Consolidated Returns--Consolidated Overall
Foreign Losses & Separate Limitation Losses

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Parts 1 and 602 [TD 8833] RIN 1545-
AW08

TITLE: Consolidated Returns--Consolidated Overall Foreign Losses and
Separate Limitation Losses

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains final consolidated return
regulations relating to the treatment of overall foreign losses and
separate limitation losses in the computation of the foreign tax
credit limitation. The regulations replace existing guidance with
respect to overall foreign losses and provide guidance with respect
to separate limitation losses. These regulations affect consolidated
groups that compute the foreign tax credit limitation or that
dispose of property used in a foreign trade or business.

DATES: Effective Date: These regulations are effective August 11,
1999.

Applicability Dates: For dates of applicability of these
regulations, see ��1.1502-9A(a)(1) and (b)(1) and 1.1502-9(e).

FOR FURTHER INFORMATION CONTACT: Trina Dang of the Office of
Associate Chief Counsel (International), (202) 622-3850 (not a toll-
free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in these final regulations
has been reviewed and approved by the Office of Management and
Budget in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507) under the control number 1545-1634.

Responses to this collection of information are mandatory.

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.

The estimated annual burden per respondent is 1.5 hoU.S. Comments
concerning the accuracy of this burden estimate and suggestions for
reducing this burden should be sent to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC 20224,
and 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.

Books or records relating to a collection of information must be
retained so 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

On December 29, 1998, the IRS and Treasury published in the Federal
Register (REG-106902-98, 63 FR 71589) a notice of proposed
rulemaking modifying the rules relating to the treatment of overall
foreign loss (OFL) accounts, and providing new rules relating to the
treatment of separate limitation loss (SLL) accounts. The
regulations proposed to replace the notional account method for
allocating a group's consolidated OFL (COFL) account to a departing
member of a group with an asset-based method for allocating both
OFLs and SLLs. The regulations also proposed to modify the section
904(f)(3) and (5)(F) disposition rules in the case of intercompany
transactions, and to provide computational rules and nomenclature
for SLLs as well as OFLs.

A public hearing was held on February 17, 1999, and two written
comments were received. One commentator recommended the retention of
the notional account method because the asset-based method can
result in the allocation of a portion of the COFL account to a
departing member that did not contribute to the COFL account, a
result that the commentator views as arbitrary. To alleviate the
tension between the interest allocation and COFL rules, the
commentator suggested amending the interest allocation rules instead
of the COFL rules.

Treasury and the IRS recognize that, under the asset-based method, a
portion of a COFL account can under certain circumstances be
allocated to a member that did not directly contribute to the COFL
account (because, for example, it was not a member of the group at
the time the OFL arose). However, as noted in the preamble to
regulations issued in January 1998 that eliminated the limitation on
OFL recapture and foreign tax credit utilization with respect to
separate return limitation years, any single member's economic A
contribution @ to a COFL account is difficult to measure since the
expense allocation rules require interest and certain other expenses
to be allocated to a member's income in separate limitation
categories on the basis of the group's assets.

An asset-based method is not arbitrary because it associates a COFL
account with assets that will produce income subject to recapture,
thereby ensuring the recapture of the COFL account.

As explained in the preamble to the proposed regulations, Treasury
and the IRS believe that the asset-based method for allocating a
COFL account harmonizes the COFL rules with the interest allocation
provisions. Those provisions, as required by statute, are designed
to prevent corporations from borrowing in ways that inappropriately
minimize the amount of interest expense allocated against foreign-
source income (thereby inflating the amount of foreign-source income
that can be sheltered from U.S. tax by foreign tax credits).

The commentator also criticized the asset-based method for
allocating COFL accounts as creating uncertainty and administrative
burdens in determining the proper amount of a selling group's COFL
account to be apportioned to a departing member at the time a member
is acquired. Treasury and the IRS recognize that the asset-based
method may result in greater uncertainty under certain
circumstances. It is anticipated that a taxpayer acquiring a member
of a consolidated group may address any uncertainties as to the
proper allocation of a COFL account by entering into a tax indemnity
or similar agreement. It is also noted that, even under the notional
account method, a COFL account apportioned to a departing member
cannot be determined with certainty at the time of the acquisition
because the apportionment is made at the end of the taxable year
during which the member departs the group. Treasury and the IRS
recognize that the new rules may result in an increased burden for
certain taxpayers, but have concluded that the possibility of an
increased burden is not sufficient to warrant the retention of the
notional account method in light of severe distortions created by
the interaction of the notional account method and the interest
expense allocation provisions.

