offset by its pre-change net
operating loss carryovers that did not arise (and are not treated as
arising) in a SRLY, and also may have recognized built-in losses the
absorption of which is limited. Similar results may obtain for loss
subgroups. In such cases, Sec. 1.1502-93(c)(2) prohibits the use of
recognized built-in gains to increase the amount of consolidated
taxable income that can be offset by recognized built-in losses.
5. Recognized Built-in Gain or Loss on the Disposition of an
Intercompany Obligation of a Member, Sec. 1.1502-91(h)(2)
Proposed Sec. 1.1502-91(h)(2) provides that gain or loss recognized
by a member on the disposition of stock of another member or of an
intercompany obligation is treated as recognized built-in gain or loss
under section 382(h)(2)(unless disallowed under Sec. 1.1502-20 or
otherwise), even though gain or loss on such stock or obligation is not
included in the determination of the group's NUBIG or NUBIL immediately
before the ownership change. The IRS and Treasury have determined that
such treatment may lead to inappropriate results. For instance, if a
bad debt deduction is treated as a recognized built-in loss,
application of a section 382 limitation to that loss may prevent the
proper offset of cancellation of indebtedness income against the bad
debt deduction. Accordingly, Sec. 1.1502-91(h)(2) of the final
regulations treats gain or loss recognized on the disposition of an
intercompany obligation as recognized built-in gain or loss only to the
extent that the transaction gives rise to aggregate income or loss
within the consolidated group.
6. Ownership Change Determination--The Parent Change Method,
Sec. 1.1502-92
Proposed Sec. 1.1502-92 provides rules for determining an ownership
change of a loss group (or a loss subgroup). A loss group (or loss
subgroup) has an ownership change only if the common parent has an
ownership change under the parent change method. Out of concern that
taxpayers could exploit the parent change method's failure to account
for minority shifts of stock, the proposed regulations adopted a
supplemental change method that does take into account minority shifts
of stock under certain circumstances.
Under the proposed regulations, the supplemental method applies if
a person who is a 5-percent shareholder of the common parent (including
any person acting pursuant to a plan or arrangement with such 5-percent
shareholder) increases its percentage ownership both in the common
parent and in any subsidiary of the group within the same testing
period. In that event, the loss group (or loss subgroup) must also
determine whether it had an ownership change under the rules for the
parent change method by treating the common parent as though it had
issued to the person who acquires (or is deemed to acquire) the
subsidiary stock an amount of its own stock (by value) that equals the
value of the subsidiary stock represented by the percentage increase in
that person's ownership of the subsidiary (determined on a separate
entity basis).
Section 1.1502-92(c), Example 2 of the proposed regulations
illustrates application of the supplemental change method. In Example
2, A owns all the stock of L, a loss group parent, and L owns all of
the stock of L1. As part of a plan, A sells 49 percent of the L stock
[[Page 36121]]
to B on October 7, Year 2, and L1 issues new stock representing a 20
percent ownership interest in L1 to the public on November 6, Year 2.
The example concludes that ``because the issuance of L1 stock to the
public occurs in connection with B's acquisition of L stock pursuant to
a plan,'' the supplemental change method applies to the public offering
of L1 stock.
Commentators suggest that the ``plan or arrangement'' language
sweeps too broadly, and that only plans to avoid section 382 should be
subject to this rule. Commentators also contend that Example 2 is
beyond the scope of the operative rule because the facts do not
demonstrate a plan or arrangement with a 5-percent shareholder.
The IRS and Treasury believe that it is appropriate to apply the
supplemental change method to certain acquisitions of a loss group in
which the plan is not between the 5-percent shareholder of the loss
group parent and another person to increase their interests in the loss
group. For example, if an individual buys 50 percent or less of the
stock of a loss group parent, and as part of the same plan, causes a
public offering out of a subsidiary, the supplemental change method
should apply to that offering. (Conversely, the supplemental change
method should not apply unless the 5-percent shareholder's increase in
the stock of parent or subsidiary is related to the increase by another
person because those increases are pursuant to the same plan.)
Accordingly, these final regulations provide that a 5-percent
shareholder of the common parent (or loss subgroup parent) is treated
as increasing its ownership interest in the stock of a subsidiary to
the extent, if any, that the percentage ownership interest of another
person or persons in the stock of the subsidiary is increased pursuant
to a plan or arrangement under which the 5-percent shareholder
increases its percentage ownership interest in the common parent (or
loss subgroup parent).
To alleviate concerns that the supplemental change method is overly
broad, the final regulations limit the scope of the supplemental change
method through application of the rules of Sec. 1.382-2T(k). The final
regulations provide that the supplemental change method will apply if
the common parent (or loss subgroup parent) has actual knowledge of the
increase in the 5-percent shareholder's ownership interest in the stock
of the subsidiary (or has actual knowledge of the plan or arrangement)
before the date that the group's income tax return is filed for the
taxable year that includes the date of that increase or, if, at any
time during the testing period, the 5-percent shareholder of the common
parent is also a 5-percent shareholder of the subsidiary (determined
without regard to a deemed acquisition of subsidiary stock under the
plan or arrangement rule) whose percentage increase in the ownership of
the stock of the subsidiary would be taken into account in determining
if the subsidiary has an ownership change. For purposes of determining
the 5-percent shareholders of the subsidiary, the principles of
Sec. 1.382-2T(k), including the duty to inquire, apply to the common
parent (or loss subgroup parent).
Several additional changes to the supplemental change method were
made in response to comments. Section 1.1502-92(c)(4)(iii) clarifies
that stock treated as issued under the supplemental change method is
not treated as issued in testing periods that do not include the
testing date on which the parent stock is deemed to be issued. Section
1.1502-92(c)(4)(ii) provides that stock is not treated as issued if a
deemed issuance of parent stock would not cause the loss group (or loss
subgroup) to have an ownership change before the day on which the
subsidiary leaves the loss group (or loss subgroup).
To avoid retroactive changes in ownership, Sec. 1.1502-92(c)(4)(v)
provides that if the supplemental change method applies to an
acquisition of subsidiary stock before the first date that the 5-
percent shareholder increases its percentage ownership interest in the
stock of the common parent (or loss subgroup parent), then the deemed
issuance of stock is treated as occurring on the first such date.
However, the value of the subsidiary stock is the value of such stock
on the date it was acquired. In addition, Sec. 1.1502-92(c)(4)(vi)
provides that if two or more 5-percent shareholders are treated as
increasing their percentage ownership interests pursuant to a single
plan or arrangement described above, appropriate adjustments must be
made so that the amount of stock treated as issued is not taken into
account more than one time.
Commentators also requested that the supplemental change method
apply only if the acquisitions of parent stock and subsidiary stock are
with a principal purpose of avoiding or lessening the impact of section
382. The IRS and Treasury believe that if the same 5-percent
shareholder increases in the stock of both a subsidiary and the common
parent within the same testing period, the supplemental change method
should apply without further evidence of an avoidance purpose.
Similarly, a plan or arrangement under which a 5-percent shareholder
and another person both increase their interests in the loss group is
sufficient proof of an avoidance purpose that the supplemental change
method properly applies without further inquiry.
7. Consolidated Section 382 Limitation, Sec. 1.1502-93
Proposed Sec. 1.1502-93 provides rules for computing the
consolidated section 382 limitation following an ownership change of a
loss group. The value of the loss group is the value, immediately
before the ownership change, of the stock (including stock described in
section 1504(a)(4)) of each member of the loss group, other than stock
that is owned directly or indirectly by a member. Section 1.1502-
93(b)(2) provides that this value is adjusted under any rule in section
382 (such as section 382(l)(1), relating to certain capital
contributions) requiring an adjustment to value for purposes of
computing the section 382 limitation. The section 382 limitation, as so
determined, is further adjusted as required by section 382 and the
regulations thereunder (such as section 382(m)(2), relating to a short
taxable year). Similar rules apply in determining the section 382
limitation for a loss subgroup.
In response to comments, the final regulations make several
clarifications with respect to circumstances that require an adjustment
to the value of a loss group or loss subgroup.
Section 1.1502-93(b)(2)(i) provides that, for purposes of section
382(e)(2), redemptions and corporate contractions that do not effect a
transfer of value outside of the loss group (or loss subgroup) are
disregarded. For purposes of section 382(l)(1), capital contributions
between members of the loss group (or loss subgroup) (or a contribution
of stock to a member made solely to satisfy the loss subgroup parent
requirement of Secs. 1.1502-91(d)(1)(ii) or 1.1502-91(d)(2)(ii)), are
not taken into account. Also, the substantial nonbusiness asset test of
section 382(l)(4) is applied on a group (or subgroup) basis, and is not
applied separately to its members.
Section 1.1502-93(b)(2)(ii) provides rules that apply to prevent
duplication of value of the group (or loss subgroup) and to prevent
duplication of the section 382 limitation. This section provides that
appropriate adjustments must be made to the extent necessary to prevent
any duplication of the value of the stock of a member, even though
corporations that do not file
[[Page 36122]]
consolidated returns may not be required to make such an adjustment. In
making these adjustments, the group (or loss subgroup) may apply the
principles of Sec. 1.382-8 (relating to controlled groups of
corporations) in determining the value of a loss group (or loss
subgroup) even if that section would not apply if separate returns were
filed. Also, the principles of Sec. 1.382-5(d) (relating to successive
ownership changes and absorption of a section 382 limitation) may apply
to adjust the consolidated section 382 limitation (or subgroup section
382 limitation) of a loss group (or loss subgroup) to avoid a
duplication of value if there are simultaneous (rather than successive)
ownership changes.
One commentator suggested that contributions of assets by the
selling group to a departing member or loss subgroup generally should
not be subject to section 382(l)(1). The IRS and Treasury have
determined that, unlike transfers of stock or assets that do not effect
a transfer of value into a loss subgroup, capital contributions that
constitute a transfer of value into a loss group or to a departing
member should continue to be subject to section 382(l)(1).
A new Sec. 1.1502-93(c)(2) provides that appropriate adjustments
must be made so that any recognized built-in gain of a member that
increases more than one section 382 limitation (whether consolidated,
subgroup, or separate) does not effect a duplication in the amount of
consolidated taxable income that can be offset by pre-change net
operating losses. In addition, recognized built-in gains may not
increase the amount of consolidated taxable income that can be offset
by recognized built-in losses.
8. Ceasing To Be a Member of a Consolidated Group (or Loss Subgroup),
Sec. 1.1502-95
Elective Apportionment of NUBIG
In general, the common parent of a consolidated group may elect to
apportion all or part of each element (the value element and the
adjustment element) of a consolidated section 382 limitation to a
former member or loss subgroup. The proposed regulations do not provide
that the common parent may elect to apportion all or part of a loss
group's NUBIG.
Under section 382(h)(1)(A), if a consolidated group has a NUBIG
immediately before an ownership change, the section 382 limitation for
any recognition period taxable year is increased by the recognized
built-in gain for such taxable year. This increase cannot exceed the
NUBIG, reduced by recognized built-in gains for prior years ending in
the recognition period.
Commentators suggest that, like the value element and the
adjustment element of the consolidated section 382 limitation, the
common parent should be able to apportion any part or all of the
group's NUBIG to a departing member (or loss subgroup). The final
regulations adopt this recommendation.
In general, Sec. 1.1502-95(c)(2)(ii) provides that the amount of
the loss group's NUBIG that may be apportioned to one or more former
members that cease to be members during the same consolidated return
year cannot exceed the loss group's excess, immediately after the close
of that year, of net unrealized built-in gain over recognized built-in
gain, determined under section 382(h)(1)(A)(ii) (relating to a
limitation on recognized built-in gain). In general, NUBIG apportioned
to a former member reduces the amount of NUBIG that the group can avail
itself of in subsequent taxable years.
For purposes of determining the extent to which the former member's
section 382 limitation can be increased by recognized built-in gains,
the amount of NUBIG apportioned is treated as if it were an amount
determined under section 382(h) with respect to the former member. The
former member's five-year recognition period begins on the group's (or
loss subgroup's) change date.
Default Apportionment of Zero Section 382 Limitation and NUBIG When a
Member Ceases To Be a Member of a Group (or Loss Subgroup),
Sec. 1.1502-95(c)(2)(ii)
Section 1.1502-95(c)(1) provides that the common parent may elect
to apportion all or any part of a consolidated section 382 limitation
to a former member (or a loss subgroup) when the member or loss
subgroup leaves the group. If the common parent does not make an
apportionment of the applicable section 382 limitation(s) or of a NUBIG
that the member recognizes during the recognition period, the former
member or loss subgroup has a consolidated section 382 limitation of
zero with respect to pre-change attributes (the zero default rule).
Commentators suggested that the zero default rule may be a trap for
the unwary. For instance, under the proposed regulations, a subgroup
member that ceases to bear a section 1504(a)(1) to the subgroup parent
is subject to the zero default rule, even if that member remains within
the current consolidated group.
The IRS and Treasury recognize that any default rule will benefit
some taxpayers while operating to the detriment of others. For example,
a default apportionment of a section 382 limitation or NUBIG based on
the departing member's contribution to the group's net operating loss
carryover could cause some apportioned limitation to go unused if that
member becomes subject to a new section 382 limitation upon departing
the group. By contrast, a rule providing that the default limitation is
capped by the amount of any subsequent section 382 limitation, would be
difficult to administer. Because the consequences of applying any
default rule depend on the particular facts of a transaction, including
the relative income generation of the departing and remaining members,
the IRS and Treasury believe that the simplicity of the zero default
rule makes the rule preferable to other alternatives.
Also, the IRS and the Treasury believe that the new exceptions to
ceasing to be a member of a loss subgroup substantially reduce the
likelihood that the zero default rule will yield unexpected results.
For example, an acquisition of a loss subgroup typically will cause an
ownership change of the loss subgroup. Following that ownership change,
a member that remains within the current group now can break the
section 1504(a)(1) relationship to the loss subgroup parent without
ceasing to be a member of the loss subgroup. Accordingly, these final
regulations retain the zero default rule when a member ceases to be a
member of a group (or loss subgroup). The zero default rule also
applies to a NUBIG.
Mandatory Apportionment of a Group's NUBIL to a Departing Member,
Sec. 1.1502-95(e)
In general, a group has a NUBIL if the adjusted bases of the assets
of members included in such determination under Sec. 1.1502-91(g)
exceed their fair market value immediately before the change date.
