| T.D. 8823 |
August 02, 1999 |
Consolidated Returns--Limitations on the
Use of Certain Losses & Deductions
DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Parts 1, 301, and 602 [TD 8823] RIN
1545-AU31
TITLE: Consolidated Returns--Limitations on the Use of Certain
Losses and Deductions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
SUMMARY: This document contains final regulations regarding certain
deductions and losses, including built-in deductions and losses, of
members who join a consolidated group. The regulations provide rules
for computing the limitation with respect to separate return
limitation year (SRLY) losses, and the carryover or carryback of
losses to consolidated and separate return years. The regulations
also eliminate the application of the SRLY rules in certain
circumstances in which the rules of section 382 of the Internal
Revenue Code also apply.
DATES: Effective Dates: These regulations are effective June 25,
1999.
Applicability Dates: For dates of applicability, see the A Dates of
Applicability @ portion of this preamble.
FOR FURTHER INFORMATION CONTACT: Jeffrey L. Vogel, or Marie Milnes-
Vasquez at (202) 622-7770 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information in this final rule 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 1545-1237.
The collection of information in this regulation is in �1.1502-21(b)
(3). This information is required to ensure that an election to
relinquish a carryback period is properly documented, and will be
used for that purpose. The collection of information is required to
obtain a benefit (relating to the carryover of losses which would
otherwise be carried back). The likely respondents are consolidated
groU.S.
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 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 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: 2,000 hoU.S.
Estimated average annual burden hours per respondent: 15 minutes.
Estimated number of respondents: 8,000.
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.
Background and Explanation of Provisions
On February 4, 1991, the Treasury and the IRS 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 amendments to the
rules regarding net operating losses, built-in deductions, and
capital losses of consolidated groups. Those proposed regulations
also included rules regarding the carryover and carryback of losses
to consolidated return years and separate return years, and rules
regarding the application of section 382 and 383 by consolidated
groups and by controlled groups. A.4 public hearing regarding the
three sets of proposed regulations was held on April 8, 1991.
On June 27, 1996, the Treasury and the IRS published temporary
regulations regarding the separate return limitation year (SRLY)
limitation (TD 8677, 61 FR 33321). These regulations were
substantially identical to the proposed regulations. A notice of
proposed rulemaking cross-referencing the temporary regulations, the
1996 proposed SRLY regulations, was published in the Federal
Register on the same day (CO-024-96, 61 FR 33393), and the proposed
regulations published in 1991 were withdrawn.
The Treasury and the IRS also 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, and controlled group losses (TD 8679, 61 FR 33391). Notices
of proposed rulemaking cross-referencing these temporary regulations
were published on the same day (CO-026-96, 61 FR 33395, and
CO-025-96, 61 FR 33395), and the earlier proposed regulations
published in 1991 were withdrawn.
On August 10, 1998, the Treasury and the IRS issued Notice 98-38
(1998-32 I.R.B. 4). The Notice requested comments about the
advisability of adopting rules that would replace the existing SRLY
rules with an approach modeled on section 382.
As companions to this Treasury decision, which adopts the 1996
proposed SRLY regulations with certain revisions and modifications,
the Treasury and the IRS are also issuing final regulations relating
to the application of sections 382 and 383 by members of
consolidated and controlled groups. See TD 8824 and TD 8825
published elsewhere in this issue of the Federal Register.
On January 12, 1998, the Treasury and IRS issued temporary and
proposed regulations governing the use of tax credits of a
consolidated group and its members (TD 8751, 63 FR 1740). The
Treasury and IRS intend to finalize those regulations at a later
date.
Operation of the Proposed and Temporary Regulations
The 1991 proposed regulations generally retained the approach of the
prior SRLY regulations in limiting a consolidated group's use of
attributes arising in or attributable to a SRLY, but altered the
manner in which the limitation is computed.
While the pre-1991 regulations determined the limitation separately
for each member (fragmentation), and under a year-by-year approach,
the proposed regulations introduced two new concepts: subgrouping
and the cumulative register.
Subgrouping was added because fragmentation is in many ways
inconsistent with the single entity approach to the use of losses
under the consolidated return regulations. For example, if an entire
consolidated group were acquired by another group, under the
fragmentation approach, none of the losses of a former member of the
target group could be used to offset income of another former member
of the target group. However, had no acquisition occurred, those
losses could have been used to offset income within the target
group.
The 1991 proposed regulations also introduced the concept of a
cumulative register to address certain issues resulting from the
year-by-year approach. The prior SRLY regulations based the
limitation on the SRLY member's annual contribution to the group's
consolidated taxable income. The SRLY limitation was computed by
taking the difference between the group's consolidated taxable
income "with" the SRLY member and "without" the SRLY member. This
resulted in certain anomalies. For example, if a SRLY member
produced income in a tax year but the group as a whole did not have
income, the SRLY loss could not be absorbed in that year. Because
the member's contribution to income was not carried over to later
years, the SRLY losses also could not be absorbed in a later year
unless the member also contributed to the group's taxable income in
that year.
The cumulative register, rather than looking to a member's
contribution for the year, includes in the limitation computation a
member's complete income history while it is a member of a
consolidated group. The cumulative register is determined by
aggregating a member's net contribution of income in excess of
losses absorbed during the entire period the member was in the
consolidated group. To the extent that the cumulative register for a
member is positive, that member's SRLY net operating losses can be
absorbed in a consolidated return year (provided the group otherwise
has taxable income) even though the member might not have
contributed to taxable income in that year. On the other hand, if
the cumulative register is negative, the absorption of losses is
precluded even though the member might have contributed to taxable
income in that consolidated return year.
Much of the complexity of the SRLY rules results from the subgroup
and cumulative register concepts. In fact, the preamble to the
proposed SRLY regulations acknowledged that the subgrouping approach
was more complex than the fragmentation approach and solicited
comments about whether the benefits provided by subgrouping outweigh
and justify the additional burdens required, and whether the
fragmentation approach should be retained. 1991-1 C.B. 759. No
comments received in response to this request advocated the
elimination of subgrouping or the cumulative register, and it was
ultimately decided that these principles would be retained.
Comments
Comments were received in response to the 1991 proposed regulations,
the 1996 temporary regulations and Notice 98-38.
Some comments addressed whether the SRLY rules should be retained.
Other comments addressed issues about the technical operation of the
proposed rules.
All of the comments were evaluated in finalizing these regulations.
Several suggestions were adopted while others were not. This
preamble describes some of the decisions that were made in
finalizing the regulations.
Elimination or Retention of SRLY
The preliminary issue considered in finalizing these regulations was
the extent, if any, to which the SRLY rules should be retained. The
comments were divided about whether to retain or eliminate SRLY.
Some commentators asserted that the amendment to section 382 in 1986
adequately addressed Congressional concerns regarding loss
trafficking. Therefore, it was argued, the SRLY rules should be
eliminated because they have become superfluous, add unwarranted
complexity to the consolidated return system, and are easily
avoided. Other commentators asserted that the SRLY rules should be
retained because in their view, policing loss trafficking is
incidental to SRLY's function of resolving a single entity/separate
entity conflict in applying the consolidated return regulations. A
third group suggested a middle position by urging the elimination of
SRLY only in those circumstances in which the rules of section 382
also apply.
Arguments for Elimination of SRLY
Some commentators urged elimination of the SRLY rules (either in
whole or in part) because, in their view, section 382 provides
sufficient protection against loss trafficking transactions. They
asserted that the rules of section 382 provide greater precision and
predictability about the consequences of a transfer of tax losses,
and that section 382 promotes neutrality between a buyer and seller
of tax benefits in a more efficient and more equitable way than do
the SRLY rules.
Section 382 and SRLY overlap to a large extent, and the rules
applying section 382 to consolidated groups are even more complex
than the SRLY rules. Thus, these commentators asserted that
requiring a taxpayer to run the SRLY gauntlet in addition to the
section 382 gauntlet is unwarranted because any additional revenue
that might be gained from retaining a dual limitation is outweighed
by the added complexity of the SRLY rules.
These commentators argued that the complexity of the SRLY rules is
unwarranted because the impact of the SRLY rules is easily avoided
by various A self-help @ techniques. For example, taxpayers can
contribute income-producing assets or built-in gain assets to the
SRLY member to minimize the effect of a SRLY limitation. They also
argued that the SRLY rules impose a meaningful limitation only in
those cases in which, for regulatory or other reasons, loss
corporations cannot be combined with other profitable businesses.
Some commentators also argued that the SRLY rules improperly
discriminate between stock and asset acquisitions. Other arguments
urging the elimination of SRLY asserted that section 382 supercedes
the SRLY rules as a Congressionally mandated rule for policing loss
trafficking and that the SRLY rules are inconsistent with treating
the consolidated group as a single entity.
Arguments for Retention of SRLY
Notwithstanding the substantial area of overlap between section 382
and SRLY, section 382 does not always apply when SRLY does. In fact,
most commentators expressed concern about loss trafficking through
carryback transactions (to which section 382 does not apply) and
acknowledged the need for a rule to police those transactions. Many
urged retention of the existing SRLY rules at least for that
purpose. Moreover, some commentators speculated that elimination of
the SRLY rules would likely present new unforeseen opportunities for
trafficking in tax benefits.
Those commentators supporting retention of SRLY argued that the
objectives of section 382 and SRLY differ. Section 382, which seeks
to prevent loss trafficking, is based on the notion that the rate of
loss utilization following a change in ownership should be based on
the expected income generated if all of the assets were converted to
tax-exempt debt instruments.
Accordingly, section 382 permits a fixed amount of income to be used
each year to absorb a loss, regardless of the actual income
contribution of the loss corporation. Moreover, under section 382
and in the absence of SRLY, the available loss can be used against
any member's income. SRLY, on the other hand, makes actual income
generation by the SRLY member the determinant of loss usage. Thus,
SRLY assures that the loss attributes that arose outside of the
consolidated group are not generally available to the other group
members.
These commentators noted that the consolidated return system
combines single and separate entity treatment. The ability to offset
the income of one member with the losses of another member reflects
single entity treatment of the consolidated group. But, when a
corporation becomes a member of a consolidated group, it retains its
separate existence and individual status, its own accounting
methods, and its own separate attributes, including its losses that
are carried from a separate return year to a consolidated return
year. These aspects reflect treatment of each member of a
consolidated group as a separate entity. The carryover of losses
from separate return years reflects separate entity treatment, while
the sharing of losses among the members of a consolidated group
reflects single entity treatment. Thus, there is a conflict between
single entity and separate entity treatment. Single entity treatment
in computing consolidated taxable income is inconsistent with
permitting a corporation's losses to straddle consolidated and
separate return years when it enters or leaves a consolidated group.
These commentators argued that the SRLY rules present a resolution
of this conflict and protect the integrity of the consolidated
return system by ensuring that attributes arising in a separate
return year belong to, and remain with, the SRLY member, and
attributes arising in a consolidated return year belong to the
group.
Through these rules, according to these commentators, SRLY seeks to
provide that the manner and extent to which a corporation's separate
tax attributes are absorbed or utilized should not vary based on
whether the corporation is inside or outside a consolidated group.
Unlike in the case of section 382, the policy objectives underlying
these rules do not hinge on whether the ownership of the corporation
changes upon its entrance into or departure from the group.
Moreover, commentators urging the retention of SRLY pointed out that
the rules of section 381 dictate the circumstances under which one
corporation can use the tax attributes of another corporation. In
certain reorganizations, section 381 allows the tax attributes of
one corporation to be used by another corporation after an
acquisition, but in those transactions generally stock basis is also
lost. By contrast, in a taxable stock purchase where the stock takes
a cost basis and the corporation retains its existence, including
its underlying attributes, there is no policy reason for those
attributes to be freely available to the purchaser. In essence,
these commentators argued, the SRLY limitation prevents the benefits
provided by section 381 in certain reorganization transactions from
being extended to acquisitions and restructurings that do not
involve the commingling of assets in one entity that section 381
transactions generally require. A consolidated group's acquisition
of the stock of a corporation should not be treated the same way as
an asset acquisition.
Notice 98-38
Notice 98-38 announced that the Treasury and the IRS were
considering an approach that would model the SRLY limitation on the
mechanism of section 382. One intended advantage of this approach
was to reduce complexity in cases of overlap of the SRLY rules with
section 382. In those cases, the SRLY limitation would be the same
as the section 382 limitation, and consolidated groups would not
need to make two computations to determine how much income could be
used to absorb a loss. A second intended advantage was to address
concerns that the impact of a SRLY limitation can be minimized by
stuffing transactions (e.g., transferring income-producing assets to
the loss corporation) which could not be used to affect the section
382 limitation.
Although many commentators favor the elimination of a separate SRLY
limitation in the case where section 382 also applies, commentators
did not favor adoption of the section 382 mechanism in cases where
section 382 does not otherwise apply.
Commentators argued that imposing a limitation based on section 382
in a case where section 382 would not otherwise apply would be
inordinately burdensome. Because (absent an ownership change) the
owners of a loss corporation held outside a consolidated group could
engage in a stuffing transaction in order to increase that
corporation's loss absorption, commentators argued that a SRLY
limitation that could not be increased through stuffing transactions
would violate the objective of providing that the extent of a
corporation's loss absorption should not vary based on whether it is
inside or outside a consolidated group.
In light of these concerns, the Treasury and the IRS decided not to
impose a SRLY limitation based on the mechanism of section 382.
The Overlap Rule The Treasury and the IRS believe that limitations
on the extent to which a consolidated group can use attributes
arising in a separate return limitation year remain necessary.
However, the Treasury and the IRS remain concerned about complexity
in applying the current SRLY rules, particularly with respect to
situations where both the SRLY rules and section 382 apply. As
described above, the SRLY limitation is based on the member's (or
subgroup's) actual contribution to consolidated taxable income.
The section 382 limitation is based on the expected income
generation of the member (or subgroup) determined with reference to
its value on the change date. On balance, the Treasury and the IRS
believe that the simultaneous or proximate imposition of a section
382 limitation reasonably approximates a corresponding SRLY
limitation. Accordingly, these regulations generally eliminate the
SRLY limitation in circumstances in which its application overlaps
with that of section 382.
In the majority of cases, the date on which a corporation becomes a
member of a consolidated group (and thus subject to the SRLY rules)
is also a A change date @ as defined in section 382(j), determined
as a result of an ownership change as defined in section 382(g). In
this situation, under the temporary regulations, taxpayers must
calculate two separate limitations for loss carryovers -- the SRLY
limitation and the section 382 limitation. The final regulations
provide an overlap rule which eliminates the application of the SRLY
rules in this situation.
As a result, the final regulations remove the burden of determining
two limitations, and simplify the loss limitation rules applicable
to consolidated groups in most instances in which both the SRLY and
the section 382 limitations would otherwise arise.
To address situations in which not all of an acquisition occurs
simultaneously, the overlap rule also applies if the acquisition
results in a corporation joining the consolidated group on a date
other than the A change date @ , provided the transactions are
separated by no more than six months.
Additional rules have been included to prevent the inappropriate
operation of the overlap rule in certain cases involving the
acquisition of multiple corporations.
Net Operating Losses
Generally, to qualify for the net operating loss overlap rule, a
corporation must become a member of a consolidated group (a SRLY
event) within six months of the change date of an ownership change
that gives rise to a section 382(a) limitation with respect to that
carryover (a section 382 event). For net operating losses, an
overlap also will generally include situations in which a net
operating loss arises in the maximum six month period after the
section 382 event but before the SRLY event.
For example, if a section 382 event occurs on April 1 and a SRLY
event occurs on September 1, any losses that arise between April 1
and September 1 would not be subject to a section 382 limitation
because they would be allocable to the post-change period. However,
in the absence of the overlap rule, those losses would be subject to
a SRLY limitation. The overlap rule of the final regulations
eliminates the application of SRLY to those post-change losses. In
cases of an acquisition of a single corporation, the elimination of
SRLY has been determined to be an appropriate result and is a trade-
off to promote simplicity in the consolidated return regulations.
The final regulations provide special overlap rules for subgroups.
In general, the overlap rule applies to the subgroup and not
separately to the members of the subgroup. However, the overlap rule
does not apply unless the SRLY subgroup is coextensive with the
section 382 loss subgroup. This rule is necessary because a section
382 subgroup limitation that is computed with respect to the
expected income generation of a group of corporations does not
reasonably approximate a limitation that would be based on the
actual contribution to consolidated taxable income by a smaller
number of corporations.
In the reverse case, where the SRLY subgroup is larger than any
corresponding section 382 loss subgroup or single new loss member,
and particularly with respect to built-in losses, it is unclear in
certain circumstances how the overlap rule could be applied. To
address such circumstances in which a SRLY subgroup would otherwise
be larger than the corresponding section 382 subgroup or single new
loss member, the accompanying final regulations relating to the
application of sections 382 and 383 provide for an election
effectively to expand a newly-formed section 382 subgroup to conform
with a SRLY subgroup.
For example, assume that the S consolidated group (composed entirely
of S and T) has a $200 consolidated net operating loss, of which
$100 is attributable to S and $100 is attributable to T.
If the M group acquires the S group, S and T compose both a SRLY
subgroup as well as a section 382 loss subgroup. Because the
subgroups are coextensive, the overlap rule applies to eliminate the
application of SRLY in the M group for the $200 consolidated net
operating loss.
The overlap rule will not apply, however, if all the corporations
included in a section 382 loss subgroup are not also included in a
SRLY subgroup. For example, in Year 1, T joins the S group with a
net operating loss carryover in a transaction that is not subject to
section 382, and T does not subsequently have an ownership change.
Under �1.1502-96 (relating to the end of separate tracking), after
five years, T's net operating loss becomes an attribute of the S
group (also referred to as a A fold-in @ ) for section 382 purposes.
If the P group later acquires S in a transaction to which section
382 applies, the section 382 loss subgroup with respect to the T
loss would include S and T, but for SRLY purposes there would be no
subgroup. In this situation, the overlap rule would not apply, and
the limitations under both SRLY and section 382 would continue to
apply.
To preserve the effect of the elimination of SRLY under the overlap
rule as corporations move from group to group, the final regulations
also provide a special rule expanding the definition of SRLY
subgroups. Under this rule, a SRLY subgroup includes a member
carrying over a loss that was subject to the overlap rule in a
former group, and all members of that former group who become a
member of the current group at the same time as the loss member. The
effect of this rule is to increase the number of circumstances in
which SRLY subgroups and section 382 subgroups will be coextensive
as corporations move from group to group.
However, SRLY and section 382 subgroups may not be coextensive with
respect to losses that were carried into a former group in a
transaction to which the overlap rule does not apply. Subgroups may
not be coextensive, as demonstrated above, if for purposes of
section 382, such losses A fold-in @ to the former group by virtue
of an ownership change occurring more than six months after the SRLY
event or because the loss member remains a member of the former
group for at least five years.
Operating Rules
If the section 382 event occurs on the same date as the SRLY event
or precedes the SRLY event, the overlap rule, and therefore the
elimination of SRLY, is applicable to the tax year that includes the
SRLY event. If the SRLY event precedes the section 382 event, the
elimination of SRLY is delayed until the first tax year that begins
after the section 382 event. The delay is necessary to ensure that
an adequate limitation is always in effect for a net operating loss
carryover.
For example, for a calendar year consolidated group, if the SRLY
event occurs December 1, Year 1, but the section 382 event occurs on
April 1, Year 2, it is necessary to maintain the.19 application of
the SRLY rules between such dates because otherwise no limitation
would be applicable and the separate attributes could be freely
absorbed during that period.
