`[Federal Register Volume 89, Number 249 (Monday, December 30, 2024)]
[Rules and Regulations]
[Pages 106848-106883]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-29480]



[[Page 106847]]

Vol. 89

Monday,

No. 249

December 30, 2024

Part III





 Department of the Treasury





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Internal Revenue Service





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26 CFR Parts 1, 5, 301, et al.





Revising Consolidated Return Regulations and Controlled Group of 
Corporations Regulations to Reflect Statutory Changes, Modernize 
Language, and Enhance Clarity; Final Rule and Proposed Rule

  Federal Register / Vol. 89 , No. 249 / Monday, December 30, 2024 / 
Rules and Regulations  

[[Page 106848]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 5, 301, and 602

[TD 10018]
RIN 1545-BJ87


Revising Consolidated Return Regulations and Controlled Group of 
Corporations Regulations to Reflect Statutory Changes, Modernize 
Language, and Enhance Clarity

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that affect 
affiliated groups of corporations that file consolidated Federal income 
tax returns. These regulations modify the consolidated return 
regulations and the controlled group of corporations regulations to 
reflect statutory changes, update language to remove antiquated or 
regressive terminology, and enhance clarity. Additionally, this 
document withdraws certain temporary regulations.

DATES: Effective date: These final regulations are effective on 
December 30, 2024.
    Applicability date: For dates of applicability, see Sec. Sec.  
1.52-1(i), 1.414(c)-6(g), 1.1502-0, 1.1502-5(e), 1.1502-45(f), 1.1552-
1(g), 1.1562-1(e), 1.1563-2(d), and 1.1563-3(e).

FOR FURTHER INFORMATION CONTACT: Concerning the regulations under 
section 52, Christopher Dellana of the Office of Associate Chief 
Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes) 
at (202) 317-5500; concerning the regulations under section 414, 
Jessica Weinberger of the Office of Associate Chief Counsel (Employee 
Benefits, Exempt Organizations, and Employment Taxes) at (202) 317-
4148; concerning the regulations under all other sections, William W. 
Burhop or Kelton P. Frye of the Office of Associate Chief Counsel 
(Corporate) at (202) 317-5363 or (202) 317-6975, respectively (not 
toll-free numbers).

SUPPLEMENTARY INFORMATION:

Authority

    Section 1502 of the Internal Revenue Code (Code) authorizes the 
Secretary of the Treasury or her delegate (Secretary) to prescribe 
consolidated return regulations for an affiliated group of corporations 
that join in filing (or that are required to join in filing) a 
consolidated return (consolidated group) to clearly reflect the Federal 
income tax liability of the consolidated group and to prevent avoidance 
of such tax liability. See Sec.  1.1502-1(h) (defining the term 
``consolidated group''). For purposes of carrying out those objectives, 
section 1502 also permits the Secretary to prescribe rules that may be 
different from the provisions of chapter 1 of the Code (chapter 1) that 
would apply if the corporations composing the consolidated group filed 
separate returns. Additionally, section 7805(a) of the Code authorizes 
the Secretary to ``prescribe all needful rules and regulations for the 
enforcement of [the Code], including all rules and regulations as may 
be necessary by reason of any alteration of law in relation to internal 
revenue.''

Background

I. Overview

    This Treasury decision contains final regulations under sections 
52, 414, 1502, 1503, 1552, and 1563 of Code. These regulations 
primarily revise the Income Tax Regulations (26 CFR part 1) issued 
under section 1502 (consolidated return regulations). Terms used in the 
consolidated return regulations generally are defined in Sec.  1.1502-
1.

II. 2023 Proposed Regulations

    On August 7, 2023, the Department of the Treasury (Treasury 
Department) and the IRS published a notice of proposed rulemaking (REG-
134420-10) in the Federal Register (88 FR 52057) under sections 1502, 
1503, 1552, and 1563 (2023 proposed regulations). The 2023 proposed 
regulations would revise the consolidated return regulations (i) to 
eliminate obsolete or otherwise outdated provisions, (ii) to modernize 
the language and improve the clarity of the regulations, and (iii) to 
facilitate taxpayer compliance.
    The 2023 proposed regulations also would revise the consolidated 
return regulations and the regulations under section 1563 to eliminate 
antiquated or regressive terminology. For example, the 2023 proposed 
regulations (i) would replace gender-specific pronouns and other 
identifiers with gender-neutral pronouns and identifiers, and (ii) 
would identify (A) American Samoa, (B) the Commonwealth of the Northern 
Mariana Islands, (C) the Commonwealth of Puerto Rico, (D) Guam, and (E) 
the U.S. Virgin Islands as ``territories'' of the United States rather 
than ``possessions'' in Sec. Sec.  1.1502-4(d)(1) and 1.1503(d)-
1(b)(7). These revisions are consistent with, and in furtherance of, 
the Treasury Department's Equity Action Plan, as well as Executive 
Order 13985 of January 20, 2021, Advancing Racial Equity and Support 
for Underserved Communities Through the Federal Government, 86 FR 7009 
(January 25, 2021).
    The 2023 proposed regulations also would revise or remove other 
regulations under the Code. These regulations are set forth in (i) the 
Income Tax Regulations (26 CFR part 1), (ii) the Temporary Income Tax 
Regulations under the Revenue Act of 1978 (26 CFR part 5), (iii) the 
Regulations on Procedure and Administration (26 CFR part 301), and (iv) 
the OMB Control Numbers under the Paperwork Reduction Act Regulations 
(26 CFR part 602).
    The notice of proposed rulemaking (NPRM) containing the 2023 
proposed regulations also withdrew or partially withdrew numerous 
earlier NPRMs, including: (i) NPRMs that previously had been 
incorporated into final regulations in revised form or that were 
incorporated into the 2023 proposed regulations in revised form; (ii) 
an NPRM that became obsolete when proposed regulations provided in a 
subsequent, discrete NPRM were adopted as final regulations; and (iii) 
NPRMs that cross-referenced temporary regulations (the text of which 
served as the text for those proposals) that were removed, have 
expired, or otherwise have become obsolete. Additionally, the 2023 
proposed regulations proposed to withdraw temporary regulations that 
(i) no longer have practical applicability to taxpayers, or (ii) would 
be replaced by final regulations provided by this Treasury decision.
    Finally, the 2023 proposed regulations would remove numerous 
provisions that cross-reference prior-law editions of the Code of 
Federal Regulations (CFR).

III. Correction to 2023 Proposed Regulations

    The 2023 proposed regulations contained amendments to the 
regulations under section 1563. A correction to the 2023 proposed 
regulations was published in the Federal Register (88 FR 84770-02) on 
December 6, 2023, and provided an additional opportunity for public 
comment (2023 correction), to make parallel amendments to similar 
regulations under sections 52 and 414 to avoid creating 
inconsistencies.

IV. Comments Received

    The Treasury Department and the IRS requested comments on the 2023 
proposed regulations. The comments received are described in further 
detail

[[Page 106849]]

in the Summary of Comments and Explanation of Revisions. No public 
hearing was requested or held.

Summary of Comments and Explanation of Revisions

I. Withdrawal of Proposed or Temporary Regulations

    A commenter expressed concern that the withdrawal or partial 
withdrawal of old proposed or temporary regulations in the 2023 
proposed regulations could lead to confusion or uncertainty for 
consolidated groups if the withdrawn regulations contain substantive 
provisions on which consolidated groups continue to rely. The commenter 
recommended either retaining or revising the withdrawn proposed or 
temporary regulations or providing guidance on how to apply the 
existing final regulations in light of the withdrawals.
    The Treasury Department and the IRS are of the view that, with the 
exception of the proposed consolidated return regulations under Sec.  
1.1502-80(d) relating to the non-applicability of section 357(c) 
discussed in part VII of this Summary of Comments and Explanation of 
Revisions, the withdrawn or partially withdrawn regulations do not 
contain substantive provisions on which taxpayers continue to rely. 
Accordingly, these final regulations do not adopt the commenter's 
recommendation.

II. Section 1.1502-5 (Consolidated Estimated Tax)

    Section 10101 of Public Law 117-169, 136 Stat. 1818 (August 16, 
2022), commonly referred to as the Inflation Reduction Act of 2022, 
amended section 55 of the Code to impose a new corporate alternative 
minimum tax (commonly referred to as the corporate alternative minimum 
tax, or CAMT) based on adjusted financial statement income. To reflect 
this change, the 2023 proposed regulations would modify the definition 
of the term ``tax'' in Sec.  1.1502-5(b)(5) by adding a reference to 
section 55(a). Because the amount of tax imposed under section 55 is 
determined in part by reference to the amount of tax imposed under 
section 59A of the Code (that is, the base erosion anti-abuse tax, or 
BEAT), the 2023 proposed regulations also would modify the definition 
of the term ``tax'' in Sec.  1.1502-5(b)(5) by adding a reference to 
section 59A.
    A commenter recommended adding the foregoing references not only in 
Sec.  1.1502-5(b)(5), but also in other sections of the consolidated 
return regulations that use the word ``tax''. However, these changes in 
the 2023 proposed regulations were necessary to implement the recently 
enacted CAMT. The Treasury Department and the IRS have determined that 
similar changes to other provisions in the consolidated return 
regulations are beyond the scope of this guidance. Accordingly, these 
final regulations do not adopt the commenter's recommendation.

III. Revisions To Remove Obsolete or Outdated References or Terms

    As noted in part II of the Background, the 2023 proposed 
regulations would make nonsubstantive changes to the consolidated 
return regulations and the regulations under section 1563 to replace 
gender-specific pronouns and other identifiers with gender-neutral 
pronouns and identifiers, and to replace the term ``possession'' with 
the defined term ``U.S. territory'' in Sec. Sec.  1.1502-4(d)(1) and 
1.1503(d)-1(b)(7). A commenter welcomed the removal of gender-specific 
pronouns and identifiers but suggested that the gender-neutral pronouns 
and identifiers are not entirely clear or consistent throughout the 
consolidated return regulations (for example, some provisions use 
``its'' as a singular possessive pronoun, whereas others use ``their'' 
as a singular possessive pronoun). The commenter recommending either 
using a consistent set of gender-neutral pronouns and identifiers 
throughout the regulations or providing a glossary or explanation of 
these pronouns and identifiers.
    The Treasury Department and the IRS have determined that revising 
all gender-neutral pronouns throughout the consolidated return 
regulations and the section 1563 regulations is beyond the scope of 
this guidance. However, the Treasury Department and the IRS will 
continue to consider the revision of particular pronouns when modifying 
the consolidated return regulations in future guidance.
    The commenter also requested clarification that the replacement of 
the term ``possessions'' with the term ``territories'' is purely 
terminological and is not intended to affect the tax treatment of these 
jurisdictions under the consolidated return regulations. The Treasury 
Department and the IRS agree with the commenter that this change was 
intended to be purely terminological. See https://www.doi.gov/oia/islands/politicatypes.

IV. Revisions to Sec. Sec.  1.1502-13, 1.1502-32, and 1.1502-36

    A commenter raised questions about amendments to Sec. Sec.  1.1502-
13(c)(2)(ii) and (c)(6)(ii)(A), 1.1502-32(b)(2)(iv) and (b)(4)(i), and 
1.1502-36(d)(3)(ii)(B) and (d)(6)(ii)(B) in the 2023 proposed 
regulations. However, neither the 2023 proposed regulations nor these 
final regulations would amend these provisions. Accordingly, no 
revisions have been made in response to this comment.

V. Definition of ``Consolidated Return Regulations''

    The 2023 proposed regulations would add ``consolidated return 
regulations'' as a new defined term in Sec.  1.1502-1. As defined in 
proposed Sec.  1.1502-1(g), this term would mean the regulations issued 
under section 1502. A commenter noted that certain consolidated return 
regulations issued under the authority of section 1502 were not 
actually placed under section 1502 (for example, see Sec.  1.163(j)-4 
and Sec.  1.385-4). Accordingly, these final regulations revise the 
term ``consolidated return regulations'' to mean the regulations issued 
under the authority of section 1502. These final regulations also amend 
Sec. Sec.  1.1502-47(a)(3), (k), and (l) and 1.1504-3(d)(1)(ii) to 
replace the cited range of sections with the defined term 
``consolidated return regulations.''

VI. Sections 52 and 414

    Sections 52(a) and 414(b) provide rules for controlled groups of 
corporations that incorporate the definitions and rules in section 
1563(a), with modifications. Sections 52(b) and 414(c)(1) authorize 
regulations applying principles similar to the principles that apply in 
the case of sections 52(a) and 414(b), respectively, to trades or 
businesses under common control.
    A controlled group of corporations under section 52(a) or section 
414(b), which cross-reference section 1563(a), is determined based on 
the constructive ownership rules of section 1563(e), including section 
1563(e)(2) and (3) (but not section 1563(e)(3)(C)). A group of trades 
or businesses under common control under sections 52(b) and 414(c) is 
determined by taking into account the constructive ownership rules in 
Sec. Sec.  1.52-1(b) and (c) and 1.414(c)-2(b)(1), respectively, that 
mirror the rules under section 1563.
    As discussed in the preamble to the 2023 proposed regulations, the 
2023 proposed regulations would revise Sec.  1.1563-1(a)(2)(i)(A) and 
(B) to reflect an amendment to section 1563(d)(1)(B) by the Technical 
and Miscellaneous Revenue Act of 1988, Public Law 100-647, 102 Stat. 
3342 (November 10, 1988). That amendment expanded the constructive 
ownership rules of section 1563(e) that apply for purposes of section 
1563(d)(1) to include section 1563(e)(2) (relating to attribution from

[[Page 106850]]

partnerships) and section 1563(e)(3) (relating to attribution from 
estates or trusts). The 2023 proposed regulations generally would apply 
to consolidated return years for which the due date of the return 
(without regard to extensions) is after the date of publication of the 
Treasury Decision adopting the regulations as final regulations in the 
Federal Register.
    The 2023 correction does not specify an applicability date for the 
proposed revisions to Sec. Sec.  1.52-1(c)(1) and 1.414(c)-2(b)(1). In 
addition, the Treasury Department and the IRS are of the view that 
applying the general applicability date in the 2023 proposed 
regulations to the proposed revisions to Sec. Sec.  1.52-1(c)(1) and 
1.414(c)-2(b)(1) may cause confusion, because the rules in Sec. Sec.  
1.52-1(c)(1) and 1.414(c)-2(b)(1) apply to taxpayers who may not file 
consolidated returns.
    Accordingly, these final regulations clarify that the amendment to 
Sec.  1.52-1(c)(1) applies to taxable years beginning on or after 
January 1, 2025, and that the amendment to Sec.  1.414(c)-2(b)(1) 
applies to plan years beginning on or after January 1, 2025. The final 
regulations add new paragraph (i) to Sec.  52-1 to provide that Sec.  
52-1, as amended by this Treasury decision, applies to taxable years 
beginning on or after January 1, 2025. Section 1.414(c)-6, which 
provides the effective date and various applicability dates for the 
regulations under sections 414(b) and (c), is amended to reflect the 
applicability date of the amendment to Sec.  1.414(c)-2(b)(1); see also 
the Applicability Date section of this preamble. The amendment to 
section 1563(d)(1)(B) by the Technical and Miscellaneous Revenue Act of 
1988 was not incorporated into the regulations under sections 52(b) and 
414(c)(1) with respect to taxable years and plan years, respectively, 
that began prior to the applicability date for the regulations 
specified in this Treasury decision. Accordingly, the IRS will not 
challenge the application of Sec. Sec.  1.52-1(c)(1) and 1.414(c)-2(b) 
as previously in effect or taking into account the amendment to section 
1563(d)(1)(B) with respect to taxable years that began prior to January 
1, 2025, for the regulations under section 52(b) or plan years that 
began prior to January 1, 2025, for the regulations under section 
414(c)(1).

VII. Section 357(c) and Sec.  1.1502-80(d)

    A commenter raised concerns about the withdrawal of proposed 
consolidated return regulations under Sec.  1.1502-80(d) relating to 
the non-applicability of section 357(c). The comment has led the 
Treasury Department and the IRS to reconsider that withdrawal. For a 
discussion of the comment, see the notice of proposed rulemaking 
published in the Proposed Rules section of this issue of the Federal 
Register.

VIII. Other Non-Substantive Revisions

    To make the reading of these regulations more user-friendly, these 
final regulations generally restate the revised paragraphs in the 
regulations under sections 52, 414, 1502, 1503, 1552, and 1563. 
Additionally, the formatting changes to the examples in Sec.  1.1502-
13(j) in the 2023 proposed regulations were adopted by T.D. 10016, 
published in the Federal Register on December 11, 2024 (89 FR 100138).

Applicability Date

    Pursuant to section 1503(a) of the Code, the regulations issued 
under the authority of section 1502 apply to consolidated return years 
for which the due date of the return (without regard to extensions) is 
after December 30, 2024.
    In addition, Sec.  1.52-1(c)(1) applies to taxable years beginning 
on or after January 1, 2025, and Sec.  1.414(c)-2(b)(1) applies to plan 
years beginning on or after January 1, 2025. The amendments to 
Sec. Sec.  1.1552-1(g), 1.1562-1(e), 1.1563-2(d), and 1.1563-3(e) apply 
to taxable years beginning after December 30, 2024.

Special Analyses

I. Regulatory Planning and Review

    Pursuant to the Memorandum of Agreement, Review of Treasury 
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory 
actions issued by the IRS are not subject to the requirements of 
section 6 of Executive Order 12866, as amended. Therefore, a regulatory 
impact assessment is not required.

II. Paperwork Reduction Act

    These final regulations update the consolidated return regulations 
by revising and removing outdated and obsolete provisions, such as 
cross-references to temporary regulations, regulations, and statutes 
that have been repealed, removed, expired, renumbered, or otherwise 
have become obsolete. Therefore, these final regulations would not 
impose an additional reporting burden beyond what is otherwise required 
by existing statutes, regulations, and forms. The total burden 
associated with these final regulations is $0.

III. Regulatory Flexibility Act

    Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it 
is hereby certified that these final regulations would not have a 
significant economic impact on a substantial number of small entities. 
This certification is based on the fact that these final regulations 
would apply only to corporations that file consolidated Federal income 
tax returns, and that such corporations tend to be larger businesses. 
Specifically, based on data available to the IRS, corporations that 
file consolidated Federal income tax returns represent only 
approximately two percent of all filers of Forms 1120 (U.S. Corporation 
Income Tax Return). However, these consolidated Federal income tax 
returns account for approximately 95 percent of the aggregate amount of 
receipts reported on all Forms 1120. Therefore, these final regulations 
would not create significant additional obligations for, or impose an 
economic impact on, a substantial number of small entities. 
Accordingly, the Secretary certifies that these final regulations will 
not have significant economic impact on a significant number of small 
entities.
    Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking that preceded these final regulations was submitted to the 
Chief Counsel for the Office of Advocacy of the Small Business 
Administration for comment on its impact on small business. No comments 
were received from the Chief Counsel for the Office of Advocacy of the 
Small Business Administration.

IV. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits and take certain 
other actions before issuing a final rule that includes any Federal 
mandate that may result in expenditures in any one year by a State, 
local, or Tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. [In 2024, that threshold is approximately $190 million.] 
These final regulations do not include any rule that would include any 
Federal mandate that may result in expenditures by State, local, or 
Tribal governments, or by the private sector in excess of that 
threshold.

V. Executive Order 13132: Federalism

    Executive Order 13132 (Federalism) prohibits an agency from 
publishing any rule that has federalism implications if the rule either 
imposes substantial, direct compliance costs on State and local 
governments, and is not required by statute, or preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. These final regulations

[[Page 106851]]

do not propose rules that would have federalism implications, impose 
substantial direct compliance costs on State and local governments, or 
preempt State law within the meaning of the Executive order.

VI. Congressional Review Act

    Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), 
the Office of Information and Regulatory Affairs designated this rule 
as not a major rule, as defined by 5 U.S.C. 804(2).

Drafting Information

    The principal authors of this document are Kelton P. Frye and 
William W. Burhop of the Office of Associate Chief Counsel (Corporate). 
Other personnel from the Treasury Department and the IRS participated 
in its development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 5

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 1, 5, 301, and 602 are amended as 
follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by removing 
the entries for Sec. Sec.  1.1503-2, 1.1502-9A, 1.1502-15A, 1.1502-21A, 
1.1502-22A, 1.1502-23A, 1.1502-41A, 1.1502-79A, 1.1502-91A, 1.1502-92A, 
1.1502-93A, 1.1502-94A, 1.1502-95A, 1.1502-96A, 1.1502-98A, and 1.1502-
99A to read in part as follows:

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

0
Par. 2. Section 1.52-1 is amended by revising paragraphs (c)(1)(i) and 
(ii) and adding paragraph (i) to read as follows:


Sec.  1.52-1  Trades or businesses that are under common control.

* * * * *
    (c) * * *
    (1) * * *
    (i) A controlling interest in each of the organizations, except the 
common parent organization, is owned (directly and with the application 
of Sec.  1.414(c)-4(b)(1), (2), and (3)) by one or more of the other 
organizations; and
    (ii) The common parent organization owns (directly and with the 
application of Sec.  1.414(c)-4(b)(1), (2), and (3)) a controlling 
interest in at least one of the other organizations, excluding, in 
computing the controlling interest, any direct ownership interest by 
the other organizations.
* * * * *
    (i) Applicability date. This section applies to taxable years 
beginning on or after January 1, 2025. See 26 CFR 1.52-1, as revised 
April 1, 2024, for taxable years beginning before January 1, 2025.

0
Par. 3. Section 1.57-1 is amended by revising paragraph (b)(4)(ii) to 
read as follows:


Sec.  1.57-1  Items of tax preference defined.

* * * * *
    (b) * * *
    (4) * * *
    (ii) Where the taxpayer acquires property in a transaction to which 
section 381(a) applies or from another member of an affiliated group 
during a consolidated return year and an ``accelerated'' method of 
depreciation as described in section 167(b)(2), (3), or (4) or section 
167(j)(1)(B) or (C) is permitted (see Sec.  1.381(c)(6)-1), the 
depreciation which would have been allowable under the straight line 
method is determined as if the property had been depreciated under the 
straight line method since depreciation was first taken on the property 
by the transferor of such property. In such cases, references in this 
paragraph to the period for which the property is held or useful life 
of the property are treated as including the period beginning with the 
commencement of the original use of the property.
* * * * *

0
Par. 4. Section 1.167(c)-1 is amended by revising paragraph (a)(5) to 
read as follows:


Sec.  1.167(c)-1  Limitations on methods of computing depreciation 
under section 167(b)(2), (3), and (4).

    (a) * * *
    (5) See Sec. Sec.  1.1502-13 and 1.1502-68 for provisions dealing 
with depreciation of property received by a member of an affiliated 
group from another member of the group during a consolidated return 
period.
* * * * *

0
Par. 5. Section 1.279-6 is amended by revising and republishing 
paragraph (d) to read as follows:


Sec.  1.279-6  Application of section 279 to certain affiliated groups.

* * * * *
    (d) Aggregate projected earnings. In the case of an affiliated 
group of corporations (whether or not such group files a consolidated 
return under section 1501), the aggregate projected earnings of such 
group is computed by separately determining the projected earnings of 
each member of such group under paragraph (d) of Sec.  1.279-5, and 
then adding together such separately determined amounts, except that--
    (1) A dividend (a distribution which is described in section 
301(c)(1) other than a distribution described in section 243(c)(1)) 
distributed by one member to another member is eliminated;
    (2) In determining the earnings and profits of any member of an 
affiliated group, there is eliminated any amount of interest income 
received or accrued, and of interest expense paid or incurred, which is 
attributable to intercompany indebtedness; and
    (3) No gain or loss is recognized in any transaction between 
members of the affiliated group.
* * * * *


Sec.  1.382-8  [Amended]

0
Par. 6. Section 1.382-8 is amended by removing and reserving paragraph 
(i).

0
Par. 7. Section 1.414(c)-2 is amended by revising paragraphs (b)(1)(i) 
and (ii) to read as follows:


Sec.  1.414(c)-2  Two or more trades or businesses under common 
control.

* * * * *
    (b) * * *
    (1) * * *
    (i) A controlling interest in each of the organizations, except the 
common parent organization, is owned (directly and with the application 
of Sec.  1.414(c)-4(b)(1), (2), and (3)) by one or more of the other 
organizations; and
    (ii) The common parent organization owns (directly and with the 
application of Sec.  1.414(c)-4(b)(1), (2), and (3)) a controlling 
interest in at least one of the other organizations, excluding, in 
computing such controlling interest, any direct ownership interest by 
such other organizations.
* * * * *

0
Par. 8. Section 1.414(c)-6 is amended by revising and republishing 
paragraph (a) and adding paragraph (g) to read as follows:


Sec.  1.414(c)-6  Effective date.

    (a) General rule. Except as provided in paragraph (b), (c), (e), 
(f), or (g) of this section, the provisions of Sec.  1.414(b)-1 and 
Sec. Sec.  1.414(c)-1 through 1.414(c)-4

[[Page 106852]]

apply for plan years beginning after September 2, 1974.
* * * * *
    (g) Special rule. Notwithstanding paragraph (a), (b), or (c) of 
this section, Sec.  1.414(c)-2(b)(1) applies to plan years beginning on 
or after January 1, 2025.

0
Par. 9. Section 1.1502-0 is revised to read as follows:


Sec.  1.1502-0  Effective/applicability dates.

    (a) In general. Except as provided in paragraph (b) of this 
section, the consolidated return regulations (as defined in Sec.  
1.1502-1(g)) are applicable to taxable years beginning after December 
31, 1965.
    (b) Exceptions. The applicability date described in paragraph (a) 
of this section does not apply to any provision of the consolidated 
return regulations with an applicability or effective date different 
than the date provided by paragraph (a) of this section.

0
Par. 10. Section 1.1502-1 is amended by:
0
a. Adding introductory text;
0
b. Revising and republishing paragraphs (f)(2) and (3) and (g);
0
c. Redesignating paragraph (l) as paragraph (m); and
0
d. Adding a new paragraph (l).
    The additions and revisions read as follows:


Sec.  1.1502-1  Definitions.

    For purposes of the consolidated return regulations (and any 
provision of this chapter that refers to the consolidated return 
regulations):
* * * * *
    (f) * * *
    (2) Exceptions. The term separate return limitation year (or SRLY) 
does not include:
    (i) A separate return year of the corporation which is the common 
parent for the consolidated return year to which the tax attribute is 
to be carried (except as provided in Sec.  1.1502-75(d)(2)(ii) and 
paragraph (f)(3) of this section);
    (ii) A separate return year of any corporation which was a member 
of the group for each day of such year; or
    (iii) A separate return year of a predecessor of any member if such 
predecessor was a member of the group for each day of such year.
    (3) Reverse acquisitions. In the event of an acquisition to which 
Sec.  1.1502-75(d)(3) applies, all taxable years of the first 
corporation and of each of its subsidiaries ending on or before the 
date of the acquisition are treated as separate return limitation 
years, and the separate return years (if any) of the second corporation 
and each of its subsidiaries are not treated as separate return 
limitation years (unless they were so treated immediately before the 
acquisition). For example, if corporation P merges into corporation T, 
and the persons who were stockholders of P immediately before the 
merger, as a result of owning the stock of P, own more than 50 percent 
of the fair market value of the outstanding stock of T, then a loss 
incurred before the merger by T (even though it is the common parent), 
or by a subsidiary of T, is treated as having been incurred in a 
separate return limitation year. Conversely, a loss incurred before the 
merger by P, or by a subsidiary of P in a separate return year during 
all of which such subsidiary was a member of the group of which P was 
the common parent, is treated as having been incurred in a year which 
is not a separate return limitation year.
* * * * *
    (g) Consolidated return regulations. The term consolidated return 
regulations means the regulations issued under the authority of section 
1502.
* * * * *
    (l) U.S. territory. The term U.S. territory means--
    (1) American Samoa;
    (2) The Commonwealth of the Northern Mariana Islands;
    (3) The Commonwealth of Puerto Rico;
    (4) Guam; and
    (5) The U.S. Virgin Islands.
* * * * *


Sec.  1.1502-3  [Amended]

0
Par. 11. Section 1.1502-3 is amended by removing and reserving 
paragraph (e).

0
Par. 12. Section 1.1502-4 is amended by revising paragraph (d)(1) to 
read as follows:


Sec.  1.1502-4  Consolidated foreign tax credit.