Similar rules apply to loss subgroups. Subject to the limitations of
section 382(h)(2)(B), NUBILs recognized within the five year period
beginning on the change date are subject to the consolidated section
382 limitation. The proposed regulations do not provide rules for
apportioning a group's NUBIL to a former member (or loss subgroup). The
IRS and Treasury believe that a mandatory apportionment of the group's
NUBIL is necessary to ensure that the group's NUBIL, if recognized by
the former member (or loss subgroup) during the recognition period,
remains subject to the consolidated section 382 limitation. One
commentator suggests that a former member (or loss group)
[[Page 36123]]
should be apportioned a group's NUBIL only if and when a former member
that had a separately computed NUBIL that contributed to the group's
NUBIL departs the group, and the contributed built-in loss has not
fully been recognized. Adjustments would reflect intragroup transfers
of assets occurring between the change date and the date that the
former member departs.
The IRS and Treasury believe that the suggested approach
overemphasizes the location of assets with a NUBIG. For example, if a
former member has a NUBIG determined on a separate entity basis, a
recognized built-in loss of that member will not be limited, even if
the former member is the first corporation to dispose of a built-in
loss asset. The IRS and Treasury believe that subjecting the sale of
built-in loss assets to the consolidated section 382 limitation,
regardless of the location of built-in gain assets, more accurately
reflects the NUBIL as a group attribute. Similarly, consistent with
treatment of the NUBIL as a group attribute, the approach permits
built-in gain to be sheltered by built-in loss only after the excess of
built-in losses over built-in gains has been recognized. Accordingly,
these final regulations adopt a model that apportions NUBIL based on
the gross amount of built-in loss that the departing member contributed
to the determination of the group's NUBIL.
In general, Sec. 1.1502-95(f) provides that a departing member is
allocated a portion of the group's (or loss subgroup's) NUBIL if,
immediately after the close of the consolidated return year in which
the departing member ceases to be a member, the amount of the loss
group's (or loss subgroup's) excess of net unrealized built-in loss
over recognized built-in loss (the remaining NUBIL balance) is greater
than zero. In general, NUBIL apportioned to former members in prior
taxable years is treated as recognized built-in loss in those years.
The amount of NUBIL allocated to a departing member is equal to the
remaining NUBIL balance multiplied by a fraction. The numerator of the
fraction is the amount of the built-in loss, taken into account on the
change date, in the assets held by the departing member immediately
after the member ceases to be a member of the loss group (or loss
subgroup). The denominator of the fraction is the sum of the numerator,
plus the amount of the built-in loss, taken into account on the change
date, in the assets held by the group immediately after the close of
the taxable year in which the departing member ceases to be a member.
(Fluctuations in value of the assets between the change date and the
date that the member ceases to be a member of the group (or loss
subgroup), or the close of the taxable year in which the member ceases
to be a member of the loss group, are disregarded.) In general,
adjustments are made for gain or loss that has been recognized during
the recognition period, and for assets that are transferred basis
property. The amount of the NUBIL allocated to a former member
generally is treated as previously recognized built-in loss for
purposes of applying the limitation of section 382(h)(1)(B)(ii) to a
loss group's taxable years beginning after the year in which the former
member ceases to be a member.
For purposes of determining the amount of the former member's
recognized built-in losses in any taxable year beginning after the
former member ceases to be a member, the amount of the loss group's (or
loss subgroup's) net unrealized built-in loss that is apportioned to
the former member is treated as if it were an amount of net unrealized
built-in loss determined under section 382(h)(1)(B)(i) with respect to
such member, and that amount is not reduced under section
382(h)(1)(B)(ii) by the loss group's (or loss subgroup's) recognized
built-in losses.
Subgroup principles apply to the allocation of a NUBIL. For
example, if two or more members leave a loss group, and are members of
a consolidated group, any allocation of the loss group's NUBIL is made
on a subgroup basis. In general, the common parent may apportion all or
any part of a consolidated section 382 limitation (or subgroup section
382 limitation) under Sec. 1.1502-95(c) to a former member to which the
group's NUBIL is allocated (or to a loss subgroup that includes that
member).
9. Miscellaneous Rules, Sec. 1.1502-96
Fold-in rules do not apply to NUBIGs, Sec. 1.1502-96(a)
Proposed Sec. 1.1502-96(a)(2) provides in part that, following a
fold-in event described in Sec. 1.1502-96(a)(1), the member's
separately computed NUBIG or NUBIL is included in the determination
whether the group has a NUBIG or NUBIL.
The IRS and Treasury believe that the ``fold-in'' of a member's
NUBIG can lead to inappropriate results. For example, a consolidated
group that acquires a corporation with a small net operating loss
carryover and a large NUBIG can immediately offset the group's NUBIL
with the NUBIG, if the member is acquired with an ownership change.
Accordingly, the fold-in rules of Sec. 1.1502-96(a) do not apply to
include a member's separately computed NUBIG in determining whether a
group has a NUBIL. A member's NUBIG is only included in such
determination if the member is included under Sec. 1.1502-91(g)(2).
Net Operating Loss Carryovers Reattributed Under Sec. 1.1502-20(g)
Section 1.1502-20 of the regulations disallows a deduction for
certain losses on the disposition of stock of a subsidiary. In general,
under Sec. 1.1502-20(g), the common parent can reattribute to itself
net operating loss carryovers or capital loss carryovers attributable
to the subsidiary in an amount not to exceed the disallowed loss.
Section 1.1502-20(g) further provides that the common parent succeeds
to the reattributed losses as if the losses were succeeded to in a
transaction described in section 381(a). Also, any owner shift of the
subsidiary (including any deemed owner shift resulting from section
382(g)(4)(D) or 382(l)(3)) in connection with the disposition is not
taken into account under section 382 with respect to the reattributed
losses. (Sec. 1.1502-20(g)(1)). The preamble to TD 8364 (56 FR 47379,
September 19, 1991)(which added Sec. 1.1502-20), states that
clarification regarding the application of section 382 to reattributed
losses would be provided in connection with finalizing Secs. 1.1502-91
through 1.1502-99. The preamble states that, for example, it is
anticipated that proposed Sec. 1.1502-95 would be modified to permit
the common parent to elect to retain all or part of a section 382
limitation that applies to reattributed SRLY losses.
A new Sec. 1.1502-96(d) provides rules relating to reattributed
losses. This section generally provides that Secs. 1.1502-91 through
1.1502-96 and Sec. 1.1502-98 apply to reattributed losses consistent
with the provision of Sec. 1.1502-20(g) that treats the common parent
as succeeding to the losses in a transaction to which section 381(a)
applies. For example, if the reattributed loss is a pre-change
attribute subject to a section 382 limitation, it remains subject to
that limitation following the reattribution. Section 1.1502-96(d)(4)
provides rules that allow the common parent to elect to apportion to
itself all or part of any separate section 382 limitation or subgroup
section 382 limitation to which the reattributed loss is subject. The
apportionment is made under the principles of the rules of Sec. 1.1502-
95(c), relating to the apportionment of a consolidated section 382
limitation to a member that leaves
[[Page 36124]]
the group. In certain cases, the section 382 limitation applicable to
the reattributed loss is zero unless an apportionment of such
limitation is made to the common parent. The election to apportion a
section 382 limitation is made as part of the election to reapportion
the loss. See Sec. 1.1502-20(g)(4), as amended by this document.
As previously set forth in Sec. 1.1502-20(g), Sec. 1.1502-96(d)
adopts the general rule that any owner shift of the subsidiary
(including any deemed owner shift resulting from section 382(g)(4)(D)
or 382(l)(3))in connection with the disposition of the subsidiary's
stock) is not taken into account under section 382 with respect to the
reattributed losses. The final regulations, however, modify the general
rule to provide that any owner shift with respect to the successor
corporation that is treated as continuing in existence under
Sec. 1.382-2(a)(1)(ii) must be taken into account for such purpose if
such owner shift is effected by the reattribution and any owner shift
of the stock of the subsidiary not held directly or indirectly by the
common parent would have been taken into account if such shift had
occurred immediately before the reattribution. Such an owner shift may
occur if the subsidiary has minority shareholders that, under
Sec. 1.382-2(a)(1)(ii), are treated as decreasing their ownership in
the reattributed loss, while the shareholders of the common parent
increase their ownership interests in that loss.
The final regulations provide that, in general, the value of the
stock of the common parent is used to establish a section 382
limitation for the reattributed loss with respect to an ownership
change upon, or after, the reattribution. These rules coordinate the
determination of the value of that stock with the capital contribution
rules of section 382(l)(1), and also require appropriate adjustments so
that value is not improperly omitted or duplicated as a result of the
reattribution.
Effective Dates
Sections 1.1502-91 through 1.1502-96 and 1.1502-98
Except as set forth below, Secs. 1.1502-91 through 1.1502-96 and
1.1502-98 apply to testing dates that occur on or after June 25, 1999.
Sections 1.1502-94 through 1.1502-96 also apply on any date on or after
June 25, 1999 on which a corporation becomes a member of a group or on
which a corporation ceases to be a member of a loss group (or a loss
subgroup).
A transition rule for net unrealized built-in loss provides that a
consolidated group may apply Sec. 1.1502-91A(g) for the period ending
on the day before June 25, 1999 to determine the earliest date that its
testing period begins (treating the day before June 25, 1999 as the end
of a taxable year.)
The election under Sec. 1.1502-91(d)(4) to treat the subgroup
parent requirement as satisfied is effective for corporations that
become members of a consolidated group in taxable years for which the
due date of the income tax return (without extensions) is after June
25, 1999. Section 1.1502-95(d)(2)(ii) (relating to exceptions to
ceasing to be a member of loss subgroup) applies to corporations that
cease to bear a section 1504(a)(1) relationship to a loss subgroup
parent in taxable years for which the due date of the income tax return
(without extensions) is after June 25, 1999.
The third sentence of Sec. 1.1502-91(d)(5) (relating to members
excluded from a loss subgroup) applies to corporations that become
members of a consolidated group on or after June 25, 1999.
In the case of corporations that cease to be members of a loss
group (or loss subgroup) before June 25, 1999, in a taxable year for
which the due date of the income tax return (without extensions) is
after June 25, 1999, Secs. 1.1502-95 (a), (b), (c) and (f) apply to
those corporations if the common parent makes the election described in
the second sentence of (c)(1) of that section in the time and manner
prescribed in paragraph (f) of that section.
Section 1.1502-96(d) applies to reattributions of net operating
losses or net capital losses in taxable years for which the due date of
the income tax return (without extensions) is after June 25, 1999;
except that the election under Sec. 1.1502-96(d)(5) (relating to an
election to reattribute section 382 limitation) can be made with any
election under Sec. 1.1502-20(g)(4) to reattribute to the common parent
a net operating loss or net capital loss that is timely filed on or
after June 25, 1999.
Sections 1.1502-91A through 1.1502-96A and 1.1502-98A apply to any
testing date on or after January 1, 1997, and before June 25, 1999.
Sections 1.1502-94A through 1.1502-96A also apply on any date on or
after January 1, 1997, and before June 25, 1999, on which a corporation
becomes a member of a group or on which a corporation ceases to be a
member of a loss group (or a loss subgroup). For periods before January
1, 1997, the transition rules in Sec. 1.1502-99A(c) continue to apply.
The transition rules in Sec. 1.1502-99A for periods ending before
January 1, 1997 also are clarified to provide that a member that ceases
to be a member of a group does not have a zero section 382 limitation
with respect to pre-change net operating losses allocated to that
member.
Need for Immediate Guidance
Because the temporary regulations are not applicable for taxable
years ending after June 26, 1999, it is necessary to implement these
final regulations without delay to ensure continuity of treatment of
certain attributes and to ensure that there is no period within which
the treatment of such attributes is inconsistent with the temporary
regulations and these final regulations. See section 7805(e)(2).
Accordingly, it is impracticable and contrary to the public interest to
issue this Treasury decision subject to the effective date limitation
of section 553(d) of title 5 of the United States Code (if applicable).
Special Analysis
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. 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 principally affect
corporations filing consolidated federal income tax returns that have
net operating losses or other attributes that are subject to section
382. Available data indicates that many consolidated return filers are
large companies (not small businesses). In addition, the data indicates
that an insubstantial number of consolidated return filers that are
smaller companies have net operating losses or other attributes subject
to section 382. Moreover, many of these corporations will not have
ownership changes. 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 was sent to the Small
Business Administration for comment on its impact on small business.
Drafting Information. The principal author of the final regulations
is Lee A. Kelley 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:
[[Page 36125]]
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by
removing the entries for sections 1.1502-91T, 1.1502-92T, 1.1502-93T,
1.1502-94T, 1.1502-95T, 1.1502-96T, 1.1502-98T, and 1.1502-99T, and
adding entries in numerical order to read in part as follows:
Authority: 26 U.S. C. 7805 * * *
Section 1.1502-91 also issued under 26 U.S.C. 382(m) and 26
U.S.C. 1502.
Section 1.1502-92 also issued under 26 U.S.C. 382(m) and 26
U.S.C. 1502.
Section 1.1502-93 also issued under 26 U.S.C. 382(m) and 26
U.S.C. 1502.
Section 1.1502-94 also issued under 26 U.S.C. 382(m) and 26
U.S.C. 1502.
Section 1.1502-95 also issued under 26 U.S.C. 382(m) and 26
U.S.C. 1502.
Section 1.1502-96 also issued under 26 U.S.C. 382(m) and 26
U.S.C. 1502.
Section 1.1502-98 also issued under 26 U.S.C. 382(m) and 26
U.S.C. 1502.
Section 1.1502-99 also issued under 26 U.S.C. 382(m) and 26
U.S.C. 1502. * * *
Section 1.1502-91A also issued under 26 U.S.C. 382(m) and 26 U.S.C.
1502.
Section 1.1502-92A also issued under 26 U.S.C. 382(m) and 26 U.S.C.
1502.
Section 1.1502-93A also issued under 26 U.S.C. 382(m) and 26 U.S.C.
1502.
Section 1.1502-94A also issued under 26 U.S.C. 382(m) and 26 U.S.C.
1502.
Section 1.1502-95A also issued under 26 U.S.C. 382(m) and 26 U.S.C.
1502.
Section 1.1502-96A also issued under 26 U.S.C. 382(m) and 26 U.S.C.
1502.
Section 1.1502-98A also issued under 26 U.S.C. 382(m) and 26 U.S.C.