Built-in Losses
The overlap rule for built-in losses is very similar to the overlap
rule for net operating losses. Generally, to qualify for the built-
in loss overlap rule, a SRLY event must occur within six months of
the change date of an ownership change that gives rise to a section
382(a) limitation that would apply to recognized built-in losses (a
section 382 event). However, the overlap rule does not apply (even
with respect to assets held on the date of the section 382 event) if
assets are transferred to a corporation after the section 382 event
and before the SRLY event that exceed the de minimis threshold of
section 382(h). In that case, both the SRLY rules and the section
382 rules will apply.
Even after the application of the overlap rule, the SRLY rules for
built-in losses apply to asset acquisitions by an acquired
corporation that occur after the latter or the SRLY event or section
382 event.
Special Subgroup Rule for Built-in Losses The temporary regulations
provide that, for purposes of built-in losses, a SRLY subgroup
consists of those members that have been continuously affiliated for
the 60-month period ending immediately before they become members of
the group in which the loss is recognized. Generally, the final
regulations maintain the subgroup rule provided by the temporary
regulations. The final regulations, however, modify the subgroup
rules to take account of the overlap rule. These modifications, in
effect, conform the SRLY subgroup rules to adopt principles
contained in ��1.1502-91 through 1.1502-98 (regarding the
application of section 382 to consolidated groups) where necessary
to preserve the effect of an overlap transaction in a former group
and to increase the number of SRLY and section 382 subgroups that
are coextensive and eligible for future operation of the overlap
rule as corporations move from group to group.
The final regulations provide that after a corporation joins a group
in an overlap transaction, it is deemed to have been affiliated with
the common parent of the acquiring group for 60 consecutive months.
Those corporations that join the group in the same transaction, but
that were not part of a subgroup eligible for the overlap rule,
begin measuring the period of their affiliation immediately after
joining the group, notwithstanding their actual affiliation history.
This rule may prevent some corporations from subsequently qualifying
as a SRLY subgroup, notwithstanding their actual affiliation
history. For example, assume that after four years of affiliation, S
and T join the P group without any net operating loss carryovers. S,
which has a net unrealized built-in loss, and T, which has a net
unrealized built-in gain, would not qualify as a SRLY subgroup with
respect to their built-in items because they do not have the
requisite affiliation history. Therefore, S and T are tested
separately under section 382 and �1.1502-15. The acquisition results
in S becoming subject to section 382 (but owing to the overlap rule,
not to the limitation contained in �1.1502-15(a)).
T is not subject to either. Because S joined the P group in a
transaction subject to the overlap rule, it is deemed to have been
affiliated with P for 60 consecutive months. T, however, is required
to begin measuring its affiliation with P and S from the date it
joined the group, notwithstanding its historic affiliation with S.
Other Substantive Changes
Predecessors and Successors
Material Difference Requirement
The temporary regulations provide that a reference to a corporation
or member also includes, as the context may require, a reference to
a successor or predecessor. See, �1.1502-15T(e) and �1.1502-21T(f).
The definition of predecessor is provided in �1.1502-1(f)(4). In
general, a predecessor is any transferor of assets in a section
381(a) transaction. A predecessor also includes any transferor of
assets in a transaction in which the basis of assets to the
transferee (successor) is determined by reference to the
transferor's basis, but only if there is a A material difference @
between the basis and the value of assets.
Thus the application of the predecessor rule to a section 351
transaction is dependent upon the specific assets transferred, and
consequently a transferor in a section 351 transaction might not
qualify as a predecessor. Also, in the case of such a section 351
transaction, the temporary regulations provided that there be a
maximum of one predecessor to, or successor of, any member.
Commentators objected to the A material difference @ requirement and
suggested that a section 351 transferee should not be excluded from
successor status solely because there was no material difference
between the basis and value of the assets transferred. The final
regulations eliminate both the material difference and the single
predecessor-successor requirements.
CNOL Carrybacks
Section 1.1502-21T(b)(2)(B) of the temporary regulations provides an
offspring rule which generally permits the common parent of a group
to carryback a consolidated net operating loss (CNOL) attributable
to a member that did not exist in the year to which the loss is
carried, provided that the member has been a member of the group
continuously since its organization. In that section, there is also
a reference to the application of the predecessor and successor rule
of �1.1502-21T(f), which states that a reference to a member also
includes references to a predecessor of the member, as the context
may require.
Commentators were concerned that the combination of the predecessor
and successor rule would deny any carryback in the case of a merger
under section 368(a)(1)(A) and (a)(2)(D). For example, assume that
P, the common parent of a consolidated group, forms Newco in Year 2
for the sole purpose of acquiring T, in a merger with and into
Newco. In Year 3, there is a CNOL all of which is attributable to
Newco. Newco appears to be within the scope of the offspring rule,
and therefore a carryback to P's Year 1 consolidated return, a year
before Newco's existence, would be permitted. However, because the
merger is a transaction to which section 381(a) applies, Newco is
also a successor to T.
Under this analysis, Newco would not be considered to have been a
member of the P group continuously since its organization, so a
carryback to the P group's consolidated return year would not be
permitted. Moreover, Newco would not be permitted to carryback the
loss to any year of T. Thus, no carryback of Newco's loss would be
permitted.
The Treasury and the IRS believe that the denial of any carryback in
this situation is inappropriate. In general, a newly-formed group
member should be permitted to carry back its contribution to the
consolidated net operating loss, whether or not it is a successor to
a corporation that was acquired by the group. Moreover, the Treasury
and the IRS believe that rules providing for a carryback within --
rather than outside -- the group would be more administrable than
rules requiring taxpayers to trace the assets of a newly-formed
member to determine whether such corporation's contribution to the
consolidated net operating loss should be carried back to the pre-
consolidation years of an acquired corporation or back within the
group. The Treasury and the IRS also considered whether to provide
that all consolidated net operating losses should be carried back
within the group, even if attributable to a corporation that was
itself acquired from outside the group. Whether or not such a rule
is appropriate, it was determined that such a change should not be
adopted in final regulations. Accordingly, the final regulations
provide that the offspring rule applies regardless of whether the
newly-formed member is a successor to any other corporation.
Successor's Income
Section 1.1502-21T(f)(2) of the temporary regulations provides, A
Except as the Commissioner may otherwise determine, any increase in
the taxable income of a SRLY subgroup that is attributable to a
successor is disregarded unless the successor acquires substantially
all of the assets and liabilities of its predecessor and the
predecessor ceases to exist.
@ The rule was intended to prevent the subgroup from inappropriately
affecting the determination of its taxable income either by removing
assets that would generate losses or by bringing into the subgroup
income generated by members outside the subgroup.
Some commentators stated that they did not understand whether the
rule was intended to require the subgroup to disregard all income of
the successor, or only that income of the successor in excess of
that generated by the transferred assets.
In the event that all the successor's income is disregarded,
commentators argued that the rule produced unduly harsh results.
A particularly sympathetic case is a divisive section 351
transaction. For example, if T, a member of a SRLY subgroup, formed
T1, by contributing to it one of its businesses, and T1 produced net
operating losses, those losses would be included in determining the
taxable income of the subgroup. On the other hand, if T1 produced
taxable income, that income would not be included in the subgroup's
taxable income. If no transfer to T1 had occurred, and the business
had remained in T, all of its income or loss, as the case may be,
would be included in determining the subgroup's taxable income.
The Treasury and the IRS have determined that a broad rule
disregarding all income contributed by the successor is necessary to
avoid an unadministrable requirement that the successor's income be
traced to particular assets, but that the rule should only be
applied in more limited circumstances. Thus, the final regulations
provide that the net positive income attributable to the successor
generally is disregarded, but provide four exceptions to this rule:
(A) the successor acquires substantially all of the assets and
liabilities of its predecessor, and the predecessor ceases to exist;
(B) the successor became a member of the SRLY subgroup at the time
the subgroup was formed (e.g., the successor was organized before it
and its affiliates joined the current group and thus qualifies in
its own right as a subgroup member); (C) 100 percent of the stock of
the successor is owned directly by corporations that were members of
the SRLY subgroup when the subgroup was formed; or (D) the
Commissioner determines otherwise. The IRS might, for example,
publish a revenue ruling or other guidance expanding the list of
exceptions if it is later determined that other circumstances should
be excluded from the general rule. It is also anticipated that
through the letter ruling process, the IRS will evaluate individual
cases upon request and determine whether income attributable to a
successor will be included in determining the subgroup's taxable
income.
See also �1.1502-21(c)(2)(iv) of the regulations (an anti-abuse rule
denying SRLY subgroup treatment in certain circumstances.)
Built-in Losses
Non-Corporate Transferors
Section 1.1502-15T(a) of the temporary regulations provides that
solely for the purpose of determining the amount of, and the extent
to which, a built-in loss is limited by the SRLY rules for the year
in which it is recognized, a built-in loss is treated as a
hypothetical net operating loss carryover or net capital loss
arising in a SRLY, instead of as a deduction or loss in the year
recognized.
Some commentators thought the rule was anomalous as applied to
transfers of built-in loss assets by individuals. In their view,
because a SRLY is defined only with respect to corporations (see
�1.1502-1(f)), it would be inappropriate to view a corporate
transferee as a successor to a non-corporate transferor. Other
commentators asserted that because the built-in loss concept is a
subset of the SRLY limitations, the built-in loss rules should not
apply to transfers by an individual or other non-corporate
transferor to a member of a consolidated group in a section 351
transaction.
The temporary regulation does not base the determination of whether
a corporation has built-in losses on any application of the
predecessor and successor rule. If an asset enters the group with a
built-in loss, in general, the temporary regulation deems the built-
in loss to have arisen in a SRLY without regard to whether the asset
was owned by a corporation when the built-in loss arose. Moreover,
�1.1502-15T(b)(2)(i) provides that in the case of an asset
acquisition by a group, the assets and liabilities acquired directly
from the same transferor pursuant to the same plan are treated as
the assets and liabilities of a corporation that becomes a member of
the group on the date of the acquisition. That corporation would
generally be subject to the SRLY built-in loss rules when it becomes
a member of the consolidated group. The Treasury and the IRS
continue to believe that a separate tax attribute arising outside
the consolidated group should not be freely absorbed within the
group, regardless of where that separate attribute arose.
Accordingly, these final regulations reaffirm that a built-in loss
asset transferred to a group by a non-corporate transferor is
subject to the SRLY rules.
An example explains that for purposes of applying the SRLY
limitation to that built-in loss, all of the items contributed by
the acquiring member (and not just items attributable to that asset)
to consolidated taxable income are taken into account.
Lonely Parent
Under �1.1502-15T of the temporary regulations, the SRLY limitation
on recognized built-in losses applies to a loss recognized by the
group on an asset the common parent held prior to the formation of a
group. In contrast, net operating loss carryovers of a corporation
that becomes the common parent of a consolidated group are not
subject to a SRLY limitation within the group under the so-called A
lonely parent @ rule (see �1.1502- 1(f)(2)(i)).
The final regulations conform the built-in loss rules to the net
operating loss rules as applied in conjunction with the lonely
parent rule. Therefore, a loss recognized by any member of the group
on an asset that was held by the corporation that becomes the common
parent when the group is formed is not subject to the SRLY rules.
However, a built-in loss asset acquired by the common parent after
the formation of the group remains subject to the SRLY limitation.
An anti-abuse rule is also provided to apply the SRLY limitation to
built-in loss assets transferred to a corporation prior to and in
anticipation of the corporation becoming the common parent of a
group.
For example, in Year 1, P, a stand alone corporation holds Asset 1,
a built-in loss asset. In Year 3, P forms S but retains Asset 1. In
Year 4, P sells Asset 1, recognizing a loss.
Section 1.1502-15(f) of the final regulations provides that the loss
is not subject to the SRLY limitation. Similarly if P transferred
Asset 1 with an unrealized built-in loss to S, the SRLY limitation
on built-in losses would not apply if S sold Asset 1 and recognized
the loss. However if, after the formation of the P/S group, P
acquired an asset with an unrealized built-in loss and sold the
asset, recognizing that loss during the recognition period, a SRLY
limitation would apply with respect to that loss.
Split Election Rule
Section 1.1502-21T(b)(3)(i) of the temporary regulations permits a
consolidated group to waive the entire carryback period provided by
section 172. This irrevocable election is not available on a member
by member basis, but rather requires that the common parent waive
the carryback period for all members of the group.
Some commentators suggested that the election be permitted on a
member-by-member basis. The commentators expressed concern that
requiring the whole group to waive the carryback period makes it
difficult for sellers and purchasers to negotiate who gets the
benefit of a post-acquisition loss. Because section 172 generally
requires a carryback to the earliest year, absent the purchaser's
waiver of the carryback, a seller could be required to disclose
confidential tax information to the purchaser relating to the
ability to use the loss carryback. In situations where such
disclosure is a concern, an election to waive the loss carryback,
available on a member by member basis, could ensure the separation
of a particular purchaser and seller without requiring the group to
waive the remaining amount of the consolidated net operating loss
carryback.
The final regulations permit taxpayers to waive, with respect to all
consolidated net operating losses attributable to a member, the
portion of the carryback period for which the corporation was a
member of another group. If an election is made for any member, all
members acquired from the same group, in the same transaction, are
required to make the election. The election must be made on the
timely filed original return for the year of the acquisition.
Absorption of Losses
Section 1.1502-21T(b)(1) provides general rules concerning the
absorption of losses within a consolidated group. Although the rules
refer to section 382(l)(2)(B), commentators stated that the
absorption rules were ambiguous with respect to establishing the
priority of absorption of multiple losses carried from the same
taxable year if only a portion of the losses were subject to
limitation under section 382. The final regulations make clear that
the rule of section 382(l)(2)(B) applies, and that losses limited by
section 382 are absorbed before losses from the same taxable year
that are not subject to a section 382 limitation, regardless of
whether such losses are attributable to the same member.
A comment was also received requesting guidance on how to determine
the amount of a subgroup member's net operating loss carryover that
was absorbed so that it can determine how much of the loss it
retains when it leaves the group. In response to this comment, the
final regulations provide that within a subgroup, losses are
absorbed on a pro rata basis. Thus, when a subgroup member leaves
the group, its net operating loss carryover is treated as having
been absorbed on a pro rata basis, determined by comparing its
initial net operating loss carryover and the subgroup's initial net
operating loss carryover.
Dates of Applicability
The final regulations generally are applicable for taxable years for
which the due date (without extensions) of the consolidated return
is after June 25, 1999. However, there are several special effective
dates, including an effective date which addresses transitional
issues relating to the adoption of the rule eliminating SRLY in the
event of an overlap with section 382. Generally, if a particular
attribute would not have been subject to a SRLY limitation as of
June 25, 1999 if these final regulations had always been in effect,
and the overlap transaction occurred after the effective date of
section 382 as amended by the 1986 Tax Reform Act, then the existing
SRLY limitation will not apply in taxable years for which the due
date (without extensions) of the consolidated return is after June
25, 1999 (but will not be eliminated retroactively with respect to
earlier taxable years).
If an existing SRLY limitation for which the cumulative register
began in a taxable year prior to a taxable year for which the due
date (without extensions) of the consolidated return is after June
25, 1999 would not be eliminated by the overlap rule, that SRLY
limitation continues to be applied without regard to the changes
applicable to the definition of SRLY subgroups (so that a member or
SRLY subgroup is not forced to alter the application of a SRLY
limitation in midstream).
However, when corporations enter a group in a new SRLY event
occurring in a taxable year for which the due date (without
extensions) of the consolidated return is after June 25, 1999, the
regulations apply (with respect to any overlap transactions
occurring after the effective date of section 382 as amended by the
1986 Tax Reform Act) as if the final regulations had always been in
effect.
Thus, for example, and assuming that all corporations are on a
calendar taxable year, if a corporation S joins the P group in an
overlap transaction in 1996, and the first year for which this final
regulation is effective is 1999, then any losses carried by S into
the P group are subject to a SRLY limitation in 1996, 1997 and 1998.
However, the losses are no longer subject to a SRLY limitation
within the P group starting in 1999.
If, in the above example, the M group had acquired both P and S on
January 1, 1998 in a non-overlap transaction, and S carried into the
M group its losses arising before it joined the P group, then, in
1998, under the temporary regulations as then in effect, those S
losses would have been subject to a SRLY limitation computed with
reference only to S's cumulative register. Under the special
transition rule, the new regulations would not operate in 1999 or
thereafter to cause S and P to constitute a SRLY subgroup in the M
group with respect to those S losses, even though P and S would
otherwise qualify as a SRLY subgroup with respect to those losses
under the new rules.
However, if the X group acquires both P and S from M in or after
1999, P and S would constitute a SRLY subgroup with respect to those
S loss carryovers.
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 Analyses
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 will 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 carryover or carryback of certain losses from
separate return limitation years. 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
loss carryovers or carrybacks that are subject to the separate
return limitation year rules. 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 Code, the notice
of proposed rulemaking preceding these regulations was sent to the
Small Business Administration for comment on its impact on small
businesses.
Drafting Information
The principal author of these regulations is Jeffrey L.
Vogel of the Office of Assistant Chief Counsel (Corporate), IRS.
Other personnel from the Treasury and the IRS participated in their
development.
List of Subjects
26 CFR Part 1 Income taxes, Reporting and recordkeeping
requirements.
26 CFR Part 602 Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations Accordingly, 26 CFR parts
1, 301, and 602 are amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by
removing the entries for sections 1.1502-15T, 1.1502-21T,
1.1502-22T, and 1.1502-23T and adding entries in numerical order to
read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1502-12 also issued under 26 U.S.C. 1502.* * *
Section 1.1502-15 also issued under 26 U.S.C. 1502.* * *
Section 1.1502-22 also issued under 26 U.S.C. 1502.
Section 1.1502-23 also issued under 26 U.S.C. 1502.* * *
Par. 2. In the list below, for each section indicated in the left
column, remove the wording indicated in the middle column, and add
the wording indicated in the right column.
Affected Section Remove Add 1.469-1(h)(2) 1.1502-21T (net 1.1502-21
(net operating losses operating losses), (temporary)), and and
1.1502-22
1.1502-22T (consolidated net (consolidated net capital gain and
capital gain and loss) loss (temporary))
1.597-2(c)(5), first 1.1502-15T, 1.1502- 1.1502-15, 1.1502- sentence
21T, and 1.1502-22T 21, and 1.1502-22
1.597-2(c)(5), 1.1502-15T, 1.1502- 1.1502-15, 1.1502-21 second
sentence 21T or 1.1502-22T or 1.1502-22
1.597-4(g)(3), fifth 1.1502-15T, 1.1502- 1.1502-15, 1.1502-21
sentence 21T and 1.1502-22T and 1.1502-22
1.597-4(g)(3), sixth 1.1502-15T, 1.1502- 1.1502-15, 1.1502- sentence
21T, or 1.1502-22T 21, or 1.1502-22
1.904(f)-3(a), first (or �1.1502-21T(b) (or �1.1502-21(b) sentence
1.904(f)-3(b), first (or �1.1502-22T(b) (or �1.1502-22(b) sentence
1.1502-2(h) 1.1502-22T)(or, for 1.1502-22)(or, for consolidated
return consolidated return years to which years to which �1.1502-22T
�1.1502-22
1.1502- 1.1502-21T(c)(2) 1.1502-21(c)(2) 3T(c)(2)(iii), first
sentence
1.1502- 1.1502-21T(f) 1.1502-21(f) 3T(c)(2)(iii), second sentence
1.1502-9(a), seventh �1.1502-21T(b)(2) 1.1502-21(b)(2) sentence
1.1502-9(a), eighth 1.1502-21T(b)(1) 1.1502-21(b)(1) sentence
1.1502-11(a)(2) �1.1502-21T 1.1502-21
1.1502-11(a)(3) �1.1502-22T 1.1502-22
1.1502-11(a)(4) �1.1502-23T 1.1502-23
1.1502-11(b)(2)(iii) 1.1502-21T 1.1502-21 Example 1(c), last
sentence
1.1502-11(b)(2)(iii) 1.1502-21T and 1.1502-21 and Example 2(d), last
1.1502-22T 1.1502-22 sentence
1.1502-12(b) 1.1502-15T 1.1502-15
1.1502-13(c)(7)(ii) S's net operating P's acquisition of S Example
10(d), first loss carryovers are is not subject to and second
sentences subject to the the overlap rule of separate return
�1.1502-21(g), and limitation year S's net operating (SRLY) rules.