* * * * *
    (d) * * *
    (1) Allowance of unused foreign tax as consolidated carryover or 
carryback. The consolidated group's carryovers and carrybacks of unused 
foreign tax (as defined in Sec.  1.904-2(c)(1)) to the taxable year is 
determined on a consolidated basis under the principles of section 
904(c) and Sec.  1.904-2 and is deemed to be paid or accrued to a 
foreign country or U.S. territory (as defined in Sec.  1.1502-1(l)) for 
that year. The consolidated group's unused foreign tax carryovers and 
carrybacks to the taxable year consist of any unused foreign tax of the 
consolidated group, plus any unused foreign tax of members for separate 
return years, which may be carried over or back to the taxable year 
under the principles of section 904(c) and Sec.  1.904-2. The 
consolidated group's unused foreign tax carryovers and carrybacks do 
not include any unused foreign taxes apportioned to a corporation for a 
separate return year pursuant to Sec.  1.1502-79(d). A consolidated 
group's unused foreign tax in each separate category is the excess of 
the foreign taxes paid, accrued or deemed paid under section 960 by the 
consolidated group over the limitation in the applicable separate 
category for the consolidated return year. See paragraph (c) of this 
section.
* * * * *

0
Par. 13. Section 1.1502-5 is revised to read as follows:


Sec.  1.1502-5  Estimated tax.

    (a) General rule--(1) Consolidated estimated tax. If a group files 
a consolidated return for two consecutive taxable years, it must make 
payments of estimated tax on a consolidated basis for each subsequent 
taxable year until separate returns are filed. When filing on a 
consolidated basis, the group is generally treated as a single 
corporation for purposes of section 6655 (relating to payment of 
estimated tax by corporations). If separate returns are filed by the 
members for a taxable year, the amount of any estimated tax payments 
made with respect to a consolidated estimated tax for the year is 
credited against the separate tax liabilities of the members in any 
reasonable manner designated by the common parent.
    (2) First two consolidated return years. For its first two 
consolidated return years, a group may make payments of estimated tax 
on either a consolidated or a separate member basis. The amount of any 
separate estimated tax payments is credited against the consolidated 
tax liability of the group.
    (b) Addition to tax for failure to pay estimated tax under section 
6655--(1) Consolidated return filed. For its first two consolidated 
return years, a group may compute the amount of the penalty (if any) 
under section 6655 on a consolidated basis or a separate member basis, 
regardless of the method of payment. Thereafter, the group must compute 
the penalty for any consolidated return year on a consolidated basis.
    (2) Computation of penalty on consolidated basis--(i) In general. 
This paragraph (b)(2) provides rules for computing the penalty under 
section 6655 on a consolidated basis.
    (ii) Preceding taxable year. The tax shown on the return for the 
preceding

[[Page 106853]]

taxable year referred to in section 6655(d)(1)(B)(ii) is, if a 
consolidated return was filed for that preceding year, the tax shown on 
the consolidated return for that preceding year or, if a consolidated 
return was not filed for that preceding year, the aggregate of the 
taxes shown on the separate returns of the common parent and any other 
corporation that was a member of the same affiliated group as the 
common parent for that preceding year.
    (iii) Aggregate of payments made by all members. If estimated tax 
was not paid on a consolidated basis, the amount of the group's 
payments of estimated tax for the taxable year is the aggregate of the 
payments made by all members for the year.
    (iv) Required annual payment rule. If the common parent is 
otherwise eligible to use the section 6655(d)(1)(B)(ii) required annual 
payment rule, that rule applies only if the group's consolidated 
return, or each member's separate return if the group did not file a 
consolidated return, for the preceding taxable year was a taxable year 
of 12 months.
    (3) Computation of penalty on separate member basis. To compute any 
penalty under section 6655 on a separate member basis, for purposes of 
section 6655(d)(1)(B)(i), the ``tax shown on the return'' for the 
taxable year is the portion of the tax shown on the consolidated return 
allocable to the member under paragraph (b)(6) of this section. If the 
member was included in the consolidated return filed by the group for 
the preceding taxable year, for purposes of section 6655(d)(1)(B)(ii), 
the ``tax shown on the return'' for the preceding taxable year for any 
member is the portion of the tax shown on the consolidated return for 
the preceding year allocable to the member under paragraph (b)(6) of 
this section.
    (4) Consolidated payments if separate returns filed. If the group 
does not file a consolidated return for the taxable year but makes 
payments of estimated tax on a consolidated basis, for purposes of 
section 6655(b)(1)(B), the ``amount (if any) of the installment paid'' 
by any member is an amount apportioned to the member in any reasonable 
manner designated by the common parent. If a member was included in the 
consolidated return filed by the group for the preceding taxable year, 
the amount of the member's penalty under section 6655 is computed on 
the separate member basis described in paragraph (b)(3) of this 
section.
    (5) Tax defined. For purposes of this section, the term tax means 
the excess of--
    (i) The sum of--
    (A) The consolidated tax imposed by section 11 or subchapter L of 
chapter 1, whichever applies;
    (B) The tax imposed by section 55(a); plus
    (C) The tax imposed by section 59A; over
    (ii) The credits against tax provided by part IV of subchapter A of 
chapter 1 of the Internal Revenue Code.
    (6) Allocation of consolidated tax liability for determining 
earnings and profits. For purposes of this section, the tax shown on a 
consolidated return is allocated to the members of the group by 
allocating any tax described in paragraph (b)(5)(i) of this section, 
net of allowable credits under paragraph (b)(5)(ii) of this section, 
under the method that the group has elected pursuant to section 1552 
and Sec.  1.1502-33(d).
    (c) Examples. The provisions of this section are illustrated by the 
following examples.
    (1) Example 1. Corporations P and S1 file a consolidated return for 
the first time for calendar year 2021. P and S1 also file consolidated 
returns for calendar year 2022 and calendar year 2023. Under paragraph 
(a)(2) of this section, for the 2021 and 2022 taxable years, P and S1 
may pay estimated tax on either a separate or consolidated basis. Under 
paragraph (a)(1) of this section, for the 2023 taxable year, the group 
must pay its estimated tax on a consolidated basis. In determining 
whether P and S1 come within the exception provided in section 
6655(d)(1)(B)(ii) for 2023, the ``tax shown on the return'' is the tax 
shown on the consolidated return for the 2022 taxable year.
    (2) Example 2. Corporations P, S1, and S2 file a consolidated 
return for the first time for calendar year 2021 and file their second 
consolidated return for calendar year 2022. S2 ceases to be a member of 
the group on September 15, 2023. Under paragraph (b)(2) of this 
section, in determining whether the group (which no longer includes S2) 
comes within the exception provided in section 6655(d)(1)(B)(ii) for 
2023, the ``tax shown on the return'' is the tax shown on the 
consolidated return for calendar year 2022.
    (3) Example 3. Corporations P and S1 file a consolidated return for 
the first time for calendar year 2021 and file their second 
consolidated return for calendar year 2022. Corporation S2 becomes a 
member of the group on July 1, 2023, and joins in the filing of the 
consolidated return for calendar year 2023. Under paragraph (b)(2) of 
this section, in determining whether the group (which now includes S2) 
comes within the exception provided in section 6655(d)(1)(B)(ii) for 
2023, the ``tax shown on the return'' is the tax shown on the 
consolidated return for calendar year 2022. Any tax of S2 for any 
separate return year is not included as a part of the ``tax shown on 
the return'' for purposes of applying section 6655(d)(1)(B)(ii).
    (4) Example 4. Corporations X and Y file consolidated returns for 
the calendar years 2021 and 2022 and separate returns for calendar year 
2023. Under paragraph (b)(3) of this section, in determining whether X 
or Y comes within the exception provided in section 6655(d)(1)(B)(ii) 
for 2023, the ``tax shown on the return'' is the amount of tax shown on 
the consolidated return for 2022 allocable to X and to Y in accordance 
with paragraph (b)(6) of this section.
    (d) Cross-references--(1) For provisions relating to quick refunds 
of corporate estimated tax payments, see Sec. Sec.  1.1502-78 and 
1.6425-1 through 1.6425-3.
    (2) For provisions relating to depositing estimated taxes, see 
Sec.  1.6302-1(b).
    (e) Applicability date. This section applies to any taxable year 
for which the due date of the income tax return (without regard to 
extensions) is after December 30, 2024. For prior years, see Sec.  
1.1502-5 (as contained in the 26 CFR edition revised as of April 1, 
2024).

0
Par. 14. Section 1.1502-6 is amended by revising paragraph (b) to read 
as follows:


Sec.  1.1502-6  Liability for tax.

* * * * *
    (b) Liability of subsidiary after withdrawal. If a subsidiary has 
ceased to be a member of the group and in such cessation resulted from 
a bona fide sale or exchange of its stock for fair value and occurred 
prior to the date upon which any deficiency is assessed, the 
Commissioner may, if the Commissioner believes that the assessment or 
collection of the balance of the deficiency will not be jeopardized, 
make assessment and collection of such deficiency from such former 
subsidiary in an amount not exceeding the portion of such deficiency 
which the Commissioner may determine to be allocable to it. If the 
Commissioner makes assessment and collection of any part of a 
deficiency from such former subsidiary, then for purposes of any credit 
or refund of the amount collected from such former subsidiary the 
agency of the common parent under the provisions of Sec.  1.1502-77 
does not apply.
* * * * *

[[Page 106854]]


0
Par. 15. Section 1.1502-9 is amended by revising and republishing 
paragraphs (a), (b)(1), and (c)(2)(ii) and (iii) to read as follows:


Sec.  1.1502-9  Consolidated overall foreign losses, separate 
limitation losses, and overall domestic losses.

    (a) In general. This section provides rules for applying section 
904(f) and (g) (including its definitions and nomenclature) to a group 
and its members. Generally, section 904(f) concerns rules relating to 
overall foreign losses (OFLs) and separate limitation losses (SLLs) and 
the consequences of such losses. Under section 904(f)(5), losses are 
computed separately in each category of income described in section 
904(d)(1) or Sec.  1.904-5(a)(4)(v) (separate category). Section 904(g) 
concerns rules relating to overall domestic losses (ODLs) and the 
consequences of such losses. Paragraph (b) of this section defines 
terms and provides computational and accounting rules, including rules 
regarding recapture. Paragraph (c) of this section provides rules that 
apply to OFLs, SLLs, and ODLs when a member becomes or ceases to be a 
member of a group. Paragraph (d) of this section provides a predecessor 
and successor rule. Paragraph (e) of this section provides effective 
dates.
    (b) * * *
    (1) Computation of CSLI or CSLL and consolidated U.S.-source 
taxable income or CDL. The group computes its consolidated separate 
limitation income (CSLI) or consolidated separate limitation loss 
(CSLL) for each separate category under the principles of Sec.  1.1502-
11 by aggregating each member's foreign-source taxable income or loss 
in such separate category computed under the principles of Sec.  
1.1502-12, and taking into account the foreign portion of the 
consolidated items described in Sec.  1.1502-11(a)(2) through (a)(6) 
for such separate category. The group computes its consolidated U.S.-
source taxable income or consolidated domestic loss (CDL) under similar 
principles.
* * * * *
    (c) * * *
    (2) * * *
    (ii) Departing member's portion of group's account. A departing 
member's portion of a group's COFL, CSLL or CODL account for a loss 
category is computed based upon the member's share of the group's 
assets that generate income subject to recapture at the time that the 
member ceases to be a member. Under the characterization principles of 
Sec. Sec.  1.861-9T(g)(3), 1.861-12, and 1.861-13, the group identifies 
the assets of the departing member and the remaining members that 
generate U.S.-source income (domestic assets) and foreign-source income 
(foreign assets) in each separate category. The assets are 
characterized based upon the income that the assets are reasonably 
expected to generate after the member ceases to be a member. The 
member's portion of a group's COFL or CSLL account for a loss category 
is the group's COFL or CSLL account, respectively, multiplied by a 
fraction, the numerator of which is the value of the member's foreign 
assets for the loss category and the denominator of which is the value 
of the foreign assets of the group (including the departing member) for 
the loss category. The member's portion of a group's CODL account for 
each income category is the group's CODL account multiplied by a 
fraction, the numerator of which is the value of the member's domestic 
assets and the denominator of which is the value of the domestic assets 
of the group (including the departing member). The value of the 
domestic and foreign assets is determined under the asset valuation 
rules of Sec.  1.861-9(g)(1) and (2) using either tax book value or 
alternative tax book value under the method chosen by the group for 
purposes of interest apportionment as provided in Sec.  1.861-
9(g)(1)(ii). For purposes of this paragraph (c)(2)(ii), Sec.  1.861-
9T(g)(2)(iv) (assets in intercompany transactions) applies, but Sec.  
1.861-9T(g)(2)(iii) (adjustments for directly allocated interest) does 
not apply. The member's portions of COFL, CSLL, and CODL accounts are 
limited by paragraph (c)(2)(iii) of this section. In addition, for 
purposes of this paragraph (c)(2)(ii), the tax book value of assets 
transferred in intercompany transactions is determined without regard 
to previously deferred gain or loss that is taken into account by the 
group as a result of the transaction in which the member ceases to be a 
member. The assets should be valued at the time the member ceases to be 
a member, but values on other dates may be used unless this creates 
substantial distortions. For example, if a member ceases to be a member 
in the middle of the group's consolidated return year, an average of 
the values of assets at the beginning and end of the year (as provided 
in Sec.  1.861-9(g)(2)) may be used or, if a member ceases to be a 
member in the early part of the group's consolidated return year, 
values at the beginning of the year may be used, unless this creates 
substantial distortions.
    (iii) Limitation on member's portion. If the aggregate of a 
member's portions of COFL and CSLL accounts for a loss category (with 
respect to one or more income categories) determined under paragraph 
(c)(2)(ii) of this section exceeds 150 percent of the actual fair 
market value of the member's foreign assets in the loss category, the 
member's portion of the COFL or CSLL accounts for the loss category is 
reduced (proportionately, in the case of multiple accounts) by such 
excess. In addition, if the aggregate of a member's portions of CODL 
accounts (with respect to one or more income categories) determined 
under paragraph (c)(2)(ii) of this section exceeds 150 percent of the 
actual fair market value of the member's domestic assets, the member's 
portion of the CODL accounts is reduced (proportionately, in the case 
of multiple accounts) by such excess. This rule does not apply in the 
case of COFL or CSLL accounts if the departing member and all other 
members that cease to be members as part of the same transaction own 
all (or substantially all) the foreign assets in the loss category. In 
the case of CODL accounts, this rule does not apply if the departing 
member and all other members that cease to be members as part of the 
same transaction own all (or substantially all) the domestic assets.
* * * * *

0
Par. 16. Section 1.1502-11 is amended by:
0
1. Revising and republishing paragraph (a).
0
2. In paragraph (b)(2)(iii), redesignating Examples 1 through 3 as 
paragraphs (b)(2)(iii)(A) through (C), respectively.
0
3. In newly redesignated paragraphs (b)(2)(iii)(A) through (C), further 
redesignating the paragraphs in the first column as the paragraphs in 
the second column:

------------------------------------------------------------------------
              Old paragraphs                       New paragraphs
------------------------------------------------------------------------
(b)(2)(iii)(A)(a), (b), and (c)...........  (b)(2)(iii)(A)(1), (2), and
                                             (3).
(b)(2)(iii)(B)(a), (b), (c), and (d)......  (b)(2)(iii)(B)(1), (2), (3),
                                             and (4).
(b)(2)(iii)(C)(a), (b), (c), (d), and (e).  (b)(2)(iii)(C)(1), (2), (3),
                                             (4), and (5),.
------------------------------------------------------------------------

0
4. Revising newly redesignated paragraphs (b)(2)(iii)(A)(3) and 
(b)(2)(iii)(B)(4).
0
5. Revising and republishing paragraph (c)(7).
    The revisions read as follows:


Sec.  1.1502-11  Consolidated taxable income.

    (a) In general. The consolidated taxable income (CTI) for a 
consolidated return year is determined by taking into account:
    (1) The separate taxable income of each member of the group (see 
Sec.  1.1502-

[[Page 106855]]

12 for the computation of separate taxable income);
    (2) Any consolidated net operating loss (CNOL) deduction (see Sec.  
1.1502-21 for the computation of the CNOL deduction);
    (3) Any consolidated capital gain net income (see Sec.  1.1502-22 
for the computation of consolidated capital gain net income);
    (4) Any consolidated section 1231 net loss (see Sec.  1.1502-23 for 
the computation of consolidated section 1231 net loss);
    (5) Any consolidated charitable contributions deduction (see Sec.  
1.1502-24 for the computation of the consolidated charitable 
contributions deduction); and
    (6) Any consolidated dividends received deduction (see Sec.  
1.1502-26 for the computation of the consolidated dividends received 
deduction).
    (b) * * *
    (2) * * *
    (iii) * * *
    (A) * * *
    (3) Because $30 of S's loss is absorbed in the determination of 
consolidated taxable income under paragraph (b)(2)(ii) of this section, 
P's basis in S's stock is reduced under Sec.  1.1502-32(b) from $500 to 
$470 immediately before the disposition. Consequently, P recognizes a 
$50 gain from the sale of S's stock and the group has consolidated 
taxable income of $50 for Year 1 (P's $30 of ordinary income and $50 
gain from the sale of S's stock, less the $30 of S's loss). In 
addition, S's limited loss of $50 is treated as a separate net 
operating loss attributable to S and, because S ceases to be a member, 
the loss is apportioned to S under Sec.  1.1502-21 and carried to its 
first separate return year.
    (B) * * *
    (4) Under paragraph (b)(2)(ii) of this section, S's $40 ordinary 
loss from Year 2 that is limited under this paragraph (b) is treated as 
a separate net operating loss arising in Year 2. Similarly, $40 of the 
consolidated net capital loss from Year 1 attributable to S is treated 
as a separate net capital loss carried over from Year 1. Because S 
ceases to be a member, the $40 net operating loss from Year 2 and the 
$40 consolidated net capital loss from Year 1 are allocated to S under 
Sec. Sec.  1.1502-21 and 1.1502-22, respectively and are carried to S's 
first separate return year.
* * * * *
    (c) * * *
    (7) Effective date. This paragraph (c) applies to dispositions of 
subsidiary stock that occur after March 22, 2005.
* * * * *

0
Par. 17. Section 1.1502-12 is amended by:
0
a. Revising paragraph (b);
0
b. Removing and reserving paragraphs (e), (g), and (m);
0
c. Revising paragraph (n); and
0
d. Removing and reserving paragraph (q).
    The revisions read as follows:


Sec.  1.1502-12  Separate taxable income.

* * * * *
    (b) Any deduction that is disallowed under Sec.  1.1502-15 must be 
taken into account as provided in that section.
* * * * *
    (n) No deduction under section 243(a)(1) or section 245 (relating 
to deductions with respect to dividends received) is taken into 
account;
* * * * *

0
Par. 18. Section 1.1502-13 is amended by:
0
a. Revising and republishing paragraphs (a)(3)(i), (a)(6)(ii), 
(c)(4)(i)(B), (c)(5), (d)(3), (e)(1)(v), (f)(5)(ii)(B)(2), 
(f)(5)(ii)(F), (f)(6)(ii) and (v), (f)(7), and (g)(7)(ii).b. 
Redesignating paragraphs (h)(2)(v)(a) and (b) as paragraphs 
(h)(2)(v)(A) and (B).
0
c. Revising paragraph (l)(6).
0
d. Adding paragraphs (l)(8) through (10).
0
e. Removing paragraph (m).
    The revisions and additions read as follows:


Sec.  1.1502-13  Intercompany transactions.

    (a) * * *
    (3) * * *
    (i) In general. The timing rules of this section are a method of 
accounting for intercompany transactions, to be applied by each member 
in addition to the member's other methods of accounting. See Sec. Sec.  
1.1502-17 and 1.446-1(c)(2)(iii). To the extent the timing rules of 
this section are inconsistent with a member's otherwise applicable 
methods of accounting, the timing rules of this section control. For 
example, if S sells property to B in exchange for B's note, the timing 
rules of this section apply instead of the installment sale rules of 
section 453. S's or B's application of the timing rules of this section 
to an intercompany transaction clearly reflects income only if the 
effect of that transaction as a whole (including, for example, related 
costs and expenses) on consolidated taxable income is clearly 
reflected.
* * * * *
    (6) * * *
    (ii) Table of examples. This section contains the following 
examples:

----------------------------------------------------------------------------------------------------------------
                Rule                    General location            Paragraph                  Example
----------------------------------------------------------------------------------------------------------------
(A) Matching rule..................  Sec.   1.1502-          (A)...................  Example 1. Intercompany
                                      13(c)(7)(ii).                                   sale of land followed by
                                                                                      sale to a nonmember.
                                                             (B)...................  Example 2. Dealer
                                                                                      activities.
                                                             (C)...................  Example 3. Intercompany
                                                                                      section 351 transfer.
                                                             (D)...................  Example 4. Depreciable
                                                                                      property.
                                                             (E)...................  Example 5. Intercompany
                                                                                      sale followed by
                                                                                      installment sale.
                                                             (F)...................  Example 6. Intercompany
                                                                                      sale of installment
                                                                                      obligation.
                                                             (G)...................  Example 7. Performance of
                                                                                      services.
                                                             (H)...................  Example 8. Rental of
                                                                                      property.
                                                             (I)...................  Example 9. Intercompany
                                                                                      sale of a partnership
                                                                                      interest.
                                                             (J)...................  Example 10. Net operating
                                                                                      losses subject to section
                                                                                      382 or the SRLY rules.
                                                             (K)...................  Example 11. Section 475.
                                                             (L)...................  Example 12. Section 1092.
                                                             (M)...................  Example 13. [Reserved]
                                                             (N)...................  Example 14. Source of
                                                                                      income under section 863.
                                                             (O)...................  Example 15. Section 1248.
                                                             (P)...................  Example 16. Intercompany
                                                                                      stock distribution
                                                                                      followed by section 332
                                                                                      liquidation.

[[Page 106856]]

 
                                                             (Q)...................  Example 17. Intercompany
                                                                                      stock sale followed by
                                                                                      section 355 distribution.
                                                             (R)...................  Example 18. Redetermination
                                                                                      of attributes for section
                                                                                      250 purposes.
(B) Acceleration rule..............  Sec.   1.1502-13(d)(3)  (i)...................  Example 1. Becoming a
                                                                                      nonmember--timing.
                                                             (ii)..................  Example 2. Becoming a
                                                                                      nonmember--attributes.
                                                             (iii).................  Example 3. Selling member's
                                                                                      disposition of installment
                                                                                      note.
                                                             (iv)..................  Example 4. Cancellation of
                                                                                      debt and attribute
                                                                                      reduction under section
                                                                                      108(b).
                                                             (v)...................  Example 5. Section 481.
(C) Simplifying rules--inventory...  Sec.   1.1502-          (A)...................  Example 1. Increment
                                      13(e)(1)(v).                                    averaging method.
                                                             (B)...................  Example 2. Increment
                                                                                      valuation method.
                                                             (C)...................  Example 3. Other reasonable
                                                                                      inventory methods.
(D) Stock of members...............  Sec.   1.1502-13(f)(7)  (i)...................  Example 1. Dividend
                                                                                      exclusion and property
                                                                                      distribution.
                                                             (ii)..................  Example 2. Excess loss
                                                                                      accounts.
                                                             (iii).................  Example 3. Intercompany
                                                                                      reorganization.
                                                             (iv)..................  Example 4. All cash
                                                                                      intercompany
                                                                                      reorganization under
                                                                                      section 368(a)(1)(D).
                                                             (v)...................  Example 5. Stock
                                                                                      redemptions and
                                                                                      distributions.
                                                             (vi)..................  Example 6. Intercompany
                                                                                      stock sale followed by
                                                                                      section 332 liquidation.
                                                             (vii).................  Example 7. Intercompany
                                                                                      stock sale followed by
                                                                                      section 355 distribution.
(E) Obligations of members.........  Sec.   1.1502-          (A)...................  Example 1. Interest on
                                      13(g)(7)(ii).                                   intercompany obligation.
                                                             (B)...................  Example 2. Intercompany
                                                                                      obligation becomes
                                                                                      nonintercompany
                                                                                      obligation.
                                                             (C)...................  Example 3. Loss or bad debt
                                                                                      deduction with respect to
                                                                                      intercompany obligation.
                                                             (D)...................  Example 4. Intercompany
                                                                                      nonrecognition
                                                                                      transactions.
                                                             (E)...................  Example 5. Assumption of
                                                                                      intercompany obligation.
                                                             (F)...................  Example 6. Extinguishment
                                                                                      of intercompany
                                                                                      obligation.
                                                             (G)...................  Example 7. Exchange of
                                                                                      intercompany obligations.
                                                             (H)...................  Example 8. Tax benefit
                                                                                      rule.
                                                             (I)...................  Example 9. Issuance at off-
                                                                                      market rate of interest.
                                                             (J)...................  Example 10. Nonintercompany
                                                                                      obligation becomes
                                                                                      intercompany obligation.
                                                             (K)...................  Example 11. Notional
                                                                                      principal contracts.
(F) Anti-avoidance rules...........  Sec.   1.1502-13(h)(2)  (i)...................  Example 1. Sale of a
                                                                                      partnership interest.
                                                             (ii)..................  Example 2. Transitory
                                                                                      status as an intercompany
                                                                                      obligation.
                                                             (iii).................  Example 3. Corporate mixing
                                                                                      bowl.
                                                             (iv)..................  Example 4. Partnership
                                                                                      mixing bowl.
                                                             (v)...................  Example 5. Sale and
                                                                                      leaseback.
                                                             (vi)..................  Example 6. Section 163(j)
                                                                                      interest limitation.
(G) Miscellaneous operating rules..  Sec.   1.1502-          (i)...................  Example 1. Intercompany
                                      13(j)(10).                                      sale followed by section
                                                                                      351 transfer to member.
                                                             (ii)..................  Example 2. Intercompany
                                                                                      sale of member stock
                                                                                      followed by
                                                                                      recapitalization.
                                                             (iii).................  Example 3. Back-to-back
                                                                                      intercompany transactions--
                                                                                      matching.
                                                             (iv)..................  Example 4. Back-to-back
                                                                                      intercompany transactions--
                                                                                      acceleration.
                                                             (v)...................  Example 5. Successor group.
                                                             (vi)..................  Example 6. Liquidation--80%
                                                                                      distributee.
                                                             (vii).................  Example 7. Liquidation--no
                                                                                      80% distributee.
                                                             (viii)................  Example 8: Loan by section
                                                                                      987 QBU.
                                                             (ix)..................  Example 9: Sale of property
                                                                                      by section 987 QBU.
----------------------------------------------------------------------------------------------------------------

