53934 Federal Register / Vol. 73, No. 181 / Wednesday, September 17, 2008 / Rules and Regulations 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Parts 1 and 602 

[TD 9424] 

RIN 1545–BB61 

Unified Rule for Loss on Subsidiary 

Stock 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final regulations and removal of 

temporary regulations. 

SUMMARY: This document contains final 

regulations under sections 358, 

362(e)(2), and 1502 of the Internal 

Revenue Code (Code). The regulations 

apply to corporations filing 

consolidated returns, and corporations 

that enter into certain tax-free 

reorganizations. The regulations provide 

rules for determining the tax 

consequences of a member’s transfer 

(including by deconsolidation and 

worthlessness) of loss shares of 

subsidiary stock. In addition, the 

regulations provide that section 

362(e)(2) generally does not apply to 

transactions between members of a 

consolidated group. Finally, the 

regulations conform or clarify various 

provisions of the consolidated return 

regulations, including those relating to 

adjustments to subsidiary stock basis. 

DATES: Effective Date: These regulations 

are effective on September 17, 2008. 

Applicability Date: For dates of 

applicability, see §§ 1.358–6(f)(3), 

1.1502–13(l)(1), 1.1502–19(h), 1.1502– 

21(h)(1)(iii), 1.1502–30(c), 1.1502– 

31(h)(1), 1.1502–32(h)(9), 1.1502– 

33(j)(1), 1.1502–35(j), 1.1502–36(h), 

1.1502–75(l), 1.1502–80(a)(4), 1.1502– 

80(h), 1.1502–80(j), 1.1502–91(h)(2), and 

1.1502–99(b)(4). 

FOR FURTHER INFORMATION CONTACT: 

Marcie P. Barese at (202) 622–7790, 

Sean P. Duffley at (202) 622–7770, or 

Theresa Abell at (202) 622–7700 (none 

of the numbers are toll-free). 

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act 

The collection of information 

contained in these final regulations has 

been reviewed and approved by the 

Office of Management and Budget in 

accordance with the Paperwork 

Reduction Act of 1995 (44 U.S.C. 

3507(d)) under control number 1545– 

2096. The collection of information in 

these final regulations is in § 1.1502– 

36(e)(5). The collection of information is 

necessary to allow a corporation to 

redetermine basis under the basis 

redetermination rule when it sells all 

the stock of a subsidiary, to modify the 

application of the attribute reduction 

rule, to apply the Unified Loss Rule 

retroactively to certain intercompany 

transfers, and to reattribute a section 

382 limitation. 

An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless it displays a valid control 

number. 

Books or records relating to the 

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 

On January 23, 2007, the IRS and 

Treasury Department issued a notice of 

proposed rulemaking (REG–157711–02, 

2007–8 IRB 537, 72 FR 2964) (January 

2007 proposal) that included proposed 

regulations under § 1.1502–36 (Unified 

Loss Rule). The proposed Unified Loss 

Rule would implement aspects of the 

repeal of the General Utilities doctrine 

and address the duplication of loss by 

consolidated groups. The proposed 

Unified Loss Rule consisted of three 

principal rules that would apply when 

a member (M) transferred a loss share of 

stock of a subsidiary (S): A basis 

redetermination rule (that would 

reallocate investment adjustments to 

address both noneconomic and 

duplicated stock loss), a basis reduction 

rule (that would address noneconomic 

stock loss), and an attribute reduction 

rule (that would address duplicated 

loss). 

In addition, the January 2007 proposal 

included proposed regulations under 

§ 1.1502–13(e)(4) that would address the 

application of section 362(e)(2) to 

certain intercompany transactions. The 

January 2007 proposal also included 

proposed regulations that would make 

various technical and administrative 

revisions to other provisions of the 

consolidated return regulations and to 

regulations regarding stock basis 

following certain corporate restructuring 

transactions. 

No public hearing regarding the 

proposed regulations was requested or 

held. Written, electronic, and oral 

comments responding to the notice of 

proposed rulemaking were received. 

After consideration of all the comments, 

these final regulations generally adopt 

the rules of the proposed regulations 

other than proposed § 1.1502–13(e)(4) 

and its related provisions. The 

significant comments and modifications 

are discussed in this preamble. 

1. The Unified Loss Rule 

A. General Comments 

In general, commentators and 

practitioners have consistently 

described the provisions of the 

proposed Unified Loss Rule as reaching 

a fair and reasonable systemic balance. 

They have generally concurred with the 

major policy decisions reflected in the 

proposed regulations, including the 

retention of the loss limitation model, 

the rejection of a tracing approach, the 

application of the rule to built-in 

income, and the systemic prevention of 

loss duplication. However, 

commentators and practitioners have 

also consistently raised concerns 

regarding both the complexity of the 

proposed rules and the anticipated 

difficulty in compiling the data required 

to implement the proposed rules, 

especially those relating to transfers of 

stock of subsidiaries that hold stock in 

other subsidiaries. 

The IRS and Treasury Department 

recognize that the proposed rules are 

complex. However, as recognized by 

commentators and practitioners, the 

complexity of the rules is a result of the 

balancing of benefits and burdens 

arising from the presumptions on which 

the rules are based. The IRS and 

Treasury Department are concerned, 

therefore, that simplifying the proposed 

rules would adversely impact the 

fundamental fairness the rules are 

intended to achieve. Nevertheless, 

careful consideration has been given to 

all simplifying suggestions, and they 

have been incorporated wherever 

possible. 

The suggestions regarding the general 

application and operation of the rule, 

and the conclusions reached as to each, 

are set forth in this section A of this 

preamble. Suggestions relating to 

individual paragraphs of the Unified 

Loss Rule and to other regulations in the 

January 2007 proposal, including 

proposed § 1.1502–13(e)(4), and the 

conclusions reached as to each, are set 

forth in the following sections. 

i. Order of Application of the Unified 

Loss Rule and Other Adjustments 

The January 2007 proposal provided 

that the Unified Loss Rule would apply 

to a transfer of a share of subsidiary 

stock if, after giving effect to all 

applicable rules of law (other than the 

Unified Loss Rule), the share is a loss 

share. The provisions of the proposed 

Unified Loss Rule would then apply 

sequentially to adjust subsidiary stock 

basis and attributes. Any adjustments 


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required under the Unified Loss Rule 

would be given effect immediately 

before the transfer. 

Commentators found the timing rules 

unclear, particularly as they related to 

the application of other provisions of 

the consolidated return regulations that 

also purport to apply immediately 

before a transaction. The IRS and 

Treasury Department have considered 

this comment and agree that there could 

be some uncertainty in this respect. 

To address this concern, § 1.1502– 

36(a)(3)(i) of these final regulations 

provides that the Unified Loss Rule 

applies when a member transfers a share 

of subsidiary stock and, after taking into 

account the effects of all rules of law 

applicable as of the transfer, even those 

that would not be given effect until after 

the transfer, the share is a loss share. 

Such effects may be attributable to 

lower-tier dispositions and 

worthlessness, as well as to the 

application of the Unified Loss Rule. 

Although the determination of whether 

a transferred share is a loss share is 

made as of the transfer, the Unified Loss 

Rule as a whole applies, and any 

adjustments required under the Unified 

Loss Rule are given effect, immediately 

before the transfer. 

When the Unified Loss Rule applies 

to a transfer, its individual provisions 

are each applied in order. Thus, as 

described in § 1.1502–36(a)(3)(i) of these 

final regulations, the general rule is that 

paragraph (b) applies first with respect 

to a transferred loss share (or shares). 

Then, if there is still a transfer of a loss 

share after the application of paragraph 

(b), paragraph (c) applies to the loss 

share (or shares). Finally, if there is still 

a transfer of a loss share after the 

application of paragraph (c), paragraph 

(d) applies with respect to that loss 

share (or shares). Section 1.1502– 

36(a)(3)(ii) provides detailed instruction 

regarding the order in which the 

individual provisions of the Unified 

Loss Rule apply if there are transfers at 

multiple tiers in the same transaction. 

ii. Application of Unified Loss Rule to 

Nondeconsolidating Transfers 

Several commentators have suggested 

that the final regulations include an 

election to defer basis recovery in the 

case of a nondeconsolidating transfer. 

Under such an election, a group could 

avoid applying the Unified Loss Rule to 

such transfers by shifting the basis of a 

transferred share (to the extent such 

basis exceeds the share’s value) to other 

shares held by members. As a result, the 

group would forego any current loss, but 

the Unified Loss Rule would continue to 

be applicable to any subsequent transfer 

of loss shares of stock of that subsidiary. 