Another commentator requested a transition rule under which the
notional account method would continue to apply to a group's
existing COFL account that would not be a part of the group's
account had the asset-based allocation method been in effect in
prior years. The commentator argued that a transition rule is
necessary because taxpayers can be adversely affected by the
transition from the old rules to the new rules.

The final regulations do not adopt this transition rule because of
administrative and equity concerns. The rule would be difficult to
administer because a taxpayer would be required to ascertain asset
values of all members that departed the group (on the date that the
member departed) going back a number of years in order to apply the
asset-based allocation method.

Additionally, keeping track of the grandfathered account on a
prospective basis and distinguishing it from non-grandfathered
accounts could add significant complexity.

Furthermore, it is not clear whether the commentator's suggested
transition rule generally produces equitable results.

Under the suggested transition rule, no portion of the group's COFL
account that would not be a part of the group's account had the new
rules applied in earlier years would be allocated to a departing
member that has foreign assets but that does not have a notional
account. Treasury and the IRS are not convinced that it would be
more equitable for the group to bear the burden of the COFL account
under these circumstances.

A question has been raised regarding whether the asset-based method
for allocating COFL accounts to a departing member also applies to
an affiliated group that does not file a consolidated return.
Because the interest expense allocation rules apply to affiliated
groups, these rules can result under certain circumstances in the
creation of OFL accounts in members with no foreign assets. Section
904(i) is an anti-abuse rule intended to prevent an affiliated group
from circumventing the consolidated return rules to avoid the
foreign tax credit limitation provisions. Under �1.904(i)-1, each
member of an affiliated group determines its taxable income for each
separate limitation income category under section 904(d) and then
combines those amounts to determine one amount of income for the
group in each income category. The consolidated return regulations
that apply the principles of sections 904(f) and 907(c)(4) will then
be applied to the combined amounts in each separate category as if
all affiliates were members of a single consolidated group. By
reason of the section 904(i) regulations, the asset-based method for
allocating the appropriate portion of a group's COFL account to a
departing member applies to an affiliated group of corporations that
does not file returns on a consolidated basis.

A question has also been raised as to whether the tax book value of
assets is affected for purposes of COFL apportionment if a member's
departure from a group causes the group to take into account in
computing consolidated taxable income gain or loss on assets
transferred in intercompany transactions. To prevent apportionment
of a disproportionate amount of the COFL account to a departing
member, �1.1502-9(c)(2)(ii) of the final regulations clarifies that
the computation of the tax book value of assets for purposes of such
apportionment shall be determined without regard to previously
deferred gain or loss that is taken into account as a result of the
member's departure from the group (because, for example, of the
acceleration rule under �1.1502- 13(d)).

After full consideration of all questions and comments, the proposed
regulations published in the Federal Register on December 29, 1998
(REG-106902-98, 63 FR 71589) are adopted by this Treasury decision
without substantive amendment.

Special Analyses

It has been determined that this regulation is not a significant
regulatory action as defined in Executive Order 12866. Therefore, a
regulatory impact analysis is not required.

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 overall foreign losses or
separate limitation losses. 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
overall foreign losses or separate limitation losses. Therefore, a
Regulatory Flexibility Analysis under the Regulatory Flexibility Act
(5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of
the Internal Revenue Code, the notice of proposed rulemaking
preceding this regulation was submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its
impact on small businesses.

Drafting Information

The principal author of this regulation is Trina Dang of the Office
of Associate Chief Counsel (International), IRS. However, other
personnel from the IRS and Treasury Department 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 and 602 are amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by
removing the entry for �1.1502-9T and by adding entries in numerical
order to read in part as follows:

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

Section 1.1502-9 also issued under 26 U.S.C. 1502. * * *

Section 1.1502-9A also issued under 26 U.S.C. 1502. * * *

Par. 2. In �1.1502-3T, paragraph (c)(4), the first sentence is
amended by removing the language A 1.1502-9T(b)(1)(v) @ and adding A
1.1502-9A(b)(1)(v) @ in its place, and revising the last sentence to
read as follows:

�1.1502-3T Consolidated investment credit (temporary).