* * * * *
    (c) * * *
    (4) * * *
    (i) * * *
    (B) B controls unreasonable. To the extent the results under 
paragraph (c)(4)(i)(A) of this section are inconsistent with treating S 
and B as divisions of a single corporation, the attributes of the 
offsetting items must be redetermined in a manner consistent with 
treating S and B as divisions of a single corporation. To the extent, 
however, that B's corresponding item on a separate entity basis is 
excluded from gross income, is a noncapital, nondeductible amount, or 
is otherwise permanently disallowed or eliminated, the attributes of 
B's corresponding item always control the attributes of S's offsetting 
intercompany item.
* * * * *
    (5) Special status. Notwithstanding the general rule of paragraph 
(c)(1)(i) of this section, to the extent an item's attributes 
determined under this section

[[Page 106857]]

are permitted or not permitted to a member under the Internal Revenue 
Code or regulations by reason of the member's special status, the 
attributes required under the Internal Revenue Code or regulations 
apply to that member's items (but not the other member). For example, 
if S is a bank to which section 582(c) applies, and sells debt 
securities at a gain to B, a nonbank, the character of S's intercompany 
gain is ordinary as required under section 582(c), but the character of 
B's corresponding item as capital or ordinary is determined under 
paragraph (c)(1)(i) of this section without the application of section 
582(c). For other special status issues, see, for example, sections 
818(b) (life insurance company treatment of capital gains and losses) 
and 1503(c) (limitation on absorption of certain losses).
* * * * *
    (d) * * *
    (3) Examples. The acceleration rule of this paragraph (d) is 
illustrated by the following examples.
    (i) Example 1. Becoming a nonmember--timing--(A) Facts. S owns land 
with a basis of $70. On January 1 of Year 1, S sells the land to B for 
$100. On July 1 of Year 3, P sells 60% of S's stock to X for $60 and, 
as a result, S becomes a nonmember.
    (B) Matching rule. Under the matching rule, none of S's $30 gain is 
taken into account in Years 1 through 3 because there is no difference 
between B's $0 gain or loss taken into account and the recomputed gain 
or loss.
    (C) Acceleration of S's intercompany items. Under the acceleration 
rule of paragraph (d) of this section, S's $30 gain is taken into 
account in computing consolidated taxable income (and consolidated tax 
liability) immediately before the effect of treating S and B as 
divisions of a single corporation cannot be produced. Because the 
effect cannot be produced once S becomes a nonmember, S takes its $30 
gain into account in Year 3 immediately before becoming a nonmember. 
S's gain is reflected under Sec.  1.1502-32 in P's basis in the S stock 
immediately before P's sale of the stock. Under Sec.  1.1502-32, P's 
basis in the S stock is increased by $30, and therefore P's gain is 
reduced (or loss is increased) by $18 (60% of $30). See also Sec. Sec.  
1.1502-33 and 1.1502-76(b). (The results would be the same if S sold 
the land to B in an installment sale to which section 453 would 
otherwise apply, because S must take its intercompany gain into account 
under this section.)
    (D) B's corresponding items. Notwithstanding the acceleration of 
S's gain, B continues to take its corresponding items into account 
under its accounting method. Thus, B's items from the land are taken 
into account based on subsequent events (for example, its sale of the 
land).
    (E) Sale of B's stock. The facts are the same as in paragraph 
(d)(3)(i)(A) of this section (Example 1), except that P sells 60% of 
B's stock (rather than S stock) to X for $60 and, as a result, B 
becomes a nonmember. Because the effect of treating S and B as 
divisions of a single corporation cannot be produced once B becomes a 
nonmember, S takes its $30 gain into account under the acceleration 
rule immediately before B becomes a nonmember. (The results would be 
the same if S sold the land to B in an installment sale to which 
section 453 would otherwise apply, because S must take its intercompany 
gain into account under this section.)
    (F) Discontinue filing consolidated returns. The facts are the same 
as in paragraph (d)(3)(i)(A) of this section (Example 1), except that 
the P group receives permission under Sec.  1.1502-75(c) to discontinue 
filing consolidated returns beginning in Year 3. Under the acceleration 
rule, S takes its $30 gain into account on December 31 of Year 2.
    (G) No subgroups. The facts are the same as in paragraph 
(d)(3)(i)(A) of this section (Example 1), except that P simultaneously 
sells all of the stock of both S and B to X (rather than 60% of S's 
stock), and S and B become members of the X consolidated group. Because 
the effect of treating S and B as divisions of a single corporation in 
the P group cannot be produced once S and B become nonmembers, S takes 
its $30 gain into account under the acceleration rule immediately 
before S and B become nonmembers. (Paragraph (j)(5) of this section 
does not apply to treat the X consolidated group as succeeding to the P 
group because the X group acquired only the stock of S and B.) However, 
so long as S and B continue to join with each other in the filing of 
consolidated returns, B continues to treat S and B as divisions of a 
single corporation for purposes of determining the attributes of B's 
corresponding items from the land.
    (ii) Example 2. Becoming a nonmember--attributes--(A) Facts. S 
holds land for investment with a basis of $70. On January 1 of Year 1, 
S sells the land to B for $100. B holds the land for sale to customers 
in the ordinary course of business, and expends substantial resources 
over a two-year period subdividing, developing, and marketing the land. 
On July 1 of Year 3, before B has sold any of the land, P sells 60% of 
S's stock to X for $60 and, as a result, S becomes a nonmember.
    (B) Attributes. Under the acceleration rule, the attributes of S's 
gain are redetermined under the principles of the matching rule as if B 
sold the land to an affiliated corporation that is not a member of the 
group for a cash payment equal to B's adjusted basis in the land 
(because the land continues to be held within the group). Thus, whether 
S's gain is capital gain or ordinary income depends on the activities 
of both S and B. Because S and B no longer join with each other in the 
filing of consolidated returns, the attributes of B's corresponding 
items (for example, from its subsequent sale of the land) are 
redetermined under the principles of the matching rule as if the S 
division (but not the B division) were transferred by the single 
corporation to an unrelated person at the time of P's sale of the S 
stock. Thus, B continues to take into account the activities of S with 
respect to the land before the intercompany transaction.
    (C) Depreciable property. The facts are the same as in paragraph 
(d)(3)(ii)(A) of this section (Example 2), except that the property 
sold by S to B is depreciable property. Section 1239 applies to treat 
all of S's gain as ordinary income because it is taken into account as 
a result of B's deemed sale of the property to an affiliated 
corporation that is not a member of the group (a related person within 
the meaning of section 1239(b)).
    (iii) Example 3. Selling member's disposition of installment note--
(A) Facts. S owns land with a basis of $70. On January 1 of Year 1, S 
sells the land to B in exchange for B's $110 note. The note bears a 
market rate of interest in excess of the applicable Federal rate, and 
provides for principal payments of $55 in Year 4 and $55 in Year 5. On 
July 1 of Year 3, S sells B's note to X for $110.
    (B) Timing. S's intercompany gain is taken into account under this 
section, and not under the rules of section 453. Consequently, S's sale 
of B's note does not result in its intercompany gain from the land 
being taken into account (for example, under section 453B). The sale 
does not prevent S's intercompany items and B's corresponding items 
from being taken into account in determining the group's consolidated 
taxable income under the matching rule, and X does not reflect any 
aspect of the intercompany transaction (X has its own cost basis in the 
note). S will take the intercompany gain into account under the 
matching rule or acceleration rule based on subsequent events (for 
example, B's sale of the land). See also paragraph (g) of this section 
for additional rules

[[Page 106858]]

applicable to B's note as an intercompany obligation.
    (iv) Example 4. Cancellation of debt and attribute reduction under 
section 108(b)--(A) Facts. S holds land for investment with a basis of 
$0. On January 1 of Year 1, S sells the land to B for $100. B also 
holds the land for investment. During Year 3, B is insolvent and B's 
nonmember creditors discharge $60 of B's indebtedness. Because of 
insolvency, B's $60 discharge is excluded from B's gross income under 
section 108(a), and B reduces the basis of the land by $60 under 
sections 108(b) and 1017.
    (B) Acceleration rule. As a result of B's basis reduction under 
section 1017, $60 of S's intercompany gain will not be taken into 
account under the matching rule (because there is only a $40 difference 
between B's $40 basis in the land and the $0 basis the land would have 
if S and B were divisions of a single corporation). Accordingly, S 
takes $60 of its gain into account under the acceleration rule in Year 
3. S's gain is long-term capital gain, determined under paragraph 
(d)(1)(ii) of this section as if B sold the land to an affiliated 
corporation that is not a member of the group for $100 immediately 
before the basis reduction.
    (C) Purchase price adjustment. Assume instead that S sells the land 
to B in exchange for B's $100 purchase money note, B remains solvent, 
and S subsequently agrees to discharge $60 of the note as a purchase 
price adjustment to which section 108(e)(5) applies. Under applicable 
principles of tax law, $60 of S's gain and $60 of B's basis in the land 
are eliminated and never taken into account. Similarly, the note is not 
treated as satisfied and reissued under paragraph (g) of this section.
    (v) Example 5. Section 481--(A) Facts. S operates several trades or 
businesses, including a manufacturing business. S receives permission 
to change its method of accounting for valuing inventory for its 
manufacturing business. S increases the basis of its ending inventory 
by $100, and the related $100 positive section 481(a) adjustment is to 
be taken into account ratably over six taxable years, beginning in Year 
1. During Year 3, S sells all of the assets used in its manufacturing 
business to B at a gain. Immediately after the transfer, B does not use 
the same inventory valuation method as S. On a separate entity basis, 
S's sale results in an acceleration of the balance of the section 
481(a) adjustment to Year 3.
    (B) Timing and attributes. Under paragraph (b)(2) of this section, 
the balance of S's section 481(a) adjustment accelerated to Year 3 is 
intercompany income. However, S's $100 basis increase before the 
intercompany transaction eliminates the related difference for this 
amount between B's corresponding items taken into account and the 
recomputed corresponding items in subsequent periods. Because the 
accelerated section 481(a) adjustment will not be taken into account in 
determining the group's consolidated taxable income (and consolidated 
tax liability) under the matching rule, the balance of S's section 481 
adjustment is taken into account under the acceleration rule as 
ordinary income at the time of the intercompany transaction. (If S's 
sale had not resulted in accelerating S's section 481(a) adjustment on 
a separate entity basis, S would have no intercompany income to be 
taken into account under this section.)
* * * * *
    (e) * * *
    (1) * * *
    (v) Examples. The inventory rules of this paragraph (e)(1) are 
illustrated by the following examples.
    (A) Example 1. Increment averaging method--(1) Facts. Both S and B 
use a double-extension, dollar-value LIFO inventory method, and both 
value inventory increments using the earliest acquisitions cost 
valuation method. During Year 2, S sells 25 units of product Q to B on 
January 15 at $10/unit. S sells another 25 units on April 15, on July 
15, and on September 15, at $12/unit. S's earliest cost of product Q is 
$7.50/unit and S's most recent cost of product Q is $8.00/unit. Both S 
and B have an inventory increment for the year. B's total inventory 
costs incurred during Year 2 are $6,000 and the LIFO value of B's Year 
2 layer of increment is $600.
    (2) Intercompany inventory income. Under paragraph (e)(1)(iii) of 
this section, S must use a reasonable method of allocating its LIFO 
inventory costs to intercompany transactions. Because S has an 
inventory increment for Year 2 and uses the earliest acquisitions cost 
method, a reasonable method of determining its intercompany cost of 
goods sold for product Q is to use its most recent costs. Thus, its 
intercompany cost of goods sold is $800 ($8.00 most recent cost, 
multiplied by 100 units sold to B), and its intercompany inventory 
income is $350 ($1,150 sales proceeds from B minus $800 cost).
    (3) Timing. (i) Under the increment averaging method of paragraph 
(e)(1)(ii)(B) of this section, $35 of S's $350 of intercompany 
inventory income is not taken into account in Year 2, computed as 
follows: LIFO value of B's Year 2 layer of increment/B's total 
inventory costs for year 2, or $600/$6,000 = 10%. 10% x S's $350 
intercompany inventory income = $35.
    (ii) Thus, $315 of S's intercompany inventory income is taken into 
account in Year 2 ($350 of total intercompany inventory income minus 
$35 not taken into account).
    (4) S incurs a decrement. The facts are the same as in paragraph 
(e)(1)(v)(A)(1) of this section (Example 1), except that in Year 2, S 
incurs a decrement equal to 50% of its Year 1 layer. Under paragraph 
(e)(1)(iii) of this section, S must reasonably allocate the LIFO cost 
of the decrement to the cost of goods sold to B to determine S's 
intercompany inventory income.
    (5) B incurs a decrement. The facts are the same as in paragraph 
(e)(1)(v)(A)(1) of this section (Example 1), except that B incurs a 
decrement in Year 2. S must take into account the entire $350 of Year 2 
intercompany inventory income because all 100 units of product Q are 
deemed sold by B in Year 2.
    (B) Example 2. Increment valuation method--(1) Facts. The facts are 
the same as in paragraph (e)(1)(v)(A)(1) of this section (Example 1). 
In addition, B's use of the earliest acquisition's cost method of 
valuing its increments results in B valuing its year-end inventory 
using costs incurred from January through March. B's costs incurred 
during the year are: $1,428 in the period January through March; $1,498 
in the period April through June; $1,524 in the period July through 
September; and $1,550 in the period October through December. S's 
intercompany inventory income for these periods is: $50 in the period 
January through March ((25 x $10)-(25 x $8)); $100 in the period April 
through June ((25 x $12)-(25 x $8)); $100 in the period July through 
September ((25 x $12)-(25 x $8)); and $100 in the period October 
through December ((25 x $12)-(25 x $8)).
    (2) Timing. (i) Under the increment valuation method of paragraph 
(e)(1)(ii)(C) of this section, $21 of S's $350 of intercompany 
inventory income is not taken into account in Year 2, computed as 
follows: LIFO value of B's Year 2 layer of increment/B's total 
inventory costs from January through March of Year 2, or $600/$1,428 = 
42%. 42% x S's $50 intercompany inventory income for the period from 
January through March = $21.
    (ii) Thus, $329 of S's intercompany inventory income is taken into 
account in Year 2 ($350 of total intercompany inventory income minus 
$21 not taken into account).

[[Page 106859]]

    (3) B incurs a subsequent decrement. The facts are the same as in 
paragraph (e)(1)(v)(B)(1) of this section (Example 2). In addition, 
assume that in Year 3, B experiences a decrement in its pool that 
receives intercompany purchases from S. B's decrement equals 20% of the 
base-year costs for its Year 2 layer. The fact that B has incurred a 
decrement means that all of its inventory costs incurred for Year 3 are 
included in cost of goods sold. As a result, S takes into account its 
entire amount of intercompany inventory income from its Year 3 sales. 
In addition, S takes into account $4.20 of its Year 2 layer of 
intercompany inventory income not already taken into account (20% of 
$21).
    (C) Example 3. Other reasonable inventory methods--(1) Facts. Both 
S and B use a dollar-value LIFO inventory method for their inventory 
transactions. During Year 1, S sells inventory to B and to X. Under 
paragraph (e)(1)(iv) of this section, to compute its intercompany 
inventory income and the amount of this income not taken into account, 
S computes its intercompany inventory income using the transfer price 
of the inventory items less a FIFO cost for the goods, takes into 
account these items based on a FIFO cost flow assumption for B's 
corresponding items, and the LIFO methods used by S and B are ignored 
for these computations. These computations are comparable to the 
methods used by S and B for financial reporting purposes, and the book 
methods and results are used for tax purposes. S adjusts the amount of 
intercompany inventory items not taken into account as required by 
section 263A.
    (2) Reasonable method. The method used by S is a reasonable method 
under paragraph (e)(1)(iv) of this section if the cumulative amount of 
intercompany inventory items not taken into account by S is not 
significantly greater than the cumulative amount that would not be 
taken into account under the methods specifically described in 
paragraph (e)(1) of this section. If, for any year, the method results 
in a cumulative amount of intercompany inventory items not taken into 
account by S that significantly exceeds the cumulative amount that 
would not be taken into account under the methods specifically 
provided, S must take into account for that year the amount necessary 
to eliminate the excess. The method is thereafter applied with 
appropriate adjustments to reflect the amount taken into account (for 
example, to prevent the amount from being taken into account more than 
once).
* * * * *
    (f) * * *
    (5) * * *
    (ii) * * *
    (B) * * *
    (2) Time limitation and adjustments. The transfer of old T's assets 
to new T qualifies under paragraph (f)(5)(ii)(B)(1) of this section 
only if B has entered into a written plan, on or before the due date of 
the group's consolidated income tax return (including extensions) for 
the tax year that includes the date of old T's liquidation, to transfer 
the old T assets to new T, and the statement described in paragraph 
(f)(5)(ii)(E) of this section is included on or with a timely filed 
consolidated income tax return (including extensions) for the tax year 
that includes the date of the liquidation. The transfer of 
substantially all of T's assets to new T must be completed within 12 
months of the filing of the return. Appropriate adjustments are made to 
reflect any events occurring before the formation of new T and to 
reflect any assets not transferred to new T, or liabilities not assumed 
by new T. For example, if B retains an asset of old T, the asset is 
treated under paragraph (f)(3) of this section as acquired by new T but 
distributed to B immediately after the reorganization.
* * * * *
    (F) Applicability date. Paragraphs (f)(5)(ii)(B)(1) and (2) of this 
section apply to transactions in which old T's liquidation into B 
occurs on or after October 25, 2007.
    (6) * * *
    (ii) Gain stock. For dispositions of P stock, see Sec.  1.1032-3.
* * * * *
    (v) Applicability date. This paragraph (f)(6) applies to gain or 
loss taken into account on or after July 12, 1995, and to transactions 
occurring on or after July 12, 1995.
    (7) Examples--In general. The application of this section to 
intercompany transactions with respect to stock of members is 
illustrated by the following examples.
    (i) Example 1. Dividend exclusion and property distribution--(A) 
Facts. S owns land with a $70 basis and $100 value. On January 1 of 
Year 1, P's basis in S's stock is $100. During Year 1, S declares and 
makes a dividend distribution of the land to P. Under section 311(b), S 
has a $30 gain. Under section 301(d), P's basis in the land is $100. On 
July 1 of Year 3, P sells the land to X for $110.
    (B) Dividend elimination and stock basis adjustments. Under 
paragraph (b)(1) of this section, S's distribution to P is an 
intercompany distribution. Under paragraph (f)(2)(ii) of this section, 
P's $100 of dividend income is not included in gross income. Under 
Sec.  1.1502-32, P's basis in S's stock is reduced from $100 to $0 in 
Year 1.
    (C) Matching rule and stock basis adjustments. Under the matching 
rule (treating P as the buying member and S as the selling member), S 
takes its $30 gain into account in Year 3 to reflect the $30 difference 
between P's $10 gain taken into account and the $40 recomputed gain. 
Under Sec.  1.1502-32, P's basis in S's stock is increased from $0 to 
$30 in Year 3.
    (D) Loss property. The facts are the same as in paragraph 
(f)(7)(i)(A) of this section (Example 1), except that S has a $130 
(rather than $70) basis in the land. Under paragraph (f)(2)(iii) of 
this section, the principles of section 311(b) apply to S's loss from 
the intercompany distribution. Thus, S has a $30 loss that is taken 
into account under the matching rule in Year 3 to reflect the $30 
difference between P's $10 gain taken into account and the $20 
recomputed loss. (The results are the same under section 267(f).) Under 
Sec.  1.1502-32, P's basis in S's stock is reduced from $100 to $0 in 
Year 1, and from $0 to a $30 excess loss account in Year 3. (If P had 
distributed the land to its shareholders, rather than selling the land 
to X, P would take its $10 gain under section 311(b) into account, and 
S would take its $30 loss into account under the matching rule with $10 
offset by P's gain and $20 recharacterized as a noncapital, 
nondeductible amount.)
    (E) Entitlement rule. The facts are the same as in paragraph 
(f)(7)(i)(A) of this section (Example 1), except that, after P becomes 
entitled to the distribution but before the distribution is made, S 
issues additional stock to the public and becomes a nonmember. Under 
paragraph (f)(2)(i) of this section, the determination of whether a 
distribution is an intercompany distribution is made under the 
entitlement rule of paragraph (f)(2)(iv) of this section. Treating S's 
distribution as made when P becomes entitled to it results in the 
distribution being an intercompany distribution. Under paragraph 
(f)(2)(ii) of this section, the distribution is not included in P's 
gross income. S's $30 gain from the distribution is intercompany gain 
that is taken into account under the acceleration rule immediately 
before S becomes a nonmember. Thus, there is a net $70 decrease in P's 
basis in its S stock under Sec.  1.1502-32 ($100 decrease for the 
distribution and a $30 increase for S's $30 gain). Under paragraph 
(f)(2)(iv) of this section, P does not take the distribution into 
account again under separate return rules when received, and P is not 
entitled to a dividends received deduction.

[[Page 106860]]

    (ii) Example 2. Excess loss accounts--(A) Facts. S owns all of T's 
only class of stock with a $10 basis and $100 value. S has substantial 
earnings and profits, and T has $10 of earnings and profits. On January 
1 of Year 1, S declares and distributes a dividend of all of the T 
stock to P. Under section 311(b), S has a $90 gain. Under section 
301(d), P's basis in the T stock is $100. During Year 3, T borrows $90 
and declares and makes a $90 distribution to P to which section 301 
applies, and P's basis in the T stock is reduced under Sec.  1.1502-32 
from $100 to $10. During Year 6, T has $5 of earnings that increase P's 
basis in the T stock under Sec.  1.1502-32 from $10 to $15. On December 
1 of Year 9, T issues additional stock to X and, as a result, T becomes 
a nonmember.
    (B) Dividend exclusion. Under paragraph (f)(2)(ii) of this section, 
P's $100 of dividend income from S's distribution of the T stock, and 
its $10 of dividend income from T's $90 distribution, are not included 
in gross income.
    (C) Matching and acceleration rules. Under Sec.  1.1502-19(b)(1), 
when T becomes a nonmember P must include in income the amount of its 
excess loss account (if any) in T stock. P has no excess loss account 
in the T stock. Therefore P's corresponding item from the 
deconsolidation of T is $0. Treating S and P as divisions of a single 
corporation, the T stock would continue to have a $10 basis after the 
distribution, and the adjustments under Sec.  1.1502-32 for T's $90 
distribution and $5 of earnings would result in a $75 excess loss 
account. Thus, the recomputed corresponding item from the 
deconsolidation is $75. Under the matching rule, S takes $75 of its $90 
gain into account in Year 9 as a result of T becoming a nonmember, to 
reflect the difference between P's $0 gain taken into account and the 
$75 recomputed gain. S's remaining $15 of gain is taken into account 
under the matching and acceleration rules based on subsequent events 
(for example, under the matching rule if P subsequently sells its T 
stock, or under the acceleration rule if S becomes a nonmember).
    (D) Reverse sequence. The facts are the same as in paragraph 
(f)(7)(ii)(A) of this section (Example 2), except that T borrows $90 
and makes its $90 distribution to S before S distributes T's stock to 
P. Under paragraph (f)(2)(ii) of this section, T's $90 distribution to 
S ($10 of which is a dividend) is not included in S's gross income. The 
corresponding negative adjustment under Sec.  1.1502-32 reduces S's 
basis in the T stock from $10 to an $80 excess loss account. Under 
section 311(b), S has a $90 gain from the distribution of T stock to P. 
Under section 301(d) P's initial basis in the T stock is $10 (the 
stock's fair market value), and the basis increases to $15 under Sec.  
1.1502-32 as a result of T's earnings in Year 6. The timing and 
attributes of S's gain are determined in the manner provided in 
paragraph (f)(7)(ii)(C) of this section (Example 2). Thus, $75 of S's 
gain is taken into account under the matching rule in Year 9 as a 
result of T becoming a nonmember, and the remaining $15 is taken into 
account under the matching and acceleration rules based on subsequent 
events.
    (E) Partial stock sale. The facts are the same as in paragraph 
(f)(7)(ii)(A) of this section (Example 2), except that P sells 10% of 
T's stock to X on December 1 of Year 9 for $1.50 (rather than T's 
issuing additional stock and becoming a nonmember). Under the matching 
rule, S takes $9 of its gain into account to reflect the difference 
between P's $0 gain taken into account ($1.50 sale proceeds minus $1.50 
basis) and the $9 recomputed gain ($1.50 sale proceeds plus $7.50 
excess loss account).
    (F) Loss, rather than cash distribution. The facts are the same as 
in paragraph (f)(7)(ii)(A) of this section (Example 2), except that T 
retains the loan proceeds and incurs a $90 loss in Year 3 that is 
absorbed by the group. The timing and attributes of S's gain are 
determined in the same manner provided in paragraph (f)(7)(ii)(C) of 
this section (Example 2). Under Sec.  1.1502-32, the loss in Year 3 
reduces P's basis in the T stock from $100 to $10, and T's $5 of 
earnings in Year 6 increase the basis to $15. Thus, $75 of S's gain is 
taken into account under the matching rule in Year 9 as a result of T 
becoming a nonmember, and the remaining $15 is taken into account under 
the matching and acceleration rules based on subsequent events. (The 
timing and attributes of S's gain would be determined in the same 
manner provided in paragraph (f)(7)(ii)(D) of this section (Example 2) 
if T incurred the $90 loss before S's distribution of the T stock to 
P.)
    (G) Stock sale, rather than stock distribution. The facts are the 
same as in paragraph (f)(7)(ii)(A) of this section (Example 2), except 
that S sells the T stock to P for $100 (rather than distributing the 
stock). The timing and attributes of S's gain are determined in the 
same manner provided in paragraph (f)(7)(ii)(C) of this section 
(Example 2). Thus, $75 of S's gain is taken into account under the 
matching rule in Year 9 as a result of T becoming a nonmember, and the 
remaining $15 is taken into account under the matching and acceleration 
rules based on subsequent events.
    (iii) Example 3. Intercompany reorganization--(A) Facts. P forms S 
and B by contributing $200 to the capital of each. During Years 1 
through 4, S and B each earn $50, and under Sec.  1.1502-32 P adjusts 
its basis in the stock of each to $250. (See Sec.  1.1502-33 for 
adjustments to earnings and profits.) On January 1 of Year 5, the fair 
market value of S's assets and its stock is $500, and S merges into B 
in a tax-free reorganization. Pursuant to the plan of reorganization, P 
receives B stock with a fair market value of $350 and $150 of cash.
    (B) Treatment as a section 301 distribution. The merger of S into B 
is a transaction to which paragraph (f)(3) of this section applies. P 
is treated as receiving additional B stock with a fair market value of 
$500 and, under section 358, a basis of $250. Immediately after the 
merger, $150 of the stock received is treated as redeemed, and the 
redemption is treated under section 302(d) as a distribution to which 
section 301 applies. Because the $150 distribution is treated as not 
received as part of the merger, section 356 does not apply and no basis 
adjustments are required under section 358(a)(1)(A) and (B). Because B 
is treated under section 381(c)(2) as receiving S's earnings and 
profits and the redemption is treated as occurring after the merger, 
$100 of the distribution is treated as a dividend under section 301 and 
P's basis in the B stock is reduced correspondingly under Sec.  1.1502-
32. The remaining $50 of the distribution reduces P's basis in the B 
stock. Section 301(c)(2) and Sec.  1.1502-32. Under paragraph 
(f)(2)(ii) of this section, P's $100 of dividend income is not included 
in gross income. Under Sec.  1.302-2(c), proper adjustments are made to 
P's basis in its B stock to reflect its basis in the B stock redeemed, 
with the result that P's basis in the B stock is reduced by the entire 
$150 distribution.
    (C) Depreciated property. The facts are the same as in paragraph 
(f)(7)(iii)(A) of this section (Example 3), except that property of S 
with a $200 basis and $150 fair market value is distributed to P 
(rather than cash of B). As in paragraph (f)(7)(iii)(B) of this section 
(Example 3), P is treated as receiving additional B stock in the merger 
and a $150 distribution to which section 301 applies immediately after 
the merger. Under paragraph (f)(2)(iii) of this section, the principles 
of section 311(b) apply to B's $50 loss and the loss is taken into 
account under the matching and acceleration rules based on subsequent 
events (for example, under

