106848 Federal Register / Vol. 89, No. 249 / Monday, December 30, 2024 / Rules and Regulations 

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. 

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 §§ 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 § 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 § 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 §§ 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 


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Federal Register / Vol. 89, No. 249 / Monday, December 30, 2024 / Rules and Regulations 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 § 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 § 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 § 1.1502– 

5(b)(5) by adding a reference to section 

59A. 

A commenter recommended adding 

the foregoing references not only in 

§ 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 §§ 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 §§ 1.1502–13, 1.1502– 

32, and 1.1502–36 

A commenter raised questions about 

amendments to §§ 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 § 1.1502–1. As 

defined in proposed § 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 

§ 1.163(j)–4 and § 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 §§ 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 §§ 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 

§ 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 


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106850 Federal Register / Vol. 89, No. 249 / Monday, December 30, 2024 / Rules and Regulations 

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 §§ 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 

§§ 1.52–1(c)(1) and 1.414(c)–2(b)(1) may 

cause confusion, because the rules in 

§§ 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 § 1.52– 

1(c)(1) applies to taxable years 

beginning on or after January 1, 2025, 

and that the amendment to § 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 

§ 52–1 to provide that § 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 

§ 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 §§ 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 § 1.1502–80(d) 

A commenter raised concerns about 

the withdrawal of proposed 

consolidated return regulations under 

§ 1.1502–80(d) relating to the nonapplicability 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 

§ 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, § 1.52–1(c)(1) applies to 

taxable years beginning on or after 

January 1, 2025, and § 1.414(c)–2(b)(1) 

applies to plan years beginning on or 

after January 1, 2025. The amendments 

to §§ 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 crossreferences 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 


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

■ Paragraph 1. The authority citation 

for part 1 is amended by removing the 

entries for §§ 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 * * * 

■ Par. 2. Section 1.52–1 is amended by 

revising paragraphs (c)(1)(i) and (ii) and 

adding paragraph (i) to read as follows: 

§ 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 § 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 § 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. 

■ Par. 3. Section 1.57–1 is amended by 

revising paragraph (b)(4)(ii) to read as 

follows: 

§ 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 § 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. 

* * * * * 

■ Par. 4. Section 1.167(c)–1 is amended 

by revising paragraph (a)(5) to read as 

follows: 

§ 1.167(c)–1 Limitations on methods of 

computing depreciation under section 

167(b)(2), (3), and (4). 

(a) * * * 

(5) See §§ 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. 

* * * * * 

■ Par. 5. Section 1.279–6 is amended by 

revising and republishing paragraph (d) 

to read as follows: 

§ 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 § 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. 

* * * * * 

§ 1.382–8 [Amended] 

■ Par. 6. Section 1.382–8 is amended by 

removing and reserving paragraph (i). 

■ Par. 7. Section 1.414(c)–2 is amended 

by revising paragraphs (b)(1)(i) and (ii) 

to read as follows: 

§ 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 § 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 § 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. 

* * * * * 

■ Par. 8. Section 1.414(c)–6 is amended 

by revising and republishing paragraph 

(a) and adding paragraph (g) to read as 

follows: 

§ 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 § 1.414(b)–1 

and §§ 1.414(c)–1 through 1.414(c)–4 


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106852 Federal Register / Vol. 89, No. 249 / Monday, December 30, 2024 / Rules and Regulations 

apply for plan years beginning after 

September 2, 1974. 

* * * * * 

(g) Special rule. Notwithstanding 

paragraph (a), (b), or (c) of this section, 

§ 1.414(c)–2(b)(1) applies to plan years 

beginning on or after January 1, 2025. 

■ Par. 9. Section 1.1502–0 is revised to 

read as follows: 

§ 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 § 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. 

■ Par. 10. Section 1.1502–1 is amended 

by: 

■ a. Adding introductory text; 

■ b. Revising and republishing 

paragraphs (f)(2) and (3) and (g); 

■ c. Redesignating paragraph (l) as 

paragraph (m); and 

■ d. Adding a new paragraph (l). 

The additions and revisions read as 

follows: 

§ 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 § 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 § 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. 

* * * * * 

§ 1.1502–3 [Amended] 

■ Par. 11. Section 1.1502–3 is amended 

by removing and reserving paragraph 

(e). 

