Title 26—Internal Revenue--Volume 1
PART 1—INCOME TAXES
§ 1.1502-68   Additional first year depreciation deduction for property acquired and placed in service after September 27, 2017.
(a) In general —(1) Overview. This section provides rules governing the availability of the additional first year depreciation deduction allowable under section 168(k) for qualified property that is acquired and placed in service after September 27, 2017, by a member of a consolidated group. Except as otherwise provided in paragraph (c) of this section, the rules in § 1.168(k)-2 apply to members of a consolidated group in addition to the rules in this section. Paragraph (a)(2) of this section provides definitions of terms used in this section. Paragraph (b) of this section provides rules addressing the application of § 1.168(k)-2(b)(3)(iii)(A)( 1 ) (requiring that a taxpayer claiming the additional first year depreciation deduction for used property not previously have used the property) to members of a consolidated group. Paragraph (c) of this section provides rules addressing certain transfers of eligible property (as defined in paragraph (a)(2)(vii) of this section) between members of a consolidated group if the transferee member (as defined in paragraph (a)(2)(xii) of this section) leaves the group pursuant to the same series of related transactions. Paragraph (d) of this section provides examples illustrating the application of the rules of this section. Paragraph (e) of this section provides the applicability dates.
(2) Definitions. The following definitions apply for purposes of this section.
(i) Consolidated Asset Acquisition Rule. The term Consolidated Asset Acquisition Rule refers to the rule set forth in paragraph (c)(1)(i) of this section addressing certain intercompany transfers of eligible property.
(ii) Consolidated Deemed Acquisition Rule. The term Consolidated Deemed Acquisition Rule refers to the rule set forth in paragraph (c)(2)(i) of this section addressing certain intercompany transfers of the stock of target (as defined in paragraph (a)(2)(xi) of this section).
(iii) Deconsolidation date. The term deconsolidation date means the date on which a transferee member ceases to be a member of a consolidated group.
(iv) Designated transaction. The term designated transaction has the meaning provided in paragraph (c)(4)(i) of this section.
(v) Deemed replacement property. The term deemed replacement property means used property that is identical to (but is separate and distinct from) the eligible property that the transferee member or target is deemed to sell to an unrelated party under the Consolidated Asset Acquisition Rule or the Consolidated Deemed Acquisition Rule. For all Federal income tax purposes, the deemed purchase of deemed replacement property by the transferee member or target under paragraph (c)(1)(i)(B) or (c)(2)(i)(B) of this section, respectively, does not result in the basis in such property being determined, in whole or in part, by reference to the basis of other property held at any time by the transferee member or target. See section 179(d)(3) and § 1.168(k)-2(b)(3)(iii)(A)( 3 ).
(vi) Deemed sale amount. The term deemed sale amount means an amount equal to the transferee member's or the target's adjusted basis in the eligible property immediately before the transferee member or target is deemed to sell the property to an unrelated party under the Consolidated Asset Acquisition Rule or the Consolidated Deemed Acquisition Rule.
(vii) Eligible property. The term eligible property means depreciable property (as defined in § 1.168(b)-1(a)(1)) that meets the requirements in § 1.168(k)-2(b)(2), determined without regard to § 1.168(k)-2(b)(2)(ii)(C) (property subject to an election not to claim the additional first year depreciation for a class of property) except on the day after the deconsolidation date.
(viii) Group Prior Use Rule. The term Group Prior Use Rule refers to the rule set forth in paragraph (b)(1) of this section addressing when a member of a consolidated group is attributed another member's depreciable interest in property.
(ix) Lookback Period. The term lookback period means, with respect to a member of a consolidated group, the period that includes the five calendar years immediately prior to the current calendar year in which the property is placed in service by such member, as well as the portion of such current calendar year before the date on which the member placed the property in service (without taking into account the applicable convention).
(x) Stock and Asset Acquisition Rule. The term Stock and Asset Acquisition Rule refers to the rule set forth in paragraph (b)(2) of this section addressing when a member of a consolidated group is attributed a new member's depreciable interest in property.
(xi) Target. The term target means the member whose stock is transferred in a transaction that is subject to the Consolidated Deemed Acquisition Rule.
(xii) Transferee member. The term transferee member means the member that acquires eligible property or target stock, respectively, in a transaction that is subject to the Consolidated Asset Acquisition Rule or the Consolidated Deemed Acquisition Rule.
(xiii) Transferor member. The term transferor member means the member that transfers eligible property or target stock, respectively, in a transaction that is subject to the Consolidated Asset Acquisition Rule or the Consolidated Deemed Acquisition Rule.
(b) Acquisitions of depreciable property by a member of a consolidated group —(1) General rule (Group Prior Use Rule). Solely for purposes of applying § 1.168(k)-2(b)(3)(iii)(A)( 1 ), if a member of a consolidated group acquires depreciable property in which the group had a depreciable interest at any time within the lookback period, the member is treated as having a depreciable interest in the property prior to the acquisition. For purposes of this paragraph (b)(1), a consolidated group is treated as having a depreciable interest in property during the time any current or previous member of the group had a depreciable interest in the property while a member of the group. For special rules that apply when a member of a consolidated group acquires depreciable property in an intercompany transaction (as defined in § 1.1502-13(b)(1)(i)) and then leaves the group pursuant to the same series of related transactions, see paragraph (c) of this section.
(2) Certain acquisitions pursuant to a series of related transactions (Stock and Asset Acquisition Rule). Solely for purposes of applying § 1.168(k)-2(b)(3)(iii)(A)( 1 ), if a series of related transactions includes one or more transactions in which property is acquired by a member of a consolidated group, and one or more transactions in which a corporation that had a depreciable interest in the property (determined without regard to the application of the Group Prior Use Rule) within the lookback period becomes a member of the group, then the member that acquires the property is treated as having a depreciable interest in the property prior to the acquisition.
(c) Certain intercompany transfers of eligible property followed by deconsolidation —(1) Acquisition of eligible property by a member that leaves the group —(i) General rule (Consolidated Asset Acquisition Rule). This paragraph (c)(1) applies to certain transactions pursuant to which one member of a consolidated group (transferee member) acquires from another member of the same consolidated group (transferor member) eligible property. Except as otherwise provided in paragraph (c)(3) or (4) of this section, if a transaction satisfies the requirements of paragraph (c)(1)(ii) of this section, then § 1.168(k)-2(b)(3)(iii)(C) (providing special rules when depreciable property is acquired as part of a series of related transactions) does not apply to the transaction, and for all Federal income tax purposes—
(A) The transferee member is treated as selling the eligible property to an unrelated person on the day after the deconsolidation date in exchange for an amount of cash equal to the deemed sale amount; and
(B) Immediately after the deemed sale in paragraph (c)(1)(i)(A) of this section, the transferee member is treated as purchasing deemed replacement property from an unrelated person for an amount of cash equal to the deemed sale amount.
(ii) Requirements. A transaction satisfies the requirements of this paragraph (c)(1)(ii) if—
(A) The transferee member's acquisition of the eligible property meets the requirements of § 1.168(k)-2(b)(3)(iii)(A) without regard to section 179(d)(2)(A) or (B) and § 1.179-4(c)(1)(ii) or (iii) or the Group Prior Use Rule;
(B) As part of the same series of related transactions that includes the acquisition, the transferee member ceases to be a member of the consolidated group and ceases to be related, within the meaning of section 179(d)(2)(A) or (B) and § 1.179-4(c)(1)(ii) or (iii), to the transferor member; and
(C) The acquired eligible property continues to be eligible property on the deconsolidation date and the day after the deconsolidation date.
(2) Deemed acquisition of eligible property pursuant to an election under section 338 or 336(e) by a member that leaves the group —(i) General rule (Consolidated Deemed Acquisition Rule). This paragraph (c)(2) applies to certain transactions pursuant to which a transferee member acquires from a transferor member the stock of another member of the same consolidated group that holds eligible property (target) in either a qualified stock purchase for which a section 338 election is made or a qualified stock disposition described in § 1.336-2(b)(1) for which a section 336(e) election is made. Except as otherwise provided in paragraph (c)(3) or (4) of this section, if a transaction satisfies the requirements of paragraph (c)(2)(ii) of this section, then § 1.168(k)-2(b)(3)(iii)(C) does not apply to the transaction, and for all Federal income tax purposes—
(A) The target is treated as selling the eligible property to an unrelated person on the day after the deconsolidation date in exchange for an amount of cash equal to the deemed sale amount; and
(B) Immediately after the deemed sale in paragraph (c)(2)(i)(A) of this section, the target is treated as purchasing deemed replacement property from an unrelated person for an amount of cash equal to the deemed sale amount.
(ii) Requirements. A transaction satisfies the requirements of this paragraph (c)(2)(ii) if:
(A) The target's acquisition of the eligible property meets the requirements of § 1.168(k)-2(b)(3)(iii)(A) without regard to the Group Prior Use Rule;
(B) As part of the same series of related transactions that includes the qualified stock purchase or qualified stock disposition, the transferee member and the target cease to be members of the transferor member's consolidated group and cease to be related, within the meaning of section 179(d)(2)(A) or (B) and § 1.179-4(c)(1)(ii) or (iii), to the transferor member; and
(C) The target's eligible property on the acquisition date (within the meaning of § 1.338-2(c)(1)) or the disposition date (within the meaning of § 1.336-1(b)(8)) continues to be eligible property on the deconsolidation date and the day after the deconsolidation date.
(3) Disposition of depreciable property pursuant to the same series of related transactions. Paragraph (c)(1) of this section does not apply if, following the acquisition of eligible property, the transferee member disposes of such property pursuant to the same series of related transactions that includes the property acquisition. Paragraph (c)(2) of this section does not apply if, following the deemed acquisition of eligible property, the target disposes of such property pursuant to the same series of related transactions that includes the qualified stock purchase or qualified stock disposition. See § 1.168(k)-2(b)(3)(iii)(C) for rules regarding the transfer of property in a series of related transactions. See also § 1.168(k)-2(g)(1) for rules regarding property placed in service and disposed of in the same taxable year. For purposes of this paragraph (c)(3), the deemed sale of eligible property by the transferee member or the target pursuant to paragraph (c)(1)(i)(A) or (c)(2)(i)(A) of this section is not treated as a “disposition” of such property.
(4) Election to not apply paragraph (c)(1)(i) or (c)(2)(i) of this section —(i) In general. If a transaction satisfies the requirements of the Consolidated Asset Acquisition Rule or the Consolidated Deemed Acquisition Rule in paragraph (c)(1)(ii) or (c)(2)(ii) of this section, respectively, the transferee member or the target nonetheless may elect not to apply the Consolidated Asset Acquisition Rule or the Consolidated Deemed Acquisition Rule, respectively, to all eligible property that is acquired or deemed acquired in such transaction. If a transferee member or target makes an election under this paragraph (c)(4) with respect to any transaction (designated transaction), then—
(A) The transferee member or target is deemed to have made such an election for all other transactions—
( 1 ) That satisfy the requirements of the Consolidated Asset Acquisition Rule or the Consolidated Deemed Acquisition Rule;
( 2 ) That are part of the same series of related transactions as the designated transaction; and
( 3 ) In which the transferee member or target either is the same transferee member or target as in the designated transaction or is related, within the meaning of section 179(d)(2)(A) or (B) and § 1.179-4(c)(1)(ii) or (iii), to the transferee member or target in the designated transaction immediately after the end of the series of related transactions; and
(B) Any eligible property acquired or deemed acquired in the designated transaction and in any transactions described in paragraph (c)(4)(i)(A) of this section does not satisfy either the original use requirement or the used property acquisition requirements in § 1.168(k)-2(b)(3) and, thus, is not “qualified property” within the meaning of § 1.168(k)-2(b)(1).
(ii) Time and manner for making election —(A) Time to make election. An election under this paragraph (c)(4) must be made by the due date, including extensions, for the Federal tax return for the taxable year of the transferee member or target that begins on the day after the deconsolidation date.
(B) Manner of making election. A transferee member or target, as applicable, makes the election under this paragraph (c)(4) by attaching a statement to its return for the taxable year that begins on the day after the deconsolidation date. The statement must describe the transaction(s) to which the Consolidated Asset Acquisition Rule or Consolidated Deemed Acquisition Rule otherwise would apply and state that the transferee member or the target, as applicable, is not claiming the additional first year depreciation deduction for any eligible property transferred in such transaction(s). If, at the time the election is made, the transferee member or the target is a member of a consolidated group, the statement is made by the agent for the group (within the meaning of § 1.1502-77(a) and (c)) on behalf of the transferee member or the target and is attached to the consolidated return of the group for the taxable year of the group that includes the taxable year of the transferee member or target that begins on the day after the deconsolidation date.
(C) Additional procedural guidance. The IRS may publish procedural guidance in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)( b ) of this chapter) that provides alternative procedures for complying with paragraph (c)(4)(ii)(A) or (B) of this section.
(iii) Revocation of election. An election specified in this paragraph (c)(4), once made, may be revoked only by filing a request for a private letter ruling and obtaining the Commissioner of Internal Revenue's written consent to revoke the election. The Commissioner may grant a request to revoke the election if the taxpayer acted reasonably and in good faith, and the revocation will not prejudice the interests of the Government. See generally § 301.9100-3 of this chapter. An election specified in this paragraph (c)(4) may not be revoked through a request under section 446(e) to change the taxpayer's method of accounting.
(d) Examples. For purposes of the examples in this section, unless otherwise stated: Parent, S, B, Controlled, and T are members of a consolidated group of which Parent is the common parent (Parent group); Parent owns all of the only class of stock of each of S, B, Controlled, and T; X is the common parent of the X consolidated group (X group); no member of the X group is related, within the meaning of section 179(d)(2)(A) or (B) and § 1.179-4(c)(1)(ii) or (iii) (Related), to any member of the Parent group; G and U are corporations that are not Related to each other or to any member of the Parent group or the X group; the Equipment in each example is eligible property; no member of the Parent group or the X group has had a depreciable interest in the Equipment within the lookback period; § 1.168(k)-2(b)(3)(iii)(A)( 1 ) is referred to as the No Prior Use Requirement; and § 1.168(k)-2(b)(3)(iii)(A)( 2 ) is referred to as the Unrelated Party Requirement. The rules of this section are illustrated by the following examples.
(1) Example 1: Intercompany sale of eligible property —(i) Facts. S has a depreciable interest in Equipment #1. In 2018, S sells Equipment #1 to B, and B places Equipment #1 in service in the same year.
(ii) Analysis. B's acquisition of Equipment #1 does not satisfy either the No Prior Use Requirement or the Unrelated Party Requirement. Under the Group Prior Use Rule, B is treated as previously having a depreciable interest in Equipment #1 because B (a member of the Parent group) acquired Equipment #1 and S, while a member of the Parent group, had a depreciable interest in Equipment #1 within the lookback period. In addition, B acquires Equipment #1 from S, and B and S are Related at the time of the acquisition. Accordingly, B is not eligible to claim the additional first year depreciation deduction for Equipment #1 in 2018.
(2) Example 2: Sale outside of the consolidated group followed by a reacquisition within the lookback period —(i) Facts. S has a depreciable interest in Equipment #2. In 2018, S sells Equipment #2 to G. In 2019, in an unrelated transaction, B acquires Equipment #2 from G and places it in service in the same year.
(ii) Analysis. B's acquisition of Equipment #2 does not satisfy the No Prior Use Requirement as a result of the Group Prior Use Rule. Pursuant to the Group Prior Use Rule, B is treated as previously having a depreciable interest in Equipment #2 because B is a member of the Parent group and S, while a member of the Parent group, had a depreciable interest in Equipment #2 within the lookback period. Thus, B is not eligible to claim the additional first year depreciation deduction for Equipment #2 in 2019. The result would be the same if, after selling Equipment #2 to G, S had ceased to be a member of the Parent group prior to B's acquisition of Equipment #2.
(iii) Sale outside of the consolidated group followed by a reacquisition beyond the lookback period. The facts are the same as in paragraph (d)(2)(i) of this section, except that B acquires Equipment #2 and places it in service in 2024 instead of 2019. B's acquisition of Equipment #2 satisfies the No Prior Use Requirement. B would not be treated as previously having a depreciable interest in Equipment #2 under the Group Prior Use Rule because the Parent group did not have a depreciable interest in Equipment #2 within the lookback period. Further, B itself did not have a prior depreciable interest in Equipment #2 within the lookback period. Assuming all other requirements in § 1.168(k)-2 are satisfied, B is eligible to claim the additional first year depreciation deduction for Equipment #2 in 2024. The result would be the same if S, rather than B, acquired and placed in service Equipment #2 in 2024.
(3) Example 3: Acquisition of eligible property by the consolidated group followed by a corporation with a prior depreciable interest joining the group as part of the same series of related transactions —(i) Facts. G has a depreciable interest in Equipment #3. During 2018, G sells Equipment #3 to U. In a series of related transactions that does not include the 2018 sale, Parent acquires all of the stock of G in 2019. Later in 2019, B purchases Equipment #3 from U and places it in service immediately thereafter.
(ii) Analysis. B's acquisition of Equipment #3 does not satisfy the No Prior Use Requirement as a result of the Stock and Asset Acquisition Rule. In a series of related transactions, G became a member of the Parent group and B acquired Equipment #3. Because G had a depreciable interest in Equipment #3 within the lookback period, B is treated as having a depreciable interest in Equipment #3 under the Stock and Asset Acquisition Rule. Thus, B is not eligible to claim the additional first year depreciation deduction for Equipment #3 in 2019.
(iii) B purchases Equipment #3 in 2024. The facts are the same as in paragraph (d)(3)(i) of this section, except that B acquires and places in service Equipment #3 in 2024 instead of 2019. B is not treated under the Stock and Asset Acquisition Rule as having a prior depreciable interest in Equipment #3 because G (which sold Equipment #3 to U in 2018) did not have a depreciable interest in Equipment #3 within the lookback period. In addition, B is not treated under the Group Prior Use Rule as having a prior depreciable interest in Equipment #3 at the time of the purchase because neither G nor any other member of the Parent group had a depreciable interest in Equipment #3 while a member of the Parent group within the lookback period. Further, B itself did not have a depreciable interest in Equipment #3 within the lookback period. Accordingly, B's acquisition of Equipment #3 satisfies the No Prior Use Requirement. Assuming all other requirements in § 1.168(k)-2 are satisfied, B is eligible to claim the additional first year depreciation deduction for Equipment #3 in 2024.
(iv) No series of related transactions. The facts are the same as in paragraph (d)(3)(i) of this section, except that Parent's acquisition of the G stock and B's purchase of Equipment #3 are not part of the same series of related transactions. Because B's purchase of Equipment #3 and Parent's acquisition of the G stock did not occur pursuant to the same series of related transactions, the Stock and Asset Acquisition Rule does not apply. In addition, B is not treated under the Group Prior Use Rule as having a prior depreciable interest in Equipment #3 at the time of the purchase because neither G nor any other member of the Parent group had a depreciable interest in Equipment #3 while a member of the Parent group within the lookback period. Further, B itself did not have a depreciable interest in Equipment #3 within the lookback period. Accordingly, B's acquisition of Equipment #3 satisfies the No Prior Use Requirement. Assuming all other requirements in § 1.168(k)-2 are satisfied, B is eligible to claim the additional first year depreciation deduction for Equipment #3 in 2019.
