[Federal Register Volume 61, Number 125 (Thursday, June 27, 1996)]
[Rules and Regulations]
[Pages 33321-33335]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-15823]


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DEPARTMENT OF THE TREASURY
26 CFR Parts 1 and 602

[TD 8677]
RIN 1545-AU35


Consolidated Returns--Limitations on the use of Certain Losses 
and Deductions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains final and temporary amendments to the 
consolidated return regulations relating to deductions and losses of 
members. The temporary amendments concern the method for computing the 
limitations with respect to separate return limitation year (SRLY) 
losses. They also concern the rules relating to carryover and carryback 
of losses to consolidated and separate return years and to the built-in 
deduction rules. Final amendments are made amending definitions and 
redesignating sections displaced by temporary regulations. The text of 
these temporary regulations also serves as the text of the proposed 
regulations set forth in the notice of proposed rulemaking on this 
subject in the Proposed Rules section of this issue of the Federal 
Register.

DATES: These amendments are effective June 27, 1996.
    For dates of application and special transition rules, see 
Effective Dates under SUPPLEMENTARY INFORMATION.

FOR FURTHER INFORMATION CONTACT: David B. Friedel at (202) 622-7550 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in the temporary 
regulations has been reviewed and approved by the Office of Management 
and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 
3507) under the control number 1545-1237. Section 1.1502-21T(b)(3) 
requires a response from certain consolidated groups. The IRS requires 
the information to assure that an election to relinquish a carryback 
period is properly documented. Reponses to this collection of 
information are required to obtain a benefit (relating to the carryover 
of losses which would otherwise be carried back).
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number.
    For further information concerning this collection of information, 
and where to submit comments on the collection of information and the 
accuracy of the estimated burden, and suggestions for reducing this 
burden, please refer to the preamble to the cross-referencing notice of 
proposed rulemaking published in the Proposed Rules section of this 
issue of the Federal Register.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any Internal Revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background and Explanation of Provisions

    On February 4, 1991, the IRS and Treasury published in the Federal 
Register a notice of proposed rulemaking (CO-078-90, 56 FR 4228) 
setting forth amendments to the rules regarding the net operating 
losses, built-in deductions, and capital losses of consolidated groups, 
including rules regarding the carryover and carryback of losses to 
consolidated and separate return years. Some of the amendments are 
clarifying, and some change the existing rules. The principal changes 
related to losses arising in (or carried to) SRLY years. The preamble 
to the proposed amendments explains the proposed changes in detail. The 
IRS and Treasury also published Notice 91-27 (1991-2 C.B. 629) to 
advise of intended modifications to the proposed amendments.
    Generally, section 1503(a) requires that a consolidated group 
determine its tax in accordance with the regulations under section 1502 
prescribed before the last day prescribed by law for the filing of its 
tax return. Many of the proposed amendments have proposed effective 
dates of January 29, 1991, and other transitional rules for their 
application. Because of this effective date, consolidated groups have 
been uncertain whether the existing rules or the proposed rules (if 
adopted) will determine their use of losses for consolidated return 
years ending on or after January 29, 1991.
    To address the uncertainty, the IRS and Treasury are issuing this 
Treasury decision to adopt temporary amendments to the rules regarding 
a consolidated group's losses, including the carryover and carryback of 
SRLY losses. The temporary amendments are substantially identical to 
the rules proposed on January 29, 1991. A more detailed discussion of 
the effective dates of the temporary amendments, including special 
transitional rules, is set forth below under Effective Dates.
    These temporary amendments primarily address the uncertainty 
created by the proposed effective dates. They do not address the 
comments on the proposed amendments. Many of these comments are still 
under consideration.
    As companions to this Treasury decision, the IRS and Treasury also 
issue two other sets of temporary regulations under sections 382 and 
383

[[Page 33322]]

concerning the use of losses and deductions by consolidated groups and 
by members of controlled groups. See TD 8678 and TD 8679 published 
elsewhere in this issue of the Federal Register.
Effective Date
    The temporary amendments are generally effective for consolidated 
return years beginning on or after January 1, 1997. However, two 
important changes are made to the effective date provisions set forth 
in the proposed rules.
    As proposed, the amendments generally applied to consolidated 
return years ending on or after January 29, 1991, without regard to the 
year in which the losses arose and without regard to whether the losses 
are subject to the SRLY rules. An exception to the general effective 
date rules was made for the proposed SRLY rules and built-in deduction 
rules, which generally applied only to losses and deductions of 
corporations that became members (and acquisitions occurring) on or 
after January 29, 1991, without regard to when they arose. Thus, the 
proposed amendments required the losses and deductions of members 
acquired before January 29, 1991, to remain subject to the existing 
SRLY limitations.
    The temporary amendments revise this treatment. Losses and 
deductions of a member (including SRLY losses) carried to consolidated 
return years beginning on or after January 1, 1997, are governed by the 
temporary amendments, regardless of the year in which the loss or 
deduction was recognized, and regardless of when the member with the 
SRLY loss became a member of the group.
    The temporary amendments also contain rules relating to 
consolidated return years ending on or after January 29, 1991, and 
beginning before January 1, 1997. Specifically, a consolidated group 
may apply the temporary amendments to those consolidated return years 
provided that three principal conditions are met: (1) all the temporary 
amendments must be applied consistently on the group's final return 
(original or amended return) for each such year for which the statute 
of limitations does not preclude the filing of an amended return on 
January 1, 1997; (2) the temporary amendments relating to the treatment 
of built-in deductions and SRLY losses must be applied with respect to 
the losses and deductions of those corporations that became members of 
the group, and to acquisitions occurring, on or after January 29, 1991, 
and only with respect to such losses and deductions; and (3) 
appropriate adjustments must be made in the earliest subsequent open 
year to reflect any inconsistency in a year for which the statute of 
limitations precludes the filing of an amended return on January 1, 
1997. Until consolidated return years beginning on or after January 1, 
1997, the rules of the existing regulations relating to the treatment 
of built-in deductions and SRLY losses continue to apply to 
corporations that became members before, and to acquisitions occurring 
before, January 29, 1991. See Sec. 1.1502-21T(g)(3).
Special Analysis
    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in EO 12866. Therefore, a 
regulatory assessment is not required. It is hereby certified that 
these regulations do not have a significant economic impact on a 
substantial number of small entities. This certification is based on 
the fact that these regulations will primarily affect affiliated groups 
of corporations that have elected to file consolidated returns, which 
tend to be larger businesses. Therefore, a Regulatory Flexibility 
Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is 
not required. Pursuant to section 7805(f) of the Internal Revenue Code, 
the notice of proposed rulemaking preceding these regulations were sent 
to the Small Business Administration for comment on their impact on 
small business.
Drafting Information
    The principal author of these regulations is David B. Friedel of 
the Office of Assistant Chief Counsel (Corporate), IRS. Other personnel 
from the IRS and Treasury participated in their development.
Adoption of Amendments to the Regulations
    Accordingly, 26 CFR parts 1 and 602 are amended as follows:
PART 1--INCOME TAXES
    Paragraph 1. The authority citation for Part 1 is amended in part 
by adding citations in numerical order to read as follows:

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

Section 1.1502-0 also issued under 26 U.S.C. 1502. * * *
Section 1.1502-1T also issued under 26 U.S.C. 1502.
Section 1.1502-2 also issued under 26 U.S.C. 1502. * * *
Section 1.1502-15T also issued under 26 U.S.C. 1502. * * *
Section 1.1502-21T also issued under 26 U.S.C. 1502.
Section 1.1502-22T also issued under 26 U.S.C. 1502.
Section 1.1502-23T also issued under 26 U.S.C. 1502. * * *
Section 1.1502-79T also issued under 26 U.S.C. 1502.
Section 1.1502-15A also issued under 26 U.S.C. 1502.
Section 1.1502-21A also issued under 26 U.S.C. 1502.
Section 1.1502-22A also issued under 26 U.S.C. 1502.
Section 1.1502-23A also issued under 26 U.S.C. 1502.
Section 1.1502-41A also issued under 26 U.S.C. 1502.
Section 1.1502-79A also issued under 26 U.S.C. 1502.* * *

    Par. 2. In the list below, for each section indicated in the left 
column, remove the wording indicated in the middle column, and add the 
wording indicated in the right column.

------------------------------------------------------------------------
        Affected section                Remove                Add       
------------------------------------------------------------------------
1.469-1(h)(2)...................  1.1502-21           1.1502-21T (Net   
                                   (consolidated net   operating losses 
                                   operating loss),    (temporary)), and
                                   and 1.1502-22       1.1502-22T       
                                   (consolidated net   (consolidated net
                                   capital gain or     capital gain and 
                                   loss).              loss             
                                                       (temporary)).    
1.597-2(c)(5), first sentence...  Secs.  1.1502-15,   Secs.  1.1502-15T,
                                   1.1502-21, and      1.1502-21T, and  
                                   1.1502-22.          1.1502-22T (or   
                                                       Secs.  1.1502-15A
                                                       , 1.1502-21A, and
                                                       1.1502-22A, as   
                                                       appropriate).    
1.597-2(c)(5), second sentence..  Secs.  1.1502-15,   Secs.  1.1502-15T,
                                   1.1502-21 or        1.1502-21T or    
                                   1.1502-22.          1.1502-22T (or   
                                                       Secs.  1.1502-15A
                                                       , 1.1502-21A or  
                                                       1.1502-22A, as   
                                                       appropriate).    
1.597-4(g)(3), fifth sentence...  Secs.  1.1502-15,   Secs.  1.1502-15T,
                                   1.1502-21 and       1.1502-21T and   
                                   1.1502-22.          1.1502-22T (or   
                                                       Secs.  1.1502-15A
                                                       , 1.1502-21A and 
                                                       1.1502-22A, as   
                                                       appropriate).    

[[Page 33323]]