* * * * *

(c) * * *

(4) * * * However, a consolidated group making the election provided
in �1.1502-9A(b)(1)(vi) (electing not to apply �1.1502- 9A(b)(1)(v)
to years beginning before January 1, 1998) may nevertheless choose
to apply all such paragraphs other than �1.1502-9A(b)(1)(v) for all
relevant years.

* * * * *

Par. 3. Immediately following �1.1504-4 an undesignated center
heading is added to read as follows:

REGULATIONS APPLICABLE FOR TAX YEARS FOR WHICH A RETURN IS DUE ON OR
BEFORE AUGUST 11, 1999

Par. 4. Section 1.1502-9 is redesignated as �1.1502-9A and
transferred under the new undesignated center heading set out in
Par. 3. above.

Par. 5. Newly designated �1.1502-9A is amended by:

1. Revising the section heading.

2. Redesignating the paragraph heading and text of paragraph (a) as
the paragraph heading and text of paragraph (a)(2).

3. Adding a new paragraph heading for paragraph (a), and new
paragraphs (a)(1), (b)(1)(v) and (b)(1)(vi).

The revisions and additions read as follows:

�1.1502-9A Application of overall foreign loss recapture rules to
corporations filing consolidated returns due on or before August 11,
1999.

(a) Scope--(1) Effective date. This section applies only to
consolidated return years for which the due date of the income tax
return (without extensions) is on or before August 11, 1999.

(2) In general. * * *

(b) * * *

(1) * * *

(v) Special effective date for SRLY limitation. Except as provided
in paragraph (b)(1)(vi) of this section, paragraphs (b)(1)(iii) and
(iv) of this section apply only to consolidated return years for
which the due date of the income tax return (without extensions) is
on or before March 13, 1998. For consolidated return years for which
the due date of the income tax return (without extensions) is after
March 13, 1998, the rules of paragraph (b)(1)(ii) of this section
shall apply to overall foreign losses from separate return years
that are separate return limitation years. For purposes of applying
paragraph (b)(1)(ii) of this section in such years, the group treats
a member with a balance in an overall foreign loss account from a
separate return limitation year on the first day of the first
consolidated return year for which the due date of the income tax
return (without extensions) is after March 13, 1998, as a
corporation joining the group on such first day. An overall foreign
loss that is part of a net operating loss or net capital loss
carryover from a separate return limitation year of a member that is
absorbed in a consolidated return year for which the due date of the
income tax return (without extensions) is after March 13, 1998,
shall be added to the appropriate consolidated overall foreign loss
account in the year that it is absorbed. For consolidated return
years for which the due date of the income tax return (without
extensions) is after March 13, 1998, similar principles apply to
overall foreign losses when there has been a consolidated return
change of ownership (regardless of when the change of ownership
occurred). See also �1.1502-3T(c)(4) for an optional effective date
rule (generally making this paragraph (b)(1)(v) applicable to a
consolidated return year beginning after December 31, 1996, if the
due date of the income tax return (without extensions) for such year
is on or before March 13, 1998).

(vi) Election to defer application of special effective date. A
consolidated group may elect not to apply paragraph (b)(1)(v) of
this section to consolidated return years beginning before January
1, 1998. To make this election, a consolidated group must write
"Election Pursuant to Notice 98-40" across the top of page 1 of an
original or amended tax return for each consolidated return year
subject to the election. For the first consolidated return year to
which the overall foreign loss provisions of paragraph (b)(1)(v) of
this section apply (i.e., the first year beginning on or after
January 1, 1998), such consolidated group must write A Notice 98-40
Election in Effect in Prior Years @ across the top of page 1 of the
consolidated tax return for that year. For purposes of applying
paragraph (b)(1)(ii) of this section with respect to such year, any
member with a balance in an overall foreign loss account from a
separate return limitation year on the first day of such year shall
be treated as joining the group on such first day.

