Federal Register / Vol. 61, No. 125 / Thursday, June 27, 1996 / Rules and Regulations 33321

(3) Amended returns. A taxpayer that

has had an ownership change before

January 1, 1997, may file an amended

return for any taxable year to modify the

amount of a limitation under section

382 with respect to a controlled group

loss only if—

(i) The modification complies with

the rules contained in this section for

computing a limitation under section

382;

(ii) Any other component member of

the controlled group with respect to the

controlled group loss who elects to

restore value and whose taxable income

is affected by the election to restore

value also files amended returns that

comply with such rules; and

(iii) Corresponding adjustments are

made in amended returns for all taxable

years ending after December 31, 1986.

PART 602—OMB CONTROL NUMBERS

UNDER THE PAPERWORK

REDUCTION ACT

Par. 6. The authority citation for part

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 7. In § 602.101, paragraph (c) is

amended by adding an entry in

numerical order to the table to read as

follows:

§ 602.101 OMB Control numbers.

* * * * *

(c) * * *

CFR part or section where

identified or described

Current

OMB control No.

* * * * *

1.382.8T .................................... 1545–1434 

* * * * *

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: May 31, 1996.

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 96–15825 Filed 6–26–96; 8:45 am]

BILLING CODE 4830–01–U

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 crossreferencing 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, builtin 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
33322 Federal Register / Vol. 61, No. 125 / Thursday, June 27, 1996 / Rules and Regulations

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 § 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 (consolidated net operating loss),

and 1.1502–22 (consolidated net capital

gain or loss).

1.1502–21T (Net operating losses (temporary)), and 1.1502–22T (consolidated net

capital gain and loss (temporary)).

1.597–2(c)(5), first sentence ............................. §§ 1.1502–15, 1.1502–21, and 1.1502–22 ....... §§ 1.1502–15T, 1.1502–21T, and 1.1502–22T

(or §§ 1.1502–15A, 1.1502–21A, and

1.1502–22A, as appropriate).

1.597–2(c)(5), second sentence ....................... §§ 1.1502–15, 1.1502–21 or 1.1502–22 .......... §§ 1.1502–15T, 1.1502–21T or 1.1502–22T (or

§§ 1.1502–15A, 1.1502–21A or 1.1502–22A,

as appropriate).

1.597–4(g)(3), fifth sentence ............................. §§ 1.1502–15, 1.1502–21 and 1.1502–22 ........ §§ 1.1502–15T, 1.1502–21T and 1.1502–22T

(or §§ 1.1502–15A, 1.1502–21A and

1.1502–22A, as appropriate).
Federal Register / Vol. 61, No. 125 / Thursday, June 27, 1996 / Rules and Regulations 33323

Affected section Remove Add

1.597–4(g)(3), sixth sentence ........................... §§ 1.1502–15, 1.1502–21, or 1.1502–22 ......... §§ 1.1502–15T, 1.1502–21T, or 1.1502–22T

(or §§ 1.1502–15A, 1.1502–21A, or 1.1502–

22A, as appropriate).

1.904(f)–3(a) ..................................................... (or §§ 1.1502–21(b) and 1.1502–79(a)) ........... (or § 1.1502–21T(b) (or §§ 1.1502–21A(b) and

1.1502–79A(a), as appropriate)).

1.904(f)–3(b) ..................................................... (or §§ 1.1502–22 and 1.1502–79(b) ................. (or § 1.1502–22T(b) (or §§ 1.1502–22A and

1.1502–79A(b), as appropriate)).

1.1341–1(f)(2)(i) ................................................ § 1.1502–2A ...................................................... § 1.1502–2A (as contained in the 26 C.F.R.

edition revised as of April 1, 1996).

1.1502–9(a), seventh sentence ........................ § 1.1502–79 ...................................................... § 1.1502–21T(b)(2) (or § 1.1502–79A, as appropriate).