1502.
Section 1.1502-99A also issued under 26 U.S.C. 382(m) and 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
------------------------------------------------------------------------
1.1502-91T(a)(1), first sentence Secs. 1.1502-92T Secs. 1.1502-92A
and 1.1502-93T. and 1.1502-93A.
1.1502-91T(a)(1), third sentence Sec. 1.1502-92T.. Sec. 1.1502-92A.
1.1502-91T(a)(1), third sentence Sec. 1.1502-93T.. Sec. 1.1502-93A.
1.1502-91T(a)(3)................ Secs. 1.1502-94T Secs. 1.1502-94A
and 1.1502-95T. and 1.1502-95A.
1.1502-91T(b) introductory text. Secs. 1.1502-92T Secs. 1.1502-92A
through 1.1502- through 1.1502-
99T. 99A.
1.1502-91T(b)(1)................ Secs. 1.1502-92T Secs. 1.1502-92A
through 1.1502- through 1.1502-
99T. 99A.
1.1502-91T(c)(2), second Sec. 1.1502-96T(a Sec. 1.1502-96A(a
sentence. ). ).
1.1502-91T(c)(3), Example (b), Sec. 1.1502-94T.. Sec. 1.1502-94A.
second sentence.
1.1502-91T(d)(4), second Sec. 1.1502-94T.. Sec. 1.1502-94A
sentence.
1.1502-91T(d)(5), first sentence Sec. 1.1502-95T(d Sec. 1.1502-95A(d
). ).
1.1502-91T(d)(5), second Sec. 1.1502-96T(a Sec. 1.1502-96A(a
sentence. ). ).
1.1502-91T(e)(2), Example(b), Sec. 1.1502-93T.. Sec. 1.1502-93A.
third sentence.
1.1502-91T(f)(2), Example(b)(2), Sec. 1.1502-96T(a Sec. 1.1502-96A(a
first sentence. ). ).
1.1502-91T(f)(2), Example(b)(2), Sec. 1.1502-92T(a Sec. 1.1502-92A(a
third sentence. )(2). )(2).
1.1502-91T(f)(2), Example(b)(2), Sec. 1.1502-93T.. Sec. 1.1502-93A.
fourth sentence.
1.1502-91T(f)(2), Example(c), Sec. 1.1502-96T(c Sec. 1.1502-96A(c
second sentence. ). ).
1.1502-91T(g)(1), last sentence. Sec. 1.1502-94T(c Sec. 1.1502-94A(c
). ).
1.1502-91T(g)(1), last sentence. Sec. 1.1502-96T(a Sec. 1.1502-96A(a
). ).
1.1502-91T(g)(2)(i)(A).......... Sec. 1.1502-94T(a Sec. 1.1502-94A(a
)(1)(ii). )(1)(ii).
1.1502-91T(g)(2)(i)(B).......... Sec. 1.1502-91T(d Sec. 1.1502-91A(d
)(2). )(2).
1.1502-91T(j), first sentence... Secs. 1.1502-92T Secs. 1.1502-92A
through 1.1502- through 1.1502-
99T. 99A.
1.1502-92T(a), second sentence.. Sec. 1.1502-94T.. Sec. 1.1502-94A.
1.1502-92T(a), second sentence.. Sec. 1.1502-96T(b Sec. 1.1502-96A(b
). ).
1.1502-92T(b)(1)(i)(A).......... Sec. 1.1502-91T(c Sec. 1.1502-91A(c
). ).
1.1502-92T(b)(1)(i)(B).......... Sec. 1.1502-91T(c Sec. 1.1502-91A(c
). ).
1.1502-92T(b)(1)(ii), second Sec. 1.1502-95T(b Sec. 1.1502-95A(b
sentence. ). ).
1.1502-92T(b)(1)(ii)(A)......... Sec. 1.1502-91T(d Sec. 1.1502-91A(d
). ).
1.1502-92T(b)(1)(ii)(C)......... Sec. 1.1502-91T(d Sec. 1.1502-91A(d
). ).
1.1502-92T(b)(2) Example 1(a), Sec. 1.1502-91T(c Sec. 1.1502-91A(c
sixth sentence. )(1). )(1)
1.1502-92T(b)(2) Example 3(b), Sec. 1.1502-91T(d Sec. 1.1502-91A(d
first sentence. )(1). )(1).
1.1502-92T(b)(2) Example 4(b), Sec. 1.1502-91T(d Sec. 1.1502-91A(d
first sentence. )(1). )(1).
1.1502-92T(b)(3)(iii) Example Sec. 1.1502-94T.. Sec. 1.1502-94A.
2(d), fourth sentence.
1.1502-92T(b)(3)(iii) Example Sec. 1.1502-91T(d Sec. 1.1502-91A(d
3(a), seventh sentence. ). ).
1.1502-92T(b)(4), first sentence Sec. 1.1502-96T(a Sec. 1.1502-96A(a
). ).
1.1502-92T(b)(4), first sentence Sec. 1.1502-96T(a Sec. 1.1502-96A(a
)(2). )(2).
1.1502-92T(b)(4), first sentence Sec. 1.1502-96T(b Sec. 1.1502-96A(b
). ).
1.1502-92T(b)(4), second Sec. 1.1502-96T(a Sec. 1.1502-96A(a
sentence. ) applies, see ) applies, see
Sec. 1.1502-96T( Sec. 1.1502-96A(
c). c).
1.1502-92T(e)(1)(ii)............ Sec. 1.1502-96T(b Sec. 1.1502-96A(b
). ).
1.1502-92T(e)(2), fifth sentence Sec. 1.1502-96T(a Sec. 1.1502-96A(a
). ).
1.1502-92T(e)(2), fifth sentence Sec. 1.1502-91T(d Sec. 1.1502-91A(d
). ).
1.1502-93T(a)(2)................ Sec. 1.1502-95T(c Sec. 1.1502-95A(c
). ).
1.1502-93T(b)(2), last sentence. Sec. 1.382-8T.... Sec. 1.382-8.
1.1502-93T(b)(2), fourth Sec. 1.1502-91T(g Sec. 1.1502-91A(g
sentence. )(2). )(2).
1.1502-94T(a)(1)(i)............. Sec. 1.1502-91T(d Sec. 1.1502-91A(d
)(1). )(1).
1.1502-94T(a)(1)(ii)............ Sec. 1.1502-91T(d Sec. 1.1502-91A(d
)(2). )(2).
1.1502-94T(a)(3)................ Sec. 1.1502-91T(d Sec. 1.1502-91A(d
). ).
1.1502-94T(a)(3)................ Secs. 1.1502-92T Secs. 1.1502-92A
and 1.1502-93T. and 1.1502-93A.
1.1502-94T(a)(4), first sentence Sec. 1.1502-96T(a Sec. 1.1502-96A(a
). ).
1.1502-94T(a)(4), first sentence Sec. 1.1502-96T(a Sec. 1.1502-96A(a
)(2). )(2).
[[Page 36126]]
1.1502-94T(a)(4), first sentence Sec. 1.1502-92T(b Sec. 1.1502-92A(b
)(1)(i). )(1)(i).
1.1502-94T(a)(4), first sentence Sec. 1.1502-96T(b Secs. 1.1502-96A(
). b).
1.1502-94T(a)(4), second Sec. 1.1502-96T(a Sec. 1.1502-96A(a
sentence. ) applies, see ) applies, see
Sec. 1.1502-96T( Sec. 1.1502-96A(
c). c).
1.1502-94T(a)(5)................ Sec. 1.1502-96T(c Sec. 1.1502-96A(c
). ).
1.1502-94T(b)(4) Example 1(b), Sec. 1.1502-91T(d Sec. 1.1502-91A(d
first sentence. ). ).
1.1502-94T(b)(4) Example 2(b),.. Sec. 1.1502-91T(d Sec. 1.1502-91A(d
)(1). )(1).
1.1502-94T(b)(4) Example 2(d), Sec. 1.1502-96T(a Sec. 1.1502-96A(a
first sentence. ). ).
1.1502-94T(b)(4) Example 2(d), Sec. 1.1502-91T(c Sec. 1.1502-91A(c
third sentence. ). ).
1.1502-94T(b)(4) Example 3(b), Sec. 1.1502-91T(d Sec. 1.1502-91A(d
first sentence. )(1). )(1).
1.1502-94T(b)(4) Example 3(c), Secs. 1.1502-96T( Secs. 1.1502-96A(
second sentence. a) and 1.1502- a) and 1.1502-
91T(c)(2). 91A(c)(2).
1.1502-94T(c), first sentence... Secs. 1.1502-91T( Secs. 1.1502-91A(
g) and (h). g) and (h) and
1.1502-93A(c).
1.1502-94T(c), second sentence.. Sec. 1.1502-91T(g Sec. 1.1502-91A(g
)(3). )(3).
1.1502-94T(d), fifth sentence... Sec. 1.1502-96T(a Sec. 1.1502-96A(a
). ).
1.1502-94T(d), sixth sentence... Sec. 1.1502-92T(e Sec. 1.1502-92A(e
)(1). )(1).
1.1502-95T(a)(3), paragraph Secs. 1.1502-91T Secs. 1.1502-91A
heading. through 1.1502- through 1.1502-
93T. 93A.
1.1502-95T(a)(3)................ Secs. 1.1502-91T Secs. 1.1502-91A
through 1.1502- through 1.1502-
93T. 93A.
1.1502-95T(b)(1) introductory Secs. 1.1502-91T Secs. 1.1502-91A
text, first sentence. through 1.1502- through 1.1502-
93T. 93A.
1.1502-95T(b)(2) introductory Sec. 1.1502-92T.. Sec. 1.1502-92A.
text.
1.1502-95T(b)(4) Example(2)(a), Sec. 1.1502-92T.. Sec. 1.1502-92A.
second sentence.
1.1502-95T(c)(2) introductory Sec. 1.1502-93T.. Sec. 1.1502-93A.
text.
1.1502-95T(c)(7) Example(1)(a), Sec. 1.1502-92T.. Sec. 1.1502-92A.
third sentence.
1.1502-95T(d)(2) Example(1)(a), Sec. 1.1502-92T.. Sec. 1.1502-92A.
fifth sentence.
1.1502-95T(d)(2) Example(3)(a), Sec. 1.1502-92T(b Sec. 1.1502-92A(b
fourth sentence. )(1)(ii). )(1)(ii).
1.1502-95T(e)(1) introductory Sec. 1.1502-95T.. Sec. 1.1502-95A.
text.
1.1502-96T(a)(2) introductory Sec. 1.1502-91T(c Sec. 1.1502-91A(c
text, first sentence. )(1)(i). )(1)(i).
1.1502-96T(a)(2)(ii)............ Sec. 1.1502-91T(c Sec. 1.1502-91A(c
). ).
1.1502-96T(a)(3), second Sec. 1.1502-91T(f Sec. 1.1502-91A(f
sentence. )(2). )(2).
1.1502-96T(a)(5), first sentence Secs. 1.1502-91T Secs. 1.1502-91A
through 1.1502- through 1.1502-
95T. 95A.
1.1502-96T(a)(5), first sentence Sec. 1.1502-98T.. Sec. 1.1502-98A.
1.1502-96T(b)(1) introductory Sec. 1.1502-92T.. Sec. 1.1502-92A.
text, first sentence.
1.1502-96T(b)(1) introductory Sec. 1.1502-91T(c Sec. 1.1502-91A(c
text, first sentence. )(1). )(1).
1.1502-96T(b)(1) introductory Sec. 1.1502-91T(d Sec. 1.1502-91A(d
text, first sentence. ). ).
1.1502-96T(b)(1) introductory Sec. 1.1502-95T(b Sec. 1.1502-95A(b
text, second sentence. ). ).
1.1502-96T(b)(3), paragraph Secs. 1.1502-91T, Secs. 1.1502-91A,
heading. 1.1502-92T, and 1.1502-92A, and
1.1502-94T. 1.1502-94A.
1.1502-96T(b)(3), first sentence Sec. 1.1502-92T.. Sec. 1.1502-92A.
1.1502-96T(b)(3), first sentence Sec. 1.1502-92T.. Sec. 1.1502-92A.
1.1502-96T(b)(3), second Sec. 1.1502-94T.. Sec. 1.1502-94A.
sentence.
1.1502-96(c), last sentence..... Sec. 1.382-5T(d). Sec. 1.382-5(d).
1.1502-98T, first sentence...... Secs. 1.1502-91T Secs. 1.1502-91A
through 1.1502- through 1.1502-
96T. 96A.
1.1502-98T, second sentence..... Secs. 1.1502-91T Secs. 1.1502-91A
through 1.1502- through 1.1502-
96T. 96A
1.1502-98T, third sentence...... Sec. 1.1502-92T.. Sec. 1.1502-92A.
1.1502-98T, third sentence...... Sec. 1.1502-93T.. Sec. 1.1502-93A
1.1502-99T(a), first sentence... Sections 1.1502- Sections 1.1502-
91T through 91A through
1.1502-96T and 1.1502-96A and
1.1502-98T. 1.1502-98A.
1.1502-99T(a), second sentence.. Sections 1.1502- Sections 1.1502-
94T through 94A through
1.1502-96T. 1.1502-96A.
1.1502-99T(b), first sentence... Secs. 1.1502-91T Secs. 1.1502-91A
through 1.1502- through 1.1502-
96T and 1.1502- 96A and 1.1502-
98T. 98A.
1.1502-99T(b), second sentence.. Sec. 1.1502-92T(b Sec. 1.1502-92A(b
)(1)(i). )(1)(i).
1.1502-99T(b), third sentence... Sec. 1.1502-92T(b Sec. 1.1502-92A(b
)(1). )(1).
1.1502-99T(c)(1)(ii)............ Secs. 1.1502-91T Secs. 1.1502-91A
through 1.1502- through 1.1502-
96T and 1.1502- 96A and 1.1502-
98T. 98A
1.1502-99T(c)(1)(iii), first Secs. 1.1502-91T Secs. 1.1502-91A
sentence. through 1.1502- through 1.1502-
96T and 1.1502- 96A and 1.1502-
98T. 98A.
1.1502-99T(c)(1)(iii), second Sec. 1.1502-92T.. Sec. 1.1502-92A.
sentence.
1.1502-99T(c)(2)(i), first Secs. 1.1502-91T Secs. 1.1502-91A
sentence. through 1.1502- 1.1502-96A and
96T and through 1.1502-98A.