[[Page 106861]]

the matching rule if P subsequently sells the property, or under the 
acceleration rule if B becomes a nonmember). The results are the same 
under section 267(f).
    (D) Divisive transaction. Assume instead that, pursuant to a plan, 
S distributes the stock of a lower-tier subsidiary in a spin-off 
transaction to which section 355 applies together with $150 of cash. 
The distribution of stock is a transaction to which paragraph (f)(3) of 
this section applies. P is treated as receiving the $150 of cash 
immediately before the section 355 distribution, as a distribution to 
which section 301 applies. Section 356(b) does not apply and no basis 
adjustments are required under section 358(a)(1) (A) and (B). Because 
the $150 distribution is treated as made before the section 355 
distribution, the distribution reduces P's basis in the S stock under 
Sec.  1.1502-32, and the basis allocated under section 358(c) between 
the S stock and the lower-tier subsidiary stock received reflects this 
basis reduction.
    (iv) Example 4. All cash intercompany reorganization under section 
368(a)(1)(D)--(A) Facts. P owns all of the stock of M and B. M owns all 
of the stock of S with a basis of $25. On January 1 of Year 2, the fair 
market value of S's assets and its stock is $100, and S sells all of 
its assets to B for $100 cash and liquidates. The transaction qualifies 
as a reorganization described in section 368(a)(1)(D). Pursuant to 
Sec.  1.368-2(l), B will be deemed to issue a nominal share of B stock 
to S in addition to the $100 of cash actually exchanged for the S 
assets, and S will be deemed to distribute all of the consideration to 
M. M will be deemed to distribute the nominal share of B stock to P.
    (B) Treatment as a section 301 distribution. The sale of S's assets 
to B is a transaction to which paragraph (f)(3) of this section 
applies. In addition to the nominal share issued by B to S under Sec.  
1.368-2(l), S is treated as receiving additional B stock with a fair 
market value of $100 (in lieu of the $100) and, under section 358, a 
basis of $25 which S distributes to M in liquidation. Immediately after 
the sale, the B stock (with the exception of the nominal share which is 
still held by M) received by M is treated as redeemed for $100, and the 
redemption is treated under section 302(d) as a distribution to which 
section 301 applies. M's basis of $25 in the B stock is reduced under 
Sec.  1.1502-32(b)(3)(v), resulting in an excess loss account of $75 in 
the nominal share. (See Sec.  1.302-2(c)). M's deemed distribution of 
the nominal share of B stock to P under Sec.  1.368-2(l) will result in 
M generating an intercompany gain under section 311(b) of $75, to be 
subsequently taken into account under the matching and acceleration 
rules.
    (v) Example 5. Stock redemptions and distributions--(A) Facts. 
Before becoming a member of the P group, S owns P stock with a $30 
basis. On January 1 of Year 1, P buys all of S's stock. On July 1 of 
Year 3, P redeems the P stock held by S for $100 in a transaction to 
which section 302(a) applies.
    (B) Gain under section 302. Under paragraph (f)(4) of this section, 
P's basis in the P stock acquired from S is treated as eliminated. As a 
result of this elimination, S's intercompany item will never be taken 
into account under the matching rule because P's basis in the stock 
does not reflect S's intercompany item. Therefore, S's $70 gain is 
taken into account under the acceleration rule in Year 3. The 
attributes of S's item are determined under paragraph (d)(1)(ii) of 
this section by applying the matching rule as if P had sold the stock 
to an affiliated corporation that is not a member of the group at no 
gain or loss. Although P's corresponding item from a sale of its stock 
would have been excluded from gross income under section 1032, 
paragraph (c)(6)(ii) of this section prevents S's gain from being 
treated as excluded from gross income; instead S's gain is capital 
gain.
    (C) Gain under section 311. The facts are the same as in paragraph 
(f)(7)(v)(A) of this section (Example 5), except that S distributes the 
P stock to P in a transaction to which section 301 applies (rather than 
the stock being redeemed), and S has a $70 gain under section 311(b). 
The timing and attributes of S's gain are determined in the manner 
provided in paragraph (f)(7)(v)(B) of this section (Example 5).
    (D) Loss stock. The facts are the same as in paragraph (f)(7)(v)(A) 
of this section (Example 5), except that S has a $130 (rather than $30) 
basis in the P stock and has a $30 loss under section 302(a). The 
limitation under paragraph (c)(6)(ii) of this section does not apply to 
intercompany losses. Thus, S's loss is taken into account in Year 3 as 
a noncapital, nondeductible amount.
    (vi) Example 6. Intercompany stock sale followed by section 332 
liquidation--(A) Facts. S owns all of the stock of T, with a $70 basis 
and $100 value, and T's assets have a $10 basis and $100 value. On 
January 1 of Year 1, S sells all of T's stock to B for $100. On July 1 
of Year 3, when T's assets are still worth $100, T distributes all of 
its assets to B in an unrelated complete liquidation to which section 
332 applies.
    (B) Timing and attributes. Under paragraph (b)(3)(ii) of this 
section, B's unrecognized gain or loss under section 332 is a 
corresponding item for purposes of applying the matching rule. In Year 
3 when T liquidates, B has $0 of unrecognized gain or loss under 
section 332 because B has a $100 basis in the T stock and receives a 
$100 distribution with respect to its T stock. Treating S and B as 
divisions of a single corporation, the recomputed corresponding item 
would have been $30 of unrecognized gain under section 332 because B 
would have succeeded to S's $70 basis in the T stock. Thus, under the 
matching rule, S's $30 intercompany gain is taken into account in Year 
3 as a result of T's liquidation. Under paragraph (c)(1)(i) of this 
section, the attributes of S's gain and B's corresponding item are 
redetermined as if S and B were divisions of a single corporation. 
Although S's gain ordinarily would be redetermined to be treated as 
excluded from gross income to reflect the nonrecognition of B's gain 
under section 332, S's gain remains capital gain because B's 
unrecognized gain under section 332 is not permanently and explicitly 
disallowed under the Code. See paragraph (c)(6)(ii) of this section. 
However, relief may be elected under paragraph (f)(5)(ii) of this 
section.
    (C) Intercompany sale at a loss. The facts are the same as in 
paragraph (f)(7)(vi)(A) of this section (Example 6), except that S has 
a $130 (rather than $70) basis in the T stock. The limitation under 
paragraph (c)(6)(ii) of this section does not apply to intercompany 
losses. Thus, S's intercompany loss is taken into account in Year 3 as 
a noncapital, nondeductible amount. However, relief may be elected 
under paragraph (f)(5)(ii) of this section.
    (vii) Example 7. Intercompany stock sale followed by section 355 
distribution--(A) Facts. S owns all of the stock of T with a $70 basis 
and a $100 value. On January 1 of Year 1, S sells all of T's stock to M 
for $100. On June 1 of Year 6, M distributes all of its T stock to its 
nonmember shareholders in a transaction to which section 355 applies. 
At the time of the distribution, M has a basis in T stock of $100 and T 
has a value of $150.
    (B) Timing and attributes. Under paragraph (b)(3)(ii) of this 
section, M's $50 gain not recognized on the distribution under section 
355 is a corresponding item. Treating S and M as divisions of a single 
corporation, the recomputed corresponding item would be $80 of 
unrecognized gain under section 355 because M would have succeeded to 
S's $70 basis in the T

[[Page 106862]]

stock. Thus, under the matching rule, S's $30 intercompany gain is 
taken into account in Year 6 as a result of the distribution. Under 
paragraph (c)(1)(i) of this section, the attributes of S's intercompany 
item and M's corresponding item are redetermined to produce the same 
effect on consolidated taxable income as if S and M were divisions of a 
single corporation. Although S's gain ordinarily would be redetermined 
to be treated as excluded from gross income to reflect the 
nonrecognition of M's gain under section 355(c), S's gain remains 
capital gain because M's unrecognized gain under section 355(c) is not 
permanently and explicitly disallowed under the Code. See paragraph 
(c)(6)(ii) of this section. Because M's distribution of the T stock is 
not an intercompany transaction, relief is not available under 
paragraph (f)(5)(ii) of this section.
    (C) Section 355 distribution within the group. The facts are the 
same as under paragraph (f)(7)(vii)(A) of this section (Example 7), 
except that M distributes the T stock to B (another member of the 
group), and B takes a $75 basis in the T stock under section 358. Under 
paragraph (j)(2) of this section, B is a successor to M for purposes of 
taking S's intercompany gain into account, and therefore both M and B 
might have corresponding items with respect to S's intercompany gain. 
To the extent it is possible, matching with respect to B's 
corresponding items produces the result most consistent with treating 
S, M, and B as divisions of a single corporation. See paragraphs (j)(3) 
and (j)(4) of this section. However, because there is only $5 
difference between B's $75 basis in the T stock and the $70 basis the 
stock would have if S, M, and B were divisions of a single corporation, 
only $5 can be taken into account under the matching rule with respect 
to B's corresponding items. (This $5 is taken into account with respect 
to B's corresponding items based on subsequent events.) The remaining 
$25 of S's $30 intercompany gain is taken into account in Year 6 under 
the matching rule with respect to M's corresponding item from its 
distribution of the T stock. The attributes of S's remaining $25 of 
gain are determined in the same manner as in paragraph (f)(7)(vii)(B) 
of this section (Example 7).
    (D) Relief elected. The facts are the same as in paragraph 
(f)(7)(vii)(C) of this section (Example 7) except that P elects relief 
pursuant to paragraph (f)(5)(ii)(D) of this section. As a result of the 
election, M's distribution of the T stock is treated as subject to 
sections 301 and 311 instead of section 355. Accordingly, M recognizes 
$50 of intercompany gain from the distribution, B takes a basis in the 
stock equal to its fair market value of $150, and S and M take their 
intercompany gains into account with respect to B's corresponding items 
based on subsequent events. (None of S's gain is taken into account in 
Year 6 as a result of M's distribution of the T stock.)
* * * * *
    (g) * * *
    (7) Examples--(i) In general. For purposes of the examples in this 
paragraph (g), unless otherwise stated, interest is qualified stated 
interest under Sec.  1.1273-1(c), and the intercompany obligations are 
capital assets and are not subject to section 475.
    (ii) The application of this section to obligations of members is 
illustrated by the following examples:
    (A) Example 1. Interest on intercompany obligation--(1) Facts. On 
January 1 of year 1, B borrows $100 from S in return for B's note 
providing for $10 of interest annually at the end of each year, and 
repayment of $100 at the end of year 5. B fully performs its 
obligations. Under their separate entity methods of accounting, B 
accrues a $10 interest deduction annually under section 163, and S 
accrues $10 of interest income annually under section 61(a)(4) and 
Sec.  1.446-2.
    (2) Matching rule. Under paragraph (b)(1) of this section, the 
accrual of interest on B's note is an intercompany transaction. Under 
the matching rule, S takes its $10 of income into account in each of 
years 1 through 5 to reflect the $10 difference between B's $10 of 
interest expense taken into account and the $0 recomputed expense. S's 
income and B's deduction are ordinary items. (Because S's intercompany 
item and B's corresponding item would both be ordinary on a separate 
entity basis, the attributes are not redetermined under paragraph 
(c)(1)(i) of this section.)
    (3) Original issue discount. The facts are the same as in paragraph 
(g)(7)(ii)(A)(1) of this section (Example 1), except that B borrows $90 
(rather than $100) from S in return for B's note providing for $10 of 
interest annually and repayment of $100 at the end of year 5. The 
principles described in paragraph (g)(7)(ii)(A)(2) of this section 
(Example 1) for stated interest also apply to the $10 of original issue 
discount. Thus, as B takes into account its corresponding expense under 
section 163(e), S takes into account its intercompany income under 
section 1272. S's income and B's deduction are ordinary items.
    (4) Tax-exempt income. The facts are the same as in paragraph 
(g)(7)(ii)(A)(1) of this section (Example 1), except that B's borrowing 
from S is allocable under section 265 to B's purchase of state and 
local bonds to which section 103 applies. The timing of S's income is 
the same as in paragraph (g)(7)(ii)(A)(2) of this section (Example 1). 
Under paragraph (c)(4)(i) of this section, the attributes of B's 
corresponding item of disallowed interest expense control the 
attributes of S's offsetting intercompany interest income. Paragraph 
(c)(6) of this section does not prevent the redetermination of S's 
intercompany item as excluded from gross income because section 
265(a)(2) permanently and explicitly disallows B's corresponding 
deduction and because, under paragraph (g)(4)(i)(B) of this section, 
paragraph (c)(6)(ii) of this section does not apply to prevent any 
intercompany income from the B note from being excluded from gross 
income. Accordingly, S's intercompany income is treated as excluded 
from gross income.
    (B) Example 2. Intercompany obligation becomes nonintercompany 
obligation--(1) Facts. On January 1 of year 1, B borrows $100 from S in 
return for B's note providing for $10 of interest annually at the end 
of each year, and repayment of $100 at the end of year 5. As of January 
1 of year 3, B has paid the interest accruing under the note and S 
sells B's note to X for $70, reflecting an increase in prevailing 
market interest rates. B is never insolvent within the meaning of 
section 108(d)(3).
    (2) Deemed satisfaction and reissuance. Because the B note becomes 
an obligation that is not an intercompany obligation, the transaction 
is a triggering transaction under paragraph (g)(3)(i)(A)(2) of this 
section. Under paragraph (g)(3)(ii) of this section, B's note is 
treated as satisfied and reissued for its fair market value of $70 
immediately before S's sale to X. As a result of the deemed 
satisfaction of the note for less than its adjusted issue price, B 
takes into account $30 of discharge of indebtedness income under Sec.  
1.61-12. On a separate entity basis, S's $30 loss would be a capital 
loss under section 1271(a)(1). Under the matching rule, however, the 
attributes of S's intercompany item and B's corresponding item must be 
redetermined to produce the same effect as if the transaction had 
occurred between divisions of a single corporation. Under paragraph 
(c)(4)(i) of this section, the attributes of B's $30 of discharge of 
indebtedness income control the attributes of S's loss. Thus, S's loss 
is treated as ordinary loss. B is also treated as reissuing, 
immediately after the satisfaction, a new note to S with a $70 issue 
price, a $100 stated

[[Page 106863]]

redemption price at maturity, and a $70 basis in the hands of S. S is 
then treated as selling the new note to X for the $70 received by S in 
the actual transaction. Because S has a basis of $70 in the new note, S 
recognizes no gain or loss from the sale to X. After the sale, the new 
note held by X is not an intercompany obligation, it has a $70 issue 
price, a $100 stated redemption price at maturity, and a $70 basis. The 
$30 of original issue discount will be taken into account by B and X 
under sections 163(e) and 1272.
    (3) Creditor deconsolidation. The facts are the same as in 
paragraph (g)(7)(ii)(B)(1) of this section (Example 2), except that P 
sells S's stock to X (rather than S selling B's note to X). Because the 
B note becomes an obligation that is not an intercompany obligation, 
the transaction is a triggering transaction under paragraph 
(g)(3)(i)(A)(2) of this section. Under paragraph (g)(3)(ii) of this 
section, B's note is treated as satisfied and reissued for its $70 fair 
market value immediately before S becomes a nonmember. The treatment of 
S's $30 of loss and B's $30 of discharge of indebtedness income is the 
same as in paragraph (g)(7)(ii)(B)(2) of this section (Example 2). The 
new note held by S upon deconsolidation is not an intercompany 
obligation, it has a $70 issue price, a $100 stated redemption price at 
maturity, and a $70 basis. The $30 of original issue discount will be 
taken into account by B and S under sections 163(e) and 1272.
    (4) Debtor deconsolidation. The facts are the same as in paragraph 
(g)(7)(ii)(B)(1) of this section (Example 2), except that P sells B's 
stock to X (rather than S selling B's note to X). The results to S and 
B are the same as in paragraph (g)(7)(ii)(B)(3) of this section 
(Example 2).
    (5) Subgroup exception. The facts are the same as in paragraph 
(g)(7)(ii)(B)(1) of this section (Example 2), except that P owns all of 
the stock of S, S owns all of the stock of B, and P sells all of the S 
stock to X, the parent of another consolidated group. Because B and S, 
members of an intercompany obligation subgroup, cease to be members of 
the P group in a transaction that does not cause either member to 
recognize an item with respect to the B note, and such members 
constitute an intercompany obligation subgroup in the X group, P's sale 
of S stock is not a triggering transaction under paragraph 
(g)(3)(i)(B)(8) of this section, and the note is not treated as 
satisfied and reissued under paragraph (g)(3)(ii) of this section. 
After the sale, the note held by S has a $100 issue price, a $100 
stated redemption price at maturity, and a $100 basis. The results are 
the same if the S stock is sold to an individual and the S-B affiliated 
group elects to file a consolidated return for the period beginning on 
the day after S and B cease to be members of the P group.
    (6) Section 338 election. The facts are the same as in paragraph 
(g)(7)(ii)(B)(1) of this section (Example 2), except that P sells S's 
stock to X and a section 338 election is made with respect to the stock 
sale. Under section 338, S is treated as selling all of its assets to 
new S, including the B note, at the close of the acquisition date. The 
aggregate deemed sales price (within the meaning of Sec.  1.338-4) 
allocated to the B note is $70. Because the B note becomes an 
obligation that is not an intercompany obligation, the transaction is a 
triggering transaction under paragraph (g)(3)(i)(A)(2) of this section. 
Under paragraph (g)(3)(ii) of this section, B's note is treated as 
satisfied and reissued immediately before S's deemed sale to new S for 
$70, the amount realized with respect to the note (the aggregate deemed 
sales price allocated to the note under Sec.  1.338-6). The results to 
S and B are the same as in paragraph (g)(7)(ii)(B)(2) of this section 
(Example 2).
    (7) Appreciated note. The facts are the same as in paragraph 
(g)(7)(ii)(B)(1) of this section (Example 2), except that S sells B's 
note to X for $130 (rather than $70), reflecting a decline in 
prevailing market interest rates. Because the B note becomes an 
obligation that is not an intercompany obligation, the transaction is a 
triggering transaction under paragraph (g)(3)(i)(A)(2) of this section. 
Under paragraph (g)(3)(ii) of this section, B's note is treated as 
satisfied and reissued for its fair market value of $130 immediately 
before S's sale to X. As a result of the deemed satisfaction of the 
note for more than its adjusted issue price, B takes into account $30 
of repurchase premium under Sec.  1.163-7(c). On a separate entity 
basis, S's $30 gain would be a capital gain under section 1271(a)(1). 
Under the matching rule, however, the attributes of S's intercompany 
item and B's corresponding item must be redetermined to produce the 
same effect as if the transaction had occurred between divisions of a 
single corporation. Under paragraph (c)(4)(i) of this section, the 
attributes of B's premium deduction control the attributes of S's gain. 
Accordingly, S's gain is treated as ordinary income. B is also treated 
as reissuing, immediately after the satisfaction, a new note to S with 
a $130 issue price, $100 stated redemption price at maturity, and $130 
basis in the hands of S. S is then treated as selling the new note to X 
for the $130 received by S in the actual transaction. Because S has a 
basis of $130 in the new note, S recognizes no gain or loss from the 
sale to X. After the sale, the new note held by X is not an 
intercompany obligation, it has a $130 issue price, a $100 stated 
redemption price at maturity, and a $130 basis. The treatment of B's 
$30 of bond issuance premium under the new note is determined under 
Sec.  1.163-13.
    (8) Deferral of loss or deduction with respect to nonmember 
indebtedness acquired in debt exchange. The facts are the same as in 
paragraph (g)(7)(ii)(B)(1) of this section (Example 2), except that S 
sells B's note to X for a non-publicly traded X note with an issue 
price and face amount of $100 and a fair market value of $70, and that, 
subsequently, S sells the X note for $70. Because the B note becomes an 
obligation that is not an intercompany obligation, the transaction is a 
triggering transaction under paragraph (g)(3)(i)(A)(2) of this section. 
Under paragraph (g)(3)(ii) of this section, B's note is treated as 
satisfied and reissued immediately before S's sale to X for $100, the 
amount realized with respect to the note (determined under section 
1274). As a result of the deemed satisfaction, neither S nor B take 
into account any items of income, gain, deduction, or loss. S is then 
treated as selling the new B note to X for the X note received by S in 
the actual transaction. Because S has a basis of $100 in the new note, 
S recognizes no gain or loss from the sale to X. After the sale, the 
new B note held by X is not an intercompany obligation, it has a $100 
issue price, a $100 stated redemption price at maturity, and a $100 
basis. S also holds an X note with a basis of $100 but a fair market 
value of $70. When S disposes of the X note, S's loss on the 
disposition is deferred under paragraph (g)(4)(iv) of this section, 
until B retires its note (the former intercompany obligation in the 
hands of X).
    (C) Example 3. Loss or bad debt deduction with respect to 
intercompany obligation--(1) Facts. On January 1 of year 1, B borrows 
$100 from S in return for B's note providing for $10 of interest 
annually at the end of each year, and repayment of $100 at the end of 
year 5. On January 1 of year 3, the fair market value of the B note has 
declined to $60 and S sells the B note to P for property with a fair 
market value of $60. B is never insolvent within the meaning of section 
108(d)(3). The B note is not a security within the meaning of section 
165(g)(2).

[[Page 106864]]

    (2) Deemed satisfaction and reissuance. Because S realizes an 
amount of loss from the assignment of the B note, the transaction is a 
triggering transaction under paragraph (g)(3)(i)(A)(1) of this section. 
Under paragraph (g)(3)(ii) of this section, B's note is treated as 
satisfied and reissued for its fair market value of $60 immediately 
before S's sale to P. As a result of the deemed satisfaction of the 
note for less than its adjusted issue price ($100), B takes into 
account $40 of discharge of indebtedness income under Sec.  1.61-12. On 
a separate entity basis, S's $40 loss would be a capital loss under 
section 1271(a)(1). Under the matching rule, however, the attributes of 
S's intercompany item and B's corresponding item must be redetermined 
to produce the same effect as if the transaction had occurred between 
divisions of a single corporation. Under paragraph (c)(4)(i) of this 
section, the attributes of B's $40 of discharge of indebtedness income 
control the attributes of S's loss. Thus, S's loss is treated as 
ordinary loss. B is also treated as reissuing, immediately after the 
satisfaction, a new note to S with a $60 issue price, $100 stated 
redemption price at maturity, and $60 basis in the hands of S. S is 
then treated as selling the new note to P for the $60 of property 
received by S in the actual transaction. Because S has a basis of $60 
in the new note, S recognizes no gain or loss from the sale to P. After 
the sale, the note is an intercompany obligation, it has a $60 issue 
price and a $100 stated redemption price at maturity, and the $40 of 
original issue discount will be taken into account by B and P under 
sections 163(e) and 1272.
    (3) Partial bad debt deduction. The facts are the same as in 
paragraph (g)(7)(ii)(C)(1) of this section (Example 3), except that S 
claims a $40 partial bad debt deduction under section 166(a)(2) (rather 
than selling the note to P). Because S realizes a deduction from a 
transaction comparable to an assignment of the B note, the transaction 
is a triggering transaction under paragraph (g)(3)(i)(A)(1) of this 
section. Under paragraph (g)(3)(ii) of this section, B's note is 
treated as satisfied and reissued for its fair market value of $60 
immediately before section 166(a)(2) applies. The treatment of S's $40 
loss and B's $40 of discharge of indebtedness income are the same as in 
paragraph (g)(7)(ii)(C)(2) of this section (Example 3). After the 
reissuance, S has a basis of $60 in the new note. Accordingly, the 
application of section 166(a)(2) does not result in any additional 
deduction for S. The $40 of original issue discount on the new note 
will be taken into account by B and S under sections 163(e) and 1272.
    (4) Insolvent debtor. The facts are the same as in paragraph 
(g)(7)(ii)(C)(1) of this section (Example 3), except that B is 
insolvent within the meaning of section 108(d)(3) at the time that S 
sells the note to P. As explained in paragraph (g)(7)(ii)(C)(2) of this 
section (Example 3), the transaction is a triggering transaction and 
the B note is treated as satisfied and reissued for its fair market 
value of $60 immediately before S's sale to P. On a separate entity 
basis, S's $40 loss would be capital, B's $40 income would be excluded 
from gross income under section 108(a), and B would reduce attributes 
under section 108(b) or section 1017 (see also Sec.  1.1502-28). 
However, under paragraph (g)(4)(i)(C) of this section, section 108(a) 
does not apply to characterize B's income as excluded from gross 
income. Accordingly, the attributes of S's loss and B's income are 
redetermined in the same manner as in paragraph (g)(7)(ii)(C)(2) of 
this section (Example 3).
    (D) Example 4. Intercompany nonrecognition transactions--(1) Facts. 
On January 1 of year 1, B borrows $100 from S in return for B's note 
providing for $10 of interest annually at the end of each year, and 
repayment of $100 at the end of year 5. As of January 1 of year 3, B 
has fully performed its obligations, but the note's fair market value 
is $130, reflecting a decline in prevailing market interest rates. On 
January 1 of year 3, S transfers the note and other assets to a newly 
formed corporation, Newco, for all of Newco's common stock in an 
exchange to which section 351 applies.
    (2) No deemed satisfaction and reissuance. Because the assignment 
of the B note is an exchange to which section 351 applies and neither S 
nor B recognize gain or loss, the transaction is not a triggering 
transaction under paragraph (g)(3)(i)(B)(1) of this section, and the 
note is not treated as satisfied and reissued under paragraph 
(g)(3)(ii) of this section.
    (3) Receipt of other property. The facts are the same as in 
paragraph (g)(7)(ii)(D)(1) of this section (Example 4), except that the 
other assets transferred to Newco have a basis of $100 and a fair 
market value of $260, and S receives, in addition to Newco common 
stock, $15 of cash. Because S would recognize $15 of gain under section 
351(b), the assignment of the B note is a triggering transaction under 
paragraph (g)(3)(i)(A)(1) of this section. Under paragraph (g)(3)(ii) 
of this section, B's note is treated as satisfied and reissued for its 
fair market value of $130 immediately before the transfer to Newco. As 
a result of the deemed satisfaction of the note for more than its 
adjusted issue price, B takes into account $30 of repurchase premium 
under Sec.  1.163-7(c). On a separate entity basis, S's $30 gain would 
be a capital gain under section 1271(a)(1). Under the matching rule, 
however, the attributes of S's intercompany item and B's corresponding 
item must be redetermined to produce the same effect as if the 
transaction had occurred between divisions of a single corporation. 
Under paragraph (c)(4)(i) of this section, the attributes of B's 
premium deduction control the attributes of S's gain. Accordingly, S's 
gain is treated as ordinary income. B is also treated as reissuing, 
immediately after the satisfaction, a new note to S with a $130 issue 
price, $100 stated redemption price at maturity, and $130 basis in the 
hands of S. S is then treated as transferring the new note to Newco for 
the Newco stock and cash received by S in the actual transaction. 
Because S has a basis of $130 in the new B note, S recognizes no gain 
or loss with respect to the transfer of the note in the section 351 
exchange, and S recognizes $10 of gain with respect to the transfer of 
the other assets under section 351(b). After the transfer, the note has 
a $130 issue price and a $100 stated redemption price at maturity. The 
treatment of B's $30 of bond issuance premium under the new note is 
determined under Sec.  1.163-13.
    (4) Transferee loss subject to limitation. The facts are the same 
as in paragraph (g)(7)(ii)(D)(1) of this section (Example 4), except 
that T is a member with a loss from a separate return limitation year 
that is subject to limitation under Sec.  1.1502-21(c) (a SRLY loss), 
and on January 1 of year 3, S transfers the assets and the B note to T 
in an exchange to which section 351 applies. Because the transferee, T, 
has a loss that is subject to a limitation, the assignment of the B 
note is a triggering transaction under paragraph (g)(3)(i)(A)(1) of 
this section (the exception in paragraph (g)(3)(i)(B)(1) of this 
section does not apply). Under paragraph (g)(3)(ii) of this section, 
B's note is treated as satisfied and reissued for its fair market 
value, immediately before S's transfer to T. As a result of the deemed 
satisfaction of the note for more than its adjusted issue price, B 
takes into account $30 of repurchase premium under Sec.  1.163-7(c). On 
a separate entity basis, S's $30 gain would be a capital gain under 
section 1271(a)(1). Under the matching rule, however, the attributes of 
S's intercompany item and B's