1.1502–9(a), eighth sentence ........................... § 1.1502–79 ...................................................... § 1.1502–21T(b)(1) (or § 1.1502–79A, as appropriate).

1.1502–9(f) Example 5(ii) ................................. § 1.1502–21(c) .................................................. § 1.1502–21A(c)

1.1502–11(a)(2) ................................................ § 1.1502–21 ...................................................... §§ 1.1502–21T (or 1.1502–21A, as appropriate).

1.1502–11(a)(3) ................................................ § 1.1502–22 ...................................................... §§ 1.1502–22T (or 1.1502–22A, as appropriate).

1.1502–11(a)(4) ................................................ § 1.1502–23 ...................................................... §§ 1.1502–23T (or 1.1502–23A, as appropriate).

1.1502–11(b)(2)(iii) Example 1(c) ..................... § 1.1502–79 ...................................................... § 1.1502–21T (or § 1.1502–79A, as appropriate).

1.1502–11(b)(2)(iii) Example 2(d) ..................... § 1.1502–79 ...................................................... §§ 1.1502–21T and 1.1502–22T, respectively

(or § 1.1502–79A, as appropriate).

1.1502–11(b)(2)(iii) Example 3(e) ..................... § 1.1502–79 ...................................................... § 1.1502–21T (or § 1.1502–79A, as appropriate).

1.1502–12(b) ..................................................... § 1.1502–15 shall be taken into account as

provided in that section.

§§ 1.1502–15A or 1.1502–15T shall be taken

into account as provided in those sections.

1.1502–13(c)(7)(ii) Example 10(d) .................... § 1.1502–21(c) .................................................. § 1.1502–21T(c).

1.1502–13(g)(5) Example 4(b) .......................... § 1.1502–15 ...................................................... § 1.1502–15T (or § 1.1502–15A, as appropriate).

1.1502–13(h)(2), Example 1(a) ......................... § 1.1502–21(c) .................................................. § 1.1502–21T(c).

1.1502–13(h)(2), Example 1(b) ......................... § 1.1502–21(c) .................................................. § 1.1502–21T(c).

1.1502–13(h)(2), Example 2(a) ......................... § 1.1502–15 ...................................................... § 1.1502–15T.

1.1502–13(h)(2), Example 2(b) ......................... 1.1502–22 ......................................................... 1.1502–22T.

1.1502–15(a)(1), first sentence ......................... § 1.1502–21(c) .................................................. § 1.1502–21A(c).

1.1502–15(a)(1), first sentence ......................... § 1.1502–22(c) .................................................. § 1.1502–22A(c).

1.1502–15(a)(1), second sentence ................... Under §§ 1.1502–21, 1.1502–22, and 1.1502–

79.

Under §§ 1.1502–21A, 1.1502–22A, and

1.1502–79A (or §§ 1.1502–21T and 1.1502–

22T, as appropriate).

1.1502–15(a)(1), second sentence ................... In § 1.1502–21(c) or § 1.1502–22(c) (as the

case may be).

In §§ 1.1502–21T(c) or 1.1502–22T(c) (or

§§ 1.1502–21A(c) or 1.1502–22A(c), as appropriate), as the case may be.

1.1502–15(a)(3) ................................................ § 1.1502–31A(b)(9) ........................................... § 1.1502–31A(b)(9) (as contained in the 26

C.F.R. edition revised as of April 1, 1996).

1.1502–18(f)(1)(ii), (1)(iii), (2)(i), (2)(ii), and (4)

Example (i) and (ii).

§ 1.1502–39A .................................................... § 1.1502–39A (as contained in the 26 C.F.R.

edition revised as of April 1, 1996).

1.1502–18(f)(5) ................................................. § 1.1502–31A(b)(1) ........................................... § 1.1502–31A(b)(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) ........................ § 1.1502–21 ...................................................... §§ 1.1502–21A or 1.1502–21T.

1.1502–20(g)(3), Example 1(i) .......................... § 1.1502–21 ...................................................... §§ 1.1502–21A or 1.1502–21T.