* * * * *

Par. 6. New �1.1502-9 is added to read as follows:

�1.1502-9 Consolidated overall foreign losses and separate
limitation losses.

(a) In general. This section provides rules for applying section
904(f) (including its definitions and nomenclature) to a group and
its members. Generally, section 904(f) concerns rules relating to
overall foreign losses (OFLs) and separate limitation losses (SLLs)
and the consequences of such losses. As provided in section 904(f)
(5), losses are computed separately in each category of income
described in section 904(d)(1) (basket).

Paragraph (b) of this section defines terms and provides
computational and accounting rules, including rules regarding
recapture. Paragraph (c) of this section provides rules that apply
to OFLs and SLLs when a member becomes or ceases to be a member of a
group. Paragraph (d) of this section provides a predecessor and
successor rule. Paragraph (e) of this section provides effective
dates.

(b) Consolidated application of section 904(f). A group applies
section 904(f) for a consolidated return year in accordance with
that section, subject to the following rules:

(1) Computation of CSLI or CSLL and consolidated U.S. source income
or loss. The group computes its consolidated separate limitation
income (CSLI) or consolidated separate limitation loss (CSLL) for
each basket under the principles of �1.1502-11 by aggregating each
member's foreign-source taxable income or loss in such basket
computed under the principles of �1.1502-12, and taking into account
the foreign portion of the consolidated items described in
�1.1502-11(a)(2) through (8) for such basket. The group computes its
consolidated U.S.-source taxable income or loss under similar
principles.

(2) Netting CSLLs, CSLIs, and consolidated U.S. source taxable
income or loss. The group applies section 904(f)(5) to determine the
extent to which a CSLL for a basket reduces CSLI for another basket
or consolidated U.S.-source taxable income.

(3) CSLL and COFL accounts. To the extent provided in section
904(f), the amount by which a CSLL for a basket (the loss basket)
reduces CSLI for another basket (the income basket) shall result in
the creation of (or addition to) a CSLL account for the loss basket
with respect to the income basket. Likewise, the amount by which a
CSLL for a loss basket reduces consolidated U.S.-source income will
create (or add to) a consolidated overall foreign loss account (a
COFL account).

(4) Recapture of COFL and CSLL accounts. In the case of a COFL
account for a loss basket, section 904(f)(1) and (3) recharacterizes
some or all of the foreign-source income in the loss basket as U.S.-
source income. In the case of a CSLL account for a loss basket with
respect to an income basket, section 904(f)(5)(C) and (F)
recharacterizes some or all of the foreign-source income in the loss
basket as foreign-source income in the income basket. The COFL
account or CSLL account is reduced to the extent amounts are
recharacterized with respect to such account.

(5) Intercompany transactions--(i) Nonapplication of section 904(f)
disposition rules. Neither section 904(f)(3) (in the case of a COFL
account) nor (5)(F) (in the case of a CSLL account) applies at the
time of a disposition that is an intercompany transaction to which
�1.1502-13 applies. Instead, section 904(f)(3) and (5)(F) applies
only at such time and only to the extent that the group is required
under �1.1502-13 (without regard to section 904(f)(3) and (5)(F)) to
take into account any intercompany items resulting from the
disposition, based on the COFL or CSLL account existing at the end
of the consolidated return year during which the group takes the
intercompany items into account.

(ii) Example. Paragraph (b)(5)(i) of this section is illustrated by
the following examples. The identity of the parties and the basic
assumptions set forth in �1.1502- 13(c)(7)(i) apply to the examples.
Except as otherwise stated, assume further that the consolidated
group recognizes no foreign-source income other than as a result of
the transactions described. The examples are as follows:

Example 1. (i) On June 10, Year 1, S transfers nondepreciable
property with a basis of $100 and a fair market value of $250 to B
in a transaction to which section 351 applies.

The property was predominantly used without the United States in a
trade or business, within the meaning of section 904(f)(3). B
continues to use the property without the United States. The group
has a COFL account in the relevant loss basket of $120 as of
December 31, Year 1.

(ii) Because the contribution from S to B is an intercompany
transaction, section 904(f)(3) does not apply to result in any gain
recognition in Year 1. See paragraph (b)(5)(i) of this section.