                                                                        
1.597-4(g)(3), sixth sentence...  Secs.  1.1502-15,   Secs.  1.1502-15T,
                                   1.1502-21, or       1.1502-21T, or   
                                   1.1502-22.          1.1502-22T (or   
                                                       Secs.  1.1502-15A
                                                       , 1.1502-21A, or 
                                                       1.1502-22A, as   
                                                       appropriate).    
1.904(f)-3(a)...................  (or Secs.  1.1502-  (or Sec.  1.1502- 
                                   21(b) and 1.1502-   21T(b) (or Secs. 
                                   79(a)).             1.1502-21A(b) and
                                                       1.1502-79A(a), as
                                                       appropriate)).   
1.904(f)-3(b)...................  (or Secs.  1.1502-  (or Sec.  1.1502- 
                                   22 and 1.1502-      22T(b) (or Secs. 
                                   79(b).              1.1502-22A and   
                                                       1.1502-79A(b), as
                                                       appropriate)).   
1.1341-1(f)(2)(i)...............  Sec.  1.1502-2A...  Sec.  1.1502-2A   
                                                       (as contained in 
                                                       the 26 C.F.R.    
                                                       edition revised  
                                                       as of April 1,   
                                                       1996).           
1.1502-9(a), seventh sentence...  Sec.  1.1502-79...  Sec.  1.1502-21T(b
                                                       )(2) (or Sec.    
                                                       1.1502-79A, as   
                                                       appropriate).    
1.1502-9(a), eighth sentence....  Sec.  1.1502-79...  Sec.  1.1502-21T(b
                                                       )(1) (or Sec.    
                                                       1.1502-79A, as   
                                                       appropriate).    
1.1502-9(f) Example 5(ii).......  Sec.  1.1502-21(c)  Sec.  1.1502-21A(c
                                                       )                
1.1502-11(a)(2).................  Sec.  1.1502-21...  Secs.  1.1502-21T 
                                                       (or 1.1502-21A,  
                                                       as appropriate). 
1.1502-11(a)(3).................  Sec.  1.1502-22...  Secs.  1.1502-22T 
                                                       (or 1.1502-22A,  
                                                       as appropriate). 
1.1502-11(a)(4).................  Sec.  1.1502-23...  Secs.  1.1502-23T 
                                                       (or 1.1502-23A,  
                                                       as appropriate). 
1.1502-11(b)(2)(iii) Example      Sec.  1.1502-79...  Sec.  1.1502-21T  
 1(c).                                                 (or Sec.  1.1502-
                                                       79A, as          
                                                       appropriate).    
1.1502-11(b)(2)(iii) Example      Sec.  1.1502-79...  Secs.  1.1502-21T 
 2(d).                                                 and 1.1502-22T,  
                                                       respectively (or 
                                                       Sec.  1.1502-79A,
                                                       as appropriate). 
1.1502-11(b)(2)(iii) Example      Sec.  1.1502-79...  Sec.  1.1502-21T  
 3(e).                                                 (or Sec.  1.1502-
                                                       79A, as          
                                                       appropriate).    
1.1502-12(b)....................  Sec.  1.1502-15     Secs.  1.1502-15A 
                                   shall be taken      or 1.1502-15T    
                                   into account as     shall be taken   
                                   provided in that    into account as  
                                   section.            provided in those
                                                       sections.        
1.1502-13(c)(7)(ii) Example       Sec.  1.1502-21(c)  Sec.  1.1502-21T(c
 10(d).                                                ).               
1.1502-13(g)(5) Example 4(b)....  Sec.  1.1502-15...  Sec.  1.1502-15T  
                                                       (or Sec.  1.1502-
                                                       15A, as          
                                                       appropriate).    
1.1502-13(h)(2), Example 1(a)...  Sec.  1.1502-21(c)  Sec.  1.1502-21T(c
                                                       ).               
1.1502-13(h)(2), Example 1(b)...  Sec.  1.1502-21(c)  Sec.  1.1502-21T(c
                                                       ).               
1.1502-13(h)(2), Example 2(a)...  Sec.  1.1502-15...  Sec.  1.1502-15T. 
1.1502-13(h)(2), Example 2(b)...  1.1502-22.........  1.1502-22T.       
1.1502-15(a)(1), first sentence.  Sec.  1.1502-21(c)  Sec.  1.1502-21A(c
                                                       ).               
1.1502-15(a)(1), first sentence.  Sec.  1.1502-22(c)  Sec.  1.1502-22A(c
                                                       ).               
1.1502-15(a)(1), second sentence  Under Secs.         Under Secs.       
                                   1.1502-21, 1.1502-  1.1502-21A,      
                                   22, and 1.1502-79.  1.1502-22A, and  
                                                       1.1502-79A (or   
                                                       Secs.  1.1502-21T
                                                       and 1.1502-22T,  
                                                       as appropriate). 
1.1502-15(a)(1), second sentence  In Sec.  1.1502-    In Secs.  1.1502- 
                                   21(c) or Sec.       21T(c) or 1.1502-
                                   1.1502-22(c) (as    22T(c) (or Secs. 
                                   the case may be).   1.1502-21A(c) or 
                                                       1.1502-22A(c), as
                                                       appropriate), as 
                                                       the case may be. 
1.1502-15(a)(3).................  Sec.  1.1502-31A(b  Sec.  1.1502-31A(b
                                   )(9).               )(9) (as         
                                                       contained in the 
                                                       26 C.F.R. edition
                                                       revised as of    
                                                       April 1, 1996).  
1.1502-18(f)(1)(ii), (1)(iii),    Sec.  1.1502-39A..  Sec.  1.1502-39A  
 (2)(i), (2)(ii), and (4)                              (as contained in 
 Example (i) and (ii).                                 the 26 C.F.R.    
                                                       edition revised  
                                                       as of April 1,   
                                                       1996).           
1.1502-18(f)(5).................  Sec.  1.1502-31A(b  Sec.  1.1502-31A(b
                                   )(1).               )(1) (as         
                                                       contained in the 
                                                       26 C.F.R. edition
                                                       revised as of    
                                                       April 1, 1996).  
1.1502-20(a)(1).................  1.1502-15(b)......  1.1502-11(c).     
1.1502-20(c)(4), Example 7(iii).  Sec.  1.1502-21...  Secs.  1.1502-21A 
                                                       or 1.1502-21T.   
1.1502-20(g)(3), Example 1(i)...  Sec.  1.1502-21...  Secs.  1.1502-21A 
                                                       or 1.1502-21T.   
1.1502-20(g)(3), Example 2(i)...  Sec.  1.1502-21...  Secs.  1.1502-21A 
                                                       or 1.1502-21T.   
1.1502-21(b)(1).................  Paragraph (a) of    Secs.  1.1502-79A(
                                   Sec.  1.1502-79.    a).              
1.1502-21(b)(1).................  Sec.  1.1502-15...  Sec.  1.1502-15A  
                                                       (or Sec.  1.1502-
                                                       11(c), as        
                                                       appropriate).    
1.1502-21(b)(2)(i)..............  Paragraph (a)(4)    This paragraph.   
                                   of Sec.  1.1502-                     
                                   79.                                  
1.1502-21(e)(1)(i)..............  Paragraph (a)(3)    This paragraph.   
                                   of Sec.  1.1502-                     
                                   79.                                  
1.1502-22(a)(1)(ii).............  Sec.  1.1502-23...  Secs.  1.1502-23A 
                                                       or 1.1502-23T.   
1.1502-22(a)(3).................  Sec.  1.1502-15...  Secs.  1.1502-15A 
                                                       and 1.1502-11(c).
1.1502-22(b)(1).................  Paragraph (b) of    Sec.  1.1502-79A(b
                                   Sec.  1.1502-79.    ) (or Sec.       
                                                       1.1502-22T(b), as
                                                       appropriate).    
1.1502-23.......................  Secs.  1.1502-21(c  Secs.  1.1502-21A(
                                   ) and 1.1502-       c) and 1.1502-   
                                   22(c), as           22A(c), as       
                                   provided in Sec.    provided in Sec. 
                                   1.1502-15(a).       1.1502-15A(a) (or
                                                       Secs.  1.1502-21T
                                                       (c) and 1.1502-  
                                                       22T(c), as       
                                                       provided in Sec. 
                                                       1.1502-15T(a), as
                                                       appropriate).    
1.1502-26(a)(1)(ii) concluding    Paragraph (f) of    Secs.  1.1502-21T(
 text.                             Sec.  1.1502-21.    e) or 1.1502-    
                                                       21A(f), as       
                                                       appropriate.     
1.1502-32(b)(5) Example 2(b)....  1.1502-79.........  1.1502-21T(b).    
1.1502-41(a)....................  Paragraph (a)(1)    Sec.  1.1502-22A(a
                                   of Sec.  1.1502-    ).               
                                   22.                                  
1.1502-41(a)....................  Sec.  1.1502-23...  Sec.  1.1502-23A. 
1.1502-41(b)....................  Paragraph (a)(1)    Sec.  1.1502-22A(a
                                   of Sec.  1.1502-    ).               
                                   22.                                  
1.1502-41(b)....................  Paragraph (b) of    Sec.  1.1502-22A(b
                                   Sec.  1.1502-22.    ).               

[[Page 33324]]

                                                                        
1.1502-42(f)(4)(i)(A)...........  Sec.  1.1502-79(a)  Sec.  1.1502-21T(b
                                   (3)..               ) (or Sec.       
                                                       1.1502-79A(a)(3),
                                                       as appropriate). 
1.1502-42(j) Example 4(b).......  Sec.  1.1502-79(a)  Sec.  1.1502-79A(a
                                   (3)..               )(3).            
1.1502-42(j) Example 4(c).......  Sec.  1.1502-21(b)  Sec.  1.1502-21A(b
                                   (3).                )(3).            
1.1502-42(j) Example 4(c).......  Sec.  1.1502-79(a)  Sec.  1.1502-79A(a
                                   (3).                )(3).            
1.1502-43(b)(2)(iv).............  Sec.  1.1502-21(a)  Secs.  1.1502-21T(
                                                       a) or 1.1502-    
                                                       21A(a), as       
                                                       appropriate.     
1.1502-43(b)(2)(v)..............  Sec.  1.1502-22(a)  Secs.  1.1502-22T(
                                                       a) or 1.1502-    
                                                       22A(a), as       
                                                       appropriate.     
1.1502-43(b)(2)(vi).............  Sec.  1.1502-41(a)  Secs.  1.1502-22T(
                                                       a) or 1.1502-41A,
                                                       as appropriate.  
1.1502-43(b)(2)(vi).............  Sec.  1.1502-41(b)  Secs.  1.1502-22T(
                                                       a) or 1.1502-41A,
                                                       as appropriate.  
1.1502-43(b)(2)(vii)............  Sec.  1.1502-22(b)  Secs.  1.1502-22T(
                                                       b) or 1.1502-    
                                                       22A(b), as       
                                                       appropriate.     
1.1502-43(b)(2)(viii)...........  Section 1.1502-15   Sections 1.1502-  
                                   (built-in           15A (Limitations 
                                   deductions) does.   on built-in      
                                                       deductions not   
                                                       subject to Sec.  
                                                       1.1502-15T) and  
                                                       1.1502-15T (SRLY 
                                                       limitation on    
                                                       built-in losses  
                                                       (temporary)) do. 
1.1502-44(b)(2).................  Sec.  1.1502-21...  Secs.  1.1502-21T 
                                                       or 1.1502-21A (as
                                                       appropriate).    
1.1502-44(b)(3).................  Sec.  1.1502-22...  Secs.  1.1502-22T 
                                                       or 1.1502-22A (as
                                                       appropriate).    
1.1502-47(h)(2)(i)..............  Sec.  1.1502-21...  Secs.  1.1502-21T 
                                                       or 1.1502-21A (as
                                                       appropriate).    
1.1502-47(h)(2)(ii).............  Sec.  1.1502-21(f)  Secs.  1.1502-21(A
                                                       )(f) or 1.1502-  
                                                       21T(e) (as       
                                                       appropriate).    
1.1502-47(h)(2)(iii)............  Sec.  1.1502-21...  Secs.  1.1502-21A 
                                                       or 1.1502-21T (as
                                                       appropriate).    
1.1502-47(h)(2)(iv).............  Sec.  1.1502-21...  Secs.  1.1502-21A 
                                                       or 1.1502-21T (as
                                                       appropriate).    
1.1502-47(h)(2)(vii) Example....  Secs.  1.1502-21    Secs.  1.1502-21A 
                                   and 1.1502-79.      and 1.1502-79A.  
1.1502-47(h)(3)(iii)............  Sec.  1.1502-21(c)  Secs.  1.1502-21A(
                                                       c) or 1.1502-    
                                                       21T(c) (as       
                                                       appropriate).    
1.1502-47(h)(3)(iv) and (v).....  Sec.  1.1502-21(d)  Sec.  1.1502-21A(d
                                                       ).               
1.1502-47(h)(4)(i), first         Sec.  1.1502-22...  Secs.  1.1502-22T 
 sentence.                                             or 1.1502-22A (as
                                                       appropriate).    
1.1502-47(h)(4)(i), second        Sec.  1.1502-22(a)  Secs.  1.1502-22T 
 sentence.                                             or 1.1502-22A(a) 
                                                       (as appropriate).
1.1502-47(h)(4)(ii), first        Sec.  1.1502-22...  Secs.  1.1502-22A 
 sentence.                                             or 1.1502-22T.   
1.1502-47(h)(4)(ii), first        Sec.  1.1502-21...  Secs.  1.1502-21T 
 sentence.                                             or 1.1502-21A (as
                                                       appropriate).    
1.1502-47(h)(4)(ii), second       ``Sec.  1.1502-22(  ``Sec.  1.1502-22A
 sentence.                         d)''.               (d)''.           
1.1502-47(h)(4)(ii), second       ``Sec.  1.1502-21(  ``Sec.  1.1502-21A
 sentence.                         d)''.               (d)''.           
1.1502-47(h)(4)(iii)............  Sec.  1.1502-22(b)  Secs.  1.1502-22A(
                                   (1).                b)(1) or 1.1502- 
                                                       22T(b).          
1.1502-47(k)(5).................  Sec.  1.1502-22...  Secs.  1.1502-22T 
                                                       or 1.1502-22A (as
                                                       appropriate).    
1.1502-47(l)(3)(i)..............  Sec.  1.1502-21...  Secs.  1.1502-21T 
                                                       or 1.1502-21A (as
                                                       appropriate).    
1.1502-47(m)(2)(ii).............  Sec.  1.1502-21...  Secs.  1.1502-21T 
                                                       or 1.1502-21A (as
                                                       appropriate).    
1.1502-47(m)(2)(ii).............  Sec.  1.1502-22...  Secs.  1.1502-22T 
                                                       or 1.1502-22A (as
                                                       appropriate).    
1.1502-47(m)(3)(i)..............  Secs.  1.1502-21    Secs.  1.1502-21T 
                                   and 1.1502-22.      and 1.1502-22T   
                                                       (or Secs.  1.1502-
                                                       21A and 1.1502-  
                                                       22A, as          
                                                       appropriate).    
1.1502-47(m)(3)(vi)(A), both      Sec.  1.1502-79(a)  Secs.  1.1502-21T(
 instances.                        (3).                b) or 1.1502-    
                                                       79A(a)(3) (as    
                                                       appropriate).    
1.1502-47(m)(3)(vii)............  Sec.  1.1502-21(b)  Sec.  1.1502-21A(b
                                   (3)(ii).            )(3)(ii).        
1.1502-47(m)(3)(ix).............  Sec.  1.1502-15     Secs.  1.1502-15T 
                                   (including the      and 1.1502-15A   
                                   exceptions in       (including       
                                   paragraph (a)(4)    applicable       
                                   thereof).           exceptions       
                                                       thereto).        
1.1502-47(m)(5) Example 4.......  Sec.  1.1502-15...  Sec.  1.1502-15A. 
1.1502-47(o)(2)(i)..............  Sec.  1.1502-41...  Secs.  1.1502-41A 
                                                       or 1.1502-22T (as
                                                       appropriate).    
1.1502-47(o)(2)(ii).............  Sec.  1.1502-41...  Secs.  1.1502-41A 
                                                       or 1.1502-22T (as
                                                       appropriate).    
1.1502-47(q)....................  Sec.  1.1502-21(b)  Secs.  1.1502-21A(
                                   (3) and Sec.        b)(3) and 1.1502-
                                   1.1502-79(a)(3).    79A(a)(3) (or    
                                                       Sec.  1.1502-21T,
                                                       as appropriate). 
1.1502-78(a)....................  Sec.  1.1502-79     Secs.  1.1502-21T(
                                   (a), (b), or (c).   b), 1.1502-      
                                                       22T(b), or 1.1502-
                                                       79(c) (or Secs.  
                                                       1.1502-79A(a),   
                                                       1.1502-79A(b), or
                                                       1.1502-79(c), as 
                                                       appropriate).    
1.1502-79(a)(1)(i)..............  Sec.  1.1502-21...  Sec.  1.1502-21A. 
1.1502-79(b)(1).................  1.1502-22.........  1.1502-22A.       