1.1502–20(g)(3), Example 2(i) .......................... § 1.1502–21 ...................................................... §§ 1.1502–21A or 1.1502–21T.

1.1502–21(b)(1) ................................................ Paragraph (a) of § 1.1502–79 .......................... §§ 1.1502–79A(a).

1.1502–21(b)(1) ................................................ § 1.1502–15 ...................................................... § 1.1502–15A (or § 1.1502–11(c), as appropriate).

1.1502–21(b)(2)(i) ............................................. Paragraph (a)(4) of § 1.1502–79 ...................... This paragraph.

1.1502–21(e)(1)(i) ............................................. Paragraph (a)(3) of § 1.1502–79 ...................... This paragraph.

1.1502–22(a)(1)(ii) ............................................ § 1.1502–23 ...................................................... §§ 1.1502–23A or 1.1502–23T.

1.1502–22(a)(3) ................................................ § 1.1502–15 ...................................................... §§ 1.1502–15A and 1.1502–11(c).

1.1502–22(b)(1) ................................................ Paragraph (b) of § 1.1502–79 .......................... § 1.1502–79A(b) (or § 1.1502–22T(b), as appropriate).

1.1502–23 ......................................................... §§ 1.1502–21(c) and 1.1502–22(c), as provided in § 1.1502–15(a).§§ 1.1502–21A(c) and 1.1502–22A(c), as provided in § 1.1502–15A(a) (or §§ 1.1502–

21T(c) and 1.1502–22T(c), as provided in

§ 1.1502–15T(a), as appropriate).

1.1502–26(a)(1)(ii) concluding text ................... Paragraph (f) of § 1.1502–21 ........................... §§ 1.1502–21T(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) of § 1.1502–22 ...................... § 1.1502–22A(a).

1.1502–41(a) ..................................................... § 1.1502–23 ...................................................... § 1.1502–23A.

1.1502–41(b) ..................................................... Paragraph (a)(1) of § 1.1502–22 ...................... § 1.1502–22A(a).

1.1502–41(b) ..................................................... Paragraph (b) of § 1.1502–22 .......................... § 1.1502–22A(b).
33324 Federal Register / Vol. 61, No. 125 / Thursday, June 27, 1996 / Rules and Regulations

Affected section Remove Add

1.1502–42(f)(4)(i)(A) ......................................... § 1.1502–79(a)(3). ............................................ § 1.1502–21T(b) (or § 1.1502–79A(a)(3), as

appropriate).

1.1502–42(j) Example 4(b) ............................... § 1.1502–79(a)(3). ............................................ § 1.1502–79A(a)(3).

1.1502–42(j) Example 4(c) ............................... § 1.1502–21(b)(3) ............................................. § 1.1502–21A(b)(3).

1.1502–42(j) Example 4(c) ............................... § 1.1502–79(a)(3) ............................................. § 1.1502–79A(a)(3).

1.1502–43(b)(2)(iv) ........................................... § 1.1502–21(a) .................................................. §§ 1.1502–21T(a) or 1.1502–21A(a), as appropriate.

1.1502–43(b)(2)(v) ............................................ § 1.1502–22(a) .................................................. §§ 1.1502–22T(a) or 1.1502–22A(a), as appropriate.

1.1502–43(b)(2)(vi) ........................................... § 1.1502–41(a) .................................................. §§ 1.1502–22T(a) or 1.1502–41A, as appropriate.

1.1502–43(b)(2)(vi) ........................................... § 1.1502–41(b) .................................................. §§ 1.1502–22T(a) or 1.1502–41A, as appropriate.

1.1502–43(b)(2)(vii) ........................................... § 1.1502–22(b) .................................................. §§ 1.1502–22T(b) or 1.1502–22A(b), as appropriate.