(iii) On January 10, Year 4, B ceases to be a member of the group.
Because S did not recognize gain in Year 1 under section 351, no
gain is taken into account in Year 4 under �1.1502-13(d).

Thus, no portion of the group's COFL account is recaptured in Year
4. For rules requiring apportionment of a portion of the COFL
account to B, see paragraph (c)(2) of this section..16 Example 2.
(i) The facts are the same as in paragraph (i) of Example 1. On
January 10, Year 4, B sells the property to X for $300. As of
December 31, Year 4, the group's COFL account is $40. (The COFL
account was reduced between Year 1 and Year 4 due to unrelated
foreign-source income taken into account by the group.)

(ii) B takes into account gain of $200 in Year 4. The $40 COFL
account in Year 4 recharacterizes $40 of the gain as U.S. source.
See section 904(f)(3).

Example 3. (i) On June 10, Year 1, S sells nondepreciable property
with a basis of $100 and a fair market value of $250 to B for $250
cash. The property was predominantly used without the United States
in a trade or business, within the meaning of section 904(f)(3). The
group has a COFL account in the relevant loss basket of $120 as of
December 31, Year 1. B predominately uses the property in a trade or
business without the United States.

(ii) Because the sale is an intercompany transaction, section 904(f)
(3) does not require the group to take into account any gain in Year
1. Thus, under paragraph (b)(5)(i) of this section, the COFL account
is not reduced in Year 1.

(iii) On January 10, Year 4, B sells the property to X for $300. As
of December 31, Year 4, the group's COFL account is $60. (The COFL
account was reduced between Year 1 and Year 4 due to unrelated
foreign-source income taken into account by the group.)

(iv) In Year 4, S's $150 intercompany gain and B's $50 corresponding
gain are taken into account to produce the same effect on
consolidated taxable income as if S and B were divisions of a single
corporation. See �1.1502-13(c). All of B's $50 corresponding gain is
recharacterized under section 904(f)(3). If S and B were divisions
of a single corporation and the intercompany sale were a transfer
between the divisions, B would succeed to S's $100 basis in the
property and would have $200 of gain ($60 of which would be
recharacterized under section 904(f)(3)), instead of a $50 gain.
Consequently, S's $150 intercompany gain and B's $50 corresponding
gain are taken into account, and $10 of S's gain is recharacterized
under section 904(f)(3) as U.S. source to reflect the $10 difference
between B's $50 recharacterized gain and the $60 recomputed gain
that would have been recharacterized.

(c) Becoming or ceasing to be a member of a group--(1) Adding
separate accounts on becoming a member. At the time that a
corporation becomes a member of a group (a new member), the group
adds to the balance of its COFL or CSLL account the balance of the
new member's corresponding OFL account or SLL account. A new
member's OFL account corresponds to a COFL account if the account is
for the same loss basket. A new member's SLL account corresponds to
a CSLL account if the account is for the same loss basket and with
respect to the same income basket. If the group does not have a COFL
or CSLL account corresponding to the new member's account, it
creates a COFL or CSLL account with a balance equal to the balance
of the member's account.

(2) Apportionment of consolidated account to departing member--(i)
In general. A group apportions to a member that ceases to be a
member (a departing member) a portion of each COFL and CSLL account
as of the end of the year during which the member ceases to be a
member and after the group makes the additions or reductions to such
account required under paragraphs (b)(3), (b)(4) and (c)(1) of this
section (other than an addition under paragraph (c)(1) of this
section attributable to a member becoming a member after the
departing member ceases to be a member). The group computes such
portion under paragraph (c)(2)(ii) of this section, as limited by
paragraph (c)(2)(iii) of this section. The departing member carries
such portion to its first separate return year after it ceases to be
a member.

Also, the group reduces each account by such portion and carries
such reduced amount to its first consolidated return year beginning
after the year in which the member ceases to be a member. If two or
more members cease to be members in the same.18 year, the group
computes the portion allocable to each such member (and reduces its
accounts by such portion) in the order that the members cease to be
members.