The IRS and Treasury Department are 

concerned that such an election could 

cause significant administrative 

complexity. The IRS and Treasury 

Department are also concerned that 

such an election could cause substantial 

distortions that could adversely affect 

the treatment of subsequent 

deconsolidating transfers. For example, 

a basis shift resulting from such an 

election could significantly increase the 

disconformity amount of the retained 

shares, potentially causing a substantial 

and inappropriate reduction in the basis 

of the retained shares when they are 

ultimately transferred. Further, because 

this relief would only address transfers 

of minority interests, and the IRS and 

Treasury Department believe that such 

transfers reflect a small portion of 

subsidiary stock dispositions, the IRS 

and Treasury Department do not believe 

such a rule would give rise to any 

significant relief. Accordingly, this 

suggestion was not adopted. 

Other suggestions were made that 

would apply special rules to 

nondeconsolidating transfers. The final 

regulations generally do not adopt 

special rules for nondeconsolidating 

transfers. The principal reasons are the 

complexity a dual system would create 

and the small number of transactions 

expected to be affected by such rules. In 

addition, the IRS and Treasury 

Department believe that taxpayers will 

typically be able to restructure 

nondeconsolidating transfers to avoid 

the application of the Unified Loss Rule, 

for example, by issuing subsidiary stock. 

iii. Application of Unified Loss Rule to 

Deferred Recognition Transfers 

The proposed regulations provided 

that all transfers of loss shares of 

subsidiary stock are immediately subject 

to the Unified Loss Rule when the stock 

is transferred, even if any loss 

recognized on the transfer would be 

deferred. The IRS and Treasury 

Department had concluded that the 

immediate application of the Unified 

Loss Rule was necessary to prevent the 

significant administrative burden of 

retroactively applying the Unified Loss 

Rule to members’ bases in shares of 

subsidiary stock, and to the subsidiary’s 

attributes, long after a stock sale. 

Commentators questioned the need to 

apply the Unified Loss Rule to a transfer 

in which any loss that would be 

recognized would be deferred, citing as 

a model § 1.1502–20(a)(3) (deferring the 

application of § 1.1502–20, the Loss 

Disallowance Rule). Commentators also 

observed that single-entity principles 

seemed to suggest that an intercompany 

transfer is not an appropriate time to 

apply the Unified Loss Rule, urging that 

it would be more appropriate to apply 

the Unified Loss Rule to such a transfer 

when the intercompany item is taken 

into account. 

The IRS and Treasury Department 

have considered these comments and 

are persuaded that single-entity 

principles would be furthered, and 

group income would be more clearly 

reflected, if the application of the 

Unified Loss Rule were coordinated 

with the intercompany transaction 

provisions in § 1.1502–13. Accordingly, 

under these final regulations, if a 

member transfers a share of subsidiary 

stock to another member and any gain 

or loss on the transfer is deferred under 

§ 1.1502–13, the Unified Loss Rule 

applies to the transfer, or to any 

subsequent transfer of that share by a 

member, when the intercompany item is 

taken into account. At that time, the 

determination of whether the Unified 

Loss Rule applies and, if so, the 

consequences of its application are 

made by treating the buying and selling 

members as divisions of a single 

corporation. The final regulations also 

provide that appropriate adjustments 

will be made to intercompany item(s), 

any member’s basis in the subsidiary’s 

share, and/or the subsidiary’s attributes 

in order to further the purposes of both 

the Unified Loss Rule and the 

intercompany transaction provisions in 

§ 1.1502–13. 

Notwithstanding this modification of 

the treatment of intercompany transfers, 

the IRS and Treasury Department 

continue to believe that the deferral of 

loss recognized on a sale of subsidiary 

stock should not, in general, defer the 

application of the Unified Loss Rule. 

One reason is that postponing the 

application of the Unified Loss Rule in 

transfers that are not intercompany 

transactions would likely make it much 

more difficult, and in some cases 

impossible, to obtain the information 

and make the determinations necessary 

to apply the rule. Another reason is that 

such an approach could require 

subsequent adjustments to attributes 

outside the consolidated group. 

Accordingly, these final regulations 

continue to apply the Unified Loss Rule 

to non-intercompany transfers of loss 

shares at the time the stock is 

transferred, even if any loss recognized 

on the transfer is subject to deferral. 

These final regulations modify the 

definition of the term transfer to reflect 

both the general rule that the deferral of 

loss does not affect the determination of 

whether stock is transferred and the 

limited exception for intercompany 

transactions. 


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iv. Application of Unified Loss Rule to 

Liquidations Under Section 332 

The proposed Unified Loss Rule 

provided that the term transfer generally 

includes transactions in which a 

member ceases to own subsidiary stock. 

However, the proposed regulations 

included an exception for section 381(a) 

transactions in which any member 

acquires assets of the subsidiary, 

provided that no gain or loss is 

recognized by member shareholders 

with respect to the subsidiary’s stock. 

Commentators observed that this 

exclusion would apply to liquidations 

in which more than one member owns 

stock of the subsidiary and that, in such 

cases, upper-tier distortions could result 

because the basis redetermination rule 

would not apply. 

The IRS and Treasury Department 

agree with this observation and are 

concerned with the potential for 

distortion and abuse. Accordingly, 

under the final regulations, a 

disposition of subsidiary stock in a 

liquidation to which section 332 applies 

is not excepted from the definition of a 

transfer if more than one member owns 

stock in the liquidating subsidiary. 

However, the final regulations provide 

that, in the case of a multiple-member 

section 332 liquidation, neither 

paragraph (c) (the basis reduction rule) 

nor paragraph (d) (the attribute 

reduction rule) will apply to the 

transfer. Thus, if more than one member 

owns stock in a subsidiary and those 

members dispose of the subsidiary stock 

in a section 332 liquidation of the 

subsidiary, the transaction is subject to 

the other provisions of the Unified Loss 

Rule, in particular the basis 

redetermination rule in § 1.1502–36(b). 

v. Basis in Lower-Tier Stock 

In formulating the proposed Unified 

Loss Rule, the IRS and Treasury 

Department believed that, by using 

information that taxpayers were 

otherwise required to create and 

maintain, the administrative burden on 

taxpayers would be minimal. However, 

commentators have uniformly expressed 

concern that taxpayers will find it costly 

and time-consuming, if not impossible, 

to obtain the subsidiary stock basis 

information needed to apply many of 

the provisions of the Unified Loss Rule. 

Particular concern has been expressed 

regarding the lower-tier subsidiary rules 

in the proposed basis reduction rule 

(proposed § 1.1502–36(c)) and the 

proposed attribute reduction rule 

(proposed § 1.1502–36(d)). The reasons 

cited include the widespread practice of 

determining stock basis only when 

necessary to determine a person’s tax 

liability, complicated intercompany 

accounting rules that make stock basis 

determinations prone to error, and the 

frequent inability to obtain accurate 

historical basis information when 

acquiring companies with lower-tier 

subsidiaries. 

To address this problem, several 

commentators have suggested modifying 

the proposed rules to apply solely based 

on the net inside attributes of lower-tier 

subsidiaries (the ‘‘look-through’’ 

approach). Those commentators have 

argued that information regarding inside 

attributes is much more regularly and 

reliably maintained and available than 

stock basis information. 

The IRS and Treasury Department 

recognize that adopting a look-through 

approach would not only address the 

problem of inadequate stock basis data, 

it would also significantly simplify the 

application of the rules. However, the 

IRS and Treasury Department are 

concerned that a look-through approach 

could produce inappropriate results for 

groups transferring S stock if S holds 

stock of another subsidiary (S1) and S’s 

basis in its S1 stock reflects 

unrecognized appreciation in S1’s assets 

(built-in gain). 

Example. P, the common parent of a 

consolidated group, transfers $100 to S in 

exchange for S’s sole outstanding share of 

stock. S purchases the sole outstanding share 

of S1 stock for $100 when S1 holds one asset 

with a basis of $0 and a value of $100. S 

earns $100, increasing P’s basis in S to $200. 

S1’s asset declines in value to $0. P sells its 

S share to X, an unrelated person, for $100, 

recognizing a loss of $100. Under the basis 

reduction rule as proposed, P’s basis in S 

stock is reduced by the lesser of S’s 

disconformity amount and S’s net positive 

adjustment. S’s disconformity amount is $0, 

the excess of P’s $200 basis in the S share 

over S’s net inside attribute amount ($200, 

the sum of S’s $100 cash and its $100 basis 

in the S1 share, which is not treated as 

reduced under the tentative reduction rule 

because there were no investment 

adjustments applied to the basis of the S1 

share). Accordingly, although S had a $100 

net positive adjustment, there is no reduction 

to P’s basis in S stock and so P’s $100 loss 

on the S stock is allowed. However, because 

the stock loss is duplicated in S’s attributes, 

the attribute reduction rule will apply to 

eliminate S’s inside loss. 