[[Page 33325]]

                                                                        
1.1502-79(c)(1).................  Paragraph (a)(1)    Sec.  1.1502-21T(b
                                   and (2) of this     ) (or Secs.      
                                   section.            1.1502-79A(a)(1) 
                                                       and (2), as      
                                                       appropriate).    
1.1502-79(d)(1).................  Paragraph (a)(1)    Sec.  1.1502-21T(b
                                   and (2) of this     ) (or Secs.      
                                   section.            1.1502-79A(a)(1) 
                                                       and (2), as      
                                                       appropriate).    
1.1502-79(e)(1).................  Paragraph (a)(1)    Sec.  1.1502-21T(b
                                   and (2) of this     ) (or Secs.      
                                   section.            1.1502-79A(a)(1) 
                                                       and (2), as      
                                                       appropriate).    
1.1502-80(c)....................  Sec.  1.1502-15(b)  Sec.  1.1502-11(c)
                                                       .                
1.1502-100(c)(2)................  Sec.  1.1502-21...  Secs.  1.1502-21A 
                                                       or 1.1502-21T (as
                                                       appropriate).    
1.1503-2(d)(2)(i)...............  Sec.  1.1502-21(c)  Secs.  1.1502-21A(
                                                       c) or 1.1502-    
                                                       21T(c), as       
                                                       appropriate.     
1.1503-2(d)(2)(ii)..............  Sec.  1.1502-21(c)  Secs.  1.1502-21A(
                                                       c) or 1.1502-    
                                                       21T(c), as       
                                                       appropriate.     
1.1503-2(d)(4) Example 1(iv)....  1.1502-22.........  1.1502-22T(c).    
1.1503-2(d)(4) Example 2(iv)....  Sec.  1.1502-21(c)  Sec.  1.1502-21A(c
                                                       ).               
1.1503-2(g)(2)(vii)(B)(1).......  Sec.  1.1502-21(c)  Secs.  1.1502-21A(
                                                       c) or 1.1502-    
                                                       21T(c) (as       
                                                       appropriate).    
1.1503-2(g)(2)(vii)(B)(2).......  Sec.  1.1502-21(c)  Secs.  1.1502-21A(
                                                       c) or 1.1502-    
                                                       21T(c) (as       
                                                       appropriate).    
1.1503-2(g)(2)(vii)(E)..........  Sec.  1.1502-21(c)  Secs.  1.1502-21A(
                                                       c) or 1.1502-    
                                                       21T(c) (as       
                                                       appropriate).    
1.1503-2(g)(2)(vii)(G) Example 1  Sec.  1.1502-21(c)  Secs.  1.1502-21A(
                                                       c) or 1.1502-    
                                                       21T(c), as       
                                                       appropriate.     
1.1503-2(g)(2)(vii)(G) Example 2  Sec.  1.1502-21(c)  Secs.  1.1502-21A(
                                                       c) or 1.1502-    
                                                       21T(c), as       
                                                       appropriate.     
1.1503-2(h)(3)..................  Sec.  1.1502-21(c)  Secs.  1.1502-21A(
                                                       c) or 1.1502-    
                                                       21T(c) (as       
                                                       appropriate).    
1.1503-2A(f)(1)(i) intro text...  Sec.  1.1502-79(a)  Sec.  1.1502-21T(b
                                   (3).                ).               
1.1503-2A(f)(1)(i)(C)...........  Sec.  1.1502-79...  Sec.  1.1502-22T(b
                                                       ).               
1.1503-2A(f)(2)(i)..............  Sec.  1.1502-21(c)  Secs.  1.1502-21A(
                                   (2).                c)(2) or 1.1502- 
                                                       21T(c) (as       
                                                       appropriate).    
1.1503-2A(f)(2)(ii).............  Sec.  1.1502-21(c)  Secs.  1.1502-21A(
                                   (2).                c)(2) or 1.1502- 
                                                       21T(c) (as       
                                                       appropriate).    
1.1503-2A(f)(4) Example 2(iv),    Sec.  1.1502-21(c)  Sec.  1.1502-21A(c
 first sentence.                   (2).                )(2).            
1.1503-2A(f)(4) Example 2(iv),    Sec.  1.1502-21(c)  Sec.  1.1502-21A(c
 second sentence.                                      ).               
1.1552-1(a)(3)(i)...............  Sec.  1.1502-30A..  Sec.  1.1502-30A  
                                                       (as contained in 
                                                       the 26 C.F.R.    
                                                       edition revised  
                                                       as of April 1,   
                                                       1996).           
1.1552-1(b)(1)..................  Sec.  1.1502-30A..  Sec.  1.1502-30A  
                                                       (as contained in 
                                                       the 26 C.F.R.    
                                                       edition revised  
                                                       as of April 1,   
                                                       1996).           
301.6402-7(g)(2)(iii)...........  Sec.  1.1502-21(b)  Secs.  1.1502-21T(
                                                       b) or 1.1502-    
                                                       21A(b) (as       
                                                       appropriate).    
301.6402-7(g)(3) Example 2,       Sec.  1.1502-21...  Sec.  1.1502-21T. 
 second sentence.                                                       
301.6402-7(g)(3) Example 2,       Sec.  1.1502-21(c)  Sec.  1.1502-21T(c
 third sentence.                                       ).               
301.6402-7(h)(1)(ii) Example (B)  1.1502-21(b)......  1.1502-21T(b).    
301.6402-7(h)(1)(ii) Example (B)  1.1502-22(b)......  1.1502-22T(b).    
------------------------------------------------------------------------




Sec. 1.1501-1  [Removed]

    Par. 3. Section 1.1501-1 is removed. -
    Par. 4. The undesignated centerheading immediately following 
Sec. 1.1504-4 is revised from ``Regulations Applicable to Taxable Years 
Prior to January 1, 1966'' to ``Regulations Applicable to Taxable Years 
Before January 1, 1997''.


Secs. 1.1502-0A through 1.1502-3A, 1.1502-10A through 1.1502-19A and 
1.1502-30A through 1.1502-51A  [Removed]

    Par. 5. Sections 1.1502-0A through 1.1502-3A, 1.1502-10A through 
1.1502-19A, and 1.1502-30A through 1.1502-51A are removed.
    Par. 6. Section 1.1502-0 is revised to read as follows:


Sec. 1.1502-0  Effective dates.

    (a) The regulations under section 1502 are applicable to taxable 
years beginning after December 31, 1965, except as otherwise provided 
therein.
    (b) The provisions of Secs. 1.1502-0A through 1.1502-3A, 1.1502-10A 
through 1.1502-19A, and 1.1502-30A through 1.1502-51A (as contained in 
the 26 CFR part 1 edition revised April 1, 1996) are applicable to 
taxable years beginning before January 1, 1966.
    Par. 7. Section 1.1502-1 is amended by revising paragraphs (b), 
(f)(1), and (f)(2) introductory text, adding paragraphs (f)(4) and (j), 
and adding and reserving paragraph (i) to read as follows:


Sec. 1.1502-1  Definitions.

* * * * *
    (b) Member. The term member means a corporation (including the 
common parent) that is included in the group, or as the context may 
require, a corporation that is included in a subgroup.
* * * * *
    (f) Separate return limitation year--(1) In general. Except as 
provided in paragraphs (f)(2) and (3) of this section, the term 
separate return limitation year (or SRLY) means any separate return 
year of a member or of a predecessor of a member.
    (2) Exceptions. The term separate return limitation year (or SRLY) 
does not include:
* * * * *
    (4) Predecessors and successors. The term predecessor means a 
transferor or distributor of assets to a member (the successor) in a 
transaction--
    (i) To which section 381(a) applies; or
    (ii) That occurs on or after January 1, 1997, in which the 
successor's basis for the assets is determined, directly or

[[Page 33326]]

indirectly, in whole or in part, by reference to the basis of the 
assets of the transferor or distributor, but only if the amount by 
which basis differs from value, in the aggregate, is material. In the 
case of such a transaction, only one member may be considered a 
predecessor to or a successor of one other member.
* * * * *
    (i) [Reserved]
    (j) Affiliated. Corporations are affiliated if they are members of 
a group with each other.
    Par. 8. In Sec. 1.1502-2, paragraph (h) is revised to read as 
follows:


Sec. 1.1502-2  Computation of tax liability.

* * * * *
    (h) The tax imposed by section 1201, instead of the taxes computed 
under paragraphs (a) and (g) of this section, computed by reference to 
the net capital gain of the group (see Sec. 1.1502-22T) (or, for 
consolidated return years to which Sec. 1.1502-22T does not apply, 
computed by reference to the excess of the consolidated net long-term 
capital gain over the consolidated net short-term capital loss (see 
Sec. 1.1502-41A for the determination of the consolidated net long-term 
capital gain and the consolidated net short-term capital loss));
* * * * *


Sec. 1.1502-15  [Amended]

    Par. 9. In Sec. 1.1502-15, paragraph (b) is redesignated as 
paragraph (c) of Sec. 1.1502-11, and the heading of newly designated 
Sec. 1.1502-11, paragraph (c) is revised to read as follows:


Sec. 1.1502-11  Consolidated taxable income.

* * * * * -
    (c) Disallowance of loss attributable to pre-1966 distributions. * 
* *


Sec. 1.1502-15  [Redesignated as Sec. 1.1502-15A]

    Par. 10. Section 1.1502-15 is redesignated as Sec. 1.1502-15A; the 
section heading of the newly designated Sec. 1.1502-15A is revised; and 
paragraph (b) is added to read as follows:


Sec. 1.1502-15A  Limitations on the allowance of built-in deductions 
for consolidated return years beginning before January 1, 1997.

* * * * * -
    (b) Effective date. This section applies to any consolidated return 
years to which Sec. 1.1502-21T does not apply. See Sec. 1.1502-21T(g) 
for effective dates of that section. -
    Par. 11. Section 1.1502-15T is added to read as follows:


Sec. 1.1502-15T  SRLY limitation on built-in losses (temporary).