1.1502-98T.
1.1502-99T(c)(2)(i), first Sec. 1.1502-95T(c Sec. 1.1502-95A(c
sentence. ). ).
1.1502-99T(c)(2)(i), fifth Sec. 1.1502-91T(d Sec. 1.1502-91A(d
sentence. )(2)(i). )(2)(i).
1.1502-99T(c)(2)(ii)............ Sec. 1.382-8T.... Sec. 1.382-8.
1.1502-99T(c)(2)(ii)............ Sec. 1.382-8T(h). Sec. 1.382-8(h).
1.1502-99T(d)(1)................ Sec. 1.1502-92T.. Sec. 1.1502-92A.
[[Page 36127]]
1.1502-99T(d)(3)................ Secs. 1.1502-91T Secs. 1.1502-91A
through 1.1502- through 1.1502-
96T and 1.1502- 96A and 1.1502-
98T. 98A.
------------------------------------------------------------------------
Par. 3. Section 1.1502-20 is amended as follows:
1. Adding a sentence to the end of paragraph (g)(1).
2. Redesignating paragraph (g)(5) as paragraph (g)(4).
3. Paragraph (g)(4)(i)(A) is amended by removing ``, and'' and
adding ``;'' in its place.
4. Paragraph (g)(4)(i)(B) is amended by removing the period at the
end of the paragraph and adding ``; and'' in its place.
5. Adding a new paragraph (g)(4)(i)(C) immediately after paragraph
(g)(4)(i)(B) and before paragraph (g)(4)(i) concluding text.
6. Redesignating paragraph (g)(4)(ii) as paragraph (g)(4)(iii).
7. Adding a new paragraph (g)(4)(ii).
The revisions and additions read as follows:
Sec. 1.1502-20 Disposition or deconsolidation of subsidiary stock.
* * * * *
(g) * * *
(1) * * * See Sec. 1.1502-96(d) for rules relating to section 382
and the reattribution of losses under this paragraph (g).
* * * * *
(4)
(i) * * *
(C) If the common parent is reattributing to itself all or any part
of a section 382 limitation pursuant to Sec. 1.1502-96(d)(5), the
information required by paragraph (g)(4)(ii) of this section.
* * * * *
(ii) Reattribution of section 382 limitation. The information
required by this paragraph (g)(4)(ii) is a separate list for each
subsidiary (or a separate list for two or more subsidiaries that are
members of a loss subgroup whose pre-change subgroup losses are being
reattributed) with respect to which an apportionment of a separate
section 382 limitation or subgroup section 382 limitation is being
made, setting forth--
(A) The name and E.I.N. of the subsidiary (or subsidiaries that
were members of a loss subgroup);
(B) A statement entitled ``THIS IS AN ELECTION UNDER Sec. 1.1502-
96(d)(5) TO APPORTION ALL OR PART OF [insert A SEPARATE or A SUBGROUP
or BOTH A SEPARATE AND A SUBGROUP] SECTION 382 LIMITATION TO [insert
name and E.I.N. of the common parent]'';
(C) The date of the ownership change giving rise to the separate
section 382 limitation or subgroup section 382 limitation that is being
apportioned;
(D) The amount of the separate (or subgroup) section 382 limitation
for the taxable year in which the reattribution occurs (determined
without reference to any apportionment under this section or
Sec. 1.1502-95(c));
(E) The amount of each net operating loss carryover or capital loss
carryover, and the year in which it arose, of the subsidiary (or
subsidiaries) that is subject to the separate section 382 limitation or
subgroup section 382 limitation that is being apportioned to the common
parent, and the amount of the value element and adjustment element of
that limitation that is apportioned to the common parent.
* * * * *
Par. 3a. Immediately following Sec. 1.1502-79A, an undesignated
centerheading is added to read as follows:
Regulations Applying Section 382 With Respect to Testing Dates (and
Corporations Joining or Leaving Consolidated Groups) Before June
25, 1999
Par. 4. Section Sec. 1.1502-90T is amended as follows:
1. Redesignating Sec. 1.1502-90T as Sec. 1.1502-90A [newly
redesignated Sec. 1.1502-90A will appear after the centerheading added
in Par. 3a.]
2. Revising the section heading and the introductory text of newly
designated Sec. 1.1502-90A.
3. Redesignating the entries for Sec. 1.1502-91T through
Sec. 1.1502-99T as Sec. 1.1502-91A through Sec. 1.1502-99A and revising
the section headings.
4. Revising the entries for paragraph (a) of newly designated
Sec. 1.1502-99A.
The revisions read as follows:
Sec. 1.1502-90A Table of contents.
The following list contains the major headings in Secs. 1.1502-91A
through 1.1502-99A:
Sec. 1.1502-91A Application of Section 382 With Respect to a
Consolidated Group Generally Applicable for Testing Dates Before
June 25, 1999.
* * * * *
Sec. 1.1502-92A Ownership change of a loss group or a loss
subgroup generally applicable for testing dates before June 25,
1999.
* * * * *
Sec. 1.1502-93A Consolidated section 382 limitation (or subgroup
section 382 limitation) generally applicable for testing dates
before June 25, 1999.
* * * * *
Sec. 1.1502-94A Coordination with section 382 and the regulations
thereunder when a corporation becomes a member of a consolidated
group generally applicable for corporations becoming members of a
group before June 25, 1999.
* * * * *
Sec. 1.1502-95A Rules on ceasing to be a member of a consolidated
group (or loss subgroup) generally applicable for corporations
ceasing to be members before June 25, 1999.
* * * * *
Sec. 1.1502-96A Miscellaneous rules generally applicable for
testing dates before June 25, 1999.
* * * * *
Sec. 1.1502-97A Special rules under section 382 for members under
the jursidiction of a court in a title 11 or similar case.
[Reserved].
Sec. 1.1502-98A Coordination with section 383 generally applicable
for testing dates (or members joining or leaving a group) before
June 25, 1999.
* * * * *
Sec. 1.1502-99A Effective dates.
(a) Effective date.
(1) In general.
(2) Anti-duplication rules for recognized built-in gain.
* * * * *
Par. 5. Section 1.1502-91T is amended as follows:
1. Redesignating Sec. 1.1502-91T as Sec. 1.1502-91A.
2. Revising the section heading of newly designated Sec. 1.1502-
91A.
3. Amending paragraph (h)(2) by removing the words ``or an
intercompany obligation'' and replacing them with ``(or an intercompany
obligation disposed of before June 25, 1999''.
The revision reads as follows:
Sec. 1.1502-91A Application of section 382 with respect to a
consolidated group generally applicable for testing dates before June
25, 1999.
* * * * *
Par. 6. Section 1.1502-92T is revised as Sec. 1.1502-92A, and the
section heading is revised to read as follows:
[[Page 36128]]
Sec. 1.1502-92A Ownership change of a loss group or a loss subgroup
generally applicable for testing dates before June 25, 1999.
* * * * *
Par 6a. Section 1.1502-93T is amended as follows:
1. Redesignating Sec. 1.1502-93T as Sec. 1.1502-93A.
2. Revising the section heading of newly redesignated Sec. 1.1502-
93A.
3. Adding a sentence at the end of paragraph (c).
The additions and revisions read as follows:
Sec. 1.1502-93A Consolidated section 382 limitation (or subgroup
section 382 limitation) generally applicable for testing dates before
June 25, 1999.
* * * * *
(c) * * * See Sec. 1.1502-99A(a)(2) for a special rule relating to
the application of Sec. 1.502-93(c)(2) to consolidated return years for
which the due date of the return is after June 25, 1999.
* * * * *
Par. 7. Section 1.1502-94T is amended as follows:
1. Redesignating Sec. 1.1502-94T as Sec. 1.1502-94A.
2. Revising the section heading of newly redesignated Sec. 1.1502-
94A.
3. Revising the last sentence of paragraph (b)(4), Example 3(b).
The revision reads as follows:
Sec. 1.1502-94A Coordination with section 382 and the regulations
thereunder when a corporation becomes a member of a consolidated group)
generally applicable for corporations becoming members of a group
before June 25, 1999.
* * * * *
(b) * * *
(4) * * *
Example 3. * * *
(b) * * * See also Sec. 1.1502-21T in effect prior to June 25,
1999, contained in 26 CFR Part 1, revised April 1, 1999, or
Sec. 1.1502-21, as applicable.
* * * * *
Par. 8. Redesignate Sec. 1.1502-95T as Sec. 1.1502-95A and revise
the section heading to read as follows:
Sec. 1.1502-95A Rules on ceasing to be a member of a consolidated
group generally applicable for corporations ceasing to be members
before June 25, 1999.
* * * * *
Par. 9. Redesignate Sec. 1.1502-96T as Sec. 1.1502-96A and revise
the section heading to read as follows:
Sec. 1.1502-96A. Miscellaneous rules generally applicable for testing
dates before June 25, 1999.
* * * * *
Par. 10. Redesignate Sec. 1.1502-97T as Sec. 1.1502-97A and revise
the section heading to read as follows:
Sec. 1.1502-97A Special rules under section 382 for members under the
jurisdiction of a court in a title 11 or similar case.
[Reserved].
* * * * *
Par. 11. Redesignate Sec. 1.1502-98T as Sec. 1.1502-98A and revise
the section heading to read as follows:
Sec. 1.1502-98A Coordination with section 383 generally applicable for
testing dates (or members joining or leaving a group) before June 25,
1999.
* * * * *
Par. 12. Section 1.1502-99T is amended as follows:
1. Redesignating Sec. 1.1502-99T as Sec. 1.1502-99A.
2. Revising the section heading.
3. Revising paragraph (a).
4. Amending paragraph (c)(2)(i) by removing the language
``(relating to the apportionment'' in the first sentence and adding
``and (b)(2)(ii)(relating to the apportionment''.
The revisions read as follows:
Sec. 1.1502-99A Effective dates.
(a) Effective date--(1) In general. Except as provided in
Sec. 1.1502-99(b), Secs. 1.1502-91A through 1.1502-96A and 1.1502-98A
apply to any testing date on or after January 1, 1997, and before June
25, 1999.
Sections 1.1502-94A through 1.1502-96A also apply on any date on or
after January 1, 1997, and before June 25, 1999, on which a corporation
becomes a member of a group or on which a corporation ceases to be a
member of a loss group (or a loss subgroup).
(2) Anti-duplication rules for recognized built-in gain. Section
1.1502-93(c)(2)(relating to recognized built-in gain of a loss group or
loss subgroup) applies to taxable years for which the due date for
income tax returns (without extensions) is after June 25, 1999,
* * * * *
Par. 13. Sections 1.1502-90 through 1.1502-99 are added to read as
follows:
Sec. 1.1502-90 Table of contents.
The following list contains the major headings in Secs. 1.1502-91
through 1.1502-99:
Sec. 1.1502-91 Application of section 382 with respect to a
consolidated group.
(a) Determination and effect of an ownership change.
(1) In general.
(2) Special rule for post-change year that includes the change
date.
(3) Cross-reference.
(b) Definitions and nomenclature.
(c) Loss group.
(1) Defined.
(2) Coordination with rule that ends separate tracking.
(3) Example.
(d) Loss subgroup.
(1) Net operating loss carryovers.
(2) Net unrealized built-in loss.
(3) Loss subgroup parent.
(4) Election to treat loss subgroup parent requirement as
satisfied.
(5) Principal purpose of avoiding a limitation.
(6) Special rules.
(7) Examples.
(e) Pre-change consolidated attribute.
(1) Defined.
(2) Example.
(f) Pre-change subgroup attribute.
(1) Defined.
(2) Example.
(g) Net unrealized built-in gain and loss.
(1) In general.
(2) Members included.
(i) Consolidated group with a net operating loss.
(ii) Determination whether a consolidated group has a net
unrealized built-in loss.
(iii) Loss subgroup with net operating loss carryovers.
(iv) Determination whether subgroup has a net unrealized built-
in loss.
(v) Separate determination of section 382 limitation for
recognized built-in losses and net operating losses.
(3) Coordination with rule that ends separate tracking.
(4) Acquisitions of built-in gain or loss assets.
(5) Indirect ownership.
(6) Common parent not common parent for five years.
(h) Recognized built-in gain or loss.
(1) In general. [Reserved]
(2) Disposition of stock or an intercompany obligation of a
member.
(3) Intercompany transactions.
(4) Exchanged basis property.
(i) [Reserved]
(j) Predecessor and successor corporations.
Sec. 1.1502-92 Ownership change of a loss group or a loss
subgroup.
(a) Scope.
(b) Determination of an ownership change.
(1) Parent change method.
(i) Loss group.
(ii) Loss subgroup.
(iii) Special rule if election regarding section 1504(a)(1)
relationship is made.
(2) Examples.
(3) Special adjustments.
(i) Common parent succeeded by a new common parent.
(ii) Newly created loss subgroup parent.
(iii) Examples.
(4) End of separate tracking of certain losses.
(c) Supplemental rules for determining ownership change.
(1) Scope.
(2) Cause for applying supplemental rule.
(3) Operating rules.
(4) Supplemental ownership change rules.
(i) Additional testing dates for the common parent (or loss
subgroup parent).
(ii) Treatment of subsidiary stock as stock of the common parent
(or loss subgroup parent).
(iii) Different testing periods.
[[Page 36129]]
(iv) Disaffiliation of a subsidiary.
(v) Subsidiary stock acquired first.
(vi) Anti-duplication rule.
(5) Examples.
(d) Testing period following ownership change under this
section.
(e) Information statements.
(1) Common parent of a loss group.
(2) Abbreviated statement with respect to loss subgroups.
Sec. 1.1502-93 Consolidated section 382 limitation (or subgroup
section 382 limitation).
(a) Determination of the consolidated section 382 limitation (or
subgroup section 382 limitation).
(1) In general.
(2) Coordination with apportionment rule.
(b) Value of the loss group (or loss subgroup).
(1) Stock value immediately before ownership change.
(2) Adjustment to value.
(i) In general.
(ii) Anti-duplication.
(3) Examples.
(c) Recognized built-in gain of a loss group or loss subgroup.
(1) In general.
(2) Adjustments.
(d) Continuity of business.
(1) In general.
(2) Example.
(e) Limitations of losses under other rules.
Sec. 1.1502-94 Coordination with section 382 and the regulations
thereunder when a corporation becomes a member of a consolidated
group.