If a look-through approach were 

adopted, however, S’s basis in its S1 

share would be disregarded and S’s 

disconformity amount would be $100 

(the excess of P’s $200 basis in its S 

share over S’s $100 net inside attribute 

amount, computed as the sum of S’s 

$100 cash and S1’s $0 basis in its asset). 

As a result, P’s basis in its S share 

would be reduced by $100, the lesser of 

S’s $100 disconformity amount and S’s 

$100 net positive adjustment. Although 

S would retain its $100 basis in its S1 

share, P would recognize no loss on its 

sale of the S stock. Thus, the selling 

group would have suffered an economic 

loss but the loss would be neither 

recognized nor allowed. Such a result 

would be contrary to the general rule 

adopted in the proposed regulations, 

that stock basis is not presumed 

noneconomic to the extent there is no 

disconformity amount or no net positive 

adjustment amount. 

The IRS and Treasury Department 

recognize that, under the proposed 

regulations, a very different result 

follows where it is S1, not S, that earns 

the $100. In that case, the proposed 

regulation would treat S’s basis in the 

S1 stock as tentatively reduced by $100 

(the lesser of S1’s $100 disconformity 

amount and S1’s net positive 

adjustment). As a result, S would have 

a disconformity amount of $100 and P’s 

basis in its S share would be reduced by 

$100 (the lesser of S’s $100 

disconformity amount and S’s $100 net 

positive adjustment). But the IRS and 

Treasury Department believe this result 

is appropriate because S1’s 

disconformity amount evidences that S1 

has at least $100 of built-in gain. 

Further, S1 has a net positive 

adjustment that evidences the 

recognition of that built-in gain. Thus, 

in this case, the facts indicate that S1’s 

income is attributable to the recognition 

of built-in gain and that, as a result, M’s 

loss on the share of S stock should be 

treated as noneconomic. 

The IRS and Treasury Department 

recognize that this approach could lead 

to situations in which the location of an 

item is manipulated to produce 

inappropriate results, but believe there 

are adequate protections against such 

manipulation. See, for example, section 

482 and the various anti-abuse 

provisions of the consolidated return 

regulations, including these final 

regulations. 

For all these reasons, the IRS and 

Treasury Department continue to 

believe that including lower-tier stock 

basis in determinations made under the 

Unified Loss Rule more fully safeguards 

taxpayers’ interests and generally 

produces more appropriate results. 

Several commentators argued that an 

elective look-through rule would 

address the concerns inherent in a 

mandatory look-through rule, as well as 

the concerns regarding the availability 

of stock basis information and the 

complexity of the proposed rules. 

The IRS and Treasury Department 

agree that an elective approach would 

mitigate the concerns presented by a 

mandatory look-through rule, but 

believe that an elective approach would 


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not provide the desired simplification. 

The reason is that the decision will 

affect computations under both the basis 

reduction rule and the attribute 

reduction rule, and what may be 

taxpayer favorable for one rule may be 

taxpayer unfavorable for the other rule. 

Thus, the benefit (or burden) of ignoring 

lower-tier stock basis for the basis 

reduction rule will need to be weighed 

against any benefit (or burden) of 

ignoring lower-tier stock basis for the 

attribute reduction rule. 

The IRS and Treasury Department 

acknowledge that, in order to simplify 

compliance, some taxpayers might elect 

a look-through approach without 

making detailed alternative 

computations. However, the IRS and 

Treasury Department believe that, given 

the consequences of such an election, 

the vast majority of taxpayers will 

compute their tax treatment both with 

and without a look-through approach 

before deciding whether to make such 

an election. Thus, in the vast majority 

of cases, there would be little or no 

simplification from an elective lookthrough approach, and one of the major 

goals of such a rule would not be 

achieved. 

Moreover, the IRS and Treasury 

Department believe that taxpayers 

making both computations will then 

universally choose the method that 

produces better results. While taxpayers 

are free to arrange their affairs so as to 

legitimately minimize their taxes, a 

system that will always operate to the 

disadvantage of one party or the other 

(in this case, the government) is not 

properly balanced. 

Accordingly, the IRS and Treasury 

Department believe that a mandatory 

look-through approach would produce 

inappropriate results in certain cases, 

and that an elective look-through 

approach would fail to achieve a 

significant amount of simplification and 

would significantly diminish the 

balance and fairness of the regulations. 

The final Unified Loss Rule therefore 

does not adopt any form of the lookthrough approach. 

Still, the IRS and Treasury 

Department recognize that determining 

lower-tier subsidiary stock basis may be 

difficult for the reasons previously 

noted. Further, although the need to 

determine lower-tier subsidiary stock 

basis is not particular to these 

regulations, the Unified Loss Rule 

arguably increases both the frequency 

and significance of these 

determinations. Accordingly, the IRS 

and Treasury Department are 

considering various proposals that 

would mitigate these difficulties on a 

system-wide basis. 

One alternative under consideration is 

a conforming basis election. Under this 

election, consolidated groups could 

determine members’ bases in shares of 

subsidiary stock by treating the basis in 

each share owned by a member as being 

equal to the share’s proportionate 

interest in the subsidiary’s net inside 

attributes. If such an election were 

made, the determination would 

presumably be effective for all Federal 

income tax purposes. Further, because 

the determination of subsidiary stock 

basis is not a concern that is unique to 

the Unified Loss Rule, consideration is 

being given to allowing the election 

with respect to all subsidiaries, with no 

restrictions on consistency or the time 

for making elections. However, the IRS 

and Treasury Department are not certain 

that such a rule would materially 

simplify the determination of basis 

because taxpayers are likely to conclude 

that they must determine stock basis in 

judging whether to make the election. 

Further, the IRS and Treasury 

Department are concerned about the 

collateral consequences of such a rule. 

Accordingly, the IRS and Treasury 

Department are requesting comments 

regarding whether such an election 

would assist taxpayers and whether it 

would in fact provide any 

simplification. Additionally, comments 

are requested regarding what collateral 

consequences, if any, such an election 

should or would have, and whether 

such consequences are appropriate. The 

issues include, for example, whether 

such an election would be an 

appropriate means of eliminating excess 

loss accounts, whether it could 

potentially produce inappropriate crosschain basis shifts, or whether it could 

inappropriately facilitate the 

acceleration of losses. 

The IRS and Treasury Department 

also request comments regarding any 

other method for addressing this issue. 

vi. Items Taken Into Account in 

Determining the Net Inside Attribute 

Amount 

As a result of various questions and 

comments received, the IRS and 

Treasury Department have reconsidered 

the inclusion of credits in the 

determination of the net inside attribute 

amount. Commentators have correctly 

observed that, at least with respect to 

credits held at the time of a taxable 

acquisition of subsidiary stock, credits 

are economically similar to other 

valuable attributes and it would be 

appropriate to take such credits into 

account in determining the 

disconformity amount. However, the 

proper treatment of other credits (that is, 

credits accruing after the subsidiary 

stock was acquired) in determining the 

disconformity amount, and of any 

credits (whenever accruing) in 

determining loss duplication, is less 

clear. Presumably, however, any such 

methodology would need to be tracingbased, and would therefore be expected 

to present the significant administrative 

concerns described in the preamble to 

the January 2007 proposal. Ultimately, 

no viable presumptive methodology was 

identified for determining the proper 

inclusion of credits, and so no change 

is made in the final Unified Loss Rule 

regarding the treatment of credits. 

vii. Adjustments for Section 362(e)(2) 

Transactions 

As discussed in Section 3 of this 

preamble, the IRS and Treasury 

Department have concluded that section 

362(e)(2) should generally not apply to 

intercompany transactions. However, 

section 362(e)(2) will apply to 

transactions occurring prior to 

September 17, 2008 if the taxpayer does 

not elect to apply the rule in the final 

regulations. In such cases, distortions 

will result and, thus, adjustments will 

need to be made. The IRS and Treasury 

Department are also concerned that 

there are other provisions that could 

create distortions. Accordingly, the final 

regulations retain the rule in proposed 

§ 1.1502–36(e)(2) that provided for 

adjustments to offset the effects of basis 

reductions required by section 362(e)(2) 

with respect to intercompany 

transactions, and the rule that provided 

for appropriate adjustments in cases 

raising similar issues. However, under 

the final regulations, taxpayers may 

make appropriate adjustments without a 

determination from the Commissioner. 

viii. Effective/Applicability Date Issues 

As proposed, the Unified Loss Rule 

would have been applicable for all 

transfers on or after the date the 

regulations were published as final. 