    (a) SRLY limitation. Built-in losses are subject to the SRLY 
limitation under Secs. 1.1502-21T(c) and 1.1502-22T(c) (including 
applicable subgroup principles). Built-in losses are treated as 
deductions or losses in the year recognized, except for the purpose of 
determining the amount of, and the extent to which the built-in loss is 
limited by, the SRLY limitation for the year in which it is recognized. 
Solely for such purpose, a built-in loss is treated as a hypothetical 
net operating loss carryover or net capital loss carryover arising in a 
SRLY, instead of as a deduction or loss in the year recognized. To the 
extent that a built-in loss is allowed as a deduction under this 
section in the year it is recognized, it offsets any consolidated 
taxable income for the year before any loss carryovers or carrybacks 
are allowed as a deduction. To the extent not so allowed, it is treated 
as a separate net operating loss or net capital loss carryover or 
carryback arising in the year of recognition and, under Sec. 1.1502-
21T(c) or Sec. 1.1502-22T(c), the year of recognition is treated as a 
SRLY.
    (b) Built-in losses--(1) Defined. If a corporation has a net 
unrealized built-in loss under section 382(h)(3) (as modified by this 
section) on the day it becomes a member of the group (whether or not 
the group is a consolidated group), its deductions and losses are 
built-in losses under this section to the extent they are treated as 
recognized built-in losses under section 382(h)(2)(B) (as modified by 
this section). This paragraph (b) generally applies separately with 
respect to each member, but see paragraph (c) of this section for 
circumstances in which it is applied on a subgroup basis.
    (2) Operating rules. Solely for purposes of applying paragraph 
(b)(1) of this section, the principles of Sec. 1.1502-94T(c) apply with 
appropriate adjustments, including the following:
    (i) Ownership change. A corporation is treated as having an 
ownership change under section 382(g) on the day the corporation 
becomes a member of a group, and no other events (e.g., a subsequent 
ownership change under section 382(g) while it is a member) are treated 
as causing an ownership change. In the case of an asset acquisition by 
a group, the assets and liabilities acquired directly from the same 
transferor pursuant to the same plan are treated as the assets and 
liabilities of a corporation that becomes a member of the group (and 
has an ownership change) on the date of the acquisition. -
    (ii) Recognized built-in gain or loss. A loss that is included in 
the determination of net unrealized built-in gain or loss and that is 
recognized but disallowed or deferred (e.g., under Sec. 1.1502-20 or 
section 267) is not treated as a built-in loss unless and until the 
loss would be allowed during the recognition period without regard to 
the application of this section. Section 382(h)(1)(B)(ii) does not 
apply to the extent it limits the amount of recognized built-in loss 
that may be treated as a pre-change loss to the amount of the net 
unrealized built-in loss.
    (c) Built-in losses of subgroups--(1) In general. In the case of a 
subgroup, the principles of paragraph (b) of this section apply to the 
subgroup, and not separately to its members. Thus, the net unrealized 
built-in loss and recognized built-in loss for purposes of paragraph 
(b) of this section are based on the aggregate amounts for each member 
of the subgroup. -
    (2) Members of subgroups. A subgroup is composed of those members 
that have been continuously affiliated with each other for the 60 
consecutive month period ending immediately before they become members 
of the group in which the loss is recognized. A member remains a member 
of the subgroup until it ceases to be affiliated with the loss member. 
For this purpose, the principles of Sec. 1.1502-21T(c)(2) (iv) through 
(vi) apply with appropriate adjustments.
    (3) Built-in amounts. Solely for purposes of determining whether 
the subgroup has a net unrealized built-in loss or whether it has a 
recognized built-in loss, the principles of Secs. 1.1502-91T (g) and 
(h) apply with appropriate adjustments.
    (d) Examples. For purposes of the examples in this section, unless 
otherwise stated, all groups file consolidated returns, all 
corporations have calendar taxable years, the facts set forth the only 
corporate activity, value means fair market value and the adjusted 
basis of each asset equals its value, all transactions are with 
unrelated persons, and the application of any limitation or threshold 
under section 382 is disregarded. The principles of this section are 
illustrated by the following examples:

    Example 1. Determination of recognized built-in loss. (a) P buys 
all the stock of T during Year 1 for $100, and T becomes a member of 
the P group. T has three depreciable assets. Asset 1 has an 
unrealized loss of $20 (basis $45, value $25), asset 2 has an 
unrealized loss of $25 (basis $50, value $25), and asset 3 has an 
unrealized gain of $25 (basis $25, value $50).

[[Page 33327]]

    (b) Under paragraph (b)(2)(i) of this section, T is treated as 
having an ownership change under section 382(g) on becoming a member 
of the P group. This treatment does not depend on whether P's 
acquisition of the T stock actually constitutes an ownership change 
under section 382(g), or whether T is subject to any limitation 
under section 382. Under paragraph (b)(1) of this section, none of 
T's $45 of unrealized loss is treated as a built-in loss unless T 
has a net unrealized built-in loss under section 382(h)(3) on 
becoming a member of the P group.
    (c) Under section 382(h)(3)(A), T has a $20 net unrealized 
built-in loss on becoming a member of the P group 
(($20)+($25)+$25=($20)). Assume that this amount exceeds the 
threshold requirement in section 382(h)(3)(B). Under section 
382(h)(2)(B), the entire amount of T's $45 unrealized loss is 
treated as a built-in loss to the extent it is recognized during the 
5-year recognition period described in section 382(h)(7). Under 
paragraph (b)(2)(ii) of this section, the restriction under section 
382(h)(1)(B)(ii), which limits the amount of recognized built-in 
loss that is treated as pre-change loss to the amount of the net 
unrealized built-in loss, is inapplicable for this purpose. 
Consequently, the entire $45 of unrealized loss (not just the $20 
net unrealized loss) is treated under paragraph (b)(1) of this 
section as a built-in loss to the extent it is recognized within 5 
years of T's becoming a member of the P group. Under paragraph (a) 
of this section, a built-in loss is subject to the SRLY limitation 
under Sec. 1.1502-21T(c)(1).
    (d) Under paragraph (b)(2)(i) of this section, the results would 
be the same if T transferred all of its assets and liabilities to a 
subsidiary of the P group in a single transaction described in 
section 351.
    Example 2. Actual application of section 382 not relevant. (a) 
The facts are the same as in Example 1, except that P buys 55 
percent of the stock of T during Year 1, resulting in an ownership 
change of T under section 382(g). During Year 2, P buys the 45 
percent balance of the T stock, and T becomes a member of the P 
group.
    (b) Although T has an ownership change for purposes of section 
382 in Year 1 and not Year 2, T's joining the P group in Year 2 is 
treated as an ownership change under section 382(g) for purposes of 
this section. Consequently, for purposes of this section, whether T 
has a net unrealized built-in loss under section 382(h)(3) is 
determined as if the day T joined the P group were a change date. 
Thus, the results are the same as in Example 1.
    Example 3. Determination of a recognized built-in loss of a 
subgroup. (a) During Year 1, P buys all of the stock of S for $100, 
and S becomes a member of the P group. M is the common parent of 
another group. At the beginning of Year 7, M acquires all of the 
stock of P, and P and S become members of the M group. At the time 
of M's acquisition of the P stock, P has (disregarding the stock of 
S) a $10 net unrealized built-in gain (two depreciable assets, asset 
1 with a basis of $35 and a value of $55, and asset 2 with a basis 
of $55 and a value of $45), and S has a $75 net unrealized built-in 
loss (two depreciable assets, asset 3 with a basis of $95 and a 
value of $10, and asset 4 with a basis of $10 and a value of $20).
    (b) Under paragraph (c) of this section, P and S compose a 
subgroup on becoming members of the M group because P and S were 
continuously affiliated for the 60 month period ending immediately 
before they became members of the M group. Consequently, paragraph 
(b) of this section does not apply to P and S separately. Instead, 
their separately computed unrealized gains and losses are aggregated 
for purposes of determining whether and the extent to which any 
unrealized loss is treated as built-in loss under this section and 
is subject to the SRLY limitation under Sec. 1.1502-21T(c).
    (c) Under paragraph (c) of this section, the P subgroup has a 
net unrealized built-in loss on the day P and S become members of 
the M group determined by treating the day they become members as a 
change date. The net unrealized built-in loss is the aggregate of 
P's net unrealized built-in gain of $10 and S's net unrealized 
built-in loss of $75, or an aggregate net unrealized built-in loss 
of $65. (The stock of S owned by P is disregarded for purposes of 
determining the net unrealized built-in loss. However, any loss 
allowed on the sale of the stock within the recognition period is 
taken into account in determining recognized built-in loss.) Assume 
that the $65 net unrealized built-in loss exceeds the threshold 
requirement under section 382(h)(3)(B).
    (d) Under paragraphs (b)(1), (b)(2)(ii), and (c) of this 
section, a loss recognized during the 5-year recognition period on 
an asset of P or S held on the day that P and S became members of 
the M group is a built-in loss except to the extent the group 
establishes that such loss exceeds the amount by which the adjusted 
basis of such asset on the day the member became a member exceeded 
the fair market value of such asset on that same day. If P sells 
asset 2 for $45 in Year 7 and recognizes a $10 loss, the entire $10 
loss is treated as a built-in loss under paragraphs (b)(2)(ii) and 
(c) of this section. If S sells asset 3 for $10 in Year 7 and 
recognizes an $85 loss, the entire $85 loss is treated as a built-in 
loss under paragraphs (b)(2)(ii) and (c) of this section (not just 
the $55 balance of the P subgroup's $65 net unrealized built-in 
loss).
    (e) The determination of whether P and S constitute a SRLY 
subgroup for purposes of loss carryovers and carrybacks, and the 
extent to which built-in losses are not allowed under the SRLY 
limitation, is made under Sec. 1.1502-21T(c).
    Example 4. Computation of SRLY limitation. (a) During Year 1, 
individual A forms T by contributing $300 and T sustains a $100 net 
operating loss. During Year 2, T's assets decline in value to $100. 
At the beginning of Year 3, P buys all the stock of T for $100, and 
T becomes a member of the P group with a net unrealized built-in 
loss of $100. Assume that $100 exceeds the threshold requirements of 
section 382(h)(3)(B). During Year 3, T recognizes its unrealized 
built-in loss as a $100 ordinary loss. The members of the P group 
contribute the following net income to the consolidated taxable 
income of the P group (disregarding T's recognized built-in loss and 
any consolidated net operating loss deduction under Sec. 1.1502-21T) 
for Years 3 and 4:

------------------------------------------------------------------------
                                             Year 3    Year 4     Total 
------------------------------------------------------------------------
P group (without T).......................      $100      $100      $200
T.........................................        60        40       100
                                           -----------------------------
CTI.......................................       160       140       300
------------------------------------------------------------------------

    (b) Under paragraph (b) of this section, T's $100 ordinary loss 
in Year 3 (not taken into account in the consolidated taxable income 
computations above) is a built-in loss. Under paragraph (a) of this 
section, the built-in loss is treated as a net operating loss 
carryover for purposes of determining the SRLY limitation under 
Sec. 1.1502-21T(c).
    (c) For Year 3, Sec. 1.1502-21T(c) limits T's $100 built-in loss 
and $100 net operating loss carryover from Year 1 to the aggregate 
of the P group's consolidated taxable income through Year 3 
determined by reference to only T's items. For this purpose, 
consolidated taxable income is determined without regard to any 
consolidated net operating loss deductions under Sec. 1.1502-21T(a).
    (d) The P group's consolidated taxable income through Year 3 is 
$60 when determined by reference to only T's items. Under 
Sec. 1.1502-21T(c), the SRLY limitation for Year 3 is therefore $60.
    (e) Under paragraph (a) of this section, the $100 built-in loss 
is treated as a current deduction for all purposes other than 
determination of the SRLY limitation under Sec. 1.1502-21T(c). 
Consequently, a deduction for the built-in loss is allowed in Year 3 
before T's loss carryover from Year 1 is allowed, but only to the 
extent of the $60 SRLY limitation. None of T's Year 1 loss carryover 
is allowed because the built-in loss ($100) exceeds the SRLY 
limitation for Year 3.
    (f) The $40 balance of the built-in loss that is not allowed in 
Year 3 because of the SRLY limitation is treated as a $40 net 
operating loss arising in Year 3 that is carried to other years in 
accordance with the rules of Sec. 1.1502-21T(b). The $40 net 
operating loss is treated under paragraph (a) of this section and 
Sec. 1.1502-21T(c)(1)(ii) as a loss carryover or carryback from Year 
3 that arises in a SRLY, and is subject to the rules of Sec. 1.1502-
21T (including Sec. 1.1502-21T(c)) rather than this section.
    (g) The facts are the same as in paragraphs (a) through (f) of 
this Example 4, except that T also recognizes additional built-in 
losses in Year 4. For purposes of determining the SRLY limitation 
for these additional losses in Year 4 (or any subsequent year), the 
$60 of built-in loss allowed as a deduction in Year 3 is treated 
under paragraph (a) of this section as a deduction in Year 3 that 
reduces the P group's consolidated taxable income when determined by 
reference to only T's items.
    Example 5. Built-in loss exceeding consolidated taxable income 
in the year recognized. (a) P buys all the stock of T during Year 1, 
and T becomes a member of the P group. At the time of acquisition, T 
has

[[Page 33328]]

a depreciable asset with an unrealized loss of $45 (basis $100, 
value $55), which exceeds the threshold requirements of section 
382(h)(3)(B). During Year 2, T sells its asset for $55 and 
recognizes the unrealized built-in loss. The P group has $10 of 
consolidated taxable income in Year 2, computed by disregarding T's 
recognition of the $45 built-in loss and the consolidated net 
operating loss deduction, while the consolidated taxable income 
would be $25 if determined by reference to only T's items (other 
than the $45 loss).
    (b) T's $45 loss is recognized in Year 2 and, under paragraph 
(b) of this section, constitutes a built-in loss. Under paragraph 
(a) of this section and Sec. 1.1502-21T(c)(1)(ii), the loss is 
treated as a net operating loss carryover to Year 2 for purposes of 
applying the SRLY limitation under Sec. 1.1502-21T(c).
    (c) For Year 2, T's SRLY limitation is the aggregate of the P 
group's consolidated taxable income through Year 2 determined by 
reference to only T's items. For this purpose, consolidated taxable 
income is determined by disregarding any built-in loss that is 
treated as a net operating loss carryover, and any consolidated net 
operating loss deductions under Sec. 1.1502-21T(a). Consolidated 
taxable income so determined is $25.
    (d) Under Sec. 1.1502-21T(c), $25 of the $45 built-in loss could 
be deducted in Year 2. Because the P group has only $10 of 
consolidated taxable income (determined without regard to the $45), 
the $25 loss creates a consolidated net operating loss of $15. This 
loss is carried back or over under the rules of Sec. 1.1502-21T(b) 
and absorbed under the rules of Sec. 1.1502-21T(a). This loss is not 
treated as arising in a SRLY (see Sec. 1.1502-21T(c)(1)(ii)) and 
therefore is not subject to the SRLY limitation under Sec. 1.1502-
21T(c) in any consolidated return year of the group to which it is 
carried. The remaining $20 is treated as a loss carryover arising in 
a SRLY and is subject to the limitation of Sec. 1.1502-21T(c) in the 
year to which it is carried.