(4) Example 4: Termination of the consolidated group —(i) Facts. S owns Equipment #4. In 2018, S sells Equipment #4 to U. In 2019, X acquires all of the stock of Parent in a transaction that causes the Parent group to terminate and Parent, B, and S to become members of the X group. In 2020, in a transaction that is not part of a series of related transactions, B purchases Equipment #4 from U and places it in service in the same year.
(ii) Analysis. B's acquisition of Equipment #4 satisfies the No Prior Use Requirement. The Group Prior Use Rule does not apply to treat B as having a prior depreciable interest in Equipment #4 because B is a member of the X group and no member of the X group had a depreciable interest in Equipment #4 while a member of the X group within the lookback period. Further, B itself did not have a prior depreciable interest in Equipment #4 within the lookback period. Assuming all other requirements in § 1.168(k)-2 are satisfied, B is eligible to claim the additional first year depreciation deduction for Equipment #4 in 2020.
(iii) S purchases Equipment #4 in 2020. The facts are the same as in paragraph (d)(4)(i) of this section, except that S rather than B purchases and places in service Equipment #4 in 2020. S's purchase of Equipment #4 does not satisfy the No Prior Use Requirement because S had a depreciable interest in Equipment #4 within the lookback period. Thus, S is not eligible to claim the additional first year depreciation deduction for Equipment #4 in 2020.
(iv) Acquisitions are part of the same series of related transactions. The facts are the same as in paragraph (d)(4)(i) of this section, except that X's acquisition of the Parent stock and B's purchase of Equipment #4 are part of the same series of related transactions. Thus, pursuant to the same series of related transactions, S became a member of the X group and B (another member of the X group) acquired Equipment #4. Because S had a depreciable interest in Equipment #4 within the lookback period, B is treated as having a depreciable interest in Equipment #4 under the Stock and Asset Acquisition Rule. As a result, B's acquisition of Equipment #4 does not satisfy the No Prior Use Requirement, and B is not eligible to claim the additional first year depreciation deduction for Equipment #4 in 2020.
(5) Example 5: Intercompany sale of eligible property followed by sale of B stock as part of the same series of related transactions —(i) Facts. S has a depreciable interest in Equipment #5. On January 1, 2019, B purchases Equipment #5 from S and places it in service. On June 1, 2019, as part of the same series of related transactions that includes B's purchase of Equipment #5, Parent sells all of the stock of B to X. Thus, B leaves the Parent group at the end of the day on June 1, 2019, and B is a member of the X group starting June 2, 2019. See § 1.1502-76(b). As of June 1, 2019, Equipment #5 remains eligible property.
(ii) Analysis —(A) Application of the Consolidated Asset Acquisition Rule. B was a member of the Parent group when it acquired Equipment #5. Because S, another member of the Parent group, had a depreciable interest in Equipment #5 while a member of the group within the lookback period, B would be treated as having a prior depreciable interest in Equipment #5 under the Group Prior Use Rule and B's acquisition of Equipment #5 would not satisfy the No Prior Use Requirement. However, B's acquisition of Equipment #5 satisfies the requirements of the Consolidated Asset Acquisition Rule in paragraph (c)(1)(ii) of this section. First, B's acquisition of Equipment #5 meets the requirements of § 1.168(k)-2(b)(3)(iii)(A) without regard to the related-party tests under section 179(d)(2)(A) or (B) and § 1.179-4(c)(1)(ii) or (iii) or the Group Prior Use Rule. Second, as part of the same series of related transactions that includes B's acquisition of Equipment #5, B ceases to be a member of the Parent group and ceases to be Related to S. Third, Equipment #5 continues to be eligible property on the deconsolidation date (June 1, 2019).
(B) Consequences of the Consolidated Asset Acquisition Rule. Under the Consolidated Asset Acquisition Rule, B is treated for all Federal income tax purposes as transferring Equipment #5 to an unrelated person on June 2, 2019, in exchange for an amount of cash equal to the deemed sale amount and, immediately thereafter, acquiring deemed replacement property (New Equipment #5) from an unrelated person for an amount of cash equal to the deemed sale amount. Accordingly, assuming all other requirements in § 1.168(k)-2 are satisfied, B is eligible to claim the additional first year depreciation for an amount equal to the deemed sale amount for the taxable year in which it places New Equipment #5 in service.
(iii) Distribution of B. The facts are the same as in paragraph (d)(5)(i) of this section, except that, on June 1, 2019, Parent distributes the stock of B to its shareholders (which are not Related to S) in a distribution that qualifies for nonrecognition under section 355(a). Accordingly, the Consolidated Asset Acquisition Rule applies. As in paragraph (d)(5)(ii)(B) of this section, assuming all other requirements in § 1.168(k)-2 are satisfied, B is eligible to claim the additional first year depreciation deduction for an amount equal to the deemed sale amount for the taxable year in which it places New Equipment #5 in service.
(iv) Equipment #5 ceases to be eligible property. The facts are the same as in paragraph (d)(5)(i) of this section, except that, on June 1, 2019, Equipment #5 is no longer eligible property. The Consolidated Asset Acquisition Rule does not apply because B's acquisition of Equipment #5 fails to satisfy the requirement in paragraph (c)(1)(ii)(C) of this section that the acquired eligible property continue to be eligible property on the deconsolidation date. Therefore, B's acquisition of Equipment #5 on January 1, 2019, fails to satisfy the No Prior Use Requirement. Under the Group Prior Use Rule, B is treated as having a prior depreciable interest in Equipment #5 because B is a member of the Parent group and S, while a member of the Parent group, had a depreciable interest in Equipment #5 within the lookback period. Accordingly, B is not eligible to claim the additional first year depreciation deduction with respect to Equipment #5 in 2019.
(6) Example 6: Intercompany sale of member stock for which a section 338(h)(10) election is made followed by sale of B stock as part of a series of related transactions —(i) Facts. S owns all of the stock of T, which has a depreciable interest in Equipment #6. On January 1, 2019, B purchases all of the T stock from S in a qualified stock purchase for which a section 338(h)(10) election is made. On June 1, 2019, as part of the same series of related transactions that includes B's purchase of the T stock, Parent sells all of the stock of B to X. Thus, B and T leave the Parent group at the end of the day on June 1, 2019, and B and T are members of the X group starting June 2, 2019. See § 1.1502-76(b). As of June 1, 2019, Equipment #6 remains eligible property.
(ii) Analysis —(A) Section 338(h)(10) election. Pursuant to the section 338(h)(10) election, Old T is treated as transferring all of its assets, including Equipment #6, to an unrelated person in a single transaction in exchange for consideration at the close of the acquisition date (January 1, 2019), and New T is treated as acquiring all of its assets, including Equipment #6, from an unrelated person in exchange for consideration. Old T is deemed to liquidate following the deemed asset sale. See § 1.338-1(a)(1).
(B) Application of the Consolidated Deemed Acquisition Rule. New T was a member of the Parent group when New T acquired Equipment #6 from an unrelated person. Because Old T, another member of the Parent group, had a depreciable interest in Equipment #6 while a member of the group within the lookback period, New T would be treated as having a prior depreciable interest in Equipment #6 under the Group Prior Use Rule and New T's acquisition of Equipment #6 would not satisfy the No Prior Use Requirement. However, New T's acquisition of Equipment #6 satisfies the requirements of the Consolidated Deemed Acquisition Rule in paragraph (c)(2)(ii) of this section. First, New T's acquisition of Equipment #6 meets the requirements of § 1.168(k)-2(b)(3)(iii)(A) without regard to the Group Prior Use Rule. Second, as part of the same series of related transactions that includes B's qualified stock purchase of the T stock, B and New T cease to be members of the Parent group and cease to be Related to S. Third, Equipment #6 continues to be eligible property on the deconsolidation date (June 1, 2019).
(C) Consequences of the Consolidated Deemed Acquisition Rule. Under the Consolidated Deemed Acquisition Rule, New T is treated for all Federal income tax purposes as transferring Equipment #6 to an unrelated person on June 2, 2019, in exchange for an amount of cash equal to the deemed sale amount and, immediately thereafter, acquiring deemed replacement property (New Equipment #6) from an unrelated person for an amount of cash equal to the deemed sale amount. Accordingly, assuming all other requirements in § 1.168(k)-2 are satisfied, New T is eligible to claim the additional first year depreciation deduction for an amount equal to the deemed sale amount for the taxable year in which it places New Equipment #6 in service.
(iii) T owns multiple assets. The facts are the same as in paragraph (d)(6)(i) of this section, except that, in addition to Equipment #6, T also owns Asset A (depreciable real estate that is not eligible property). With respect to Equipment #6, the results are the same as in paragraph (d)(6)(ii) of this section. However, the Consolidated Deemed Acquisition Rule does not apply to Asset A because it is not eligible property. Accordingly, New T is not treated as transferring Asset A to an unrelated person on June 2, 2019 and then, immediately thereafter, acquiring deemed replacement property for Asset A. If Equipment #6 had ceased to be eligible property as of June 1, 2019, the Consolidated Deemed Acquisition Rule also would not apply to Equipment #6.
(7) Example 7: Section 355 transaction following a section 338(h)(10) transaction pursuant to the same series of related transactions —(i) Facts. T has a depreciable interest in Equipment #7. On January 1, 2019, Parent contributes all of the stock of T to B in exchange for common and non-voting preferred stock of B and sells the non-voting preferred stock of B to U pursuant to a binding commitment entered into prior to the contribution (T Exchange). The non-voting preferred stock is not treated as “stock” for purposes of section 1504(a). See section 1504(a)(4). Parent and B jointly make an election under section 338(h)(10) with respect to the T Exchange. On June 1, 2019, as part of the same series of related transactions that includes the T Exchange, Parent contributes the stock of B and assets comprising an active trade or business (within the meaning of section 355(b)) to Controlled in exchange for Controlled common stock and then distributes the Controlled common stock to Parent's shareholders in a distribution qualifying under section 355(a) (Controlled Distribution). In the Controlled Distribution, T and B cease to be Related to Parent. Equipment #7 remains eligible property on June 1, 2019.
(ii) Section 338(h)(10) election. Immediately after the Controlled Distribution, Parent and B are not related as determined under section 338(h)(3)(A)(iii). Further, B's basis in the T stock is not determined, in whole or in part, by reference to the adjusted basis of the T stock in the hands of Parent, and the stock is not acquired in an exchange to which section 351, 354, 355, or 356 applies. Accordingly, the T Exchange qualifies as a “purchase” within the meaning of section 338(h)(3). Pursuant to the section 338(h)(10) election, Old T is treated as transferring all of its assets, including Equipment #7, to an unrelated person in a single transaction in exchange for consideration at the close of the acquisition date (January 1, 2019), and New T is treated as acquiring all of its assets, including Equipment #7, from an unrelated person in exchange for consideration. Old T is deemed to liquidate following the deemed asset sale. See § 1.338-1(a)(1).
(iii) Application of the Consolidated Deemed Acquisition Rule. New T was a member of the Parent group when New T acquired Equipment #7 from an unrelated person. Because Old T, another member of the Parent group, had a depreciable interest in Equipment #7 while a member of the group within the lookback period, New T would be treated as having a prior depreciable interest in Equipment #7 under the Group Prior Use Rule and New T's acquisition of Equipment #7 would not satisfy the No Prior Use Requirement. However, New T's acquisition of Equipment #7 satisfies the requirements of the Consolidated Deemed Acquisition Rule in paragraph (c)(2)(ii) of this section. Thus, New T is treated for all Federal income tax purposes as transferring Equipment #7 to an unrelated person on June 2, 2019, in exchange for an amount of cash equal to the deemed sale amount and, immediately thereafter, acquiring deemed replacement property (New Equipment #7) from an unrelated person for an amount of cash equal to the deemed sale amount. Accordingly, assuming all other requirements in § 1.168(k)-2 are satisfied, New T is eligible to claim the additional first year depreciation deduction for an amount equal to the deemed sale amount for the taxable year in which it places New Equipment #7 in service.
(e) Applicability dates —(1) In general. Except as provided in paragraph (e)(2) of this section, this section applies to—
(i) Depreciable property acquired after September 27, 2017, by the taxpayer and placed in service by the taxpayer during or after the taxpayer's taxable year that begins on or after January 1, 2021;
(ii) A specified plant for which the taxpayer properly made an election to apply section 168(k)(5) and that is planted, or grafted to a plant that was previously planted, by the taxpayer during or after the taxpayer's taxable year that begins on or after January 1, 2021; and
(iii) Components acquired or self-constructed after September 27, 2017, of larger self-constructed property described in § 1.168(k)-2(c)(2) and placed in service by the taxpayer during or after the taxpayer's taxable year that begins on or after January 1, 2021.
(2) Early application of this section and § 1.168(k)-2 —(i) In general. Subject to paragraphs (e)(2)(ii) and (iii) of this section, and provided that all members of a consolidated group consistently apply the same set of rules, a taxpayer may choose to apply both the rules of this section and the rules of § 1.168(k)-2, in their entirety and in a consistent manner, to—
(A) Depreciable property acquired after September 27, 2017, by the taxpayer and placed in service by the taxpayer during a taxable year ending on or after September 28, 2017;
(B) A specified plant for which the taxpayer properly made an election to apply section 168(k)(5) and that is planted, or grafted to a plant that was previously planted, after September 27, 2017, by the taxpayer during a taxable year ending on or after September 28, 2017; and
(C) Components acquired or self-constructed after September 27, 2017, of larger self-constructed property described in § 1.168(k)-2(c)(2) and placed in service by the taxpayer during a taxable year ending on or after September 28, 2017.
(ii) Early application to certain transactions. In the case of property described in paragraph (e)(2)(i) of this section that is acquired in a transaction that satisfies the requirements of paragraph (c)(1)(ii) or (c)(2)(ii) of this section, the taxpayer may apply the rules of this section and the rules of § 1.168(k)-2, in their entirety and in a consistent manner, to such property only if those rules are applied, in their entirety and in a consistent manner, by all parties to the transaction (including the transferor member, the transferee member, and the target, as applicable) and the consolidated groups of which they are members, for the taxable year(s) in which the transaction occurs and the taxable year(s) that includes the day after the deconsolidation date.
(iii) Bound by early application. Once a taxpayer applies the rules of this section and the rules of § 1.168(k)-2, in their entirety, for a taxable year, the taxpayer must continue to apply the rules of this section and the rules of § 1.168(k)-2, in their entirety, for the taxpayer's subsequent taxable years.
§ 1.1502-75   Filing of consolidated returns.
(a) Privilege of filing consolidated returns —(1) Exercise of privilege for first consolidated return year. A group which did not file a consolidated return for the immediately preceding taxable year may file a consolidated return in lieu of separate returns for the taxable year, provided that each corporation which has been a member during any part of the taxable year for which the consolidated return is to be filed consents (in the manner provided in paragraph (b) of this section) to the regulations under section 1502. If a group wishes to exercise its privilege of filing a consolidated return, such consolidated return must be filed not later than the last day prescribed by law (including extensions of time) for the filing of the common parent's return. Such consolidated return may not be withdrawn after such last day (but the group may change the basis of its return at any time prior to such last day).
(2) Continued filing requirement. A group which filed (or was required to file) a consolidated return for the immediately preceding taxable year is required to file a consolidated return for the taxable year unless it has an election to discontinue filing consolidated returns under paragraph (c) of this section.
(b) How consent for first consolidated year exercised —(1) General rule. The consent of a corporation referred to in paragraph (a)(1) of this section is made by such corporation joining in the making of the consolidated return for such year. A corporation is deemed to have joined in the making of such return for such year if it files a Form 1122 (or successor form) in the manner specified in paragraph (h)(2) of this section.
(2) Consent under facts and circumstances —(i) In general. If a member of the group fails to file Form 1122 (or successor form), the Commissioner may under the facts and circumstances determine that such member has joined in the making of a consolidated return by such group. The following circumstances, among others, will be taken into account in making this determination—
(A) Whether or not the income and deductions of the member were included in the consolidated return;
(B) Whether or not a separate return was filed by the member for that taxable year; and
(C) Whether or not the member was included in the affiliations schedule, Form 851 (or successor form).
(ii) Treatment of member. If the Commissioner determines that the member described in paragraph (b)(1)(i) of this section has joined in the making of the consolidated return, such member is treated as if it had filed a Form 1122 (or successor form) for such year for purposes of paragraph (h)(2) of this section.
(3) Failure to consent due to mistake. If any member has failed to join in the making of a consolidated return under either paragraph (b)(1) or (2) of this section, then the tax liability of each member of the group is determined on the basis of separate returns unless the common parent corporation establishes to the satisfaction of the Commissioner that the failure of such member to join in the making of the consolidated return was due to a mistake of law or fact, or to inadvertence. In such case, such member is treated as if it had filed a Form 1122 (or successor form) for such year for purposes of paragraph (h)(2) of this section, and thus joined in the making of the consolidated return for such year.
(c) Election to discontinue filing consolidated returns —(1) Good cause —(i) In general. Notwithstanding that a consolidated return is required for a taxable year, the Commissioner, upon application by the common parent, may for good cause shown grant permission to a group to discontinue filing consolidated returns. Any such application must be made through a letter ruling request filed not later than the 90th day before the due date of the consolidated return for the taxable year (including extensions). In addition, if an amendment of the Code, or other law affecting the computation of tax liability, is enacted and the enactment is effective for a taxable year ending before or within 90 days after the date of enactment, then application for such a taxable year may be made not later than the 180th day after the date of enactment, and if the application is approved the permission to discontinue filing consolidated returns will apply to such taxable year notwithstanding that a consolidated return has already been filed for such year.
(ii) Substantial adverse change in law affecting tax liability. Ordinarily, the Commissioner will grant a group permission to discontinue filing consolidated returns if the net result of all amendments to the Code or regulations with effective dates commencing within the taxable year has a substantial adverse effect on the consolidated tax liability of the group for such year relative to what the aggregate tax liability would be if the members of the group filed separate returns for such year. Thus, for example, assume P and S filed a consolidated return for the calendar year 1966 and that the provisions of the Code have been amended by a bill which was enacted by Congress in 1966, but which is first effective for taxable years beginning on or after January 1, 1967. Assume further that P makes a timely application to discontinue filing consolidated returns. In order to determine whether the amendments have a substantial adverse effect on the consolidated tax liability for 1967, relative to what the aggregate tax liability would be if the members of the group filed separate returns for 1967, the difference between the tax liability of the group computed on a consolidated basis and taking into account the changes in the law effective for 1967 and the aggregate tax liability of the members of the group computed as if each such member filed separate returns for such year (also taking into account such changes) shall be compared with the difference between the tax liability of such group for 1967 computed on a consolidated basis without regard to the changes in the law effective in such year and the aggregate tax liability of the members of the group computed as if separate returns had been filed by such members for such year without regard to the changes in the law effective in such year.
(iii) Other factors. In addition, the Commissioner will take into account other factors in determining whether good cause exists for granting permission to discontinue filing consolidated returns beginning with the taxable year, including:
( a ) Changes in law or circumstances, including changes which do not affect Federal income tax liability,
( b ) Changes in law which are first effective in the taxable year and which result in a substantial reduction in the consolidated net operating loss (or consolidated unused investment credit) for such year relative to what the aggregate net operating losses (or investment credits) would be if the members of the group filed separate returns for such year, and
( c ) Changes in the Code or regulations which are effective prior to the taxable year but which first have a substantial adverse effect on the filing of a consolidated return relative to the filing of separate returns by members of the group in such year.