Several practitioners observed that the 

proposed effective date caused problems 

for taxpayers attempting to negotiate 

transactions because they could not be 

certain what set of regulations would be 

in effect when their transactions were 

completed. Accordingly, commentators 

and practitioners requested that the 

regulations include a transition rule that 

would exclude transfers effected on or 

after the date the final regulations are 

published, if such transfers were made 

pursuant to a binding agreement in 

place before the publication date. 

The IRS and Treasury Department 

recognized the difficulty created by the 

proposed effective date and, in Notice 

2008–9, 2008–3 IRB 277 (regarding the 

Internal Revenue Bulletin generally, see 


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§ 601.601(d)(2)(ii)(b)), announced that 

the final regulations would include a 

transition rule for transfers between 

unrelated parties if made pursuant to an 

agreement that is binding before the 

date that final regulations are published 

and at all times thereafter. Further, 

Notice 2008–9 stated that the IRS and 

Treasury Department expect that the 

rule would incorporate the provisions of 

section 267(b) in determining whether 

persons are related for this purpose. 

Accordingly, as stated in Notice 2008– 

9, the final Unified Loss Rule applies to 

transfers on or after September 17, 2008, 

unless the transfer is made pursuant to 

a binding agreement between unrelated 

parties that was in effect before 

September 17, 2008 and at all times 

thereafter. The final regulations provide 

that the term related party has the same 

meaning as in section 267(b). 

One comment was also received 

suggesting that the final regulations 

include an election to apply their 

provisions retroactively. The IRS and 

Treasury Department considered this 

suggestion but are concerned that 

adopting such an approach would 

disrupt taxpayers’ otherwise closed 

transactions and thereby exacerbate the 

problems caused by the uncertainty and 

instability in this area over these past 

years. Accordingly, the final Unified 

Loss Rule does not include an election 

to apply its provisions retroactively. 

B. Section 1.1502–36(b): Basis 

Redetermination Rule 

Commentators generally recognize 

and concur with the need for a rule that 

reallocates investment adjustments to 

address the problems created when 

shares of stock are held with disparate 

bases. As illustrated in Sections B.3, 

B.4, and E of the preamble to the 

January 2007 proposal, the allocation of 

investment adjustments under § 1.1502– 

32 can create a noneconomic stock loss 

on an individual share that would be 

eliminated under § 1.1502–36(c). 

Similarly, the allocation of investment 

adjustments under § 1.1502–32 can fail 

to eliminate a duplicated loss on an 

individual share. In both cases, 

however, the allocation creates no net 

loss if all the shares are taken into 

account. The basis redetermination rule 

in § 1.1502–36(b) is designed to address 

these issues. 

Commentators have expressed 

concern, however, with both the 

availability of the investment 

adjustment data required to implement 

the rule and the complexity of the 

application of the rule. 

The IRS and Treasury Department 

recognize that the information may be 

difficult and costly to produce. 

However, unlike lower-tier subsidiary 

stock basis information, the information 

required to implement the basis 

redetermination rule (specifically, the 

investment adjustment history of the 

stock of the subsidiary that is being 

transferred) is generally information 

obtained from the group’s own tax 

returns and other records. Groups are 

therefore, as a general matter, not 

dependent on other taxpayers for this 

information. 

Furthermore, the IRS and Treasury 

Department expect that this rule will 

apply to only a small number of 

transactions due to the exception for 

transactions in which members transfer 

all of their S stock to one or more 

nonmembers in a fully taxable 

transaction. Accordingly, it is 

anticipated that, in most transactions, 

taxpayers will not be required to 

redetermine basis. Moreover, in those 

situations in which it does apply, it 

accomplishes important objectives for 

both taxpayers and the government. 

Some commentators suggested 

allowing a member to be treated as 

having an averaged basis in its shares of 

S stock if S has only one class of stock 

outstanding and the member holds all of 

the S stock. The commentators argue 

that such an election could significantly 

reduce the number of taxpayers required 

to apply the basis redetermination rule. 

While that might be true, such basis 

averaging could result in additional 

complexities and distortions. For 

example, if a portion of the shares were 

previously transferred in an 

intercompany transaction and the bases 

in all of the subsidiary’s shares were 

averaged, it might be difficult to 

determine the extent to which particular 

shares reflect the prior intercompany 

transaction. Further, averaging the basis 

in the subsidiary’s shares could alter the 

application of section 267 and section 

311. 

For all these reasons, the final Unified 

Loss Rule retains the basis 

redetermination rule without the 

suggested modifications. 

The final regulations do, however, 

modify the basis redetermination rule to 

omit the reallocation of positive 

investment adjustments applied to 

preferred shares under § 1.1502–32. The 

reason is that § 1.1502–32 allocates 

positive adjustments to preferred shares 

solely to account for the right to receive 

distributions. Thus, the positive 

§ 1.1502–32 adjustments allocated to 

preferred shares, like the adjustments 

for distributions (which were not 

reallocated under the proposed Unified 

Loss Rule), are based on economic 

changes in the shareholder’s 

investment. As a result, they should 

have no correlation to unrecognized loss 

reflected in the bases of the shares and 

so should not be subject to this rule. The 

final regulations do, however, continue 

to permit the reallocation of both 

positive and negative adjustments from 

common to preferred shares in order to 

reduce or eliminate any loss on 

transferred preferred shares and any 

gain on either transferred or 

nontransferred preferred shares. The IRS 

and Treasury Department believe such 

reallocations are necessary and 

appropriate to address any reflection of 

unrecognized gain or loss in preferred 

shares attributable, for example, to 

contributions of assets in exchanged for 

preferred stock. 

i. Exceptions to Basis Redetermination 

Rule 

The proposed basis redetermination 

rule contained two exceptions to its 

application, the ‘‘no potential for 

redetermination’’ exception and the 

‘‘disposition of entire interest’’ 

exception. 

The proposed ‘‘no potential for 

redetermination’’ exception provided 

that basis redetermination is not 

required if redetermination would not 

change any member’s basis in S stock. 

Some commentators found this 

exception confusing; others suggested 

that it offered no simplification because 

it would be necessary to apply the basis 

redetermination rule to determine 

whether the exception was available. 

Other commentators thought that it 

provided a useful safe harbor. The IRS 

and Treasury Department have 

concluded that the rule should be 

retained, but that it should be revised to 

state its scope and effect more clearly. 

Accordingly, under the final 

regulations, the basis redetermination 

rule does not apply if members’ bases in 

shares of S common stock are equal 

(that is, there is no disparity) and 

members’ bases in shares of S preferred 

stock reflect no gain or loss. The reason 

is that, under these circumstances, the 

only effect that a reallocation of 

investment adjustments could have 

would be an increase, not a decrease, in 

basis disparity. 

The proposed ‘‘disposition of entire 

interest’’ exception provided that basis 

redetermination is not required if, 

within the group’s taxable year in which 

the transfer occurs, all of the shares of 

S stock held by members are transferred 

to a nonmember in a one or more fully 

taxable transactions. This rule differed 

from the basis reduction netting rule in 

proposed § 1.1502–36(c)(7) and the net 

stock loss definition in proposed 

§ 1.1502–36(d)(3)(ii), which only netted 

among shares transferred in the same 


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transaction. Commentators observed 

that this difference presents a potential 

for distortion and abuse if items are 

taken into account by S between 

transfers. While this problem exists to a 

certain extent if a transaction is 

comprised of steps that are not executed 

simultaneously, the problem may be 

significantly exacerbated by a rule that 

allowed netting among all transactions 

within a year. Moreover, because the 

netting rule in the basis reduction rule 

is intended, in part, to protect taxpayers 

when the basis redetermination rule is 

not applied, the IRS and Treasury 

Department believe that the application 

of these rules should be coextensive. 

Accordingly, the final regulations 

provide that this exception only applies 

if members dispose of their entire 

interest in S stock to one or more 

nonmembers, if all members’ shares of 

S stock become worthless, or if all 

members’ shares of S stock are either 

worthless or disposed of to one or more 

nonmembers, in one fully taxable 

transaction. 