(a) Scope.
(1) In general.
(2) Successor corporation as new loss member.
(3) Coordination in the case of a loss subgroup.
(4) End of separate tracking of certain losses.
(5) Cross-reference.
(b) Application of section 382 to a new loss member.
(1) In general.
(2) Adjustment to value.
(3) Pre-change separate attribute defined.
(4) Examples.
(c) Built-in gains and losses.
(d) Information statements.
Sec. 1.1502-95 Rules on ceasing to be a member of a consolidated
group (or loss subgroup).
(a) In general.
(1) Consolidated group.
(2) Election by common parent.
(3) Coordination with Secs. 1.1502-91 through 1.1502-93.
(b) Separate application of section 382 when a member leaves a
consolidated group.
(1) In general.
(2) Effect of a prior ownership change of the group.
(3) Application in the case of a loss subgroup.
(4) Examples.
(c) Apportionment of a consolidated section 382 limitation.
(1) In general.
(2) Amount which may be apportioned.
(i) Consolidated section 382 limitation.
(ii) Net unrealized built-in gain.
(3) Effect of apportionment on the consolidated group.
(i) Consolidated section 382 limitation.
(ii) Net unrealized built-in gain.
(4) Effect on corporations to which an apportionment is made.
(i) Consolidated section 382 limitation.
(ii) Net unrealized built-in gain.
(5) Deemed apportionment when loss group terminates.
(6) Appropriate adjustments when former member leaves during the
year.
(7) Examples.
(d) Rules pertaining to ceasing to be a member of a loss
subgroup.
(1) In general.
(2) Exceptions.
(3) Examples.
(e) Allocation of net unrealized built-in loss.
(1) In general.
(2) Amount of allocation.
(i) In general.
(ii) Transferred basis property and deferred gain or loss.
(iii) Assets for which gain or loss has been recognized.
(iv) Exchanged basis property.
(v) Two or more members depart during the same year.
(vi) Anti-abuse rule.
(3) Effect of the allocation on the consolidated group.
(4) Effect on corporations to which the allocation is made.
(5) Subgroup principles.
(6) Apportionment of consolidated section 382 limitation (or
subgroup section 382 limitation).
(i) In general.
(ii) Special rule for former members that become members of the
same consolidated group.
(7) Examples.
(8) Reporting requirement.
(f) Filing the election to apportion the section 382 limitation
and net unrealized built-in gain.
(1) Form of the election to apportion.
(2) Signing of the election.
(3) Filing of the election.
(4) Revocation of election.
Sec. 1.1502-96 Miscellaneous rules.
(a) End of separate tracking of losses.
(1) Application.
(2) Effect of end of separate tracking.
(i) Net operating loss carryovers.
(ii) Net unrealized built-in losses.
(iii) Common parent not common parent for five years.
(3) Continuing effect of end of separate tracking.
(i) In general.
(ii) Example.
(4) Special rule for testing period.
(5) Limits on effects of end of separate tracking.
(b) Ownership change of subsidiary.
(1) Ownership change of a subsidiary because of options or plan
or arrangement.
(2) Effect of the ownership change.
(i) In general.
(ii) Pre-change losses.
(3) Coordination with Secs. 1.1502-91, 1.1502-92, and 1.1502-94.
(4) Example.
(c) Continuing effect of an ownership change.
(d) Losses reattributed under Sec. 1.1502-20(g).
(1) In general.
(2) Deemed section 381(a) transaction.
(3) Rules relating to owner shifts.
(i) In general.
(ii) Examples.
(4) Rules relating to the section 382 limitation.
(i) Reattributed loss is a pre-change separate attribute of a
new loss member.
(ii) Reattributed loss is a pre-change subgroup attribute.
(iii) Potential application of section 382(l)(1).
(iv) Duplication or omission of value.
(v) Special rule for continuity of business requirement.
(5) Election to reattribute section 382 limitation.
(i) Effect of election.
(ii) Examples.
(e) Time and manner of making election under Sec. 1.1502-
91(d)(4).
(1) In general.
(2) Election statement.
Sec. 1.1502-97 Special rules under section 382 for members under
the jurisdiction of a court in a title 11 or similar case.
[Reserved].
Sec. 1.1502-98 Coordination with section 383.
Sec. 1.1502-99 Effective dates.
(a) Effective date.
(b) Special rules.
(1) Election to treat subgroup parent requirement as satisfied.
(2) Principal purpose of avoiding a limitation.
(3) Ceasing to be a member of a loss subgroup.
(i) Ownership change of a loss subgroup.
(ii) Expiration of 5-year period.
(4) Reattribution of net operating loss carryovers under
Sec. 1.1502-20(g).
(5) Election to apportion net unrealized built-in gain.
(c) Testing period may include a period beginning before June
25, 1999.
(1) In general.
(2) Transition rule for net unrealized built-in losses.
Sec. 1.1502-91 Application of section 382 with respect to a
consolidated group.
(a) Determination and effect of an ownership change--(1) In
general. This section and Secs. 1.1502-92 and 1.1502-93 set forth the
rules for determining an ownership change under section 382 for members
of consolidated groups and the section 382 limitations with respect to
attributes described in paragraphs (e) and (f) of this section. These
rules generally provide that an ownership change and the section 382
limitation are determined with respect to these attributes for the
group (or loss subgroup) on a single entity basis and
[[Page 36130]]
not for its members separately. Following an ownership change of a loss
group (or a loss subgroup) under Sec. 1.1502-92, the amount of
consolidated taxable income for any post-change year which may be
offset by pre-change consolidated attributes (or pre-change subgroup
attributes) shall not exceed the consolidated section 382 limitation
(or subgroup section 382 limitation) for such year as determined under
Sec. 1.1502-93.
(2) Special rule for post-change year that includes the change
date. If the post-change year includes the change date, section
382(b)(3)(A) is applied so that the consolidated section 382 limitation
(or subgroup section 382 limitation) does not apply to the portion of
consolidated taxable income that is allocable to the period in the year
on or before the change date. See generally Sec. 1.382-6 (relating to
the allocation of income and loss). The allocation of consolidated
taxable income for the post-change year that includes the change date
must be made before taking into account any consolidated net operating
loss deduction (as defined in Sec. 1.1502-21(a)).
(3) Cross-reference. See Secs. 1.1502-94 and 1.1502-95 for rules
that apply section 382 to a corporation that becomes or ceases to be a
member of a group or loss subgroup.
(b) Definitions and nomenclature. For purposes of this section and
Secs. 1.1502-92 through 1.1502-99, unless otherwise stated:
(1) The definitions and nomenclature contained in section 382 and
the regulations thereunder (including the nomenclature and assumptions
relating to the examples in Sec. 1.382-2T(b)) and this section and
Secs. 1.1502-92 through 1.1502-99 apply.
(2) In all examples, all groups file consolidated returns, all
corporations file their income tax returns on a calendar year basis,
the only 5-percent shareholder of a corporation is a public group, the
facts set forth the only owner shifts during the testing period, no
election is made under paragraph (d)(4) of this section, and each asset
of a corporation has a value equal to its adjusted basis.
(3) As the context requires, references to Secs. 1.1502-91 through
1.1502-96 include references to corresponding provisions of
Secs. 1.1502-91A through 1.1502-96A. For example, a reference to an
ownership change under Sec. 1.1502-92 in Sec. 1.1502-95(b) can include
a reference to an ownership change under Sec. 1.1502-92A.
(c) Loss group--(1) Defined. A loss group is a consolidated group
that--
(i) Is entitled to use a net operating loss carryover to the
taxable year that did not arise (and is not treated under Sec. 1.1502-
21(c) as arising) in a SRLY;
(ii) Has a consolidated net operating loss for the taxable year in
which a testing date of the common parent occurs (determined by
treating the common parent as a loss corporation); or
(iii) Has a net unrealized built-in loss (determined under
paragraph (g) of this section by treating the date on which the
determination is made as though it were a change date).
(2) Coordination with rule that ends separate tracking. A
consolidated group may be a loss group because a member's losses that
arose in (or are treated as arising in) a SRLY are treated as described
in paragraph (c)(1)(i) of this section. See Sec. 1.1502-96(a).
(3) Example. The following example illustrates the principles of
this paragraph (c):
Example. Loss group. (i) L and L1 file separate returns and each
has a net operating loss carryover arising in Year 1 that is carried
over to Year 2. A owns 40 shares and L owns 60 shares of the 100
outstanding shares of L1 stock. At the close of Year 1, L buys the
40 shares of L1 stock from A. For Year 2, L and L1 file a
consolidated return. The following is a graphic illustration of
these facts:
BILLING CODE 4830-01-U
[[Page 36131]]
[GRAPHIC] [TIFF OMITTED] TR02JY99.000
BILLING CODE 4830-01-C
[[Page 36132]]
(ii) L and L1 become a loss group at the beginning of Year 2
because the group is entitled to use the Year 1 net operating loss
carryover of L, the common parent, which did not arise (and is not
treated under Sec. 1.1502-21(c) as arising) in a SRLY. See
Sec. 1.1502-94 for rules relating to the application of section 382
with respect to L1's net operating loss carryover from Year 1 which
did arise in a SRLY.
(d) Loss subgroup--(1) Net operating loss carryovers. Two or more
corporations that become members of a consolidated group (the current
group) compose a loss subgroup if--
(i) They were affiliated with each other in another group (the
former group), whether or not the group was a consolidated group;
(ii) They bear the relationship described in section 1504(a)(1) to
each other through a loss subgroup parent immediately after they become
members of the current group (or are deemed to bear that relationship
as a result of an election described in paragraph (d)(4) of this
section); and
(iii) At least one of the members carries over a net operating loss
that did not arise (and is not treated under Sec. 1.1502-21(c) as
arising) in a SRLY with respect to the former group.
(2) Net unrealized built-in loss. Two or more corporations that
become members of a consolidated group compose a loss subgroup if
they--
(i) Have been continuously affiliated with each other for the 5
consecutive year period ending immediately before they become members
of the group;
(ii) Bear the relationship described in section 1504(a)(1) to each
other through a loss subgroup parent immediately after they become
members of the current group (or are deemed to bear that relationship
as a result of an election described in paragraph (d)(4) of this
section); and
(iii) Have a net unrealized built-in loss (determined under
paragraph (g) of this section on the day they become members of the
group by treating that day as though it were a change date).
(3) Loss subgroup parent. A loss subgroup parent is the corporation
that bears the same relationship to the other members of the loss
subgroup as a common parent bears to the members of a group.
(4) Election to treat loss subgroup parent requirement as
satisfied--(i) In general. Solely for purposes of paragraphs (d)(1)(i)
and (2)(ii) of this section, two or more corporations that become
members of a consolidated group at the same time and that were
affiliated with each other immediately before becoming members of the
group are deemed to bear a section 1504(a)(1) relationship to each
other immediately after they become members of the group if the common
parent of that group makes an election under this paragraph (d)(4) with
respect to those members. See Sec. 1.1502-96(e) for the time and manner
of making the election.
(ii) Members included. An election under this paragraph (d)(4)
includes all corporations that become members of the current group at
the same time and that were affiliated with each other immediately
before they become members of the current group.
(iii) Each member included treated as loss subgroup parent. If the
members to which this election applies are a loss subgroup described in
paragraph (d)(1) or (2) of this section, then each member is treated as
a loss subgroup parent. See Sec. 1.1502-92(b)(1)(iii) for special rules
relating to an ownership change of a loss subgroup if the election
under this paragraph (d)(4) is made.
(5) Principal purpose of avoiding a limitation. The corporations
described in paragraphs (d)(1) or (2) of this section do not compose a
loss subgroup if any one of them is formed, acquired, or availed of
with a principal purpose of avoiding the application of, or increasing
any limitation under, section 382. Instead, Sec. 1.1502-94 applies with
respect to the attributes of each such corporation. Any member excluded
from a loss subgroup, if excluded with a principal purpose of so
avoiding or increasing any section 382 limitation, is treated as
included in the loss subgroup. This paragraph (d)(5) does not apply
solely because, in connection with becoming members of the group, the
members of a group (or loss subgroup) are rearranged (or, in the case
of the preceding sentence, are not rearranged) to bear a relationship
to the other members described in section 1504(a)(1).
(6) Special rules. See Sec. 1.1502-95(d) for rules concerning when
a corporation ceases to be a member of a loss subgroup, and for certain
exceptions that may apply if a member does not continue to satisfy the
loss subgroup parent requirement within the current group. See also
Sec. 1.1502-96(a) for a special rule regarding the end of separate
tracking of SRLY losses of a member that has an ownership change or
that has been a member of a group for at least 5 consecutive years.
(7) Examples. The following examples illustrate the principles of
this paragraph (d):
Example 1. Loss subgroup. (i) P owns all the L stock and L owns
all the L1 stock. The P group has a consolidated net operating loss
arising in Year 1 that is carried to Year 2. On May 2, Year 2, P
sells all the stock of L to A, and L and L1 thereafter file
consolidated returns. A portion of the Year 1 consolidated net
operating loss is apportioned under Sec. 1.1502-21(b) to each of L
and L1, which they carry over to Year 2. The following is a graphic
illustration of these facts:
BILLING CODE 4830-01-U
[[Page 36133]]
[GRAPHIC] [TIFF OMITTED] TR02JY99.001
BILLING CODE 4830-01-C
[[Page 36134]]
(ii) (a) L and L1 compose a loss subgroup within the meaning of
paragraph (d)(1) of this section because--
(A) They were affiliated with each other in the P group (the
former group);
(B) They bear a relationship described in section 1504(a)(1) to
each other through a loss subgroup parent (L) immediately after they
became members of the L group; and
(C) At least one of the members (here, both L and L1) carries
over a net operating loss to the L group (the current group) that
did not arise in a SRLY with respect to the P group.
(b) Under paragraph (d)(3) of this section, L is the loss
subgroup parent of the L loss subgroup.
Example 2. Loss subgroup--section 1504(a)(1) relationship. (i) P
owns all the stock of L and L1. L owns all the stock of L2. L1 and
L2 own 40 percent and 60 percent of the stock of L3, respectively.