■ Par. 12. Section 1.1502–4 is amended 

by revising paragraph (d)(1) to read as 

follows: 

§ 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 § 1.904–2(c)(1)) to the taxable 

year is determined on a consolidated 

basis under the principles of section 

904(c) and § 1.904–2 and is deemed to 

be paid or accrued to a foreign country 

or U.S. territory (as defined in § 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 § 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 

§ 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. 

* * * * * 

■ Par. 13. Section 1.1502–5 is revised to 

read as follows: 

§ 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 


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

§§ 1.1502–78 and 1.6425–1 through 

1.6425–3. 

(2) For provisions relating to 

depositing estimated taxes, see 

§ 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 

§ 1.1502–5 (as contained in the 26 CFR 

edition revised as of April 1, 2024). 

■ Par. 14. Section 1.1502–6 is amended 

by revising paragraph (b) to read as 

follows: 

§ 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 § 1.1502–77 does not 

apply. 

* * * * * 


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■ 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: 

§ 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 § 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 

§ 1.1502–11 by aggregating each 

member’s foreign-source taxable income 

or loss in such separate category 

computed under the principles of 

§ 1.1502–12, and taking into account the 

foreign portion of the consolidated 

items described in § 1.1502–11(a)(2) 

through (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 

§§ 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 foreignsource 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 § 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 § 1.861– 

9(g)(1)(ii). For purposes of this 

paragraph (c)(2)(ii), § 1.861–9T(g)(2)(iv) 

(assets in intercompany transactions) 

applies, but § 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 § 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. 

* * * * * 

■ Par. 16. Section 1.1502–11 is 

amended by: 

■ 1. Revising and republishing 

paragraph (a). 

■ 2. In paragraph (b)(2)(iii), 

redesignating Examples 1 through 3 as 

paragraphs (b)(2)(iii)(A) through (C), 

respectively. 

■ 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),. 

■ 4. Revising newly redesignated 

paragraphs (b)(2)(iii)(A)(3) and 

(b)(2)(iii)(B)(4). 

■ 5. Revising and republishing 

paragraph (c)(7). 

The revisions read as follows: 

§ 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 § 1.1502– 


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12 for the computation of separate 

taxable income); 

(2) Any consolidated net operating 

loss (CNOL) deduction (see § 1.1502–21 

for the computation of the CNOL 

deduction); 

(3) Any consolidated capital gain net 

income (see § 1.1502–22 for the 

computation of consolidated capital 

gain net income); 

(4) Any consolidated section 1231 net 

loss (see § 1.1502–23 for the 

computation of consolidated section 

1231 net loss); 

(5) Any consolidated charitable 

contributions deduction (see § 1.1502– 

24 for the computation of the 

consolidated charitable contributions 

deduction); and 

(6) Any consolidated dividends 

received deduction (see § 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 § 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 § 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 §§ 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. 

* * * * * 

■ Par. 17. Section 1.1502–12 is 

amended by: 

■ a. Revising paragraph (b); 

■ b. Removing and reserving paragraphs 

(e), (g), and (m); 

■ c. Revising paragraph (n); and 

■ d. Removing and reserving paragraph 

(q). 

The revisions read as follows: 

§ 1.1502–12 Separate taxable income. 

* * * * * 

(b) Any deduction that is disallowed 

under § 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; 

* * * * * 

■ Par. 18. Section 1.1502–13 is 

amended by: 

■ 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). 

■ c. Revising paragraph (l)(6). 

■ d. Adding paragraphs (l)(8) through 

(10). 

■ e. Removing paragraph (m). 

The revisions and additions read as 

follows: 

§ 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 §§ 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 ................................... § 1.1502–13(c)(7)(ii) ......... (A) ........................ Example 1. Intercompany 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. 


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Rule General location Paragraph Example 

(Q) ....................... Example 17. Intercompany stock sale followed by 

section 355 distribution. 

(R) ....................... Example 18. Redetermination of attributes for section 250 purposes. 

(B) Acceleration rule .............................. § 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 ............ § 1.1502–13(e)(1)(v) ......... (A) ........................ Example 1. Increment averaging method. 

(B) ........................ Example 2. Increment valuation method. 

(C) ....................... Example 3. Other reasonable inventory methods. 