(2) Discretion of Commissioner to grant blanket permission —(i)
(i) Permission to all groups. The Commissioner, in the Commissioner's discretion, may grant all groups permission to discontinue filing consolidated returns if any provision of the Code or regulations has been amended and such amendment is of the type which could have a substantial adverse effect on the filing of consolidated returns by substantially all groups, relative to the filing of separate returns. Ordinarily, the permission to discontinue applies with respect to the taxable year of each group which includes the effective date of such an amendment.
(ii) Permission to a class of groups. The Commissioner, in the Commissioner's discretion, may grant a particular class of groups permission to discontinue filing consolidated returns if any provision of the Code or regulations has been amended and such amendment is of the type which could have a substantial adverse effect on the filing of consolidated returns by substantially all such groups relative to the filing of separate returns. Ordinarily, the permission to discontinue applies with respect to the taxable year of each group within the class which includes the effective date of such an amendment.
(3) Time and manner for exercising election. If, under subparagraph (1) or (2) of this paragraph, a group has an election to discontinue filing consolidated returns for any taxable year and such group wishes to exercise such election, then the common parent must file a separate return for such year on or before the last day prescribed by law (including extensions of time) for the filing of the consolidated return for such year. See section 6081 (relating to extensions of time for filing returns).
(d) When a group remains in existence —(1) General rule. A group remains in existence for a tax year if the common parent remains as the common parent and at least one subsidiary that was affiliated with it at the end of the prior year remains affiliated with it at the beginning of the year, whether or not one or more corporations have ceased to be subsidiaries at any time after the group was formed. Thus, for example, assume that corporation P acquires the sole outstanding share of stock of S on January 1, year 1, and that P and S file a consolidated return for the year 1 calendar year. On May 1, year 2, P acquires the sole outstanding share of stock of S1 and, on July 1, year 2, P sells the S share. The group (consisting originally of P and S) remains in existence in year 2 because P remained the common parent and, S, a subsidiary that was affiliated with P at the end of year 1, remained affiliated with P at the beginning of year 2.
(2) Common parent no longer in existence —(i) Mere change in identity. For purposes of this paragraph, the common parent corporation shall remain as the common parent irrespective of a mere change in identity, form, or place of organization of such common parent corporation (see section 368(a)(1)(F)).
(ii) Transfer of assets to subsidiary. The group shall be considered as remaining in existence notwithstanding that the common parent is no longer in existence if the members of the affiliated group succeed to and become the owners of substantially all of the assets of such former parent and there remains one or more chains of includible corporations connected through stock ownership with a common parent corporation which is an includible corporation and which was a member of the group prior to the date such former parent ceases to exist. For purposes of applying paragraph (f)(2)(i) of § 1.1502-1 to separate return years ending on or before the date on which the former parent ceases to exist, such former parent, and not the new common parent, shall be considered to be the corporation described in such paragraph.
(iii) Taxable years. If a transfer of assets described in subdivision (ii) of this subparagraph is an acquisition to which section 381(a) applies and if the group files a consolidated return for the taxable year in which the acquisition occurs, then for purposes of section 381:
( a ) The former common parent shall not close its taxable year merely because of the acquisition, and all taxable years of such former parent ending on or before the date of acquisition shall be treated as taxable years of the acquiring corporation, and
( b ) The corporation acquiring the assets shall close its taxable year as of the date of acquisition, and all taxable years of such corporation ending on or before the date of acquisition shall be treated as taxable years of the transferor corporation.
(iv) Exception. With respect to acquisitions occurring before January 1, 1971, subdivision (iii) of this subparagraph shall not apply if the group, in its income tax return, treats the taxable year of the former common parent as having closed as of the date of acquisition.
(3) Reverse acquisitions —(i) In general. If a corporation (hereinafter referred to as the “first corporation”) or any member of a group of which the first corporation is the common parent acquires after October 1, 1965:
( a ) Stock of another corporation (hereinafter referred to as the second corporation), and as a result the second corporation becomes (or would become but for the application of this subparagraph) a member of a group of which the first corporation is the common parent, or
( b ) Substantially all the assets of the second corporation,
(ii) Prior ownership of stock. For purposes of subdivision (i) of this subparagraph, if the first corporation, and any members of a group of which the first corporation is the common parent, have continuously owned for a period of at least 5 years ending on the date of the acquisition an aggregate of at least 25 percent of the fair market value of the outstanding stock of the second corporation, then the first corporation (and any subsidiary which owns stock of the second corporation immediately before the acquisition) shall, as a result of owning such stock, be treated as owning (immediately after the acquisition) a percentage of the fair market value of the first corporation's outstanding stock which bears the same ratio to ( a ) the percentage of the fair market value of all the stock of the second corporation owned immediately before the acquisition by the first corporation and its subsidiaries as ( b ) the fair market value of the total outstanding stock of the second corporation immediately before the acquisition bears to ( c ) the sum of ( 1 ) the fair market value, immediately before the acquisition, of the total outstanding stock of the first corporation, and ( 2 ) the fair market value, immediately before the acquisition, of the total outstanding stock of the second corporation (other than any such stock owned by the first corporation and any of its subsidiaries). For example, assume that corporation P owns stock in corporation T having a fair market value of $100,000, that P acquires the remaining stock of T from individuals in exchange for stock of P, that immediately before the acquisition the total outstanding stock of T had a fair market value of $150,000, and that immediately before the acquisition the total outstanding stock of P had a fair market value of $200,000. Assuming P owned at least 25 percent of the fair market value of T's stock for 5 years, then for purposes of this subparagraph, P is treated as owning (immediately after the acquisition) 40 percent of the fair market value of its own outstanding stock, determined as follows:
(iii) Election. The provisions of subdivision (ii) of this subparagraph shall not apply to any acquisition occurring in a taxable year ending after October 7, 1969, unless the first corporation elects to have such subdivision apply. The election shall be made by means of a statement, signed by any officer who is duly authorized to act on behalf of the first corporation, stating that the corporation elects to have the provisions of § 1.1502-75(d)(3)(ii) apply and identifying the acquisition to which such provisions will apply. The statement shall be filed, on or before the due date (including extensions of time) of the return for the group's first consolidated return year ending after the date of the acquisition, with the internal revenue officer with whom such return is required to be filed.
(iv) Transfer of assets to subsidiary. This subparagraph shall not apply to a transaction to which subparagraph (2)(ii) of this paragraph applies.
(v) Taxable years. If, in a transaction described in subdivision (i) of this subparagraph, the first corporation files a consolidated return for the first taxable year ending after the date of acquisition, then:
( a ) The first corporation, and each corporation which, immediately before the acquisition, is a member of the group of which the first corporation is the common parent, shall close its taxable year as of the date of acquisition, and each such corporation shall, immediately after the acquisition, change to the taxable year of the second corporation, and
( b ) If the acquisition is a transaction described in section 381(a)(2), then for purposes of section 381:
( 1 ) All taxable years ending on or before the date of acquisition, of the first corporation and each corporation which, immediately before the acquisition, is a member of the group of which the first corporation is the common parent, shall be treated as taxable years of the transferor corporation, and
( 2 ) The second corporation shall not close its taxable year merely because of such acquisition, and all taxable years ending on or before the date of acquisition, of the second corporation and each corporation which, immediately before the acquisition, is a member of any group of which the second corporation is the common parent, shall be treated as taxable years of the acquiring corporation.
(vi) Exception. With respect to acquisitions occurring before April 17, 1968, subdivision (v) of this subparagraph shall not apply if the parties to the transaction, in their income tax returns, treat subdivision (i) as not affecting the closing of taxable years or the operation of section 381.
(4) [Reserved]
(e) Failure to include subsidiary. If a consolidated return is required for the taxable year under the provisions of paragraph (a)(2) of this section, the tax liability of all members of the group for such year shall be computed on a consolidated basis even though:
(1) Separate returns are filed by one or more members of the group, or
(2) There has been a failure to include in the consolidated return the income of any member of the group.
(f) Inclusion of one or more corporations not members of the group —(1) Method of determining tax liability. If a consolidated return includes the income of a corporation which was not a member of the group at any time during the consolidated return year, the tax liability of such corporation will be determined upon the basis of a separate return (or a consolidated return of another group, if paragraph (a)(2) or (b)(3) of this section applies), and the consolidated return will be considered as including only the income of the corporations which were members of the group during that taxable year. If a consolidated return includes the income of two or more corporations which were not members of the group but which constitute another group, the tax liability of such corporations will be computed in the same manner as if separate returns had been made by such corporations unless the Commissioner upon application approves the making of a consolidated return for the other group or unless under paragraph (a)(2) of this section a consolidated return is required for the other group.
(2) Allocation of tax liability. In any case in which amounts have been assessed and paid upon the basis of a consolidated return and the tax liability of one or more of the corporations included in the consolidated return is to be computed in the manner described in subparagraph (1) of this paragraph, the amounts so paid shall be allocated between the group composed of the corporations properly included in the consolidated return and each of the corporations the tax liability of which is to be computed on a separate basis (or on the basis of a consolidated return of another group) in such manner as the corporations which were included in the consolidated return may, subject to the approval of the Commissioner, agree upon or in the absence of an agreement upon the method used in allocating the tax liability of the members of the group under the provisions of section 1552(a).
(g) Computing periods of limitation —(1) Income incorrectly included in consolidated return. If:
(i) A consolidated return is filed by a group for the taxable year, and
(ii) The tax liability of a corporation whose income is included in such return must be computed on the basis of a separate return (or on the basis of a consolidated return with another group), then for the purpose of computing any period of limitation with respect to such separate return (or such other consolidated return), the filing of such consolidated return by the group shall be considered as the making of a return by such corporation.
(2) Income incorrectly included in separate returns. If a consolidated return is required for the taxable year under the provisions of paragraph (a)(2) of this section, the filing of separate returns by the members of the group for such year shall not be considered as the making of a return for the purpose of computing any period of limitation with respect to such consolidated return unless there is attached to each such separate return a statement setting forth:
(i) The most recent taxable year of the member for which its income was included in a consolidated return, and
(ii) The reasons for the group's belief that a consolidated return is not required for the taxable year.
(h) Method of filing return and forms —(1) Consolidated return made by common parent or agent. The consolidated return must be made on Form 1120, U.S. Corporation Income Tax Return (or any successor form), for the group by the common parent or the agent for the group as provided in § 1.1502-77(c). The consolidated return, with Form 851, Affiliations Schedule (or any successor form), attached, must be filed with the service center with which the common parent would have filed a separate return.
(2) Filing of Form 1122 for first year. If, under the provisions of paragraph (a)(1) of this section, a group wishes to file a consolidated return for a taxable year, then a Form 1122 ( Authorization and Consent of Subsidiary Corporation To Be Included in a Consolidated Income Tax Return ) (or successor form) must be executed by each subsidiary. The group must attach either executed Forms 1122 (or successor forms) or unsigned copies of the completed Forms 1122 (or successor forms) to the consolidated return. If the group submits unsigned Forms 1122 (or successor forms) with its return, it must retain the signed originals in its records in the manner required by § 1.6001-1(e). Form 1122 (or any successor form) is not required for a taxable year if a consolidated return was filed (or was required to be filed) by the group for the immediately preceding taxable year.
(3) Persons qualified to execute returns and forms. Each return or form required to be made or prepared by a corporation must be executed by the person authorized under section 6062 to execute returns of separate corporations.
(i) [Reserved]
(j) Statements and schedules for subsidiaries. The statement of gross income and deductions and the schedules required by the instructions on the return shall be prepared and filed in columnar form so that the details of the items of gross income, deductions, and credits for each member may be readily audited. Such statements and schedules shall include in columnar form a reconciliation of surplus for each corporation, and a reconciliation of consolidated surplus. Consolidated balance sheets as of the beginning and close of the taxable year of the group, taken from the books of the members, shall accompany the consolidated return and shall be prepared in a form similar to that required for reconciliation of surplus.
(k) Cross-reference. See § 1.338(h)(10)-1(d)(7) for special rules regarding filing consolidated returns when a section 338(h)(10) election is made for a target acquired from a selling consolidated group.
(l) Effective/applicability dates. Paragraph (d)(1) of this section applies to taxable years for which the due date of the original return (without regard to extensions) is on or after September 17, 2008.
§ 1.1502-76   Taxable year of members of group.
(a) Taxable year of members of group. The consolidated return of a group must be filed on the basis of the common parent's taxable year, and each subsidiary must adopt the common parent's annual accounting period for the first consolidated return year for which the subsidiary's income is includible in the consolidated return. If any member is on a 52-53-week taxable year, the rule of the preceding sentence will, with the advance consent of the Commissioner, be deemed satisfied if the taxable years of all members of the group end within the same 7-day period. Any request for such consent must be requested at the time and in the manner that the Commissioner of Internal Revenue may prescribe by Internal Revenue Service forms and instructions or by publication in the Internal Revenue Bulletin ( see § 601.601(d)(2)(ii) of this chapter).
(b) Items included in the consolidated return —(1) General rules —(i) In general. A consolidated return must include the common parent's items of income, gain, deduction, loss, and credit for the entire consolidated return year, and each subsidiary's items for the portion of the year for which it is a member. If the consolidated return includes the items of a corporation for only a portion of its tax year determined without taking this section into account, items for the portion of the year not included in the consolidated return must be included in a separate return (including the consolidated return of another group). The rules of this paragraph (b) must be applied to prevent the duplication or elimination of the corporation's items.
(ii) The day a corporation becomes or ceases to be a member —(A) End of the day rule. ( 1 ) In general. If a corporation (S), other than one described in paragraph (b)(1)(ii)(A)( 2 ) of this section, becomes or ceases to be a member during a consolidated return year, it becomes or ceases to be a member at the end of the day on which its status as a member changes, and its tax year ends for all Federal income tax purposes at the end of that day. Appropriate adjustments must be made if another provision of the Internal Revenue Code or the regulations thereunder contemplates the event occurring before or after S's change in status. For example, S's items restored under § 1.1502-13 immediately before it becomes a nonmember are taken into account in determining the basis of S's stock under § 1.1502-32. On the other hand, if a section 338(g) election is made in connection with S becoming a member, the deemed asset sale under that section takes place before S becomes a member. See § 1.338-10(a)(5) (deemed sale excluded from purchasing corporation's consolidated return.)
( 2 ) Special rule for former S corporations. If S becomes a member in a transaction other than in a qualified stock purchase for which an election under section 338(g) is made, and immediately before becoming a member an election under section 1362(a) was in effect, then S will become a member at the beginning of the day the termination of its S corporation election is effective. S's tax year ends for all Federal income tax purposes at the end of the preceding day.
(B) Next day rule. If, on the day of S's change in status as a member, a transaction occurs that is properly allocable to the portion of S's day after the event resulting in the change, S and all persons related to S under section 267(b) immediately after the event must treat the transaction for all Federal income tax purposes as occurring at the beginning of the following day. A determination as to whether a transaction is properly allocable to the portion of S's day after the event will be respected if it is reasonable and consistently applied by all affected persons. In determining whether an allocation is reasonable, the following factors are among those to be considered—
( 1 ) Whether income, gain, deduction, loss, and credit are allocated inconsistently (e.g., to maximize a seller's stock basis adjustments under § 1.1502-32);
( 2 ) If the item is from a transaction with respect to S stock, whether it reflects ownership of the stock before or after the event (e.g., if a member transfers encumbered land to nonmember S in exchange for additional S stock in a transaction to which section 351 applies and the exchange results in S becoming a member of the consolidated group, the applicability of section 357(c) to the exchange must be determined under § 1.1502-80(d) by treating the exchange as occurring after the event; on the other hand, if S is a member but has a minority shareholder and becomes a nonmember as a result of its redemption of stock with appreciated property, S's gain under section 311 is treated as from a transaction occurring before the event);
( 3 ) Whether the allocation is inconsistent with other requirements under the Internal Revenue Code and regulations promulgated thereunder (e.g., if a section 338(g) election is made in connection with a group's acquisition of S, the deemed asset sale must take place before S becomes a member and S's gain or loss with respect to its assets must be taken into account by S as a nonmember (but see § 1.338-1(d)), or if S realizes discharge of indebtedness income that is excluded from gross income under section 108(a) on the day it becomes a nonmember, the discharge of indebtedness income must be treated as realized by S as a member (see § 1.1502-28(b)(11))); and
( 4 ) Whether other facts exist, such as a prearranged transaction or multiple changes in S's status, indicating that the transaction is not properly allocable to the portion of S's day after the event resulting in S's change.
(C) Successor corporations. For purposes of this paragraph (b)(1)(ii), any reference to a corporation includes a reference to a successor or predecessor as the context may require. A corporation is a successor if the basis of its assets is determined, directly or indirectly, in whole or in part, by reference to the basis of the assets of another corporation (the predecessor). For example, if a member forms S, S is treated as a member from the beginning of its existence.
(iii) Group structure changes. If the common parent ceases to be the common parent but the group remains in existence, adjustments must be made in accordance with the principles of § 1.1502-75(d)(2) and (3).
(2) Determination of items included in separate and consolidated returns —(i) In general. The returns for the years that end and begin with S becoming (or ceasing to be) a member are separate tax years for all Federal income tax purposes. The returns are subject to the rules of the Internal Revenue Code applicable to short periods, as if S ceased to exist on becoming a member (or first existed on becoming a nonmember). For example, cost recovery deductions under section 168 must be allocated for short periods. On the other hand, annualization under section 443 is not required of S solely because it has a short year as a result of becoming a member. (Similarly, section 443 applies with respect to a consolidated return only to the extent that the group's return is for a short period and section 443 applies without taking this paragraph (b) into account.)
(ii) Ratable allocation of a year's items —(A) Application. Although the periods ending and beginning with S's change in status are different tax years, items (other than extraordinary items) may be ratably allocated between the periods if—
( 1 ) S is not required to change its annual accounting period or its method of accounting as a result of its change in status (e.g., because its stock is sold between consolidated groups that have the same annual accounting periods); and
( 2 ) An irrevocable ratable allocation election is made under paragraph (b)(2)(ii)(D) of this section.
(B) General rule —( 1 ) Allocation within original year. Under a ratable allocation election, paragraph (b)(2) of this section applies by allocating to each day of S's original year (S's tax year determined without taking this section into account) an equal portion of S's items taken into account in the original year, except that extraordinary items must be allocated to the day that they are taken into account. All persons affected by the election must take into account S's extraordinary items and the ratable allocation of S's remaining items in a manner consistent with the election.
( 2 ) Items to be allocated. Under ratable allocation, the items to be allocated and their timing, location, character, and source are generally determined by treating the original year as a single tax year, and the items are not subject to the rules of the Internal Revenue Code applicable to short periods (unless the original year is a short period). However, the years ending and beginning with S's change in status are treated as different tax years (and as short periods) with respect to any item carried to or from these years (e.g., a net operating loss carried under section 172) and with respect to the application of section 481.