(ii) Departing member's portion of group's account. A departing
member's portion of a group's COFL or CSLL account for a loss basket
is computed based upon the member's share of the group's assets that
generate income subject to recapture at the time that the member
ceases to be a member. Under the characterization principles of
��1.861-9T(g)(3) and 1.861-12T, the group identifies the assets of
the departing member and the remaining members that generate
foreign-source income (foreign assets) in each basket. The assets
are characterized based upon the income that the assets are
reasonably expected to generate after the member ceases to be a
member. The member's portion of a group's COFL or CSLL account for a
loss basket is the group's COFL or CSLL account, respectively,
multiplied by a fraction, the numerator of which is the value of the
member's foreign assets for the loss basket and the denominator of
which is the value of the foreign assets of the group (including the
departing member) for the loss basket. The value of the foreign
assets is determined under the asset valuation rules of �1.861-9T(g)
(1) and (2) using either tax book value or fair market value under
the method chosen by the group for purposes of interest
apportionment as provided in �1.861-9T(g)(1)(ii). For purposes of
this paragraph (c)(2)(ii), �1.861-9T(g)(2)(iv) (assets in
intercompany transactions) shall apply, but �1.861-9T(g)(2)(iii)
(adjustments for directly allocated interest) shall not apply. If
the group uses the tax book value method, the member's portions of
COFL and CSLL accounts are limited by paragraph (c)(2)(iii) of this
section. In addition, for purposes of this paragraph (c)(2)(ii), the
tax book value of assets transferred in intercompany transactions
shall be determined without regard to previously deferred gain or
loss that is taken into account by the group as a result of the
transaction in which the member ceases to be a member. The assets
should be valued at the time the member ceases to be a member, but
values on other dates may be used unless this creates substantial
distortions. For example, if a member ceases to be a member in the
middle of the group's consolidated return year, an average of the
values of assets at the beginning and end of the year (as provided
in �1.861- 9T(g)(2)) may be used or, if a member ceases to be a
member in the early part of the group's consolidated return year,
values at the beginning of the year may be used, unless this creates
substantial distortions.

(iii) Limitation on member's portion for groups using tax book value
method. If a group uses the tax book value method of valuing assets
for purposes of paragraph (c)(2)(ii) of this section and the
aggregate of a member's portions of COFL and CSLL accounts for a
loss basket (with respect to one or more income baskets) determined
under paragraph (c)(2)(ii) of this section exceeds 150 percent of
the actual fair market value of the member's foreign assets in the
loss basket, the member's portion of the COFL or CSLL accounts for
the loss basket shall be reduced (proportionately, in the case of
multiple accounts) by such excess. This rule does not apply if the
departing member and all other members that cease to be members as
part of the same transaction own all (or substantially all) the
foreign assets in the loss basket.

(iv) Determination of values of foreign assets binding on departing
member. The group's determination of the value of the member's and
the group's foreign assets for a loss basket is binding on the
member, unless the Commissioner concludes that the determination is
not appropriate. The common parent of the group must attach a
statement to the return for the taxable year that the departing
member ceases to be a member of the group that sets forth the name
and taxpayer identification number of the departing member, the
amount of each COFL or CSLL for each loss basket that is apportioned
to the departing member under this paragraph (c)(2), the method used
to determine the value of the member's and the group's foreign
assets in each such loss basket, and the value of the member's and
the group's foreign assets in each such loss basket. The common
parent must also furnish a copy of the statement to the departing
member.

(v) Anti-abuse rule. If a corporation becomes a member and ceases to
be a member, and a principal purpose of the corporation becoming and
ceasing to be a member is to transfer the corporation's OFL account
or SLL account to the group or to transfer the group's COFL or CSLL
account to the corporation, appropriate adjustments will be made to
eliminate the benefit of such a transfer of accounts. Similarly, if
any member acquires assets or disposes of assets (including a
transfer of assets between members of the group and the departing
member) with a principal purpose of affecting the apportionment of
accounts under paragraph (c)(2)(i) of this section, appropriate
adjustments will be made to eliminate the benefit of such
acquisition or disposition.