[[Page 106865]]

corresponding item must be redetermined to produce the same effect as 
if the transaction had occurred between divisions of a single 
corporation. Under paragraph (c)(4)(i) of this section, the attributes 
of B's premium deduction control the attributes of S's gain. 
Accordingly, S's gain is treated as ordinary income. B is also treated 
as reissuing, immediately after the satisfaction, a new note to S with 
a $130 issue price, $100 stated redemption price at maturity, and $130 
basis in the hands of S. The treatment of B's $30 of bond issuance 
premium under the new note is determined under Sec.  1.163-13. S is 
then treated as transferring the new note to T as part of the section 
351 exchange. Because T will have a fair market value basis in the 
reissued B note immediately after the exchange, T's intercompany item 
from the subsequent retirement of the B note will not reflect any of 
S's built-in gain (and the amount of T's SRLY loss that may be absorbed 
by such item will be limited to any appreciation in the B note accruing 
after the exchange).
    (5) Intercompany obligation transferred in section 332 transaction. 
The facts are the same as paragraph (g)(7)(ii)(D)(1) of this section 
(Example 4), except that S transfers the B note to P in complete 
liquidation under section 332. Because the transaction is an exchange 
to which section 332 and section 337(a) applies, and neither S nor B 
recognize gain or loss, the transaction is not a triggering transaction 
under paragraph (g)(3)(i)(B)(1) of this section, and the note is not 
treated as satisfied and reissued under paragraph (g)(3)(ii) of this 
section.
    (E) Example 5. Assumption of intercompany obligation--(1) Facts. On 
January 1 of year 1, B borrows $100 from S in return for B's note 
providing for $10 of interest annually at the end of each year, and 
repayment of $100 at the end of year 5. The note is fully recourse and 
is incurred for use in Business Z. As of January 1 of year 3, B has 
fully performed its obligations, but the note's fair market value is 
$110 reflecting a decline in prevailing market interest rates. Business 
Z has a fair market value of $95. On January 1 of year 3, B transfers 
all of the assets of Business Z and $15 of cash (substantially all of 
B's assets) to member T in exchange for the assumption by T of all of 
B's obligations under the note in a transaction in which gain or loss 
is recognized under section 1001. The terms and conditions of the note 
are not modified in connection with the sales transaction, the 
transaction does not result in a change in payment expectations, and no 
amount of income, gain, deduction, or loss is recognized by S, B, or T 
with respect to the note.
    (2) No deemed satisfaction and reissuance. Because all of B's 
obligations under the B note are assumed by T in connection with the 
sale of the Business Z assets, the assignment of B's obligations under 
the note is not a triggering transaction under paragraph 
(g)(3)(i)(B)(2) of this section, and the note is not treated as 
satisfied and reissued under paragraph (g)(3)(ii) of this section.
    (F) Example 6. Extinguishment of intercompany obligation--(1) 
Facts. On January 1 of year 1, B borrows $100 from S in return for B's 
note providing for $10 of interest annually at the end of each year, 
and repayment of $100 at the end of year 20. The note is a security 
within the meaning of section 351(d)(2). As of January 1 of year 3, B 
has fully performed its obligations, but the fair market value of the B 
note is $130, reflecting a decline in prevailing market interest rates, 
and S transfers the note to B in exchange for $130 of B stock in a 
transaction to which both section 351 and section 354 applies.
    (2) No deemed satisfaction and reissuance. As a result of the 
satisfaction of the note for more than its adjusted issue price, B 
takes into account $30 of repurchase premium under Sec.  1.163-7(c). 
Although the transfer of the B note is a transaction to which both 
section 351 and section 354 applies, under paragraph (g)(4)(i)(C) of 
this section, any gain or loss from the intercompany obligation is not 
subject to either section 351(a) or section 354, and therefore, S has a 
$30 gain under section 1001. Because the note is extinguished in a 
transaction in which the adjusted issue price of the note is equal to 
the creditor's basis in the note, and the debtor's and creditor's items 
offset in amount, the transaction is not a triggering transaction under 
paragraph (g)(3)(i)(B)(5) of this section, and the note is not treated 
as satisfied and reissued under paragraph (g)(3)(ii) of this section. 
On a separate entity basis, S's $30 gain would be a capital gain under 
section 1271(a)(1). Under the matching rule, however, the attributes of 
S's intercompany item and B's corresponding item must be redetermined 
to produce the same effect as if the transaction had occurred between 
divisions of a single corporation. Under paragraph (c)(4)(i) of this 
section, the attributes of B's premium deduction control the attributes 
of S's gain. Accordingly, S's gain is treated as ordinary income. Under 
paragraph (g)(4)(i)(D) of this section, section 108(e)(7) does not 
apply upon the extinguishment of the B note, and therefore, the B stock 
received by S in the exchange will not be treated as section 1245 
property.
    (G) Example 7. Exchange of intercompany obligations--(1) Facts. On 
January 1 of year 1, B borrows $100 from S in return for B's note 
providing for $10 of interest annually at the end of each year, and 
repayment of $100 at the end of year 20. As of January 1 of year 3, B 
has fully performed its obligations and, pursuant to a recapitalization 
to which section 368(a)(1)(E) applies, B issues a new note to S in 
exchange for the original B note. The new B note has an issue price, 
stated redemption price at maturity, and stated principal amount of 
$100, but contains terms that differ sufficiently from the terms of the 
original B note to cause a realization event under Sec.  1.1001-3. The 
original B note and the new B note are both securities (within the 
meaning of section 354(a)(1)).
    (2) No deemed satisfaction and reissuance. Because the original B 
note is extinguished in exchange for a newly issued B note and the 
issue price of the new B note is equal to both the adjusted issue price 
of the original B note and S's basis in the original B note, the 
transaction is not a triggering transaction under paragraph 
(g)(3)(i)(B)(6) of this section, and the note is not treated as 
satisfied and reissued under paragraph (g)(3)(ii) of this section. B 
has neither income from discharge of indebtedness under section 
108(e)(10) nor a deduction for repurchase premium under Sec.  1.163-
7(c). Although the exchange of the original B note for the new B note 
is a transaction to which section 354 applies, under paragraph 
(g)(4)(i)(C) of this section, any gain or loss from the intercompany 
obligation is not subject to section 354. Under section 1001, S has no 
gain or loss from the exchange of notes.
    (H) Example 8. Tax benefit rule--(1) Facts. On January 1 of year 1, 
B borrows $100 from S in return for B's note providing for $10 of 
interest annually at the end of each year, and repayment of $100 at the 
end of year 5. As of January 1 of year 3, B has fully performed its 
obligations, but the note's fair market value has depreciated, 
reflecting an increase in prevailing market interest rates. On that 
date, S transfers the B note to member T as part of an exchange for T 
common stock which is intended to qualify for nonrecognition treatment 
under section 351 but with a view to sell the T stock at a reduced 
gain. On February 1 of year 4, all of the stock of T is sold at a 
reduced gain.
    (2) Deemed satisfaction and reissuance. Because the assignment of

[[Page 106866]]

the B note does not occur within 12 months of the sale of T stock, 
paragraph (g)(3)(i)(B)(1)(vi) of this section does not apply to treat 
the assignment as a triggering transaction. However, because the 
assignment of the B note was engaged in with a view to shift built-in 
loss from the obligation in order to secure a tax benefit that the 
group or its members would not otherwise enjoy, under paragraph 
(g)(3)(i)(C) of this section, the assignment of the B note is a 
triggering transaction to which paragraph (g)(3)(ii) of this section 
applies. Under paragraph (g)(3)(ii) of this section, B's note is 
treated as satisfied and reissued for its fair market value, 
immediately before S's transfer to T. As a result of the deemed 
satisfaction of the note for less than its adjusted issue price, B 
takes into account discharge of indebtedness income and S has a 
corresponding loss which is treated as ordinary loss. B is also treated 
as reissuing, immediately after the deemed satisfaction, a new note to 
S with an issue price and basis equal to its fair market value. S is 
then treated as transferring the new note to T as part of the section 
351 exchange. Because S's basis in the T stock received with respect to 
the transferred B note is equal to its fair market value, S's gain with 
respect to the T stock will not reflect any of the built-in loss 
attributable to the B note. (This example does not address common law 
doctrines or other authorities that might apply to recharacterize the 
transaction or to otherwise affect the tax treatment of the 
transaction.)
    (I) Example 9. Issuance at off-market rate of interest--(1) Facts. 
T is a member with a SRLY loss. T's sole shareholder, P, borrows an 
amount of cash from T in return for a P note that provides for a 
materially above market rate of interest. The P note is issued with a 
view to generate additional interest income to T over the term of the 
note to facilitate the absorption of T's SRLY loss.
    (2) With a view. Because the P note is issued with a view to shift 
interest income from the off-market obligation in order to secure a tax 
benefit that the group or its members would not otherwise enjoy, under 
paragraph (g)(4)(iii) of this section, the intercompany obligation is 
treated, for all Federal income tax purposes, as originally issued for 
its fair market value so T is treated as purchasing the note at a 
premium. The difference between the amount loaned and the fair market 
value of the obligation is treated as transferred from P to T as a 
capital contribution at the time the note is issued. Throughout the 
term of the note, T takes into account interest income and bond premium 
and P takes into account interest deduction and bond issuance premium 
under generally applicable Internal Revenue Code sections. The 
adjustment under paragraph (g)(4)(iii) of this section is made without 
regard to the application of, and in lieu of any adjustment under, 
section 482 or 1274.
    (J) Example 10. Nonintercompany obligation becomes intercompany 
obligation--(1) Facts. On January 1 of year 1, B borrows $100 from X in 
return for B's note providing for $10 of interest annually at the end 
of each year, and repayment of $100 at the end of year 5. As of January 
1 of year 3, B has fully performed its obligations, but the note's fair 
market value is $70, reflecting an increase in prevailing market 
interest rates. On January 1 of year 3, P buys all of X's stock. B is 
solvent within the meaning of section 108(d)(3).
    (2) Deemed satisfaction and reissuance. Under paragraph (g)(5)(ii) 
of this section, B's note is treated as satisfied for $70 (determined 
under the principles of Sec.  1.108-2(f)(2)) immediately after it 
becomes an intercompany obligation. Both X's $30 capital loss (under 
section 1271(a)(1)) and B's $30 of discharge of indebtedness income 
(under Sec.  1.61-12) are taken into account in determining 
consolidated taxable income for year 3. Under paragraph (g)(6)(i)(B) of 
this section, the attributes of items resulting from the satisfaction 
are determined on a separate entity basis. But see section 382 and 
Sec.  1.1502-15 (as appropriate). B is also treated as reissuing a new 
note to X. The new note is an intercompany obligation, it has a $70 
issue price and $100 stated redemption price at maturity, and the $30 
of original issue discount will be taken into account by B and X in the 
same manner as provided in paragraph (g)(7)(ii)(A)(3) of this section 
(Example 1).
    (3) Amortization of repurchase premium. The facts are the same as 
in paragraph (g)(7)(ii)(J)(1) of this section (Example 10), except that 
on January 1 of year 3, the B note has a fair market value of $130 and 
rather than P purchasing the X stock, P purchases the B note from X by 
issuing its own note. The P note has an issue price, stated redemption 
price at maturity, stated principal amount, and fair market value of 
$130. Under paragraph (g)(5)(ii) of this section, B's note is treated 
as satisfied for $130 (determined under the principles of Sec.  1.108-
2(f)(1)) immediately after it becomes an intercompany obligation. As a 
result of the deemed satisfaction of the note, P has no gain or loss 
and B has $30 of repurchase premium. Under paragraph (g)(6)(iii) of 
this section, B's $30 of repurchase premium from the deemed 
satisfaction is amortized by B over the term of the newly issued P note 
in the same manner as if it were original issue discount and the newly 
issued P note had been issued directly by B. B is also treated as 
reissuing a new note to P. The new note is an intercompany obligation, 
it has a $130 issue price and $100 stated redemption price at maturity, 
and the treatment of B's $30 of bond issuance premium under the new B 
note is determined under Sec.  1.163-13.
    (4) Election to file consolidated returns. Assume instead that B 
borrows $100 from S during year 1, but the P group does not file 
consolidated returns until year 3. Under paragraph (g)(5)(ii) of this 
section, B's note is treated as satisfied and reissued as a new note 
immediately after the note becomes an intercompany obligation. The 
satisfaction and reissuance are deemed to occur on January 1 of year 3, 
for the fair market value of the obligation (determined under the 
principles of Sec.  1.108-2(f)(2)) at that time.
    (K) Example 11. Notional principal contracts--(1) Facts. On April 1 
of year 1, M1 enters into a contract with counterparty M2 under which, 
for a term of five years, M1 is obligated to make a payment to M2 each 
April 1, beginning in year 2, in an amount equal to the London 
Interbank Offered Rate (LIBOR), as determined by reference to LIBOR on 
the day each payment is due, multiplied by a $1,000 notional principal 
amount. M2 is obligated to make a payment to M1 each April 1, beginning 
in year 2, in an amount equal to 8 percent multiplied by the same 
notional principal amount. LIBOR is 7.80 percent on April 1 of year 2, 
and therefore, M2 owes $2 to M1.
    (2) Matching rule. Under Sec.  1.446-3(d), the net income (or net 
deduction) from a notional principal contract for a taxable year is 
included in (or deducted from) gross income. Under Sec.  1.446-3(e), 
the ratable daily portion of M2's obligation to M1 as of December 31 of 
year 1 is $1.50 ($2 multiplied by 275/365). Under the matching rule, 
M1's net income for year 1 of $1.50 is taken into account to reflect 
the difference between M2's net deduction of $1.50 taken into account 
and the $0 recomputed net deduction. Similarly, the $.50 balance of the 
$2 of net periodic payments made on April 1 of year 2 is taken into 
account for year 2 in M1's and M2's net income and net deduction from 
the contract. In addition, the attributes of M1's intercompany income 
and M2's corresponding deduction are redetermined to produce the same 
effect as if the transaction had occurred between divisions of a single

[[Page 106867]]

corporation. Under paragraph (c)(4)(i) of this section, the attributes 
of M2's corresponding deduction control the attributes of M1's 
intercompany income. (Although M1 is the selling member with respect to 
the payment on April 1 of year 2, it might be the buying member in a 
subsequent period if it owes the net payment.)
    (3) Dealer. The facts are the same as in paragraph (g)(7)(ii)(K)(1) 
of this section (Example 11), except that M2 is a dealer in securities, 
and the contract with M1 is not inventory in the hands of M2. Under 
section 475, M2 must mark its securities to fair market value at year-
end. Assume that under section 475, M2's loss from marking to fair 
market value the contract with M1 is $10. Because M2 realizes an amount 
of loss from the mark to fair market value of the contract, the 
transaction is a triggering transaction under paragraph (g)(3)(i)(A)(1) 
of this section. Under paragraph (g)(3)(ii) of this section, M2 is 
treated as making a $10 payment to M1 to terminate the contract 
immediately before a new contract is treated as reissued with an up-
front payment by M1 to M2 of $10. M1's $10 of income from the 
termination payment is taken into account under the matching rule to 
reflect M2's deduction under Sec.  1.446-3(h). The attributes of M1's 
intercompany income and M2's corresponding deduction are redetermined 
to produce the same effect as if the transaction had occurred between 
divisions of a single corporation. Under paragraph (c)(4)(i) of this 
section, the attributes of M2's corresponding deduction control the 
attributes of M1's intercompany income. Accordingly, M1's income is 
treated as ordinary income. Under Sec.  1.446-3(f), the deemed $10 up-
front payment by M1 to M2 in connection with the issuance of a new 
contract is taken into account over the term of the new contract in a 
manner reflecting the economic substance of the contract (for example, 
allocating the payment in accordance with the forward rates of a series 
of cash-settled forward contracts that reflect the specified index and 
the $1,000 notional principal amount). (The timing of taking items into 
account is the same if M1, rather than M2, is the dealer subject to the 
mark-to-market requirement of section 475 at year-end. However in this 
case, because the attributes of the corresponding deduction control the 
attributes of the intercompany income, M1's income from the deemed 
termination payment from M2 might be ordinary or capital). Under 
paragraph (g)(3)(ii)(A) of this section, section 475 does not apply to 
mark the notional principal contract to fair market value after its 
deemed satisfaction and reissuance.
* * * * *
    (l) * * *
    (6) Applicability date regarding paragraph (f)(7)(iv) of this 
section (Example 4). Paragraph (f)(7)(iv) of this section (Example 4) 
applies to transactions occurring on or after December 18, 2009.
* * * * *
    (8) Election to apply paragraph (f)(5)(ii) of this section to an 
intercompany transaction. Paragraph (f)(5)(ii)(E) of this section 
applies to any original consolidated Federal income tax return due 
(without extensions) after June 14, 2007.
    (9) Election to reduce basis of parent stock under paragraph (f)(6) 
of this section. Paragraph (f)(6)(i)(C)(2) of this section applies to 
any original consolidated Federal income tax return due (without 
extensions) after June 14, 2007.
    (10) Certain qualified stock dispositions. Paragraph (f)(5)(ii)(C) 
of this section applies to any qualified stock disposition (as defined 
in Sec.  1.336-1(b)(6)) for which the disposition date (as defined in 
Sec.  1.336-1(b)(8)) is on or after May 15, 2013.

0
Par. 19. Section 1.1502-17 is amended by revising and republishing 
paragraphs (a) and (e) to read as follows:


Sec.  1.1502-17  Methods of accounting.

    (a) General rule. The method of accounting to be used by each 
member of the group is determined in accordance with the provisions of 
section 446 as if such member filed a separate return.
* * * * *
    (e) Effective dates. Paragraph (b) of this section applies to 
changes in method of accounting effective for years beginning on or 
after July 12, 1995. Paragraphs (c) and (d) of this section apply with 
respect to acquisitions occurring or activities undertaken in years 
beginning on or after July 12, 1995.


Sec.  1.1502-18   [Removed]

0
Par. 20. Section 1.1502-18 is removed.

0
Par. 21. Section 1.1502-21 is amended by:
0
a. Revising paragraphs (b)(3)(i) and (b)(4);
0
b. Removing and reserving paragraph (d); and
0
c. Revising paragraphs (h)(6) and (8).
    The revisions read as follows:


Sec.  1.1502-21   Net operating losses.

* * * * *
    (b) * * *
    (3) * * *
    (i) In general. A group may make an irrevocable election under 
section 172(b)(3) to relinquish the entire carryback period with 
respect to a CNOL for any consolidated return year. Except as provided 
in paragraphs (b)(4) and (5) of this section, the election may not be 
made separately for any member (whether or not it remains a member), 
and must be made in a separate statement titled ``THIS IS AN ELECTION 
UNDER Sec.  1.1502-21(b)(3)(i) TO WAIVE THE ENTIRE CARRYBACK PERIOD 
PURSUANT TO SECTION 172(b)(3) FOR THE [insert consolidated return year] 
CNOLs OF THE CONSOLIDATED GROUP OF WHICH [insert name and employer 
identification number of common parent] IS THE COMMON PARENT.'' The 
statement must be filed with the group's income tax return for the 
consolidated return year in which the loss arises. The election may be 
made in an unsigned statement.
* * * * *
    (4) General split-waiver election. If one or more members of a 
consolidated group becomes a member of another consolidated group, the 
acquiring group may make an irrevocable election to relinquish, with 
respect to all consolidated net operating losses attributable to the 
member, the portion of the carryback period for which the corporation 
was a member of another group, provided that any other corporation 
joining the acquiring group that was affiliated with the member 
immediately before it joined the acquiring group is also included in 
the waiver. This election is not a yearly election and applies to all 
losses that would otherwise be subject to a carryback to a former group 
under section 172. The election must be made in a separate statement 
titled ``THIS IS AN ELECTION UNDER Sec.  1.1502-21(b)(4) TO WAIVE THE 
PRE- [insert first taxable year for which the member (or members) was 
not a member of another group] CARRYBACK PERIOD FOR THE CNOLs 
attributable to [insert names and employer identification number of 
members].'' The statement must be filed with the acquiring consolidated 
group's original income tax return for the year the corporation (or 
corporations) became a member. The election may be made in an unsigned 
statement.
* * * * *
    (h) * * *
    (6) Certain prior periods. Paragraphs (b)(1), (b)(2)(iv)(A), 
(b)(2)(iv)(B)(1), and (c)(2)(vii) of this section apply to taxable

[[Page 106868]]

years for which the due date of the original return (without regard to 
extensions) is after March 21, 2005.
* * * * *
    (8) Losses treated as expired under Sec.  1.1502-35(f)(1). For 
rules regarding losses treated as expired under Sec.  1.1502-35(f) on 
or after March 10, 2006, see Sec.  1.1502-21(b)(3)(v) as contained in 
26 CFR part 1 in effect on April 1, 2006.
* * * * *


Sec.  1.1502-22   [Amended]

0
Par. 22. Section 1.1502-22 is amended by removing and reserving 
paragraph (d).

0
Par. 23. Section 1.1502-24 is amended by revising paragraphs (a)(2) and 
(c) to read as follows:


Sec.  1.1502-24  Consolidated charitable contributions deduction.

    (a) * * *
    (2) The percentage limitation on the total charitable contribution 
deduction provided in section 170(b)(2)(A) applied to adjusted 
consolidated income as determined under paragraph (c) of this section.
* * * * *
    (c) Adjusted consolidated taxable income. For purposes of this 
section, the adjusted consolidated taxable income of the group for any 
consolidated return year is the consolidated taxable income computed 
without regard to this section, section 243(a)(2) and (3), and Sec.  
1.1502-26, and without regard to any consolidated net operating or net 
capital loss carrybacks to such year.

0
Par. 24. Section 1.1502-26 is amended by revising paragraphs (a) and 
(c) to read as follows:


Sec.  1.1502-26  Consolidated dividends received deduction.

    (a) In general. The consolidated dividends received deduction for 
the taxable year is the lesser of--
    (1) The aggregate of the deduction of the members of the group 
allowable under sections 243(a)(1), 245(a) and (b), and 250 (computed 
without regard to the limitations provided in section 246(b)), or
    (2) The aggregate amount described in section 246(b), determined by 
substituting, wherever it appears--
    (i) The term consolidated taxable income for taxable income,
    (ii) The term consolidated net operating loss for net operating 
loss, and
    (iii) The term consolidated net capital loss for capital loss.
* * * * *
    (c) Examples. The provisions of this section may be illustrated by 
the following examples:
    (1) Example 1. (i) Corporations P, S, and S-1 filed a consolidated 
return for the calendar year 2023 showing consolidated taxable income 
of $100,000 (determined without regard to the consolidated net 
operating loss deduction, and the consolidated dividends received 
deduction). These corporations received dividends during such year from 
less than 20-percent owned domestic corporations as follows:

                     Table 1 to Paragraph (c)(1)(i)
------------------------------------------------------------------------
                       Corporation                           Dividends
------------------------------------------------------------------------
P.......................................................          $6,000
S.......................................................          10,000
S-1.....................................................          34,000
                                                         ---------------
    Total...............................................          50,000
------------------------------------------------------------------------

    (ii) The dividends received deduction allowable to each member 
under section 243(a)(1) (computed without regard to the limitation in 
section 246(b)) is as follows: P has $3,000 (50 percent of $6,000), S 
has $5,000 (50 percent of $10,000), and S-1 has $17,000 (50 percent of 
$34,000), or a total of $25,000. Since $25,000 is less than $50,000 (50 
percent of $100,000), the consolidated dividends received deduction is 
$25,000.
    (2) Example 2. Assume the same facts as in paragraph (c)(1)(i) of 
this section (Example 1), except that consolidated taxable income 
(computed without regard to the consolidated net operating loss 
deduction and the consolidated dividends received deduction) was 
$40,000. The aggregate of the dividends received deductions, $42,500, 
computed without regard to section 246(b), results in a consolidated 
net operating loss of $2,500. See section 172(d)(5). Therefore, 
paragraph (a)(2) of this section does not apply and the consolidated 
dividends received deduction is $42,500.


Sec.  1.1502-27   [Removed]

0
Par. 25. Section 1.1502-27 is removed.

0
Par. 26. Section 1.1502-32 is amended by:
0
a. Revising paragraphs (b)(4)(v) and (vii).
0
b. Revising and republishing paragraphs (b)(5), (h)(2)(i), and (h)(5) 
through (8).
0
c. Redesignating paragraph (j) as paragraph (h)(10) and revising newly 
designated paragraph (h)(10).
0
d. Removing paragraph (k).
    The revisions read as follows:


Sec.  1.1502-32  Investment adjustments.