(D) Stock of members ........................... § 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 ................... § 1.1502–13(g)(7)(ii) ......... (A) ........................ Example 1. Interest on 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 ........................ § 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 ......... § 1.1502–13(j)(10) ............ (i) ......................... Example 1. Intercompany 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 


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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 § 1.1502–32 in P’s basis 

in the S stock immediately before P’s 

sale of the stock. Under § 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 §§ 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 § 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 


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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% × 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 × 

$10)¥(25 × $8)); $100 in the period 

April through June ((25 × $12)¥(25 × 

$8)); $100 in the period July through 

September ((25 × $12)¥(25 × $8)); and 

$100 in the period October through 

December ((25 × $12)¥(25 × $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% × 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). 


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(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 § 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 

§ 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 § 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 

§ 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 § 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. 


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(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 

§ 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 

§ 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 § 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 § 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 § 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 § 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 § 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 

§ 1.1502–32 P adjusts its basis in the 

stock of each to $250. (See § 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 § 1.1502–32. The remaining $50 

of the distribution reduces P’s basis in 

the B stock. Section 301(c)(2) and 

§ 1.1502–32. Under paragraph (f)(2)(ii) 

of this section, P’s $100 of dividend 

income is not included in gross income. 

Under § 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 


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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 § 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 

§ 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 

§ 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 § 1.1502– 

32(b)(3)(v), resulting in an excess loss 

account of $75 in the nominal share. 

(See § 1.302–2(c)). M’s deemed 

distribution of the nominal share of B 

stock to P under § 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 


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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 

§ 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 § 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 

§ 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 


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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 § 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 § 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 § 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 § 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). 


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(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 

§ 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 § 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 § 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 

§ 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 § 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 § 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 


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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 

§ 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 § 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 

§ 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 § 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 


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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 § 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 § 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 § 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 § 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 § 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 

§ 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 § 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 § 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 


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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 § 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 § 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 § 1.336– 

1(b)(6)) for which the disposition date 

(as defined in § 1.336–1(b)(8)) is on or 

after May 15, 2013. 

■ Par. 19. Section 1.1502–17 is 

amended by revising and republishing 

paragraphs (a) and (e) to read as follows: 

§ 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. 

§ 1.1502–18 [Removed] 

■ Par. 20. Section 1.1502–18 is 

removed. 

■ Par. 21. Section 1.1502–21 is 

amended by: 

■ a. Revising paragraphs (b)(3)(i) and 

(b)(4); 

■ b. Removing and reserving paragraph 

(d); and 

■ c. Revising paragraphs (h)(6) and (8). 

The revisions read as follows: 

§ 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 § 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 § 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 


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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 

§ 1.1502–35(f)(1). For rules regarding 

losses treated as expired under 

§ 1.1502–35(f) on or after March 10, 

2006, see § 1.1502–21(b)(3)(v) as 

contained in 26 CFR part 1 in effect on 

April 1, 2006. 

* * * * * 

§ 1.1502–22 [Amended] 

■ Par. 22. Section 1.1502–22 is 

amended by removing and reserving 

paragraph (d). 

■ Par. 23. Section 1.1502–24 is 

amended by revising paragraphs (a)(2) 

and (c) to read as follows: 

§ 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 § 1.1502– 

26, and without regard to any 

consolidated net operating or net capital 

loss carrybacks to such year. 

■ Par. 24. Section 1.1502–26 is 

amended by revising paragraphs (a) and 

(c) to read as follows: 

§ 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. 

§ 1.1502–27 [Removed] 

■ Par. 25. Section 1.1502–27 is 

removed. 

■ Par. 26. Section 1.1502–32 is 

amended by: 

■ a. Revising paragraphs (b)(4)(v) and 

(vii). 

■ b. Revising and republishing 

paragraphs (b)(5), (h)(2)(i), and (h)(5) 

through (8). 

■ c. Redesignating paragraph (j) as 

paragraph (h)(10) and revising newly 

designated paragraph (h)(10). 

■ d. Removing paragraph (k). 

The revisions read as follows: 

§ 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 § 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 § 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 § 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 


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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 § 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 §§ 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 § 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 § 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 § 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 

§ 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 


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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 

§ 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 § 1.1502– 

13(f)(3) applies. Under §§ 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 § 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 § 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 § 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 calendaryear 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 § 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 


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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 taxexempt 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 taxexempt 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 

§ 1.1502–32T or § 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 

§ 1.1502–32T instead of § 1.1502–32(g), 

the election remains available. However, 

§§ 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 § 1.1502– 

35(c) or disallowed under § 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 § 1.1502– 

32T as contained in 26 CFR part 1 in 

effect on April 1, 2007. 