(vi) Examples. The following examples illustrate this paragraph (c):

Example 1. (i) On November 6, Year 1, S, a member of the P group, a
consolidated group with a calendar consolidated return year, ceases
to be a member of the group. On December 31, Year 1, the P group has
a $40 COFL account for the general limitation basket, a $20 CSLL
account for the general limitation basket (i.e., the loss basket)
with respect to the passive basket (i.e., the income basket), and a
$10 CSLL account for the shipping income basket (i.e., the loss
basket) with respect to the passive basket (i.e., the income
basket). No member of the group has foreign-source income or loss in
Year 1. The group apportions its interest expense according to the
tax book value method.

(ii) On November 6, Year 1, the group identifies S's assets and its
own assets (including S's assets) expected to produce foreign
general limitation income. Use of end-of-the-year values will not
create substantial distortions in determining the relative values of
S's and the group's relevant assets on November 6, Year 1. The group
determines that S's relevant assets have a tax book value of $2,000
and a fair market value of $2,200. Also, the group's relevant assets
(including S's assets) have a tax book value of $8,000. On November
6, Year 1, S has no assets expected to produce foreign shipping
income.

(iii) Under paragraph (c)(2)(ii) of this section, S takes a $10 COFL
account for the general limitation basket ($40 x $2000/$8000) and a
$5 CSLL account for the general limitation basket with respect to
the passive basket ($20 x $2000/$8000). S does not take any portion
of the shipping income basket CSLL account. The limitation described
in paragraph (c)(2)(iii) of this section does not apply because the
aggregate of the COFL and CSLL accounts for the general limitation
basket that are apportioned to S ($15) is less than 150 percent of
the actual fair market value of S's general limitation foreign
assets ($2,200 x 150%).

Example 2. (i) Assume the same facts as in Example 1, except that
the fair market value of S's general limitation foreign assets is $4
as of November 6, Year 1.

(ii) Under paragraph (c)(2)(iii) of this section, S's COFL and CSLL
accounts for the general limitation basket must be reduced by $9,
which is the excess of $15 (the aggregate amount of the accounts
apportioned under paragraph (c)(2)(ii) of this section) over $6 (150
percent of the $4 actual fair market value of S's general limitation
foreign assets). S thus takes a $4 COFL account for the general
limitation basket ($10 - ($9 x $10/$15)) and a $2 CSLL account for
the general limitation basket with respect to the passive basket ($5
- ($9 x $5/$15)).

(d) Predecessor and successor. A reference to a member includes, as
the context may require, a reference to a predecessor or successor
of the member. See �1.1502-1(f).

(e) Effective dates. This section applies to consolidated return
years for which the due date of the income tax return (without
extensions) is after August 11, 1999. However, paragraph (b)(5) of
this section (intercompany transactions) is not applicable for
intercompany transactions that occur before January 28, 1999. A
group applies the principles of �1.1502- 9A(e) to a disposition
which is an intercompany transaction to which �1.1502-13 applies and
that occurs before January 28, 1999.

Also, paragraph (c)(2) of this section (apportionment of
consolidated account to departing member) is not applicable for
members ceasing to be members of a group before January 28, 1999.

A group applies the principles of �1.1502-9A (rather than paragraph
(c)(2) of this section) to determine the amount of a consolidated
account that is apportioned to a member that ceases to be a member
of the group before January 28, 1999 (and reduces its consolidated
account by such apportioned amount) before applying paragraph (c)(2)
of this section to members that cease to be members on or after
January 28, 1999.

�1.1502-9T [Removed]

Par. 7. Section 1.1502-9T is removed.

PART 602--OMB CONTROL NUMBERS UNDER THE Paperwork Reduction Act

Par. 8. The authority citation for part 602 continues to read as
follows:

Authority: 26 U.S.C. 7805..Par 9. In �602.101, paragraph (b) is
amended in the table by removing the current entry for 1.1502-9 and
adding new entries for 1.1502-9 and 1.1502-9A to read as follows:

�602.101 OMB Control numbers.

* * * * *

(b) * * *

CFR part or section Current OMB where identified control No. and
described

* * * * *

1.1502-9 . . . . . . . . . . .  . . . . . . . .1545-1634

* * * * *

1.1502-9A . . . . . . . . . . .. . . . . . . . 1545-0121

* * * * *

Robert E. Wenzel
Deputy Commissioner of Internal Revenue
Approved: July 16, 1999
Donald C. Lubick
Assistant Secretary of the Treasury

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