The P group has a consolidated net operating loss arising in Year 1
that is carried over to Year 2. On May 22, Year 2, P sells all the
stock of L and L1 to P1, the common parent of another consolidated
group. The Year 1 consolidated net operating loss is apportioned
under Sec. 1.1502-21(b), and each of L, L1, L2, and L3 carries over
a portion of such loss to the first consolidated return year of the
P1 group ending after the acquisition. The following is a graphic
illustration of these facts:
BILLING CODE 4830-01-U
[[Page 36135]]
[GRAPHIC] [TIFF OMITTED] TR02JY99.002
BILLING CODE 4830-01-C
[[Page 36136]]
(ii) L and L2 compose a loss subgroup within the meaning of
paragraph (d)(1) of this section. Neither L1 nor L3 is included in a
loss subgroup because neither bears a relationship described in section
1504(a)(1) through a loss subgroup parent to any other member of the
former group immediately after becoming members of the P1 group.
Example 3. Loss subgroup--section 1504(a)(1) relationship. The
facts are the same as in Example 2, except that the stock of L1 is
transferred to L in connection with the sale of the L stock to P1.
L, L1, L2, and L3 compose a loss subgroup within the meaning of
paragraph (d)(1) of this section because--
(i) They were affiliated with each other in the P group (the
former group);
(ii) They bear a relationship described in section 1504(a)(1) to
each other through a loss subgroup parent (L) immediately after they
become members of the P1 group; and
(iii) At least one of the members (here, each of L, L1, L2, and
L3) carries over a net operating loss to the P1 group (the current
group).
Example 4. Loss subgroup--elective section 1504(a)(1)
relationship. The facts are the same as in Example 2, except that P1
makes the election under paragraph (d)(4) of this section. The
election includes L, L1, L2, and L3 (even though L and L2 would
compose a loss subgroup without regard to the election) because they
become members of the current group (the P1 group) at the same time
and were affiliated with each other in the P group immediately
before they became members of the P1 group. As a result of the
election, L, L1, L2, and L3 are treated as satisfying the
requirement that they bear the relationship described in section
1504(a)(1) to each other through a loss subgroup parent immediately
after they become members of the P1 group. L, L1, L2, and L3 compose
a loss subgroup within the meaning of paragraph (d)(1) of this
section.
(e) Pre-change consolidated attribute--(1) Defined. A pre-change
consolidated attribute of a loss group is--
(i) Any loss described in paragraph (c)(1)(i) or (ii) of this
section (relating to the definition of loss group) that is allocable to
the period ending on or before the change date; and
(ii) Any recognized built-in loss of the loss group.
(2) Example. The following example illustrates the principle of
this paragraph (e):
Example. Pre-change consolidated attribute. (i) The L group has
a consolidated net operating loss arising in Year 1 that is carried
over to Year 2. The L loss group has an ownership change at the
beginning of Year 2.
(ii) The net operating loss carryover of the L loss group from
Year 1 is a pre-change consolidated attribute because the L group
was entitled to use the loss in Year 2 and therefore the loss was
described in paragraph (c)(1)(i) of this section. Under paragraph
(a)(2)(i) of this section, the amount of consolidated taxable income
of the L group for Year 2 that may be offset by this loss carryover
may not exceed the consolidated section 382 limitation of the L
group for that year. See Sec. 1.1502-93 for rules relating to the
computation of the consolidated section 382 limitation.
(f) Pre-change subgroup attribute--(1) Defined. A pre-change
subgroup attribute of a loss subgroup is--
(i) Any net operating loss carryover described in paragraph
(d)(1)(iii) of this section (relating to the definition of loss
subgroup); and
(ii) Any recognized built-in loss of the loss subgroup.
(2) Example. The following example illustrates the principle of
this paragraph (f):
Pre-change subgroup attribute. (i) P is the common parent of a
consolidated group. P owns all the stock of L, and L owns all the
stock of L1. L2 is not a member of an affiliated group, and has a
net operating loss arising in Year 1 that is carried over to Year 2.
On December 11, Year 2, L1 acquires all the stock of L2, causing an
ownership change of L2. During Year 2, the P group has a
consolidated net operating loss that is carried over to Year 3. On
November 2, Year 3, M acquires all the L stock from P. M, L, L1, and
L2 thereafter file consolidated returns. All of the P group Year 2
consolidated net operating loss is apportioned under Sec. 1.1502-
21(b) to L and L2, which they carry over to the M group.
(ii)(a) L, L1, and L2 compose a loss subgroup because--
(1) They were affiliated with each other in the P group (the
former group);
(2) They bear a relationship described in section 1504(a)(1) to
each other through a loss subgroup parent (L) immediately after they
became members of the L group; and
(3) At least one of the members (here, both L and L2) carries
over a net operating loss to the M group (the current group) that is
described in paragraph (d)(1)(iii) of this section.
(b) For this purpose, L2's loss from Year 1 that was a SRLY loss
with respect to the P group (the former group) is described in
paragraph (d)(1)(iii) of this section because L2 had an ownership
change on becoming a member of the P group (see Sec. 1.1502-96(a))
on December 11, Year 2. Starting on December 12, Year 2, the P group
no longer separately tracked owner shifts of the stock of L1 with
respect to the Year 1 loss. M's acquisition results in an ownership
change of L, and therefore the L loss subgroup under Sec. 1.1502-
92(a)(2). See Sec. 1.1502-93 for rules governing the computation of
the subgroup section 382 limitation.
(iii) In the M group, L2's Year 1 loss continues to be subject
to a section 382 limitation resulting from the ownership change that
occurred on December 11, Year 2. See Sec. 1.1502-96(c).
(g) Net unrealized built-in gain and loss--(1) In general. The
determination whether a consolidated group (or loss subgroup) has a net
unrealized built-in gain or loss under section 382(h)(3) is based on
the aggregate amount of the separately computed net unrealized built-in
gains or losses of each member that is included in the group (or loss
subgroup) under paragraph (g)(2) of this section, including items of
built-in income and deduction described in section 382(h)(6). Thus, for
example, amounts deferred under section 267, or under Sec. 1.1502-13
(other than amounts deferred with respect to the stock of a member (or
an intercompany obligation) included in the group (or loss subgroup)
under paragraph (g)(2) of this section) are built-in items. The
threshold requirement under section 382(h)(3)(B) applies on an
aggregate basis and not on a member-by-member basis. The separately
computed amount of a member included in a group or loss subgroup does
not include any unrealized built-in gain or loss on stock (including
stock described in section 1504(a)(4) and Sec. 1.382-2T(f)(18)(ii) and
(iii)) of another member included in the group or loss subgroup (or an
intercompany obligation). However, a member of a group or loss subgroup
includes in its separately computed amount the unrealized built-in gain
or loss on stock (but not on an intercompany obligation) of another
member not included in the group or loss subgroup. If a member is not
included in the determination whether a group (or subgroup) has a net
unrealized built-in loss under paragraph (g)(2)(ii) or (iv) of this
section, that member is not included in the loss group or loss
subgroup. See Sec. 1.1502-94(c) (relating to built-in gain or loss of a
new loss member) and Sec. 1.1502-96(a) (relating to the end of separate
tracking of certain losses).
(2) Members included--(i) Consolidated group with a net operating
loss. The members included in the determination whether a consolidated
group described in paragraph (c)(1)(i) or (ii) of this section
(relating to loss groups with net operating losses) has a net
unrealized built-in gain are all members of the consolidated group on
the day that the determination is made.
(ii) Determination whether a consolidated group has a net
unrealized built-in loss. The members included in the determination
whether a consolidated group is a loss group described in paragraph
(c)(1)(iii) of this section are--
(A) The common parent and all other members that have been
affiliated with the common parent for the 5 consecutive year period
ending on the day that the determination is made;
[[Page 36137]]
(B) Any other member that has a net unrealized built-in loss
determined under paragraph (g)(1) of this section on the date that the
determination is made, and that is neither a new loss member described
in Sec. 1.1502-94(a)(1)(ii) nor a member of a loss subgroup described
in paragraph (d)(2) of this section;
(C) Any new loss member described in Sec. 1.1502-94(a)(1)(ii) that
has a net unrealized built-in gain determined under paragraph (g)(1) of
this section on the day that the determination is made; and
(D) The members of a loss subgroup described in paragraph (d)(2) of
this section if the members of the subgroup have, in the aggregate, a
net unrealized built-in gain on the day that the determination is made.
(iii) Loss subgroup with net operating loss carryovers. The members
included in the determination whether a loss subgroup described in
paragraph (d)(1) of this section (relating to loss subgroups with net
operating loss carryovers) has a net unrealized built-in gain are all
members of the loss subgroup on the day that the determination is made.
(iv) Determination whether subgroup has a net unrealized built-in
loss. The members included in the determination whether a subgroup has
a net unrealized built-in loss are those members described in
paragraphs (d)(2)(i) and (ii) of this section.
(v) Separate determination of section 382 limitation for recognized
built-in losses and net operating losses. In determining whether a loss
group described in paragraph (c)(1)(i) or (ii) of this section
(relating to loss groups that have net operating loss carryovers) has a
net unrealized built-in gain which, if recognized, increases the
consolidated section 382 limitation, the group includes, under
paragraph (g)(2)(i) of this section, all of its members on the day the
determination is made. Under paragraph (g)(2)(ii) of this section,
however, for purposes of determining whether a group has a net
unrealized built-in loss described in paragraph (c)(1)(iii) of this
section, not all members of the consolidated group may be included.
Thus, a consolidated group may have recognized built-in gains that
increase the amount of consolidated taxable income that may be offset
by its pre-change net operating loss carryovers that did not arise (and
are not treated as arising) in a SRLY, and also may have recognized
built-in losses the absorption of which is limited. Similar results may
obtain for loss subgroups under paragraphs (g)(2)(iii) and (iv) of this
section. See Sec. 1.1502-93(c)(2) for rules prohibiting the use of
recognized built-in gains to increase the amount of consolidated
taxable income that can be offset by recognized built-in losses.
(3) Coordination with rule that ends separate tracking. See
Sec. 1.1502-96(a) for special rules relating to members (or loss
subgroups) that have an ownership change within six months before, on,
or after becoming a member of the group.
(4) Acquisitions of built-in gain or loss assets. A member of a
consolidated group (or loss subgroup) may not, in determining its
separately computed net unrealized built-in gain or loss, include any
gain or loss with respect to assets acquired with a principal purpose
to affect the amount of its net unrealized built-in gain or loss. A
group (or loss subgroup) may not, in determining its net unrealized
built-in gain or loss, include any gain or loss of a member acquired
with a principal purpose to affect the amount of its net unrealized
built-in gain or loss.
(5) Indirect ownership. A member's separately computed net
unrealized built-in gain or loss is adjusted to the extent necessary to
prevent any duplication of unrealized gain or loss attributable to the
member's indirect ownership interest in another member through a
nonmember if the member has a 5-percent or greater ownership interest
in the nonmember.
(6) Common parent not common parent for five years. If the common
parent has become the common parent of an existing group within the
previous 5 year period in a transaction described in Sec. 1.1502-
75(d)(2)(ii) or (3), appropriate adjustments must be made in applying
paragraph (g)(2)(ii)(A) of this section so that corporations that have
not been members of the group for five years are not included. In such
a case, references to the common parent in paragraph (g)(2)(ii)(A) of
this section are to the former common parent. Thus, members of the
group remaining in existence (including the new common parent) that
have not been affiliated with the former common parent (or that have
not been members of that group) for the five consecutive year period
ending on the day that the determination is made are not included under
paragraph (g)(2)(ii)(A) of this section. See, however, Sec. 1.1502-
96(a)(2) for special rules relating to members (or loss subgroups) that
have an ownership change within six months before, on, or after the
time that the member becomes a member of the group.
(h) Recognized built-in gain or loss--(1) In general. [Reserved].
(2) Disposition of stock or an intercompany obligation of a member.
Gain or loss recognized by a member on the disposition of stock
(including stock described in section 1504(a)(4) and Sec. 1.382-
2T(f)(18)(ii) and (iii)) of another member is treated as a recognized
gain or loss for purposes of section 382(h)(2) (unless disallowed under
Sec. 1.1502-20 or otherwise), even though gain or loss on such stock
was not included in the determination of a net unrealized built-in gain
or loss under paragraph (g)(1) of this section. Gain or loss recognized
by a member with respect to an intercompany obligation is treated as
recognized gain or loss only to the extent (if any) the transaction
gives rise to aggregate income or loss within the consolidated group.
(3) Intercompany transactions. Gain or loss that is deferred under
provisions such as section 267 and Sec. 1.1502-13 is treated as
recognized built-in gain or loss only to the extent taken into account
by the group during the recognition period. See also Sec. 1.1502-
13(c)(7) Example 10.
(4) Exchanged basis property. If the adjusted basis of any asset is
determined, directly or indirectly, in whole or in part, by reference
to the adjusted basis of another asset held by the member at the
beginning of the recognition period, the asset is treated, with
appropriate adjustments, as held by the member at the beginning of the
recognition period.
(i) [Reserved]
(j) Predecessor and successor corporations. A reference in this
section and Secs. 1.1502-92 through 1.1502-99 to a corporation, member,
common parent, loss subgroup parent, or subsidiary includes, as the
context may require, a reference to a predecessor or successor
corporation as defined in Sec. 1.1502-1(f)(4). For example, the
determination whether a successor satisfies the continuous affiliation
requirement of paragraph (d)(2)(i) or (g)(2)(ii) of this section is
made by reference to its predecessor.
Sec. 1.1502-92 Ownership change of a loss group or a loss subgroup.
(a) Scope. This section provides rules for determining if there is
an ownership change for purposes of section 382 with respect to a loss
group or a loss subgroup. See Sec. 1.1502-94 for special rules for
determining if there is an ownership change with respect to a new loss
member and Sec. 1.1502-96(b) for special rules for determining if there
is an ownership change of a subsidiary.
(b) Determination of an ownership change--(1) Parent change
method--(i) Loss group. A loss group has an ownership change if the
loss group's common parent has an ownership change under section 382
and the regulations thereunder. Solely for
[[Page 36138]]
purposes of determining whether the common parent has an ownership
change--
(A) The losses described in Sec. 1.1502-91(c) are treated as net
operating losses (or a net unrealized built-in loss) of the common
parent; and
(B) The common parent determines the earliest day that its testing
period can begin by reference to only the attributes that make the
group a loss group under Sec. 1.1502-91(c).