* * * * * 

■ Par. 27. Section 1.1502–34 is revised 

to read as follows: 

§ 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- 


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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 331⁄3

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. 

§ 1.1502–42 [Removed] 

■ Par. 28. Section 1.1502–42 is 

removed. 

■ Par. 29. Section 1.1502–43 is 

amended by revising paragraphs 

(b)(2)(iii) through (viii) and (e) to read 

as follows: 

§ 1.1502–43 Consolidated accumulated 

earnings tax. 

* * * * * 

(b) * * * 

(2) * * * 

(iii) Under section 535(b)(3), the 

deduction determined under § 1.1502– 

26 is not allowed. 

(iv) Under section 535(b)(4), the 

consolidated net operating loss 

deduction described in § 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 

§ 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 § 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 

§ 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. 

■ Par. 30. Section 1.1502–44 is 

amended by revising paragraph (b) to 

read as follows: 

§ 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 § 1.1502–21; and 

(3) Any consolidated net capital loss 

carryback to the consolidated return 

year under § 1.1502–22. 

* * * * * 

■ Par. 31. Section 1.1502–45 is added to 

read as follows: 

§ 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 


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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 §§ 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. 

■ 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: 

§ 1.1502–47 Consolidated returns by lifenonlife 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 § 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 §§ 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 


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106874 Federal Register / Vol. 89, No. 249 / Monday, December 30, 2024 / Rules and Regulations 

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) 

Facts 

(a) 

Offsetable 

(b) 

Limit 

(c) 

Unused loss 

(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 § 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 

§ 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. 

* * * * * 

■ Par. 33. Section 1.1502–75 is 

amended by: 

■ a. Revising and republishing 

paragraphs (b)(1) through (3), (c)(1)(i), 

and (c)(2)(i) and (ii); 

■ b. Removing paragraph (d)(5); and 

■ c. Revising and republishing 

paragraphs (h)(1) and (2). 

The revisions read as follows: 

§ 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 


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

§ 1.1502–77(c). The consolidated return, 

with Form 851, Affiliations Schedule (or 

any successor form), attached, must be 

filed with the service center with which 

the common parent would have filed a 

separate return. 

(2) Filing of Form 1122 for first year. 

If, under the provisions of paragraph 

(a)(1) of this section, a group wishes to 

file a consolidated return for a taxable 

year, then a Form 1122 (Authorization 

and Consent of Subsidiary Corporation 

To Be Included in a Consolidated 

Income Tax Return) (or successor form) 

must be executed by each subsidiary. 

The group must attach either executed 

Forms 1122 (or successor forms) or 

unsigned copies of the completed Forms 

1122 (or successor forms) to the 

consolidated return. If the group 

submits unsigned Forms 1122 (or 

successor forms) with its return, it must 

retain the signed originals in its records 

in the manner required by § 1.6001–1(e). 

Form 1122 (or any successor form) is 

not required for a taxable year if a 

consolidated return was filed (or was 

required to be filed) by the group for the 

immediately preceding taxable year. 

* * * * * 

■ 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: 

§ 1.1502–76 Taxable year of members of 

group. 

(a) Taxable year of members of group. 

The consolidated return of a group must 

be filed on the basis of the common 

parent’s taxable year, and each 

subsidiary must adopt the common 

parent’s annual accounting period for 

the first consolidated return year for 

which the subsidiary’s income is 

includible in the consolidated return. If 

any member is on a 52–53-week taxable 

year, the rule of the preceding sentence 

will, with the advance consent of the 

Commissioner, be deemed satisfied if 

the taxable years of all members of the 

group end within the same 7-day 

period. Any request for such consent 

must be requested at the time and in the 

manner that the Commissioner of 

Internal Revenue may prescribe by 

Internal Revenue Service forms and 

instructions or by publication in the 

Internal Revenue Bulletin (see 

§ 601.601(d)(2)(ii) of this chapter). 