    (e) Predecessors and successors. For purposes of this section, any 
reference to a corporation or member includes, as the context may 
require, a reference to a successor or predecessor, as defined in 
Sec. 1.1502-1(f)(4).
    (f) Effective date--(1) In general. This section applies to built-
in losses recognized in consolidated return years beginning on or after 
January 1, 1997.
    (2) Application to prior periods. See Sec. 1.1502-21T(g)(3) for 
rules generally permitting a group to apply the rules of this section 
to consolidated return years ending on or after January 29, 1991, and 
beginning before January 1, 1997. A group must treat all corporations 
that were affiliated on January 1, 1987, and continuously thereafter as 
having met the 60 consecutive month requirement of paragraph (c)(2) of 
this section on any day before January 1, 1992, on which the 
determination of net unrealized built-in gain or loss of a subgroup is 
made.
    Par. 12. Section 1.1502-21 is redesignated as Sec. 1.1502-21A; the 
heading of the newly designated Sec. 1.1502-21A is revised; and 
paragraphs (d)(4), (e)(3) and (h) are added to read as follows:


Sec. 1.1502-21A  Consolidated net operating loss deduction generally 
applicable for consolidated return years beginning before January 1, 
1997.

* * * * *
    (d) * * *
    (4) Cross-reference. See Sec. 1.1502-21T(d)(1) for the rule that 
applies the principles of this paragraph (d) in consolidated return 
years beginning on or after January 1, 1997, with respect to a 
consolidated return change of ownership occurring before January 1, 
1997.
    (e) * * *
    (3) Effective date. This paragraph (e) disallows or reduces the net 
operating loss carryovers of a member as a result of a transaction to 
which old section 382 (as defined in Sec. 1.382-2T(f)(21)) applies. See 
Sec. 1.1502-21T(d)(2) for the rule that applies the principles of this 
paragraph (e) in consolidated return years beginning on or after 
January 1, 1997, with respect to such a transaction.
* * * * * -
    (h) Effective date. Except as provided in Sec. 1.1502-21T (d)(1), 
(d)(2), and (g)(3), this section applies to consolidated return years 
beginning before January 1, 1997. -
    Par. 13. Section 1.1502-21T is added to read as follows:


Sec. 1.1502-21T  Net operating losses (temporary). -

    (a) Consolidated net operating loss deduction. The consolidated net 
operating loss deduction (or CNOL deduction) for any consolidated 
return year is the aggregate of the net operating loss carryovers and 
carrybacks to the year. The net operating loss carryovers and 
carrybacks consist of-- -
    (1) Any CNOLs (as defined in paragraph (e) of this section) of the 
consolidated group; and -
    (2) Any net operating losses of the members arising in separate 
return years. -
    (b) Net operating loss carryovers and carrybacks to consolidated 
return and separate return years. Net operating losses of members 
arising during a consolidated return year are taken into account in 
determining the group's CNOL under paragraph (e) of this section for 
that year. Losses taken into account in determining the CNOL may be 
carried to other taxable years (whether consolidated or separate) only 
under this paragraph (b). -
    (1) Carryovers and carrybacks generally. The net operating loss 
carryovers and carrybacks to a taxable year are determined under the 
principles of section 172 and this section. Thus, losses permitted to 
be absorbed in a consolidated return year generally are absorbed in the 
order of the taxable years in which they arose, and losses carried from 
taxable years ending on the same date, and which are available to 
offset consolidated taxable income for the year, generally are absorbed 
on a pro rata basis. See Example 2 of paragraph (c)(1)(iii) of this 
section for an illustration of pro rata absorption of losses subject to 
a SRLY limitation. Additional rules provided under the Code or 
regulations also apply. See, e.g., section 382(l)(2)(B). -
    (2) Carryovers and carrybacks of CNOLs to separate return years--
(i) In general. If any CNOL that is attributable to a member may be 
carried to a separate return year of the member, the amount of the CNOL 
that is attributable to the member is apportioned to the member 
(apportioned loss) and carried to the separate return year. If carried 
back to a separate return year, the apportioned loss may not be carried 
back to an equivalent, or earlier, consolidated return year of the 
group; if carried over to a separate return year, the apportioned loss 
may not be carried over to an equivalent, or later, consolidated return 
year of the group. For rules permitting the reattribution of losses of 
a subsidiary to the common parent when loss is disallowed on the 
disposition of subsidiary stock, see Sec. 1.1502-20(g). -
    (ii) Special rules--(A) Year of departure from group. If a 
corporation ceases to be a member during a consolidated return year, 
net operating loss carryovers attributable to the corporation are first 
carried to the consolidated return year, and only the amount so 
attributable that is not absorbed by the group in that year is carried 
to the corporation's first separate return year. -
    (B) Offspring rule. In the case of a member that has been a member 
continuously since its organization, the CNOL attributable to the 
member is included in the carrybacks to consolidated return years 
before the member's existence. See paragraph (f) of this section for 
applications to predecessors and successors. If the group did not file 
a consolidated return for a carryback year, the loss may be carried 
back to a separate return year of the common parent under paragraph 
(b)(2)(i) of this section, but only if the common parent was not a 
member of a different consolidated group or of an

[[Page 33329]]

affiliated group filing separate returns for the year to which the loss 
is carried or any subsequent year in the carryback period. Following an 
acquisition described in Sec. 1.1502-75(d) (2) or (3), references to 
the common parent are to the corporation that was the common parent 
immediately before the acquisition. -
    (iii) Equivalent years. Taxable years are equivalent if they bear 
the same numerical relationship to the consolidated return year in 
which a CNOL arises, counting forward or backward from the year of the 
loss. For example, in the case of a member's third taxable year (which 
was a separate return year) that preceded the consolidated return year 
in which the loss arose, the equivalent year is the third consolidated 
return year preceding the consolidated return year in which the loss 
arose. See paragraph (b)(3)(iii) of this section for certain short 
taxable years that are disregarded in making this determination. -
    (iv) Amount of CNOL attributable to a member. The amount of a CNOL 
that is attributable to a member is determined by a fraction the 
numerator of which is the separate net operating loss of the member for 
the year of the loss and the denominator of which is the sum of the 
separate net operating losses for that year of all members having such 
losses. For this purpose, the separate net operating loss of a member 
is determined by computing the CNOL by reference to only the member's 
items of income, gain, deduction, and loss, including the member's 
losses and deductions actually absorbed by the group in the taxable 
year (whether or not absorbed by the member). -
    (v) Examples. For purposes of the examples in this section, unless 
otherwise stated, all groups file consolidated returns, all 
corporations have calendar taxable years, the facts set forth the only 
corporate activity, value means fair market value and the adjusted 
basis of each asset equals its value, all transactions are with 
unrelated persons, and the application of any limitation or threshold 
under section 382 is disregarded. The principles of this paragraph 
(b)(2) are illustrated by the following examples:

    Example 1. Offspring rule. (a) P is formed at the beginning of 
Year 1 and files a separate return. P forms S on March 15 of Year 2, 
and P and S file a consolidated return. P purchases all the stock of 
T at the beginning of Year 3, and T becomes a member of the P group. 
T was formed in Year 2 and filed a separate return for that year. P, 
S, and T sustain a $1,100 CNOL in Year 3 and, under paragraph 
(b)(2)(iv) of this section, the loss is attributable $200 to P, $300 
to S, and $600 to T. -
    (b) Of the $1,100 CNOL in Year 3, the $500 amount of the CNOL 
that is attributable to P and S ($200 + $300) may be carried to P's 
separate return in Year 1. Even though S was not in existence in 
Year 1, the $300 amount of the CNOL attributable to S may be carried 
back to P's separate return in Year 1 because S (unlike T) has been 
a member of the P group since its organization and P is a qualified 
parent under paragraph (b)(2)(ii)(B) of this section. To the extent 
not absorbed in that year, the loss may then be carried to the P 
group's return in Year 2. The $600 amount of the CNOL attributable 
to T is a net operating loss carryback to T's separate return in 
Year 2. -
    Example 2. Departing members. (a) The facts are the same as in 
Example 1. In addition, on June 15 of Year 4, P sells all the stock 
of T. The P group's consolidated return for Year 4 includes the 
income of T through June 15. T files a separate return for the 
period from June 16 through December 31. -
    (b) $600 of the Year 3 CNOL attributable to T is apportioned to 
T and is carried back to its separate return in Year 2. To the 
extent the $600 is not absorbed in T's separate return in Year 2, it 
is carried to the consolidated return in Year 4 before being carried 
to T's separate return in Year 4. Any portion of the loss not 
absorbed in T's Year 2 or in the P group's Year 4 is then carried to 
T's separate return in Year 4.

    -(3) Special rules--(i) Election to relinquish carryback. A group 
may make an irrevocable election under section 172(b)(3) to relinquish 
the entire carryback period with respect to a CNOL for any consolidated 
return year. 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 entitled ``THIS IS AN ELECTION UNDER SECTION 1.1502-
21T(b)(3)(i) TO WAIVE THE ENTIRE CARRYBACK PERIOD PURSUANT TO SECTION 
172(b)(3) FOR THE [insert consolidated return year] CNOLs OF THE 
CONSOLIDATED GROUP OF WHICH [insert name and employer identification 
number of common parent] IS THE COMMON PARENT.'' The statement must be 
signed by the common parent and filed with the group's income tax 
return for the consolidated return year in which the loss arises.
    (ii) Special election for groups that include insolvent financial 
institutions. For rules applicable to relinquishing the entire 
carryback period with respect to losses attributable to insolvent 
financial institutions, see Sec. 301.6402-7 of this chapter. -
    (iii) Short years in connection with transactions to which section 
381(a) applies. If a member distributes or transfers assets to a 
corporation that is a member immediately after the distribution or 
transfer in a transaction to which section 381(a) applies, the 
transaction does not cause the distributor or transferor to have a 
short year within the consolidated return year of the group in which 
the transaction occurred that is counted as a separate year for 
purposes of determining the years to which a net operating loss may be 
carried. -
    (iv) Special status losses. [Reserved] -
    (c) Limitations on net operating loss carryovers and carrybacks 
from separate return limitation years--(1) SRLY limitation--(i) General 
rule. The aggregate of the net operating loss carryovers and carrybacks 
of a member arising (or treated as arising) in SRLYs that are included 
in the CNOL deductions for all consolidated return years of the group 
under paragraph (a) of this section may not exceed the aggregate 
consolidated taxable income for all consolidated return years of the 
group determined by reference to only the member's items of income, 
gain, deduction, and loss. For this purpose-- -
    (A) Consolidated taxable income is computed without regard to CNOL 
deductions; -
    (B) Consolidated taxable income takes into account the member's 
losses and deductions (including capital losses) actually absorbed by 
the group in consolidated return years (whether or not absorbed by the 
member); -
    (C) In computing consolidated taxable income, the consolidated 
return years of the group include only those years, including the year 
to which the loss is carried, that the member has been continuously 
included in the group's consolidated return, but exclude: -
    (1) For carryovers, any years ending after the year to which the 
loss is carried; and -
    (2) For carrybacks, any years ending after the year in which the 
loss arose; and -
    (D) The treatment under Sec. 1.1502-15T of a built-in loss as a 
hypothetical net operating loss carryover in the year recognized is 
solely for purposes of determining the limitation under this paragraph 
(c) with respect to the loss in that year and not for any other 
purpose. Thus, for purposes of determining consolidated taxable income 
for any other losses, a built-in loss allowed under this section in the 
year it arises is taken into account. -
    (ii) Losses treated as arising in SRLYs. If a net operating loss 
carryover or carryback did not arise in a SRLY but is attributable to a 
built-in loss (as defined under Sec. 1.1502-15T), the carryover or 
carryback is treated for purposes of this paragraph (c) as arising in a 
SRLY if the built-in loss was not allowed, after application of the 
SRLY limitation, in the year it arose. For an