Commentators also inquired whether 

the ‘‘disposition of entire interest’’ 

exception was mandatory, that is, 

whether the basis redetermination rule 

could be applied even if a group 

disposed of its entire interest in a 

transaction that qualifies for the 

exception. The IRS and Treasury 

Department recognize that taxpayers 

might choose to apply the basis 

redetermination rule in such cases in 

order to reduce gain or avoid the 

Unified Loss Rule with respect to uppertier shares. The IRS and Treasury 

Department do not believe that doing so 

would be inappropriate, as the premise 

of the basis redetermination rule is that 

reallocations made under the rule are 

appropriate allocations. However, 

because the IRS and Treasury 

Department believe that taxpayers will 

most often not want to apply the basis 

redetermination rule, the final 

regulations generally provide that basis 

is not redetermined when the exception 

applies, but include an election to apply 

the basis redetermination rule in such 

cases. 

ii. Manner in Which Investment 

Adjustments Are Reallocated 

Some commentators observed that the 

proposed rules were vague regarding the 

manner in which reallocations were to 

be made. The IRS and Treasury 

Department generally agree with this 

observation, but had concluded that the 

rule would work best if taxpayers were 

given considerable flexibility in 

determining how to make specific 

reallocations. In recognition of the fact 

that such an approach would allow 

differing interpretations, section F.2 of 

the preamble to the January 2007 

proposal stated that the IRS would 

respect any reasonable method or 

formula employed in applying the basis 

redetermination rule. 

The IRS and Treasury Department 

continue to believe that the rule should 

be as flexible as possible. However, in 

response to these comments, the 

specific provisions of the final basis 

redetermination rule provide some 

additional guidance (discussed more 

fully in the next section). But the rule 

is still intended to be flexible in its 

application and, therefore, the final 

regulations explicitly provide that the 

reallocation of an investment 

adjustment may be made using any 

reasonable method or formula that is 

consistent with the basis 

redetermination rule and furthers the 

purposes of the Unified Loss Rule. 

Thus, like the proposed regulations, the 

final regulations contemplate that more 

than one result may be reasonable in 

any specific case. 

iii. Decreasing Disparity in Basis of 

Members’ Shares 

The general operating rules of the 

proposed basis redetermination rule 

provided that reallocations are made in 

a manner that reduces the extent to 

which there is disparity in members’ 

bases in S stock. The IRS and Treasury 

Department have received various 

questions regarding the scope of this 

rule. Some practitioners read the rule to 

completely eliminate the loss on 

transferred shares even if overall 

disparity were increased. One 

practitioner suggested that the general 

rule, in referring only to the manner of 

redetermination, did not clearly restrict 

the amount of redetermination that 

would otherwise be required under the 

rules. 

To address these concerns, each of the 

specific allocation provisions in the 

final regulations includes a statement 

regarding the manner and extent to 

which allocations are to be made under 

the provision. In addition, the operating 

rules generally provide that the overall 

application of the rule must reduce 

disparity among members’ bases in 

preferred shares of subsidiary stock (as 

provided in the applicable reallocation 

provisions) and among members’ bases 

in common shares of subsidiary stock, 

to the greatest extent possible. 

C. Section 1.1502–36(c): Basis 

Reduction Rule 

In general, commentators found the 

general structure of the basis reduction 

rule and its components (limiting basis 

reduction to the lesser of the share’s 

disconformity amount and net positive 

adjustment) to be a reasonable approach 

to addressing the issue of noneconomic 

loss. The principal concern expressed 

was the anticipated difficulty with 

respect to gathering the information 

necessary to implement the lower-tier 

subsidiary rules. Nevertheless, 

commentators uniformly agreed that 

basis adjustments from lower-tier 

subsidiaries must be taken into account 

in order to identify and address 

noneconomic stock loss. 

The principal suggestion for 

addressing the lack of readily accessible 

and reliable information on lower-tier 

stock basis was to adopt a look-through 

approach, as discussed in section 1.A.v. 

of this preamble. For the reasons set 

forth in that section of this preamble, 

the final regulations do not adopt this 

approach. However, as noted, the IRS 

and Treasury Department continue to 

request and consider comments on 

mechanisms for alleviating the difficulty 

in determining lower-tier subsidiary 

stock basis. 

Commentators and practitioners did 

suggest a number of other modifications 

to the basis reduction rule. Those 

suggestions and the decisions reached 

are discussed in the following sections. 

i. Treatment of Intercompany Debt 

Several commentators suggested 

revising the net positive adjustment 

amount to exclude items related to 

intercompany debt. The rationale for 

this suggestion was that, in general, the 

nature of such amounts makes them 

more like to capital transactions than 

the recognition of built-in gain or loss. 

Thus it is argued that these amounts 

should be treated like contributions and 

distributions, which are not included in 

the net positive adjustment amount. 

The IRS and Treasury Department 

recognize that, in certain circumstances, 

intercompany debt has some inherent 

similarity to capital contributions and 

distributions, at least with respect to the 

principal amounts of such obligations. 

However, the IRS and Treasury 

Department also recognize that there are 

circumstances in which unrecognized 

appreciation in intercompany debt can 

be reflected in stock basis. For example, 

if a subsidiary receives cash in exchange 

for newly issued stock when it holds an 

intercompany obligation, the basis of 

the newly issued shares will reflect a 

portion of any unrecognized 

appreciation in the obligation. Because 

the consequences of having that 

unrecognized appreciation reflected in 

stock basis are no different from the 

consequences of any other built-in gain, 

the regulations would have to provide a 

system to identify and monitor those 


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amounts. Such a system would need to 

rely on a tracing-based methodology, 

which the IRS and Treasury Department 

have rejected for the reasons articulated 

in the preamble to the January 2007 

proposal. Accordingly, the IRS and 

Treasury Department have concluded 

that no special rules would be adopted 

for items related to intercompany debt. 

ii. Disconformity Amount: Net Inside 

Attributes 

In the proposed regulations, the term 

net inside attributes was defined as the 

excess of the sum of S’s loss carryovers, 

deferred deductions, and asset basis 

over S’s liabilities. Although different 

rules applied to determine basis in 

lower-tier subsidiary stock, the terms 

otherwise had the same meaning for 

purposes of both the basis reduction and 

attribute reduction rules. 

The proposed regulations defined the 

term loss carryover to mean any net 

operating or capital loss carryover 

attributable to S that is or, under the 

principles of § 1.1502–21 would be, 

carried to S’s first taxable year, if any, 

following the year of the transfer. Thus, 

if a buyer were to waive a loss carryover 

under § 1.1502–32(b)(4), the loss would 

not be carried to S’s first taxable year 

after the transfer, and so it would be 

excluded from the computation of net 

inside attributes. 

Practitioners agree that this definition 

is appropriate for purposes of measuring 

loss duplication, as it prevents attributes 

that cannot be duplicated from being 

taken into account in computing S’s 

attribute reduction amount. However, 

one commentator observed that this 

definition seemed inappropriate for 

purposes of measuring S’s 

disconformity amount. 

The IRS and Treasury Department 

have considered this comment and 

agree that the definition is inappropriate 

for computing S’s disconformity 

amount. As discussed in the January 

2007 preamble, the disconformity 

amount was incorporated in the basis 

reduction rule in order to limit basis 

reduction to the net amount of a 

subsidiary’s built-in gain. The IRS and 

Treasury Department believed that, by 

limiting basis reduction to the amount 

of net built-in gain, the basis reduction 

rule would not reduce stock basis by an 

amount that could not be attributed to 

the recognition of built-in gain. 

However, by adopting a definition of 

loss carryovers that required such losses 

to be carried to a separate return year, 

the rule allowed a waiver of a loss 

carryover under § 1.1502–32(b)(4) to 

reduce the amount of a subsidiary’s loss 

carryovers and, as a result, the 

subsidiary’s net inside attributes. That, 

in turn, caused an increase in the 

subsidiary’s disconformity amount. But, 

as the commentator observed, any 

disconformity created by the waiver of 

a loss carryover would be unrelated to 

the existence of built-in gain. Thus, this 

definition of loss carryovers 

undermined the protection otherwise 

afforded by the use of the disconformity 

amount as a limit on basis reduction. 

In addition, other commentators 

found the proposed rule unclear in its 

reference to losses that would be carried 

to a separate return year. 

To address these concerns, the final 

regulations provide that the term loss 

carryovers means those losses that are 

attributable to the subsidiary, including 

any losses that would be apportioned to 

the subsidiary under the principles of 

§ 1.1502–21(b)(2) if the subsidiary had a 

separate return year. However, because 

a waiver under § 1.1502–32(b)(4) does 

affect the extent to which a loss can be 

duplicated, the final regulations provide 

that, solely for purposes of applying the 

attribute reduction rule, a subsidiary’s 

loss carryovers (and therefore its net 

inside attributes) do not include the 

amount of any losses waived under 

§ 1.1502–32(b)(4). 

D. Section 1.1502–36(d): The Attribute 

Reduction Rule 

As discussed in the preamble to the 

January 2007 proposal, the loss 

duplication component of the Unified 

Loss Rule addresses loss duplication 

systemically in order to clearly reflect 

the income of both the group and its 

members, including former members. 