See loss carryovers are �1.1502-21T(c) subject to the separate
return limitation year (SRLY) rules. See �1.1502-21(c)
1.1502-13(g)(5) 1.1502-15T (or 1.1502-15 (as Example 4(b), fourth
�1.1502-15A, as appropriate) sentence appropriate) (limitations on
the absorption of built in losses)
1.1502-13(h)(2) 1.1502-21T(c) 1.1502-21(c) Example 1(a), second
sentence
1.1502-13(h)(2) 1.1502-21T(c) 1.1502-21(c) Example 1(b), first
sentence.37
1.1502-13(h)(2) 1.1502-15T 1.1502-15 Example 2(a), last sentence
1.1502-13(h)(2) 1.1502-22T 1.1502-22 Example 2(b), second sentence
1.1502-20(c)(4) 1.1502-21T 1.1502-21 Example 7(iii), first sentence
1.1502-20(g)(3) 1.1502-21T 1.1502-21 Example 1(i), second sentence
1.1502-20(g)(3) �1.1502-21A or 1.1502-21A or Example 2(i),third
1.1502-21T 1.1502-21 sentence
1.1502-23A(a), third 1.1502-21T(c) and (1.1502-21T(c) in sentence
1.1502-22T(c), as effect prior to June provided in 1.1502- 25, 1999,
as 15T(a) contained in 26 CFR part 1 revised April 1, 1999 and
1.1502- 22T(c) in effect prior to June 25, 1999, as contained in 26
CFR part 1 revised April 1, 1999, as provided in 1.1502-15T(a) in
effect prior to June 25, 1999, as contained in 26 CFR part 1 revised
April 1, 1999) or (1.1502- 21(c) and 1.1502- 22(c), as provided in
1.1502-15(a), as applicable))
1.1502-23A(b), first 1.1502-21T(g) 1.1502-21(h) or sentence
1.1502-21T(g) in effect prior to June 25, 1999, as contained in 26
CFR part 1 revised April 1, 1999, as applicable
1.1502-23A(b), 1.1502-21T(g) for 1.1502-21(h) or second sentence
effective dates of 1.1502-21T(g) in that section effect prior to
June 25, 1999, as contained in 26 CFR part 1 revised April 1, 1999,
as applicable for effective dates of these sections
1.1502-26(a)(1) 1.1502-21T(e) 1.1502-21(e) concluding text
1.1502-32(b)(5)(ii) 1.1502-21T(b) 1.1502-21(b) Example 2(b), third
sentence
1.1502-41A(c), first 1.1502-21T(g) 1.1502-21(h) or sentence
1.1502-21T(g) in effect prior to June 25, 1999, as contained in 26
CFR part 1 revised April 1, 1999, as applicable
1.1502-41A(c), 1.1502-21T(g) for 1.1502-21(h) or second sentence
effective dates of 1.1502-21T(g) in that section effect prior to
June 25, 1999, as contained in 26 CFR part 1 revised April 1, 1999,
as applicable for effective dates of these sections
1.1502- 1.1502-21T(b) 1.1502-21(b) 42(f)(4)(i)(A)
1.1502-43(b)(2)(iv) 1.1502-21T(a) 1.1502-21(a)
1.1502-43(b)(2)(v) 1.1502-22T(a) 1.1502-22(a)
1.1502- 1.1502-22T(a) 1.1502-22(a) 43(b)(2)(vi)(A)
1.1502-43(b)(2)(vii) 1.1502-22T(b) 1.1502-22(b)
1.1502- 1.1502-15T) and 1.1502-15) and 43(b)(2)(viii) 1.1502-15T
(SRLY 1.1502-15 limitation on built-in losses (temporary))
1.1502-44(b)(2) �1.1502-21T 1.1502-21
1.1502-44(b)(3) �1.1502-22T 1.1502-22
1.1502-47(h)(2)(i) 1.1502-21T 1.1502-21
1.1502-47(h)(2)(ii) 1.1502-21T(e) 1.1502-21(e)
1.1502- 1.1502-21T 1.1502-21 47(h)(2)(iii),first sentence
1.1502-47(h)(2)(iv), 1.1502-21T 1.1502-21 first sentence
1.1502-47(h)(3)(iii) 1.1502-21T(c) 1.1502-21(c)
1.1502-47(h)(4)(i), 1.1502-22T 1.1502-22 first sentence
1.1502-47(h)(4)(i), 1.1502-22T 1.1502-22 second sentence
1.1502-47(h)(4)(ii), 1.1502-22T 1.1502-22 first sentence
1.1502-47(h)(4)(ii), 1.1502-21T 1.1502-21 first sentence
1.1502-47(h)(4)(iii) 1.1502-22T(b) 1.1502-22(b)
1.1502-47(k)(5) 1.1502-22T 1.1502-22 introductory text
1.1502-47(l)(3)(i), 1.1502-21T 1.1502-21 second sentence
1.1502-47(m)(2)(ii), 1.1502-21T 1.1502-21 first sentence
1.1502-47(m)(2)(ii), 1.1502-22T 1.1502-22 first sentence
1.1502-47(m)(3)(i), 1.1502-21T and 1.1502-21 and first sentence
1.1502-22T 1.1502-22
1.1502- 1.1502-21T(b) or 1.1502-21(b)) 47(m)(3)(vi)(A),
1.1502-79A(a)(3)(as second sentence appropriate).40
1.1502- �1.1502-21T(b) or 1.1502-21(b) 47(m)(3)(vi)(A),
1.1502-79A(a)(3)(as second sentence appropriate)
1.1502- 1.1502-21A(b)(3)(ii) 1.1502-21A(b)(3)(ii) 47(m)(3)(vii)(A)
or 1.1502-21(b)
1.1502-47(m)(3)(ix), 1.1502-15T 1.1502-15 last sentence
1.1502-47(q), last 1.1502-21T 1.1502-21 sentence
1.1502- 1.1502-21T(c)(2) 1.1502-21(c)(2) 55T(h)(4)(iii) (B)(4),
first sentence
1.1502- 1.1502-21T(f) 1.1502-21(f) 55T(h)(4)(iii) (B)(4), second
sentence
1.1502-78(a), first 1.1502-21T(b), 1.1502-21(b), sentence
1.1502-22T(b) 1.1502-22(b)
1.1502-79(a), second 1.1502-21T(b) 1.1502-21(b) sentence
1.1502-79(b), second 1.1502-22T(b) 1.1502-22(b) sentence
1.1502-79(c)(1) 1.1502-21T(b) 1.1502-21(b)
1.1502-79(d)(1) 1.1502-21T(b) 1.1502-21(b)
1.1502-79(e)(1) 1.1502-21T(b) 1.1502-21(b)
1.1502-91T(a)(2), 1.1502-21T(a) 1.1502-21(a) or last sentence
1.1502-21T(a) in effect prior to June 25, 1999, as contained in 26
CFR part 1 revised April 1, 1999, as applicable.41
1.1502-91T(c)(3) 1.1502-21T(c) 1.1502-21(c) or Example (b), first
1.1502-21T(c) in sentence effect prior to June 25, 1999, as
contained in 26 CFR part 1 revised April 1, 1999, as applicable
1.1502- 1.1502-21T(c) 1.1502-21(c) or 91T(d)(1)(iii) 1.1502-21T(c)
in effect prior to June 25, 1999, as contained in 26 CFR part 1
revised April 1, 1999, as applicable
1.1502-91T(d)(6) 1.1502-21T(b) 1.1502-21(b) or Example 1(a), fourth
1.1502-21T(b) in sentence effect prior to June 25, 1999, as
contained in 26 CFR part 1 revised April 1, 1999, as applicable
1.1502-91T(d)(6) 1.1502-21T(b) 1.1502-21(b) or Example 2(a), fourth
1.1502-21T(b) in sentence effect prior to June 25, 1999, as
contained in 26 CFR part 1 revised April 1, 1999, as applicable
1.1502-91T(f)(2) 1.1502-21T(b) 1.1502-21(b) or Example (a), last
1.1502-21T(b) in sentence effect prior to June 25, 1999, as
contained in 26 CFR part 1 revised April 1, 1999, as applicable.42
1.1502-92T(b)(2) 1.1502-21T(b) 1.1502-21(b) or Example 3(a),
1.1502-21T(b) in fourth sentence effect prior to June 25, 1999, as
contained in 26 CFR part 1 revised April 1, 1999, as applicable
1.1502-93T(e) 1.1502-21T(c) 1.1502-21(c) or 1.1502-21T(c) in effect
prior to June 25, 1999, as contained in 26 CFR part 1 revised April
1, 1999, as applicable
1.1502-94T(a)(1)(i) 1.1502-21T(c) 1.1502-21(c) or 1.1502-21T(c) in
effect prior to June 25, 1999, as contained in 26 CFR part 1 revised
April 1, 1999, as applicable
1.1502-94T(b)(4) 1.1502-21T(c) 1.1502-21(c) or Example 1(c), last
1.1502-21T(c) in sentence effect prior to June 25, 1999, as
contained in 26 CFR part 1 revised April 1, 1999, as applicable
1.1502-95T(b)(1)(i) 1.1502-21T(b) 1.1502-21(b) or 1.1502-21T(b) in
effect prior to June 25, 1999, as contained in 26 CFR part 1 revised
April 1, 1999, as applicable
1.1502-95T(b)(4) 1.1502-21T(b) 1.1502-21(b) or Example 1(a), sixth
1.1502-21T(b) in sentence effect prior to June 25, 1999, as
contained in 26 CFR part 1 revised April 1, 1999, as applicable
1.1502-95T(c)(7) 1.1502-21T(b) 1.1502-21(b) or Example 1(a), fifth
1.1502-21T(b) in sentence effect prior to June 25, 1999, as
contained in 26 CFR part 1 revised April 1, 1999, as applicable
1.1502-96T(a)(1) 1.1502-21T(c) 1.1502-21(c) or introductory text
1.1502-21T(c) in effect prior to June 25, 1999, as contained in 26
CFR part 1 revised April 1, 1999, as applicable
1.1502-96T(a)(2), 1.1502-21T(c) 1.1502-21(c) or first sentence
1.1502-21T(c) in effect prior to June 25, 1999, as contained in 26
CFR part 1 revised April 1, 1999, as applicable
1.1502-96T(a)(5), 1.1502-15T and 1.1502-15 and first sentence
1.1502-21T 1.1502-21 (or �1.1502-15T in effect prior to June 25,
1999, as contained in 26 CFR part 1 revised April 1, 1999 and
1.1502- 21T in effect prior to June 25, 1999, as contained in 26 CFR
part 1 revised April 1, 1999, as applicable)
1.1502- 1.1502-21T(b) 1.1502-21(b) or 96T(b)(2)(ii)(A) 1.1502-21T(b)
in effect prior to June 25, 1999, as contained in 26 CFR part 1
revised April 1, 1999, as applicable
1.1502- 1.1502-21T(c) 1.1502-21(c) or 96T(b)(2)(ii)(B) 1.1502-21T(c)
in effect prior to June 25, 1999, as contained in 26 CFR part 1
revised April 1, 1999, as applicable
1.1502-99T(c)(2)(i), 1.1502-21T(c) 1.1502-21(c) or fourth sentence
1.1502-21T(c) in effect prior to June 25, 1999, as contained in 26
CFR part 1 revised April 1, 1999, as applicable
1.1502-99T(c)(2)(ii) 1.1502-21T(b) 1.1502-21(b) or 1.1502-21T(b) in
effect prior to June 25, 1999, as contained in 26 CFR part 1 revised
April 1, 1999, as applicable
1.1502-100(c)(2) ��1.1502-21A or �1.1502-21A or
1.1502-21T 1.1502-21
1.1503-2(d)(2)(i), �1.1502-21A(c) or 1.1502-21A(c) or last sentence
1.1502-21T(c) 1.1502-21(c)
1.1503-2(d)(2)(ii), �1.1502-21A(c) or 1.1502-21A(c) or last sentence
1.1502-21T(c) 1.1502-21(c)
1.1503-2(d)(4) 1.1502-22T(c) 1.1502-22(c) Example 1 (iv), last
sentence
1.1503- �1.1502-21A(c) or 1.1502-21A(c) or 2(g)(2)(vii)(B)(1),
1.1502-21T(c) 1.1502-21(c) second sentence.45
1.1503- �1.1502-21A(c) or 1.1502-21A(c) or 2(g)(2)(vii)(B)(2),
1.1502-21T(c) 1.1502-21(c) first sentence
1.1503- �1.1502-21A(c) or 1.1502-21A(c) or 2(g)(2)(vii)(G)
1.1502-21T(c) 1.1502-21(c) Example 1, ninth sentence
1.1503- ��1.1502-21A(c) or �1.1502-21A(c) or 2(g)(2)(vii)(G)
1.1502-21T(c) 1.1502-21(c) Example 2, last sentence
1.1503-2(h)(3), ��1.1502-21A(c) or (�1.1502-21A(c) or second
sentence 1.1502-21T(c)) 1.1502-21(c)
1.1503-2A(f)(1)(i) 1.1502-21T(b) 1.1502-79A(a)(3) introductory text
1.1503- 1.1502-22T(b) 1.1502-22 2A(f)(1)(i)(C)
1.1503-2A(f)(2)(i), 1.1502-21T(c) 1.1502-21(c) fourth sentence
1.1503-2A(f)(2)(ii), 1.1502-21T(c) 1.1502-21(c) last sentence
301.6402- �1.1502-21T(b) 1.1502-21(b) 7(g)(2)(iii), first sentence
301.6402-7(g)(3) 1.1502-21T 1.1502-21
Example 2, second sentence
301.6402-7(g)(3) 1.1502-21T(c) 1.1502-21(c)
Example 2, third sentence 301.6402-7(h)(1)(ii) 1.1502-21T(b) and
1.1502-21(b) and Example (b), first 1.1502-22T(b) 1.1502-22(b)
sentence
Par. 3. Section 1.1502-1 is amended by revising paragraph (f)(4) to
read as follows:
�1.1502-1 Definitions.
* * * * *
(f) * * *
(4) Predecessor and successors. The term predecessor means a
transferor or distributor of assets to a member (the successor) in a
transaction-
(i) To which section 381(a) applies; or
(ii) That occurs on or after January 1, 1997, in which the
successor's basis for the assets is determined, directly or
indirectly, in whole or in part, by reference to the basis of the
assets of the transferor or distributor, but in the case of a
transaction that occurs before June 25, 1999, only if the amount by
which basis differs from value, in the aggregate, is material.
For a transaction that occurs before June 25, 1999, only one member
may be considered a predecessor to or a successor of one other
member.
* * * * *
Par. 4. Section 1.1502-15 is added to read as follows:
�1.1502-15 SRLY limitation on built-in losses.
(a) SRLY limitation. Except as provided in paragraph (f) of this
section (relating to built-in losses of the common parent) and
paragraph (g) of this section (relating to an overlap with section
382), built-in losses are subject to the SRLY limitation under
��1.1502-21(c) and 1.1502-22(c) (including applicable subgroup
principles). Built-in losses are treated as deductions or losses in
the year recognized, except for the purpose of determining the
amount of, and the extent to which the built-in loss is limited by,
the SRLY limitation for the year in which it is recognized. Solely
for such purpose, a built-in loss is treated as a hypothetical net
operating loss carryover or net capital loss carryover arising in a
SRLY, instead of as a deduction or loss in the year recognized. To
the extent that a built-in loss is allowed as a deduction under this
section in the year it is recognized, it offsets any consolidated
taxable income for the year before any loss carryovers or carrybacks
are allowed as a deduction. To the extent not so allowed, it is
treated as a separate net operating loss or net capital loss
carryover or carryback arising in the year of recognition and, under
�1.1502-21(c) or 1.1502-22(c), the year of recognition is treated as
a SRLY.
(b) Built-in losses--(1) Defined. If a corporation has a net
unrealized built-in loss under section 382(h)(3) (as modified by
this section) on the day it becomes a member of the group (whether
or not the group is a consolidated group), its deductions and losses
are built-in losses under this section to the extent they are
treated as recognized built-in losses under section 382(h)(2)(B) (as
modified by this section). This paragraph (b) generally applies
separately with respect to each member, but see paragraph (c) of
this section for circumstances in which it is applied on a subgroup
basis.
(2) Operating rules. Solely for purposes of applying paragraph (b)
(1) of this section, the principles of �1.1502-94(c) apply with
appropriate adjustments, including the following:
(i) Stock acquisition. A corporation is treated as having an
ownership change under section 382(g) on the day the corporation
becomes a member of a group, and no other events (e.g., a subsequent
ownership change under section 382(g) while it is a member) are
treated as causing an ownership change.
(ii) Asset acquisition. In the case of an asset acquisition by a
group, the assets and liabilities acquired directly from the same
transferor (whether corporate or non-corporate, foreign or domestic)
pursuant to the same plan are treated as the assets and liabilities
of a corporation that becomes a member of the group (and has an
ownership change) on the date of the acquisition.
(iii) Recognized built-in gain or loss. A loss that is included in
the determination of net unrealized built-in gain or loss and that
is recognized but disallowed or deferred (e.g., under �1.1502-20 or
section 267) is not treated as a built-in loss unless and until the
loss would be allowed during the recognition period without regard
to the application of this section. Section 382(h)(1)(B)(ii) does
not apply to the extent it limits the amount of recognized built-in
loss that may be treated as a pre-change loss to the amount of the
net unrealized built-in loss.
(c) Built-in losses of subgroups--(1) In general. In the case of a
subgroup, the principles of paragraph (b) of this section apply to
the subgroup, and not separately to its members.
Thus, the net unrealized built-in loss and recognized built-in loss
for purposes of paragraph (b) of this section are based on the
aggregate amounts for each member of the subgroup.
(2) Members of subgroups. A subgroup is composed of those members
that have been continuously affiliated with each other for the 60
consecutive month period ending immediately before they become
members of the group in which the loss is recognized.
A member remains a member of the subgroup until it ceases to be
affiliated with the loss member. For this purpose, the principles of
�1.1502-21(c)(2)(iv) through (vi) apply with appropriate
adjustments.