[[Page 33330]]

illustration, see Sec. 1.1502-15T(d), Example 5. -
    (iii) Examples. The principles of this paragraph (c)(1) are 
illustrated by the following examples:

    Example 1. Determination of SRLY limitation. (a) In Year 1, 
individual A forms T and T sustains a $100 net operating loss that 
is carried forward. P buys all the stock of T at the beginning of 
Year 2, and T becomes a member of the P group. The P group has $300 
of consolidated taxable income in Year 2 (computed without regard to 
the CNOL deduction). Such consolidated taxable income would be $70 
if determined by reference to only T's items.
    (b) T's $100 net operating loss carryover from Year 1 arose in a 
SRLY. See Sec. 1.1502-1(f)(2)(iii). Thus, the $100 net operating 
loss carryover is subject to the SRLY limitation in paragraph (c)(1) 
of this section. The SRLY limitation for Year 2 is consolidated 
taxable income determined by reference to only T's items, or $70. 
Thus, $70 of the loss is included under paragraph (a) of this 
section in the P group's CNOL deduction for Year 2.
    (c) The facts are the same as in paragraph (a) of this Example 
1, except that such consolidated taxable income (computed without 
regard to the CNOL deduction and by reference to only T's items) is 
a loss (a CNOL) of $370. Because the SRLY limitation may not exceed 
the consolidated taxable income determined by reference to only T's 
items, and such items aggregate to a CNOL, T's $100 net operating 
loss carryover from Year 1 is not allowed under the SRLY limitation 
in Year 2. Moreover, if consolidated taxable income (computed 
without regard to the CNOL deduction and by reference to only T's 
items) did not exceed $370 in Year 3, the carryover would still be 
restricted under Sec. 1.1502-21T(c) in Year 3, because the aggregate 
consolidated taxable income for all consolidated return years of the 
group computed by reference to only T's items would not be a 
positive amount.
    Example 2. Net operating loss carryovers. (a) In Year 1, 
individual A forms P and P sustains a $40 net operating loss that is 
carried forward. P has no income in Year 2. Unrelated corporation T 
sustains a net operating loss of $50 in Year 2 that is carried 
forward. P buys the stock of T during Year 3, but T is not a member 
of the P group for each day of the year. P and T file separate 
returns and sustain net operating losses of $120 and $60, 
respectively, for Year 3. The P group files consolidated returns 
beginning in Year 4. During Year 4, the P group has $160 of 
consolidated taxable income (computed without regard to the CNOL 
deduction). Such consolidated taxable income would be $70 if 
determined by reference to only T's items. These results are 
summarized as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                        Separate                
                                                            Separate      Separate     affiliated   Consolidated
                                                             year 1        year 2        year 3        year 4   
----------------------------------------------------------------------------------------------------------------
P.......................................................         $(40)           $0         $(120)           $90
T.......................................................            0           (50)          (60)            70
                                                         -------------------------------------------------------
CTI.....................................................  ............  ............  ............           160
----------------------------------------------------------------------------------------------------------------

    (b) P's Year 1, Year 2, and Year 3 are not SRLYs with respect to 
the P group. See Sec. 1.1502-1(f)(2)(i). Thus, P's $40 net operating 
loss arising in Year 1 and $120 net operating loss arising in Year 3 
are not subject to the SRLY limitation under paragraph (c) of this 
section. Under the principles of section 172, paragraph (b) of this 
section requires that the loss arising in Year 1 be the first loss 
absorbed by the P group in Year 4. Absorption of this loss leaves 
$120 of the group's consolidated taxable income available for offset 
by other loss carryovers.
    (c) T's Year 2 and Year 3 are SRLYs with respect to the P group. 
See Sec. 1.1502-1(f)(2)(ii). Thus, T's $50 net operating loss 
arising in Year 2 and $60 net operating loss arising in Year 3 are 
subject to the SRLY limitation. Under paragraph (c)(1) of this 
section, the SRLY limitation for Year 4 is $70, and under paragraph 
(b) of this section, T's $50 loss from Year 2 must be included under 
paragraph (a) of this section in the P group's CNOL deduction for 
Year 4. The absorption of this loss leaves $70 of the group's 
consolidated taxable income available for offset by other loss 
carryovers.
    (d) P and T each carry over net operating losses to Year 4 from 
a taxable year ending on the same date (Year 3). The losses carried 
over from Year 3 total $180. Under paragraph (b) of this section, 
the losses carried over from Year 3 are absorbed on a pro rata 
basis, even though one arises in a SRLY and the other does not. 
However, the group cannot absorb more than $20 of T's $60 net 
operating loss arising in Year 3 because its $70 SRLY limitation for 
Year 4 is reduced by T's $50 Year 2 SRLY loss already included in 
the CNOL deduction for Year 4. Thus, the absorption of Year 3 losses 
is as follows:
    Amount of P's Year 3 losses absorbed = $120/($120 + $20) x $70 = 
$60.
    Amount of T's Year 3 losses absorbed = Sec. 20/($120 + $20) x 
$70 = $10.
    (e) The absorption of $10 of T's Year 3 loss further reduces T's 
SRLY limitation to $10 ($70 of initial SRLY limitation, reduced by 
the $60 net operating loss already included in the CNOL deductions 
for Year 4 under paragraph (a) of this section).
    (f) P carries its remaining $60 Year 3 net operating loss and T 
carries its remaining $50 Year 3 net operating loss over to Year 5. 
Assume that, in Year 5, the P group has $90 of consolidated taxable 
income (computed without regard to the CNOL deduction). The group's 
CTI determined by reference to only T's items is a CNOL of $4. For 
Year 5, the CNOL deduction includes $60 of P's Year 3 loss but only 
$6 of T's Year 3 loss (the aggregate consolidated taxable income for 
Years 4 and 5 determined by reference to T's items, or $66, reduced 
by T's SRLY losses actually absorbed by the group in Year 4, or 
$60).
    Example 3. Net operating loss carrybacks. (a)(1) P owns all of 
the stock of S and T. The members of the P group contribute the 
following to the consolidated taxable income of the P group for 
Years 1, 2, and 3:

----------------------------------------------------------------------------------------------------------------
                                                                      Year 1     Year 2     Year 3       Total  
----------------------------------------------------------------------------------------------------------------
P.................................................................       $100        $60        $80        $240 
S.................................................................         20         20         30          70 
T.................................................................         30         10        (50)        (10)
                                                                   ---------------------------------------------
CTI...............................................................        150         90         60         300 
----------------------------------------------------------------------------------------------------------------

    (2) P sells all of the stock of T to individual A at the 
beginning of Year 4. For its Year 4 separate return year, T has a 
net operating loss of $30.
    (b) T's Year 4 is a SRLY with respect to the P group. See 
Sec. 1.1502-1(f)(1). T's $30 net operating loss carryback to the P 
group from Year 4 is not allowed under Sec. 1.1502-21T(c) to be 
included in the CNOL deduction under paragraph (a) of this section 
for Year 1, 2, or 3, because the P group's consolidated taxable 
income would not be a positive amount if determined by reference to 
only T's items for all consolidated return years through Year 4 
(without regard to the $30 net operating loss). However, the $30 
loss is carried forward to T's Year 5 and succeeding taxable years 
as provided under the Code.
    -Example 4. Computation of SRLY limitation for built-in losses 
treated as net operating loss carryovers. (a) In Year 1, individual 
A forms T by contributing $300 and T sustains a $100 net operating 
loss. During Year 2, T's assets decline in value by

[[Page 33331]]

$100. At the beginning of Year 3, P buys all the stock of T for 
$100, and T becomes a member of the P group. At the time of the 
acquisition, T has a $100 net unrealized built-in loss, which 
exceeds the threshold requirements of section 382(h)(3)(B). During 
Year 3, T recognizes its unrealized loss as a $100 ordinary loss. 
The members of the P group contribute the following to the 
consolidated taxable income of the P group for Years 3 and 4 
(computed without regard to T's recognition of its unrealized loss 
and any CNOL deduction under Sec. 1.1502-21T):

------------------------------------------------------------------------
                                             Year 3    Year 4     Total 
------------------------------------------------------------------------
P group (without T).......................      $100      $100      $200
T.........................................        60        40       100
                                           -----------------------------
CTI.......................................       160       140       300
------------------------------------------------------------------------

    (b) Under Sec. 1.1502-15T(a), T's $100 of ordinary loss in Year 
3 constitutes a built-in loss that is subject to the SRLY limitation 
under Sec. 1.1502-21T(c). The amount of the limitation is determined 
by treating the deduction as a net operating loss carryover from a 
SRLY. The built-in loss is therefore subject to a $60 SRLY 
limitation for Year 3. The built-in loss is treated as a net 
operating loss carryover solely for purposes of determining the 
extent to which the loss is not allowed by reason of the SRLY 
limitation, and for all other purposes the loss remains a loss 
arising in Year 3. Consequently, under paragraph (b) of this 
section, the $60 allowed under the SRLY limitation is absorbed by 
the P group before T's $100 net operating loss carryover from Year 1 
is allowed.
    (c) Under Sec. 1.1502-15T(a), the $40 balance of the built-in 
loss that is not allowed in Year 3 because of the SRLY limitation is 
treated as a $40 net operating loss arising in Year 3 that is 
subject to the SRLY limitation because, under Sec. 1.1502-
21T(c)(1)(ii), Year 3 is treated as a SRLY, and is carried to other 
years in accordance with the rules of paragraph (b) of this section. 
The SRLY limitation for Year 4 is the P group's consolidated taxable 
income for Year 3 and Year 4 determined by reference to only T's 
items and without regard to the group's CNOL deductions ($60+$40), 
reduced by T's loss actually absorbed by the group in Year 3 ($60). 
The SRLY limitation for Year 4 is $40.
    (d) Under paragraph (c) of this section and the principles of 
section 172(b), $40 of T's $100 net operating loss carryover from 
Year 1 is included in the CNOL deduction under paragraph (a) of this 
section in Year 4.

    (2) SRLY subgroup limitation. In the case of a net operating loss 
carryover or carryback for which there is a SRLY subgroup, the 
principles of paragraph (c)(1) of this section apply to the SRLY 
subgroup, and not separately to its members. Thus, the contribution to 
consolidated taxable income and the net operating loss carryovers and 
carrybacks arising (or treated as arising) in SRLYs that are included 
in the CNOL deductions for all consolidated return years of the group 
under paragraph (a) of this section are based on the aggregate amounts 
of income, gain, deduction, and loss of the members of the SRLY 
subgroup for the relevant consolidated return years (as provided in 
paragraph (c)(1)(i)(C) of this section). For an illustration of 
aggregate amounts during the relevant consolidated return years 
following the year in which a member of a SRLY subgroup ceases to be a 
member of the group, see paragraph (c)(2)(vii) Example 4 of this 
section. A SRLY subgroup may exist only for a carryover or carryback 
arising in a year that is not a SRLY (and is not treated as a SRLY 
under paragraph (c)(1)(ii) of this section) with respect to another 
group (the former group), whether or not the group is a consolidated 
group. A separate SRLY subgroup is determined for each such carryover 
or carryback. A consolidated group may include more than one SRLY 
subgroup and a member may be a member of more than one SRLY subgroup. 
Solely for purposes of determining the members of a SRLY subgroup with 
respect to a loss:
    (i) Carryovers. In the case of a carryover, the SRLY subgroup is 
composed of the member carrying over the loss (the loss member) and 
each other member that was a member of the former group that becomes a 
member of the group at the same time as the loss member. A member 
remains a member of the SRLY subgroup until it ceases to be affiliated 
with the loss member. The aggregate determination described in 
paragraph (c)(1) of this section and this paragraph (c)(2) includes the 
amounts of income, gain, deduction, and loss of each member of the SRLY 
subgroup for the consolidated return years during which it remains a 
member of the SRLY subgroup. For an illustration of the aggregate 
determination of a SRLY subgroup, see paragraph (c)(2)(vii) Example 2 
of this section.
    (ii) Carrybacks. In the case of a carryback, the SRLY subgroup is 
composed of the member carrying back the loss (the loss member) and 
each other member of the group from which the loss is carried back that 
has been continuously affiliated with the loss member from the year to 
which the loss is carried through the year in which the loss arises.
    (iii) Built-in losses. In the case of a built-in loss, the SRLY 
subgroup is composed of the member recognizing the loss (the loss 
member) and each other member that was part of the subgroup with 
respect to the loss determined under Sec. 1.1502-15T(c)(2) immediately 
before the members became members of the group. The principles of 
paragraphs (c)(2)(i) and (ii) of this section apply to determine the 
SRLY subgroup for the built-in loss that is, under paragraph (c)(1)(ii) 
of this section, treated as arising in a SRLY with respect to the group 
in which the loss is recognized. For this purpose and as the context 
requires, a reference in those paragraphs to a group or former group is 
a reference to the subgroup determined under Sec. 1.1502-15T(c)(2).
    (iv) Principal purpose of avoiding or increasing a SRLY limitation. 
The members composing a SRLY subgroup are not treated as a SRLY 
subgroup if any of them is formed, acquired, or availed of with a 
principal purpose of avoiding the application of, or increasing any 
limitation under, this paragraph (c). Any member excluded from a SRLY 
subgroup, if excluded with a principal purpose of so avoiding or 
increasing any SRLY limitation, is treated as included in the SRLY 
subgroup.
    (v) Coordination with other limitations. This paragraph (c)(2) does 
not allow a net operating loss to offset income to the extent 
inconsistent with other limitations or restrictions on the use of 
losses, such as a limitation based on the nature or activities of 
members. For example, any dual consolidated loss may not reduce the 
taxable income to an extent greater than that allowed under section 
1503(d) and Sec. 1.1503-2. See also Sec. 1.1502-47(q) (relating to 
preemption of rules for life-nonlife groups).
    (vi) Anti-duplication. If the same item of income or deduction 
could be taken into account more than once in determining a limitation 
under this paragraph (c), or in a manner inconsistent with any other 
provision of the Code or regulations incorporating this paragraph (c), 
the item of income or deduction is taken into account only once and in 
such manner that losses are absorbed in accordance with the ordering 
rules in paragraph (b) of this section and the underlying purposes of 
this section.
    (vii) Examples. The principles of this paragraph (c)(2) are 
illustrated by the following examples:

    Example 1. Members of SRLY subgroups. (a) During Year 1, P 
sustains a $50 net operating loss. At the beginning of Year 2, P 
buys all the stock of S at a time when the aggregate basis of S's 
assets exceeds their aggregate value by $70 (as determined under 
Sec. 1.1502-15T). At the beginning of Year 3, P buys all the stock 
of T, T has a $60 net operating loss carryover at the time of the 
acquisition, and T becomes a member of the P group. During Year 4, S 
forms S1 and T forms T1, each by contributing assets with built-in 
gains which are, in the aggregate, material. S1 and T1 become 
members of the P group. M is the common parent of another group. 
During Year 7, M acquires all of the

[[Page 33332]]

stock of P, and the members of the P group become members of the M 
group for the balance of Year 7. The $50 and $60 loss carryovers of 
P and T are carried to Year 7 of the M group, and the value and 
basis of S's assets did not change after it became a member of the 
former P group.
    (b) Under paragraph (c)(2) of this section, a separate SRLY 
subgroup is determined for each loss carryover and built-in loss. In 
the P group, P's $50 loss carryover is not treated as arising in a 
SRLY. See Sec. 1.1502-1(f). Consequently, the carryover is not 
subject to limitation under paragraph (c) of this section in the P 
group.
    (c) In the M group, P's $50 loss carryover is treated as arising 
in a SRLY and is subject to the limitation under paragraph (c) of 
this section. A SRLY subgroup with respect to that loss is composed 
of members which were members of the P group, the group as to which 
the loss was not a SRLY. The SRLY subgroup is composed of P, the 
member carrying over the loss, and each other member of the P group 
that became a member of the M group at the same time as P. A member 
of the SRLY subgroup remains a member until it ceases to be 
affiliated with P. For Year 7, the SRLY subgroup is composed of P, 
S, T, S1, and T1.
    (d) In the P group, S's $70 unrealized loss, if recognized 
within the 5-year recognition period after S becomes a member of the 
P group, is subject to limitation under paragraph (c) of this 
section. See Sec. 1.1502-15T and paragraph (c)(1)(ii) of this 
section. Because S was not continuously affiliated with P, T, or T1 
for 60 consecutive months prior to joining the P group, these 
corporations cannot be included in a SRLY subgroup with respect to 
S's unrealized loss in the P group. See paragraph (c)(2)(iii) of 
this section. As a successor to S, S1 is included in a subgroup with 
S in the P group. Because S did not cease to exist, however, S1's 
contribution to consolidated taxable income may not be used to 
increase the consolidated taxable income of the P group that may be 
offset by the built-in loss. See paragraph (f) of this section.
    (e) In the M group, S's $70 unrealized loss, if recognized 
within the 5-year recognition period after S becomes a member of the 
M group, is subject to limitation under paragraph (c) of this 
section. Prior to becoming a member of the M group, S had been 
continuously affiliated with P (but not T or T1) for 60 consecutive 
months and S1 is a successor that has remained continuously 
affiliated with S. Those members had a net unrealized built-in loss 
immediately before they became members of the group under 
Sec. 1.1502-15T(c). Consequently, in Year 7, S, S1, and P compose a 
subgroup in the M group with respect to S's unrealized loss. S1's 
contribution to consolidated taxable income may not be used to 
increase the consolidated taxable income of the M group that may be 
offset by the recognized built-in loss. See paragraph (f) of this 
section.
    (f) In the P group, T's $60 loss carryover arose in a SRLY and 
is subject to limitation under paragraph (c) of this section. P, S, 
and S1 were not members of the group in which T's loss arose and 
cannot be members of a SRLY subgroup with respect to the carryover 
in the P group. See paragraph (c)(2)(i) of this section. As a 
successor to T, T1 is included in a SRLY subgroup with T in the P 
group; however, because T did not cease to exist, T1's contribution 
to consolidated taxable income may not be used to increase the 
consolidated taxable income of the P group that may be offset by the 
carryover. See paragraph (f) of this section.
    (g) In the M group, T's $60 loss carryover arose in a SRLY and 
is subject to limitation under paragraph (c) of this section. T and 
T1 remain the only members of a SRLY subgroup with respect to the 
carryover, but T1's contribution to consolidated taxable income may 
not be used to increase consolidated taxable income of the M group 
that may be offset by the carryover. See paragraph (f) of this 
section.
    Example 2. Computation of SRLY subgroup limitation. (a) 
Individual A forms S. Individual B forms T. In Year 2, P buys all 
the stock of S and T from A and B, and S and T become members of the 
P group. For Year 3, the P group has a $45 CNOL, which is 
attributable to P, and which P carries forward. M is the common 
parent of another group. At the beginning of Year 4, M acquires all 
of the stock of P and the former members of the P group become 
members of the M group.
    (b) P's year to which the loss is attributable, Year 3, is a 
SRLY with respect to the M group. See Sec. 1.1502-1(f)(1). However, 
P, S, and T compose a SRLY subgroup with respect to the Year 3 loss 
under paragraph (c)(2)(i) of this section because Year 3 is not a 
SRLY (and is not treated as a SRLY) with respect to the P group. P's 
loss is carried over to the M group's Year 4 and is therefore 
subject to the SRLY subgroup limitation in paragraph (c)(2) of this 
section.
    (c) In Year 4, the M group has $10 of consolidated taxable 
income (computed without regard to the CNOL deduction for Year 4). 
However, such consolidated taxable income would be $45 if determined 
by reference to only the items of P, S, and T, the members included 
in the SRLY subgroup with respect to P's loss carryover. Therefore, 
the SRLY subgroup limitation under paragraph (c)(2) of this section 
for P's net operating loss carryover from Year 3 is $45. Because the 
M group has only $10 of consolidated taxable income in Year 4, 
however, only $10 of P's net operating loss carryover is included in 
the CNOL deduction under paragraph (a) of this section in Year 4.
    (d) In Year 5, the M group has $100 of consolidated taxable 
income (computed without regard to the CNOL deduction for Year 5). 
Neither P, S, nor T has any items of income, gain, deduction, or 
loss in Year 5. Although the members of the SRLY subgroup do not 
contribute to the $100 of consolidated taxable income in Year 5, the 
SRLY subgroup limitation for Year 5 is $35 (the sum of SRLY subgroup 
consolidated taxable income of $45 in Year 4 and $0 in Year 5, less 
the $10 net operating loss carryover actually absorbed by the M 
group in Year 4). Therefore, $35 of P's net operating loss carryover 
is included in the CNOL deduction under paragraph (a) of this 
section in Year 5.
    Example 3. Inclusion in more than one SRLY subgroup. (a) At the 
beginning of Year 1, S buys all the stock of T, and T becomes a 
member of the S group. For Year 1, the S group has a CNOL of $10, 
all of which is attributable to S and is carried over to Year 2. At 
the beginning of Year 2, P buys all the stock of S, and S and T 
become members of the P group. For Year 2, the P group has a CNOL of 
$35, all of which is attributable to P and is carried over to Year 
3. At the beginning of Year 3, M acquires all of the stock of P and 
the former members of the P group become members of the M group.
    (b) P's and S's net operating losses arising in SRLYs with 
respect to the M group are subject to limitation under paragraph (c) 
of this section. P, S, and T compose a SRLY subgroup for purposes of 
determining the limitation for P's $35 net operating loss carryover 
arising in Year 2 because, under paragraph (c)(2)(i) of this 
section, Year 2 is not a SRLY with respect to the P group. 
Similarly, S and T compose a SRLY subgroup for purposes of 
determining the limitation for S's $10 net operating loss carryover 
arising in Year 1 because Year 1 is not a SRLY with respect to the S 
group.
    (c) S and T are members of both the SRLY subgroup with respect 
to P's losses and the SRLY subgroup with respect to S's losses. 
Under paragraph (c)(2) of this section, S's and T's items cannot be 
included in the determination of the SRLY subgroup limitation for 
both SRLY subgroups for the same consolidated return year; paragraph 
(c)(2)(vi) of this section requires the M group to consider the 
items of S and T only once so that the losses are absorbed in the 
order of the taxable years in which they were sustained. Because S's 
loss was incurred in Year 1, while P's loss was incurred in Year 2, 
the items will be added in the determination of the consolidated 
taxable income of the S and T SRLY subgroup to enable S's loss to be 
absorbed first. The taxable income of the P, S, and T SRLY subgroup 
is then computed by including the consolidated taxable income for 
the S and T SRLY subgroup less the amount of any net operating loss 
carryover of S that is absorbed after applying this section to the S 
subgroup for the year.
    Example 4. Corporation ceases to be affiliated with a SRLY 
subgroup. (a) P and S are members of the P group and the P group has 
a CNOL of $30 in Year 1, all of which is attributable to P and 
carried over to Year 2. At the beginning of Year 2, M acquires all 
of the stock of P, and P and S become members of the M group. P and 
S compose a SRLY subgroup with respect to P's net operating loss 
carryover. For Year 2, consolidated taxable income of the M group 
determined by reference to only the items of P (and without regard 
to the CNOL deduction for Year 2) is $40. However, such consolidated 
taxable income of the M group determined by reference to the items 
of both P and S is a loss of $20. Thus, the SRLY subgroup limitation 
under paragraph (c)(2) of this section prevents the M group from 
including any of P's net operating loss carryover in the CNOL 
deduction under paragraph (a) of this section in Year 2, and P 
carries the loss to Year 3.

[[Page 33333]]

    (b) At the end of Year 2, P sells all of the S stock and S 
ceases to be a member of the M group and, in turn, ceases to be 
affiliated with the P subgroup. For Year 3, consolidated taxable 
income of the M group is $50 (determined without regard to the CNOL 
deduction for Year 3), and such consolidated taxable income would be 
$10 if determined by reference to only items of P. However, the 
limitation under paragraph (c) of this section for Year 3 for P's 
net operating loss carryover still prevents the M group from 
including any of P's loss in the CNOL deduction under paragraph (a) 
of this section. The limitation results from the inclusion of S's 
items for Year 2 in the determination of the SRLY subgroup 
limitation for Year 3 even though S ceased to be a member of the M 
group (and the P subgroup) at the end of Year 2. Thus, the M group's 
consolidated taxable income determined by reference to only the SRLY 
subgroup members' items for all consolidated return years of the 
group through Year 3 (determined without regard to the CNOL 
deduction) is not a positive amount.