The IRS and Treasury Department view 

this rule as a necessary and appropriate 

complement to § 1.1502–32 because, 

together they work to eliminate the 

duplication of a group item once the 

group enjoys the benefit of the item, 

without regard to which of the 

duplicative items is recognized and 

allowed first. The IRS and Treasury 

Department also view this rule as a 

necessary and appropriate complement 

to the basis reduction rule because it 

eliminates S’s unrecognized built-in loss 

to the extent it prevented the 

identification of S’s recognized built-in 

gain (and thus prevented the reduction 

of noneconomic stock basis, and 

noneconomic stock loss). See sections 

C.3 and C.4.v of the preamble to the 

January 2007 proposal for a discussion 

of the interaction between unrecognized 

built-in loss and recognized built-in 

gain. 

Commentators generally agreed with 

the IRS and Treasury Department on the 

need for, and appropriateness of, the 

systemic approach to loss duplication. 

However, like the basis redetermination 

and basis reduction rules, the attribute 

reduction rule received considerable 

commentary regarding the issues of data 

availability and computational 

complexity. Commentators and 

practitioners made several suggestions 

for technical revisions to the proposed 

regulations. The IRS and Treasury 

Department have considered the 

suggestions received as well as other 

revisions to the proposed attribute 

reduction rule. The suggestions and 

conclusions are discussed in the 

following sections. 

i. Lower-Tier Subsidiary Rules 

In general, commentators and 

practitioners recognize that the rules for 

measuring and eliminating loss 

duplication must take into account both 

the basis in lower-tier subsidiary stock 

and the attributes of lower-tier 

subsidiaries in order to be most 

effective. Nevertheless, as already noted, 

commentators expressed much concern 

regarding the administrability of the 

proposed lower-tier subsidiary rules. 

Their principal suggestion for 

addressing this concern was the 

adoption of a look-through approach 

that would address loss duplication 

only by taking lower-tier attributes into 

account. 

The IRS and Treasury Department 

considered a look-through approach 

when drafting the January 2007 

proposal, but were concerned that such 

an approach would not adequately 

address loss duplication. The principal 

reason for this concern was that loss 

duplication can reside in the basis of 

lower-tier subsidiary stock and in the 

attributes of that lower-tier subsidiary 

and, moreover, that it can reside in 

those locations in differing amounts. 

Therefore, a rule that measures loss 

duplication solely by reference to lowertier attributes, or solely by reference to 

lower-tier stock basis, would permit 

potentially significant amounts of loss 

duplication to avoid reduction. To avoid 

this problem, the IRS and Treasury 

Department concluded that the loss 

duplication regulations must measure 

loss duplication by reference to both. 

The IRS and Treasury Department 

recognized, however, that when 

duplication is not uniformly reflected in 

stock basis and attributes, this approach 

could cause an over-reduction in lowertier attributes (when loss duplication 

resides primarily in lower-tier stock 

basis) or in lower-tier stock basis (when 

loss duplication resides primarily in 

lower-tier attributes). To prevent the 

former result, the conforming limitation 

on lower-tier attribute reduction limits 

the application of tiered-down attribute 

reduction (generally permitting a lowerVerDate Aug<31>2005 17:29 Sep 16, 2008 Jkt 214001 PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 E:\FR\FM\17SER2.SGM 17SER2

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tier subsidiary’s attributes to be reduced 

only to the extent necessary to conform 

them to members’ bases in that 

subsidiary’s stock, as reduced under this 

rule). To prevent the latter result, the 

basis restoration rule reverses 

reductions to lower-tier stock basis 

made by the Unified Loss Rule 

(generally to the extent necessary to 

conform members’ bases in the 

subsidiary’s stock to the subsidiary’s net 

inside attributes, as reduced under this 

rule). 

Thus, these rules work together to 

protect the government’s interests (by 

addressing the entire potential for loss 

duplication) and taxpayers’ interests (by 

preventing the over-reduction of either 

lower-tier stock basis or lower-tier 

attributes). Accordingly, the IRS and 

Treasury Department continue to 

believe these rules are essential to the 

balance and fundamental fairness of the 

Unified Loss Rule. 

Nevertheless, the IRS and Treasury 

Department recognize that the 

conforming limitation and basis 

restoration rules can add considerable 

complexity to the application of the 

Unified Loss Rule. To address this 

concern, commentators have suggested 

that one or the other of these rules could 

be omitted to simplify the proposed 

rule. The IRS and Treasury Department 

are concerned, however, that 

eliminating either of these rules would 

considerably undermine the overall 

fairness of the regulation. But the IRS 

and Treasury Department are persuaded 

that, if a taxpayer determines that the 

expected benefit of applying these rules 

is outweighed by the additional 

complexity, then that taxpayer should 

be permitted to choose not to apply 

these rules. 

Accordingly, these final regulations 

continue to measure the potential for 

loss duplication by taking both stock 

basis and attributes into account and 

continue to safeguard against overreduction of either inside attributes or 

stock basis by applying both the 

conforming limitation and the basis 

restoration rules. However, under the 

final regulations, taxpayers are 

permitted to elect not to apply the 

conforming limitation or the basis 

restoration rule if they decide the 

protection afforded by either or both of 

those rules does not outweigh the 

burden of applying them. 

ii. Attribute Reduction Amount Below 

Five Percent of Value 

Although the fundamental structure 

of the attribute reduction rule has been 

retained, the IRS and Treasury 

Department have determined that it is 

appropriate to provide an exception to 

the application of the attribute 

reduction rule if the attribute reduction 

amount (that is, the duplicated loss) is 

small relative to the size of the 

transaction. This decision reflects a 

balancing of the need to eliminate 

duplicated loss and the administrative 

burden of applying the attribute 

reduction rule. Accordingly, under 

these final regulations, taxpayers must 

still compute their attribute reduction 

amount, but if the total attribute 

reduction amount is less than five 

percent of the aggregate value of the 

subsidiary shares that are transferred by 

members in the transaction, the attribute 

reduction rule does not apply to the 

transfer. 

However, the IRS and Treasury 

Department also recognize that, in 

certain circumstances, a taxpayer may 

prefer to have the attribute reduction 

rule apply. For example, a group may 

want to apply the rule in order to 

reattribute a subsidiary’s attributes. 

Accordingly, the final regulations allow 

taxpayers to elect to apply the attribute 

reduction rule notwithstanding that 

their total attribute reduction amount is 

less than five percent of the aggregate 

value of the transferred shares. If this 

election is made, the attribute reduction 

rule will apply with respect to the entire 

attribute reduction amount determined 

in the transaction, and thus applies with 

respect to all members transferring 

shares, and all shares transferred, in the 

transaction. 

iii. Ordering of Reduction of Recognized 

Losses 

Commentators generally agreed with 

the decision to reduce recognized losses 

(net operating loss (NOL) carryovers, 

capital loss carryovers, and deferred 

deductions, identified as Category A, 

Category B, and Category C attributes, 

respectively) before reducing asset basis, 

since the former items represent actual, 

identified losses. The proposed 

regulations provided that the attribute 

reduction amount would be first applied 

to reduce NOL carryovers (from oldest 

to newest), then capital loss carryovers 

(from oldest to newest), and then 

deferred deductions (proportionately). 

However, several commentators 

questioned the need for a mandatory 

order in which these attributes would be 

reduced. These commentators observed 

that, because loss duplication is a 

mathematical determination under the 

Unified Loss Rule, and because it is 

difficult (if not impossible) to know 

which attributes are economically 

duplicative of a stock loss, the reduction 

of any item in those categories should 

be equally appropriate and effective. 

The IRS and Treasury Department 

have reconsidered this issue and agree 

with the commentators. Accordingly, 

the final regulations provide that if the 

attribute reduction amount is less than 

the total attributes in Category A, 

Category B, and Category C, the taxpayer 

may specify the allocation of S’s 

attribute reduction amount among the 

attributes in those categories. 

The final regulations do, however, 

prescribe a default allocation for the 

reduction of such attributes that is used 

to the extent the taxpayer does not 

specify an allocation. This default 

allocation differs from the order 

provided in the proposed rule in that 

capital loss carryovers (not NOLs) are 

reduced first. This modification was 

made in response to a commentator’s 

suggestion, based on the observation 

that capital loss carryovers have a 

significantly shorter expiration period 

and are therefore more likely than NOLs 

to expire unused. Accordingly, except to 

the extent a taxpayer elects to specify an 

allocation, the final regulations first 

reduce capital loss carryovers (oldest to 

newest), then NOL carryovers (oldest to 

newest), and then deferred deductions 

(proportionately). This change in the 

order of reduction is intended to 

minimize the possibility that the 

attribute reduction rule will reduce 

attributes in an amount greater than the 

amount that would ultimately be 

available for duplicative use. 