(3) Coordination of 60 month affiliation requirement with the
overlap rule. If one or more corporations become members of a group
and are included in the determination of a net unrealized built-in
loss that is subject to the overlap rule described in paragraph (g)
(1) of this section, then for purposes of paragraph (c)(2) of this
section, such corporations that become members of the group are
treated as having been affiliated for 60 consecutive months with the
common parent of the group and are also treated as having been
affiliated with any other members who have been affiliated or are
treated as having been affiliated with the common parent at such
time. The corporations are treated as having been affiliated with
such other members for the same period of time that those members
have been affiliated or are treated as having been affiliated with
the common parent. If two or more corporations become members of the
group at the same time, but this paragraph (c)(3) does not apply to
every such corporation, then immediately after the corporations
become members of the group, and solely for purposes of paragraph
(c)(2) of this section, the corporations to which this paragraph (c)
(3) applies are treated as having not been previously affiliated
with the corporations to which this paragraph (c)(3) does not apply.
If the common parent has become the common parent of an existing
group within the previous five year period in a transaction
described in �1.1502-75(d)(2)(ii) or (3), the principles of
��1.1502-91(g)(6) and 1.1502-96(a)(2)(iii) shall apply.
(4) Built-in amounts. Solely for purposes of determining whether the
subgroup has a net unrealized built-in loss or whether it has a
recognized built-in loss, the principles of �1.1502-91(g) and (h)
apply with appropriate adjustments.
(d) Examples. For purposes of the examples in this section, unless
otherwise stated, all groups file consolidated returns, all
corporations have calendar taxable years, the facts set forth the
only corporate activity, value means fair market value and the
adjusted basis of each asset equals its value, all transactions are
with unrelated persons, and the application of any limitation or
threshold under section 382 is disregarded.
The principles of this section are illustrated by the following
examples:
Example 1. Determination of recognized built-in loss. (i) Individual
A owns all of the stock of P and T. T has two depreciable assets.
Asset 1 has an unrealized loss of $55 (basis $75, value $20), and
asset 2 has an unrealized gain of $20 (basis $30, value $50). P
acquires all the stock of T from Individual A during Year 1, and T
becomes a member of the P group. P's acquisition of T is not an
ownership change as defined by section 382(g). Paragraph (g) of this
section does not apply because there is not an overlap of the
application of the rules contained in paragraph (a) of this section
and section 382.
(ii) Under paragraph (b)(2)(i) of this section, and solely for
purposes of applying paragraph (b)(1) of this section, T is treated
as having an ownership change under section 382(g) on becoming a
member of the P group. Under paragraph (b)(1) of this section, none
of T's $55 of unrealized loss is treated as a built-in loss unless T
has a net unrealized built-in loss under section 382(h)(3) on
becoming a member of the P group.
(iii) Under section 382(h)(3)(A), T has a $35 net unrealized built-
in loss on becoming a member of the P group (($55) + $20=($35)).
Assume that this amount exceeds the threshold requirement in section
382(h)(3)(B). Under section 382(h)(2)(B), the entire amount of T's
$55 unrealized loss is treated as a built-in loss to the extent it
is recognized during the 5-year recognition period described in
section 382(h)(7). Under paragraph (b)(2)(iii) of this section, the
restriction under section 382(h)(1)(B)(ii), which limits the amount
of recognized built-in loss that is treated as pre-change loss to
the amount of the net unrealized built-in loss, is inapplicable for
this purpose. Consequently, the entire $55 of unrealized loss (not
just the $35 net unrealized loss) is treated under paragraph (b)(1)
of this section as a built-in loss to the extent it is recognized
within 5 years of T's becoming a member of the P group. Under
paragraph (a) of this section, a built-in loss is subject to the
SRLY limitation under �1.1502-21(c)(1).
(iv) Under paragraph (b)(2)(ii) of this section, the built-in loss
would similarly be subject to a SRLY limitation under �1.1502-21(c)
(1) if T transferred all of its assets and liabilities to a
subsidiary of the P group in a single transaction described in
section 351. To the extent the built-in loss is recognized within 5
years of T's transfer, all of the items contributed by the acquiring
subsidiary to consolidated taxable income (and not just the items
attributable to the assets and liabilities transferred by T) are
included for purposes of determining the SRLY limitation under
�1.1502-21(c)(1).
Example 2. Actual application of section 382 not relevant.
(i) Individual A owns all of the stock of P, and Individual B owns
all of the stock of T. T has two depreciable assets. Asset 1 has an
unrealized loss of $25 (basis $75, value $50), and asset 2 has an
unrealized gain of $20 (basis $30, value $50). P buys 55 percent of
the stock of T in January of Year 1, resulting in an ownership
change of T under section 382(g). During March of Year 2, P buys the
45 percent balance of the T stock, and T becomes a member of the P
group.
(ii) Although T has an ownership change for purposes of section 382
in Year 1 and not Year 2, T's joining the P group in Year 2 is
treated as an ownership change under section 382(g) solely for
purposes of this section. Consequently, for purposes of this
section, whether T has a net unrealized built-in loss under section
382(h)(3) is determined as if the day T joined the P group were a
change date.
Example 3. Determination of a recognized built-in loss of a
subgroup. (i) Individual A owns all of the stock of P, S, and M.
P and M are each common parents of a consolidated group. During Year
1, P acquires all of the stock of S from Individual A, and S becomes
a member of the P group. P's acquisition of S is not an ownership
change as defined by section 382(g). At the beginning of Year 7, M
acquires all of the stock of P from Individual A, and P and S become
members of the M group. M's acquisitions of P and S are also not
ownership changes as defined by section 382(g). At the time of M's
acquisition of the P stock, P has (disregarding the stock of S) a
$10 net unrealized built-in gain (two depreciable assets, asset 1
with a basis of $35 and a value of $55, and asset 2 with a basis of
$55 and a value of $45), and S has a $75 net unrealized built-in
loss (two depreciable assets, asset 3 with a basis of $95 and a
value of $10, and asset 4 with a basis of $10 and a value of $20).
(ii) Under paragraph (c) of this section, P and S compose a subgroup
on becoming members of the M group because P and S were continuously
affiliated for the 60 month period ending immediately before they
became members of the M group.
Consequently, paragraph (b) of this section does not apply to P and
S separately. Instead, their separately computed unrealized gains
and losses are aggregated for purposes of determining whether, and
the extent to which, any unrealized loss is treated as built-in loss
under this section and is subject to the SRLY limitation under
�1.1502-21(c).
(iii) Under paragraph (c) of this section, the P subgroup has a net
unrealized built-in loss on the day P and S become members of the M
group, determined by treating the day they become members as a
change date. The net unrealized built-in loss is the aggregate of
P's net unrealized built-in gain of $10 and S's net unrealized
built-in loss of $75, or an aggregate net unrealized built-in loss
of $65. (The stock of S owned by P is disregarded for purposes of
determining the net unrealized built-in loss. However, any loss
allowed on the sale of the stock within the recognition period is
taken into account in determining recognized loss.) Assume that the
$65 net unrealized built-in loss exceeds the threshold requirement
under section 382(h)(3)(B).
(iv) Under paragraphs (b)(1), (b)(2)(iii), and (c) of this section,
a loss recognized during the 5-year recognition period on an asset
of P or S held on the day that P and S became members of the M group
is a built-in loss except to the extent the group establishes that
such loss exceeds the amount by which the adjusted basis of such
asset on the day the member became a member exceeded the fair market
value of such asset on that same day. If P sells asset 2 for $45 in
Year 7 and recognizes a $10 loss, the entire $10 loss is treated as
a built-in loss under paragraphs (b)(2)(iii) and (c) of this
section. If S sells asset 3 for $10 in Year 7 and recognizes an $85
loss, the entire $85 loss is treated as a built-in loss under
paragraphs (b)(2)(iii) and (c) of this section (not just the $55
balance of the P subgroup's $65 net unrealized built-in loss).
(v) The determination of whether P and S constitute a SRLY subgroup
for purposes of loss carryovers and carrybacks, and the extent to
which built-in losses are not allowed under the SRLY limitation, is
made under �1.1502-21(c).
Example 4. Computation of SRLY limitation. (i) Individual A owns all
of the stock of P, the common parent of a consolidated group. During
Year 1, Individual A forms T by contributing $300 and T sustains a
$100 net operating loss. During Year 2, T's assets decline in value
to $100. At the beginning of Year 3, P acquires all the stock of T
from Individual A, and T becomes a member of the P group with a net
unrealized built-in loss of $100. P's acquisition of T is not an
ownership change as defined by section 382(g). Assume that $100
exceeds the threshold requirements of section 382(h)(3)(B). During
Year 3, T recognizes its unrealized built-in loss as a $100 ordinary
loss.
The members of the P group contribute the following net income to
the consolidated taxable income of the P group (disregarding T's
recognized built-in loss and any consolidated net operating loss
deduction under �1.1502-21) for Years 3 and 4:
Year 3 Year 4 Total
P group $100 $100 $200
(without T)
T $60 $40 $100
CTI $160 $140 $300
(ii) Under paragraph (b) of this section, T's $100 ordinary loss in
Year 3 (not taken into account in the consolidated taxable income
computations above) is a built-in loss. Under paragraph (a) of this
section, the built-in loss is treated as a net operating loss
carryover for purposes of determining the SRLY limitation under
�1.1502-21(c).
(iii) For Year 3, �1.1502-21(c) limits T's $100 built-in loss and
$100 net operating loss carryover from Year 1 to the aggregate of
the P group's consolidated taxable income through Year 3, determined
by reference to only T's items. For this purpose, consolidated
taxable income is determined without regard to any consolidated net
operating loss deductions under �1.1502-21(a).
(iv) The P group's consolidated taxable income through Year 3 is $60
when determined by reference to only T's items. Under �1.1502-21(c),
the SRLY limitation for Year 3 is therefore $60.
(v) Under paragraph (a) of this section, the $100 built-in loss is
treated as a current deduction for all purposes other than
determination of the SRLY limitation under �1.1502-21(c).
Consequently, a deduction for the built-in loss is allowed in Year 3
before T's loss carryover from Year 1 is allowed, but only to the
extent of the $60 SRLY limitation. None of T's Year 1 loss carryover
is allowed because the built-in loss ($100) exceeds the SRLY
limitation for Year 3.
(vi) The $40 balance of the built-in loss that is not allowed in
Year 3 because of the SRLY limitation is treated as a $40 net
operating loss arising in Year 3 that is carried to other years in
accordance with the rules of �1.1502-21(b). The $40 net operating
loss is treated under paragraph (a) of this section and
�1.1502-21(c)(1)(ii) as a loss carryover or carryback from Year 3
that arises in a SRLY, and is subject to the rules of �1.1502-21
(including �1.1502-21(c)) rather than this section. See also
�1.1502-21(c)(1)(iii) Example 4.
(vii) The facts are the same as in paragraphs (i) through (vi) of
this Example 4, except that T has an additional built-in loss when
it joins the P group which is recognized in Year 4. For purposes of
determining the SRLY limitation for these additional losses in Year
4 (or any subsequent year), the $60 of built-in loss allowed as a
deduction in Year 3 is treated under paragraph (a) of this section
as a deduction in Year 3 that reduces the P group's consolidated
taxable income when determined by reference to only T's items.
Example 5. Built-in loss exceeding consolidated taxable income in
the year recognized. (i) Individual A owns all of the stock of P and
T. During Year 1, P acquires all the stock of T from Individual A,
and T becomes a member of the P group. P's acquisition of T was not
an ownership change as defined by section 382(g). At the time of
acquisition, T has a noncapital asset with an unrealized loss of $45
(basis $100, value $55), which exceeds the threshold requirements of
section 382(h)(3)(B).
During Year 2, T sells its asset for $55 and recognizes the
unrealized built-in loss. The P group has $10 of consolidated
taxable income in Year 2, computed by disregarding T's recognition
of the $45 built-in loss and the consolidated net operating loss
deduction, while the consolidated taxable income would be $25 if
determined by reference to only T's items (other than the $45 loss).
(ii) T's $45 loss is recognized in Year 2 and, under paragraph (b)
of this section, constitutes a built-in loss. Under paragraph (a) of
this section and �1.1502-21(c)(1)(ii), the loss is treated as a net
operating loss carryover to Year 2 for purposes of applying the SRLY
limitation under �1.1502-21(c).
(iii) For Year 2, T's SRLY limitation is the aggregate of the P
group's consolidated taxable income through Year 2 determined by
reference to only T's items. For this purpose, consolidated taxable
income is determined by disregarding any built-in loss that is
treated as a net operating loss carryover, and any consolidated net
operating loss deductions under �1.1502-21(a). Consolidated taxable
income so determined is $25.
(iv) Under �1.1502-21(c), $25 of the $45 built-in loss could be
deducted in Year 2. Because the P group has only $10 of consolidated
taxable income (determined without regard to the $45), the $25 loss
creates a consolidated net operating loss of $15. This loss is
carried back or forward under the rules of �1.1502-21(b) and
absorbed under the rules of �1.1502-21(a). This loss is not treated
as arising in a SRLY (see �1.1502-21(c)(1)(ii)) and therefore is not
subject to the SRLY limitation under �1.1502-21(c) in any
consolidated return year of the group to which it is carried. The
remaining $20 is treated as a loss carryover arising in a SRLY and
is subject to the limitation of �1.1502-21(c) in the year to which
it is carried.
(e) Predecessors and successors. For purposes of this section, any
reference to a corporation or member includes, as the context may
require, a reference to a successor or predecessor, as defined in
�1.1502-1(f)(4).
(f) Built-in losses recognized by common parent of group-- (1)
General rule. Paragraph (a) of this section does not apply to any
loss recognized by the group on an asset held by the common parent
on the date the group is formed. Following an acquisition described
in �1.1502-75(d)(2) or (3), references to the common parent are to
the corporation that was the common parent immediately before the
acquisition.
(2) Anti-avoidance rule. If a corporation that becomes a common
parent of a group acquires assets with a net unrealized built-in
loss in excess of the threshold requirement of section 382(h)(3)(B)
(and thereby increases its net unrealized built-in loss or decreases
its net unrealized built-in gain) prior to, and in anticipation of,
the formation of the group, paragraph (f)(1) of this section does
not apply.
(g) Overlap with section 382--(1) General rule. The limitations
provided in ��1.1502-21(c) and 1.1502-22(c) do not apply to
recognized built-in losses or to loss carryovers or carrybacks
attributable to recognized built-in losses when the application of
paragraph (a) of this section results in an overlap with the
application of section 382.
(2) Definitions--(i) Generally. For purposes of this paragraph (g),
the definitions and nomenclature contained in section 382, the
regulations thereunder, and ��1.1502-90 through 1.1502-99 apply.
(ii) Overlap--(A) An overlap of the application of paragraph (a) of
this section and the application of section 382 with respect to
built-in losses occurs if a corporation becomes a member of a
consolidated group (the SRLY event) within six months of the change
date of an ownership change giving rise to a section 382(a)
limitation that would apply with respect to the corporation's
recognized built-in losses (the section 382 event).
Except as provided in paragraph (g)(3) of this section, application
of the overlap rule does not require that the size and composition
of the corporation's net unrealized built-in loss is the same on the
date of the section 382 event and the SRLY event.
(B) For special rules in the event that there is a SRLY subgroup
and/or a loss subgroup as defined in �1.1502-91(d)(2) with respect
to built-in losses, see paragraph (g)(4) of this section.
(3) Operating rules--(i) Section 382 event before SRLY event. If a
SRLY event occurs on the same date as a section 382 event or within
the six month period beginning on the date of the section 382 event,
paragraph (g)(1) of this section applies beginning with the tax year
that includes the SRLY event.
Paragraph (g)(1) of this section does not apply, however, if a
corporation that would otherwise be subject to the overlap rule
acquires assets from a person other than a member of the group with
a net unrealized built-in loss in excess of the threshold
requirement of section 382(h)(3)(B) (and thereby increases its net
unrealized built-in loss) after the section 382 event, and before
the SRLY event.
(ii) SRLY event before section 382 event. If a section 382 event
occurs within the period beginning the day after the SRLY event and
ending six months after the SRLY event, paragraph (g)(1) of this
section applies starting with the first tax year that begins after
the section 382 event. However, paragraph (g)(1) of this section
does not apply at any time if a corporation that otherwise would be
subject to paragraph (g)(1) of this section transfers assets with an
unrealized built-in loss to another member of the group after the
SRLY event, but before the section 382 event, unless the corporation
recognizes the built-in loss upon the transfer.
(4) Subgroup rules. In general, in the case of built-in losses for
which there is a SRLY subgroup and the corporations joining the
group at the time of the SRLY event also constitute a loss subgroup
(as defined in �1.1502-91(d)(2)), the principles of this paragraph
(g) apply to the SRLY subgroup, and not separately to its members.
However, paragraph (g)(1) of this section applies with respect to
built-in losses only if--
(i) all members of the SRLY subgroup with respect to those built-in
losses are also included in a loss subgroup; and
(ii) all members of a loss subgroup are also members of a SRLY
subgroup with respect to those built-in losses.
(5) Asset acquisitions. Notwithstanding the application of this
paragraph (g), paragraph (a) of this section applies to asset
acquisitions by the corporation that occurs after the latter of the
SRLY event and the section 382 event. See, paragraph (b)(2)(ii) of
this section.
(6) Examples. The principles of this paragraph (g) are illustrated
by the following examples:
Example 1. Determination of subgroup. (i) Individual A owns all of
the stock of P, P1, and S. In Year 1, P acquires all of the stock of
P1, and they file a consolidated return. In Year 3, P acquires all
of the stock of S, and S joins the P group.
Individual B, unrelated to Individual A, owns all of the stock of M
and K, each the common parent of a consolidated group.
Individual C, unrelated to either Individual A or Individual B, owns
all of the stock of T.
(ii) At the beginning of Year 7, M acquires all of the stock of P
from Individual A, and, as a result, P, P1, and S become members of
the M group. At the time of M's acquisition of the P stock, P has a
$15 net unrealized built-in loss (disregarding the stock of P1), P1
has a net unrealized built-in gain of $10, and S has a net
unrealized built-in gain of $5.
(iii) During Year 8, M acquires all of the stock of T, and T joins
the M group. At the time of M's acquisition of the T stock, T had an
unrealized built-in loss of $15. At the beginning of Year 9, K
acquires all of the stock of M from Individual B, and the members of
the M consolidated group including P, P1, S, and T become members of
the K group. At the time of K's acquisition of the M stock, M has
(disregarding the stock of P and T) a $15 net unrealized built-in
loss, P has a $20 net unrealized built-in loss (disregarding the
stock of P1), P1 has a net unrealized built-in gain of $5, S has a
net unrealized built-in loss of $35, and T has a $15 net unrealized
built-in loss.
(iv) M's acquisition of P in Year 7 results in P, P1, and S becoming
members of the M group (the SRLY event). Under paragraph (c) of this
section, P and P1 compose a SRLY built-in loss subgroup because they
have been affiliated for the 60 consecutive month period immediately
preceding joining the M group. S is not a member of the subgroup
because on becoming a member of the M group it had not been
continuously affiliated with P and P1 for the 60 month period ending
immediately before it became a member of the M group. Consequently,
�1.1502-15 applies to S separately from the P and P1 subgroup.
(v) Assuming that the $5 net unrealized built-in loss of the P/P1
subgroup exceeds the threshold requirement under section 382(h)(3)
(B), M's acquisition of P resulted in an ownership change of P and
P1 within the meaning of section 382(g) that subjects P and P1 to a
limitation under section 382(a) (the section 382 event). Because,
with respect to P and P1, the SRLY event and the change date of the
section 382 event occur on the same date and because the loss
subgroup and SRLY subgroup are coextensive, there is an overlap of
the application of the SRLY rules and the application of the section
382.