(b) * * * 

(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 


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106876 Federal Register / Vol. 89, No. 249 / Monday, December 30, 2024 / Rules and Regulations 

before April 15, 2024 (the due date of 

P’s return, assuming no extensions of 

time), must file a substituted return for 

the complete fiscal year ending March 

31, 2023, in lieu of the return previously 

filed for the short period. Interest is 

computed from July 15, 2023. If, 

however, S files a return for the 

complete fiscal year ending March 31, 

2023, and the group elects to file a 

consolidated return for the calendar 

year 2023, then S must file an amended 

return covering the period from April 1, 

2022, through December 31, 2022, in 

lieu of the return previously filed for the 

complete fiscal year. Interest is 

computed from July 15, 2023. 

(ii) Example 2. Assume the same facts 

as in paragraph (c)(3)(i) of this section 

(Example 1), except that corporation P 

acquires all of the stock of corporation 

S at the close of September 30, 2023, 

and P files a consolidated return for the 

group for 2023 on April 15, 2024 (not 

having obtained any extensions of time). 

Since a consolidated return has been 

filed on or before the due date (July 15, 

2024) for the filing of the separate return 

for the taxable year ending March 31, 

2024, the return of S for the short 

taxable year beginning April 1, 2023, 

and ending September 30, 2023, should 

be filed no later than April 15, 2024. 

(d) Applicability date—(1) Taxable 

years of members of group applicability 

date. Paragraph (a) of this section 

applies to any original consolidated 

Federal income tax return due (without 

extensions) after July 20, 2007. 

(2) Election to ratably allocate items 

applicability date. Paragraph 

(b)(2)(ii)(D) of this section applies to any 

original consolidated Federal income 

tax return due (without extensions) after 

July 20, 2007. 

§ 1.1502–77 [Amended] 

■ Par. 35. Section 1.1502–77 is 

amended by: 

■ a. Designating Examples 1 through 15 

in paragraph (g) as paragraphs (g)(1) 

through (15), respectively. 

■ 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) of this Example 

11.

paragraph (g)(11)(i)(A) of this section. 

(g)(12)(i) .......................................... paragraph (ii)(A) of Example 11 .... paragraph (g)(11)(ii)(A) of this section (Example 11). 

(g)(13)(i) .......................................... March 15 ........................................ April 15. 

■ Par. 36. Section 1.1502–77A is 

amended by revising and republishing 

paragraph (d) to read as follows: 

§ 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. 

* * * * * 

■ Par. 37. Section 1.1502–77B is 

amended by revising and republishing 

paragraphs (a)(6)(i) and (ii) to read as 

follows: 

§ 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 § 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 

§ 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. 

* * * * * 

■ Par. 38. Section 1.1502–78 is 

amended by revising paragraph (f) to 

read as follows: 

§ 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. 

■ Par. 39. Section 1.1502–79 is 

amended by revising paragraphs (a), (b), 

(d), and (e)(1) and (2) to read as follows: 


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Federal Register / Vol. 89, No. 249 / Monday, December 30, 2024 / Rules and Regulations 106877 

§ 1.1502–79 Separate return years. 

(a) Carryover and carryback of 

consolidated net operating losses to 

separate return years. For rules 

regarding the carryover and carryback of 

consolidated net operating losses to 

separate return years, see § 1.1502– 

21(b). 

(b) Carryover and carryback of 

consolidated net capital loss to separate 

return years. For rules regarding the 

carryover and carryback of consolidated 

net capital losses to separate return 

years, see § 1.1502–22(b). 

* * * * * 

(d) Carryover and carryback of 

consolidated unused foreign tax—(1) In 

general. If a consolidated unused 

foreign tax can be carried under the 

principles of section 904(c) and 

§ 1.1502–4(d) to a separate return year of 

a corporation (or could have been so 

carried if such corporation were in 

existence) that was a member of the 

group in the year in which the unused 

foreign tax arose, then the portion of the 

consolidated unused foreign tax 

attributable to the corporation (as 

determined under paragraph (d)(2) of 

this section) is apportioned to the 

corporation (and any successor to that 

corporation in a transaction to which 

section 381(a) applies) under the 

principles of § 1.1502–21(b) and is 

deemed paid or accrued in such 

separate return year to the extent 

provided in section 904(c). 

(2) Portion of consolidated unused 

foreign tax attributable to a member. 