The final regulations continue to 

provide that, regardless of the order in 

which attributes in these categories are 

reduced, they are reduced in full before 

any reduction is made to asset basis. 

iv. Methodology for Reduction of Asset 

Basis 

Several commentators have suggested 

simplifying modifications to the manner 

in which asset basis is reduced under 

the attribute reduction rule. One is the 

elimination of the proposed Category D 

attributes (unrecognized losses on 

publicly traded property). This category 

was included in the proposed rule 

because the IRS and Treasury 

Department recognized that these 

amounts represent a readily identifiable 

loss that could be eliminated before the 

presumptive reduction of the bases of 

other assets. This approach prevented 

the attribute reduction rule from 

creating or increasing gain in publicly 

traded assets. However, commentators 

viewed this rule as increasing the 

complexity of an already complex 

analysis while providing only a 

marginal benefit. 

The IRS and Treasury Department are 

persuaded that this extra complexity 

might not be warranted in this context 


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and that the elimination of this rule 

would not materially affect the balance 

otherwise reached by the Unified Loss 

Rule. Accordingly, the final regulations 

include publicly traded property in the 

general asset basis category (now 

designated Category D). 

Another suggestion made by 

commentators was to apply the attribute 

reduction amount remaining after 

reducing Category A, Category B, and 

Category C attributes to reduce asset 

basis in the reverse order of the residual 

method of allocating consideration paid 

or received in a transaction under 

section 1060. 

The IRS and Treasury Department 

have concluded that this approach is 

readily administrable and reflects an 

appropriate balancing of presumptions 

regarding the location of duplicated 

loss. An important consideration is that 

such a rule reduces basis in purchased 

goodwill and going concern value before 

basis in other assets, and the IRS and 

Treasury Department are persuaded that 

duplicated loss is generally more likely 

to be reflected in the bases of such 

assets. Therefore, the elimination of the 

basis in those assets first seems 

particularly appropriate. Further, the 

IRS and Treasury Department believe 

that this approach would generally be 

more administrable than the proposed 

pro rata reduction of asset basis. 

Accordingly, these final regulations 

adopt this suggestion and generally 

provide that the attribute reduction 

amount is applied to reduce the basis of 

assets in the asset classes specified in 

§ 1.338–6(b) other than Class I (cash and 

general deposit accounts, other than 

certificates of deposit held in depository 

institutions), but in the reverse order 

from the order specified in that section. 

Thus, under this reverse residual 

method, any attribute reduction amount 

applied to reduce asset basis is generally 

applied first to reduce any basis of 

assets in Class VII (proportionately, 

based on basis instead of value, until all 

such basis is eliminated). Any 

remaining attribute reduction amount is 

then applied in the same manner to 

reduce the basis of assets in each 

succeeding lower asset class, other than 

Class I. 

Notwithstanding the general adoption 

of this allocation methodology for 

Category D attributes, these final 

regulations provide that the portion of 

the attribute reduction amount that is 

not applied to attributes in Category A, 

Category B, and Category C, is first 

allocated between S’s basis in any stock 

of lower-tier subsidiaries (treating all S’s 

shares of any one lower-tier subsidiary 

as a deemed single share) and the 

subsidiary’s other assets (treating the 

non-stock Category D assets as one 

asset). The allocation is made in 

proportion to S’s deemed basis in each 

single share of lower-tier subsidiary 

stock and S’s basis in the non-stock 

Category D asset (S’s aggregate basis in 

all of its Category D assets other than 

subsidiary stock). Only the portion of 

the attribute reduction amount not 

allocated to lower-tier subsidiary stock 

is applied under the reverse residual 

method. This initial allocation between 

lower-tier subsidiary stock and other 

assets is necessary to ensure that, to the 

extent the attribute reduction amount 

reflects items attributable to a lower-tier 

subsidiary’s stock basis or attributes, the 

attribute reduction amount is properly 

directed and applied to those items. 

v. Suspension of Excess Attribute 

Reduction Amount 

Several commentators and 

practitioners questioned the need to 

suspend attribute reduction amounts in 

excess of reducible attributes and apply 

those suspended amounts to reduce or 

eliminate attributes otherwise arising 

when all or part of the liability is paid 

or otherwise satisfied, whether by S or 

another person. The IRS and Treasury 

Department proposed this rule because 

the mathematical operation of the 

formula for computing the attribute 

reduction amount results in such an 

excess only if there is a liability or 

similar item that has reduced economic 

value but that has not been taken into 

account for tax purposes (generally a 

contingent liability). 

The IRS and Treasury Department 

continue to believe that it is 

inappropriate to permit the duplication 

of economic losses that have not 

accrued for tax purposes and, therefore, 

that this rule is both necessary and 

appropriate. Accordingly, the rule is 

retained in the final regulations. 

The IRS and Treasury Department 

recognize that this rule could create an 

administrative burden that could last for 

many years and transfer to taxpayers 

beyond the initial buyer and seller. 

However, the IRS and Treasury 

Department believe that the elimination 

of the special rule for publicly traded 

property substantially lessens the 

administrative burden of this rule. The 

reason is that, under this revised 

approach in the final regulations, a 

subsidiary’s attribute reduction amount 

can only exceed reducible assets to the 

extent of the subsidiary’s Class I assets. 

In such cases, the IRS and Treasury 

Department do not believe the burden 

imposed to be unreasonable or, in most 

cases, substantial. Moreover, a taxpayer 

believing the rule to be overly 

burdensome in its situation can readily 

avoid any suspension of its attribute 

reduction amount by converting its 

Class I assets into assets of another 

class; in that case, the remaining 

attribute reduction amount will be 

applied to the bases of those assets and 

will not give rise to a suspended 

attribute reduction amount. 

The IRS and Treasury Department 

received a comment that, if the 

suspended attribute reduction rule is 

retained, it should be clarified to 

provide that present value principles are 

to be taken into account in valuing 

liabilities. The final regulations do not 

include an explicit statement on this 

point because the rule implicitly 

incorporates present value principles 

(by limiting the attribute reduction 

amount to the lesser of the net stock loss 

and the aggregate inside loss, which are 

both a function of value). 

vi. Election to Reduce Stock Basis and/ 

or Reattribute Attributes 

Several commentators suggested that 

the final regulations should expressly 

permit taxpayers to make a protective 

election to reattribute attributes (other 

than asset basis) and/or to reduce stock 

basis (and thereby reduce stock loss) in 

order to avoid attribute reduction. The 

IRS and Treasury Department intend 

these elections to be as flexible as 

possible. Accordingly, the final 

regulations explicitly provide that, if the 

election is made and it is ultimately 

determined that S has no attribute 

reduction amount, the election will 

have no effect, or if the election is made 

for an amount that exceeds S’s finally 

determined attribute reduction amount, 

the election will have no effect to the 

extent of that excess. 

In addition, the final regulations 

permit taxpayers to reduce (or not 

reduce) stock basis, or to reattribute (or 

not reattribute) attributes, or some 

combination thereof, in any amount that 

does not exceed S’s attribute reduction 

amount. 

Thus, under the final regulations, 

taxpayers have considerable flexibility 

in making this election, and may make 

a protective election. 

Further, in order to protect against 

inadvertent attribute reduction, these 

final regulations provide for a deemed 

stock basis reduction election equal to 

the net stock loss (taking into account 

any actual elections under § 1.1502– 

36(d)(6)) in the case of a transfer in 

which the stock loss in the transferred 

shares would otherwise be permanently 

disallowed (for example under section 

311(a)). 

Several commentators also questioned 

the need for a mandatory order for the 

reattribution of losses for the same 


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reasons they questioned the need for a 

mandatory order for the reduction of 

such attributes. For the reasons 

discussed in section 1.D.iii. of this 

preamble, the IRS and Treasury 

Department agree that a mandatory 

order of reattribution is not necessary. 

Thus, under the final regulations, 

attributes are reattributed in the same 

amount, order, and category that they 

would otherwise be reduced under the 

attribute reduction rule. Accordingly, 

because the final regulations provide 

that taxpayers can specify the attributes 

in Category A, Category B, and Category 

C to be reduced, taxpayers may 

similarly specify the attributes in 

Category A, Category B, and Category C 

to be reattributed. Similar to the rule 

regarding the allocation of the attribute 

reduction amount, to the extent the 

taxpayer elects to reattribute attributes 

but does not specify the attributes to be 

reattributed, any attributes not 

specifically reattributed will be 

reattributed in the default amount, 

order, and category applicable for 

attribute reduction. 