(vi) S was not a loss corporation because it did not have a net
operating loss carryover, or a net unrealized built-in loss, and
therefore, M's acquisition of P did not result in an ownership
change of S within the meaning of section 382(g). S, therefore is
not subject to the overlap rule of paragraph (g) of this section.
(vii) M's acquisition of T resulted in T becoming a member of the M
group (the SRLY event). Assuming that T's $15 net unrealized built-
in loss exceeds the threshold requirement under section 382(h)(3)
(B), M's acquisition of T also resulted in an ownership change of T
within the meaning of section 382(g) that subjects T to a limitation
under section 382(a) (the section 382 event). Because, with respect
to T, the SRLY event and the change date of the section 382 event
occur on the same date, there is an overlap of the application of
the SRLY rules and the application of section 382 within the meaning
of paragraph (g) of this section.
(viii) K's acquisition of M results in the members of the M
consolidated group, including T, P, P1, and S, becoming members of
the K group (the SRLY event). Because T, P, and P1 were each
included in the determination of a net unrealized built-in loss that
was subject to the overlap rule described in paragraph (g)(1) of
this section when they each became members of the M group, they are
deemed under paragraph (c)(3) of this section to have been
continuously affiliated with M for the 60 month period ending
immediately before becoming a member of the M group, notwithstanding
their actual affiliation history. As a result, M, T, P, and P1
compose a SRLY built-in loss subgroup under paragraph (c)(2) of this
section. K's acquisition of M is not subject to paragraph (g) of
this section because it does not result in a section 382 event.
(ix) S, however, is not a member of the subgroup under paragraph (c)
(2) of this section. Because S was not included in the determination
of a net unrealized built-in loss that was subject to the overlap
rule described in paragraph (g)(1) of this section when it joined
the M group, S is treated as becoming an affiliate of M on the date
it joined the M group. Furthermore, under paragraph (c)(3) of this
section, S is deemed to have begun its affiliation with P and P1 on
the date it joined the M group.
Consequently, �1.1502-15 applies to S separately to the extent its
built-in loss is recognized with the recognition period.
Example 2. Post-overlap acquisition of assets. (i) Individual A owns
all of the stock of P, the common parent of a consolidated group. B,
an individual unrelated to Individual A, owns all of the stock of T.
T has two depreciable assets. Asset 1 has an unrealized built-in
loss of $25 (basis $75, value $50), and asset 2 has an unrealized
built-in gain of $20 (basis $30, value $50).
During Year 3, P buys all of the stock of T from Individual B.
On January 1, Year 4, P contributes $80 cash and Individual A
contributes asset 3, a depreciable asset, with a net unrealized
built-in loss of $45 (basis $65, value $20), in exchange for T stock
in a transaction that is described in section 351.
(ii) P's acquisition of T results in T becoming a member of the P
group (the SRLY event) and also results in an ownership change of T,
within the meaning of section 382(g), that gives rise to a
limitation under section 382(a) (the section 382 event).
(iii) Because the SRLY event and the change date of the section 382
event occur on the same date, there is an overlap of the application
of the SRLY rules and the application of section 382. Consequently,
under paragraph (g) of this section, the limitation under paragraph
(a) of this section does not apply to T's net unrealized built-in
loss when it joined the P group.
(iv) Individual A's Year 4 contribution of a depreciable asset
occurred after T was a member of the P group. Assuming that the
amount of the net unrealized built-in loss exceeds the threshold
requirement of section 382(h)(3)(B), the sale of asset 3 within the
recognition period is subject to the SRLY limitation of paragraphs
(a) and (b)(2)(ii) of this section.
Example 3. Overlap rule. (i) Individual A owns all of the stock of
P, the common parent of a consolidated group. B, an individual
unrelated to Individual A, owns all of the stock of T.
T has two depreciable assets. Asset 1 has an unrealized loss of $55
(basis $75, value $20), and asset 2 has an unrealized gain of $30
(basis $30, value $60). On February 28 of Year 2, P purchases 55% of
T from Individual B. On June 30, of Year 2, P purchases an
additional 35% of T from Individual B.
(ii) The February 28 purchase of 55% of T is a section 382 event
because it results in an ownership change of T that gives rise to a
section 382(a) limitation. The June 30 purchase of 35% of T results
in T becoming a member of the P group and is therefore a SRLY event.
(iii) Because the SRLY event occurred within six months of the
change date of the section 382 event, there is an overlap of the
application of the SRLY rules and the application of section 382,
and paragraph (a) of this section does not apply.
Therefore, the SRLY limitation does not apply to any of the $55 loss
in asset 1 recognized by T after T joined the P group. See
�1.1502-94 for rules relating to the application of section 382 with
respect to T's $25 unrealized built-in loss.
Example 4. Overlap rule-Fluctuation in value. (i) The facts are the
same as in Example 3, except that by June 30, of Year 2, asset 1 had
declined in value by a further $10. Thus asset 1 had an unrealized
loss of $65 (basis $75, value $10), and asset 2 had an unrealized
gain of $30 (basis $30, value $60).
(ii) Because paragraph (a) of this section does not apply, the
further decrease in asset 1's value is disregarded.
Consequently, the results are the same as in Example 3.
(h) Effective date--(1) In general. This section generally applies
to built-in losses recognized in taxable years for which the due
date (without extensions) of the consolidated return is after June
25, 1999. However--
(i) In the event that paragraphs (f)(1) and (g)(1) of this section
do not apply to a particular built-in loss in the current group,
then solely for purposes of applying paragraph (a) of this section
to determine a limitation with respect to that built-in loss and
with respect to which the SRLY register (consolidated taxable income
determined by reference to only the member's (or subgroup's) items
of income, gain, deduction or loss) began in a taxable year for
which the due date of the return was on or before June 25, 1999),
paragraph (c)(3) of this section shall not apply; and
(ii) For purposes of paragraph (g) of this section, only an
ownership change to which section 382(a) as amended by the Tax
Reform Act of 1986 applies shall constitute a section 382 event.
(2) Prior periods. For certain taxable years ending on or before
June 25, 1999, see �1.1502-15T in effect prior to June 25, 1999, as
contained in 26 CFR part 1 revised April 1, 1999, as applicable.
�1.1502-15T [Removed]
Par. 5. Section 1.1502-15T is removed.
Par. 6. Section 1.1502-21 is added to read as follows:
�1.1502-21 Net operating losses.
(a) Consolidated net operating loss deduction. The consolidated net
operating loss deduction (or CNOL deduction) for any consolidated
return year is the aggregate of the net operating loss carryovers
and carrybacks to the year. The net operating loss carryovers and
carrybacks consist of--
(1) Any CNOLs (as defined in paragraph (e) of this section) of the
consolidated group; and
(2) Any net operating losses of the members arising in separate
return years.
(b) Net operating loss carryovers and carrybacks to consolidated
return and separate return years. Net operating losses of members
arising during a consolidated return year are taken into account in
determining the group's CNOL under paragraph (e) of this section for
that year. Losses taken into account in determining the CNOL may be
carried to other taxable years (whether consolidated or separate)
only under this paragraph (b).
(1) Carryovers and carrybacks generally. The net operating loss
carryovers and carrybacks to a taxable year are determined under the
principles of section 172 and this section. Thus, losses permitted
to be absorbed in a consolidated return year generally are absorbed
in the order of the taxable years in which they arose, and losses
carried from taxable years ending on the same date, and which are
available to offset consolidated taxable income for the year,
generally are absorbed on a pro rata basis.
Additional rules provided under the Internal Revenue Code or
regulations also apply. See, e.g., section 382(l)(2)(B) (if losses
are carried from the same taxable year, losses subject to limitation
under section 382 are absorbed before losses that are not subject to
limitation under section 382). See Example 2 of paragraph (c)(1)
(iii) of this section for an illustration of pro rata absorption of
losses subject to a SRLY limitation.
(2) Carryovers and carrybacks of CNOLs to separate return years--(i)
In general. If any CNOL that is attributable to a member may be
carried to a separate return year of the member, the amount of the
CNOL that is attributable to the member is apportioned to the member
(apportioned loss) and carried to the separate return year. If
carried back to a separate return year, the apportioned loss may not
be carried back to an equivalent, or earlier, consolidated return
year of the group; if carried over to a separate return year, the
apportioned loss may not be carried over to an equivalent, or later,
consolidated return year of the group. For rules permitting the
reattribution of losses of a subsidiary to the common parent when
loss is disallowed on the disposition of subsidiary stock, see
�1.1502-20(g).
(ii) Special rules--(A) Year of departure from group. If a
corporation ceases to be a member during a consolidated return year,
net operating loss carryovers attributable to the corporation are
first carried to the consolidated return year, and only the amount
so attributable that is not absorbed by the group in that year is
carried to the corporation's first separate return year. For rules
concerning a member departing a subgroup, see paragraph (c)(2)(vii)
of this section.
(B) Offspring rule. In the case of a member that has been a member
continuously since its organization (determined without regard to
whether the member is a successor to any other corporation), the
CNOL attributable to the member is included in the carrybacks to
consolidated return years before the member's existence. If the
group did not file a consolidated return for a carryback year, the
loss may be carried back to a separate return year of the common
parent under paragraph (b)(2)(i) of this section, but only if the
common parent was not a member of a different consolidated group or
of an affiliated group filing separate returns for the year to which
the loss is carried or any subsequent year in the carryback period.
Following an acquisition described in �1.1502-75(d)(2) or (3),
references to the common parent are to the corporation that was the
common parent immediately before the acquisition.
(iii) Equivalent years. Taxable years are equivalent if they bear
the same numerical relationship to the consolidated return year in
which a CNOL arises, counting forward or backward from the year of
the loss. For example, in the case of a member's third taxable year
(which was a separate return year) that preceded the consolidated
return year in which the loss arose, the equivalent year is the
third consolidated return year preceding the consolidated return
year in which the loss arose.
See paragraph (b)(3)(iii) of this section for certain short taxable
years that are disregarded in making this determination.
(iv) Amount of CNOL attributable to a member. The amount of a CNOL
that is attributable to a member is determined by a fraction the
numerator of which is the separate net operating loss of the member
for the year of the loss and the denominator of which is the sum of
the separate net operating losses for that year of all members
having such losses. For this purpose, the separate net operating
loss of a member is determined by computing the CNOL by reference to
only the member's items of income, gain, deduction, and loss,
including the member's losses and deductions actually absorbed by
the group in the taxable year (whether or not absorbed by the
member).
(v) Examples. For purposes of the examples in this section, unless
otherwise stated, all groups file consolidated returns, all
corporations have calendar taxable years, the facts set forth the
only corporate activity, value means fair market value and the
adjusted basis of each asset equals its value, all transactions are
with unrelated persons, and the application of any limitation or
threshold under section 382 is disregarded. The principles of this
paragraph (b)(2) are illustrated by the following examples:
Example 1. Offspring rule. (i) During Year 1, Individual A forms P
and T, and they each file a separate return. P forms S on March 15
of Year 2, and P and S file a consolidated return. P acquires all
the stock of T from Individual A at the beginning of Year 3, and T
becomes a member of the P group. P's acquisition of T is not an
ownership change within the meaning of section 382.
P, S, and T sustain a $1,100 CNOL in Year 3 and, under paragraph (b)
(2)(iv) of this section, the loss is attributable $200 to P, $300 to
S, and $600 to T.
(ii) Of the $1,100 CNOL in Year 3, the $500 amount of the CNOL that
is attributable to P and S ($200 + $300) may be carried to P's
separate return in Year 1. Even though S was not in existence in
Year 1, the $300 amount of the CNOL attributable to S may be carried
back to P's separate return in Year 1 because S (unlike T) has been
a member of the P group since its organization and P is a qualified
parent under paragraph (b)(2)(ii)(B) of this section. To the extent
not absorbed in that year, the loss may then be carried to the P
group's return in Year 2. The $600 amount of the CNOL attributable
to T is a net operating loss carryback to T's separate return in
Year 1, and if not absorbed in Year 1, then to Year 2.
Example 2. Departing members. (i) The facts are the same as in
Example 1. In addition, on June 15 of Year 4, P sells all the stock
of T. The P group's consolidated return for Year 4 includes the
income of T through June 15. T files a separate return for the
period from June 16 through December 31.
(ii) $600 of the Year 3 CNOL attributable to T is apportioned to T
and is carried back to its separate return in Year 1. To the extent
the $600 is not absorbed in T's separate return in Year 1 or Year 2,
it is carried to the consolidated return in Year 4 before being
carried to T's separate return in Year 4. Any portion of the loss
not absorbed in T's Year 1 or Year 2 or in the P group's Year 4 is
then carried to T's separate return in Year 4.
Example 3. Offspring rule following acquisition. (i) Individual A
owns all of the stock of P, the common parent of a consolidated
group. In Year 1, B, an individual unrelated to Individual A, forms
T. P acquires all of the stock of T at the beginning of Year 3, and
T becomes a member of the P group. The P group has $200 of
consolidated taxable income in Year 2, and $300 of consolidated
taxable income in Year 3 (computed without regard to the CNOL
deduction). At the beginning of Year 4, T forms a subsidiary, Y, in
a transaction described in section 351.
The P group has a $300 consolidated net operating loss in Year 4,
and under paragraph (b)(2)(iv) of this section, the loss is
attributable entirely to Y.
(ii) Even though Y was not in existence in Year 2, $300, the amount
of the consolidated net operating loss attributable to Y, may be
carried back to the P group's Year 2 consolidated return under
paragraph (b)(2)(ii)(B) of this section because Y has been a member
of the P group since its organization. To the extent not absorbed in
that year, the loss may then be carried to the P group's
consolidated return in Year 3.
(3) Special rules--(i) Election to relinquish carryback. A group may
make an irrevocable election under section 172(b)(3) to relinquish
the entire carryback period with respect to a CNOL for any
consolidated return year. Except as provided in paragraph (b)(3)(ii)
(B) of this section, the election may not be made.68 separately for
any member (whether or not it remains a member), and must be made in
a separate statement entitled "THIS IS AN ELECTION UNDER SECTION
1.1502-21(b)(3)(i) TO WAIVE THE ENTIRE CARRYBACK PERIOD PURSUANT TO
SECTION 172(b)(3) FOR THE [insert consolidated return year] CNOLs OF
THE CONSOLIDATED GROUP OF WHICH [insert name and employer
identification number of common parent] IS THE COMMON PARENT." The
statement must be signed by the common parent and filed with the
group's income tax return for the consolidated return year in which
the loss arises.
(ii) Special elections--(A) Groups that include insolvent financial
institutions. For rules applicable to relinquishing the entire
carryback period with respect to losses attributable to insolvent
financial institutions, see �301.6402-7 of this chapter.
(B) Acquisition of member from another consolidated group.
If one or more members of a consolidated group becomes a member of
another consolidated group, the acquiring group may make an
irrevocable election to relinquish, with respect to all consolidated
net operating losses attributable to the member, the portion of the
carryback period for which the corporation was a member of another
group, provided that any other corporation joining the acquiring
group that was affiliated with the member immediately before it
joined the acquiring group is also included in the waiver. This
election is not a yearly election and applies to all losses that
would otherwise be subject to a carryback to a former group under
section 172. The election must be made in a separate statement
entitled "THIS IS AN ELECTION UNDER SECTION 1.1502-21(b)(3)(ii)(B)
TO WAIVE THE PRE-[insert first taxable year for which the member (or
members) was not a member of another group] CARRYBACK PERIOD FOR THE
CNOLs attributable to [insert names and employer identification
number of members]." The statement must be filed with the acquiring
consolidated group's original income tax return for the year the
corporation (or corporations) became a member, and it must be signed
by the common parent and each of the members to which it applies.
(iii) Short years in connection with transactions to which section
381(a) applies. If a member distributes or transfers assets to a
corporation that is a member immediately after the distribution or
transfer in a transaction to which section 381(a) applies, the
transaction does not cause the distributor or transferor to have a
short year within the consolidated return year of the group in which
the transaction occurred that is counted as a separate year for
purposes of determining the years to which a net operating loss may
be carried.
(iv) Special status losses. [Reserved] (c) Limitations on net
operating loss carryovers and carrybacks from separate return
limitation years--(1) SRLY limitation--(i) General rule. Except as
provided in paragraph (g) of this section (relating to an overlap
with section 382), the aggregate of the net operating loss
carryovers and carrybacks of a member arising (or treated as
arising) in SRLYs that are included in the CNOL deductions for all
consolidated return years of the group under paragraph (a) of this
section may not exceed the aggregate consolidated taxable income for
all consolidated return years of the group determined by reference
to only the member's items of income, gain, deduction, and loss. For
this purpose--
(A) Consolidated taxable income is computed without regard to CNOL
deductions;
(B) Consolidated taxable income takes into account the member's
losses and deductions (including capital losses) actually absorbed
by the group in consolidated return years (whether or not absorbed
by the member);
(C) In computing consolidated taxable income, the consolidated
return years of the group include only those years, including the
year to which the loss is carried, that the member has been
continuously included in the group's consolidated return, but
exclude--
(1) For carryovers, any years ending after the year to which the
loss is carried; and
(2) For carrybacks, any years ending after the year in which the
loss arose; and
(D) The treatment under �1.1502-15 of a built-in loss as a
hypothetical net operating loss carryover in the year recognized is
solely for purposes of determining the limitation under this
paragraph (c) with respect to the loss in that year and not for any
other purpose. Thus, for purposes of determining consolidated
taxable income for any other losses, a built-in loss allowed under
this section in the year it arises is taken into account.
(ii) Losses treated as arising in SRLYs. If a net operating loss
carryover or carryback did not arise in a SRLY but is attributable
to a built-in loss (as defined under �1.1502-15), the carryover or
carryback is treated for purposes of this paragraph (c) as arising
in a SRLY if the built-in loss was not allowed, after application of
the SRLY limitation, in the year it arose. For an illustration, see
�1.1502-15(d), Example 5. But see �1.1502-15(g)(1).
(iii) Examples. The principles of this paragraph (c)(1) are
illustrated by the following examples:
Example 1. Determination of SRLY limitation. (i) Individual A owns
P. In Year 1, Individual A forms T, and T sustains a $100 net
operating loss that is carried forward. P acquires all the stock of
T at the beginning of Year 2, and T becomes a member of the P group.
The P group has $300 of consolidated taxable income in Year 2
(computed without regard to the CNOL deduction). Such consolidated
taxable income would be $70 if determined by reference to only T's
items.
(ii) T's $100 net operating loss carryover from Year 1 arose in a
SRLY. See �1.1502-1(f)(2)(iii). P's acquisition of T was not an
ownership change as defined by section 382(g). Thus, the $100 net
operating loss carryover is subject to the SRLY limitation in
paragraph (c)(1) of this section. The SRLY limitation for Year 2 is
consolidated taxable income determined by reference to only T's
items, or $70. Thus, $70 of the loss is included under paragraph (a)
of this section in the P group's CNOL deduction for Year 2.
(iii) The facts are the same as in paragraph (i) of this Example 1,
except that such consolidated taxable income (computed without
regard to the CNOL deduction and by reference to only T's items) for
Year 2 is a loss (a CNOL) of $370. Because the SRLY limitation may
not exceed the consolidated taxable income determined by reference
to only T's items, and such items aggregate to a CNOL, T's $ 100 net
operating loss carryover from Year 1 is not allowed under the SRLY
limitation in Year 2.