1.1502–43(b)(2)(viii) .......................................... Section 1.1502–15 (built-in deductions) does Sections 1.1502–15A (Limitations on built-in

deductions not subject to § 1.1502–15T) and

1.1502–15T (SRLY limitation on built-in

losses (temporary)) do.

1.1502–44(b)(2) ................................................ § 1.1502–21 ...................................................... §§ 1.1502–21T or 1.1502–21A (as appropriate).

1.1502–44(b)(3) ................................................ § 1.1502–22 ...................................................... §§ 1.1502–22T or 1.1502–22A (as appropriate).

1.1502–47(h)(2)(i) ............................................. § 1.1502–21 ...................................................... §§ 1.1502–21T or 1.1502–21A (as appropriate).

1.1502–47(h)(2)(ii) ............................................ § 1.1502–21(f) ................................................... §§ 1.1502–21(A)(f) or 1.1502–21T(e) (as appropriate).

1.1502–47(h)(2)(iii) ............................................ § 1.1502–21 ...................................................... §§ 1.1502–21A or 1.1502–21T (as appropriate).

1.1502–47(h)(2)(iv) ........................................... § 1.1502–21 ...................................................... §§ 1.1502–21A or 1.1502–21T (as appropriate).

1.1502–47(h)(2)(vii) Example ........................... §§ 1.1502–21 and 1.1502–79 ........................... §§ 1.1502–21A and 1.1502–79A.

1.1502–47(h)(3)(iii) ............................................ § 1.1502–21(c) .................................................. §§ 1.1502–21A(c) or 1.1502–21T(c) (as appropriate).

1.1502–47(h)(3)(iv) and (v) ............................... § 1.1502–21(d) .................................................. § 1.1502–21A(d).

1.1502–47(h)(4)(i), first sentence ..................... § 1.1502–22 ...................................................... §§ 1.1502–22T or 1.1502–22A (as appropriate).

1.1502–47(h)(4)(i), second sentence ................ § 1.1502–22(a) .................................................. §§ 1.1502–22T or 1.1502–22A(a) (as appropriate).

1.1502–47(h)(4)(ii), first sentence ..................... § 1.1502–22 ...................................................... §§ 1.1502–22A or 1.1502–22T.

1.1502–47(h)(4)(ii), first sentence ..................... § 1.1502–21 ...................................................... §§ 1.1502–21T or 1.1502–21A (as appropriate).

1.1502–47(h)(4)(ii), second sentence ............... ‘‘§ 1.1502–22(d)’’ ............................................... ‘‘§ 1.1502–22A(d)’’.

1.1502–47(h)(4)(ii), second sentence ............... ‘‘§ 1.1502–21(d)’’ ............................................... ‘‘§ 1.1502–21A(d)’’.

1.1502–47(h)(4)(iii) ............................................ § 1.1502–22(b)(1) ............................................. §§ 1.1502–22A(b)(1) or 1.1502–22T(b).

1.1502–47(k)(5) ................................................. § 1.1502–22 ...................................................... §§ 1.1502–22T or 1.1502–22A (as appropriate).

1.1502–47(l)(3)(i) .............................................. § 1.1502–21 ...................................................... §§ 1.1502–21T or 1.1502–21A (as appropriate).

1.1502–47(m)(2)(ii) ........................................... § 1.1502–21 ...................................................... §§ 1.1502–21T or 1.1502–21A (as appropriate).

1.1502–47(m)(2)(ii) ........................................... § 1.1502–22 ...................................................... §§ 1.1502–22T or 1.1502–22A (as appropriate).

1.1502–47(m)(3)(i) ............................................ §§ 1.1502–21 and 1.1502–22 ........................... §§ 1.1502–21T and 1.1502–22T (or

§§ 1.1502–21A and 1.1502–22A, as appropriate).

1.1502–47(m)(3)(vi)(A), both instances ............ § 1.1502–79(a)(3) ............................................. §§ 1.1502–21T(b) or 1.1502–79A(a)(3) (as appropriate).