* * * * *
    (b) * * *
    (4) * * *
    (v) Special rule for loss carryovers of a subsidiary acquired in a 
transaction for which an election under Sec.  1.1502-20(i)(2) is made. 
See paragraph (b)(4)(v) of this section as contained in 26 CFR part 1 
revised as of April 1, 2005.
* * * * *
    (vii) Special rules for amending waiver of loss carryovers from 
separate return limitation year relating to the acquisition of a 
subsidiary in a transaction subject to Sec.  1.1502-20. See paragraph 
(b)(4)(vii) of this section as contained in 26 CFR part 1 revised as of 
April 1, 2005.
    (5) Examples--(i) In general. For purposes of the examples in this 
section, unless otherwise stated, M owns all of the only class of S's 
stock, the stock is owned for the entire year, S owns no stock of 
lower-tier members, the tax year of all persons is the calendar year, 
all persons use the accrual method of accounting, the facts set forth 
the only corporate activity, preferred stock is described in section 
1504(a)(4), all transactions are between unrelated persons, and tax 
liabilities are disregarded.
    (ii) Stock basis adjustments. The principles of this paragraph (b) 
are illustrated by the following examples.
    (A) Example 1. Taxable income--(1) Current taxable income. For Year 
1, the M group has $100 of taxable income when determined by including 
only S's items of income, gain, deduction, and loss taken into account. 
Under paragraph (b)(1) of this section, M's basis in S's stock is 
adjusted under this section as of the close of Year 1. Under paragraph 
(b)(2) of this section, M's basis in S's stock is increased by the 
amount of the M group's taxable income determined by including only S's 
items taken into account. Thus, M's basis in S's stock is increased by 
$100 as of the close of Year 1.
    (2) Intercompany gain that is not taken into account. The facts are 
the same as in paragraph (b)(5)(ii)(A)(1) of this section (Example 1), 
except that S also sells property to another member at a $25 gain in 
Year 1, the gain is deferred under Sec.  1.1502-13 and taken into 
account in Year 3, and M sells 10% of S's stock to nonmembers in Year 
2. Under paragraph (b)(3)(i) of this section, S's deferred gain is not 
additional taxable income for Year 1 or 2 because it is not taken into 
account in determining the M group's consolidated taxable income for 
either of those years. The deferred gain is not tax-exempt income under 
paragraph (b)(3)(ii) of this section because it is not permanently 
excluded from S's gross income. The

[[Page 106869]]

deferred gain does not result in a basis adjustment until Year 3, when 
it is taken into account in determining the M group's consolidated 
taxable income. Consequently, M's basis in the S shares sold is not 
increased to reflect S's gain from the intercompany sale of the 
property. In Year 3, the deferred gain is taken into account, but the 
amount allocable to the shares sold by M does not increase their basis 
because these shares are held by nonmembers.
    (3) Intercompany gain taken into account. The facts are the same as 
in paragraph (b)(5)(ii)(A)(2) of this section (Example 1), except that 
M sells all of S's stock in Year 2 (rather than only 10%). Under Sec.  
1.1502-13, S takes the $25 gain into account immediately before S 
becomes a nonmember. Thus, M's basis in S's stock is increased to 
reflect S's gain from the intercompany sale of the property.
    (B) Example 2. Tax loss--(1) Current absorption. For Year 2, the M 
group has a $50 consolidated net operating loss when determined by 
taking into account only S's items of income, gain, deduction, and 
loss. S's loss is absorbed by the M group in Year 2, offsetting M's 
income for that year. Under paragraph (b)(3)(i)(A) of this section, 
because S's loss is absorbed in the year it arises, M has a $50 
negative adjustment with respect to S's stock. Under paragraph (b)(2) 
of this section, M reduces its basis in S's stock by $50. Under 
paragraph (a)(3)(ii) of this section, if the decrease exceeds M's basis 
in S's stock, the excess is M's excess loss account in S's stock.
    (2) Interim determination from stock sale. The facts are the same 
as in paragraph (b)(5)(ii)(B)(1) of this section (Example 2), except 
that S's Year 2 loss arises in the first half of the calendar year, M 
sells 50% of S's stock on July 1 of Year 2, and M's income for Year 2 
does not arise until after the sale of S's stock. M's income for Year 2 
(exclusive of the sale of S's stock) is offset by S's loss, even though 
the income arises after the stock sale, and no loss remains to be 
apportioned to S. See Sec. Sec.  1.1502-11 and 1.1502-21(b). Under 
paragraph (b)(3)(i)(A) of this section, because S's $50 loss is 
absorbed in the year it arises, it reduces M's basis in the S shares 
sold by $25 immediately before the stock sale. Because S becomes a 
nonmember, the loss also reduces M's basis in the retained S shares by 
$25 immediately before S becomes a nonmember.
    (3) Loss carryback. The facts are the same as in paragraph 
(b)(5)(ii)(B)(1) of this section (Example 2), except that M has no 
income or loss for Year 2, S's $50 loss is carried back and absorbed by 
the M group in Year 1 (offsetting the income of M or S), and the M 
group receives a $17 tax refund in Year 2 that is paid to S. Under 
paragraph (b)(3)(i)(B) of this section, because the $50 loss is carried 
back and absorbed in Year 1, it is treated as a tax loss for Year 2 
(the year in which it arises). Under paragraph (b)(3)(ii) of this 
section, the refund is treated as tax-exempt income of S. Under 
paragraph (b)(3)(iv)(C) of this section, the tax-exempt income is taken 
into account in Year 2 because that is the year it would be taken into 
account under S's method of accounting if it were subject to Federal 
income taxation. Thus, under paragraph (b)(2) of this section, M 
reduces its basis in S's stock by $33 as of the close of Year 2 (the 
$50 tax loss, less the $17 tax refund).
    (4) Loss carryforward. The facts are the same as in paragraph 
(b)(5)(ii)(B)(1) of this section (Example 2), except that M has no 
income or loss for Year 2, and S's loss is carried forward and absorbed 
by the M group in Year 3 (offsetting the income of M or S). Under 
paragraph (b)(3)(i)(A) of this section, the loss is not treated as a 
tax loss under paragraph (b)(2) of this section until Year 3.
    (C) Example 3. Tax-exempt income and noncapital, nondeductible 
expenses--(1) Facts. For Year 1, the M group has $500 of consolidated 
taxable income. However, the M group has a $100 consolidated net 
operating loss when determined by including only S's items of income, 
gain, deduction, and loss taken into account. Also for Year 1, S has 
$80 of interest income that is permanently excluded from gross income 
under section 103, and S incurs $60 of related expense for which a 
deduction is permanently disallowed under section 265.
    (2) Analysis. Under paragraph (b)(3)(i)(A) of this section, S has a 
$100 tax loss for Year 1. Under paragraph (b)(3)(ii)(A) of this 
section, S has $80 of tax-exempt income. Under paragraph (b)(3)(iii)(A) 
of this section, S has $60 of noncapital, nondeductible expense. Under 
paragraph (b)(3)(iv)(C) of this section, the tax-exempt income and 
noncapital, nondeductible expense are taken into account in Year 1 
because that is the year they would be taken into account under S's 
method of accounting if they were subject to Federal income taxation. 
Thus, under paragraph (b) of this section, M reduces its basis in S's 
stock as of the close of Year 1 by an $80 net amount (the $100 tax 
loss, less $80 of tax-exempt income, plus $60 of noncapital, 
nondeductible expenses).
    (D) Example 4. Discharge of indebtedness--(1) Facts. M forms S on 
January 1 of Year 1 and S borrows $200. During Year 1, S's assets 
decline in value and the M group has a $100 consolidated net operating 
loss. Of that amount, $10 is attributable to M and $90 is attributable 
to S under the principles of Sec.  1.1502-21(b)(2)(iv). None of the 
loss is absorbed by the group in Year 1, and S is discharged from $100 
of indebtedness at the close of Year 1. M has a $0 basis in the S 
stock. M and S have no attributes other than the consolidated net 
operating loss. Under section 108(a), S's $100 of discharge of 
indebtedness income is excluded from gross income because of 
insolvency. Under section 108(b) and Sec.  1.1502-28, the consolidated 
net operating loss is reduced to $0.
    (2) Analysis. Under paragraph (b)(3)(iii)(A) of this section, the 
reduction of $90 of the consolidated net operating loss attributable to 
S is treated as a noncapital, nondeductible expense in Year 1 because 
that loss is permanently disallowed by section 108(b) and Sec.  1.1502-
28. Under paragraph (b)(3)(ii)(C)(1) of this section, all $100 of S's 
discharge of indebtedness income is treated as tax-exempt income in 
Year 1 because the discharge results in a $100 reduction to the 
consolidated net operating loss. Consequently, the loss and the 
cancellation of the indebtedness result in a net positive $10 
adjustment to M's basis in its S stock.
    (3) Insufficient attributes. The facts are the same as in paragraph 
(b)(5)(ii)(D)(1) of this section (Example 4), except that S is 
discharged from $120 of indebtedness at the close of Year 1. Under 
section 108(a), S's $120 of discharge of indebtedness income is 
excluded from gross income because of insolvency. Under section 108(b) 
and Sec.  1.1502-28, the consolidated net operating loss is reduced by 
$100 to $0 after the determination of tax for Year 1. Under paragraph 
(b)(3)(iii)(A) of this section, the reduction of $90 of the 
consolidated net operating loss attributable to S is treated as a 
noncapital, nondeductible expense. Under paragraph (b)(3)(ii)(C)(1) of 
this section, only $100 of the discharge is treated as tax-exempt 
income because only that amount is applied to reduce tax attributes. 
The remaining $20 of discharge of indebtedness income excluded from 
gross income under section 108(a) has no effect on M's basis in S's 
stock.
    (4) Purchase price adjustment. Assume instead that S buys land in 
Year 1 in exchange for S's $100 purchase money note (bearing interest 
at a market rate of interest in excess of the applicable Federal rate, 
and providing for a principal payment at the end of Year 10), and the 
seller agrees with S in Year 4 to discharge $60 of the note as a 
purchase price adjustment to which

[[Page 106870]]

section 108(e)(5) applies. S has no discharge of indebtedness income 
that is treated as tax-exempt income under paragraph (b)(3)(ii) of this 
section. In addition, the $60 purchase price adjustment is not a 
noncapital, nondeductible expense under paragraph (b)(3)(iii) of this 
section. A purchase price adjustment is not equivalent to a discharge 
of indebtedness that is offset by a deduction or loss. Consequently, 
the purchase price adjustment results in no net adjustment to M's basis 
in S's stock under paragraph (b) of this section.
    (E) Example 5. Distributions--(1) Amounts declared and distributed. 
For Year 1, the M group has $120 of consolidated taxable income when 
determined by including only S's items of income, gain, deduction, and 
loss taken into account. S declares and makes a $10 dividend 
distribution to M at the close of Year 1. Under paragraph (b) of this 
section, M increases its basis in S's stock as of the close of Year 1 
by a $110 net amount ($120 of taxable income, less a $10 distribution).
    (2) Distributions in later years. The facts are the same as in 
paragraph (b)(5)(ii)(E)(1) of this section (Example 5), except that S 
does not declare and distribute the $10 until Year 2. Under paragraph 
(b) of this section, M increases its basis in S's stock by $120 as of 
the close of Year 1, and decreases its basis by $10 as of the close of 
Year 2. (If M were also a subsidiary, the basis of its stock would also 
be increased in Year 1 to reflect M's $120 adjustment to basis of S's 
stock; the basis of M's stock would not be changed as a result of S's 
distribution in Year 2, because M's $10 of tax-exempt dividend income 
under paragraph (b)(3)(ii) of this section would be offset by the $10 
negative adjustment to M's basis in S's stock for the distribution.)
    (3) Amounts declared but not distributed. The facts are the same as 
in paragraph (b)(5)(ii)(E)(1) of this section (Example 5), except that, 
during December of Year 1, S declares (and M becomes entitled to) 
another $70 dividend distribution with respect to its stock, but M does 
not receive the distribution until after it sells all of S's stock at 
the close of Year 1. Under Sec.  1.1502-13(f)(2)(iv), S is treated as 
making a $70 distribution to M at the time M becomes entitled to the 
distribution. (If S is distributing an appreciated asset, its gain 
under section 311 is also taken into account under paragraph (b)(3)(i) 
of this section at the time M becomes entitled to the distribution.) 
Consequently, under paragraph (b) of this section, M increases its 
basis in S's stock as of the close of Year 1 by only a $40 net amount 
($120 of taxable income, less two distributions totaling $80). Any 
further adjustments after S ceases to be a member and the $70 
distribution is made would be duplicative, because the stock basis has 
already been adjusted for the distribution. Accordingly, the 
distribution will not result in further adjustments or gain, even if 
the distribution is a payment to which section 301(c)(2) or (3) 
applies.
    (F) Example 6. Reorganization with boot--(1) Facts. M owns all the 
stock of S and T. M owns ten shares of the same class of common stock 
of S and ten shares of the same class of common stock of T. The fair 
market value of each share of S stock is $10 and the fair market value 
of each share of T stock is $10. On January 1 of Year 1, M has a $5 
basis in each of its ten shares of S stock and a $10 basis in each of 
its ten shares of T stock. S and T have no items of income, gain, 
deduction, or loss for Year 1. S and T each have substantial earnings 
and profits. At the close of Year 1, T merges into S in a 
reorganization described in section 368(a)(1)(A) (and in section 
368(a)(1)(D)). M receives no additional S stock, but does receive $10 
which is treated as received by M in a separate transaction occurring 
immediately after the merger of T into S.
    (2) Analysis. The merger of T into S is a transaction to which 
Sec.  1.1502-13(f)(3) applies. Under Sec. Sec.  1.1502-13(f)(3) and 
1.358-2(a)(2)(iii), M is deemed to receive ten additional shares of S 
stock with a total fair market value of $100 (the fair market value of 
the T stock surrendered by M). Under Sec.  1.358-2(a)(2)(i), M will 
have a basis of $10 in each share of S stock deemed received in the 
reorganization. Under Sec.  1.358-2(a)(2)(iii), M is deemed to 
surrender all twenty shares of its S stock in a recapitalization under 
section 368(a)(1)(E) in exchange for the ten shares of S stock, the 
number of shares of S stock held by M immediately after the 
transaction. Thus, under Sec.  1.358-2(a)(2)(i), M has five shares of S 
stock each with a basis of $10 and five shares of S stock each with a 
basis of $20. The $10 M received is treated as a dividend distribution 
under section 301 and, under paragraph (b)(3)(v) of this section, the 
$10 is a distribution to which paragraph (b)(2)(iv) of this section 
applies. Accordingly, M's total basis in the S stock is decreased by 
the $10 distribution.
    (G) Example 7. Tiering up of basis adjustments. M owns all of S's 
stock, and S owns all of T's stock. For Year 1, the M group has $100 of 
consolidated taxable income when determined by including only T's items 
of income, gain, deduction, and loss taken into account, and $50 of 
consolidated taxable income when determined by including only S's items 
taken into account. S increases its basis in T's stock by $100 under 
paragraph (b) of this section. Under paragraph (a)(3) of this section, 
this $100 basis adjustment is taken into account in determining M's 
adjustments to its basis in S's stock. Thus, M increases its basis in 
S's stock by $150 under paragraph (b) of this section.
    (H) Example 8. Allocation of items--(1) Acquisition in mid-year. M 
is the common parent of a consolidated group, and S is an unaffiliated 
corporation filing separate returns on a calendar-year basis. M 
acquires all of S's stock and S becomes a member of the M group on July 
1 of Year 1. For the entire calendar Year 1, S has $100 of ordinary 
income and under Sec.  1.1502-76(b) $60 is allocated to the period from 
January 1 to June 30 and $40 to the period from July 1 to December 31. 
Under paragraph (b) of this section, M increases its basis in S's stock 
by $40.
    (2) Sale in mid-year. The facts are the same as in paragraph 
(b)(5)(ii)(H)(1) of this section (Example 8), except that S is a member 
of the M group at the beginning of Year 1 but ceases to be a member on 
June 30 as a result of M's sale of S's stock. Under paragraph (b) of 
this section, M increases its basis in S's stock by $60 immediately 
before the stock sale. (M's basis increase would be the same if S 
became a nonmember because S issued additional shares to nonmembers.)
    (3) Absorption of loss carryovers. Assume instead that S is a 
member of the M group at the beginning of Year 1 but ceases to be a 
member on June 30 as a result of M's sale of S's stock, and a $100 
consolidated net operating loss attributable to S is carried over by 
the M group to Year 1. The consolidated net operating loss may be 
apportioned to S for its first separate return year only to the extent 
not absorbed by the M group during Year 1. Under paragraph (b)(3)(i) of 
this section, if the loss is absorbed by the M group in Year 1, whether 
the offsetting income arises before or after M's sale of S's stock, the 
absorption of the loss carryover is included in the determination of 
S's taxable income or loss for Year 1. Thus, M's basis in S's stock is 
adjusted under paragraph (b) of this section to reflect any absorption 
of the loss by the M group.
    (I) Example 9. Gross-ups--(1) Facts. M owns all of the stock of S, 
and S owns all of the stock of T, a newly formed controlled foreign 
corporation that is not a passive foreign investment

[[Page 106871]]

company. In Year 1, T has $100 of subpart F income and pays $34 of 
foreign income tax, leaving T with $66 of earnings and profits. The M 
group has $100 of consolidated taxable income when determined by taking 
into account only S's items (the inclusion under section 951(a), taking 
into account the section 78 gross-up). As a result of the section 
951(a) inclusion, S increases its basis in T's stock by $66 under 
section 961(a).
    (2) Analysis. Under paragraph (b)(3)(i) of this section, S has $100 
of taxable income. Under paragraph (b)(3)(iii)(B) of this section, the 
$34 gross-up for taxes paid by T that S is treated as having paid is a 
noncapital, nondeductible expense (whether or not any corresponding 
amount is claimed by the M group as a tax credit). Thus, M increases 
its basis in S's stock under paragraph (b) of this section by the net 
adjustment of $66.
    (3) Subsequent distribution. The facts are the same as in paragraph 
(b)(5)(ii)(I)(1) of this section (Example 9), except that T distributes 
its $66 of earnings and profits in Year 2. The $66 distribution 
received by S is excluded from S's income under section 959(a) because 
the distribution represents earnings and profits attributable to 
amounts that were included in S's income under section 951(a) for Year 
1. In addition, S's basis in T's stock is decreased by $66 under 
section 961(b). The excluded distribution is not tax-exempt income 
under paragraph (b)(3)(ii) of this section because of the corresponding 
reduction to S's basis in T's stock. Consequently, M's basis in S's 
stock is not adjusted under paragraph (b) of this section for Year 2.
    (J) Example 10. Recapture of tax-exempt items--(1) Facts. S is a 
life insurance company. For Year 1, the M group has $200 of 
consolidated taxable income, determined by including only S's items of 
income, gain, deduction, and loss taken into account (including a $300 
small company deduction under section 806). In addition, S has $100 of 
tax-exempt interest income, $60 of which is S's company share. The 
remaining $40 of tax-exempt income is the policyholders' share that 
reduces S's deduction for increase in reserves.
    (2) Tax-exempt items generally. Under paragraph (b)(3)(i) of this 
section, S has $200 of taxable income for Year 1. Also for Year 1, S 
has $100 of tax-exempt income under paragraph (b)(3)(ii)(A) of this 
section, and another $300 is treated as tax-exempt income under 
paragraph (b)(3)(ii)(B) of this section because of the deduction under 
section 806. Under paragraph (b)(3)(iii) of this section, S has $40 of 
noncapital, nondeductible expenses for Year 1 because S's deduction 
under section 807 for its increase in reserves has been permanently 
reduced by the $40 policyholders' share of the tax-exempt interest 
income. Thus, M increases its basis in S's stock by $560 under 
paragraph (b) of this section.
    (3) Recapture. Assume instead that S is a property and casualty 
company and, for Year 1, S accrues $100 of estimated salvage 
recoverable under section 832. Of this amount, $87 (87% of $100) is 
excluded from gross income because of the ``fresh start'' provisions of 
Sec. 11305(c) of Public Law 101-508 (the Omnibus Budget Reconciliation 
Act of 1990). Thus, S has $87 of tax-exempt income under paragraph 
(b)(3)(ii)(A) of this section that increases M's basis in S's stock for 
Year 1. (S also has $13 of taxable income over the period of inclusion 
under section 481.) In Year 5, S determines that the $100 salvage 
recoverable was overestimated by $30 and deducts $30 for the reduction 
of the salvage recoverable. However, S has $26.10 (87% of $30) of 
taxable income in Year 5 due to the partial recapture of its fresh 
start. Because S has no basis corresponding to this income, S is 
treated under paragraph (b)(3)(iii)(B) of this section as having a 
$26.10 noncapital, nondeductible expense in Year 5. This treatment is 
necessary to reflect the elimination of the erroneous fresh start in 
S's stock basis and causes a decrease in M's basis in S's stock by $30 
for Year 5 (a $3.90 taxable loss and a $26.10 special adjustment).
* * * * *
    (h) * * *
    (2) * * *
    (i) In general. If M disposes of stock of S in a consolidated 
return year beginning before January 1, 1995, the amount of M's income, 
gain, deduction, or loss, and the basis reflected in that amount, are 
not redetermined under this section.
* * * * *
    (5) Continuing basis reductions for certain deconsolidated 
subsidiaries. If a subsidiary ceases to be a member of a group in a 
consolidated return year beginning before January 1, 1995, and its 
basis was subject to reduction under Sec.  1.1502-32T or Sec.  1.1502-
32(g) as contained in the 26 CFR part 1 edition revised as of April 1, 
1994, its basis remains subject to reduction under those principles. 
For example, if S ceased to be a member in 1990, and M's basis in any 
retained S stock was subject to a basis reduction account, the basis 
remains subject to reduction. Similarly, if an election could be made 
to apply Sec.  1.1502-32T instead of Sec.  1.1502-32(g), the election 
remains available. However, Sec. Sec.  1.1502-32T and 1.1502-32(g) do 
not apply as a result of a subsidiary ceasing to be a member in tax 
years beginning on or after January 1, 1995.
    (6) Loss suspended under Sec.  1.1502-35(c) or disallowed under 
Sec.  1.1502-35(g)(3)(iii). Paragraphs (a)(2), (b)(3)(iii)(C) and (D), 
and (b)(4)(vi) of this section are applicable on and after March 10, 
2006.
    (7) Rules related to discharge of indebtedness income excluded from 
gross income. Paragraphs (b)(1)(ii), (b)(3)(ii)(C)(1), (b)(3)(iii)(A), 
and (b)(5)(ii), Example 4, paragraphs (a), (b), and (c) of this section 
apply with respect to determinations of the basis of the stock of a 
subsidiary in consolidated return years the original return for which 
is due (without regard to extensions) after March 21, 2005. However, 
groups may apply those provisions with respect to determinations of the 
basis of the stock of a subsidiary in consolidated return years the 
original return for which is due (without regard to extensions) on or 
before March 21, 2005, and after August 29, 2003.
    (8) Determination of stock basis in reorganization with boot. 
Paragraph (b)(5)(ii)(F) of this section (Example 6) applies only with 
respect to determinations of the basis of the stock of a subsidiary on 
or after January 23, 2006.
* * * * *
    (10) Election to treat loss carryover as expiring. Paragraph 
(b)(4)(iv) of this section applies to any original consolidated Federal 
income tax return due (without extensions) after June 14, 2007. For 
original consolidated Federal income tax returns due (without 
extensions) after May 30, 2006, and on or before June 14, 2007, see 
Sec.  1.1502-32T as contained in 26 CFR part 1 in effect on April 1, 
2007.
* * * * *

0
Par. 27. Section 1.1502-34 is revised to read as follows:


Sec.  1.1502-34  Special aggregate stock ownership rules.

    (a) Determination of stock ownership. For purposes of the 
consolidated return regulations, in determining the stock ownership of 
a member of a group in another corporation (issuing corporation) for 
purposes of determining the application of section 165(g)(3)(A), 
332(b)(1), 351(a), 732(f), or 904(f) in a consolidated return year, 
stock in the issuing corporation owned by all other members of the 
group is included. For the determination of whether a member of the 
group is an 80-

[[Page 106872]]

percent distributee, see section 337(c) (providing that, for purposes 
of section 337, the determination of whether any corporation is an 80-
percent distributee is made without regard to any consolidated return 
regulation).
    (b) Example regarding liquidation of member. The following example 
illustrates the stock ownership aggregation rule set forth in paragraph 
(a) of this section.
    (1) Facts. P wholly owns A, B, and C, each of which is a member of 
the P group. A, B, and C each owns 33\1/3\ percent of the stock of D. D 
liquidates in a transaction purported to qualify under section 332.
    (2) Analysis. For purposes of determining satisfaction of the 80-
percent stock ownership requirement under section 332(b)(1), under the 
stock ownership aggregation rule set forth in paragraph (a) of this 
section: A is treated as owning all of the D stock owned by B and C; B 
is treated as owning all of the D stock owned by A and C; and C is 
treated as owning all of the D stock owned by A and B. Therefore, each 
of A, B, and C is treated as owning 100 percent of the stock of D and 
thus meeting the 80-percent stock ownership requirement for purposes of 
section 332. However, none of A, B, or C is treated as an 80-percent 
distributee for purposes of section 337. See section 337(c). Therefore, 
section 337(a) does not apply.


Sec.  1.1502-42   [Removed]

0
Par. 28. Section 1.1502-42 is removed.

0
Par. 29. Section 1.1502-43 is amended by revising paragraphs 
(b)(2)(iii) through (viii) and (e) to read as follows:


Sec.  1.1502-43   Consolidated accumulated earnings tax.

* * * * *
    (b) * * *
    (2) * * *
    (iii) Under section 535(b)(3), the deduction determined under Sec.  
1.1502-26 is not allowed.
    (iv) Under section 535(b)(4), the consolidated net operating loss 
deduction described in Sec.  1.1502-21(a) is not allowed.
    (v) Under section 535(b)(5), there is allowed as a deduction the 
consolidated net capital loss, determined under Sec.  1.1502-22(a).
    (vi) Under section 535(b)(6), there is allowed as a deduction an 
amount equal to--
    (A) The consolidated capital gain net income for the taxable year 
(determined under Sec.  1.1502-22(a) and without the consolidated net 
capital loss carryovers and carrybacks to the taxable year), minus
    (B) The taxes attributable to such gain.
    (vii) Under section 535(b)(7), the consolidated net capital loss 
carryovers and carrybacks are not allowed. See Sec.  1.1502-22(b).
    (viii) Section 1.1502-15 does not apply.
* * * * *
    (e) Effective/applicability date. This section applies to any 
consolidated Federal income tax return due (without extensions) on or 
after December 21, 2009.

0
Par. 30. Section 1.1502-44 is amended by revising paragraph (b) to read 
as follows:


Sec.  1.1502-44  Percentage depletion for independent producers and 
royalty owners.

* * * * *
    (b) Adjusted consolidated taxable income. For purposes of this 
section, adjusted consolidated taxable income is an amount (not less 
than zero) equal to the group's consolidated taxable income determined 
without--
    (1) Any depletion with respect to an oil or gas property (other 
than a gas property with respect to which the depletion allowance for 
all production is determined pursuant to section 613A(b)) for which 
percentage depletion would exceed cost depletion in the absence of the 
depletable quantity limitations contained in section 613A(c)(1) and (6) 
and the consolidated taxable income limitation contained in paragraph 
(a) of this section;
    (2) Any consolidated net operating loss carryback to the 
consolidated return year under Sec.  1.1502-21; and
    (3) Any consolidated net capital loss carryback to the consolidated 
return year under Sec.  1.1502-22.
* * * * *

0
Par. 31. Section 1.1502-45 is added to read as follows:


Sec.  1.1502-45   Limitation on losses to amount at risk.