( 3 ) Multiple applications. If this paragraph (b) applies more than once with respect to an original year, adjustments must be made in accordance with the principles of this paragraph (b). For example, if S becomes a member of two different consolidated groups during the same original year and ratable allocation is elected with respect to both groups, ratable allocation is generally determined for both groups by treating the original year as a single tax year; however, if ratable allocation is elected only with respect to the first group, the ratable allocation is determined by treating the original year as a short period that does not include the period that S is a member of the second group. Ratable allocation is not a method of accounting, and ratable allocation with respect to one application of this paragraph (b) to S does not require ratable allocation to be subsequently applied with respect to S.
(C) Extraordinary items. An extraordinary item is—
( 1 ) Any item from the disposition or abandonment of a capital asset as defined in section 1221 (determined without the application of any other rules of law);
( 2 ) Any item from the disposition or abandonment of property used in a trade or business as defined in section 1231(b) (determined without the application of any holding period requirement);
( 3 ) Any item from the disposition or abandonment of an asset described in section 1221(1), (3), (4), or (5), if substantially all the assets in the same category from the same trade or business are disposed of or abandoned in one transaction (or series of related transactions);
( 4 ) Any item from assets disposed of in an applicable asset acquisition under section 1060(c);
( 5 ) Any item carried to or from any portion of the original year (e.g., a net operating loss carried under section 172), and any section 481(a) adjustment;
( 6 ) The effects of any change in accounting method initiated by the filing of the appropriate form after S's change in status;
( 7 ) Any item from the discharge or retirement of indebtedness (e.g., cancellation of indebtedness income or a deduction for retirement at a premium);
( 8 ) Any item from the settlement of a tort or similar third-party liability;
( 9 ) Any compensation-related deduction in connection with S's change in status (including, for example, deductions from bonus, severance, and option cancellation payments made in connection with S's change in status);
( 10 ) Any dividend income from a nonmember that S controls within the meaning of section 304 at the time the dividend is taken into account;
( 11 ) Any deemed income inclusion from a foreign corporation, or any deferred tax amount on an excess distribution from a passive foreign investment company under section 1291;
( 12 ) Any interest expense allocable under section 172(h) to a corporate equity reduction transaction causing this paragraph (b) to apply;
( 13 ) Any credit, to the extent it arises from activities or items that are not ratably allocated (e.g., the rehabilitation credit under section 47, which is based on placement in service); and
( 14 ) Any item which, in the opinion of the Commissioner, would, if ratably allocated, result in a substantial distortion of income in any consolidated return or separate return in which the item is included.
(D) Election —( 1 ) Statement. The election to ratably allocate items under this paragraph (b)(2)(ii) must be made in a separate statement entitled, “THIS IS AN ELECTION UNDER § 1.1502-76(b)(2)(ii) TO RATABLY ALLOCATE THE YEAR'S ITEMS OF [INSERT NAME AND EMPLOYER IDENTIFICATION NUMBER OF THE MEMBER].” The election must be filed by including a statement on or with the returns including the items for the years ending and beginning with S's change in status. If two or more members of the same consolidated group, as a consequence of the same plan or arrangement, cease to be members of that group and remain affiliated as members of another consolidated group, an election under this paragraph (b)(2)(ii)(D)( 1 ) may be made only if it is made by each such member. Each statement must also indicate that an agreement, as described in paragraph (b)(2)(ii)(D)( 2 ) of this section, has been entered into. Each party signing the agreement must retain either the original or a copy of the agreement as part of its records. See § 1.6001-1(e).
( 2 ) Agreement. For each election under this paragraph (b)(2)(ii), the member and the common parent of each affected group must sign and date an agreement. The agreement must—
( i ) Identify the extraordinary items, their amounts, and the separate or consolidated returns in which they are included;
( ii ) Identify the aggregate amount to be ratably allocated, and the portion of the amount included in the separate and consolidated returns; and
( iii ) Include the name and employer identification number of the common parent (if any) of each group that must take the items into account.
(iii) Ratable allocation of a month's items. If ratable allocation under paragraph (b)(2)(ii) of this section is not elected (e.g., because S is required to change its annual accounting period), this paragraph (b)(2)(iii) may be applied to ratably allocate only S's items taken into account in the month of its change in status, but only if the allocation is consistently applied by all affected persons. The ratable allocation is made by applying the principles of paragraph (b)(2)(ii) of this section under any reasonable method. For example, S may close its books both at the end of the preceding month and at the end of the month of the change, and allocate only its items (other than extraordinary items) from the month of the change. See paragraph (b)(1)(ii)(B) of this section for factors to be considered in determining whether the method is reasonable.
(iv) Taxes. To the extent properly taken into account during the member's tax year (determined without the application of this paragraph (b)), Federal, state, local, and foreign taxes are allocated under paragraph (b)(2) of this section on the basis of the items or activities to which the taxes relate. Thus, income tax is allocated based on the inclusion of the income (determined under the principles of this paragraph (b)) to which the tax relates. For example, if a calendar-year domestic corporation has $100 of foreign source dividend income (determined in accordance with United States tax accounting principles but without taking this paragraph (b) into account) that is passive income for purposes of section 904, and $60 of the income is allocated under this paragraph (b) to the period of the calendar year after it becomes a member of a consolidated group, then 60% of the corporation's deemed paid foreign tax credit associated with its dividend income for the calendar year is taken into account in computing the group's passive basket consolidated foreign tax credit. Similarly, property taxes relate to the ownership of property and are allocated over the period that the property is owned. This paragraph (b)(2)(iv) applies without regard to any determination or allocation by another taxing jurisdiction.
(v) Acquisition of S corporation. If a corporation is acquired in a transaction to which paragraph (b)(1)(ii)(A)( 2 ) of this section applies, then paragraphs (b)(2)(ii) and (iii) of this section do not apply and items of income, gain, loss, deduction, and credit are assigned to each short taxable year on the basis of the corporation's normal method of accounting as determined under section 446.
(vi) Passthrough entities —(A) In general. If S is a partner in a partnership or an owner of a similar interest with respect to which items of the entity are taken into account by S, S is treated, solely for purposes of determining the year to which the entity's items are allocated under paragraph (b)(2) of this section, as selling or exchanging its entire interest in the entity immediately before S's change in status.
(B) Treatment as a conduit. For purposes of this paragraph (b)(2), if a member (together with other members) would be treated under section 318(a)(2) as owning an aggregate of at least 50% of any stock owned by the passthrough entity, the method that is used to determine the inclusion of the entity's items in the consolidated or separate return must be the same method that is used to determine the inclusion of the member's items in the consolidated or separate return.
(C) Exception for certain foreign entities. This paragraph (b)(2)(v) does not apply to any foreign corporation generating the deemed inclusion of income, or to any passive foreign investment company generating a deferred tax amount on an excess distribution under section 1291.
(3) Anti-avoidance rule. If any person acts with a principal purpose contrary to the purposes of this paragraph (b), to substantially reduce the Federal income tax liability of any person, adjustments must be made as necessary to carry out the purposes of this section.
(4) Determination of due date for separate return. Paragraph (c) of this section contains rules for the filing of the separate return referred to in this paragraph (b). In applying paragraph (c) of this section, the due date for the filing of S's separate return shall also be determined without regard to the ending of the tax year under paragraph (b)(1)(ii) of this section or the deemed cessation of its existence under paragraph (b)(2)(i) of this section.
(5) Examples. For purposes of the examples in this paragraph (b), unless otherwise stated, P and X are common parents of calendar-year consolidated groups, P owns all of the only class of T's stock, T owns no stock of lower-tier members, all persons use the accrual method of accounting, the facts set forth the only corporate activity, all transactions are between unrelated persons, tax liabilities are disregarded, and any election required under paragraph (b)(2) of this section is properly made. The principles of this paragraph (b) are illustrated by the following examples.
(b) Analysis. Under paragraph (b)(1) of this section, the P group's consolidated return for Year 2 includes P's income for the entire tax year and S's income for the period from January 1 to June 30, and S must file a separate return for the period from July 1 to December 31.
(c) Acquisition of another subsidiary before end of tax year. The facts are the same as in paragraph (a) of this Example 1, except that on July 31 P acquires all the stock of T (which filed a separate return for its year ending on November 30 of Year 1) and T therefore becomes a member on August 1 of Year 2. Under § 1.1502-75(d) and paragraph (b)(1) of this section, the P group's consolidated return for Year 2 includes P's income for the entire year, S's income from January 1 to June 30, and T's income from August 1 to December 31. S must file a separate return that includes its income from July 1 to December 31, and T must file a separate return that includes its income from December 1 of Year 1 to July 31 of Year 2. (If P had acquired T after December 31, the P group that included S is a different group from the P group that includes T, and, for example, the P group that includes T must make a separate election under section 1501 and § 1.1502-75 if consolidated returns are to be filed.)
(b) Analysis. Under paragraph (b)(1) of this section, the P group's return must include the common parent's items for the entire consolidated return year and, if the common parent ceases to be the common parent but the group remains in existence, appropriate adjustments must be made. Consequently, although P did not exist for all of Year 1, P's items for the portion of Year 1 ending with the merger are treated as the items of the common parent that must be included in the P group's return for Year 1.
(c) Reverse acquisition. Assume instead that X acquires all of P's assets in exchange for more than 50% of X's stock in a reorganization described in section 368(a)(1)(D). The reorganization constitutes a reverse acquisition under § 1.1502-75(d)(3), with the X group terminating and the P group surviving with X as its common parent. Consequently, P's items for the portion of Year 1 ending with the acquisition are treated as the items of the common parent that must be included in the P group's return for Year 1, and X's items are treated for purposes of paragraph (b)(1) of this section as the items of a subsidiary included in the P group's return for the portion of Year 1 for which X is a member.
(b) Analysis. If ratable allocation under paragraph (b)(2)(ii) of this section is not elected, T must perform an inventory valuation as of the acquisition and also as of the end of Year 1. If ratable allocation is elected, T must perform an inventory valuation only as of the close of Year 1, and T's income from inventory is ratably allocated, along with T's other items that are not extraordinary items, between the P and X consolidated returns.
(c) Merger into nonmember. Assume instead that T merges into a wholly owned subsidiary of X in a reorganization described in section 368(a)(2)(D), and P receives 10% of X's stock in exchange for all of T's stock. Under paragraph (b)(2)(ii)(B) of this section, because T's tax year ends on June 30 under section 381(b)(1), T's original year determined without taking paragraph (b) of this section into account also ends on June 30. Consequently, a ratable allocation under paragraph (b)(2)(ii) of this section is the same as an allocation based on closing the books.
(b) Analysis. Under paragraph (b) of this section, the sale is treated as causing T's tax year to end on June 30, and the period beginning on July 1 is treated as a separate annual accounting period for all Federal income tax purposes. T's income from January 1 to June 30 is included in the P group's Year 1 return, and T's income from July 1 to December 31 is included in the X group's Year 1 return. Thus, the $100 contribution is deductible by T for the period of Year 1 that it is a member of the X group, subject to the applicable limitations of section 404, if a contribution on the last day of that period would otherwise be deductible.
(c) The facts are the same as in paragraph (a) of this Example 5, except that, in accordance with section 404(a)(6), $40 of the $100 contribution is made on account of T's taxable period beginning on January 1 of Year 1 and is deemed to be made on the last day of T's taxable period beginning on January 1 of Year 1. The remaining $60 is made on account of T's taxable period beginning on July 1 of Year 1 and is deemed to be made on the last day of T's taxable period beginning on July 1 of Year 1. As in paragraph (b) of this Example 5, under paragraph (b) of this section, the sale is treated as causing T's tax year to end on June 30, and the period beginning on July 1 is treated as a separate annual accounting period for all Federal income tax purposes. The $40 portion of the contribution is deductible by T for the period of Year 1 that it is a member of the P group, subject to the applicable limitations of section 404 and provided that a $40 contribution on the last day of that period would otherwise be deductible for that period, and the $60 portion is deductible by T for the period of Year 1 that it is a member of the X group, subject to the same conditions.
(d) Ratable allocation. The facts are the same as in paragraph (a) of this Example 5, except that P, T, and X elect ratable allocation under paragraph (b)(2)(ii) of this section and T's deduction for the retirement plan contribution is not an extraordinary item. T's deduction may be ratably allocated, subject to the applicable limitations of section 404, and is allowable only if a contribution on the last day of Year 1 otherwise would be deductible for any period in the year. (The results would be the same if S were an unaffiliated corporation when acquired by X, and the due date of its last separate return (including extensions) were before the pension contribution was made on March 15 of Year 2.)
(b) Analysis. Under paragraph (b)(2)(vi)(A) of this section, T is treated, solely for purposes of determining T's tax year in which the partnership's items are included, as selling or exchanging its entire interest in the partnership as of P's sale of T's stock. Thus, the deemed disposition is not taken into account under section 708, it does not result in gain or loss being recognized by T, and T's holding period is unaffected. However, under section 706(a), in determining T's income, T is required to include its distributive share of partnership items for the partnership's year ending within or with T's tax year. Under section 706(c)(2), the partnership's tax year is treated as closing with respect to T for this purpose as of P's sale of T's stock. The allocation of T's distributive share of partnership items must be made under § 1.706-1(c)(2)(ii).
(c) Controlled partnership. The facts are the same as in paragraph (a) of this Example 6, except that T has a 75% interest in the capital and profits of the partnership. Under paragraph (b)(2)(vi)(B) of this section, T's distributive share of the partnership items is treated as T's items for purposes of paragraph (b)(2) of this section. Thus, if ratable allocation under paragraph (b)(2)(ii) of this section is not elected, T's distributive share of the partnership's items must be determined under § 1.706-1(c)(2)(ii) by an interim closing of the partnership's books. Similarly, if ratable allocation is elected for T's items that are not extraordinary items, T's distributive share of the partnership's nonextraordinary items must also be ratably allocated under § 1.706-1(c)(2)(ii).
(b) Analysis. As a result of P's acquisition of the Z stock, Z's election under section 1362(a) terminates. See sections 1361(b)(1)(B) and 1362(d)(2). Z is required to join in the filing of the P consolidated return. See § 1.1502-75. Z's tax year ends for all Federal income tax purposes on June 30 of Year 3. If no extension of time is sought, Z must file a separate return for the period from January 1 through June 30 of Year 3 on or before March 15 of Year 4. See paragraph (b)(4) of this section. Z will become a member of the P consolidated group as of July 1 of Year 3. See paragraph (b)(1)(ii)(A)( 2 ) of this section. P group's Year 3 consolidated return will include Z's items from July 1 to December 31 of Year 3.
(6) Applicability date. Except as provided in paragraphs (b)(1)(ii)(A)( 2 ) and (b)(2)(v) of this section, this paragraph (b) applies to corporations becoming or ceasing to be members of consolidated groups on or after January 1, 1995.
(c) Time for making separate returns for periods not included in consolidated return —(1) Consolidated return filed by due date for separate return. If the group has filed a consolidated return on or before the due date for the filing of a subsidiary's separate return (including extensions of time and determined without regard to any change of its taxable year required under paragraph (a) of this section), then the separate return for any portion of the subsidiary's taxable year for which its income is not included in the consolidated return of the group must be filed no later than the due date of such consolidated return (including extensions of time).
(2) Consolidated return not filed by due date for separate return. If the group has not filed a consolidated return on or before the due date for the filing of a subsidiary corporation's separate return (including extensions of time and determined without regard to any change of its taxable year required under paragraph (a) of this section), then on or before such due date such subsidiary shall file a separate return either for the portion of its taxable year for which its income would not be included in a consolidated return if such a return were filed, or for its complete taxable year. However, if a separate return is filed for such portion of its taxable year and the group subsequently does not file a consolidated return, such subsidiary corporation shall file a substituted return for its complete taxable year not later than the due date (including extensions of time) prescribed for the filing of the common parent's return. On the other hand, if the return is filed for the subsidiary's complete taxable year and the group later files a consolidated return, such subsidiary must file an amended return not later than the due date (including extensions of time) for the filing of the consolidated return of the group. Such amended return shall be for that portion of such subsidiary's taxable year which is not included in the consolidated return. If, under this subparagraph, a substituted return must be filed, then the return previously filed shall not be considered a return within the meaning of section 6011. If, under this subparagraph, a substituted or amended return must be filed, then, for purposes of sections 6513(a) and 6601(a), the last date prescribed for payment of tax shall be the due date (not including extensions of time) for the filing of the subsidiary's separate return (determined without regard to this subparagraph and without regard to any change of its taxable year required under paragraph (a) of this section).
(3) Examples. The provisions of this paragraph (c) may be illustrated by the following examples:
(i) Example 1. Corporation P, which filed a separate return for the calendar year 2022, acquires all of the stock of corporation S as of the close of December 31, 2022. Corporation S reports its income on the basis of a fiscal year ending March 31. On July 15, 2023, the due date for the filing of a separate return by S (assuming no extensions of time), a consolidated return has not been filed for the group (P and S). On such date S may either file a return for the period April 1, 2022, through December 31, 2022, or it may file a return for the complete fiscal year ending March 31, 2023. If S files a return for the short period ending December 31, 2022, and if the group elects not to file a consolidated return for the calendar year 2023, S, on or before April 15, 2024 (the due date of P's return, assuming no extensions of time), must file a substituted return for the complete fiscal year ending March 31, 2023, in lieu of the return previously filed for the short period. Interest is computed from July 15, 2023. If, however, S files a return for the complete fiscal year ending March 31, 2023, and the group elects to file a consolidated return for the calendar year 2023, then S must file an amended return covering the period from April 1, 2022, through December 31, 2022, in lieu of the return previously filed for the complete fiscal year. Interest is computed from July 15, 2023.
(ii) Example 2. Assume the same facts as in paragraph (c)(3)(i) of this section ( Example 1 ), except that corporation P acquires all of the stock of corporation S at the close of September 30, 2023, and P files a consolidated return for the group for 2023 on April 15, 2024 (not having obtained any extensions of time). Since a consolidated return has been filed on or before the due date (July 15, 2024) for the filing of the separate return for the taxable year ending March 31, 2024, the return of S for the short taxable year beginning April 1, 2023, and ending September 30, 2023, should be filed no later than April 15, 2024.
(d) Applicability date —(1) Taxable years of members of group applicability date. Paragraph (a) of this section applies to any original consolidated Federal income tax return due (without extensions) after July 20, 2007.
(2) Election to ratably allocate items applicability date. Paragraph (b)(2)(ii)(D) of this section applies to any original consolidated Federal income tax return due (without extensions) after July 20, 2007.
§ 1.1502-77   Agent for the group.
(a) Agent for the group —(1) Sole agent. Except as provided in paragraphs (e) and (f)(2) of this section, one entity (the agent) is the sole agent that is authorized to act in its own name regarding all matters relating to the federal income tax liability for the consolidated return year for each member of the group and any successor or transferee of a member (and any subsequent successors and transferees thereof). The identity of that agent is determined under the rules of paragraph (c) of this section.
(2) Agent for each consolidated return year. Agency for the group is established for each consolidated return year and is not affected by the status or membership of the group in later years. Thus, subject to the rules of paragraph (c) of this section, the agent will generally remain agent for that consolidated return year regardless of whether one or more subsidiaries later cease to be members of the group, whether the group files a consolidated return for any subsequent year, whether the agent ceases to be the agent or a member of the group in any subsequent year, or whether the group continues pursuant to § 1.1502-75(d) with a new common parent in any subsequent year.