    (d) Coordination with consolidated return change of ownership 
limitation and transactions subject to old section 382--(1) 
Consolidated return changes of ownership. If a consolidated return 
change of ownership occurred before January 1, 1997, the principles of 
Sec. 1.1502-21A(d) apply to determine the amount of the aggregate of 
the net operating losses attributable to old members of the group that 
may be included in the consolidated net operating loss deduction under 
paragraph (a) of this section. For this purpose, Sec. 1.1502-1(g) is 
applied by treating that date as the end of the year of change.
    (2) Old section 382. The principles of Sec. 1.1502-21A(e) apply to 
disallow or reduce the amount of a net operating loss carryover of a 
member as a result of a transaction subject to old section 382.
    (e) Consolidated net operating loss. Any excess of deductions over 
gross income, as determined under Sec. 1.1502-11(a) (without regard to 
any consolidated net operating loss deduction), is also referred to as 
the consolidated net operating loss (or CNOL).
    (f) Predecessors and successors--(1) In general. For purposes of 
this section, any reference to a corporation, member, common parent, or 
subsidiary, includes, as the context may require, a reference to a 
successor or predecessor, as defined in Sec. 1.1502-1(f)(4).
    (2) Limitation on SRLY subgroups. Except as the Commissioner may 
otherwise determine, any increase in the consolidated taxable income of 
a SRLY subgroup that is attributable to a successor is disregarded 
unless the successor acquires substantially all the assets and 
liabilities of its predecessor and the predecessor ceases to exist.
    (g) Effective date.--(1) In general. This section generally applies 
to consolidated return years beginning on or after January 1, 1997.
    (2) SRLY limitation. Except in the case of those members (including 
members of a SRLY subgroup) described in paragraph (g)(3)(iii) of this 
section, a group does not take into account a consolidated taxable year 
beginning before January 1, 1997, in determining the aggregate of the 
consolidated taxable income under paragraph (c)(1) of this section 
(including for purposes of Sec. 1.1502-15T and Sec. 1.1502-22T(c)) for 
the members (or SRLY subgroups).
    (3) Application to prior periods. A consolidated group may apply 
the rules of this section to all consolidated return years ending on or 
after January 29, 1991, and beginning before January 1, 1997, provided 
that--
    (i) The group's tax liability as shown on an original or an amended 
return is consistent with the application of the rules of this section 
(other than this paragraph (g)) and Secs. 1.1502-15T, 1.1502-22T, 
1.1502-23T, 1.1502-91T through 1.1502-96T, and 1.1502-98T for each such 
year for which the statute of limitations does not preclude the filing 
of an amended return on January 1, 1997;
    (ii) Each section described in paragraph (g)(3)(i) of this section 
and Sec. 1.1502-1(f)(4)(ii) is applied by substituting ``taxable years 
ending on or after January 29, 1991'' for ``taxable years beginning on 
or after January 1, 1997'' (and ``before January 29, 1991'' for 
``before January 1, 1997'' in the case of consolidated return changes 
of ownership) as the context requires.
    (iii) The rules of paragraph (c) of this section and Secs. 1.1502-
15T and 1.1502-22T(c) are applied only with respect to the losses and 
deductions of those corporations that became members of the group 
(including members of a subgroup), and to acquisitions occurring, on or 
after January 29, 1991, (and only with respect to such losses and 
deductions);
    (iv) The rules of Secs. 1.1502-15A, 1.1502-21A(c) and 1.1502-22A(c) 
are applied with respect to the losses and deductions of those 
corporations that became members of the group, and to acquisitions 
occurring, before January 29, 1991; and
    (v) Appropriate adjustments are made in the earliest subsequent 
open year to reflect any inconsistency in a year for which the statute 
of limitations precludes the filing of an amended return on January 1, 
1997.
    (4) Waiver of carrybacks. Paragraph (b)(3)(i) of this section 
(relating to the waiver of carrybacks) applies to net operating losses 
arising in a consolidated return year for which the due date of the 
income tax return (without regard to extensions) is on or after August 
26, 1996.
    Par. 14. Section 1.1502-22 is redesignated as Sec. 1.1502-22A; the 
heading of the newly designated Sec. 1.1502-22A is revised; and 
paragraphs (d)(3) and (e) are added to read as follows:


Sec. 1.1502-22A  Consolidated net capital gain or loss generally 
applicable for consolidated return years beginning before January 1, 
1997.

* * * * *
    (d) * * *
    (3) Cross-reference. See Sec. 1.1502-22T(d) for the rule that 
applies the principles of this paragraph (d) in consolidated return 
years beginning on or after January 1, 1997, with respect to a 
consolidated return change of ownership occurring before January 1, 
1997.
    (e) Effective date. This section applies to any consolidated return 
years to which Sec. 1.1502-21T(g) does not apply. See Sec. 1.1502-
21T(g) for effective dates of that section.
    Par. 15. Section 1.1502-22T is added to read as follows:


Sec. 1.1502-22T  Consolidated capital gain and loss (temporary).

    (a) Capital gain. The determinations under section 1222, including 
capital gain net income, net long-term capital gain, and net capital 
gain, with respect to members during consolidated return years are not 
made separately. Instead, consolidated amounts are determined for the 
group as a whole. The consolidated capital gain net income for any 
consolidated return year is determined by reference to--
    (1) The aggregate gains and losses of members from sales or 
exchanges of capital assets for the year (other than gains and losses 
to which section 1231 applies);
    (2) The consolidated net section 1231 gain for the year (determined 
under Sec. 1.1502-23T); and
    (3) The net capital loss carryovers or carrybacks to the year.
    (b) Net capital loss carryovers and carrybacks.--(1) In general. 
The determinations under section 1222, including net capital loss and 
net short-term capital loss, with respect to members during 
consolidated return years are not made separately. Instead, 
consolidated amounts are determined for the group as a whole. Losses

[[Page 33334]]

included in the consolidated net capital loss may be carried to 
consolidated return years, and, after apportionment, may be carried to 
separate return years. The net capital loss carryovers and carrybacks 
consist of--
    (i) Any consolidated net capital losses of the group; and
    (ii) Any net capital losses of the members arising in separate 
return years.
    (2) Carryovers and carrybacks generally. The net capital loss 
carryovers and carrybacks to a taxable year are determined under the 
principles of section 1212 and this section. Thus, losses permitted to 
be absorbed in a consolidated return year generally are absorbed in the 
order of the taxable years in which they were sustained, and losses 
carried from taxable years ending on the same date, and which are 
available to offset consolidated capital gain net income, generally are 
absorbed on a pro rata basis. Additional rules provided under the Code 
or regulations also apply, as well as the SRLY limitation under 
paragraph (c) of this section. See, e.g., section 382(l)(2)(B).
    (3) Carryovers and carrybacks of consolidated net capital losses to 
separate return years. If any consolidated net capital loss that is 
attributable to a member may be carried to a separate return year under 
the principles of Sec. 1.1502-21T(b)(2), the amount of the consolidated 
net capital loss that is attributable to the member is apportioned and 
carried to the separate return year (apportioned loss).
    (4) Special rules--(i) Short years in connection with transactions 
to which section 381(a) applies. If a member distributes or transfers 
assets to a corporation that is a member immediately after the 
distribution or transfer in a transaction to which section 381(a) 
applies, the transaction does not cause the distributor or transferor 
to have a short year within the consolidated return year of the group 
in which the transaction occurred that is counted as a separate year 
for purposes of determining the years to which a net capital loss may 
be carried.
    (ii) Special status losses. [Reserved]
    (c) Limitations on net capital loss carryovers and carrybacks from 
separate return limitation years. The aggregate of the net capital 
losses of a member arising (or treated as arising) in SRLYs that are 
included in the determination of consolidated capital gain net income 
for all consolidated return years of the group under paragraph (a) of 
this section may not exceed the aggregate of the consolidated capital 
gain net income for all consolidated return years of the group 
determined by reference to only the member's items of gain and loss 
from capital assets as defined in section 1221 and trade or business 
assets defined in section 1231(b), including the member's losses 
actually absorbed by the group in the taxable year (whether or not 
absorbed by the member). The principles of Sec. 1.1502-21T(c)(including 
the SRLY subgroup principles under Sec. 1.1502-21T(c)(2)) apply with 
appropriate adjustments for purposes of applying this paragraph (c).
    (d) Coordination with respect to consolidated return change of 
ownership limitation occurring in consolidated return years beginning 
before January 1, 1997. If a consolidated return change of ownership 
occurred before January 1, 1997, the principles of Sec. 1.1502-22A(d) 
apply to determine the amount of the aggregate of the net capital loss 
attributable to old members of the group (as those terms are defined in 
Sec. 1.1502-1(g)), that may be included in the net capital loss 
carryover under paragraph (b) of this section. For this purpose, 
Sec. 1.1502-1(g) is applied by treating that date as the end of the 
year of change.
    (e) Consolidated net capital loss. Any excess of losses over gains, 
as determined under paragraph (a) of this section (without regard to 
any carryovers or carrybacks), is also referred to as the consolidated 
net capital loss.
    (f) Predecessors and successors. For purposes of this section, the 
principles of Sec. 1.1502-21T(f) apply with appropriate adjustments.
    (g) Effective date--(1) In general. This section applies to 
consolidated return years beginning on or after January 1, 1997.
    (2) Application to prior periods. See Sec. 1.1502-21T(g)(3) for 
rules generally permitting a group to apply the rules of this section 
to consolidated return years ending on or after January 29, 1991, and 
beginning before January 1, 1997.
    Par. 16. Section 1.1502-23 is redesignated Sec. 1.1502-23A; the 
section heading of the newly designated Sec. 1.1502-23A is revised; the 
current text of the section is designated as paragraph (a), and 
paragraph (b) is added to read as follows:


Sec. 1.1502-23A  Consolidated net section 1231 gain or loss generally 
applicable for consolidated return years beginning before January 1, 
1997.

* * * * *
    (b) Effective date. This section applies to any consolidated return 
years to which Sec. 1.1502-21T(g) does not apply. See Sec. 1.1502-
21T(g) for effective dates of that section.
    Par. 17. Section 1.1502-23T is added to read as follows:


Sec. 1.1502-23T  Consolidated net section 1231 gain or loss 
(temporary).

    (a) In general. Net section 1231 gains and losses of members 
arising during consolidated return years are not determined separately. 
Instead, the consolidated net section 1231 gain or loss is determined 
under this section for the group as a whole.
    (b) Recapture of ordinary loss. [Reserved]
    (c) Effective date--(1) In general. This section applies to gains 
and losses arising in the determination of consolidated net section 
1231 gain or loss for taxable years beginning on or after January 1, 
1997.
    (2) Application to prior periods. See Sec. 1.1502-21T(g)(3) for 
rules generally permitting a group to apply the rules of this section 
to consolidated return years ending on or after January 29, 1991, and 
beginning before January 1, 1997.
    Par. 18. Section 1.1502-41 is redesignated as Sec. 1.1502-41A; the 
section heading of the newly designated Sec. 1.1502-41A is revised; and 
paragraph (c) is added to read as follows:


Sec. 1.1502-41A  Determination of consolidated net long-term capital 
gain and consolidated net short-term capital loss generally applicable 
for consolidated return years beginning before January 1, 1997.

* * * * *
    (c) Effective date. This section applies to any consolidated return 
years to which Sec. 1.1502-21T(g) does not apply. See Sec. 1.1502-
21T(g) for effective dates of that section.
    Par. 19. Section 1.1502-79A is added to read as follows:


Sec. 1.1502-79A  Separate return years generally applicable for 
consolidated return years beginning before January 1, 1997.

    (a) through (e) [Reserved]
    (f) Effective date. Paragraphs (a) and (b) of this section apply to 
losses arising in consolidated return years to which Sec. 1.1502-21T(g) 
does not apply. For this purpose net operating loss deductions, 
carryovers, and carrybacks arise in the year from which they are 
carried. See Sec. 1.1502-21T(g) for effective dates of that section.
    Par. 20. In Sec. 1.1502-79, paragraphs (a) and (b) are redesignated 
as Sec. 1.1502-79A, paragraphs (a) and (b).
    Par. 21. Section 1.1502-79 is amended by adding new paragraphs (a) 
and (b) to read as follows:


Sec. 1.1502-79  Separate return years.

    (a) Carryover and carryback of consolidated net operating losses to 
separate return years. For losses arising

[[Page 33335]]

in consolidated return years beginning before January 1, 1997, see 
Sec. 1.1502-79A(a). For later years, see Sec. 1.1502-21T(b).
    (b) Carryover and carryback of consolidated net capital loss to 
separate return years. For losses arising in consolidated return years 
beginning before January 1, 1997, see Sec. 1.1502-79A(b). For later 
years, see Sec. 1.1502-22T(b).
* * * * *

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

    Par. 22. The authority citation for part 602 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805.

    Par. 23. In Sec. 602.101, paragraph (c) is amended by adding an 
entry in numerical order to the table to read as follows:


Sec. 602.101  OMB Control numbers.

* * * * *
    (c) * * *

------------------------------------------------------------------------
                                                           Current OMB  
   CFR part or section where identified or described       control No.  
------------------------------------------------------------------------
                  *        *        *        *        *                 
1.1502-21T............................................         1545-1237
                                                                        
                  *        *        *        *        *                 
------------------------------------------------------------------------

Margaret Milner Richardson,
Commissioner of Internal Revenue.

    Approved: May 31, 1996.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 96-15823 Filed 6-26-96; 8:45 am]
BILLING CODE 4830-01-U