Moreover, if consolidated taxable income (computed without regard to
the CNOL deduction and by reference to only T's items) did not
exceed $370 in Year 3, the carryover would still be restricted under
paragraph (c) of this section in Year 3, because the aggregate
consolidated taxable income for all consolidated return years of the
group computed by reference to only T's items would not be a
positive amount.
Example 2. Net operating loss carryovers. (i) In Year 1, Individual
A forms P, and P sustains a $40 net operating loss that is carried
forward. P has no income in Year 2. Individual A also owns T which
sustains a net operating loss of $50 in Year 2 that is carried
forward. P acquires the stock of T from Individual A during Year 3,
but T is not a member of the P group for each day of the year. P and
T file separate returns and sustain net operating losses of $120 and
$60, respectively, for Year 3. The P group files consolidated
returns beginning in Year 4. During Year 4, the P group has $160 of
consolidated taxable income (computed without regard to the CNOL
deduction). Such consolidated taxable income would be $70 if
determined by reference to only T's items. These results are
summarized as follows:
Separate Separate Separate/ Consolidated
Affiliated
Year 1 Year 2 Year 3 Year 4
P $(40) $0 $(120) $90
T 0 (50) (60) 70
CTI 160
(ii) P's Year 1, Year 2, and Year 3 are not SRLYs with respect to
the P group. See �1.1502-1(f)(2)(i). Thus, P's $ 40 net operating
loss arising in Year 1 and $120 net operating loss arising in Year 3
are not subject to the SRLY limitation under paragraph (c) of this
section. Under the principles of section 172, paragraph (b) of this
section requires that the loss arising in Year 1 be the first loss
absorbed by the P group in Year 4.
Absorption of this loss leaves $120 of the group's consolidated
taxable income available for offset by other loss carryovers.
(iii) T's Year 2 and Year 3 are SRLYs with respect to the P group.
See �1.1502-1(f)(2)(ii). P's acquisition of T was not an ownership
change as defined by section 382(g). Thus, T's $50 net operating
loss arising in Year 2 and $60 net operating loss arising in Year 3
are subject to the SRLY limitation. Under paragraph (c)(1) of this
section, the SRLY limitation for Year 4 is $70, and under paragraph
(b) of this section, T's $50 loss from Year 2 must be included under
paragraph (a) of this section in the P group's CNOL deduction for
Year 4. The absorption of this loss leaves $70 of the group's
consolidated taxable income available for offset by other loss
carryovers.
(iv) P and T each carry over net operating losses to Year 4 from a
taxable year ending on the same date (Year 3). The losses carried
over from Year 3 total $180. Under paragraph (b) of this section,
the losses carried over from Year 3 are absorbed on a pro rata
basis, even though one arises in a SRLY and the other does not.
However, the group cannot absorb more than $20 of T's $60 net
operating loss arising in Year 3 because its $70 SRLY limitation for
Year 4 is reduced by T's $50 Year 2 SRLY loss already included in
the CNOL deduction for Year 4. Thus, the absorption of Year 3 losses
is as follows:
Amount of P's Year 3 losses absorbed = $120/($120 + $20) x $70 =
$60.
Amount of T's Year 3 losses absorbed = $20/($120 + $20) x $70 = $10.
(v) The absorption of $10 of T's Year 3 loss further reduces T's
SRLY limitation to $10 ($70 of initial SRLY limitation, reduced by
the $60 net operating loss already included in the CNOL deductions
for Year 4 under paragraph (a) of this section).
(vi) P carries its remaining $60 Year 3 net operating loss and T
carries its remaining $50 Year 3 net operating loss over to Year 5.
Assume that, in Year 5, the P group has $90 of consolidated taxable
income (computed without regard to the CNOL deduction). The group's
CTI determined by reference to only T's items is a CNOL of $4. For
Year 5, the CNOL deduction is $66, which includes $60 of P's Year 3
loss and $6 of T's Year 3 loss (the aggregate consolidated taxable
income for Years 4 and 5 determined by reference to T's items, or
$66, reduced by T's SRLY losses actually absorbed by the group in
Year 4, or $60).
Example 3. Net operating loss carrybacks. (i) P owns all of the
stock of S and T. The members of the P group contribute the
following to the consolidated taxable income of the P group for
Years 1, 2, and 3:
Year 1 Year 2 Year 3 Total
P $100 $60 $80 $240
S 20 20 30 70
T 30 10 (50) (10)
CTI 150 90 60 300
(ii) P sells all of the stock of T to Individual A at the beginning
of Year 4. For its Year 4 separate return year, T has a net
operating loss of $30.
(iii) T's Year 4 is a SRLY with respect to the P group. See
�1.1502-1(f)(1). T's $30 net operating loss carryback to the P group
from Year 4 is not allowed under paragraph (c) of this section to be
included in the CNOL deduction under paragraph (a) of this section
for Year 1, 2, or 3, because the P group's consolidated taxable
income would not be a positive amount if determined by reference to
only T's items for all consolidated return years through Year 4
(without regard to the $30 net operating loss). The $30 loss is
carried forward to T's Year 5 and succeeding taxable years as
provided under the Internal Revenue Code.
Example 4. Computation of SRLY limitation for built-in losses
treated as net operating loss carryovers. (i) Individual A owns P.
In Year 1, Individual A forms T by contributing $300 and T sustains
a $100 net operating loss. During Year 2, T's assets decline in
value by $100. At the beginning of Year 3, P acquires all the stock
of T from Individual A, and T becomes a member of the P group in a
transaction that does not result in an ownership change under
section 382(g). At the time of the acquisition, T has a $100 net
unrealized built-in loss, which exceeds the threshold requirements
of section 382(h)(3)(B). During Year 3, T recognizes its unrealized
loss as a $100 ordinary loss. The members of the P group contribute
the following to the consolidated taxable income of the P group for
Years 3 and 4 (computed without regard to T's recognition of its
unrealized loss and any CNOL deduction under this section):
Year 3 Year 4 Total
P group $100 $100 $200
(without T)
T 60 40 100
CTI 160 140 300
(ii) Under �1.1502-15(a), T's $100 of ordinary loss in Year 3
constitutes a built-in loss that is subject to the SRLY limitation
under paragraph (c) of this section. The amount of the limitation is
determined by treating the deduction as a net operating loss
carryover from a SRLY. The built-in loss is therefore subject to a
$60 SRLY limitation for Year 3. The built-in loss is treated as a
net operating loss carryover solely for purposes of determining the
extent to which the loss is not allowed by reason of the SRLY
limitation, and for all other purposes the loss remains a loss
arising in Year 3. Consequently, under paragraph (b) of this
section, the $60 allowed under the SRLY limitation is absorbed by
the P group before T's $100 net operating loss carryover from Year 1
is allowed.
(iii) Under �1.1502-15(a), the $40 balance of the built-in loss that
is not allowed in Year 3 because of the SRLY limitation is treated
as a $40 net operating loss arising in Year 3 that is subject to the
SRLY limitation because, under paragraph (c)(1)(ii) of this section,
Year 3 is treated as a SRLY, and is carried to other years in
accordance with the rules of paragraph (b) of this section. The SRLY
limitation for Year 4 is the P group's consolidated taxable income
for Year 3 and Year 4 determined by reference to only T's items and
without regard to the group's CNOL deductions ($60 + $40), reduced
by T's loss actually absorbed by the group in Year 3 ($60). The SRLY
limitation for Year 4 is $40.
(iv) Under paragraph (c) of this section and the principles of
section 172(b), $40 of T's $100 net operating loss carryover from
Year 1 is included in the CNOL deduction under paragraph (a) of this
section in Year 4.
Example 5. Dual SRLY registers and accounting for SRLY losses
actually absorbed. (i) In Year 1, T sustains a $ 100 net operating
loss and a $50 net capital loss. At the beginning of Year 2, T
becomes a member of the P group in a transaction that does not
result in an ownership change under section 382(g). Both of T's
carryovers from Year 1 are subject to SRLY limits under this
paragraph (c) and �1.1502-22(c). The members of the P group
contribute the following to the consolidated taxable income for
Years 2 and 3 (computed without regard to T's CNOL deduction under
this section or net capital loss carryover under �1.1502-22):
P T
Year 1 (SRLY)
Ordinary (100)
Capital (50)
Year 2
Ordinary 30 60
Capital 0 (20)
Year 3
Ordinary 10 40
Capital 0 30
(ii) For Year 2, the group computes separate SRLY limits for each of
T's SRLY carryovers from Year 1. The group determines its ability to
use its capital loss carryover before it determines its ability to
use its ordinary loss carryover. Under section 1212, because the
group has no Year 2 capital gain, it cannot absorb any capital
losses in Year 2. T's Year 1 net capital loss and the group's Year 2
consolidated net capital loss (all of which is attributable to T)
are carried over to Year 3.
(iii) Under this section, the aggregate amount of T's $100 net
operating loss carryover from Year 1 that may be included in the
CNOL deduction of the group for Year 2 may not exceed $60 -- the
amount of the consolidated taxable income computed by reference only
to T's items, including losses and deductions to the extent actually
absorbed (i.e., $60 of T's ordinary income for Year 2). Thus, the
group may include $60 of T's ordinary loss carryover from Year 1 in
its Year 2 CNOL deduction. T carries over its remaining $40 of its
Year 1 loss to Year 3.
(iv) For Year 3, the group again computes separate SRLY limits for
each of T's SRLY carryovers from Year 1. The group has consolidated
net capital gain (without taking into account a net capital loss
carryover deduction) of $30. Under �1.1502-22(c), the aggregate
amount of T's $50 capital loss carryover from Year 1 that may be
included in computing the group's consolidated net capital gain for
all years of the group (here Years 2 and 3) may not exceed $30 (the
aggregate consolidated net capital gain computed by reference only
to T's items, including losses and deductions actually absorbed
(i.e., $30 of capital gain in Year 3)). Thus, the group may include
$30 of T's Year 1 capital loss carryover in its computation of
consolidated net capital gain for Year 3, which offsets the group's
capital gains for Year 3. T carries over its remaining $20 of its
Year 1 loss to Year 4. The group carries over the Year 2
consolidated net capital loss to Year 4.
(v) Under this section, the aggregate amount of T's net operating
loss carryover from Year 1 that may be included in the CNOL
deduction of the group for Years 2 and 3 may not exceed $100, which
is the amount of the aggregate consolidated taxable income for Years
2 and 3 determined by reference only to T's items, including losses
and deductions actually absorbed (i.e., $60 of ordinary income in
Year 2 plus $40 of ordinary income, $30 of capital gain, and $30 of
SRLY capital losses actually absorbed in Year 3). The group included
$60 of T's ordinary loss carryover in its Year 2 CNOL deduction. It
may include the remaining $40 of the carryover in its Year 3 CNOL
deduction.
(2) SRLY subgroup limitation. In the case of a net operating loss
carryover or carryback for which there is a SRLY subgroup, the
principles of paragraph (c)(1) of this section apply to the SRLY
subgroup, and not separately to its members. Thus, the contribution
to consolidated taxable income and the net operating loss carryovers
and carrybacks arising (or treated as arising) in SRLYs that are
included in the CNOL deductions for all consolidated return years of
the group under paragraph (a) of this section are based on the
aggregate amounts of income, gain, deduction, and loss of the
members of the SRLY subgroup for the relevant consolidated return
years (as provided in paragraph (c)(1)(i)(C) of this section). For
an illustration of aggregate amounts during the relevant
consolidated return years following the year in which a member of a
SRLY subgroup ceases to be a member of the group, see paragraph (c)
(2)(viii) Example 4 of this section. A SRLY subgroup may exist only
for a carryover or carryback arising in a year that is not a SRLY
(and is not treated as a SRLY under paragraph (c)(1)(ii) of this
section) with respect to another group (the former group), or for a
carryover that was subject to the overlap rule described in
paragraph (g) of this section or �1.1502-15(g) with respect to
another group (the former group). A separate SRLY subgroup is
determined for each such carryover or carryback. A consolidated
group may include more than one SRLY subgroup and a member may be a
member of more than one SRLY subgroup. Solely for purposes of
determining the members of a SRLY subgroup with respect to a loss:
(i) Carryovers. In the case of a carryover, the SRLY subgroup is
composed of the member carrying over the loss (the loss member) and
each other member that was a member of the former group that becomes
a member of the group at the same time as the loss member. A member
remains a member of the SRLY subgroup until it ceases to be
affiliated with the loss member.
The aggregate determination described in paragraph (c)(1) of this
section and this paragraph (c)(2) includes the amounts of income,
gain, deduction, and loss of each member of the SRLY subgroup for
the consolidated return years during which it remains a member of
the SRLY subgroup. For an illustration of the aggregate
determination of a SRLY subgroup, see paragraph (c)(2)(viii) Example
2 of this section.
(ii) Carrybacks. In the case of a carryback, the SRLY subgroup is
composed of the member carrying back the loss (the loss member) and
each other member of the group from which the loss is carried back
that has been continuously affiliated with the loss member from the
year to which the loss is carried through the year in which the loss
arises.
(iii) Built-in losses. In the case of a built-in loss, the SRLY
subgroup is composed of the member recognizing the loss (the loss
member) and each other member that was part of the subgroup with
respect to the loss determined under �1.1502-15(c)(2) immediately
before the members became members of the group. The principles of
paragraphs (c)(2)(i) and (ii) of this section apply to determine the
SRLY subgroup for the built-in loss that is, under paragraph (c)(1)
(ii) of this section, treated as arising in a SRLY with respect to
the group in which the loss is recognized.
For this purpose and as the context requires, a reference in
paragraphs (c)(2)(i) and (ii) of this section to a group or former
group is a reference to the subgroup determined under �1.1502-15(c)
(2).
(iv) Principal purpose of avoiding or increasing a SRLY limitation.
The members composing a SRLY subgroup are not treated as a SRLY
subgroup if any of them is formed, acquired, or availed of with a
principal purpose of avoiding the application of, or increasing any
limitation under, this paragraph (c). Any member excluded from a
SRLY subgroup, if excluded with a principal purpose of so avoiding
or increasing any SRLY limitation, is treated as included in the
SRLY subgroup.
(v) Coordination with other limitations. This paragraph (c)(2) does
not allow a net operating loss to offset income to the extent
inconsistent with other limitations or restrictions on the use of
losses, such as a limitation based on the nature or activities of
members. For example, any dual consolidated loss may not reduce the
taxable income to an extent greater than that allowed under section
1503(d) and �1.1503-2. See also �1.1502-47(q) (relating to
preemption of rules for life-nonlife groups).
(vi) Anti-duplication. If the same item of income or deduction could
be taken into account more than once in determining a limitation
under this paragraph (c), or in a manner inconsistent with any other
provision of the Internal Revenue Code or regulations incorporating
this paragraph (c), the item of income or deduction is taken into
account only once and in such manner that losses are absorbed in
accordance with the ordering rules in paragraph (b) of this section
and the underlying purposes of this section.
(vii) Corporations that leave a SRLY subgroup. If a loss member
ceases to be affiliated with a SRLY subgroup, the amount of the
member's remaining SRLY loss from a specific year is determined by
multiplying the aggregate of the unabsorbed net operating loss
carryovers of the SRLY subgroup from that year by a fraction, the
numerator of which is the net operating loss carryover for that year
that the member leaving the subgroup had when it became a member of
the group, and the denominator of which is the aggregate of the net
operating loss carryovers of the members of the SRLY subgroup for
that year when they joined the group. The unabsorbed net operating
loss carryovers of the SRLY subgroup are those carryovers that have
not been absorbed by the group as of the end of the taxable year in
which the loss member leaves the group.
(viii) Examples. The principles of this paragraph (c)(2) are
illustrated by the following examples:
Example 1. Members of SRLY subgroups. (i) Individual A owns all of
the stock of P, S, T and M. P and M are each common parents of a
consolidated group. During Year 1, P sustains a $50 net operating
loss. At the beginning of Year 2, P acquires all the stock of S at a
time when the aggregate basis of S's assets exceeds their aggregate
value by $70 and S becomes a member of the P group. At the beginning
of Year 3, P acquires all the stock of T, T has a $60 net operating
loss carryover at the time of the acquisition, and T becomes a
member of the P group. During Year 4, S forms S1 and T forms T1,
each by contributing assets with built-in gains which are, in the
aggregate, material. S1 and T1 become members of the P group. During
Year 7, M acquires all of the stock of P, and the members of the P
group become members of the M group for the balance of Year 7. The
$50 and $60 loss carryovers of P and T are carried to Year 7 of the
M group, and the value and basis of S's assets did not change after
it became a member of the former P group. None of the transactions
described above resulted in an ownership change under section
382(g).
(ii) Under paragraph (c)(2) of this section, a separate SRLY
subgroup is determined for each loss carryover and built-in loss.
In the P group, P's $50 loss carryover is not treated as arising in
a SRLY. See �1.1502-1(f). Consequently, the carryover is not subject
to limitation under paragraph (c) of this section in the P group.
(iii) In the M group, P's $50 loss carryover is treated as arising
in a SRLY and is subject to the limitation under paragraph (c) of
this section. A SRLY subgroup with respect to that loss is composed
of members which were members of the P group, the group as to which
the loss was not a SRLY. The SRLY subgroup is composed of P, the
member carrying over the loss, and each other member of the P group
that became a member of the M group at the same time as P. A member
of the SRLY subgroup remains a member until it ceases to be
affiliated with P. For Year 7, the SRLY subgroup is composed of P,
S, T, S1, and T1.
(iv) In the P group, S's $70 unrealized loss, if recognized within
the 5-year recognition period after S becomes a member of the P
group, is subject to limitation under paragraph (c) of this section.
See �1.1502-15 and paragraph (c)(1)(ii) of this section.
Because S was not continuously affiliated with P, T, or T1 for 60
consecutive months prior to joining the P group, these corporations
cannot be included in a SRLY subgroup with respect to S's unrealized
loss in the P group. See paragraph (c)(2)(iii) of this section. As a
successor to S, S1 is included in a subgroup with S in the P group,
and because 100 percent of S1's stock is owned directly by
corporations that were members of the SRLY subgroup when the members
of the SRLY subgroup became members of the P group, its net positive
income is not excluded from the consolidated taxable income of the P
group that may be offset by the built-in loss. See paragraph (f) of
this section.
(v) In the M group, S's $70 unrealized loss, if recognized within
the 5-year recognition period after S becomes a member of the M
group, is subject to limitation under paragraph (c) of this section.
Prior to becoming a member of the M group, S had been continuously
affiliated with P (but not T or T1) for 60 consecutive months and S1
is a successor that has remained continuously affiliated with S.
Those members had a net unrealized built-in loss immediately before
they became members of the group under �1.1502-15(c). Consequently,
in Year 7, S, S1, and P compose a subgroup in the M group with
respect to S's unrealized loss. Because S1 was a member of the SRLY
subgroup when it became a member of the M group and also because 100
percent of S1's stock is owned directly by corporations that were
members of the SRLY subgroup when the members of the SRLY subgroup
became members of the M group its net positive income is not
excluded from the consolidated taxable income of the M group that
may be offset by the recognized built-in loss. See paragraph (f) of
this section.
(vi) In the P group, T's $60 loss carryover arose in a SRLY and is
subject to limitation under paragraph (c) of this section.
P, S, and S1 were not members of the group in which T's loss arose
and T's loss carryover was not subject to the overlap rule described
in paragraph (g) of this section with respect to the P group (the
former group). Thus, P, S, and S1 are not members of a SRLY subgroup
with respect to the T carryover in the P group.