(3) Communications under this section. Any designation, notification, objection, request, or other communication made to or by the Commissioner pursuant to paragraphs (c) and (f)(2) of this section must be made in accordance with procedures prescribed by the Commissioner in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii) of this chapter), forms, instructions, or other appropriate guidance.
(b) Definitions. The following definitions apply for purposes of this section only—
(1) Successor. A successor is an individual or entity (including a disregarded entity as defined in paragraph (b)(3) of this section) that is primarily liable, pursuant to applicable law (including, for example, by operation of a state or federal merger statute), for the tax liability of a corporation that was a member of the group but is no longer in existence under applicable law. The determination of tax liability is made without regard to § 1.1502-1(f)(4) or § 1.1502-6(a). (For inclusion of a successor in references to a subsidiary or member, see paragraph (b)(5)(iii) of this section.)
(2) Entity. The term entity includes any corporation, limited liability company, or partnership formed under any state, federal, or foreign jurisdiction. The term entity includes a disregarded entity (as defined in paragraph (b)(3) of this section). The term entity does not include an entity that has terminated even if it is in a winding up period under the law under which it is organized.
(3) Disregarded entity. The term disregarded entity includes any of the following types of entities that are disregarded as separate from their owners—
(i) Qualified real estate investment trust subsidiaries (within the meaning of section 856(i)(2));
(ii) Qualified subchapter S subsidiaries (within the meaning of section 1361(b)(3)(B)); and
(iii) Eligible entities with a single owner (within the meaning of § 301.7701-3 of this chapter).
(4) Default successor. A successor to the agent is the default successor if it is an entity (whether domestic or foreign) that is the sole successor to the agent. A partnership is treated as a sole successor with primary liability notwithstanding that one or more partners may also be primarily liable by virtue of being partners.
(5) Member or subsidiary. All references to a member or subsidiary for a consolidated return year include—
(i) Each corporation that was a member of the group during any part of such year (except that any reference to a subsidiary does not include the common parent);
(ii) Each corporation whose income was included in the consolidated return for such year, notwithstanding that the tax liability of such corporation should have been computed on the basis of a separate return, or as a member of another consolidated group, under the provisions of § 1.1502-75; and
(iii) Except as indicated otherwise, a successor of any of the foregoing corporations.
(6) Completed year. A completed year is a consolidated return year that has ended, or will end at the time of the referenced event.
(7) Current year. A current year is a consolidated return year that is not a completed year.
(c) Identity of the agent —(1) In general. Except as otherwise provided in this section, the agent for a current year is the common parent and the agent for a completed year is the common parent at the close of the completed year or its default successor, if any. Except as specifically provided otherwise in this paragraph (c), any entity that is an agent pursuant to paragraph (c)(3) of this section (agent following group structure change), paragraph (c)(5) of this section (agent designated by agent terminating without default successor), paragraph (c)(6) of this section (agent designated by Commissioner), or paragraph (c)(7) of this section (agent designated by resigning agent), or any entity subsequently serving as agent following such agent, acts as an agent for and under the same terms and conditions that apply to a common parent. For example, such an agent would generally be able to designate an agent if it terminates without a default successor; however, an entity that became agent pursuant to a designation by the Commissioner under paragraphs (c)(6)(i)(A)( 2 ), ( 3 ), or ( 4 ) of this section is not permitted to designate an agent if it terminates without a default successor. Other special rules described in this paragraph (c) apply.
(2) Purported agent. If any entity files a consolidated return, or takes any other action related to the tax liability for the consolidated return year, purporting to be the agent but is subsequently determined not to have been the agent with respect to the claimed group, that entity is treated, to the extent necessary to avoid prejudice to the Commissioner, as if it were the agent.
(3) New common parent after a group structure change. If the group continues in existence after a group structure change (as described in § 1.1502-33(f)(1)), the former common parent is the agent until the group structure change, and the new common parent becomes the agent after the group structure change. Following the group structure change, the new common parent is the agent with respect to the entire current year (including the period before the group structure change) and the former common parent is no longer the agent for that year. However, actions taken by the former common parent as the agent before the group structure change are not nullified when the new common parent becomes the agent with respect to the entire consolidated return year. Following the group structure change, the new common parent continues as the agent for succeeding years subject to the rules of this section.
(4) Notification by default successor —(i) In general. Failure to provide notice to the Commissioner pursuant to this paragraph (c)(4)(i) does not invalidate an entity's status as the default successor. However, until the Commissioner receives notification in writing that an entity is the default successor—
(A) Any notice of deficiency or other communication mailed to the predecessor agent, even if no longer in existence, is considered as having been properly mailed to the agent; and
(B) The Commissioner is not required to act on any communication (including, for example, a claim for refund) submitted on behalf of the group by any person (including the default successor) other than the predecessor agent.
(ii) Conversions and continuances. For purposes of the notice requirements under paragraph (c)(4)(i) of this section, any entity that results from the agent's conversion or continuance by operation of state law and that qualifies as a default successor under paragraph (b)(4) of this section is treated as a default successor for purposes of the notice provisions of paragraph (c)(4)(i) of this section, even if applicable state or local law may treat the converted or continued entity as not ceasing to exist.
(5) Designation by terminating agent —(i) In general. Prior to the termination of its existence without a default successor, an agent may designate an entity described in paragraph (c)(5)(ii) of this section to act as agent for any completed year. This designation is effective upon the termination of the designating agent's existence. However, this paragraph (c)(5) does not apply to, and no designation can be made by, an agent that was designated by the Commissioner under paragraphs (c)(6)(i)(A)( 2 ), ( 3 ), or ( 4 ) of this section, or any successor of such an agent; in such a case, the terminating agent should request that the Commissioner designate an agent pursuant to paragraph (c)(6)(i)(B) of this section.
(ii) Permissible agents —(A) The terminating agent may designate as agent a member of the group during any part of the completed year, or an entity (whether domestic or foreign) that is a successor of such a member, including an entity that will become a successor at the time the agent's existence terminates.
(B) The terminating agent may not designate as agent any entity that was previously replaced as agent by the Commissioner pursuant to paragraphs (c)(6)(i)(A)( 2 ), ( 3 ), or ( 4 ) of this section, or any successor of such an agent. However, the terminating agent may submit a request pursuant to paragraph (c)(6)(i)(B) of this section that the Commissioner designate such an entity as agent.
(iii) Notification of designation. The terminating agent must notify the Commissioner in writing of its designation of an entity as agent pursuant to paragraph (c)(5)(i) of this section and provide a statement executed by the designated entity acknowledging that it will serve as the agent for each specified completed year for which it is designated as the agent. If the designated entity was not itself a member of the group during any specified year (because it is a successor of a member), the notification must include a statement acknowledging that the designated entity is or will be primarily liable for the tax liability for the specified completed year as a successor of a member.
(iv) Failure to designate an agent. If the agent terminates without a default successor, and no agent is designated pursuant to this paragraph (c)(5)—
(A) Any notice of deficiency or other communication mailed to the agent, even if no longer in existence, is considered as having been properly mailed to the agent; and
(B) The Commissioner is not required to act on any communication (including, for example, a claim for refund) submitted on behalf of the group by any person.
(6) Designation by the Commissioner —(i) In general. The Commissioner has the authority to designate an entity to act as the agent under the circumstances prescribed in this paragraph (c)(6)(i). The designated agent for a completed year must be an entity described in paragraph (c)(5)(ii)(A) of this section when the designation becomes effective. The designated agent for a current year must be a member of the group when the designation becomes effective. If, pursuant to this paragraph (c)(6), the Commissioner replaces the common parent or another entity as the agent, the common parent or other entity, or any successor thereof, may not later act as the agent unless so designated by the Commissioner.
(A) On Commissioner's own accord. With or without a request from any member of the group, the Commissioner may designate an entity to act as the agent if—
( 1 ) The agent's existence terminates, other than in a group structure change, without there being a default successor and without any designation made under paragraph (c)(5)(i) of this section;
( 2 ) An agent previously designated by the Commissioner is no longer a member of the group in the current year and does not have a default successor that is a member of the group;
( 3 ) The Commissioner believes that the agent or its default successor exists but such entity has either not timely responded to the Commissioner's notices (sent to the last known address on file for the entity or left at the usual place of business for such entity) or has failed to perform its obligations as agent as prescribed by the Internal Revenue Code (Code) or regulations promulgated thereunder; or
( 4 ) The agent is or becomes a foreign entity as a result of any action or transaction (including, for example, a continuance into a foreign jurisdiction or certain inversion transactions subject to section 7874 in which a foreign parent is treated as a domestic corporation).
(B) Written request from any member. At the request of any member, in a circumstance not described in paragraph (c)(6)(i)(A) of this section, the Commissioner may, but is not required to, replace an agent previously designated under this paragraph (c)(6).
(ii) Notification by Commissioner. The Commissioner will notify the designated entity in writing of the Commissioner's designation of the entity as agent pursuant to paragraph (c)(6)(i) of this section, and the designation will be effective as prescribed by the Commissioner. The designated entity should give notice of the designation by the Commissioner pursuant to paragraph (c)(6)(i) of this section to each member of the group during any part of the consolidated return year. However, a failure by the designated entity to notify any such member of the group does not invalidate the designation by the Commissioner.
(iii) Term and effect of designation. Unless otherwise provided by the Commissioner in the designation, any agent designated by the Commissioner pursuant to paragraph (c)(6)(i) of this section (new agent) is the agent with respect to the entire consolidated return year for which it is designated and successive years, subject to the rules of this section. An agent immediately preceding a new agent (former agent) ceases to be the agent for a particular consolidated return year once the new agent has been designated for that year, but the designation of the new agent does not nullify actions taken on behalf of the group by the former agent while it was agent. If there is more than one new agent designated by the Commissioner for a consolidated return year, the new agent that is designated last in time by the Commissioner is the agent with respect to the entire consolidated return year. A designation pursuant to this paragraph (c)(6) is effective as prescribed by the Commissioner in such designation or the Internal Revenue Bulletin (see § 601.601(d)(2)(ii) of this chapter), forms, instructions, or other appropriate guidance.
(iv) Request by member of the group where agent previously designated by the Commissioner is no longer a member. If an agent at any time after it is designated as agent by the Commissioner pursuant to paragraph (c)(6)(i) of this section is no longer a member of the group for any current year, and its default successor, if any, is not a member of the group at that time, a member of the group, including the agent that will cease to be a member, should request, in writing, that the Commissioner designate a member of the group to be the new agent pursuant to paragraph (c)(6)(i)(A)( 2 ) of this section. Until such a request is made—
(A) Any notice of deficiency or other communication mailed to the agent, even if no longer a member, is considered as having been properly mailed to the agent; and
(B) The Commissioner is not required to act on any communication (including, for example, a claim for refund) submitted on behalf of the group by any person.
(7) Agent resigns —(i) In general. The agent may resign for a completed year if—
(A) It provides written notice to the Commissioner that it no longer intends to be the agent for that completed year;
(B) An entity described in paragraph (c)(5)(ii)(A) of this section consents, in writing, to be the agent with respect to that completed year;
(C) Immediately after its resignation takes effect, the resigning agent will not be the agent for the current year; and
(D) The Commissioner does not object to the agent's resignation.
(ii) Notification by agent that replaces agent that resigns. If the Commissioner does not object to the agent's resignation, the agent that replaces the agent that resigns should give written notice that it is the new agent to each member of the group for any part of the completed year for which it is designated the agent.
(8) Transactions under the Code. Notwithstanding section 338(a)(2), a target corporation for which an election is made under section 338 is not deemed to terminate for purposes of this section.
(d) Examples of matters subject to agency. With respect to any consolidated return year for which it is the agent—
(1) The agent makes any election (or similar choice of a permissible option) that is available to a subsidiary in the computation of its separate taxable income, and any change in an election (or similar choice of a permissible option) previously made by or for a subsidiary, including, for example, a request to change a subsidiary's method or period of accounting;
(2) All correspondence concerning the income tax liability for the consolidated return year is carried on directly with the agent;
(3) The agent files for all extensions of time, including extensions of time for payment of tax under section 6164, and any extension so filed is considered as having been filed by each member;
(4) The agent gives waivers, gives bonds, and executes closing agreements, offers in compromise, and all other documents, and any waiver or bond so given, or agreement, offer in compromise, or any other document so executed, is considered as having also been given or executed by each member;
(5) The agent files claims for refund, and any refund is made directly to and in the name of the agent and discharges any liability of the Government to any member with respect to such refund;
(6) The agent takes any action on behalf of a member of the group with respect to a foreign corporation including, for example, elections by, and changes to the method of accounting of, a controlled foreign corporation in accordance with § 1.964-1(c)(3);
(7) Notices of claim disallowance are mailed only to the agent, and the mailing to the agent is considered as a mailing to each member;
(8) Notices of deficiencies are mailed only to the agent (except as provided in paragraph (f)(3) of this section), and the mailing to the agent is considered as a mailing to each member;
(9) Notices of final partnership administrative adjustment under section 6223 with respect to any partnership in which a member of the group is a partner may be mailed to the agent, and, if so, the mailing to the agent is considered as a mailing to each member that is a partner entitled to receive such notice (for other rules regarding partnership proceedings, see paragraph (f)(2)(iii) of this section);
(10) The agent files petitions and conducts proceedings before the United States Tax Court, and any such petition is considered as also having been filed by each member;
(11) Any assessment of tax may be made in the name of the agent, and an assessment naming the agent is considered as an assessment with respect to each member; and
(12) Notice and demand for payment of taxes is given only to the agent, and such notice and demand is considered as a notice and demand to each member.
(e) Matters reserved to subsidiaries. Except as provided in this paragraph (e) and paragraph (f)(2) of this section, no subsidiary (unless it is or becomes an agent pursuant to paragraph (c) of this section) has authority to act for or to represent itself in any matter related to the tax liability for the consolidated return year. The following matters, however, are reserved exclusively to each subsidiary—
(1) The making of the consent required by § 1.1502-75(a)(1);
(2) Any action with respect to the subsidiary's liability for a federal tax other than the income tax imposed by chapter 1 of the Code (including, for example, employment taxes under chapters 21 through 25 of the Code, and miscellaneous excise taxes under chapters 31 through 47 of the Code); and
(3) The making of an election to be treated as a Domestic International Sales Corporation under § 1.992-2.
(f) Dealings with members —(1) Identifying members in notice of a lien. Notwithstanding any other provisions of this section, any notice of a lien, any levy, or any other proceeding to collect the amount of any assessment, after the assessment has been made, must name the entity from which such collection is to be made.
(2) Direct dealing with a member —(i) Several liability. The Commissioner may, upon issuing to the agent written notice that expressly invokes the authority of this provision, deal directly with any member of the group with respect to its liability under § 1.1502-6 for the consolidated tax of the group, in which event such member has sole authority to act for itself with respect to that liability. However, if the Commissioner believes or has reason to believe that the existence of the agent has terminated without an agent being identified under this section, the Commissioner may, if the Commissioner deems it advisable, deal directly with any member with respect to that member's liability under § 1.1502-6 without issuing notice to any other entity.
(ii) Information requests. The Commissioner may, upon issuing to the agent written notice, request information relevant to the consolidated tax liability from any member of the group. However, if the Commissioner believes or has reason to believe that the existence of the agent has terminated without an agent being identified under this section, the Commissioner may request such information from any member of the group without issuing notice to any other entity.
(iii) Members as partners in partnerships subject to the provisions of the Code. Except as otherwise provided in this paragraph (f)(2)(iii), the general rule of paragraph (a)(1) of this section applies so that the agent is the agent for any subsidiary member that for any part of the consolidated return year is a partner in a partnership subject to the provisions of sections 6221 through 6234 of the Code (as originally enacted by the Tax Equity and Fiscal Responsibility Act of 1982 and subsequently amended) and the accompanying regulations (TEFRA partnership). However—
(A) Any subsidiary or any disregarded entity owned by a subsidiary that is designated as tax matters partner of a TEFRA partnership will act in its own name and perform its responsibilities under sections 6221 through 6234 and the accompanying regulations without requiring any action by the agent (but see paragraph (d)(9) of this section regarding the mailing of a final partnership administrative adjustment to the agent); and
(B) The Commissioner may at any time communicate directly with a subsidiary or a disregarded entity owned by a subsidiary that is a partner in a TEFRA partnership, without having to deal with each member separately pursuant to paragraph (f)(2)(i) of this section, whenever the Commissioner determines that such direct communication will facilitate the conduct of an examination, appeal, or settlement with respect to the partnership.
(3) Copy of notice of deficiency to entity that has ceased to be a member of the group. A subsidiary that ceases to be a member of the group during or after a consolidated return year may file a written notice of that fact with the Commissioner and request a copy of any notice of deficiency with respect to the tax for a consolidated return year during which it was a member, or a copy of any notice and demand for payment of such deficiency, or both. Such filing does not limit the scope of the agency of the agent provided for in this section. Any failure by the Commissioner to comply with such request does not limit the subsidiary's tax liability under § 1.1502-6.
(g) Examples. Unless otherwise indicated, all entities are domestic and have a calendar year taxable year, and each of P, S, S-1, S-2, S-3, T, U, V, W, W-1, Y, Z, and Z-1 is a corporation. For none of the consolidated return years at issue does the Commissioner exercise the authority under paragraph (f)(2) of this section to deal with any member separately. Any surviving entity in a merger is either a successor as described in paragraph (b)(1) of this section, or a default successor as described in paragraph (b)(4) of this section, as the case may be. Except as otherwise indicated, no agent will be replaced under paragraph (c)(6) of this section or will resign under paragraph (c)(7) of this section, and all communications to and from the Commissioner are made in accordance with procedures prescribed by the Commissioner.
(1) Example 1 — Disposition of all group members where the agent remains the agent. (i) Facts. As of January 1 of Year 1, P is the common parent and agent for the P consolidated group, consisting of P and its two subsidiaries, S and S-1. P files consolidated returns for the P group in Years 1 and 2. On December 31 of Year 1, P sells all the stock of S-1 to X. On December 31 of Year 2, P distributes all the stock of S to P's shareholders. P files a separate return for Year 3.
(ii) Analysis. Although the consolidated group terminates after Year 2 under § 1.1502-75(d)(1) and P is no longer the common parent nor the agent for years after Year 2, P remains the agent for the P group for Years 1 and 2 under paragraph (a)(2) of this section. Accordingly, for as long as P remains in existence, P is the agent for the P group under paragraphs (a)(1) and (2) and (c)(1) of this section for Years 1 and 2.
(2) Example 2 — Acquisition of the agent by another group where the agent remains the agent. (i) Facts. The facts are the same as in paragraph (g)(1)(i) of this section ( Example 1 ),  except on January 1 of Year 3, all of the outstanding stock of P is acquired by Y, which is the common parent and agent of the Y consolidated group. P thereafter joins in the Y group's consolidated return as a member of the Y group.
(ii) Analysis. Although P is a member of the Y group in Year 3 and succeeding years, P remains the agent for the P group for Years 1 and 2 under paragraph (a)(2) of this section. Accordingly, for as long as P remains in existence, P is the agent for the P group under paragraphs (a)(1) and (2) and (c)(1) of this section for Years 1 and 2.