1.1502–47(m)(3)(vii) .......................................... § 1.1502–21(b)(3)(ii) ......................................... § 1.1502–21A(b)(3)(ii).

1.1502–47(m)(3)(ix) .......................................... § 1.1502–15 (including the exceptions in paragraph (a)(4) thereof).§§ 1.1502–15T and 1.1502–15A (including applicable exceptions thereto).

1.1502–47(m)(5) Example 4 ............................. § 1.1502–15 ...................................................... § 1.1502–15A.

1.1502–47(o)(2)(i) ............................................. § 1.1502–41 ...................................................... §§ 1.1502–41A or 1.1502–22T (as appropriate).

1.1502–47(o)(2)(ii) ............................................ § 1.1502–41 ...................................................... §§ 1.1502–41A or 1.1502–22T (as appropriate).

1.1502–47(q) ..................................................... § 1.1502–21(b)(3) and § 1.1502–79(a)(3) ......... §§ 1.1502–21A(b)(3) and 1.1502–79A(a)(3) (or

§ 1.1502–21T, as appropriate).

1.1502–78(a) ..................................................... § 1.1502–79 (a), (b), or (c) ............................... §§ 1.1502–21T(b), 1.1502–22T(b), or 1.1502–

79(c) (or §§ 1.1502–79A(a), 1.1502–79A(b),

or 1.1502–79(c), as appropriate).

1.1502–79(a)(1)(i) ............................................. § 1.1502–21 ...................................................... § 1.1502–21A.

1.1502–79(b)(1) ................................................ 1.1502–22 ......................................................... 1.1502–22A.
Federal Register / Vol. 61, No. 125 / Thursday, June 27, 1996 / Rules and Regulations 33325

Affected section Remove Add

1.1502–79(c)(1) ................................................. Paragraph (a)(1) and (2) of this section ........... § 1.1502–21T(b) (or §§ 1.1502–79A(a)(1) and

(2), as appropriate).

1.1502–79(d)(1) ................................................ Paragraph (a)(1) and (2) of this section ........... § 1.1502–21T(b) (or §§ 1.1502–79A(a)(1) and

(2), as appropriate).

1.1502–79(e)(1) ................................................ Paragraph (a)(1) and (2) of this section ........... § 1.1502–21T(b) (or §§ 1.1502–79A(a)(1) and

(2), as appropriate).

1.1502–80(c) ..................................................... § 1.1502–15(b) .................................................. § 1.1502–11(c).

1.1502–100(c)(2) ............................................... § 1.1502–21 ...................................................... §§ 1.1502–21A or 1.1502–21T (as appropriate).

1.1503–2(d)(2)(i) ............................................... § 1.1502–21(c) .................................................. §§ 1.1502–21A(c) or 1.1502–21T(c), as appropriate.

1.1503–2(d)(2)(ii) .............................................. § 1.1502–21(c) .................................................. §§ 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) ........................... § 1.1502–21(c) .................................................. § 1.1502–21A(c).

1.1503–2(g)(2)(vii)(B)(1) ................................... § 1.1502–21(c) .................................................. §§ 1.1502–21A(c) or 1.1502–21T(c) (as appropriate).

1.1503–2(g)(2)(vii)(B)(2) ................................... § 1.1502–21(c) .................................................. §§ 1.1502–21A(c) or 1.1502–21T(c) (as appropriate).

1.1503–2(g)(2)(vii)(E) ........................................ § 1.1502–21(c) .................................................. §§ 1.1502–21A(c) or 1.1502–21T(c) (as appropriate).

1.1503–2(g)(2)(vii)(G) Example 1 ..................... § 1.1502–21(c) .................................................. §§ 1.1502–21A(c) or 1.1502–21T(c), as appropriate.

1.1503–2(g)(2)(vii)(G) Example 2 ..................... § 1.1502–21(c) .................................................. §§ 1.1502–21A(c) or 1.1502–21T(c), as appropriate.