See paragraph (c)(2)(i) of this section. As a successor to T, T1 is
included in a SRLY subgroup with T in the P group; and, because 100
percent of T1's stock is owned directly by corporations that were
members of the SRLY subgroup when the members of the SRLY subgroup
became members of the P group, its net positive income is not
excluded from the consolidated taxable income of the P group that
may be offset by the carryover. See paragraph (f) of this section.
(vii) In the M group, T's $60 loss carryover arose in a SRLY and is
subject to limitation under paragraph (c) of this section.
T and T1 remain the only members of a SRLY subgroup with respect to
the carryover. Because T1 was a member of the SRLY subgroup when it
became a member of the M group and also because 100 percent of T1's
stock is owned directly by corporations that were members of the
SRLY subgroup when the members of the SRLY subgroup became members
of the M group, its net positive income is not excluded from the
consolidated taxable income of the M group that may be offset by the
carryover. See paragraph (f) of this section.
Example 2. Computation of SRLY subgroup limitation. (i) Individual A
owns all of the stock of S, T, P and M. P and M are each common
parents of a consolidated group. In Year 2, P acquires all the stock
of S and T from Individual A, and S and T become members of the P
group. For Year 3, the P group has a $45 CNOL, which is attributable
to P, and which P carries forward. M is the common parent of another
group. At the beginning of Year 4, M acquires all of the stock of P
and the former members of the P group become members of the M group.
None of the transactions described above resulted in an ownership
change under section 382(g).
(ii) P's year to which the loss is attributable, Year 3, is a SRLY
with respect to the M group. See �1.1502-1(f)(1). However, P, S, and
T compose a SRLY subgroup with respect to the Year 3 loss under
paragraph (c)(2)(i) of this section because Year 3 is not a SRLY
(and is not treated as a SRLY) with respect to the P group. P's loss
is carried over to the M group's Year 4 and is therefore subject to
the SRLY subgroup limitation in paragraph (c)(2) of this section.
(iii) In Year 4, the M group has $10 of consolidated taxable income
(computed without regard to the CNOL deduction for Year 4). Such
consolidated taxable income would be $45 if determined by reference
to only the items of P, S, and T, the members included in the SRLY
subgroup with respect to P's loss carryover.
Therefore, the SRLY subgroup limitation under paragraph (c)(2) of
this section for P's net operating loss carryover from Year 3 is
$45. Because the M group has only $10 of consolidated taxable income
in Year 4, however, only $10 of P's net operating loss carryover is
included in the CNOL deduction under paragraph (a) of this section
in Year 4.
(iv) In Year 5, the M group has $100 of consolidated taxable income
(computed without regard to the CNOL deduction for Year 5). Neither
P, S, nor T has any items of income, gain, deduction, or loss in
Year 5. Although the members of the SRLY subgroup do not contribute
to the $100 of consolidated taxable income in Year 5, the SRLY
subgroup limitation for Year 5 is $35 (the sum of SRLY subgroup
consolidated taxable income of $45 in Year 4 and $0 in Year 5, less
the $10 net operating loss carryover actually absorbed by the M
group in Year 4). Therefore, $35 of P's net operating loss carryover
is included in the CNOL deduction under paragraph (a) of this
section in Year 5.
Example 3. Inclusion in more than one SRLY subgroup. (i) Individual
A owns all of the stock of S, T, P and M. S, P and M are each common
parents of a consolidated group. At the beginning of Year 1, S
acquires all the stock of T from Individual A, and T becomes a
member of the S group. For Year 1, the S group has a CNOL of $10,
all of which is attributable to S and is carried over to Year 2. At
the beginning of Year 2, P acquires all the stock of S, and S and T
become members of the P group. For Year 2, the P group has a CNOL of
$35, all of which is attributable to P and is carried over to Year
3. At the beginning of Year 3, M acquires all of the stock of P and
the former members of the P group become members of the M group.
None of the transactions described above resulted in an ownership
change under section 382(g).
(ii) P's and S's net operating losses arising in SRLYs with respect
to the M group are subject to limitation under paragraph (c) of this
section. P, S, and T compose a SRLY subgroup for purposes of
determining the limitation for P's $35 net operating loss carryover
arising in Year 2 because, under paragraph (c)(2)(i) of this
section, Year 2 is not a SRLY with respect to the P group.
Similarly, S and T compose a SRLY subgroup for purposes of
determining the limitation for S's $10 net operating loss carryover
arising in Year 1 because Year 1 is not a SRLY with respect to the S
group.
(iii) S and T are members of both the SRLY subgroup with respect to
P's losses and the SRLY subgroup with respect to S's losses. Under
paragraph (c)(2) of this section, S's and T's items cannot be
included in the determination of the SRLY subgroup limitation for
both SRLY subgroups for the same consolidated return year; paragraph
(c)(2)(vi) of this section requires the M group to consider the
items of S and T only once so that the losses are absorbed in the
order of the taxable years in which they were sustained. Because S's
loss was incurred in Year 1, while P's loss was incurred in Year 2,
the items will be added in the determination of the consolidated
taxable income of the S and T SRLY subgroup to enable S's loss to be
absorbed first. The taxable income of the P, S, and T SRLY subgroup
is then computed by including the consolidated taxable income for
the S and T SRLY subgroup less the amount of any net operating loss
carryover of S that is absorbed after applying this section to the S
subgroup for the year.
Example 4. Corporation ceases to be affiliated with a SRLY subgroup.
(i) Individual A owns all of the stock of P and M. P and S are
members of the P group and the P group has a CNOL of $30 in Year 1,
all of which is attributable to P and carried over to Year 2. At the
beginning of Year 2, M acquires all of the stock of P, and P and S
become members of the M group. P and S compose a SRLY subgroup with
respect to P's net operating loss carryover. For Year 2,
consolidated taxable income of the M group determined by reference
to only the items of P (and without regard to the CNOL deduction for
Year 2) is $40. However, such consolidated taxable income of the M
group determined by reference to the items of both P and S is a loss
of $20. Thus, the SRLY subgroup limitation under paragraph (c)(2) of
this section prevents the M group from including any of P's net
operating loss carryover in the CNOL deduction under paragraph (a)
of this section in Year 2, and P carries the Year 1 loss to Year 3.
(ii) At the end of Year 2, P sells all of the S stock and S ceases
to be a member of the M group and the P subgroup. For Year 3,
consolidated taxable income of the M group is $50 (determined
without regard to the CNOL deduction for Year 3), and such
consolidated taxable income would be $10 if determined by reference
to only items of P. However, the limitation under paragraph (c) of
this section for Year 3 for P's net operating loss carryover still
prevents the M group from including any of P's loss in the CNOL
deduction under paragraph (a) of this section. The limitation
results from the inclusion of S's items for Year 2 in the
determination of the SRLY subgroup limitation for Year 3 even though
S ceased to be a member of the M group (and the P subgroup) at the
end of Year 2. Thus, the M group's consolidated taxable income
determined by reference to only the SRLY subgroup members' items for
all consolidated return years of the group through Year 3
(determined without regard to the CNOL deduction) is not a positive
amount.
(ix) Application to other than loss carryovers. Paragraph (g) of
this section and the phrase A or for a carryover that was subject to
the overlap rule described in paragraph (g) of this section or
�1.1502-15(g) with respect to another group (the former group) @ in
paragraph (c)(2) of this section apply only to net operating loss
carryovers and net capital loss carryovers, and not with respect to
other tax attributes, such as credits.
Accordingly, as the context may require, if another regulation
references this section and such other regulation does not concern
net operating loss carryovers or net capital loss carryovers, then
such reference does not include a reference to such paragraph or
phrase.
(d) Coordination with consolidated return change of ownership
limitation and transactions subject to old section 382 --(1)
Consolidated return changes of ownership. If a consolidated return
change of ownership occurred before January 1, 1997, the principles
of �1.1502-21A(d) apply to determine the amount of the aggregate of
the net operating losses attributable to old members of the group
that may be included in the consolidated net operating loss
deduction under paragraph (a) of this section. For this purpose,
�1.1502-1(g) is applied by treating that date as the end of the year
of change.
(2) Old section 382. The principles of �1.1502-21A(e) apply to
disallow or reduce the amount of a net operating loss carryover of a
member as a result of a transaction subject to old section 382.
(e) Consolidated net operating loss. Any excess of deductions over
gross income, as determined under �1.1502-11(a) (without regard to
any consolidated net operating loss deduction), is also referred to
as the consolidated net operating loss (or CNOL).
(f) Predecessors and successors--(1) In general. For purposes of
this section, any reference to a corporation, member, common parent,
or subsidiary, includes, as the context may require, a reference to
a successor or predecessor, as defined in �1.1502-1(f)(4).
(2) Limitation on SRLY subgroups--(i) General rule. Except as
provided in paragraph (f)(2)(ii) of this section, if a successor's
items of income and gain exceed the successor's items of deduction
and loss (net positive income), then the net positive income
attributable to the successor is excluded from the computation of
the consolidated taxable income of a SRLY subgroup.
(ii) Exceptions. A successor's net positive income is not excluded
from the consolidated taxable income of a SRLY subgroup if--
(A) The successor acquires substantially all the assets and
liabilities of its predecessor and the predecessor ceases to exist;
(B) The successor was a member of the SRLY subgroup when the SRLY
subgroup members became members of the group;
(C) 100 percent of the stock of the successor is owned directly by
corporations that were members of the SRLY subgroup when the SRLY
subgroup members became members of the group; or
(D) The Commissioner so determines.
(g) Overlap with section 382--(1) General rule. The limitation
provided in paragraph (c) of this section does not apply to net
operating loss carryovers (other than a hypothetical carryover
described in paragraph (c)(1)(i)(D) of this section and a carryover
described in paragraph (c)(1)(ii) of this section) when the
application of paragraph (c) of this section results in an overlap
with the application of section 382. For a similar rule applying in
the case of net operating loss carryovers described in paragraphs
(c)(1)(i)(D) and (c)(1)(ii) of this section, see �1.1502-15(g).
(2) Definitions--(i) Generally. For purposes of this paragraph (g),
the definitions and nomenclature contained in section 382, the
regulations thereunder, and ��1.1502-90 through 1.1502-99 apply.
(ii) Overlap--(A) An overlap of the application of paragraph (c) of
this section and the application of section 382 with respect to a
net operating loss carryover occurs if a corporation becomes a
member of a consolidated group (the SRLY event) within six months of
the change date of an ownership change giving rise to a section
382(a) limitation with respect to that carryover (the section 382
event).
(B) If an overlap described in paragraph (g)(2)(ii)(A) of this
section occurs with respect to net operating loss carryovers of a
corporation whose SRLY event occurs within the six month period
beginning on the date of a section 382 event, then an overlap is
treated as also occurring with respect to that corporation's net
operating loss carryover that arises within the period beginning
with the section 382 event and ending with the SRLY event.
(C) For special rules in the event that there is a SRLY subgroup
and/or a loss subgroup as defined in �1.1502-91(d)(1) with respect
to a carryover, see paragraph (g)(4) of this section.
(3) Operating rules--(i) Section 382 event before SRLY event. If a
SRLY event occurs on the same date as a section 382 event or within
the six month period beginning on the date of the section 382 event,
paragraph (g)(1) of this section applies beginning with the tax year
that includes the SRLY event.
(ii) SRLY event before section 382 event. If a section 382 event
occurs within the period beginning the day after the SRLY event and
ending six months after the SRLY event, paragraph (g)(1) of this
section applies starting with the first tax year that begins after
the section 382 event.
(4) Subgroup rules. In general, in the case of a net operating loss
carryover for which there is a SRLY subgroup and a loss subgroup (as
defined in �1.1502-91(d)(1)), the principles of this paragraph (g)
apply to the SRLY subgroup, and not separately to its members.
However, paragraph (g)(1) of this section applies--
(i) With respect to a carryover described in paragraph (g)(2)(ii)(A)
of this section only if--
(A) All members of the SRLY subgroup with respect to that carryover
are also included in a loss subgroup with respect to that carryover;
and
(B) All members of a loss subgroup with respect to that carryover
are also members of a SRLY subgroup with respect to that carryover;
and
(ii) With respect to a carryover described in paragraph (g)(2)(ii)
(B) of this section only if all members of the SRLY subgroup for
that carryover are also members of a SRLY subgroup that has net
operating loss carryovers described in paragraph (g)(2)(ii)(A) of
this section that are subject to the overlap rule of paragraph (g)
(1) of this section.
(5) Examples. The principles of this paragraph (g) are illustrated
by the following examples:
Example 1. Overlap--Simultaneous Acquisition. (i) Individual A owns
all of the stock of P, which in turn owns all of the stock of S. P
and S file a consolidated return. In Year 2, B, an individual
unrelated to Individual A, forms T which incurs a $100 net operating
loss for that year. At the beginning of Year 3, S acquires T.
(ii) S's acquisition of T results in T becoming a member of the P
group (the SRLY event) and also results in an ownership change of T,
within the meaning of section 382(g), that gives rise to a
limitation under section 382(a) (the section 382 event) with respect
to the T carryover.
(iii) Because the SRLY event and the change date of the section 382
event occur on the same date, there is an overlap of the application
of the SRLY rules and the application of section 382.
(iv) Consequently, under this paragraph (g), in Year 3 the SRLY
limitation does not apply to the Year 2 $100 net operating loss.
Example 2. Overlap--Section 382 event before SRLY event. (i)
Individual A owns all of the stock of P, which in turn owns all of
the stock of S. P and S file a consolidated return. In Year 1, B, an
individual unrelated to Individual A, forms T which incurs a $100
net operating loss for that year. On February 28 of Year 2, S
purchases 55% of T from Individual B. On June 30, of Year 2, S
purchases an additional 35% of T from Individual B.
(ii) The February 28 purchase of 55% of T is a section 382 event
because it results in an ownership change of T, under section
382(g), that gives rise to a section 382(a) limitation with respect
to the T carryover. The June 30 purchase of 35% of T results in T
becoming a member of the P group and is therefore a SRLY event.
(iii) Because the SRLY event occurred within six months of the
change date of the section 382 event, there is an overlap of the
application of the SRLY rules and the application of section 382.
(iv) Consequently, under paragraph (g) of this section, in Year 2
the SRLY limitation does not apply to the Year 1 $100 net operating
loss.
Example 3. No overlap--Section 382 event before SRLY event.
(i) The facts are the same as in Example 2 except that Individual B
does not sell the additional 35% of T to S until September 30, Year
2.
(ii) The February 28 purchase of 55% of T is a section 382 event
because it results in an ownership change of T, under section
382(g), that gives rise to a section 382(a) limitation with respect
to the T carryover. The September 30 purchase of 35% of T results in
T becoming a member of the P group and is therefore a SRLY event.
(iii) Because the SRLY event did not occur within six months of the
change date of the section 382 event, there is no overlap of the
application of the SRLY rules and the application of section 382.
Consequently, the Year 1 net operating loss is subject to a SRLY
limitation and a section 382 limitation.
Example 4. Overlap--SRLY event before section 382 event.
(i) P and S file a consolidated return. S has owned 40% of T for 6
years. For Year 6, T has an net operating loss of $500 that is
carried forward. On March 31, Year 7, S acquires an additional 40%
of T, and on August 31, Year 7, S acquires the remaining 20% of T.
(ii) The March 31 purchase of 40% of T results in T becoming a
member of the P group and is therefore a SRLY event. The August 31
purchase of 20% of T is a section 382 event because it results in an
ownership change of T, under section 382(g), that gives rise to a
section 382(a) limitation with respect to the T carryover.
(iii) Because the SRLY event occurred within six months of the
change date of the section 382 event, there is an overlap of the
application of the SRLY rules and the application of section 382
within the meaning of this paragraph (g).
(iv) Under this paragraph (g), the SRLY rules of paragraph (c) of
this section will apply to the Year 7 tax year. Beginning in Year 8
(the year after the section 382 event), any unabsorbed portion of
the Year 6 net operating loss will not be subject to a SRLY
limitation.
Example 5. Overlap--Coextensive subgroups. (i) Individual A owns all
of the stock of S, which in turn owns all of the stock of T. S and T
file a consolidated return beginning in Year 1.
B, an individual unrelated to A, owns all of the stock of P, the
common parent of a consolidated group. In Year 2, the S group has a
$200 consolidated net operating loss which is carried forward, of
which $100 is attributable to S, and $100 is attributable to T. At
the beginning of Year 3, the P group acquires all of the stock of S
from Individual A.
(ii) P's acquisition of S results in S and T becoming members of the
P group (the SRLY event). With respect to the Year 2 net operating
loss carryover, S and T compose a SRLY subgroup under paragraph (c)
(2) of this section.
(iii) S and T also compose a loss subgroup under �1.1502- 91(d)(1)
with respect to the Year 2 net operating loss carryover.
P's acquisition also results in an ownership change of S, the
subgroup parent, within the meaning of section 382(g), that gives
rise to a limitation under section 382(a) (the section 382 event)
with respect to the Year 2 carryover.
(iv) Because the SRLY event and the change date of the section 382
event occur on the same date, there is an overlap of the application
of the SRLY rules and the application of section 382 within the
meaning of paragraph (g) of this section. Because the SRLY subgroup
and the loss subgroup are coextensive, under paragraph (g) of this
section, the SRLY limitation does not apply to the Year 2 $200 net
operating loss.
Example 6. No Overlap--Different subgroups. (i) Individual B owns
all of the stock of P, the common parent of a consolidated group. P
owns all of the stock of S and all of the stock of T.
Individual A owns all of the stock of X, the common parent of
another consolidated group. In Year 1, the P group has a $200
consolidated net operating loss, of which $100 is attributable to S
and $100 is attributable to T. At the beginning of Year 3, the X
group acquires all of the stock of S and T from P and does not make
an election under �1.1502-91(d)(4) (concerning an election to treat
the loss subgroup parent requirement as having been satisfied).
(ii) X's acquisition of S and T results in S and T becoming members
of the X group (the SRLY event). With respect to the Year 1 net
operating loss, S and T compose a SRLY subgroup under paragraph (c)
(2) of this section.
(iii) S and T do not bear (and are not treated as bearing) a section
1504(a)(1) relationship. Therefore S and T do not qualify as a loss
subgroup under �1.1502-91(d)(1). X's acquisition of S and T results
in separate ownership changes of S and T, that give rise to separate
limitations under section 382(a) (the section 382 events) with
respect to each of S and T's Year 1 net operating loss carryovers.
See �1.1502-94.
(iv) The SRLY event and the change dates of the section 382 events
occur on the same date. However, paragraph (g)(1) of this section
does not apply because the SRLY subgroup (composed of S and T) is
not coextensive with a loss subgroup with respect to the Year 1
carryovers. Consequently, the Year 1 net operating loss is subject
to both a SRLY subgroup limitation and also separate section 382
limitations for each of S and T.
Example 7. No Overlap--Different subgroups. (i) Individual A owns
all of the stock of T and all of the stock of S, the common parent
of a consolidated group. B, an individual unrelated to Individual A,
owns all of the stock of P, the common parent of another
consolidated group. In Year 1, T has a net operating loss of $100
that is carried forward. At the end of Year 2, S acquires all of the
stock of T from Individual A. In Year 3, the S group sustains a $200
consolidated net operating loss that is carried forward. In Year 8,
the P group acquires all of the stock of S from Individual A.