(3) Example 3 — Reverse triangular merger of the agent where the agent remains the agent. (i) Facts. As of January 1 of Year 1, P is the common parent and agent for the P consolidated group consisting of P and its two subsidiaries, S and S-1. P files consolidated returns for the P group in Years 1 and 2. On March 1 of Year 3, W-1, a subsidiary of W, merges into P in a reverse triangular merger qualifying as a reorganization under section 368(a)(1)(A) and (a)(2)(E). P survives the merger with W-1. The transaction constitutes a reverse acquisition under § 1.1502-75(d)(3)(i) because P's shareholders receive more than 50 percent of W's stock in exchange for all of P's stock. The transaction is therefore a group structure change as described in paragraph (c)(3) of this section.
(ii) Analysis. Because the transaction constitutes a reverse acquisition that results in a group structure change, the P group is treated as remaining in existence with W as its common parent and agent. Under paragraphs (a)(1) and (2) and (c)(1) of this section, P remains the agent for the P group for Years 1 and 2 for as long as P remains in existence, even though the P group continues with W as its new common parent pursuant to § 1.1502-75(d)(3)(i). Until the merger of W-1 and P on March 1 of Year 3, P is the agent for the P group for Year 3. From the time of that merger, W, as common parent of the P group, becomes the agent for the P group with respect to all of Year 3 (including the period through March 1) and succeeding consolidated return years. The actions taken by P before the merger as agent for the P group for Year 3 are not nullified by the fact that W becomes the agent for all of Year 3.
(4) Example 4 — Reverse triangular merger of the agent—subsequent distribution of agent where the agent remains the agent. (i) Facts. The facts are the same as in paragraph (g)(3)(i) of this section ( Example 3 ),  except that on April 1 of Year 4, in a transaction unrelated to the March 1, Year 3 reverse acquisition, P distributes the stock of its subsidiaries S and S-1 to W, and W then distributes the stock of P to the W shareholders.
(ii) Analysis. Although P is no longer a member of the P group after the Year 4 distribution, P remains the agent for the P group under paragraphs (a)(1) and (2) and (c)(1) of this section for Years 1 and 2 for as long as P remains in existence.
(5) Example 5 — Agent Resigns. (i) Facts. The facts are the same as in paragraph (g)(4) of this section ( Example 4 ),  except that on August 1 of Year 4, P provides written notice to the Commissioner that it resigns as the agent for Years 1 and 2. Included with the written notice is a statement executed by either S or S-1 consenting to be the agent for the P group for Years 1 and 2.
(ii) Analysis. Pursuant to paragraph (c)(7) of this section, because P is not the agent in Year 4, the current year, it will not be the agent immediately after its resignation takes effect. Accordingly, if the Commissioner does not object to P's resignation, P may resign with respect to Years 1 and 2, both of which are completed years, and either S or S-1, each an entity described in paragraph (c)(5)(ii)(A) of this section, can be the agent for the P group for Years 1 and 2 if it consents in writing. W cannot be the agent for the P group for Years 1 and 2 because it is not an entity described in paragraph (c)(5)(ii)(A) of this section with respect to the P group for Years 1 and 2.
(6) Example 6 — Qualified stock purchase and section 338 election where the agent remains the agent. (i) Facts. As of January 1 of Year 1, P is the common parent and agent for the P consolidated group consisting of P and its two subsidiaries, S and S-1. P files consolidated returns for the P group in Years 1 and 2. On March 31 of Year 2, V purchases the stock of P in a qualified stock purchase (within the meaning of section 338(d)(3)), and V makes a timely election pursuant to section 338(g) with respect to P.
(ii) Analysis. Although section 338(a)(2) provides that P is treated as a new corporation as of the beginning of the day after the acquisition date for purposes of subtitle A, paragraph (c)(8) of this section provides that P's existence is not deemed to terminate for purposes of this section notwithstanding the general rule of section 338(a)(2). Accordingly, new P is the agent for the P group for Year 1 and the period ending March 31 of Year 2 regardless of the election under section 338(g).
(7) Example 7 — Change in the agent's federal income tax classification to a partnership and the resulting partnership continues as the agent. (i) Facts. P, a State M limited liability partnership with two partners that is formed on January 1 of Year 1, elects pursuant to § 301.7701-3(c) of this chapter to be an association taxable as a corporation for federal income tax purposes effective on the date of formation. P is the common parent and agent for the P consolidated group consisting of P and its two subsidiaries, S and S-1. P files consolidated returns for the P group in Years 1 through 6. On January 1 of Year 7, P elects pursuant to § 301.7701-3(c) of this chapter to be treated as a partnership. P remains in existence under applicable law.
(ii) Analysis. The P group terminates and P is no longer the common parent of a consolidated group after its election to be treated as a partnership for federal income tax purposes. Because P remains in existence under applicable law, P is the agent for the P group under paragraphs (a)(1) and (2) and (c)(1) of this section for Years 1 through 6. If P merged into a foreign partnership instead of converting to a partnership, the foreign partnership would be P's default successor and agent for the P group for Years 1 through 6. See paragraphs (b)(4) and (c)(1) of this section.
(8) Example 8 — Forward triangular merger of agent—successor as default successor. (i) Facts. As of January 1 of Year 1, P is the common parent and agent for the P consolidated group consisting of P and its two subsidiaries, S and S-1. P files a consolidated return for the P group for Year 1. On January 1 of Year 3, P merges with and into Z-1, a subsidiary of Z, in a forward triangular merger qualifying as a reorganization under section 368(a)(1)(A) and (a)(2)(D). The transaction constitutes a reverse acquisition under § 1.1502-75(d)(3)(i) resulting in a group structure change as described in paragraph (c)(3) of this section because P's shareholders receive more than 50 percent of Z's stock in exchange for all of P's stock. Z-1, the corporation that survives the merger and the successor of P, is the default successor for the P group for Years 1 and 2.
(ii) Analysis. Although Z is the new common parent for the P group (which continues pursuant to § 1.1502-75(d)(3)(i)) for consolidated return years after the merger, and, as a consequence, Z is the new agent as a result of this group structure change, P may not designate an agent for Years 1 or 2 because Z-1 is P's default successor and the agent for the P group for Years 1 and 2. Z-1 must file the P group's consolidated return for Year 2. See paragraphs (b)(4) and (c)(1) of this section.
(9) Example 9 — Merger of the agent into a disregarded entity in exchange for stock of owner in a transaction qualifying as a reorganization under the Code where successor is the default successor. (i) Facts. As of January 1 of Year 1, P is the common parent and agent for the P consolidated group consisting of P and its two subsidiaries, S and S-1. P files a consolidated return for the P group in Year 1. On January 1 of Year 2, the shareholders of P form Y, a State M corporation. On the same date, Y forms Y-1, a State M limited liability company that is a disregarded entity (as defined in paragraph (b)(3) of this section) for federal income tax purposes, and P merges into Y-1 under State M law. In the merger, the P shareholders receive all of the Y stock. Y (through Y-1) is treated as acquiring the assets of P in a transaction qualifying as a reorganization of P into Y under section 368(a)(1)(F), and the P group continues under § 1.1502-75(d)(2) with Y as the common parent and, as a consequence, the transaction is treated as a group structure change as described in paragraph (c)(3) with Y as the P group's agent for Year 2. In Year 4, the Commissioner seeks to extend the period of limitations on assessment with respect to Year 1 of the P group. In Year 5, the Commissioner seeks to extend the period of limitations on assessment with respect to Year 2 of the Y group (formerly the P group).
(ii) Analysis. (A) Year 1 extension. As a result of the January 1, Year 2 merger, Y-1 is the default successor of P, and the agent for the P group for Year 1. See paragraphs (b)(4) and (c)(1) of this section. Therefore, Y-1 is the only party that can sign the extension with respect to the P group for Year 1.
(B) Year 2 extension. Because the January 1, Year 2 merger qualified as a reorganization under section 368(a)(1)(F), the P group remains in existence with Y as the common parent. Therefore, Y, the common parent of the P group after the merger, is the P group's agent for all of Year 2 (see paragraph (c)(3) of this section) and is the only party that can sign the extension with respect to the P group for that year and in succeeding years. See paragraphs (a)(1) and (2) and (c)(1) of this section.
(10) Example 10 — Designation of agent where there is no default successor. (i) Facts. P is incorporated under the laws of State X. Fifty percent of its stock is owned at all times by A, an individual, and 50 percent by BCD, a partnership. On January 1 of Year 1, P forms two subsidiaries, S and T, and becomes the common parent of the P group. P files consolidated returns for the P group beginning in Year 1 and is the agent for the P consolidated group beginning on January 1 of Year 1. On November 30 of Year 3, P dissolves under X law. Under X law, A and BCD are primarily liable for the federal income tax liability of dissolved corporation P. State X law allows the officers of a dissolved corporation to perform certain actions incident to the winding up of its affairs after its dissolution, including the filing of tax returns.
(ii) Analysis. Upon P's dissolution, there is no default successor to P, pursuant to paragraph (b)(4) of this section, because there are two successors. Prior to its dissolution on November 30 of Year 3, pursuant to paragraph (c)(5)(i) of this section, P may designate an agent for the P group for Years 1 and 2 and the short taxable year ending on November 30 of Year 3, to be effective upon P's dissolution. P may designate S or T, pursuant to paragraph (c)(5)(ii)(A) of this section (because they are members of the former group), or BCD (because it is an entity that is a successor to P pursuant to paragraph (b)(1) of this section). P cannot designate A pursuant to paragraph (c)(5)(ii) of this section, because A is not an entity. Under paragraph (b)(2) of this section, the officers of P cannot designate an agent for the P group after P dissolves on November 30 of Year 3, notwithstanding the winding up provisions of State X law. Accordingly, P should designate an agent prior to its dissolution to ensure that there is an agent authorized to file the short Year 3 consolidated return. If P does not designate an agent prior to dissolution under paragraph (c)(5)(i) of this section, the Commissioner may designate an agent under paragraph (c)(6)(i)(A)( 1 ) of this section from among S, T, or BCD, upon their request or otherwise. If any of S, T, A, or BCD realizes that P has dissolved without designating an agent, it should request, in writing, a designation of an agent by the Commissioner as soon as possible.
(11) Example 11 — Commissioner designates a new agent. (i) Agent fails to fulfill its obligations. (A) Facts. P is the common parent and agent for the P consolidated group consisting of P and its two subsidiaries, S-1 and S-2, each a State Y corporation. P files a consolidated return for the P group in Year 1. In Year 2, S-3, also a State Y corporation, joins the P group. The P group continues as a consolidated group in Years 2, 3, and 4. As of Year 4, P has failed to file the P group consolidated returns for Years 2 and 3.
(B) Analysis. ( 1 ) Scope of designation. Because P failed to perform its obligations as agent as prescribed by federal tax law, the Commissioner may, under the authority of paragraph (c)(6)(i)(A)( 3 ) of this section, on the Commissioner's own accord, with or without a written request from a member, designate another entity described in paragraph (c)(6)(i) of this section to act as the agent for not just Years 2 and 3, but any of Years 1 through 4.
( 2 ) Year 1 designation. The Commissioner may designate either S-1 or S-2, both of which are entities described in paragraphs (c)(6)(i) and (c)(5)(ii)(A) of this section, to act as the agent for the P group for Year 1. Because S-3 was not a member of the group in Year 1, it is not an entity described in paragraphs (c)(6)(i) and (c)(5)(ii)(A) of this section for Year 1 and therefore cannot be the agent for Year 1. Unless otherwise provided in the designation, the designation of either S-1 or S-2 will also be effective for Years 2, 3, and 4 and all succeeding consolidated return years of the group.
( 3 ) Year 2 designation. The Commissioner may designate either S-1, S-2, or S-3, all of which are entities described in paragraph (c)(5)(ii)(A) of this section, to act as the agent for the P group for Year 2. Unless otherwise provided in the designation, the designation of either S-1, S-2, or S-3 will also be effective for Years 3 and 4 and all succeeding consolidated return years of the group.
( 4 ) Year 3 designation. The Commissioner may designate any of S-1, S-2, or S-3 as the agent for Year 3. Unless otherwise provided in the designation, the designation of either S-1, S-2, or S-3 will also be effective for Year 4 and all succeeding consolidated return years of the group.
( 5 ) Year 4 designation. The Commissioner may designate any of S-1, S-2, or S-3 as the agent for Year 4. Unless otherwise provided in the designation, the designation of either S-1, S-2, or S-3 will also be effective for all succeeding consolidated return years of the group.
(ii) Member requests replacement of designated agent. (A) Facts. The facts are the same as in paragraph (g)(11)(i)(A) of this section,  except that in Year 4 the Commissioner designates S-1 as agent for Years 1 and succeeding years to replace P for P's failure to fulfill its obligations. After receiving notification that S-1 has been designated, S-3 submits a request in Year 4, pursuant to paragraph (c)(6)(i)(B) of this section, that the Commissioner designate S-2 as the agent because S-1 does not have ready access to the group's books and records, which are located in another state and are in the possession of S-2.
(B) Analysis. In light of S-3's request, the Commissioner may, under the authority of paragraph (c)(6)(i)(B) of this section, designate either S-2 (for all or any years) or S-3 (for any year or years other than Year 1) as agent in lieu of the previously designated agent, S-1. However, notwithstanding S-3's request, the Commissioner is not required to replace S-1 as agent for any of the consolidated return years for which S-1 was designated.
(12) Example 12 — Designated agent ceases to be a member of the group. (i) Facts. The facts are the same as in paragraph (g)(11)(ii)(A) of this section ( Example 11 ),  except that in Year 4 no member requests that the Commissioner replace S-1, which accordingly continues to be the agent for the P group in Year 5 pursuant to paragraph (c)(6)(iii) of this section. On May 2 of Year 5, S-1 converts under State Y law into S-1 LLC, a limited liability company that is an entity that is treated as a disregarded entity (as defined in paragraph (b)(3) of this section) and, as a consequence, is no longer a member of the P group after the conversion.
(ii) Analysis for completed years. S-1 LLC, the disregarded entity resulting from the conversion, becomes S-1's default successor. As such, S-1 LLC is the agent for Years 1-4.
(iii) Analysis for current and succeeding years. S-1 is an agent designated by the Commissioner pursuant to paragraph (c)(6)(i)(A)( 3 ) of this section. Because S-1 is no longer a member of the P group after May 2 of Year 5, S-1 is the agent for the P group for Year 5 only while it remains a member (see paragraphs (c)(6)(i) and (iii) of this section). According to paragraph (c)(6)(i) of this section, although S-1 LLC is S-1's default successor, it is not a member of the group for the current year and therefore cannot be its agent. Furthermore, S-1 cannot designate an agent for Year 5 under paragraph (c)(5)(i) of this section because that paragraph pertains only to designations for completed years for which there is no default successor. In addition, S-1 cannot designate an agent for Year 5 under paragraph (c)(5)(i) of this section because S-1 was previously designated by the Commissioner under paragraph (c)(6)(i)(A)( 3 ) of this section.
(iv) Member's notice to Commissioner for Commissioner to designate a member of the group for a current year. A member of the group in Year 5 should request that the Commissioner designate, pursuant to paragraphs (c)(6)(i)(A)( 2 ) and (c)(6)(iv) of this section, another member of the P group to be the agent of the group for Year 5. The Commissioner may then, pursuant to paragraph (c)(6)(i)(A)( 2 ) of this section, designate either S-2, S-3, or P to be the agent for the P group and, once so designated, that member will be, effective on May 3 of Year 5, the agent for all of Year 5 and for succeeding years (subject to the rules of this section) pursuant to paragraph (c)(6)(iii) of this section. No actions taken by S-1 on behalf of the P group through May 2, Year 5, are nullified by the Commissioner's designation of another agent even though the agent so designated will be the agent for all of Year 5.
(13) Example 13 — Fraudulent conveyance of assets. (i) Facts. As of January 1 of Year 1, P is the common parent and agent for the P consolidated group consisting of P and its two subsidiaries, S and S-1. On April 15 of Year 2, P files a consolidated return that includes the income of S and S-1 for Year 1. On December 1 of Year 2, S-1 transfers assets having a fair market value of $100x to U in exchange for $10x. This transfer of assets for less than fair market value constitutes a fraudulent conveyance under applicable state law. On March 1 of Year 5, P executes a waiver extending to December 31 of Year 6 the period of limitations on assessment with respect to the P group's Year 1 consolidated return. On February 1 of Year 6, the Commissioner issues a notice of deficiency to P asserting a deficiency of $30x for the P group's Year 1 consolidated tax liability. P does not file a petition for redetermination in the Tax Court, and the Commissioner makes a timely assessment against the P group. P, S, and S-1 are all insolvent and are unable to pay the deficiency. On February 1 of Year 8, the Commissioner sends a notice of transferee liability to U, which does not file a petition in the Tax Court. On August 1 of Year 8, the Commissioner assesses the amount of the P group's deficiency against U. Under section 6901(c), the Commissioner may assess U's transferee liability within one year after the expiration of the period of limitations against the transferor, S-1. By operation of section 6213(a) and 6503(a), the issuance of the notice of deficiency to P and the expiration of the 90-day period for filing a petition in the Tax Court have the effect of further extending by 150 days the P group's limitations period on assessment from the previously extended date of December 31 of Year 6 to May 30 of Year 7.
(ii) Analysis. Pursuant to paragraph (a)(1) of this section, the waiver executed by P on March 1 of Year 5 to extend the period of limitations on assessment to December 31 of Year 6 and the further extension of the P group's limitations period to May 30 of Year 7 (by operation of sections 6213(a) and 6503(a)) have the derivative effect of extending the period of limitations on assessment of U's transferee liability to May 30 of Year 8. By operation of section 6901(f), the issuance of the notice of transferee liability to U and the expiration of the 90-day period for filing a petition in the Tax Court have the effect of further extending the limitations period on assessment of U's liability as a transferee by 150 days, from May 30 of Year 8 to October 27 of Year 8. Accordingly, the Commissioner may send a notice of transferee liability to U at any time on or before May 30 of Year 8 and assess the unpaid liability against U at any time on or before October 27 of Year 8. The result would be the same even if S-1 ceased to exist before March 1 of Year 5, the date P executed the waiver.
(14) Example 14 — Consent to extend the statute of limitations for a partnership where a member of the consolidated group is a partner of such partnership subject to the provisions of the Code and the tax matters partner is not a member of the group. (i) Facts. P is the common parent and agent for the P consolidated group consisting of P and its two subsidiaries, S and S-1. The P group has a November 30 fiscal year end and P files consolidated returns for the P group for the years ending November 30, Year 1 and November 30, Year 2. S-1 is a partner in the PRS partnership, which is subject to the provisions of sections 6221 through 6234. PRS has a calendar year end and A, an individual, is the tax matters partner of the PRS partnership. PRS files a partnership return for the year ending December 31, Year 1. On January 10, Year 5, A, as the tax matters partner for the PRS partnership, executes a consent to extend the period for assessment of partnership items of PRS for all partners, and the Commissioner co-executes the consent on the same day for the year ending December 31, Year 1.