    (a) In general--(1) Scope. This section applies to a loss of any 
subsidiary if the common parent's stock meets the stock ownership 
requirement described in section 465(a)(1)(B).
    (2) Limitation on use of losses. Except as provided in paragraph 
(a)(4) of this section, a loss from an activity of a subsidiary during 
a consolidated return year is includible in the computation of 
consolidated taxable income (or consolidated net operating loss) and 
consolidated capital gain net income (or consolidated net capital loss) 
only to the extent the loss does not exceed the amount that the parent 
is at risk in the activity at the close of that subsidiary's taxable 
year. In addition, the sum of a subsidiary's losses from all its 
activities is includible only to the extent that the parent is at risk 
in the subsidiary at the close of that year. Any excess may not be 
taken into account for the consolidated return year but will be treated 
as a deduction allocable to that activity of the subsidiary in the 
first succeeding taxable year.
    (3) Amount parent is at risk in subsidiary's activity. The amount 
the parent is at risk in an activity of a subsidiary is the lesser of 
the amount the parent is at risk in the subsidiary, or the amount the 
subsidiary is at risk in the activity. These amounts are determined 
under paragraph (b) of this section and the principles of section 465. 
See section 465 and the regulations thereunder and the examples in 
paragraph (e) of this section.
    (4) Excluded activities. The limitation on the use of losses in 
paragraph (a)(2) of this section does not apply to a loss attributable 
to an activity described in section 465(c)(4).
    (5) Substance over form. Any transaction or arrangement between 
members (or between a member and a person that is not a member) which 
does not cause the parent to be economically at risk in an activity of 
a subsidiary will be treated in accordance with the substance of the 
transaction or arrangement notwithstanding any other provision of this 
section.
    (b) Rules for determining amount at risk--(1) Excluded amounts. The 
amount a parent is at risk in an activity of a subsidiary at the close 
of the subsidiary's taxable year does not include any amount that would 
not be taken into account under section 465 were the subsidiary not a 
separate corporation. Thus, for example, if the amount a parent is at 
risk in the activity of a subsidiary is attributable to nonrecourse 
financing, the amount at risk is not more than the fair market value of 
the property (other than the subsidiary's stock or debt or assets) 
pledged as security.
    (2) Guarantees. If a parent guarantees a loan by a person other 
than a member to a subsidiary, the loan increases the amount the parent 
is at risk in the activity of the subsidiary.
    (c) Application of section 465. This section applies in a manner 
consistent with the provisions of section 465. Thus, for example, the 
recapture of losses provided in section 465(e) applies if the amount 
the parent is at risk in the activity of a subsidiary is reduced below 
zero.
    (d) Other consolidated return provisions unaffected. This section

[[Page 106873]]

limits only the extent to which losses of a subsidiary may be used in a 
consolidated return year. This section does not apply for other 
purposes, such as Sec. Sec.  1.1502-32 and 1.1502-19, relating to 
investment in stock of a subsidiary and excess loss accounts, 
respectively. Thus, a loss which reduces a subsidiary's earnings and 
profits in a consolidated return year, but is disallowed as a deduction 
for the year by reason of this section, may nonetheless result in a 
negative adjustment to the basis of an owning member's stock in the 
subsidiary or create (or increase) an excess loss account.
    (e) Examples. The provisions of this section may be illustrated by 
the examples in this paragraph (e). In each example, the stock 
ownership requirement of section 465(a)(1)(B) is met for the stock of 
the parent (P), and each affiliated group files a consolidated return 
on a calendar year basis and comprises only the members described.
    (1) Example 1. In 2022, P forms S with a contribution of $200 in 
exchange for all of S's stock. During the year, S borrows $400 from a 
commercial lender and P guarantees $100 of the loan. S uses $500 of its 
funds to acquire a motion picture film. S incurs a loss of $120 for the 
year with respect to the film. At the close of 2022, the amount P is at 
risk in S's activity is $300 ($200 contribution plus $100 guarantee). 
If S has no gain or loss in 2023, and there are no contributions from 
or distributions to P, at the close of 2023 P's amount at risk in S's 
activity will be $180.
    (2) Example 2. P forms S-1 with a capital contribution of $1 on 
January 1, 2023. On February 1, 2023. S-1 borrows $100 with full 
recourse and contributes all $101 to its newly formed subsidiary S-2. 
S-2 uses the proceeds to explore for natural oil and gas resources. S-2 
incurs neither gain nor loss from its explorations during the taxable 
year. As of December 31, 2023, P is at risk in the exploration activity 
of S-2 only to the extent of $1.
    (f) Applicability date. This section applies to consolidated return 
years for which the due date of the income tax return (without regard 
to extensions) is after December 30, 2024.

0
Par. 32. Section 1.1502-47 is amended by revising and republishing 
paragraphs (a)(3), (b)(14)(iii), (c)(2)(ii), (h)(3)(i), (ii), and (x), 
(h)(4) introductory text, (h)(4)(ii) and (iii), (k), (l), and 
(m)(1)(i), (iv), and (v) to read as follows:


Sec.  1.1502-47   Consolidated returns by life-nonlife groups.

    (a) * * *
    (3) Other provisions. The provisions of the consolidated return 
regulations apply unless this section provides otherwise. Further, 
unless otherwise indicated in this section, a term used in this section 
has the same meaning as in sections 801-848.
    (b) * * *
    (14) * * *
    (iii) Example 3. Since 2012, L has owned all the stock of 
L1, which has owned all the stock of S1, a 
nonlife insurance company. L1 writes some accident and 
health insurance business. In 2018, L1 transfers this 
business, and S1 transfers some of its business, to a new 
nonlife insurance company, S2, in a transaction described in 
section 351(a). The property transferred to S2 by 
L1 had a fair market value of $50 million. The property 
transferred by S1 had a fair market value of $40 million. 
S2 is ineligible for 2020 because the tacking rule in 
paragraph (b)(12)(v) of this section does not apply. The old 
corporations (L1 and S1) and the new corporation 
(S2) do not all have the same tax character. See paragraph 
(b)(12)(v)(B) and (D) of this section. The result would be the same if 
L1 transferred other property (for example, stock and 
securities) with the same value, rather than accident and health 
insurance contracts, to S2.
* * * * *
    (c) * * *
    (2) * * *
    (ii) Special rule. Notwithstanding the general rule, however, if 
the nonlife members in the group filed a consolidated return for the 
immediately preceding taxable year and had executed and filed a Form 
1122 (or successor form) that is effective for the preceding year, then 
such members will be treated as if they filed a Form 1122 (or successor 
form) when they join in the filing of a consolidated return under 
section 1504(c)(2) and they will be deemed to consent to the 
regulations under this section. However, an affiliation schedule (Form 
851, or any successor form) must be filed by the group and the life 
members must execute a Form 1122 (or successor form) in the manner 
prescribed in Sec.  1.1502-75(h)(2).
* * * * *
    (h) * * *
    (3) * * *
    (i) Separate return years. The carryovers in paragraph (h)(2)(ii) 
of this section may include net operating losses and net capital losses 
of the nonlife members arising in separate return years, that may be 
carried over to a succeeding year under the principles (including 
limitations) of Sec. Sec.  1.1502-21 and 1.1502-22. But see paragraph 
(h)(3)(ix) of this section.
    (ii) Capital loss. Nonlife consolidated net capital loss sets off 
consolidated LICTI only to the extent of life consolidated capital gain 
net income (as determined under paragraph (g)(3) of this section) and 
this setoff applies before any nonlife consolidated net operating loss 
sets off consolidated LICTI.
* * * * *
    (x) Percentage limitation. The offsetable nonlife consolidated net 
operating losses that may be set off against consolidated LICTI in a 
particular year may not exceed a percentage limitation. This limitation 
is the applicable percentage in section 1503(c)(1) of the lesser of two 
amounts--
    (A) The first amount is the sum of the offsetable nonlife 
consolidated net operating losses under paragraph (h)(2) of this 
section that may serve in the particular year (determined without this 
limitation) as a setoff against consolidated LICTI.
    (B) The second amount is consolidated LICTI in the particular year 
reduced by any nonlife consolidated net capital loss that sets off 
consolidated LICTI in that year.
* * * * *
    (4) Examples. The following examples illustrate the principles of 
this paragraph (h). In the examples, L indicates a life company, S is a 
nonlife insurance company, another letter indicates a nonlife company 
that is not an insurance company, no company has farming losses (within 
the meaning of section 172(b)(1)(B)(ii)), and each corporation uses the 
calendar year as its taxable year.
* * * * *
    (ii) Example 2. (A) The facts are the same as in paragraph 
(h)(4)(i) of this section (Example 1), except that, for 2021, S's 
separate net operating loss is $200. Assume further that L's 
consolidated LICTI is $200. Under paragraph (h)(3)(vi) of this section, 
the offsetable nonlife consolidated net operating loss is $100 (the 
nonlife consolidated net operating loss computed under paragraph 
(f)(2)(ii) of this section ($200), reduced by the separate net 
operating loss of I ($100)). The offsetable nonlife consolidated net 
operating loss that may be set off against consolidated LICTI in 2021 
is $35 (35 percent of the lesser of the offsetable $100 or consolidated 
LICTI of $200). See section 1503(c)(1) and paragraph (h)(3)(x) of this 
section. S carries over a loss of $65, and I carries over a loss of 
$100, to 2022 under paragraph (f)(2) of

[[Page 106874]]

this section to be used against nonlife consolidated taxable income 
(consolidated net operating loss ($200) less amount used in 2021 
($35)). Under paragraph (h)(2)(ii) of this section, the offsetable 
nonlife consolidated net operating loss that may be carried to 2022 is 
$65 ($100 minus $35). The facts and results are summarized in the 
following table.

                                       Table 1 to Paragraph (h)(4)(ii)(A)
----------------------------------------------------------------------------------------------------------------
                                                                                                    Unused loss
                                                     Facts (a)    Offsetable (b)     Limit (c)          (d)
----------------------------------------------------------------------------------------------------------------
P...............................................             100  ..............  ..............  ..............
S...............................................           (200)           (100)  ..............            (65)
I...............................................           (100)  ..............  ..............           (100)
Nonlife subgroup................................           (200)           (100)           (100)           (165)
L...............................................             200  ..............             200  ..............
35% of the lower of line 4(c) or 5(c)...........  ..............  ..............              35  ..............
Unused offsetable loss..........................  ..............  ..............  ..............            (65)
----------------------------------------------------------------------------------------------------------------

    (B) Accordingly, under paragraph (e) of this section, consolidated 
taxable income is $165 (line 5(a) minus line 6(c)).
    (iii) Example 3. The facts are the same as in paragraph (h)(4)(ii) 
of this section (Example 2), with the following additions for 2022. The 
nonlife subgroup has nonlife consolidated taxable income of $50 (all of 
which is attributable to I) before the nonlife consolidated net 
operating loss deduction under paragraph (f)(2) of this section. 
Consolidated LICTI is $100. Under paragraph (f)(2) of this section, $50 
of the nonlife consolidated net operating loss carryover ($165) is used 
in 2022 and, under paragraph (h)(3)(vi) and (vii) of this section, the 
portion used in 2022 is attributable to I, the ineligible nonlife 
member. Accordingly, the offsetable nonlife consolidated net operating 
loss from 2021 under paragraph (h)(3)(ii) of this section is $65, the 
unused loss from 2021. The offsetable nonlife consolidated net 
operating loss in 2022 is $22.75 (35 percent of the lesser of the 
offsetable loss of $65 or consolidated LICTI of $100). Accordingly, 
under paragraph (e) of this section, consolidated taxable income is 
$77.25 (consolidated LICTI of $100 minus the offsetable loss of 
$22.75).
* * * * *
    (k) Preemption. The rules in this section preempt any inconsistent 
rules in other sections of the consolidated return regulations. For 
example, the rules in paragraph (h)(3)(vi) of this section apply 
notwithstanding Sec.  1.1502-21.
    (l) Other consolidation principles. The fact that this section 
treats the life and nonlife members as separate groups in computing, 
respectively, consolidated LICTI (or life consolidated net operating 
loss) and nonlife consolidated taxable income (or loss) does not affect 
the usual rules in the consolidated return regulations unless this 
section provides otherwise. Thus, the usual rules in Sec.  1.1502-13 
(relating to intercompany transactions) apply to both the life and 
nonlife members by treating them as members of one affiliated group.
    (m) * * *
    (1) * * *
    (i) File the applicable consolidated corporate income tax return: a 
Form 1120-L, U.S. Life Insurance Company Income Tax Return, where the 
common parent is a life insurance company; a Form 1120-PC, U.S. 
Property and Casualty Insurance Company Income Tax Return, where the 
common parent is an insurance company, other than a life insurance 
company; a Form 1120, U.S. Corporation Income Tax Return, where the 
common parent is any other type of corporation; or any successor form;
* * * * *
    (iv) Report separately the nonlife consolidated taxable income or 
loss, determined under paragraph (f) of this section, on a Form 1120 or 
1120-PC (or any successor forms) (whether filed by the common parent or 
as an attachment to the consolidated return), as the case may be, of 
all nonlife members of the consolidated group; and
    (v) Report separately the consolidated Life Insurance Company 
Taxable Income or life consolidated net operating loss, on a Form 1120-
L (or any successor form) (whether filed by the common parent or as an 
attachment to the consolidated return), of all life members of the 
consolidated group.
* * * * *

0
Par. 33. Section 1.1502-75 is amended by:
0
a. Revising and republishing paragraphs (b)(1) through (3), (c)(1)(i), 
and (c)(2)(i) and (ii);
0
b. Removing paragraph (d)(5); and
0
c. Revising and republishing paragraphs (h)(1) and (2).
    The revisions read as follows:


Sec.  1.1502-75  Filing of consolidated returns.

* * * * *
    (b) * * *
    (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

[[Page 106875]]

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) * * *
    (1) * * *
    (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.
* * * * *
    (2) * * *
    (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.
* * * * *
    (h) * * *
    (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 Sec.  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 Sec.  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.
* * * * *

0
Par. 34. Section 1.1502-76 is amended by revising and republishing 
paragraphs (a), (b)(1)(ii)(A)(2), (b)(2)(v), (b)(6), (c)(3), and (d) to 
read as follows:


Sec.  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 Sec.  
601.601(d)(2)(ii) of this chapter).
    (b) * * *
    (1) * * *
    (ii) * * *
    (A) * * *
    (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.
* * * * *
    (2) * * *
    (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.
* * * * *
    (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) * * *
    (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

[[Page 106876]]

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.


Sec.  1.1502-77   [Amended]

0
Par. 35. Section 1.1502-77 is amended by:
0
a. Designating Examples 1 through 15 in paragraph (g) as paragraphs 
(g)(1) through (15), respectively.
0
b. In paragraph (g), for each newly redesignated paragraph listed in 
the ``Paragraph'' column, removing the text indicated in the ``Remove'' 
column and adding in its place the text indicated in the ``Add'' 
column:

------------------------------------------------------------------------
           Paragraph                  Remove                Add
------------------------------------------------------------------------
(g)(2)(i).....................  Example 1........  paragraph (g)(1)(i)
                                                    of this section
                                                    (Example 1).
(g)(4)(i).....................  Example 3........  paragraph (g)(3)(i)
                                                    of this section
                                                    (Example 3).
(g)(5)(i).....................  Example 4........  paragraph (g)(4) of
                                                    this section
                                                    (Example 4).
(g)(11)(i)(B)(1)..............  His..............  the Commissioner's.
(g)(11)(ii)(A)................  paragraph (i)(A)   paragraph
                                 of this Example    (g)(11)(i)(A) of
                                 11.                this section.
(g)(12)(i)....................  paragraph (ii)(A)  paragraph
                                 of Example 11.     (g)(11)(ii)(A) of
                                                    this section
                                                    (Example 11).
(g)(13)(i)....................  March 15.........  April 15.
------------------------------------------------------------------------


0
Par. 36. Section 1.1502-77A is amended by revising and republishing 
paragraph (d) to read as follows:


Sec.  1.1502-77A  Common parent agent for subsidiaries applicable for 
consolidated return years beginning before June 28, 2002.

* * * * *
    (d) Effect of dissolution of common parent corporation. If the 
common parent corporation contemplates dissolution, or is about to be 
dissolved, or if for any other reason its existence is about to 
terminate, it must forthwith notify the Commissioner of such fact and 
designate, subject to the approval of the Commissioner, another member 
to act as agent in its place to the same extent and subject to the same 
conditions and limitations as are applicable to the common parent. If 
the notice thus required is not given by the common parent, or the 
designation is not approved by the Commissioner, the remaining members 
may, subject to the approval of the Commissioner, designate another 
member to act as such agent, and notice of such designation must be 
given to the Commissioner. Until a notice in writing designating a new 
agent has been approved by the Commissioner, any notice of deficiency 
or other communication mailed to the common parent will be considered 
as having been properly mailed to the agent of the group; or, if the 
Commissioner has reason to believe that the existence of the common 
parent has terminated, the Commissioner may deal directly with any 
member in respect of its liability.
* * * * *

0
Par. 37. Section 1.1502-77B is amended by revising and republishing 
paragraphs (a)(6)(i) and (ii) to read as follows:


Sec.  1.1502-77B   Agent for the group applicable for consolidated 
return years beginning on or after June 28, 2002, and before April 1, 
2015.

    (a) * * *
    (6) * * *
    (i) Several liability. The Commissioner may, upon issuing to the 
common parent written notice that expressly invokes the authority of 
this provision, deal directly with any member of the group with respect 
to its liability under Sec.  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 common parent has 
terminated, the Commissioner may deal directly with any member with 
respect to that member's liability under Sec.  1.1502-6 without giving 
the notice required by this provision.
    (ii) Information requests. The Commissioner may, upon informing the 
common parent, 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 common 
parent has terminated, the Commissioner may request such information 
from any member of the group without informing the common parent.
* * * * *

0
Par. 38. Section 1.1502-78 is amended by revising paragraph (f) to read 
as follows:


Sec.  1.1502-78  Tentative carryback adjustments.

* * * * *
    (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.

0
Par. 39. Section 1.1502-79 is amended by revising paragraphs (a), (b), 
(d), and (e)(1) and (2) to read as follows:

[[Page 106877]]

Sec.  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 
Sec.  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 Sec.  
1.1502-22(b).
* * * * *
    (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 Sec.  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 Sec.  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) * * *
    (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 Sec.  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 
Sec.  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.
* * * * *

0
Par. 40. Section 1.1502-80 is amended by revising and republishing 
paragraph (c)(2) to read as follows:


Sec.  1.1502-80  Applicability of other provisions of law.

* * * * *
    (c) * * *
    (2) Cross reference. See Sec.  1.1502-36 for additional rules 
relating to worthlessness of subsidiary stock.
* * * * *


Sec.  1.1502-81T  [Removed]

0
Par. 41. Section 1.1502-81T is removed.

0
Par. 42. Section 1.1502-90 is amended by revising the entry for Sec.  
1.1502-99 to read as follows:


Sec.  1.1502-90   Table of contents.

* * * * *
Sec.  1.1502-99 Effective/applicability dates.

    (a) In general.
    (b) Reattribution of losses under Sec.  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.


Sec.  1.1502-91  [Amended]

0
Par. 43. Section 1.1502-91 is amended by removing paragraph (b)(3).

0
Par. 44. Section 1.1502-92 is amended by:
0
a. Designating Examples 1 through 3 in paragraph (b)(3)(iii) as 
paragraphs (b)(3)(iii)(A) through (C), respectively.
0
b. In newly redesignated paragraphs (b)(3)(iii)(A) through (C), further 
redesignating paragraphs in the first column as paragraphs in the 
second column:

------------------------------------------------------------------------
              Old paragraphs                       New paragraphs
------------------------------------------------------------------------
(b)(3)(iii)(A)(i) and (ii)................  (b)(3)(iii)(A)(1) and (2).
(b)(3)(iii)(B)(i), (ii), (iii), and (iv)..  (b)(3)(iii)(B)(1), (2), (3),
                                             and (4).
(b)(3)(iii)(C)(i) and (ii)................  (b)(3)(iii)(C)(1) and (2).
------------------------------------------------------------------------

0
c. Revising newly redesignated paragraphs (b)(3)(iii)(B)(2) through 
(4).
    The revisions read as follows:


Sec.  1.1502-92   Ownership change of a loss group or a loss subgroup.

* * * * *
    (b) * * *
    (3) * * *
    (iii) * * *
    (B) * * *
    (2) For purposes of determining if the L loss group has an 
ownership change on November 22, Year 3, the day of the merger, P is 
treated as a continuation of L so that the testing period for P begins 
on January 1, Year 2, the first day of the taxable year of the L loss 
group in which the consolidated net operating loss that is carried over 
to Year 3 arose. Immediately after the close of November 22, Year 3, D 
is the only 5-percent shareholder that has increased its ownership 
interest in P during the testing period (from zero to 10 percentage 
points).
    (3) The facts are the same as in paragraph (b)(3)(iii)(B)(1) of 
this section (Example 2), except that A has held 23\1/3\ shares (23\1/
3\ percent) of L's stock for five years, and A purchased an additional 
10 shares of L stock from E two years before the merger. Immediately 
after the close of the day of the merger (a testing date), A's 
ownership interest in P, the common parent of the L loss group, has 
increased by 6\2/3\ percentage points over A's lowest percentage 
ownership during the testing period (23\1/3\ percent to 30 percent).
    (4) The facts are the same as in paragraph (b)(3)(iii)(B)(1) of 
this section (Example 2), except that P has a net operating loss 
arising in Year 1 that is carried to the first consolidated return year 
ending after the day of the merger. Solely for purposes of determining 
whether the L loss group has an ownership change under paragraph 
(b)(1)(i) of this section, the testing period for P commences on 
January 1, Year 2. P does not determine the earliest day for its 
testing period by reference to its net operating loss carryover from 
Year 1, which Sec. Sec.  1.1502-1(f)(3) and 1.1502-75(d)(3)(i) treat as 
arising in a SRLY. See Sec.  1.1502-94 to determine the application of 
section 382 with respect to P's net operating loss carryover.
* * * * *

0
Par. 45. Section 1.1502-99 is amended by:
0
a. Revising paragraphs (a) and (b).

[[Page 106878]]

0
b. Removing paragraph (c).
0
c. Redesignating paragraph (d) as paragraph (c).
    The revisions read as follows:


Sec.  1.1502-99   Effective/applicability dates.

    (a) In general. Sections 1.1502-91 through 1.1502-96 and Sec.  
1.1502-98 apply to any testing date that is on or after June 25, 1999. 
Sections 1.1502-94 through 1.1502-96 also apply to a corporation that 
becomes a member of a group or ceases to be a member of a group (or 
loss subgroup) on or after June 25, 1999.
    (b) Reattribution of losses under Sec.  1.1502-36(d)(6). Section 
1.1502-96(d) applies to reattributions of net operating loss 
carryovers, capital loss carryovers, and deferred deductions in 
connection with a transfer of stock to which Sec.  1.1502-36 applies, 
and the election under Sec.  1.1502-96(d)(5) (relating to an election 
to reattribute section 382 limitation) can be made with an election 
under Sec.  1.1502-36(d)(6) to reattribute a loss to the common parent 
that is filed at the time and in the manner provided in Sec.  1.1502-
36(e)(5)(x).
* * * * *

0
Par. 46. Section 1.1502-100 is amended by revising and republishing 
paragraphs (a)(2), (c)(2), and (d) to read as follows:


Sec.  1.1502-100  Corporations exempt from tax.

    (a) * * *
    (2) Applicability of other consolidated return provisions. The 
provisions of the consolidated return regulations are applicable to an 
exempt group to the extent they are not inconsistent with the 
provisions of this section or the provisions of subchapter F of chapter 
1 of the Code. For purposes of applying the provisions of the 
consolidated return regulations to an exempt group, the following 
substitutions must be made--
    (i) The term ``exempt group'' is substituted for the term 
``group'';
    (ii) The terms ``unrelated business taxable income'', ``separate 
unrelated business taxable income'', and ``consolidated unrelated 
business taxable income'' are substituted for the terms ``taxable 
income'', ``separate taxable income'', and ``consolidated taxable 
income''; and
    (iii) The term consolidated liability for tax determined under 
Sec.  1.1502-2 (or an equivalent term) means the consolidated liability 
for tax of an exempt group determined under paragraph (b) of this 
section.
* * * * *
    (c) * * *
    (2) Any consolidated net operating loss deduction (determined under 
Sec.  1.1502-21) subject to the limitations provided in section 
512(b)(6);
* * * * *
    (d) Separate unrelated business taxable income--(1) In general. The 
separate unrelated business taxable income of a member of an exempt 
group must be computed in accordance with the provisions of section 512 
covering the determination of unrelated business taxable income of 
separate corporations, except that:
    (i) The provisions of paragraphs (a) through (d), (f) through (k), 
and (o) of Sec.  1.1502-12 apply; and
    (ii) No charitable contributions deduction is taken into account 
under section 512(b)(10).
    (2) Section 501(c)(2) organizations. See sections 511(c) and 
512(a)(3)(C) for special rules applicable to organizations described in 
section 501(c)(2).


Sec. Sec.  1.1502-9A, 1.1502-15A, 1.1502-21A, 1.1502-22A, 1.1502-23A, 
1.1502-41A, 1.1502-79A, 1.1502-90A, 1.1502-91A, 1.1502-92A, 1.1502-93A, 
1.1502-94A, 1.1502-95A, 1.1502-96A, 1.1502-97A, 1.1502-98A, 1.1502-99A, 
and 1.1503-2  [Removed]

0
Par. 47. Sections 1.1502-9A, 1.1502-15A, 1.1502-21A, 1.1502-22A, 
1.1502-23A, 1.1502-41A, 1.1502-79A, 1.1502-90A, 1.1502-91A, 1.1502-92A, 
1.1502-93A, 1.1502-94A, 1.1502-95A, 1.1502-96A, 1.1502-97A, 1.1502-98A, 
1.1502-99A, and 1.1503-2 are removed.

0
Par. 48. Section 1.1503(d)-1 is amended by revising and republishing 
paragraph (b)(7) to read as follows:


Sec.  1.1503(d)-1   Definitions and special rules for filings under 
section 1503(d).

* * * * *
    (b) * * *
    (7) Foreign country includes any U.S. territory (as defined in 
Sec.  1.1502-1(l)).
* * * * *

0
Par. 49. Section 1.1503(d)-8 is amended by:
0
a. Revising and republishing paragraph (a).
0
b. Removing and reserving paragraphs (b)(1) and (2), (b)(3)(ii) and 
(iii), and (b)(4).
    The revision and republication read as follows:


Sec.  1.1503(d)-8   Effective dates.

    (a) General rule. Except as provided in paragraph (b) of this 
section, this paragraph (a) provides the dates of applicability of 
Sec. Sec.  1.1503(d)-1 through 1.1503(d)-7. Sections 1.1503(d)-1 
through 1.1503(d)-7 apply to dual consolidated losses incurred in 
taxable years beginning on or after April 18, 2007. However, a taxpayer 
may apply Sec. Sec.  1.1503(d)-1 through 1.1503(d)-7, in their 
entirety, to dual consolidated losses incurred in taxable years 
beginning on or after January 1, 2007, by filing its return and 
attaching to such return the domestic use agreements, certifications, 
or other information in accordance with these regulations. For purposes 
of this section, the term application date means either April 18, 2007, 
or, if the taxpayer applies these regulations pursuant to the preceding 
sentence, January 1, 2007. Section 1.1503-2, as contained in 26 CFR 
part 1, revised as of April 1, 2024, applies for dual consolidated 
losses incurred in taxable years beginning on or after October 1, 1992, 
and before the application date.
* * * * *

0
Par. 50. Section 1.1504-3 is amended by revising and republishing 
paragraph (d)(1)(ii) to read as follows:


Sec.  1.1504-3  Treatment of stock in a QOF C corporation for purposes 
of consolidation.

* * * * *
    (d) * * *
    (1) * * *
    (ii) Analysis. Under paragraph (b)(1) of this section, stock of a 
QOF C corporation (qualifying or otherwise) is not treated as stock for 
purposes of determining whether the QOF C corporation may join in the 
filing of a consolidated return. Thus, because no election has been 
made under paragraph (b)(2) of this section, once Q1 becomes a QOF, Q1 
ceases to be affiliated with the P group members for purposes of 
section 1501, and it deconsolidates from the P group. See the 
consolidated return regulations generally for the consequences of 
deconsolidation.
* * * * *

0
Par. 51. Section 1.1552-1 is amended by:
0
a. Redesignating paragraphs (a)(1)(ii)(a) through (d) as paragraphs 
(a)(1)(ii)(A) through (D), respectively.
0
b. Revising newly redesignated paragraph (a)(1)(ii)(B).
0
c. Redesignating paragraphs (a)(2)(ii)(a) through (i) as paragraphs 
(a)(2)(ii)(A) through (I), respectively.
0
d. Removing and reserving newly redesignated paragraph (a)(2)(ii)(B).
0
e. Revising newly redesignated paragraph (a)(2)(ii)(I).
0
f. Adding paragraph (g).
    The revisions and addition read as follows:


Sec.  1.1552-1  Earnings and Profits.