The portion of a consolidated unused 

foreign tax for any year attributable to a 

member is an amount equal to the 

consolidated unused foreign tax 

multiplied by a fraction. The numerator 

of the fraction is the foreign taxes paid 

or accrued by the member for the year 

(including those taxes deemed paid or 

accrued, other than by reason of section 

904(c)). The denominator of the fraction 

is the aggregate of all such taxes paid or 

accrued for the year (including those 

taxes deemed paid or accrued, other 

than by reason of section 904(c)) by all 

members of the group. 

(e) * * * 

(1) In general. If the consolidated 

excess charitable contributions for any 

taxable year can be carried under the 

principles of section 170(b)(2) and 

§ 1.1502–24(b) to a separate return year 

of a corporation (or could have been so 

carried if such corporation were in 

existence) which was a member of the 

group in the year in which such excess 

contributions arose, then the portion of 

such consolidated excess charitable 

contributions attributable to such 

corporation (as determined under 

paragraph (e)(2) of this section) is 

apportioned to such corporation (and 

any successor to such corporation in a 

transaction to which section 381(a) 

applies) under the principles of 

§ 1.1502–21(b) and is a charitable 

contribution carryover to such separate 

return year. 

(2) Portion of consolidated excess 

charitable contributions attributable to a 

member. The portion of the 

consolidated excess charitable 

contributions for any year attributable to 

a member is an amount equal to the 

consolidated excess contributions 

multiplied by a fraction. The numerator 

of the fraction is the charitable 

contributions paid by the member for 

the year. The denominator of the 

fraction is the aggregate of all charitable 

contributions paid for the year by all 

members of the group. 

* * * * * 

■ Par. 40. Section 1.1502–80 is 

amended by revising and republishing 

paragraph (c)(2) to read as follows: 

§ 1.1502–80 Applicability of other 

provisions of law. 

* * * * * 

(c) * * * 

(2) Cross reference. See § 1.1502–36 

for additional rules relating to 

worthlessness of subsidiary stock. 

* * * * * 

§ 1.1502–81T [Removed] 

■ Par. 41. Section 1.1502–81T is 

removed. 

■ Par. 42. Section 1.1502–90 is 

amended by revising the entry for 

§ 1.1502–99 to read as follows: 

§ 1.1502–90 Table of contents. 

* * * * * 

§ 1.1502–99 Effective/applicability dates. 

(a) In general. 

(b) Reattribution of losses under § 1.1502– 

36(d)(6). 

(c) Application to section 163(j). 

(1) Sections 1.382–2 and 1.382–5. 

(2) Sections 1.382–6 and 1.383–1. 

§ 1.1502–91 [Amended] 

■ Par. 43. Section 1.1502–91 is 

amended by removing paragraph (b)(3). 

■ Par. 44. Section 1.1502–92 is 

amended by: 

■ a. Designating Examples 1 through 3 

in paragraph (b)(3)(iii) as paragraphs 

(b)(3)(iii)(A) through (C), respectively. 

■ 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). 

Old paragraphs New paragraphs 

(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). 

■ c. Revising newly redesignated 

paragraphs (b)(3)(iii)(B)(2) through (4). 

The revisions read as follows: 

§ 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 

231⁄3 shares (231⁄3 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 62⁄3 percentage points over A’s lowest 

percentage ownership during the testing 

period (231⁄3 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 §§ 1.1502–1(f)(3) and 

1.1502–75(d)(3)(i) treat as arising in a 

SRLY. See § 1.1502–94 to determine the 

application of section 382 with respect 

to P’s net operating loss carryover. 

* * * * * 

■ Par. 45. Section 1.1502–99 is 

amended by: 

■ a. Revising paragraphs (a) and (b). 


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106878 Federal Register / Vol. 89, No. 249 / Monday, December 30, 2024 / Rules and Regulations 

■ b. Removing paragraph (c). 

■ c. Redesignating paragraph (d) as 

paragraph (c). 

The revisions read as follows: 

§ 1.1502–99 Effective/applicability dates. 

(a) In general. Sections 1.1502–91 

through 1.1502–96 and § 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 

§ 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 

§ 1.1502–36 applies, and the election 

under § 1.1502–96(d)(5) (relating to an 

election to reattribute section 382 

limitation) can be made with an election 

under § 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 § 1.1502–36(e)(5)(x). 

* * * * * 

■ Par. 46. Section 1.1502–100 is 

amended by revising and republishing 

paragraphs (a)(2), (c)(2), and (d) to read 

as follows: 

§ 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 § 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 

§ 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 

§ 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). 