1.1503–2(h)(3) .................................................. § 1.1502–21(c) .................................................. §§ 1.1502–21A(c) or 1.1502–21T(c) (as appropriate).

1.1503–2A(f)(1)(i) intro text ............................... § 1.1502–79(a)(3) ............................................. § 1.1502–21T(b).

1.1503–2A(f)(1)(i)(C) ......................................... § 1.1502–79 ...................................................... § 1.1502–22T(b).

1.1503–2A(f)(2)(i) .............................................. § 1.1502–21(c)(2) .............................................. §§ 1.1502–21A(c)(2) or 1.1502–21T(c) (as appropriate).

1.1503–2A(f)(2)(ii) ............................................. § 1.1502–21(c)(2) .............................................. §§ 1.1502–21A(c)(2) or 1.1502–21T(c) (as appropriate).

1.1503–2A(f)(4) Example 2(iv), first sentence § 1.1502–21(c)(2) .............................................. § 1.1502–21A(c)(2).

1.1503–2A(f)(4) Example 2(iv), second sentence.§ 1.1502–21(c) .................................................. § 1.1502–21A(c).

1.1552–1(a)(3)(i) ............................................... § 1.1502–30A .................................................... § 1.1502–30A (as contained in the 26 C.F.R.

edition revised as of April 1, 1996).

1.1552–1(b)(1) .................................................. § 1.1502–30A .................................................... § 1.1502–30A (as contained in the 26 C.F.R.

edition revised as of April 1, 1996).

301.6402–7(g)(2)(iii) .......................................... § 1.1502–21(b) .................................................. §§ 1.1502–21T(b) or 1.1502–21A(b) (as appropriate).

301.6402–7(g)(3) Example 2, second sentence § 1.1502–21 ...................................................... § 1.1502–21T.

301.6402–7(g)(3) Example 2, third sentence ... § 1.1502–21(c) .................................................. § 1.1502–21T(c).

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).

§ 1.1501–1 [Removed]

Par. 3. Section 1.1501–1 is removed.

Par. 4. The undesignated

centerheading immediately following

§ 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’’.

§§ 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:

§ 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 §§ 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:

§ 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
33326 Federal Register / Vol. 61, No. 125 / Thursday, June 27, 1996 / Rules and Regulations

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 § 1.1502–2, paragraph (h) is

revised to read as follows:

§ 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 § 1.1502–22T) (or,

for consolidated return years to which

§ 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 § 1.1502–41A for the

determination of the consolidated net

long-term capital gain and the

consolidated net short-term capital

loss));

* * * * *

§ 1.1502–15 [Amended]

Par. 9. In § 1.1502–15, paragraph (b)

is redesignated as paragraph (c) of

§ 1.1502–11, and the heading of newly

designated § 1.1502–11, paragraph (c) is

revised to read as follows:

§ 1.1502–11 Consolidated taxable income.

* * * * *

(c) Disallowance of loss attributable to

pre-1966 distributions. * * *

§ 1.1502–15 [Redesignated as § 1.1502–

15A]

Par. 10. Section 1.1502–15 is

redesignated as § 1.1502–15A; the

section heading of the newly designated

§ 1.1502–15A is revised; and paragraph

(b) is added to read as follows:

§ 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 § 1.1502–21T does not apply. See

§ 1.1502–21T(g) for effective dates of

that section.

Par. 11. Section 1.1502–15T is added

to read as follows:

§ 1.1502–15T SRLY limitation on built-in

losses (temporary).

(a) SRLY limitation. Built-in losses are

subject to the SRLY limitation under

§§ 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 § 1.1502–21T(c)

or § 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 builtin 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 § 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

§ 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 prechange 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 § 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 builtin loss, the principles of §§ 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).
Federal Register / Vol. 61, No. 125 / Thursday, June 27, 1996 / Rules and Regulations 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 prechange 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

§ 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 § 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 builtin 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 § 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 § 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 § 1.1502–21T(c).