(ii) Analysis. A's consent to extend the statute of limitations for the partnership items of PRS partnership for the year ending December 31, Year 1, extends the statute of limitations with respect to the partnership items for all members of the P group, including P, S, and S-1 for the consolidated return year ending November 30, Year 2. This is because S-1 is a partner in the PRS partnership for which A, the tax matters partner for the PRS partnership, consents, pursuant to section 6229(b)(1)(B), to extend the statute of limitations for the year ending December 31, Year 1. However, under paragraph (f)(2)(iii) of this section, such agreement with respect to the statute of limitations for the PRS partnership for the year ending December 31, Year 1 does not obviate the need to obtain a consent from P, the agent for the P consolidated group, to extend the statute of limitations for the P consolidated group for the P group's consolidated return years ending November 30, Year 1 and November 30, Year 2 regarding any items other than partnership items or affected items of the PRS partnership.
(15) Example 15 — Contacting subsidiary member in order to facilitate the conduct of an examination, appeal, or settlement where a member of the consolidated group is a partner of a partnership subject to the provisions of the Code. (i) Facts. P is the common parent and agent for the P consolidated group consisting of P and its two subsidiaries, S and S-1. The P group has a November 30 fiscal year end, and P files consolidated returns for the P group for the years ending November 30, Year 1 and November 30, Year 2. S-1 is a partner in the PRS partnership, which is subject to the provisions of sections 6221 through 6234. PRS has a calendar year end and A, an individual, is the tax matters partner of the PRS partnership. PRS files a partnership return for the year ending December 31, Year 1. The Commissioner, on January 10, Year 4, in the course of an examination of the PRS partnership for the year ending December 31, Year 1, seeks to obtain information in the course of that examination to resolve the audit.
(ii) Analysis. Because the direct contact with a subsidiary member of a consolidated group that is a partner in a partnership subject to the provisions under sections 6221 through 6234 may facilitate the conduct of an examination, appeal, or settlement, the Commissioner, under paragraph (f)(2)(iii) of this section, may communicate directly with either S-1, P, or A regarding the PRS partnership without breaking agency pursuant to paragraph (f)(2)(i) of this section. However, if the Commissioner were instead seeking to execute a settlement agreement with respect to S-1 as a partner with respect to its liability as a partner in PRS partnership, P would need to execute such settlement agreement for all members of the group including the partner subsidiary.
(h) Cross-reference. For further rules applicable to groups that include insolvent financial institutions, see § 301.6402-7 of this chapter.
(i) [Reserved]
(j) Effective/applicability date —(1) In general. The rules of this section apply to consolidated return years beginning on or after April 1, 2015. For prior years beginning before June 28, 2002, see § 1.1502-77A. For prior years beginning on or after June 28, 2002, and before April 1, 2015, see § 1.1502-77B.
(2) Application of this section to prior years. Notwithstanding paragraph (j)(1) of this section, an agent may apply the rules of paragraph (c)(7) of this section to resign as agent for a completed year that began before April 1, 2015.
§ 1.1502-78   Tentative carryback adjustments.
(a) General rule. If a group has a consolidated net operating loss, a consolidated net capital loss, or a consolidated unused business credit for any taxable year, then any application under section 6411 for a tentative carryback adjustment of the taxes for a consolidated return year or years preceding such year shall be made by the common parent corporation for the carryback year (or the agent determined under § 1.1502-77(c) or § 1.1502-77B(d) for the carryback year) to the extent such loss or unused business credit is not apportioned to a corporation for a separate return year pursuant to § 1.1502-21(b), 1.1502-22(b), or 1.1502-79(c). In the case of the portion of a consolidated net operating loss or consolidated net capital loss or consolidated unused business credit to which the preceding sentence does not apply and that is to be carried back to a corporation that was not a member of a consolidated group in the carryback year, the corporation to which such loss or credit is attributable shall make any application under section 6411. In the case of a net capital loss or net operating loss or unused business credit arising in a separate return year that may be carried back to a consolidated return year, after taking into account the application of § 1.1502-21(b)(4) with respect to any net operating loss arising in another consolidated group, the common parent for the carryback year (or the agent determined under § 1.1502-77(c) or § 1.1502-77B(d) for the carryback year) shall make any application under section 6411.
(b) Special rules —(1) Payment of refund. Any refund allowable under an application referred to in paragraph (a) of this section shall be made directly to and in the name of the corporation filing the application, except that in all cases where a loss is deducted from the consolidated taxable income or a credit is allowed in computing the consolidated tax liability for a consolidated return year, any refund shall be made directly to and in the name of the common parent corporation for the carryback year (or the agent determined under § 1.1502-77(c) or § 1.1502-77B(d) for the carryback year). The payment of any such refund shall discharge any liability of the Government with respect to such refund.
(2) Several liability. If a group filed a consolidated return for a taxable year for which there was an adjustment by reason of an application under section 6411, and if a deficiency is assessed against such group under section 6213(b)(3), then each member of such group shall be severally liable for such deficiency including any interest or penalty assessed in connection with such deficiency.
(3) Groups that include insolvent financial institutions. For further rules applicable to groups that include insolvent financial institutions, see § 301.6402-7 of this chapter.
(c) Examples. The provisions of paragraphs (a) and (b) of this section may be illustrated by the following examples:
(d) Adjustments of overpayments of estimated income tax. If a group paid its estimated income tax on a consolidated basis, then any application under section 6425 for an adjustment of overpayment of estimated income tax shall be made by the common parent corporation. If the members of a group paid estimated income taxes on a separate basis, then any application under section 6425 shall be made by the member of the group which claims an overpayment on a separate basis. Any refund allowable under an application under section 6425 shall be made directly to and in the name of the corporation filing the application.
(e) Time for filing application —(1) General rule. The provisions of section 6411(a) apply to the filing of an application for a tentative carryback adjustment by a consolidated group.
(2) Special rule for new members —(i) New member. A new member is a corporation that, in the preceding taxable year, did not qualify as a member, as defined in § 1.1502-1(b), of the consolidated group that it now joins.
(ii) End of taxable year. Solely for the purpose of complying with the twelve-month requirement for making an application for a tentative carryback adjustment under section 6411(a), the separate return year of a qualified new member shall be treated as ending on the same date as the end of the current taxable year of the consolidated group that the qualified new member joins.
(iii) Qualified new member. A new member of a consolidated group qualifies for purposes of the provisions of this paragraph (e)(2) if, immediately prior to becoming a new member, either—
(A) It was the common parent of a consolidated group; or
(B) It was not required to join in the filing of a consolidated return.
(iv) Examples. The provisions of this paragraph (e)(2) may be illustrated by the following examples:
(f) Applicability date. This section applies to taxable years to which a loss or credit may be carried back and for which the due date (without extensions) of the original return is after June 28, 2002, except that the provisions of paragraph (e)(2) of this section apply for applications by new members of consolidated groups for tentative carryback adjustments resulting from net operating losses, net capital losses, or unused business credits arising in separate return years of new members that begin on or after January 1, 2001.
(2) Prior law. For taxable years to which a loss or credit may be carried back and for which the due date (without extensions) of the original return is on or before June 28, 2002, see § 1.1502-78 in effect prior to June 28, 2002, as contained in 26 CFR part 1 revised April 1, 2002.
§ 1.1502-79   Separate return years.
(a) Carryover and carryback of consolidated net operating losses to separate return years. For rules regarding the carryover and carryback of consolidated net operating losses to separate return years, see § 1.1502-21(b).
(b) Carryover and carryback of consolidated net capital loss to separate return years. For rules regarding the carryover and carryback of consolidated net capital losses to separate return years, see § 1.1502-22(b).
(c) Carryover and carryback of consolidated unused investment credit to separate return years —(1) In general. If a consolidated unused investment credit can be carried under the principles of section 46(b) and paragraph (b) of § 1.1502-3 to a separate return year of a corporation (or could have been so carried if such corporation were in existence) which was a member of the group in the year in which such unused credit arose, then the portion of such consolidated unused credit attributable to such corporation (as determined under subparagraph (2) of this paragraph) shall be apportioned to such corporation (and any successor to such corporation in a transaction to which section 381(a) applies) under the principles of § 1.1502-21(b) (or §§ 1.1502-79A(a)(1) and (2), as appropriate) and shall be an investment credit carryover or carryback to such separate return year.
(2) Portion of consolidated unused investment credit attributable to a member —(i) Investment credit carryback. In the case of a consolidated unused credit which is an investment credit carryback, the portion of such consolidated unused credit attributable to a member of the group is an amount equal to such consolidated unused credit multiplied by a fraction, the numerator of which is the credit earned of such member for the consolidated unused credit year, and the denominator of which is the consolidated credit earned for such unused credit year.
(ii) Investment credit carryover. In the case of a consolidated unused credit which is an investment credit carryover, the portion of such consolidated unused credit attributable to a member of the group is an amount equal to such consolidated unused credit multiplied by a fraction, the numerator of which is the credit earned with respect to any section 38 property placed in service in the consolidated unused credit year and owned by such member (whether or not placed in service by such member) at the close of the last day as of which the taxable income of such member is included in a consolidated return filed by the group, and the denominator of which is the consolidated credit earned for such unused credit year.
(d) Carryover and carryback of consolidated unused foreign tax —(1) In general. If a consolidated unused foreign tax can be carried under the principles of section 904(c) and § 1.1502-4(d) to a separate return year of a corporation (or could have been so carried if such corporation were in existence) that was a member of the group in the year in which the unused foreign tax arose, then the portion of the consolidated unused foreign tax attributable to the corporation (as determined under paragraph (d)(2) of this section) is apportioned to the corporation (and any successor to that corporation in a transaction to which section 381(a) applies) under the principles of § 1.1502-21(b) and is deemed paid or accrued in such separate return year to the extent provided in section 904(c).
(2) Portion of consolidated unused foreign tax attributable to a member. The portion of a consolidated unused foreign tax for any year attributable to a member is an amount equal to the consolidated unused foreign tax multiplied by a fraction. The numerator of the fraction is the foreign taxes paid or accrued by the member for the year (including those taxes deemed paid or accrued, other than by reason of section 904(c)). The denominator of the fraction is the aggregate of all such taxes paid or accrued for the year (including those taxes deemed paid or accrued, other than by reason of section 904(c)) by all members of the group.
(e) Carryover of consolidated excess charitable contributions to separate return years —(1) In general. If the consolidated excess charitable contributions for any taxable year can be carried under the principles of section 170(b)(2) and § 1.1502-24(b) to a separate return year of a corporation (or could have been so carried if such corporation were in existence) which was a member of the group in the year in which such excess contributions arose, then the portion of such consolidated excess charitable contributions attributable to such corporation (as determined under paragraph (e)(2) of this section) is apportioned to such corporation (and any successor to such corporation in a transaction to which section 381(a) applies) under the principles of § 1.1502-21(b) and is a charitable contribution carryover to such separate return year.
(2) Portion of consolidated excess charitable contributions attributable to a member. The portion of the consolidated excess charitable contributions for any year attributable to a member is an amount equal to the consolidated excess contributions multiplied by a fraction. The numerator of the fraction is the charitable contributions paid by the member for the year. The denominator of the fraction is the aggregate of all charitable contributions paid for the year by all members of the group.
(f) Disallowed business interest expense carryforwards. For the treatment of disallowed business interest expense carryforwards (as defined in § 1.163(j)-1(b)(11)) of a member arising in a separate return limitation year, see § 1.163(j)-5(d) and (f).
§ 1.1502-80   Applicability of other provisions of law.
(a) In general —(1) Application of other provisions. The Internal Revenue Code (Code), or other law, shall be applicable to the group to the extent the regulations do not exclude its application. To the extent not excluded, other rules operate in addition to, and may be modified by, these regulations. Thus, for example, in a transaction to which section 381(a) applies, the acquiring corporation will succeed to the tax attributes described in section 381(c). Furthermore, sections 269 and 482 apply for any consolidated return year. However, in a recognition transaction otherwise subject to section 1001, for example, the rules of section 1001 continue to apply, but may be modified by the intercompany transaction regulations under § 1.1502-13.
(2) No duplicative adjustments. Nothing in these regulations shall be interpreted or applied to require an adjustment, inclusion, or other item to the extent it would have the effect of duplicating any other adjustment, inclusion, or other item required under the Code or other rule of law, including other provisions of these regulations.
(3) Application of single-entity principles. If two or more adjustments, inclusions, or other items are subject to paragraph (a)(2) of this section, the determination of which adjustment, inclusion, or other item is treated as applied or taken into account is made by taking into account the purposes of the provisions and applying single-entity principles as appropriate.
(4) Effective/applicability dates. This paragraph (a) is applicable with respect to transactions and determinations on or after September 17, 2008.
(b) Non-applicability of section 304. Section 304 does not apply to any acquisition of stock of a corporation in an intercompany transaction or to any intercompany item from such transaction occurring on or after July 24, 1991.
(c) Deferral of section 165 —(1) General rule. Subsidiary stock is not treated as worthless under section 165 until immediately before the earlier of the time—
(i) The stock is worthless within the meaning of § 1.1502-19(c)(1)(iii); or
(ii) The subsidiary for any reason ceases to be a member of the group.
(2) Cross reference. See § 1.1502-36 for additional rules relating to worthlessness of subsidiary stock.
(3) Effective/applicability date. This paragraph (c) applies to taxable years for which the original consolidated Federal income tax return is due (without extensions) after July 18, 2007. However, taxpayers may apply this paragraph (c) to taxable years beginning on or after January 1, 1995.
(d) Non-applicability of section 357(c) —(1) In general. Section 357(c) does not apply to any transaction to which § 1.1502-13, § 1.1502-13T, § 1.1502-14, or § 1.1502-14T applies, if it occurs in a consolidated return year beginning on or after January 1, 1995. For example, P, S, and T are members of a consolidated group, P owns all of the stock of S and T with bases of $30 and $20, respectively, S has a $30 basis in its assets and $40 of liabilities, and S merges into T in a transaction described in section 368(a)(1)(A) (and in section 368(a)(1)(D)); section 357(c) does not apply to the merger, P's basis in T's stock increases to $50 ($30 plus $20), and T succeeds to S's $30 basis in the assets transferred subject to the $40 liability. Similarly, if S instead transferred its assets and liabilities to a newly formed subsidiary in a transaction to which section 351 applies, section 357(c) does not apply and S's basis in the subsidiary's stock is a $10 excess loss account. This paragraph (d) does not apply to a transaction if the transferor or transferee becomes a nonmember as part of the same plan or arrangement. The transferor (or transferee) is treated as becoming a nonmember once it is no longer a member of a consolidated group that includes the transferee (or transferor). For purposes of this paragraph (d), any reference to a transferor or transferee includes, as the context may require, a reference to a successor or predecessor.
(2) Prior period transactions. If, in a tax year beginning before January 1, 1995, a member's stock with an excess loss account is transferred in a transaction to which § 1.1502-13, § 1.1502-13T, § 1.1502-14, or § 1.1502-14T applies, paragraph (d)(1) of this section applies to the stock transfer to the extent that the income, gain, deduction, or loss (if any) is not taken into account in a tax year beginning before January 1, 1995. For example, if P, S, and T, are members of a consolidated group, T's stock has an excess loss account, and P transfers the T stock to S in 1993 in a transaction to which section 351 and § 1.1502-13 apply, section 357(c) applies to the transfer only to the extent P's gain is taken into account in tax years beginning before January 1, 1995.
(e) Non-applicability of section 163(e)(5). Section 163(e)(5) does not apply to any intercompany obligation (within the meaning of § 1.1502-13(g)) issued in a consolidated return year beginning on or after July 12, 1995.
(f) Non-applicability of section 1031. Section 1031 does not apply to any intercompany transaction occurring in consolidated return years beginning on or after July 12, 1995.
(g) Special rules for liquidations to which section 332 applies. Notwithstanding the general rule of section 381, if multiple members (distributee members) acquire assets of a corporation in a liquidation to which section 332 applies (regardless of whether any single member owns stock in the liquidating corporation meeting the requirements of section 1504(a)(2)), such members succeed to and take into account the items of the liquidating corporation (including items described in section 381(c), but excluding intercompany items under § 1.1502-13) as provided in this paragraph (g) to the extent not otherwise prohibited by any applicable provision of law. This paragraph (g) does not apply to the intercompany items of the liquidating corporation. See § 1.1502-13(j)(2)(ii).
(1) Income offset items and deferred income. Except as otherwise provided in this paragraph (g)(1), each distributee member succeeds to and takes into account the items of the liquidating corporation that could be used to offset the income of the group or any member (including deferred deductions, net operating loss carryovers, and capital loss carryovers) (income offset items) to the extent that such items would have been reflected in investment adjustments to the stock of the liquidating corporation owned by such distributee member under § 1.1502-32(c) if, immediately prior to the liquidation, any stock of the liquidating corporation owned by nonmembers had been redeemed and then such items had been taken into account. However, each distributee member succeeds to the full amount of any deferred deduction or deferred income item attributable to the particular property or business operations distributed to such distributee in the liquidation to the extent that such item is not taken into account in the determination of the income or loss of the liquidating corporation with regard to the liquidation under chapter 1 of the Internal Revenue Code (Code). If the liquidating corporation is not a member of the group at the time of the liquidation, the rules of this paragraph (g)(1) are applied as if the liquidating corporation had been a member of the group.
(2) Accounting for deferred income items. Solely for the purpose of determining whether deferred income items of a liquidating corporation are taken into account under applicable principles of law as a result of a liquidation to which section 332 applies, the transfer of property to, and the assumption of liabilities by, a distributee member that does not own stock in the liquidating corporation meeting the requirements of section 1504(a)(2) without regard to the application of § 1.1502-34 immediately prior to the liquidation is not treated as part of a transaction to which section 381(a) applies. In addition, section 332(a) does not apply in determining the recognition or nonrecognition of any income realized by the distributee member under applicable principles of law on account of consideration received (or deemed received) on the assumption of the liquidating corporation's obligation or liability attributable to any deferred income item.
(3) Credits and earnings and profits. Each distributee member succeeds to and takes into account a percentage of each credit of the liquidating corporation equal to the value of the stock of the liquidating corporation owned by such distributee at the time of the liquidation divided by the total value of all the stock of the liquidating corporation owned by members of the group at the time of the liquidation. Except to the extent that the distributee member's earnings and profits already reflect the liquidating corporation's earnings and profits, each distributee member succeeds to and takes into account under the principles of § 1.1502-32(c) the earnings and profits, or deficit in earnings and profits, of the liquidating corporation (determined after taking into account the amount of earnings and profits properly applicable to distributions to non-member shareholders under § 1.381(c)(2)-1(c)(2)). If the liquidating corporation is not a member of the group at the time of the liquidation, the rules of this paragraph (g)(3) are applied as if the liquidating corporation had been a member of the group.
(4) Other items. With regard to items to which neither paragraph (g)(1) nor (g)(3) of this section applies, a distributee member that, immediately prior to the liquidation, owns stock in the liquidating corporation meeting the requirements of section 1504(a)(2) without regard to the application of § 1.1502-34 succeeds to the items of the liquidating corporation in accordance with section 381 and other applicable principles. A distributee member that, immediately prior to the liquidation, does not own stock in the liquidating corporation meeting the requirements of section 1504(a)(2) without regard to the application of § 1.1502-34 succeeds to the items of the liquidating corporation to the extent that it would have succeeded to those items if it had purchased, in a taxable transaction, the assets or businesses of the liquidating corporation that it received in the liquidation and had assumed the liabilities that it assumed in the liquidation.