(ii) Loss subgroup. A loss subgroup has an ownership change if the
loss subgroup parent has an ownership change under section 382 and the
regulations thereunder. The principles of Sec. 1.1502-95(b) (relating
to ceasing to be a member of a consolidated group) apply in determining
whether the loss subgroup parent has an ownership change. Solely for
purposes of determining whether the loss subgroup parent has an
ownership change--
(A) The losses described in Sec. 1.1502-91(d) are treated as net
operating losses (or a net unrealized built-in loss) of the loss
subgroup parent;
(B) The day that the members of the loss subgroup become members of
the group (or a loss subgroup) is treated as a testing date within the
meaning of Sec. 1.382-2(a)(4); and
(C) The loss subgroup parent determines the earliest day that its
testing period can begin under Sec. 1.382-2T(d)(3) by reference to only
the attributes that make the members a loss subgroup under Sec. 1.1502-
91(d).
(iii) Special rule if election regarding section 1504(a)(1)
relationship is made--(A) Ownership change of deemed loss subgroup
parent is an ownership change of loss subgroup. If the common parent
makes an election under Sec. 1.1502-91(d)(4), each of the members in
the loss subgroup is treated as the loss subgroup parent for purposes
of determining whether the loss subgroup has an ownership change under
section 382 and the regulations thereunder on or after the day the
members become members of the group.
(B) Exception. Paragraph (b)(1)(iii)(A) of this section does not
apply to cause an ownership change of a loss subgroup if a deemed loss
subgroup parent has an ownership change upon (or after) ceasing to be a
member of the current group.
(2) Examples. The following examples illustrate the principles of
this paragraph (b):
Example 1. Loss group--ownership change of the common parent.
(i) A owns all the L stock. L owns 80 percent and B owns 20 percent
of the L1 stock. For Year 1, the L group has a consolidated net
operating loss that resulted from the operations of L1 and that is
carried over to Year 2. The value of the L stock is $1000. The total
value of the L1 stock is $600 and the value of the L1 stock held by
B is $120. The L group is a loss group under Sec. 1.1502-91(c)(1)
because it is entitled to use its net operating loss carryover from
Year 1. On August 15, Year 2, A sells 51 percent of the L stock to
C. The following is a graphic illustration of these facts:
BILLING CODE 4830-01-U
[[Page 36139]]
[GRAPHIC] [TIFF OMITTED] TR02JY99.003
BILLING CODE 4830-01-C
[[Page 36140]]
(ii) Under paragraph (b)(1)(i) of this section, section 382 and
the regulations thereunder are applied to L to determine whether it
(and therefore the L loss group) has an ownership change with
respect to its net operating loss carryover from Year 1 attributable
to L1 on August 15, Year 2. The sale of the L stock to C causes an
ownership change of L under Sec. 1.382-2T and of the L loss group
under paragraph (b)(1)(i) of this section. The amount of
consolidated taxable income of the L loss group for any post-change
taxable year that may be offset by its pre-change consolidated
attributes (that is, the net operating loss carryover from Year 1
attributable to L1) may not exceed the consolidated section 382
limitation for the L loss group for the taxable year.
Example 2. Loss group--owner shifts of subsidiaries disregarded.
(i) The facts are the same as in Example 1, except that on August
15, Year 2, A sells only 49 percent of the L stock to C and, on
December 12, Year 3, in an unrelated transaction, B sells the 20
percent of the L1 stock to D. A's sale of the L stock to C does not
cause an ownership change of L under Sec. 1.382-2T nor of the L loss
group under paragraph (b)(1)(i) of this section. The following is a
graphic illustration of these facts:
BILLING CODE 4830-01-U
[GRAPHIC] [TIFF OMITTED] TR02JY99.004
BILLING CODE 4830-01-C
(ii) B's subsequent sale of L1 stock is not taken into account for
purposes of determining whether the L loss group has an ownership
change under paragraph (b)(1)(i) of this section, and, accordingly,
there is no ownership change of the L loss group. See paragraph (c) of
this section, however, for a supplemental ownership change method that
would apply to cause an ownership change if the purchases by C and D
were pursuant to a plan or arrangement and certain other conditions are
satisfied.
Example 3. Loss subgroup--ownership change of loss subgroup parent
controls. (i) P owns all the L stock. L owns 80 percent and A owns 20
percent of the L1 stock. The P group has a consolidated net operating
loss arising in Year 1 that is carried over to Year 2. On September 9,
Year 2, P sells 51 percent of the L stock to B, and L1 is apportioned a
portion of the Year 1 consolidated net operating loss under
Sec. 1.1502-21(b), which it carries over to its next taxable year. L
and L1 file a consolidated return for their first taxable year ending
after the sale to B. The following is a graphic illustration of these
facts:
BILLING CODE 4830-01-U
[[Page 36141]]
[GRAPHIC] [TIFF OMITTED] TR02JY99.005
BILLING CODE 4830-01-C
[[Page 36142]]
(ii) Under Sec. 1.1502-91(d)(1), L and L1 compose a loss
subgroup on September 9, Year 2, the day that they become members of
the L group. Under paragraph (b)(1)(ii) of this section, section 382
and the regulations thereunder are applied to L to determine whether
it (and therefore the L loss subgroup) has an ownership change with
respect to the portion of the Year 1 consolidated net operating loss
that is apportioned to L1 on September 9, Year 2. L has an ownership
change resulting from P's sale of 51 percent of the L stock to A.
Therefore, the L loss subgroup has an ownership change with respect
to that loss.
Example 4. Loss group and loss subgroup--contemporaneous
ownership changes. (i) A owns all the stock of corporation M, M owns
35 percent and B owns 65 percent of the L stock, and L owns all the
L1 stock. The L group has a consolidated net operating loss arising
in Year 1 that is carried over to Year 2. On May 19, Year 2, B sells
45 percent of the L stock to M for cash. M, L, and L1 thereafter
file consolidated returns. L and L1 are each apportioned a portion
of the Year 1 consolidated net operating loss, which they carry over
to the M group's Year 2 and Year 3 consolidated return years. The M
group has a consolidated net operating loss arising in Year 2 that
is carried over to Year 3. On June 9, Year 3, A sells 70 percent of
the M stock to C. The following is a graphic illustration of these
facts:
BILLING CODE 4830-01-U
[[Page 36143]]
[GRAPHIC] [TIFF OMITTED] TR02JY99.006
BILLING CODE 4830-01-C
[[Page 36144]]
(ii) Under Sec. 1.1502-91(d)(1), L and L1 compose a loss
subgroup on May 19, Year 2, the day they become members of the M
group. Under paragraph (b)(1)(ii) of this section, section 382 and
the regulations thereunder are applied to L to determine whether L
(and therefore the L loss subgroup) has an ownership change with
respect to the loss carryovers from Year 1 on May 19, Year 2, a
testing date because of B's sale of L stock to M. The sale of L
stock to M results in only a 45 percentage point increase in A's
ownership of L stock. Thus, there is no ownership change of L (or
the L loss subgroup) with respect to those loss carryovers under
paragraph (b)(1)(ii) of this section on that day.
(iii) June 9, Year 3, is also a testing date with respect to the
L loss subgroup because of A's sale of M stock to C. The sale
results in a 56 percentage point increase in C's ownership of L
stock, and L has an ownership change. Therefore, the L loss subgroup
has an ownership change on that day with respect to the loss
carryovers from Year 1.
(iv) Paragraph (b)(1)(i) of this section requires that section
382 and the regulations thereunder be applied to M to determine
whether M (and therefore the M loss group) has an ownership change
with respect to the net operating loss carryover from Year 2 on June
9, Year 3, a testing date because of A's sale of M stock to C. The
sale results in a 70 percentage point increase in C's ownership of M
stock, and M has an ownership change. Therefore, the M loss group
has an ownership change on that day with respect to that loss
carryover.
Example 5--Deemed subgroup parent. (i) P owns all the stock of L
and L1 and 80 percent of the stock of T. A owns the remaining 20
percent of the stock of T. L1 owns all the stock of L2. P1, which
owns 60 percent of the stock of P, acquires, at the beginning of
Year 2, the T, L, and L1 stock owned by P, and T, L, L1, and L2
become members of the P1 group. The P group has a consolidated net
operating loss arising in Year 1 that is carried over to Year 2. L,
L1, and L2 are each apportioned a portion of the Year 1 consolidated
net operating loss under Sec. 1.1502-21(b), which they carry over to
the P1 group's Year 2 and Year 3 consolidated return years. P1 makes
the election described in Sec. 1.1502-91(d)(4) to treat T, L, L1 and
L2 as meeting the section 1504(a)(1) requirement of Sec. 1.1502-
91(d)(1)(ii). As a result of the election, T, L, L1 and L2 compose a
loss subgroup and T, L, L1, and L2 are each treated as the loss
subgroup parent for purposes of this paragraph (b). Because of P1's
indirect ownership of T, L, L1, and L2 prior to P1's acquisition of
the T, L, and L1 stock, P1's acquisition does not cause an ownership
change of the loss subgroup.
(ii) On February 2, Year 3, L1 sells all of the stock of L2 to
B. Although L2 is treated as a loss subgroup parent, the
determination whether the loss subgroup comprised of T, L, and L1
has an ownership change under this paragraph (b) is made without
regard to the sale of L2 because L2's ownership change occurred upon
ceasing to be a member of the P1 group. See Sec. 1.1502-95(b) to
determine the application of section 382 to L2 when L2 ceases to be
a member of the P1 group and the T, L, L1 and L2 loss subgroup.
(iii) On March 26, Year 3, A sells her 20 percent minority stock
interest in T to C . C's purchase, together with the 32 percentage
point owner shift effected by P1's acquisition of the T stock at the
beginning of Year 2, causes an ownership change of T, and therefore
of the loss subgroup comprised of T, L, and L1.
(3) Special adjustments--(i) Common parent succeeded by a new
common parent. For purposes of determining if a loss group has an
ownership change, if the common parent of a loss group is succeeded or
acquired by a new common parent and the loss group remains in
existence, the new common parent is treated as a continuation of the
former common parent with appropriate adjustments to take into account
shifts in ownership of the former common parent during the testing
period (including shifts that occur incident to the common parent's
becoming the former common parent). A new common parent may be a
continuation of the former common parent even if, under Sec. 1.1502-
91(g)(2)(ii), the new common parent is not included in determining
whether the group has a net unrealized built-in loss.
(ii) Newly created loss subgroup parent. For purposes of
determining if a loss subgroup has an ownership change, if the member
that is the loss subgroup parent has not been the loss subgroup parent
for at least 3 years as of a testing date, appropriate adjustments must
be made to take into account owner shifts of members of the loss
subgroup so that the structure of the loss subgroup does not have the
effect of avoiding an ownership change under section 382. (See
paragraph (b)(3)(iii), Example 3 of this section.)
(iii) Examples. The following examples illustrate the principles of
this paragraph (b)(3):
Example 1. New common parent acquires old common parent. (i) A,
who owns all the L stock, sells 30 percent of the L stock to B on
August 26, Year 1. L owns all the L1 stock. The L group has a
consolidated net operating loss arising in Year 1 that is carried
over to Year 3. On July 16, Year 2, A and B transfer their L stock
to a newly created holding company, HC, in exchange for 70 percent
and 30 percent, respectively, of the HC stock. HC, L, and L1
thereafter file consolidated returns. Under the principles of
Sec. 1.1502-75(d), the L loss group is treated as remaining in
existence, with HC taking the place of L as the new common parent of
the loss group. The following is a graphic illustration of these
facts:
BILLING CODE 4830-01-U
[[Page 36145]]
[GRAPHIC] [TIFF OMITTED] TR02JY99.007
BILLING CODE 4830-01-C
[[Page 36146]]
(ii) On November 11, Year 3, A sells 25 percent of the HC stock
to B. For purposes of determining if the L loss group has an
ownership change under paragraph (b)(1)(i) of this section on
November 11, Year 3, HC is treated as a continuation of L under
paragraph (b)(4)(i) of this section because it acquired L and became
the common parent without terminating the L loss group. Accordingly,
HC's testing period commences on January 1, Year 1, the first day of
the taxable year of the L loss group in which the consolidated net
operating loss that is carried over to Year 3 arose (see Sec. 1.382-
2T(d)(3)(i)). Immediately after the close of November 11, Year 3,
B's percentage ownership interest in the common parent of the loss
group (HC) has increased by 55 percentage points over its lowest
percentage ownership during the testing period (zero percent).
Accordingly, HC and the L loss group have an ownership change on
that day.
Example 2. New common parent in case in which common parent
ceases to exist. (i) A, B, and C each own one-third of the L stock.
L owns all the L1 stock. The L group has a consolidated net
operating loss arising in Year 2 that is carried over to Year 3. On
November 22, Year 3, L is merged into P, a corporation owned by D,
and L1 thereafter files consolidated returns with P. A, B, and C, as
a result of owning stock of L, own 90 percent of P's stock after the
merger. D owns the remaining 10 percent of P's stock. The merger of
L into P qualifies as a reverse acquisition of the L group under
Sec. 1.1502-75(d)(3)(i), and the L loss group is treated as
remaining in existence, with P taking the place of L as the new
common parent of the L group. The following is a graphic
illustration of these facts:
BILLING CODE 4830-01-U
[[Page 36147]]
[GRAPHIC] [TIFF OMITTED] TR02JY99.008
BILLING CODE 4830-01-C
[[Page 36148]]
(ii) For purposes of determining if the L loss group has an
ownership change on November 22, Year 3, the day of the merger, P is
treated as a continuation of L so that the testing period for P
begins on January 1, Year 2, the first day of the taxable year of
the L loss group in which the consolidated net operating loss that
is carried over to Year 3 arose. Immediately after the close of
November 22, Year 3, D is the only 5-percent shareholder that has
increased his ownership interest in P during the testing period
(from zero to 10 percentage points).
(iii) The facts are the same as in paragraph (i) of this Example
2, except that A has held 23\1/3\ shares (23\1/3\ percent) of L's
stock for five years, and A purchased an additional 10 shares of L
stock from E two years before the merger. Immediately after the
close of the day of the merger (a testing date), A's ownership
interest in P, the common parent of the L loss group, has increased
by 6\2/3\ percentage points over A's lowest percentage ownership
during the testing period (23\1/3\ percent to 30 percent).