(ii) S's acquisition of T in Year 1 results in T becoming a member
of the S group. The acquisition, however, did not result in an
ownership change under section 382(g). As a result, T's Year 1 net
operating loss is subject to SRLY within the S group.
At the end of Year 7, �1.1502-96(a) treats T's Year 1 net operating
loss as not having arisen in a SRLY with respect to the S group.
Section 1.1502-96(a), however, applies only for purposes of
��1.1502-91 through 1.1502-96 and �1.1502-98 but not for purposes of
this section. See �1.1502-96(a)(5).
(iii) P's acquisition of S in Year 8 results in S and T becoming
members of the P group (the SRLY event). With respect to the Year 1
net operating loss, S and T do not compose a SRLY subgroup under
paragraph (c)(2) of this section.
(iv) S and T compose a loss subgroup under �1.1502-91(d)(1) with
respect to the Year 1 net operating loss carryover. P's acquisition
of S results in an ownership change of the loss subgroup, within the
meaning of section 382(g), that gives rise to a subgroup limitation
under section 382(a) (the section 382 event) with respect to that
carryover.
(v) The SRLY event and the change date of the section 382 event
occur on the same date. However, under paragraph (g)(4) of this
section, because the SRLY subgroup and the loss subgroup are not
coextensive, T's Year 1 net operating loss carryover is subject to a
SRLY limitation.
(vi) With respect to the Year 3 net operating loss carryover, S and
T compose both a SRLY subgroup and a loss subgroup under
�1.1502-91(d)(1). Thus, paragraph (g)(1) of this section applies and
the S group's Year 3 net operating loss carryover is not subject to
a SRLY limitation.
Example 8. SRLY after overlap. (i) Individual A owns all of the
stock of R and M, each the common parent of a consolidated group. B,
an individual unrelated to Individual A, owns all of the stock of D.
In Year 1, D incurs a $100 net operating loss that is carried
forward. At the beginning of Year 3, R acquires all of the stock of
D. In Year 5, M acquires all of the stock of R in a transaction that
did not result in an ownership change of R.
(ii) R's Year 3 acquisition of D results in D becoming a member of
the R group (the SRLY event) and also results in an ownership change
of D, that gives rise to a limitation under section 382(a) (the
section 382 event) with respect to D's net operating loss carryover.
(iii) Because the SRLY event and the change date of the section 382
event occur on the same date, there is an overlap of the application
of paragraph (c) of this section and section 382 with respect to D's
net operating loss. Consequently, under this paragraph (g), D's Year
1 $100 net operating loss is not subject to a SRLY limitation in the
R group.
(iv) M's Year 5 acquisition of R results in R and D becoming members
of the M group (the SRLY event), but does not result in an ownership
change of R or D that gives rise to a limitation under section
382(a). Because there is no section 382 event, the application of
the SRLY rules and section 382 do not overlap.
Consequently, D's Year 1 $100 net operating loss is subject to a
SRLY limitation in the M group.
(v) Because D's Year 1 net operating loss carryover was subject to
the overlap rule of paragraph (g) of this section when it joined the
R group, under �1.1502-21(c)(2) the SRLY subgroup.94 with respect to
that carryover includes all of the members of the R group that
joined the M group at the same time as D.
Example 9. Overlap--Interim losses. (i) Individual A owns all of the
stock of P and S, each the common parent of a consolidated group. S
owns all of the stock of T, its only subsidiary. B, an individual
unrelated to Individual A, owns all of the stock of M, the common
parent of a consolidated group. In Year 1, the S group has a $100
consolidated net operating loss.
On January 1 of Year 2, P acquires all of the stock of S from
Individual A. On January 1 of Year 3, M acquires 51% of the stock of
P from Individual A. On May 31 of Year 3, M acquires the remaining
49% of the stock of P from Individual A. The P group, for the Year 3
period prior to June 1 had a $50 consolidated net operating loss,
and under paragraph (b)(2)(iv) of this section, the loss is
attributable entirely to S. Other than the losses described above,
the P group does not have any other consolidated net operating
losses.
(ii) In the P group, S's $100 loss carryover is treated as arising
in a SRLY and is subject to the limitation under paragraph (c) of
this section. A SRLY subgroup with respect to that loss is composed
of S and T, the members which were members of the S group as to
which the loss was not a SRLY.
(iii) M's January 1 purchase of 51% of P is a section 382 event
because it results in an ownership change of S and T that gives rise
to a section 382(a) limitation (the section 382 event) with respect
to the Year 1 net operating loss carryover. The purchase, however,
does not result in an ownership change of P because it is not a loss
corporation under section 382(k)(1).
M's May 31 purchase of 49% of P results in P, S, and T becoming
members of the M group and is therefore a SRLY event.
(iv) With respect to the Year 1 net operating loss, S and T compose
a SRLY subgroup under paragraph (c)(2) of this section and a loss
subgroup under �1.1502-91(d)(1). The loss subgroup does not include
P because the only loss at the time of the section 382 event was
subject to SRLY with respect to the P group. See �1.1502-91(d)(1).
(v) Because the SRLY event and the change date of the section 382
event occur on the same date and the SRLY subgroup and loss subgroup
are coextensive with respect to the Year 1 net operating loss
carryover, there is an overlap of the application of the SRLY rules
and the application of section 382 within the meaning of paragraph
(g) of this section. Thus, the SRLY limitation does not apply to
that carryover.
(vi) The Year 3 net operating loss, which arose between the section
382 event and the SRLY event, is a net operating loss described in
paragraph (g)(2)(ii)(B) of this section because it is the net
operating loss of a corporation whose SRLY event occurs within the
six month period beginning on the date of a section 382 event.
(vii) With respect to the Year 3 net operating loss, P, S, and T
compose a SRLY subgroup under paragraph (c)(2) of this section.
Because P, a member of the SRLY subgroup for the Year 3 carryover,
is not also a member of a SRLY subgroup that has net operating loss
carryovers described in paragraph (g)(2)(ii)(A) of this section (the
Year 1 net operating loss), the Year 3 carryover is subject to a
SRLY limitation in the M group. See paragraph (g)(4)(ii) of this
section.
(h) Effective date--(1) In general. This section generally applies
to taxable years for which the due date (without extensions) of the
consolidated return is after June 25, 1999.
However--
(i) In the event that paragraph (g)(1) of this section does not
apply to a particular net operating loss carryover in the current
group, then solely for purposes of applying paragraph (c) of this
section to determine a limitation with respect to that carryover and
with respect to which the SRLY register (consolidated taxable income
determined by reference to only the member's or subgroup's items of
income, gain, deduction or loss) began in a taxable year for which
the due date of the return was on or before June 25, 1999),
paragraph (c)(2) of this section shall be applied without regard to
the phrase A or for a carryover that was subject to the overlap rule
described in paragraph (g) of this section or �1.1502-15(g) with
respect to another group (the former group) @ ; and
(ii) For purposes of paragraph (g) of this section, only an
ownership change to which section 382(a), as amended by the Tax
Reform Act of 1986, applies shall constitute a section 382 event.
(2) SRLY limitation. Except in the case of those members (including
members of a SRLY subgroup) described in paragraph (h)(3) of this
section, a group does not take into account a consolidated taxable
year beginning before January 1, 1997, in determining the aggregate
of the consolidated taxable income under paragraph (c)(1) of this
section (including for purposes of �1.1502-15 and �1.1502-22(c)) for
the members (or SRLY subgroups).
(3) Prior retroactive election. A consolidated group that applied
the rules of �1.1502-21T(g)(3) in effect prior to June 25, 1999, as
contained in 26 CFR part 1 revised April 1, 1999, to all
consolidated return years ending on or after January 29, 1991, and
beginning before January 1, 1997, does not take into account a
consolidated taxable year beginning before January 29, 1991, in
determining the aggregate of the consolidated taxable income under
paragraph (c)(1) of this section (including for purposes of
�1.1502-15 and �1.1502-22(c)) for the members (or SRLY subgroups).
(4) Offspring rule. Paragraph (b)(2)(ii)(B) of this section applies
to net operating losses arising in taxable years ending
on or after June 25, 1999.
(5) Waiver of carrybacks. Paragraph (b)(3)(ii)(B) of this section
(relating to the waiver of carrybacks for acquired members) applies
to acquisitions occurring after August 24, 1999.
(6) Prior periods. For certain taxable years ending on or before
June 25, 1999, see �1.1502-21T in effect prior to June 25, 1999, as
contained in 26 CFR part 1 revised April 1, 1999, as applicable.
�1.1502-21T [Removed]
Par. 7. Section 1.1502-21T is removed.
Par. 8. Section 1.1502-22 is added to read as follows:
�1.1502-22 Consolidated capital gain and loss.
(a) Capital gain. The determinations under section 1222, including
capital gain net income, net long-term capital gain, and net capital
gain, with respect to members during consolidated return years are
not made separately. Instead, consolidated amounts are determined
for the group as a whole. The consolidated capital gain net income
for any consolidated return year is determined by reference to--
(1) The aggregate gains and losses of members from sales or
exchanges of capital assets for the year (other than gains and
losses to which section 1231 applies);
(2) The consolidated net section 1231 gain for the year (determined
under �1.1502-23); and
(3) The net capital loss carryovers or carrybacks to the year.
(b) Net capital loss carryovers and carrybacks--(1) In general. The
determinations under section 1222, including net capital loss and
net short-term capital loss, with respect to members during
consolidated return years are not made separately.
Instead, consolidated amounts are determined for the group as a
whole. Losses included in the consolidated net capital loss may be
carried to consolidated return years, and, after apportionment, may
be carried to separate return years. The net capital loss carryovers
and carrybacks consist of-- (i) Any consolidated net capital losses
of the group; and (ii) Any net capital losses of the members arising
in separate return years.
(2) Carryovers and carrybacks generally. The net capital loss
carryovers and carrybacks to a taxable year are determined under the
principles of section 1212 and this section. Thus, losses permitted
to be absorbed in a consolidated return year generally are absorbed
in the order of the taxable years in which they were sustained, and
losses carried from taxable years ending on the same date, and which
are available to offset consolidated capital gain net income,
generally are absorbed on a pro rata basis. Additional rules
provided under the Internal Revenue Code or regulations also apply,
as well as the SRLY limitation under paragraph (c) of this section.
See, e.g., section 382(l)(2)(B).
(3) Carryovers and carrybacks of consolidated net capital losses to
separate return years. If any consolidated net capital loss that is
attributable to a member may be carried to a.99 separate return year
under the principles of �1.1502-21(b)(2), the amount of the
consolidated net capital loss that is attributable to the member is
apportioned and carried to the separate return year (apportioned
loss).
(4) Special rules--(i) Short years in connection with transactions
to which section 381(a) applies. If a member distributes or
transfers assets to a corporation that is a member immediately after
the distribution or transfer in a transaction to which section
381(a) applies, the transaction does not cause the distributor or
transferor to have a short year within the consolidated return year
of the group in which the transaction occurred that is counted as a
separate year for purposes of determining the years to which a net
capital loss may be carried.
(ii) Special status losses. [Reserved]
(c) Limitations on net capital loss carryovers and carrybacks from
separate return limitation years. The aggregate of the net capital
losses of a member arising (or treated as arising) in SRLYs that are
included in the determination of consolidated capital gain net
income for all consolidated return years of the group under
paragraph (a) of this section may not exceed the aggregate of the
consolidated capital gain net income for all consolidated return
years of the group determined by reference to only the member's
items of gain and loss from capital assets as defined in section
1221 and trade or business assets defined in section 1231(b),
including the member's losses actually absorbed by the group in the
taxable year (whether or not absorbed by the member). The principles
of �1.1502-21(c)(including the SRLY subgroup principles under
�1.1502-21(c)(2)) apply with appropriate adjustments for purposes of
applying this paragraph (c).
(d) Coordination with respect to consolidated return change of
ownership limitation occurring in consolidated return years
beginning before January 1, 1997. If a consolidated return change of
ownership occurred before January 1, 1997, the principles of
�1.1502-22A(d) apply to determine the amount of the aggregate of the
net capital loss attributable to old members of the group (as those
terms are defined in �1.1502-1(g)), that may be included in the net
capital loss carryover under paragraph (b) of this section. For this
purpose, �1.1502-1(g) is applied by treating that date as the end of
the year of change.
(e) Consolidated net capital loss. Any excess of losses over gains,
as determined under paragraph (a) of this section (without regard to
any carryovers or carrybacks), is also referred to as the
consolidated net capital loss.
(f) Predecessors and successors. For purposes of this section, the
principles of �1.1502-21(f) apply with appropriate adjustments.
(g) Overlap with section 383--(1) General rule. The limitation
provided in paragraph (c) of this section does not apply to net
capital loss carryovers ((other than a hypothetical carryover like
those described in �1.1502-21(c)(1)(i)(D) and a carryover like those
described in �1.1502-21(c)(1)(ii)) when the application of paragraph
(c) of this section results in an overlap with the application of
section 383. For a similar rule applying in the case of net capital
loss carryovers like those described in ��1.1502-21(c)(1)(i)(D) and
(c)(1)(ii), see �1.1502- 15(g).
(2) Definitions--(i) Generally. For purposes of this paragraph (g),
the definitions and nomenclature contained in sections 382 and 383,
the regulations thereunder, and ��1.1502-90 through 1.1502-99 apply.
(ii) Overlap. (A) An overlap of the application of paragraph (c) of
this section and the application of section 383 with respect to a
net capital loss carryover occurs if a corporation becomes a member
of the consolidated group (the SRLY event) within six months of the
change date of an ownership change giving rise to a section 382
limitation with respect to that carryover (the section 383 event).
(B) If an overlap described in paragraph (g)(2)(ii)(A) of this
section occurs with respect to net capital loss carryovers of a
corporation whose SRLY event occurs within the six month period
beginning on the date of a section 383 event, then an overlap is
treated as also occurring with respect to that corporation's net
capital loss carryover that arises within the period beginning with
the section 383 event and ending with the SRLY event.
(C) For special rules in the event that there is a SRLY subgroup
and/or a loss subgroup as defined in �1.1502-91(d)(1) with respect
to a carryover, see paragraph (g)(4) of this section.
(3) Operating rules--(i) Section 383 event before SRLY event. If a
SRLY event occurs on the same date as a section 383 event or within
the six month period beginning on the date of the section 383 event,
paragraph (g)(1) of this section applies beginning with the tax year
that includes the SRLY event.
(ii) SRLY event before section 383 event. If a section 383 event
occurs within the period beginning the day after the SRLY event and
ending six months after the SRLY event, paragraph (g)(1) of this
section applies starting with the first tax year that begins after
the section 383 event.
(4) Subgroup rules. In general, in the case of a net capital loss
carryover for which there is a SRLY subgroup and a loss subgroup (as
defined in �1.1502-91(d)(1)), the principles of this paragraph (g)
apply to the SRLY subgroup, and not separately to its members.
However, paragraph (g)(1) of this section applies--
(i) With respect to a carryover described in paragraph
(g)(2)(ii)(A) of this section only if--
(A) All members of the SRLY subgroup with respect to that carryover
are also included in a loss subgroup with respect to that carryover;
and
(B) All members of a loss subgroup with respect to that carryover
are also members of a SRLY subgroup with respect to that carryover;
and.103
(ii) With respect to a carryover described in paragraph (g)(2)(ii)
(B) of this section only if all members of the SRLY subgroup for
that carryover are also members of a SRLY subgroup that has net
capital loss carryovers described in paragraph (g)(2)(ii)(A) of this
section that are subject to the overlap rule of paragraph (g)(1) of
this section.
(h) Effective date--(1) In general. This section generally applies
to taxable years for which the due date (without extensions) of the
consolidated return is after June 25, 1999.
However--
(i) In the event that paragraph (g)(1) of this section does not
apply to a particular net capital loss carryover in the current
group, then solely for purposes of applying paragraph (c) of this
section to determine a limitation with respect to that carryover and
with respect to which the SRLY register (consolidated taxable income
determined by reference to only the member's or subgroup's items of
income, gain, deduction or loss) began in a taxable year for which
the due date of the return was on or before June 25, 1999), the
principles of �1.1502-21(c)(2) shall be applied without regard to
the phrase A or for a carryover that was subject to the overlap rule
described in paragraph (g) of this section or �1.1502-15(g) with
respect to another group (the former group) @ ; and
(ii) For purposes of paragraph (g) of this section, only an
ownership change to which section 383, as amended by the Tax Reform
Act of 1986, applies and which results in a section 382 limitation
shall constitute a section 383 event.
(2) Prior periods. For certain taxable years ending on or before
June 25, 1999, see �1.1502-22T in effect prior to June 25, 1999, as
contained in 26 CFR part 1 revised April 1, 1999, as applicable.
�1.1502-22T [Removed] Par. 9. Section 1.1502-22T is removed.
Par. 10. Section 1.1502-23 is added to read as follows:
�1.1502-23 Consolidated net section 1231 gain or loss.
(a) In general. Net section 1231 gains and losses of members arising
during consolidated return years are not determined separately.
Instead, the consolidated net section 1231 gain or loss is
determined under this section for the group as a whole.
(b) Example. The following example illustrates the provisions of
this section:
Example. Use of SRLY registers with net gains and net losses under
section 1231. (i) In Year 1, T sustains a $20 net capital loss. At
the beginning of Year 2, T becomes a member of the P group. T's
capital loss carryover from Year 1 is subject to SRLY limits under
�1.1502-22(c). The members of the P group contribute the following
to the consolidated taxable income for Year 2 (computed without
regard to T's net capital loss carryover under �1.1502-22):
P T
Year 1 (SRLY)
Ordinary
Capital (20)
Year 2
Ordinary 10 20
Capital 70 0
�1231 (60) 30
(ii) Under section 1231, if the section 1231 losses for any taxable
year exceed the section 1231 gains for such taxable year, such gains
and losses are treated as ordinary gains or losses.
Because the P group's section 1231 losses, $(60), exceed the section
1231 gains, $30, the P group's net loss is treated as an ordinary
loss. T's net section 1231 gain has the same character as the P
group's consolidated net section 1231 loss, so T's $30 of section
1231 income is treated as ordinary income for purposes of applying
�1.1502-22(c). Under �1.1502-22(c), the group's consolidated net
capital gain determined by reference only to T's items is $0. None
of T's capital loss carryover from Year 1 may be taken into account
in Year 2.
(c) Recapture of ordinary loss. [Reserved]
(d) Effective date--(1) In general. This section applies to gains
and losses arising in the determination of consolidated net section
1231 gain or loss for taxable years for which the due date (without
extensions) of the consolidated return is taxable years is after
June 25, 1999.
(2) Application to prior periods. See �1.1502-21(h)(3) for rules
applicable to groups that applied the rules of this section to
consolidated return years ending on or after January 29, 1991, and
beginning before January 1, 1997.
�1.1502-23T [Removed] Par. 11. Section 1.1502-23T is removed.
PART 602--OMB CONTROL NUMBERS UNDER THE Paperwork Reduction Act
Par. 12. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805..Par. 13. In �602.101, paragraph (b) is
amended by removing the entry for �1.1502-21T from the table and
adding an entry in numerical order to the table to read as follows:
�602.101 OMB Control numbers.
* * * * *
(b) * * *
CFR part or section where Current OMB identified and described
control No.
* * * * *
1.1502-21 ...........................................1545-1237
* * * * *
John M. Dalrymple
Acting Deputy Commissioner of Internal Revenue
Approved: June 18, 1999
Donald C. Lubick
Assistant Secretary of the Treasury
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