§§ 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] 

■ 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. 

■ Par. 48. Section 1.1503(d)–1 is 

amended by revising and republishing 

paragraph (b)(7) to read as follows: 

§ 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 § 1.1502–1(l)). 

* * * * * 

■ Par. 49. Section 1.1503(d)–8 is 

amended by: 

■ a. Revising and republishing 

paragraph (a). 

■ b. Removing and reserving paragraphs 

(b)(1) and (2), (b)(3)(ii) and (iii), and 

(b)(4). 

The revision and republication read 

as follows: 

§ 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 §§ 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 

§§ 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. 

* * * * * 

■ Par. 50. Section 1.1504–3 is amended 

by revising and republishing paragraph 

(d)(1)(ii) to read as follows: 

§ 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. 

* * * * * 

■ Par. 51. Section 1.1552–1 is amended 

by: 

■ a. Redesignating paragraphs 

(a)(1)(ii)(a) through (d) as paragraphs 

(a)(1)(ii)(A) through (D), respectively. 

■ b. Revising newly redesignated 

paragraph (a)(1)(ii)(B). 

■ c. Redesignating paragraphs 

(a)(2)(ii)(a) through (i) as paragraphs 

(a)(2)(ii)(A) through (I), respectively. 

■ d. Removing and reserving newly 

redesignated paragraph (a)(2)(ii)(B). 

■ e. Revising newly redesignated 

paragraph (a)(2)(ii)(I). 

■ f. Adding paragraph (g). 

The revisions and addition read as 

follows: 

§ 1.1552–1 Earnings and Profits. 

(a) * * * 

(1) * * * 

(ii) * * * 


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(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. 

■ Par. 52. Section 1.1563–1 is amended 

by: 

■ a. Revising and republishing 

paragraphs (a)(2)(i)(A) and (B) and 

(a)(6); 

■ b. In paragraph (b)(4), designating 

Examples 1 through 4 as paragraphs 

(b)(4)(i) through (iv), respectively; 

■ c. Revising newly designated 

paragraph (b)(4)(i); and 

■ d. Revising paragraph (e). 

The revisions read as follows: 

§ 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 

§ 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 § 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 §§ 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 

§ 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. 

■ Par. 53. Section 1.1563–2 is amended 

by: 

■ a. Revising and republishing 

paragraphs (b)(2)(iii) and (b)(4)(ii); 

■ b. In paragraph (b)(7), designating 

Examples 1 through 3 as paragraphs 

(b)(7)(i) through (iii), respectively; 

■ c. Revising newly designated 

paragraph (b)(7)(ii) and (iii); and 

■ d. Adding paragraph (d). 

The revisions and addition read as 

follows: 

§ 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 § 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 


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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 

§ 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 × 75 percent) of the 

S–1 stock with the application of 

§ 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 § 1.1563–2 as contained in 26 

CFR part 1 in effect on April 1, 2024. 

■ 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: 

§ 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) 

Partner Capital 

percent 

Profit 

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 


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Federal Register / Vol. 89, No. 249 / Monday, December 30, 2024 / Rules and Regulations 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 § 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 × 50), and 

X is considered to own 18 shares of the 

S stock (36/100 × 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 × 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 § 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 § 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. 


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106882 Federal Register / Vol. 89, No. 249 / Monday, December 30, 2024 / Rules and Regulations 

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 § 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 § 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 

■ Par. 55. The authority citation for part 

5 continues to read as follows: 

Authority: 26 U.S.C. 7805. 

§ 5.1502–45 [Removed] 

■ Par. 56. Section 5.1502–45 is 

removed. 

PART 301—PROCEDURE AND 

ADMINISTRATION 

■ Par. 57. The authority citation for part 

301 continues to read in part as follows: 

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

■ Par. 58. Section 301.6402–7 is 

amended by revising and republishing 

paragraph (g)(2)(iii) to read as follows: 


ddrumheller on DSK120RN23PROD with RULES3
Federal Register / Vol. 89, No. 249 / Monday, December 30, 2024 / Rules and Regulations 106883 

§ 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 § 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 

■ Par. 59. The authority citation for part 

602 continues to read as follows: 

Authority: 26 U.S.C. 7805. 

§ 602.101 [Amended] 

■ Par. 60. Section 602.101 is amended 

in the table in paragraph (b) by 

removing the entries for §§ 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 


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