(c) For Year 3, § 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 § 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 § 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

§ 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

§ 1.1502–21T(b). The $40 net operating loss

is treated under paragraph (a) of this section

and § 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 § 1.1502–

21T (including § 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
33328 Federal Register / Vol. 61, No. 125 / Thursday, June 27, 1996 / Rules and Regulations

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 builtin loss. The P group has $10 of consolidated

taxable income in Year 2, computed by

disregarding T’s recognition of the $45 builtin 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 § 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 § 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 § 1.1502–21T(a).

Consolidated taxable income so determined

is $25.

(d) Under § 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 § 1.1502–21T(b) and absorbed

under the rules of § 1.1502–21T(a). This loss

is not treated as arising in a SRLY (see

§ 1.1502–21T(c)(1)(ii)) and therefore is not

subject to the SRLY limitation under

§ 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 § 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

§ 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

§ 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 § 1.1502–21A; the

heading of the newly designated

§ 1.1502–21A is revised; and paragraphs

(d)(4), (e)(3) and (h) are added to read

as follows:

§ 1.1502–21A Consolidated net operating

loss deduction generally applicable for

consolidated return years beginning before

January 1, 1997.

* * * * *

(d) * * *

(4) Cross-reference. See § 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 § 1.382–2T(f)(21)) applies.

See § 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 § 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:

§ 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

§ 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
Federal Register / Vol. 61, No. 125 / Thursday, June 27, 1996 / Rules and Regulations 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 § 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 § 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 § 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 § 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
33330 Federal Register / Vol. 61, No. 125 / Thursday, June 27, 1996 / Rules and Regulations

illustration, see § 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 § 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 § 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

year 1

Separate

year 2

Separate affiliated year 3Consolidated

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

§ 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 § 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 =

§ 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 § 1.1502–1(f)(1). T’s $30 net

operating loss carryback to the P group from

Year 4 is not allowed under § 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
Federal Register / Vol. 61, No. 125 / Thursday, June 27, 1996 / Rules and Regulations 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 § 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 § 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 § 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 § 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 § 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 § 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 § 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 § 1.1503–2. See also

§ 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

§ 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
33332 Federal Register / Vol. 61, No. 125 / Thursday, June 27, 1996 / Rules and Regulations

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 § 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 § 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 § 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 § 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.
Federal Register / Vol. 61, No. 125 / Thursday, June 27, 1996 / Rules and Regulations 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

§ 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, § 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

§ 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 § 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 § 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

§ 1.1502–15T and § 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 §§ 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

§ 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 §§ 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 §§ 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 § 1.1502–22A; the

heading of the newly designated

§ 1.1502–22A is revised; and paragraphs

(d)(3) and (e) are added to read as

follows:

§ 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 § 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 § 1.1502–21T(g) does not apply.

See § 1.1502–21T(g) for effective dates

of that section.

Par. 15. Section 1.1502–22T is added

to read as follows:

§ 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

§ 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 shortterm 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
33334 Federal Register / Vol. 61, No. 125 / Thursday, June 27, 1996 / Rules and Regulations

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 § 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 § 1.1502–

21T(c)(including the SRLY subgroup

principles under § 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

§ 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 § 1.1502–1(g)), that may be included

in the net capital loss carryover under

paragraph (b) of this section. For this

purpose, § 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 § 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

§ 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 § 1.1502–23A; the section

heading of the newly designated

§ 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:

§ 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 § 1.1502–21T(g) does not apply.

See § 1.1502–21T(g) for effective dates

of that section.

Par. 17. Section 1.1502–23T is added

to read as follows:

§ 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

§ 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 § 1.1502–41A; the

section heading of the newly designated

§ 1.1502–41A is revised; and paragraph

(c) is added to read as follows:

§ 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 § 1.1502–21T(g) does not apply.

See § 1.1502–21T(g) for effective dates

of that section.