(iv) The facts are the same as in (i) of this Example 2, except
that P has a net operating loss arising in Year 1 that is carried to
the first consolidated return year ending after the day of the
merger. Solely for purposes of determining whether the L loss group
has an ownership change under paragraph (b)(1)(i) of this section,
the testing period for P commences on January 1, Year 2. P does not
determine the earliest day for its testing period by reference to
its net operating loss carryover from Year 1, which Secs. 1.1502-
1(f)(3) and 1.1502-75(d)(3)(i) treat as arising in a SRLY. See
Sec. 1.1502-94 to determine the application of section 382 with
respect to P's net operating loss carryover.
Example 3. Newly acquired loss subgroup parent. (i) P owns all
the L stock and L owns all the L1 stock. The P group has a
consolidated net operating loss arising in Year 1 that is carried
over to Year 3. On January 19, Year 2, L issues a 20 percent stock
interest to B. On February 5, Year 3, P contributes its L stock to a
newly formed subsidiary, HC, in exchange for all the HC stock, and
distributes the HC stock to its sole shareholder A. HC, L, and L1
thereafter file consolidated returns. A portion of the P group's
Year 1 consolidated net operating loss is apportioned to L and L1
under Sec. 1.1502-21(b) and is carried over to the HC group's year
ending after February 5, Year 3. HC, L, and L1 compose a loss
subgroup within the meaning of Sec. 1.1502-91(d) with respect to the
net operating loss carryovers from Year 1. The following is a
graphic illustration of these facts:
BILLING CODE 4830-01-U
[[Page 36149]]
[GRAPHIC] [TIFF OMITTED] TR02JY99.009
BILLING CODE 4830-01-C
[[Page 36150]]
(ii) February 5, Year 3, is a testing date for HC as the loss
subgroup parent with respect to the net operating loss carryovers of
L and L1 from Year 1. See paragraph (b)(1)(ii)(B) of this section.
For purposes of determining whether HC has an ownership change on
the testing date, appropriate adjustments must be made with respect
to the changes in the percentage ownership of the stock of HC
because HC was not the loss subgroup parent for at least 3 years
prior to the day on which it became a member of the HC loss subgroup
(a testing date). The appropriate adjustments include adjustments so
that HC succeeds to the owner shifts of other members of the former
group. Thus, HC succeeds to the owner shift of L that resulted from
the sale of the 20 percent interest to B in determining whether the
HC loss subgroup has an ownership change on February 5, Year 3, and
on any subsequent testing date that includes January 19, Year 2.
(4) End of separate tracking of certain losses. If Sec. 1.1502-
96(a) (relating to the end of separate tracking of attributes) applies
to a loss subgroup, then, while one or more members that were included
in the loss subgroup remain members of the consolidated group, there is
an ownership change with respect to their attributes described in
Sec. 1.1502-96(a)(2) only if the consolidated group is a loss group and
has an ownership change under paragraph (b)(1)(i) of this section (or
such a member has an ownership change under Sec. 1.1502-96(b) (relating
to ownership changes of subsidiaries)). If, however, the loss subgroup
has had an ownership change before Sec. 1.1502-96(a) applies, see
Sec. 1.1502-96(c) for the continuing application of the subgroup's
section 382 limitation with respect to its pre-change subgroup
attributes.
(c) Supplemental rules for determining ownership change--
(1) Scope. This paragraph (c) contains a supplemental rule for
determining whether there is an ownership change of a loss group (or
loss subgroup). It applies in addition to, and not instead of, the
rules of paragraph (b) of this section. Thus, for example, if the
common parent of the loss group has an ownership change under paragraph
(b) of this section, the loss group has an ownership change even if, by
applying this paragraph (c), the common parent would not have an
ownership change. This paragraph (c) does not apply in determining an
ownership change of a loss subgroup for which an election under
Sec. 1.1502-91(d)(4) is made.
(2) Cause for applying supplemental rule. This paragraph (c)
applies to a loss group (or loss subgroup) if--
(i) Any 5-percent shareholder of the common parent (or loss
subgroup parent) increases its percentage ownership interest in the
stock of both--
(A) A subsidiary of the loss group (or loss subgroup) other than by
a direct or indirect acquisition of stock of the common parent (or loss
subgroup parent); and
(B) The common parent (or loss subgroup parent);
(ii) Those increases occur within a 3 year period ending on any day
of a consolidated return year or, if shorter, the period beginning on
the first day following the most recent ownership change of the loss
group (or loss subgroup); and
(iii) Either--
(A) The common parent (or loss subgroup parent) has actual
knowledge of the increase in the 5-percent shareholder's ownership
interest in the stock of the subsidiary (or has actual knowledge of the
plan or arrangement described in paragraph (c)(3)(i) of this section)
before the date that the group's income tax return is filed for the
taxable year that includes the date of that increase; or
(B) At any time during the period described in paragraph (c)(2)(ii)
of this section, the 5-percent shareholder of the common parent is also
a 5-percent shareholder of the subsidiary (determined without regard to
paragraph (c)(3)(i) of this section) whose percentage increase in the
ownership of the stock of the subsidiary would be taken into account in
determining if the subsidiary has an ownership change (determined as if
the subsidiary was a loss corporation and applying the principles of
Sec. 1.382-2T(k), including the principles relating to duty to
inquire).
(3) Operating rules. Solely for purposes of this paragraph (c)--
(i) A 5-percent shareholder of the common parent (or loss subgroup
parent) is treated as increasing its ownership interest in the stock of
a subsidiary to the extent, if any, that another person or persons
increases its percentage ownership interest in the stock of a
subsidiary pursuant to a plan or arrangement under which the 5-percent
shareholder increases its percentage ownership interest in the common
parent (or loss subgroup parent);
(ii) The rules in section 382(l)(3) and Secs. 1.382-2T(h) and
1.382-4(d) (relating to constructive ownership) apply with respect to
the stock of the subsidiary by treating such stock as stock of a loss
corporation; and
(iii) In the case of a loss subgroup, a subsidiary includes any
member of the loss subgroup other than the loss subgroup parent. (A
loss subgroup parent is, however, a subsidiary of the loss group of
which it is a member.)
(4) Supplemental ownership change rules. The determination whether
the common parent (or loss subgroup parent) has an ownership change is
made by applying paragraph (b)(1) of this section as modified by the
following additional rules:
(i) Additional testing dates for the common parent (or loss
subgroup parent). A testing date for the common parent (or loss
subgroup parent) also includes--
(A) Each day on which there is an increase in the percentage
ownership of stock of a subsidiary as described in paragraph (c)(2) of
this section; and
(B) The first day of the first consolidated return year for which
the group is a loss group (or the members compose a loss subgroup).
(ii) Treatment of subsidiary stock as stock of the common parent
(or loss subgroup parent). The common parent (or loss subgroup parent)
is treated as though it had issued to the person acquiring (or deemed
to acquire) the subsidiary stock an amount of its own stock (by value)
that equals the value of the subsidiary stock represented by the
percentage increase in that person's ownership of the subsidiary
(determined on a separate entity basis). Similar principles apply if
the increase in percentage ownership interest is effected by a
redemption or similar transaction.
(iii) Different testing periods. Stock treated as issued under
paragraph (c)(4)(ii) of this section on a testing date is not treated
as so issued for purposes of applying the ownership change rules of
this paragraph (c) and paragraph (b)(1) of this section in a testing
period that does not include that testing date.
(iv) Disaffiliation of a subsidiary. If a deemed issuance of stock
under paragraph (c)(4)(ii) of this section would not cause the loss
group (or loss subgroup) to have an ownership change before the day (if
any) on which the subsidiary ceases to be a member of the loss group
(or subgroup), then paragraph (c)(4) of this section shall not apply.
(v) Subsidiary stock acquired first. If an increase of subsidiary
stock described in paragraph (c)(2)(i)(A) of this section occurs before
the date that the 5-percent shareholder increases its percentage
ownership interest in the stock of the common parent (or loss subgroup
parent), then the deemed issuance of stock is treated as occurring on
that later date, but in an amount equal to the value of the subsidiary
stock on the date it was acquired.
(vi) Anti-duplication rule. If two or more 5-percent shareholders
are treated as increasing their percentage ownership interests pursuant
to the
[[Page 36151]]
same plan or arrangement described in paragraph (c)(3)(i) of this
section, appropriate adjustments must be made so that the amount of
stock treated as issued is not taken into account more than once.
(5) Examples. The following examples illustrate the principles of
this paragraph (c):
Example 1. Stock of the common parent under supplemental rules.
(i) A owns all the L stock. L is not a member of an affiliated group
and has a net operating loss carryover arising in Year 1 that is
carried over to Year 6. On September 20, Year 6, L transfers all of
its assets and liabilities to a newly created subsidiary, S, in
exchange for S stock. L and S thereafter file consolidated returns.
On November 23, Year 6, B contributes cash to L in exchange for a 45
percent ownership interest in L and contributes cash to S for a 20
percent ownership interest in S.
(ii) During the 3 year period ending on November 23, Year 6, B
is a 5% shareholder of L and of S that increases its ownership
interest in L and S during that period. Under paragraph (c)(4)(ii)
of this section, the determination whether L (the common parent of a
loss group) has an ownership change on November 23, Year 6 (or,
subject to paragraph (c)(4)(iv) of this section, on any testing date
in the testing period which includes November 23, Year 6), is made
by applying paragraph (b)(1)(i) of this section and by treating the
value of B's 20 percent ownership interest in S as if it were L
stock issued to B. Because B is a 5% shareholder of both L and S
during the 3 year period ending on November 23, Year 6, and B's
increase in its percentage ownership in the stock of S would be
taken into account in determining if S (if it were a loss
corporation) had an ownership change, it is not relevant whether L
has actual knowledge of B's acquisition of S stock.
Example 2. Plan or arrangement--public offering of subsidiary
stock. (i) A owns all the stock of L and L owns all the stock of L1.
The L group has a consolidated net operating loss arising in Year 1
that resulted from the operations of L1 and that is carried over to
Year 2. On October 7, Year 2, A sells 49 percent of the L stock to
B. As part of a plan that includes the sale of L stock, A causes a
public offering of L1 stock on November 6, Year 2. L has actual
knowledge of the plan. The following is a graphic illustration of
these facts:
BILLING CODE 4830-01-U
[[Page 36152]]
[GRAPHIC] [TIFF OMITTED] TR02JY99.010
BILLING CODE 4830-01-C
[[Page 36153]]
(ii) A's sale of the L stock to B does not cause an ownership
change of the L loss group on October 7, Year 2, under the rules of
Sec. 1.382-2T and paragraph (b)(1)(i) of this section.
(iii) Because the issuance of L1 stock to the public occurs as
part of the same plan as B's acquisition of L stock, and L has
knowledge of the plan, paragraph (c)(4) of this section applies to
determine whether the L loss group has an ownership change on
November 6, Year 2 (or, subject to paragraph (c)(4)(iv) of this
section, on any testing date for which the testing period includes
November 6, Year 2).
(d) Testing period following ownership change under this section.
If a loss group (or a loss subgroup) has had an ownership change under
this section, the testing period for determining a subsequent ownership
change with respect to pre-change consolidated attributes (or pre-
change subgroup attributes) begins no earlier than the first day
following the loss group's (or loss subgroup's) most recent change
date.
(e) Information statements--(1) Common parent of a loss group. The
common parent of a loss group must file the information statement
required by Sec. 1.382-2T(a)(2)(ii) for a consolidated return year
because of any owner shift, equity structure shift, or other
transaction described in Sec. 1.382-2T(a)(2)(i)--
(i) With respect to the common parent and with respect to any
subsidiary stock subject to paragraph (c) of this section; and
(ii) With respect to an ownership change described in Sec. 1.1502-
96(b) (relating to ownership changes of subsidiaries).
(2) Abbreviated statement with respect to loss subgroups. The
common parent of a consolidated group that has a loss subgroup during a
consolidated return year must file the information statement required
by Sec. 1.382-2T(a)(2)(ii) because of any owner shift, equity structure
shift, or other transaction described in Sec. 1.382-2T(a)(2)(i) with
respect to the loss subgroup parent and with respect to any subsidiary
stock subject to paragraph (c) of this section. Instead of filing a
separate statement for each loss subgroup parent, the common parent
(which is treated as a loss corporation) may file the single statement
described in paragraph (e)(1) of this section. In addition to the
information concerning stock ownership of the common parent, the single
statement must identify each loss subgroup parent and state which loss
subgroups, if any, have had ownership changes during the consolidated
return year. The loss subgroup parent is, however, still required to
maintain the records necessary to determine if the loss subgroup has an
ownership change. This paragraph (e)(2) applies with respect to the
attributes of a loss subgroup until, under Sec. 1.1502-96(a), the
attributes are no longer treated as described in Sec. 1.1502-91(d)
(relating to the definition of loss subgroup). After that time, the
information statement described in paragraph (e)(1) of this section
must be filed with respect to those attributes.
Sec. 1.1502-93 Consolidated section 382 limitation (or subgroup
section 382 limitation).
(a) Determination of the consolidated section 382 limitation (or
subgroup section 382 limitation)--(1) In general. Following an
ownership change, the consolidated section 382 limitation (or subgroup
section 382 limitation) for any post-change year is an amount equal to
the value of the loss group (or loss subgroup), as defined in paragraph
(b) of this section, 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(h) (relating to recognized built-in gains and section 338
gains), and section 382(m)(2) (relating to short taxable years). For
special rules relating to the recognized built-in gains of a loss group
(or loss subgroup), see paragraph (c)(2) of this section.
(2) Coordination with apportionment rule. For special rules
relating to apportionment of a consolidated section 382 limitation (or
a subgroup section 382 limitation) or net unrealized built-in gain when
one or more corporations cease to be members of a loss group (or a loss
subgroup) and to aggregation of amounts so apportioned, see
Sec. 1.1502-95(c).
(b) Value of the loss group (or loss subgroup)--(1) Stock value
immediately before ownership change. Subject to any adjustment under
paragraph (b)(2) of this section, the value of the loss group (or loss
subgroup) is the value, immediately before the ownership change, of the
stock of each member, other than stock that is owned directly or
indirectly by another member. For this purpose--
(i) Ownership is determined under Sec. 1.382-2T;
(ii) A member is considered to indirectly own stock of another
member through a nonmember only if the member has a 5-percent or
greater ownership interest in the nonmember; and
(iii) Stock includes stock described in section 1504(a)(4) and
Sec. 1.382-2T(f)(18)(ii) and (iii).
(2) Adjustment to value--(i) In general. The value
This text is long and has been trimmed here. Open the source document for the complete record.
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.