    (a) * * *
    (1) * * *
    (ii) * * *

[[Page 106879]]

    (B) Such member's capital gain net income (determined without 
regard to any net capital loss carryover attributable to such member);
* * * * *
    (2) * * *
    (ii) * * *
    (I) For purposes of subtitle A of the Code, if two or more taxable 
income brackets are set forth in section 11(b) of the Code, the amount 
in each taxable income bracket is divided by the number of members (or 
such portion of each bracket which is apportioned to the member 
pursuant to a schedule attached to the consolidated return for the 
consolidated return year). However, if for the taxable year some or all 
of the members are component members of a controlled group of 
corporations (within the meaning of section 1563) and if there are 
other such component members which do not join in filing the 
consolidated return for such year, the amount to be divided among the 
members filing the consolidated return is (in lieu of the taxable 
income brackets) the sum of the amounts apportioned to the component 
members which join in filing the consolidated return.
* * * * *
    (g) Applicability date. This section applies to taxable years 
beginning on or after January 1, 2025. See 26 CFR 1.1552-1, as revised 
April 1, 2024, for rules applicable prior to January 1, 2025.

0
Par. 52. Section 1.1563-1 is amended by:
0
a. Revising and republishing paragraphs (a)(2)(i)(A) and (B) and 
(a)(6);
0
b. In paragraph (b)(4), designating Examples 1 through 4 as paragraphs 
(b)(4)(i) through (iv), respectively;
0
c. Revising newly designated paragraph (b)(4)(i); and
0
d. Revising paragraph (e).
    The revisions read as follows:


Sec.  1.1563-1   Definition of controlled group of corporations and 
component members and related concepts.

    (a) * * *
    (2) * * *
    (i) * * *
    (A) Stock possessing at least 80 percent of the total combined 
voting power of all classes of stock entitled to vote or at least 80 
percent of the total value of shares of all classes of stock of each of 
the corporations, except the common parent corporation, is owned 
(directly and with the application of Sec.  1.1563-3(b)(1), (2), and 
(3)) by one or more of the other corporations; and
    (B) The common parent corporation owns (directly and with the 
application of Sec.  1.1563-3(b)(1), (2), and (3)) stock possessing at 
least 80 percent of the total combined voting power of all classes of 
stock entitled to vote or at least 80 percent of the total value of 
shares of all classes of stock of at least one of the other 
corporations, excluding, in computing such voting power or value, stock 
owned directly by such other corporations.
* * * * *
    (6) Voting power of stock. For purposes of this section, and 
Sec. Sec.  1.1563-2 and 1.1563-3, in determining whether the stock 
owned by a person (or persons) possesses a certain percentage of the 
total combined voting power of all classes of stock entitled to vote of 
a corporation, consideration will be given to all the facts and 
circumstances of each case. A share of stock will generally be 
considered as possessing the voting power accorded to such share by the 
corporate charter, by-laws, or share certificate. On the other hand, if 
there is any agreement, whether express or implied, that a shareholder 
will not vote the shareholder's stock in a corporation, the formal 
voting rights possessed by the shareholder's stock may be disregarded 
in determining the percentage of the total combined voting power 
possessed by the stock owned by other shareholders in the corporation, 
if the result is that the corporation becomes a component member of a 
controlled group of corporations. Moreover, if a shareholder agrees to 
vote the shareholder's stock in a corporation in the manner specified 
by another shareholder in the corporation, the voting rights possessed 
by the stock owned by the first shareholder may be considered to be 
possessed by the stock owned by such other shareholder if the result is 
that the corporation becomes a component member of a controlled group 
of corporations.
* * * * *
    (b) * * *
    (4) * * *
    (i) Example 1. B, an individual, owns all of the stock of 
corporations W and X on each day of 1964. W and X each use the calendar 
year as their taxable year. On January 1, 1964, B also owns all the 
stock of corporation Y (a fiscal year corporation with a taxable year 
beginning on July 1, 1964, and ending on June 30, 1965), which stock B 
sells on October 15, 1964. On December 1, 1964, B purchases all the 
stock of corporation Z (a fiscal year corporation with a taxable year 
beginning on September 1, 1964, and ending on August 31, 1965). On 
December 31, 1964, W, X, and Z are members of the same controlled 
group. However, the component members of the group on such December 
31st are W, X, and Y. Under paragraph (b)(2)(i) of this section, Z is 
treated as an excluded member of the group on December 31, 1964, since 
Z was a member of the group for less than one-half of the number of 
days (29 out of 121 days) during the period beginning on September 1, 
1964 (the first day of its taxable year) and ending on December 30, 
1964. Under paragraph (b)(3) of this section, Y is treated as an 
additional member of the group on December 31, 1964, since Y was a 
member of the group for at least one-half of the number of days (107 
out of 183 days) during the period beginning on July 1, 1964 (the first 
day of its taxable year) and ending on December 30, 1964.
* * * * *
    (e) Applicability dates--(1) In general. Except as provided in 
paragraph (e)(2) of this section, this section applies to taxable years 
beginning on or after May 26, 2009. However, taxpayers may apply this 
section to taxable years beginning before May 26, 2009. For taxable 
years beginning before May 26, 2009, see Sec.  1.1563-1T as contained 
in 26 CFR part 1 in effect on April 1, 2009.
    (2) Exceptions. (i) Paragraph (a)(1)(ii) of this section applies to 
taxable years beginning on or after April 11, 2011.
    (ii) Paragraphs (a)(2)(i)(A) and (B), (a)(6), and (b)(4) of this 
section apply to taxable years beginning on or after December 30, 2024.

0
Par. 53. Section 1.1563-2 is amended by:
0
a. Revising and republishing paragraphs (b)(2)(iii) and (b)(4)(ii);
0
b. In paragraph (b)(7), designating Examples 1 through 3 as paragraphs 
(b)(7)(i) through (iii), respectively;
0
c. Revising newly designated paragraph (b)(7)(ii) and (iii); and
0
d. Adding paragraph (d).
    The revisions and addition read as follows:


Sec.  1.1563-2   Excluded stock.

* * * * *
    (b) * * *
    (2) * * *
    (iii) Employees. Stock in the subsidiary corporation owned 
(directly and with the application of the rules contained in Sec.  
1.1563-3(b)) by an employee of the subsidiary corporation if such stock 
is subject to conditions which substantially restrict or limit the 
employee's right (or if the employee constructively owns such stock, 
the direct owner's right) to dispose of such stock and which run in 
favor of the parent or subsidiary corporation. In general, any 
condition which extends, directly or indirectly, to the parent

[[Page 106880]]

corporation or the subsidiary corporation preferential rights with 
respect to the acquisition of the employee's (or direct owner's) stock 
will be considered to be a condition described in the preceding 
sentence. It is not necessary, in order for a condition to be 
considered to be in favor of the parent corporation or the subsidiary 
corporation, that the parent or subsidiary be extended a discriminatory 
concession with respect to the price of the stock. For example, a 
condition whereby the parent corporation is given a right of first 
refusal with respect to any stock of the subsidiary corporation offered 
by an employee for sale is a condition which substantially restricts or 
limits the employee's right to dispose of such stock and runs in favor 
of the parent corporation. Moreover, any legally enforceable condition 
which prohibits the employee from disposing of the employee's stock 
without the consent of the parent (or a subsidiary of the parent) will 
be considered to be a substantial limitation running in favor of the 
parent corporation.
* * * * *
    (4) * * *
    (ii) Employees. Stock in such corporation owned (directly and with 
the application of the rules contained in Sec.  1.1563-3(b)) by an 
employee of such corporation if such stock is subject to conditions 
which run in favor of a common owner of such corporation (or in favor 
of such corporation) and which substantially restrict or limit the 
employee's right (or if the employee constructively owns such stock, 
the record owner's right) to dispose of such stock. The principles of 
paragraph (b)(2)(iii) of this section apply in determining whether a 
condition satisfies the requirements of the preceding sentence. Thus, 
in general, a condition which extends, directly or indirectly, to a 
common owner or such corporation preferential rights with respect to 
the acquisition of the employee's (or record owner's) stock will be 
considered to be a condition which satisfies such requirements. For 
purposes of this paragraph (b)(4)(ii), if a condition which restricts 
or limits an employee's right (or record owner's right) to dispose of 
the employee's (or record owner's) stock also applies to the stock in 
such corporation held by such common owner pursuant to a bona fide 
reciprocal stock purchase arrangement, such condition is not treated as 
one which restricts or limits the employee's (or record owner's) right 
to dispose of such stock. An example of a reciprocal stock purchase 
arrangement is an agreement whereby a common owner and the employee are 
given a right of first refusal with respect to stock of the employer 
corporation owned by the other party. If, however, the agreement also 
provides that the common owner has the right to purchase the stock of 
the employer corporation owned by the employee in the event that the 
corporation should discharge the employee for reasonable cause, the 
purchase arrangement would not be reciprocal within the meaning of this 
paragraph (b)(4)(ii).
* * * * *
    (7) * * *
    (ii) Example 2. The facts are the same as in paragraph (b)(7)(i) of 
this section (Example 1), except that Jones owns 15 shares of the 100 
shares of the only class of stock of corporation S-1, and corporation S 
owns 75 shares of such stock. P satisfies the 50 percent stock 
ownership requirement of paragraph (b)(1) of this section with respect 
to S-1 since P is considered as owning 52.5 percent (70 percent x 75 
percent) of the S-1 stock with the application of Sec.  1.1563-3(b)(4). 
Since Jones is an officer of P, under paragraph (b)(2)(ii) of this 
section, the S-1 stock owned by Jones is treated as not outstanding for 
purposes of determining whether S-1 is a member of the parent-
subsidiary controlled group of corporations. Thus, S is considered to 
own stock possessing 88.2 percent (75 / 85) of the voting power and 
value of the S-1 stock. Accordingly, P, S, and S-1 are members of a 
parent-subsidiary controlled group of corporations.
    (iii) Example 3. Corporation X owns 60 percent of the only class of 
stock of corporation Y. D, the president of Y, owns the remaining 40 
percent of the stock of Y. D has agreed that, if D offers D's stock in 
Y for sale, D will first offer the stock to X at a price equal to the 
fair market value of the stock on the first date the stock is offered 
for sale. Since D is an employee of Y within the meaning of section 
3306(i) of the Code, and D's stock in Y is subject to a condition which 
substantially restricts or limits D's right to dispose of such stock 
and runs in favor of X, under paragraph (b)(2)(iii) of this section 
such stock is treated as if it were not outstanding for purposes of 
determining whether X and Y are members of a parent-subsidiary 
controlled group of corporations. Thus, X is considered to own stock 
possessing 100 percent of the voting power and value of the stock of Y. 
Accordingly, X and Y are members of a parent-subsidiary controlled 
group of corporations. The result would be the same if D's spouse, 
instead of D, owned directly the 40 percent stock interest in Y and 
such stock was subject to a right of first refusal running in favor of 
X.
* * * * *
    (d) Applicability date. This section applies to taxable years 
beginning on or after December 30, 2024. For taxable years beginning 
before December 30, 2024, see Sec.  1.1563-2 as contained in 26 CFR 
part 1 in effect on April 1, 2024.

0
Par. 54. Section 1.1563-3 is amended by revising and republishing 
paragraphs (b)(2)(i) and (ii), (b)(3)(i) and (ii), (b)(4)(ii), 
(b)(5)(i) and (ii), (b)(6)(i), (ii), and (iv), (c)(2) and (4), (d)(3), 
and (e) to read as follows:


Sec.  1.1563-3   Rules for determining stock ownership.

* * * * *
    (b) * * *
    (2) * * *
    (i) Rule. Stock owned, directly or indirectly, by or for a 
partnership is considered as owned by any partner having an interest of 
5 percent or more in either the capital or profits of the partnership 
in proportion to the partner's interest in capital or profits, 
whichever such proportion is the greater.
    (ii) Example--(A) Facts. Green, Jones, and White are unrelated 
individuals and are partners in the GJW partnership. The partners' 
interests in the capital and profits of the partnership are as follows:

                   Table 1 to Paragraph (b)(2)(ii)(A)
------------------------------------------------------------------------
                                                       Capital   Profit
                       Partner                         percent   percent
------------------------------------------------------------------------
Green...............................................        36        25
Jones...............................................        60        71
White...............................................         4         4
------------------------------------------------------------------------

    (B) Analysis. The GJW partnership owns the entire outstanding stock 
(100 shares) of X Corporation. Under this paragraph (b)(2), Green is 
considered to own the X stock owned by the partnership in proportion to 
Green's interest in capital (36 percent) or profits (25 percent), 
whichever such proportion is the greater. Therefore, Green is 
considered to own 36 shares of the X stock. However, since Jones has a 
greater interest in the profits of the partnership, Jones is considered 
to own the X stock in proportion to Jones's interest in such profits. 
Therefore, Jones is considered to own 71 shares of the X stock. Since 
White does not have an interest of 5 percent or more in either the 
capital or profits of the partnership, White is not considered to own 
any shares of the X stock.
    (3) * * *
    (i) Stock owned, directly or indirectly, by or for an estate or 
trust is considered

[[Page 106881]]

as owned by any beneficiary who has an actuarial interest of 5 percent 
or more in such stock, to the extent of such actuarial interest. For 
purposes of this paragraph (b)(3)(i), the actuarial interest of each 
beneficiary is determined by assuming the maximum exercise of 
discretion by the fiduciary in favor of such beneficiary and the 
maximum use of such stock to satisfy the beneficiary's rights as a 
beneficiary. A beneficiary of an estate or trust who cannot under any 
circumstances receive any interest in stock held by the estate or 
trust, including the proceeds from the disposition thereof, or the 
income therefrom, does not have an actuarial interest in such stock. 
Thus, where stock owned by a decedent's estate has been specifically 
bequeathed to certain beneficiaries and the remainder of the estate is 
bequeathed to other beneficiaries, the stock is attributable only to 
the beneficiaries to whom it is specifically bequeathed. Similarly, a 
remainderman of a trust who cannot under any circumstances receive any 
interest in the stock of a corporation which is a part of the corpus of 
the trust (including any accumulated income therefrom or the proceeds 
from a disposition thereof) does not have an actuarial interest in such 
stock. However, an income beneficiary of a trust does have an actuarial 
interest in stock if that beneficiary has any right to the income from 
such stock even though under the terms of the trust instrument such 
stock can never be distributed to that beneficiary. The factors and 
methods prescribed in Sec.  20.2031-7 of this chapter (Estate Tax 
Regulations) for use in ascertaining the value of an interest in 
property for estate tax purposes must be used for purposes of this 
paragraph (b)(3)(i) in determining a beneficiary's actuarial interest 
in stock owned directly or indirectly by or for a trust.
    (ii) For the purposes of this paragraph (b)(3), property of a 
decedent is considered as owned by the decedent's estate if such 
property is subject to administration by the executor or administrator 
for the purposes of paying claims against the estate and expenses of 
administration notwithstanding that, under local law, legal title to 
such property vests in the decedent's heirs, legatees or devisees 
immediately upon death. With respect to an estate, the term beneficiary 
includes any person entitled to receive property of the decedent 
pursuant to a will or pursuant to laws of descent and distribution. A 
person no longer is considered a beneficiary of an estate when all the 
property to which the person is entitled has been received by the 
person, when the person no longer has a claim against the estate 
arising out of having been a beneficiary, and when there is only a 
remote possibility that it will be necessary for the estate to seek the 
return of property or to seek payment from the person by contribution 
or otherwise to satisfy claims against the estate or expenses of 
administration. When pursuant to the preceding sentence, a person 
ceases to be a beneficiary, stock owned by the estate is not thereafter 
considered owned by the person.
* * * * *
    (4) * * *
    (ii) Example. Brown, an individual, owns 60 shares of the 100 
shares of the only class of outstanding stock of corporation P. Smith, 
an individual, owns 4 shares of the P stock, and corporation X owns 36 
shares of the P stock. Corporation P owns, directly and indirectly, 50 
shares of the stock of corporation S. Under this paragraph (b)(4), 
Brown is considered to own 30 shares of the S stock (60/100 x 50), and 
X is considered to own 18 shares of the S stock (36/100 x 50). Since 
Smith does not own 5 percent or more in value of the P stock, Smith is 
not considered as owning any of the S stock owned by P. If, in this 
example, Smith's spouse had owned directly 1 share of the P stock, 
Smith (and Smith's spouse) would each own 5 shares of the P stock, and 
therefore Smith (and Smith's spouse) would be considered as owning 2.5 
shares of the S stock (5/100 x 50).
    (5) * * *
    (i) Except as provided in paragraph (b)(5)(ii) of this section, an 
individual is considered to own the stock owned, directly or 
indirectly, by or for the individual's spouse, other than a spouse who 
is legally separated from the individual under a decree of divorce, 
whether interlocutory or final, or a decree of separate maintenance.
    (ii) An individual is not considered to own stock in a corporation 
owned, directly or indirectly, by or for the individual's spouse on any 
day of a taxable year of such corporation, provided that each of the 
following conditions are satisfied with respect to such taxable year:
    (A) Such individual does not, at any time during such taxable year, 
own directly any stock in such corporation.
    (B) Such individual is not a member of the board of directors or an 
employee of such corporation and does not participate in the management 
of such corporation at any time during such taxable year.
    (C) Not more than 50 percent of such corporation's gross income for 
such taxable year was derived from royalties, rents, dividends, 
interest, and annuities.
    (D) Such stock in such corporation is not, at any time during such 
taxable year, subject to conditions which substantially restrict or 
limit the spouse's right to dispose of such stock and which run in 
favor of the individual or the individual's children who have not 
attained the age of 21 years. The principles of Sec.  1.1563-
2(b)(2)(iii) apply in determining whether a condition is a condition 
described in the preceding sentence.
* * * * *
    (6) * * *
    (i) An individual is considered to own the stock owned, directly or 
indirectly, by or for the individual's children who have not attained 
the age of 21 years, and, if the individual has not attained the age of 
21 years, the stock owned, directly or indirectly, by or for the 
individual's parents.
    (ii) If an individual owns (directly, and with the application of 
the rules of this paragraph but without regard to this paragraph 
(b)(6)(ii)) stock possessing more than 50 percent of the total combined 
voting power of all classes of stock entitled to vote or more than 50 
percent of the total value of shares of all classes of stock in a 
corporation, then such individual is considered to own the stock in 
such corporation owned, directly or indirectly, by or for the 
individual's parents, grandparents, grandchildren, and children who 
have attained the age of 21 years. In determining whether the stock 
owned by an individual possesses the requisite percentage of the total 
combined voting power of all classes of stock entitled to vote of a 
corporation, see Sec.  1.1563-1(a)(6).
* * * * *
    (iv) Example--(A) Facts. Individual B owns directly 40 shares of 
the 100 shares of the only class of stock of Z Corporation. B's child, 
M (20 years of age), owns directly 30 shares of such stock, and B's 
child, A (30 years of age), owns directly 20 shares of such stock. The 
remaining 10 shares of the Z stock are owned by an unrelated person.
    (B) B's ownership. Individual B owns 40 shares of the Z stock 
directly and is considered to own the 30 shares of Z stock owned 
directly by M. Since, for purposes of the more-than-50-percent stock 
ownership test contained in paragraph (b)(6)(ii) of this section, B is 
treated as owning 70 shares or 70 percent of the total voting power and 
value of the Z stock, B is also considered as owning the 20 shares 
owned by B's adult child, A.

[[Page 106882]]

Accordingly, B is considered as owning a total of 90 shares of the Z 
stock.
    (C) M's ownership. Minor child, M, owns 30 shares of the Z stock 
directly, and is considered to own the 40 shares of Z stock owned 
directly by B. However, M is not considered to own the 20 shares of Z 
stock owned directly by M's sibling, A, and constructively by B, 
because stock constructively owned by B by reason of family attribution 
is not considered as owned by M for purposes of making another member 
of B's family the constructive owner of such stock. See paragraph 
(c)(2) of this section. Accordingly, M owns and is considered as owning 
a total of 70 shares of the Z stock.
    (D) A's ownership. Adult child, A, owns 20 shares of the Z stock 
directly. Since, for purposes of the more-than-50-percent stock 
ownership test contained in paragraph (b)(6)(ii) of this section, A is 
treated as owning only the Z stock which A owns directly, A does not 
satisfy the condition precedent for the attribution of Z stock from B. 
Accordingly, A is treated as owning only the 20 shares of Z stock which 
A owns directly.
    (c) * * *
    (2) Members of family. Stock constructively owned by an individual 
by reason of the application of paragraph (b)(5) or (6) of this section 
is not treated as owned by the individual for purposes of again 
applying such paragraphs in order to make another the constructive 
owner of such stock.
* * * * *
    (4) Examples. The provisions of this paragraph (c) may be 
illustrated by the following examples:
    (i) Example 1. A, 30 years of age, has a 90 percent interest in the 
capital and profits of a partnership. The partnership owns all the 
outstanding stock of corporation X and X owns 60 shares of the 100 
outstanding shares of corporation Y. Under paragraph (c)(1) of this 
section, the 60 shares of Y constructively owned by the partnership by 
reason of paragraph (b)(4) of this section is treated as actually owned 
by the partnership for purposes of applying paragraph (b)(2) of this 
section. Therefore, A is considered as owning 54 shares of the Y stock 
(90 percent of 60 shares).
    (ii) Example 2. The facts are the same as in paragraph (c)(4)(i) of 
this section (Example 1), except that that B, who is 20 years of age 
and the sibling of A, directly owns 40 shares of Y stock. Although the 
stock of Y owned by B is considered as owned by C (the parent of A and 
B) under paragraph (b)(6)(i) of this section, under paragraph (c)(2) of 
this section such stock may not be treated as owned by C for purposes 
of applying paragraph (b)(6)(ii) of this section in order to make A the 
constructive owner of such stock.
    (iii) Example 3. The facts are the same as in paragraph (c)(4)(ii) 
of this section (Example 2), except that that C has an option to 
acquire the 40 shares of Y stock owned by B. The rule contained in 
paragraph (c)(2) of this section does not prevent the reattribution of 
such 40 shares to A because, under paragraph (c)(3) of this section, C 
is considered as owning the 40 shares by reason of option attribution 
and not by reason of family attribution. Therefore, since A satisfies 
the more-than-50-percent stock ownership test contained in paragraph 
(b)(6)(ii) of this section with respect to Y, the 40 shares of Y stock 
constructively owned by C are reattributed to A, and A is considered as 
owning a total of 94 shares of Y stock.
    (d) * * *
    (3) Examples. The provisions of this paragraph (d) may be 
illustrated by the following examples, in which each corporation 
referred to uses the calendar year as its taxable year and the stated 
facts are assumed to exist on each day of 1970 (unless otherwise 
provided in the example):
    (i) Example 1. Jones owns all the stock of corporation X and has an 
option to purchase from Smith all the outstanding stock of corporation 
Y. Smith owns all the outstanding stock of corporation Z. Since the Y 
stock is considered as owned by two or more persons, under paragraph 
(d)(2)(ii) of this section, the Y stock is treated as owned only by 
Smith since Smith has direct ownership of such stock. Therefore, on 
December 31, 1970, Y and Z are component members of the same brother-
sister controlled group. If, however, Smith had owned Smith's stock in 
corporation Z for less than one-half of the number of days of Z's 1970 
taxable year, then under paragraph (d)(1) of this section, the Y stock 
would be treated as owned only by Jones since Jones's ownership results 
in Y being a component member of a controlled group on December 
31,1970.
    (ii) Example 2. Individual A owns directly all the outstanding 
stock of corporation M. B (the spouse of A) owns directly all the 
outstanding stock of corporation N. Neither spouse is considered as 
owning the stock directly owned by the other because each of the 
conditions prescribed in paragraph (b)(5)(ii) of this section is 
satisfied with respect to each corporation's 1970 taxable year. A owns 
directly 60 percent of the only class of stock of corporation P and B 
owns the remaining 40 percent of the P stock. Under paragraph 
(d)(2)(iii) of this section, the stock of P is treated as owned only by 
A since A owns (directly and with the application of the rules 
contained in paragraphs (b)(1) through (4) of this section) the stock 
possessing the greatest percentage of the total value of shares of all 
classes of stock of P. Accordingly, on December 31, 1970, P is treated 
as a component member of a brother-sister group consisting of M and P.
    (iii) Example 3. Unrelated individuals A and B each own 49 percent 
of all the outstanding stock of corporation R, which in turn owns 70 
percent of the only class of outstanding stock of corporation S. The 
remaining 30 percent of the stock of corporation S is owned by 
unrelated individual C. C also owns the remaining 2 percent of the 
stock of corporation R. Under the attribution rule of paragraph (b)(4) 
of this section, A and B are each considered to own 34.3 percent of the 
stock of corporation S. Accordingly, since five or fewer persons own at 
least 80 percent of the stock of corporations R and S and also own more 
than 50 percent identically (A's and B's identical ownership each is 
34.3 percent, C's identical ownership is 2 percent), on December 31, 
1970, corporations R and S are treated as component members of the same 
brother-sister controlled group for purposes of Sec.  1.1563-
1(a)(3)(ii).
* * * * *
    (e) Applicability dates. This section applies to taxable years 
beginning on or after December 30, 2024. For taxable years beginning 
before December 30, 2024, see Sec.  1.1563-3 as contained in 26 CFR 
part 1 in effect on April 1, 2024.

PART 5--TEMPORARY INCOME TAX REGULATIONS UNDER THE REVENUE ACT OF 
1978

0
Par. 55. The authority citation for part 5 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.


Sec.  5.1502-45  [Removed]

0
Par. 56. Section 5.1502-45 is removed.

PART 301--PROCEDURE AND ADMINISTRATION

0
Par. 57. The authority citation for part 301 continues to read in part 
as follows:

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

0
Par. 58. Section 301.6402-7 is amended by revising and republishing 
paragraph (g)(2)(iii) to read as follows:

[[Page 106883]]

Sec.  301.6402-7  Claims for refund and applications for tentative 
carryback adjustments involving consolidated groups that include 
insolvent financial institutions.

* * * * *
    (g) * * *
    (2) * * *
    (iii) Absorption of net operating losses. The absorption of net 
operating losses generally is determined under applicable principles of 
the Code and regulations, including the principles of section 172 and 
Sec.  1.1502-21(b) of this chapter. Notwithstanding any contrary rule 
or principle of the Code or regulations, if an institution and another 
member of the carryback year group have net operating losses that arise 
in taxable years ending on the same date and are carried to the same 
consolidated carryback year, the carryback year group's consolidated 
taxable income for that year is treated as offset first by the loss 
attributable to the institution to the extent thereof.
* * * * *

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

0
Par. 59. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.


Sec.  602.101  [Amended]

0
Par. 60. Section 602.101 is amended in the table in paragraph (b) by 
removing the entries for Sec. Sec.  1.1502-9A, 1.1502-18, 1.1502-76T, 
1.1502-95A, 1.1503-2, and 1.1503-2A.

Douglas W. O'Donnell,
Deputy Commissioner,
    Approved: November 14, 2024.
Aviva R. Aron-Dine,
Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2024-29480 Filed 12-27-24; 8:45 am]
BILLING CODE 4830-01-P`