Par. 19. Section 1.1502–79A is added

to read as follows:

§ 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

§ 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

§ 1.1502–21T(g) for effective dates of

that section.

Par. 20. In § 1.1502–79, paragraphs (a)

and (b) are redesignated as § 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:

§ 1.1502–79 Separate return years.

(a) Carryover and carryback of

consolidated net operating losses to

separate return years. For losses arising
Federal Register / Vol. 61, No. 125 / Thursday, June 27, 1996 / Rules and Regulations 33335

in consolidated return years beginning

before January 1, 1997, see § 1.1502–

79A(a). For later years, see § 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 § 1.1502–

79A(b). For later years, see § 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 § 602.101, paragraph (c) is

amended by adding an entry in

numerical order to the table to read as

follows:

§ 602.101 OMB Control numbers.

* * * * *

(c) * * *

CFR part or section where

identified or described

Current OMB

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

26 CFR Parts 1 and 602

[TD 8678]

RIN 1545–AU36

Regulations Under Section 1502 of the

Internal Revenue Code of 1986;

Limitations on Net Operating Loss

Carryforwards and Certain Built-in

Losses and Credits Following an

Ownership Change of a Consolidated

Group

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Temporary regulations.

SUMMARY: This document contains

temporary regulations regarding the

operation of sections 382 and 383 of the

Internal Revenue Code of 1986 (relating

to limitations on net operating loss

carryforwards and certain built-in losses

and credits following an ownership

change) with respect to consolidated

groups. The regulations include rules

for determining whether a loss group or

a loss subgroup has an ownership

change, for computing a consolidated

section 382 limitation or subgroup

section 382 limitation, and for applying

sections 382 and 383 to corporations

that join or leave a group. The rules are

necessary to provide guidance to such

groups on the use of certain of their tax

attributes. 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 regulations 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 1545–1218. The

collection requires a response from

certain consolidated groups. The IRS

requires the information described in

§ 1.1502–95T(e) to assure that a section

382 limitation is properly determined in

cases of corporations that cease to be

members of a group. Responses to this

collection of information are required to

obtain a benefit (relating to the section

382 limition applicable to the departing

member(s)).

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 crossreferencing 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 issued three notices of

proposed rulemaking, CO–132–87 (56

FR 4194), CO–077–90 (56 FR 4183), and

CO–078–90 (56 FR 4228), setting forth

rules regarding the application of

sections 382 and 383 by consolidated

groups and by controlled groups, and

regarding the use of built-in deductions

and net operating losses and capital

losses, including the carryover and

carryback of separate return limitation

year (SRLY) losses of members of

consolidated groups. The preambles to

the three proposed regulations explain

their rules in detail. The IRS and

Treasury also published Notice 91–27

(1991–2 C.B. 629) to advise of intended

modifications to the proposed

regulations.

For reasons explained in the preamble

to TD 8677 (published elsewhere in this

issue of the Federal Register), the IRS

and Treasury are issuing temporary

amendments concerning the use of

built-in deductions and net operating

losses and capital losses of members of

consolidated groups. Some of the rules

in those temporary amendments are

closely related to rules regarding the

application of section 382 to members of

consolidated groups (for example, rules

relating to built-in deductions and

subgroups). Because of the close

relationship, and in order to give

consolidated groups immediate

guidance on the application of sections

382 and 383, the IRS and Treasury are

issuing these temporary amendments.

The temporary amendments are

substantially identical to the rules

proposed on January 29, 1991.

These temporary amendments do not

address the comments on the proposed

amendments. Many of these comments

are still under consideration.

As a companion to this Treasury

decision, the IRS and Treasury are also

issuing temporary regulations relating to

the application of sections 382 and 383

by members of controlled groups. See

TD 8679 published elsewhere in this

issue of the Federal Register.

Effective Dates

The temporary regulations are

generally effective for testing dates that

occur on or after January 1, 1997.

Transition rules contained in the

proposed amendments are retained and

made applicable to testing dates before

January 1, 1997.