(5) Determination of the items of a liquidating subsidiary. For purposes of this section, the items of a liquidating subsidiary include the amount of any consolidated tax attribute attributable to the liquidating subsidiary that is determined pursuant to the principles of § 1.1502-21(b)(2)(iv). In addition, if the liquidating subsidiary is a member of a separate return limitation year subgroup, the amount of a tax attribute that arose in a separate return limitation year that is attributable to that member shall also be determined pursuant to the principles of § 1.1502-21(b)(2)(iv).
(6) Examples. The following examples illustrate the application of this paragraph (g):
(ii) Succession to items described in section 381(c). (A) Losses. Under paragraph (g)(1) of this section, each distributee member succeeds to X's items that could be used to offset the income of the group or any member to the extent that such items would have been reflected in investment adjustments to the stock of X it owned under § 1.1502-32(c) if, immediately prior to the liquidation, such items had been taken into account. Accordingly, M1 and M2 succeed to $80 and $20, respectively, of X's net operating loss.
(B) Credits and earnings and profits. Under paragraph (g)(3) of this section, because, immediately prior to the liquidation, M1 and M2 hold 80 percent and 20 percent, respectively, of the value of the stock of X, M1 and M2 succeed to $32 and $8, respectively, of X's $40 of business credits. In addition, because M1's and M2's earnings and profits do not reflect X's earnings and profits, X's earnings and profits are allocated to M1 and M2 under the principles of § 1.1502-32(c). Therefore, M1 and M2 succeed to $64 and $16, respectively, of X's earnings and profits.
(C) Depreciation of equipment's basis. Under paragraph (g)(4) of this section, because M1 owns stock in X meeting the requirements of section 1504(a)(2) without regard to the application of § 1.1502-34, M1 is required to continue to depreciate the equipment using the straight-line method of depreciation over the remaining recovery period of 4.5 years (assuming X used a half-year convention).
(ii) Succession to items described in section 381(c). (A) Losses. Under paragraph (g)(1) of this section, each distributee member succeeds to X's items that could be used to offset the income of the group or any member to the extent that such items would have been reflected in investment adjustments to the stock of X it owned under § 1.1502-32(c) if, immediately prior to the liquidation, such items had been taken into account. Accordingly, M1 and M2 succeed to $60 and $40, respectively, of X's net operating loss.
(B) Credits and earnings and profits. Under paragraph (g)(3) of this section, because, immediately prior to the liquidation, M1 and M2 hold 60 percent and 40 percent, respectively, of the value of the stock of X, M1 and M2 succeed to $24 and $16, respectively, of X's $40 of business credits. In addition, because M1's and M2's earnings and profits do not reflect X's earnings and profits, X's earnings and profits are allocated to M1 and M2 under the principles of § 1.1502-32(c). Therefore, M1 and M2 succeed to $48 and $32, respectively, of X's earnings and profits.
(C) Depreciation of equipment's basis. Under section 334(a), M1's basis in the equipment is its fair market value at the time of the distribution. Pursuant to section 168(i)(7), to the extent that M1's basis in the equipment does not exceed X's adjusted basis in the equipment at the time of the transfer, M1 is required to continue to depreciate the equipment using the straight-line method of depreciation over the remaining recovery period of 4.5 years (assuming X used a half-year convention). Any portion of M1's basis in the equipment that exceeds X's adjusted basis in the equipment at the time of the transfer is treated as being placed in service by M1 in the year of the transfer. Thus, M1 may choose any applicable depreciation method, recovery period, and convention under section 168 for such excess basis.
(D) Method of accounting for long-term contract. Under paragraph (g)(4) of this section, M1 does not succeed to X's method of accounting for the contract. Rather, under § 1.460-4(k)(2), M1 is treated as having entered into a new contract on the date of the liquidation. Under § 1.460-4(k)(2)(iii), M1 must evaluate whether the new contract should be classified as a long-term contract within the meaning of § 1.460-1(b) and account for the contract under a permissible method of accounting.
(ii) Acceleration of deferred income items and succession to other deferred items. Under paragraph (g)(1) of this section, M1 succeeds to the full amount of the deferred prepaid subscription income of X attributable to Division 1. Under applicable law, X does not recognize the deferred prepaid subscription income attributable to Division 1 because X's liability to furnish or deliver the newspaper, magazine, or other periodical ends as a result of a transaction to which section 381(a) applies. Under paragraph (g)(2) of this section, solely for purposes of determining whether the deferred income items of X attributable to Division 2 are taken into account as a result of the liquidation, the distribution of property to M2 is not treated as a transaction to which section 381(a) applies. Therefore, under applicable law, X's deferred prepaid subscription income attributable to Division 2 is taken into account in the determination of X's income or loss with regard to the liquidation. Further, under paragraph (g)(2) of this section, section 332(a) does not apply in determining the recognition or nonrecognition of any income that M2 realizes on account of consideration received (or deemed received) on its assumption of X's liability to furnish or deliver the newspaper, magazine, or other periodical to which the prepaid subscription income relates.
(7) Effective/applicability date. This paragraph (g) applies to transactions occurring after April 14, 2008.
(h) Non-applicability of section 362(e)(2) —(1) General rule. Section 362(e)(2) does not apply to any intercompany transaction occurring on or after September 17, 2008. Taxpayers may apply this paragraph (h) to intercompany transactions occurring on or after October 22, 2004, and in such case, any election made under section 362(e)(2)(C) will have no effect. The purpose of this paragraph (h) is to facilitate the application of the consolidated return provisions addressing the duplication of loss between members of a consolidated group.
(2) Anti-abuse rule —(i) General rule. If a taxpayer engages in a transaction to which section 362(e)(2) would apply but for the application of paragraph (h)(1) of this section, and acts with a view to prevent the consolidated return provisions from properly addressing loss duplication, appropriate adjustments will be made to clearly reflect the income of the group.
(ii) Example. The following example illustrates the principle of the anti-abuse rule in this paragraph (h)(2).
(B) Analysis. Although the sale would be subject to § 1.1502-36, that section would not prevent the stock loss or reduce S's attributes (to prevent duplication of the stock loss) because neither § 1.1502-36(b) nor § 1.1502-36(c) would adjust the basis of the transferred share (because there are no investment adjustments) and § 1.1502-36(d) would not reduce S's attributes (because S's aggregate inside loss is $0). However, because P acted with a view to prevent the consolidated return provisions from addressing the duplication of the loss on Asset 2, P's transfer of Asset 2 to S is subject to the anti-abuse rule in this paragraph (h)(2). Accordingly, effective immediately before the transfer of Share 5 to X, either P's basis in Share 5 or S's basis in Asset 2 must be adjusted to reflect what it would have been had section 362(e)(2) been applied at the time P transferred Asset 2 to S (taking into account the interim facts and circumstances). Accordingly, S must either reduce its basis in Asset 2 by $80 to $20 (eliminating the duplicated loss) or P must reduce its basis in Share 5 by $80 to $20 (eliminating the duplicated loss).
(C) Transfer of all S shares. Assume the same facts as those in paragraph (A) of this Example, except that P sells all five S shares to X. Although P's transfer of Asset 2 to S results in the duplication of an $80 loss, because all the shares are transferred, the transaction does not prevent the consolidated return provisions from properly addressing loss duplication. P's $80 duplicated loss is offset by an $80 duplicated gain, and the group recognizes the offsetting stock gain and loss. Accordingly, this paragraph (h)(2) does not apply to P's transfer of Asset 2 to S.
(i) [Reserved]
(j) Special rules for application of section 951(a)(2)(B) to distributions to which section 959(b) applies —(1) Single United States shareholder treatment. In determining the amount described in section 951(a)(2)(B) that is attributable to distributions to which section 959(b) applies, members of a group are treated as a single United States shareholder (within the meaning of section 951(b) (or section 953(c)(1)(A), if applicable)) for purposes of determining the part of the year during which such shareholder did not own (within the meaning of section 958(a)) the stock described in section 951(a)(2)(A). The purpose of this paragraph (j) is to facilitate the clear reflection of income of a consolidated group by ensuring that the location of ownership of stock of a foreign corporation within the group does not affect the amount of the group's income by reason of sections 951(a)(1)(A) and 951A(a).
(2) Examples. The following examples illustrate the application of paragraph (j)(1) of this section. For purposes of the examples in this paragraph (j)(2): M1 and M2 are members of a consolidated group of which P is the common parent (P group); each of CFC1, CFC2, and CFC3 is a controlled foreign corporation (within the meaning of section 957(a)) with the U.S. dollar as its functional currency (within the meaning of section 985); the taxable year of all entities is the calendar year for Federal income tax purposes; and a reference to stock owned means stock owned within the meaning of section 958(a). These examples do not address common law doctrines or other authorities that might apply to recast a transaction or to otherwise affect the tax treatment of a transaction.
(i) Example 1: Intercompany transfer of stock of a controlled foreign corporation —(A) Facts. Throughout Year 1, M1 directly owns all the stock of CFC1, which directly owns all the stock of CFC2. In Year 1, CFC2 has $100x of subpart F income (as defined in section 952). M1's pro rata share of CFC2's subpart F income for Year 1 is $100x, which M1 includes in its gross income under section 951(a)(1)(A). In Year 2, CFC2 has $80x of subpart F income and distributes $80x to CFC1 (the CFC2 Distribution). Section 959(b) applies to the entire CFC2 Distribution. On December 29, Year 2, M1 transfers all of its CFC1 stock to M2 in an exchange described in section 351(a). As a result, on December 31, Year 2 (the last day of Year 2 on which CFC2 is a controlled foreign corporation), M2 owns 100% of the stock of CFC1, which owns 100% of the stock of CFC2.
(B) Analysis. Under paragraph (j)(1) of this section, in determining the amount described in section 951(a)(2)(B) that is attributable to the CFC2 Distribution, all members of the P group are treated as a single United States shareholder for purposes of determining the part of Year 2 during which such shareholder did not own the stock of CFC2. Thus, the ratio of the number of days in Year 2 that such United States shareholder did not own the stock of CFC2 to the total number of days in Year 2 is 0/365. The amount described in section 951(a)(2)(B) is $0, M2's pro rata share of CFC2's subpart F income for Year 2 is $80x ($80x-$0), and M2 must include $80x in its gross income under section 951(a)(1)(A).
(ii) Example 2: Transfer of stock of a controlled foreign corporation between controlled foreign corporations —(A) Facts. The facts are the same as in paragraph (j)(2)(i)(A) of this section (the facts in Example 1 ), except that M1 does not transfer its CFC1 stock to M2. Additionally, throughout Year 1 and from January 1, Year 2, to December 29, Year 2, M2 directly owns all 90 shares of the only class of stock of CFC3. Further, on December 29, Year 2, CFC3 acquires all the CFC2 stock from CFC1 in exchange for 10 newly issued shares of the same class of CFC3 stock in a transaction described in section 368(a)(1)(B). As a result, on December 31, Year 2, M1 owns 10% of the stock of CFC2, and M2 owns 90% of the stock of CFC2.
(B) Analysis. Under paragraph (j)(1) of this section, in determining the amount described in section 951(a)(2)(B) that is attributable to the portion of the CFC2 Distribution with respect to each of the CFC2 stock that M1 owns on December 31, Year 2, and the CFC2 stock that M2 owns on that day, all members of the P group are treated as a single United States shareholder for purposes of determining the part of Year 2 during which such shareholder did not own such stock. In each case, the ratio of the number of days in Year 2 that such United States shareholder did not own such stock to the total number of days in Year 2 is 0/365, and the amount described in section 951(a)(2)(B) is $0. M1's and M2's pro rata shares of CFC2's subpart F income for Year 2 are $8x ($8x−$0) and $72x ($72x−$0), respectively, and M1 and M2 must include $8x and $72x in gross income under section 951(a)(1)(A), respectively.
(3) Applicability date. This paragraph (j) applies to taxable years for which the original consolidated Federal income tax return is due (without extensions) after February 23, 2023.
§ 1.1502-90   Table of contents.
The following list contains the major headings in §§ 1.1502-91 through 1.1502-99:
(a) Determination and effect of an ownership change.
(1) In general.
(2) Special rule for post-change year that includes the change date.
(3) Cross-reference.
(b) Definitions and nomenclature.
(c) Loss group.
(1) Defined.
(2) Coordination with rule that ends separate tracking.
(3) Example.
(d) Loss subgroup.
(1) Net operating loss carryovers.
(2) Net unrealized built-in loss.
(3) Loss subgroup parent.
(4) Election to treat loss subgroup parent requirement as satisfied.
(5) Principal purpose of avoiding a limitation.
(6) Special rules.
(7) Examples.
(e) Pre-change consolidated attribute.
(1) Defined.
(2) Example.
(f) Pre-change subgroup attribute.
(1) Defined.
(2) Example.
(g) Net unrealized built-in gain and loss.
(1) In general.
(2) Members included.
(i) Consolidated group with a net operating loss.
(ii) Determination whether a consolidated group has a net unrealized built-in loss.
(iii) Loss subgroup with net operating loss carryovers.
(iv) Determination whether subgroup has a net unrealized built-in loss.
(v) Separate determination of section 382 limitation for recognized built-in losses and net operating losses.
(3) Coordination with rule that ends separate tracking.
(4) Acquisitions of built-in gain or loss assets.
(5) Indirect ownership.
(6) Common parent not common parent for five years.
(h) Recognized built-in gain or loss.
(1) In general. [Reserved]
(2) Disposition of stock or an intercompany obligation of a member.
(3) Intercompany transactions.
(4) Exchanged basis property.
(i) [Reserved]
(j) Predecessor and successor corporations.
(a) Scope.
(b) Determination of an ownership change.
(1) Parent change method.
(i) Loss group.
(ii) Loss subgroup.
(iii) Special rule if election regarding section 1504(a)(1) relationship is made.
(2) Examples.
(3) Special adjustments.
(i) Common parent succeeded by a new common parent.
(ii) Newly created loss subgroup parent.
(iii) Examples.
(4) End of separate tracking of certain losses.
(c) Supplemental rules for determining ownership change.
(1) Scope.
(2) Cause for applying supplemental rule.
(3) Operating rules.
(4) Supplemental ownership change rules.
(i) Additional testing dates for the common parent (or loss subgroup parent).
(ii) Treatment of subsidiary stock as stock of the common parent (or loss subgroup parent).
(iii) Different testing periods.
(iv) Disaffiliation of a subsidiary.
(v) Subsidiary stock acquired first.
(vi) Anti-duplication rule.
(5) Examples.
(d) Testing period following ownership change under this section.
(e) Information statements.
(1) Common parent of a loss group.
(2) Abbreviated statement with respect to loss subgroups.
(a) Determination of the consolidated section 382 limitation (or subgroup section 382 limitation).
(1) In general.
(2) Coordination with apportionment rule.
(b) Value of the loss group (or loss subgroup).
(1) Stock value immediately before ownership change.
(2) Adjustment to value.
(i) In general.
(ii) Anti-duplication.
(3) Examples.
(c) Recognized built-in gain of a loss group or loss subgroup.
(1) In general.
(2) Adjustments.
(d) Continuity of business.
(1) In general.
(2) Example.
(e) Limitations of losses under other rules.
(a) Scope.
(1) In general.
(2) Successor corporation as new loss member.
(3) Coordination in the case of a loss subgroup.
(4) End of separate tracking of certain losses.
(5) Cross-reference.
(b) Application of section 382 to a new loss member.
(1) In general.
(2) Adjustment to value.
(3) Pre-change separate attribute defined.
(4) Examples.
(c) Built-in gains and losses.
(d) Information statements.
(a) In general.
(1) Consolidated group.
(2) Election by common parent.
(3) Coordination with §§ 1.1502-91 through 1.1502-93.
(b) Separate application of section 382 when a member leaves a consolidated group.
(1) In general.
(2) Effect of a prior ownership change of the group.
(3) Application in the case of a loss subgroup.
(4) Examples.
(c) Apportionment of a consolidated section 382 limitation.
(1) In general.
(2) Amount which may be apportioned.
(i) Consolidated section 382 limitation.
(ii) Net unrealized built-in gain.
(3) Effect of apportionment on the consolidated group.
(i) Consolidated section 382 limitation.
(ii) Net unrealized built-in gain.
(4) Effect on corporations to which an apportionment is made.
(i) Consolidated section 382 limitation.
(ii) Net unrealized built-in gain.
(5) Deemed apportionment when loss group terminates.
(6) Appropriate adjustments when former member leaves during the year.
(7) Examples.
(d) Rules pertaining to ceasing to be a member of a loss subgroup.
(1) In general.
(2) Exceptions.
(3) Examples.
(e) Allocation of net unrealized built-in loss.
(1) In general.
(2) Amount of allocation.
(i) In general.
(ii) Transferred basis property and deferred gain or loss.
(iii) Assets for which gain or loss has been recognized.
(iv) Exchanged basis property.
(v) Two or more members depart during the same year.
(vi) Anti-abuse rule.
(3) Effect of the allocation on the consolidated group.
(4) Effect on corporations to which the allocation is made.
(5) Subgroup principles.
(6) Apportionment of consolidated section 382 limitation (or subgroup section 382 limitation).
(i) In general.
(ii) Special rule for former members that become members of the same consolidated group.
(7) Examples.
(8) Reporting requirements.
(i) Common parent.
(ii) Former member.
(iii) Exception.
(f) Filing the election to apportion the section 382 limitation and net unrealized built-in gain.
(1) Form of the election to apportion.
(i) Statement.
(ii) Agreement.
(2) Signing the agreement.
(3) Filing the election.
(i) Filing by the common parent.
(ii) Filing by the former member.
(4) Revocation of election.
(g) Effective/applicability date.
(a) End of separate tracking of losses.
(1) Application.
(2) Effect of end of separate tracking.
(i) Net operating loss carryovers.
(ii) Net unrealized built-in losses.
(iii) Common parent not common parent for five years.
(3) Continuing effect of end of separate tracking.
(i) In general.
(ii) Example.
(4) Special rule for testing period.
(5) Limits on effects of end of separate tracking.
(b) Ownership change of subsidiary.
(1) Ownership change of a subsidiary because of options or plan or arrangement.
(2) Effect of the ownership change.
(i) In general.
(ii) Pre-change losses.
(3) Coordination with §§ 1.1502-91, 1.1502-92, and 1.1502-94.
(4) Example.
(c) Continuing effect of an ownership change.
(d) Losses reattributed under § 1.1502-36(d)(6).
(1) In general.
(2) Deemed section 381(a) transaction.
(3) Rules relating to owner shifts.
(i) In general.
(ii) Examples.
(4) Rules relating to the section 382 limitation.
(i) Reattributed loss is a pre-change separate attribute of a new loss member.
(ii) Reattributed loss is a pre-change subgroup attribute.
(iii) Potential application of section 382(l)(1).
(iv) Duplication or omission of value.
(v) Special rule for continuity of business requirement.
(5) Election to reattribute section 382 limitation.
(i) Effect of election.
(ii) Examples.
(e) Time and manner of making election under § 1.1502-91(d)(4).
(1) In general.
(2) Election statement.
(a) In general.
(b) Reattribution of losses under § 1.1502-36(d)(6).
(c) Application to section 163(j).
(1) Sections 1.382-2 and 1.382-5.
(2) Sections 1.382-6 and 1.383-1.