Additionally, the final regulations 

revise the provisions regarding the 

election to reattribute attributes to 

provide for the reattribution of a section 

382 limitation. The final regulations 

also include conforming amendments to 

the consolidated section 382 rules in 

§§ 1.1502–90, 1.1502–91(h)(2), 1.1502– 

95(d), 1.1502–96(d), and 1.1502– 

99(b)(4). 

vii. The Conforming Limitation 

As previously discussed, the 

proposed regulations limited the 

application of the attribute reduction 

amount that tiered down to a lower-tier 

subsidiary in order to prevent an 

excessive reduction to that subsidiary’s 

attributes. Under this limitation (the 

conforming limitation), the tier-down 

attribute reduction amount (when 

combined with any attribute reduction 

amount computed with respect to a 

transfer of the shares of the lower-tier 

subsidiary) could be applied to reduce 

a lower-tier subsidiary’s attributes only 

to the extent necessary to conform those 

attributes to an amount equal to the sum 

of all members’ bases in nontransferred 

shares, and the value of all members’ 

transferred shares, of that subsidiary’s 

stock. 

Commentators observed that the 

conforming limitation could allow 

duplication to survive the application of 

the attribute reduction rule when lowertier stock basis reflects noneconomic 

basis. The commentators illustrated 

their observation with the following 

example: 

Example. M forms S with $100 of cash. S 

has no other assets or operations. S acquired 

S1 stock for $100 and no section 338 election 

is made with respect to such acquisition. S1 

has one asset (A1) with a basis of $20 and 

a value of $100. S1 sells A1 for $100. M’s 

basis in its S stock, and S’s basis in its S1 

stock, both increase by $80 to $180. S1 

invests the $100 of proceeds in another asset 

(A2). A2 subsequently, declines in value to 

$40. M sells the S stock for $40. 

Under the proposed basis reduction rule, 

M’s basis in the S stock is reduced by the 

lesser of S’s $80 net positive adjustment and 

S’s $80 disconformity amount (determined 

by treating S’s $180 basis in the S1 stock as 

tentatively reduced by $80, the lesser of S1’s 

$80 net positive adjustment and S1’s $80 

disconformity amount). After the application 

of the proposed basis reduction rule, M 

would recognize a $60 loss on the sale of the 

S stock. 

Under the proposed attribute reduction 

rule, S’s attribute reduction amount is $60 

(the lesser of the $60 net stock loss, and S’s 

$140 aggregate inside loss), and S would 

reduce its basis in the S1 stock by $60 to 

$120. Under the proposed attribute reduction 

rule, S’s $60 attribute reduction amount 

allocated to the S1 stock becomes an attribute 

reduction amount of S1. However, under the 

proposed conforming limitation on tier-down 

attribute reduction, S1 is not required to 

reduce its $100 basis in A2 because S1’s $100 

of attributes do not exceed S’s post-reduction 

$120 basis in the S1 stock. As a result, M’s 

$60 loss continues to be duplicated in both 

S’s basis in the S1 stock and S1’s basis in A2. 

The IRS and Treasury Department 

agree that, under these facts, the 

attribute reduction rule does not 

eliminate all lower-tier duplication. 

However, this effect follows directly 

from policy decisions underlying the 

Unified Loss Rule, specifically, that it 

would be a loss limitation rule and that 

the basis reduction rule would apply 

only upon a disposition, 

deconsolidation, or worthlessness of a 

loss share. Under this approach, as long 

as a share is held by the same person 

and is subject to the consolidated return 

provisions, noneconomic lower-tier 

subsidiary stock basis is preserved. As 

a result, subsequent appreciation can 

permit the stock to be transferred 

without being subject to the Unified 

Loss Rule, and the noneconomic stock 

basis can reduce any gain that would 

otherwise be recognized. It is the 

preservation of that noneconomic stock 

basis that prevents the full elimination 

of duplicated loss in S1’s attributes. 

The issue could be addressed in 

several ways. First, the decision to 

preserve basis until there is a loss 

transfer could be reversed. However, the 

rule would then either reduce lower-tier 

stock basis below value or rely on 

valuation to limit such basis reduction. 

The IRS and Treasury Department are 

concerned that adding a valuation 

component to this rule would present 

substantial administrative concerns. 

More importantly, however, the IRS and 

Treasury Department do not believe that 

such an approach adequately protects 

the balance struck in the regulation as 

proposed and so are not reconsidering 

that decision. 

Alternatively, the conforming 

limitation could be revised such that 

any conforming limit would be reduced 

by the amount of any tentative 

reduction to stock basis under the basis 

reduction rule. In the example set forth 

by the commentators, this would reduce 

S1’s conforming limitation by $80 (S1’s 

tentative reduction amount), from $120 

to $40. As a result, S1’s basis in A2 

would be reduced to $40. While this 

would produce an appropriate result 

with respect to A2, it leaves S’s basis in 

the S1 stock reflecting $80 of 

disconformity. Accordingly, absent 

additional adjustments, S’s basis in the 

S1 stock could appear to reflect a 

noneconomic loss, and so the rule 

would remain imperfect. 

Moreover, the effect of such an 

approach would be to create a 

disconformity amount that is not related 

to built-in gain. Consequently, when the 

S1 stock is ultimately sold, economic 

loss could appear noneconomic and, 

therefore, could be eliminated under the 

basis reduction rule. Although the 

Unified Loss Rule affords some 

protection for this situation in the 

operating rules (see the discussion in 

section A.1.vii. of this preamble), the 

IRS and Treasury Department are 

concerned that the tracing necessary to 

make the adjustments to prevent the 

elimination of economic loss will 

present substantial administrative 

difficulty and, in many cases, may not 

be possible. 

Furthermore, in certain 

circumstances, the proposed conforming 

limitation on tier-down attribute 

reduction could prevent an unnecessary 

reduction in lower-tier inside attributes, 

for example, when the loss on S stock 

is attributable to the loss of built-in gain 

on an asset held by S (other than 

subsidiary stock). 

Based on all of these considerations, 

the IRS and Treasury Department have 

decided not to revise this rule in the 

final regulations, but will continue to 

consider the issue. 

viii. Attribute Reduction in the Case of 

Certain Dispositions Due to 

Worthlessness and Where the 

Subsidiary Ceases to be a Member and 

Does Not Become a Nonmember 

Section 1.1502–35(f) generally 

provides that, if a member treats stock 

of S as worthless under section 165 


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(taking into account § 1.1502–80(c)) and 

S continues as a member, or if M 

recognizes a loss on S stock and on the 

following day S is not a member and 

does not have a separate return year 

following the recognition of the loss, all 

losses treated as attributable to S under 

the principles of § 1.1502–21(b)(2)(iv) 

are treated as expired as of the 

beginning of the day following the last 

day of the group’s taxable year. This 

rule was intended to prevent any 

implication that S’s share of the 

consolidated losses could be treated as 

remaining part of the consolidated net 

operating or capital loss carryover after 

S becomes worthless or is dissolved in 

a taxable transaction. The IRS and 

Treasury Department continue to 

believe that the regulations should 

explicitly clarify that such losses are 

removed from the consolidated losses. 

Commentators have observed that, in 

the specified circumstances, any credits 

and built-in losses attributable to S 

should also be eliminated to prevent 

their use after S either becomes 

worthless or is dissolved in a taxable 

transaction. The IRS and Treasury 

Department agree that, in such cases, S’s 

credits and other attributes should no 

longer be available to the group. 

Accordingly, these final regulations 

provide a special attribute elimination 

rule that applies to transfers that result 

from one of two events. The first is M’s 

transfer of a share of S stock caused 

solely by M treating the share as 

worthless under section 165 (taking into 

account the provisions of § 1.1502– 

80(c)), if S remains a member of the 

group and M has a deduction or 

recognizes a loss with respect to the 

transfer of the share. The second is M’s 

transfer of a share of S stock caused by 

S ceasing to be a member, if S has no 

separate return year and M recognizes a 

net deduction or loss on its S shares 

transferred in the transaction. When 

there is a transfer of S stock in either of 

these situations, S’s net operating loss 

carryovers, capital loss carryovers, and 

deferred deductions (including S’s share 

of such consolidated tax attributes) that 

are not otherwise reduced or 

reattributed under § 1.1502–36(d), and 

S’s credits (including S’s share of 

consolidated credits), are eliminated. 

The IRS and Treasury Department do 

not believe that any special rule is 

required regarding any built-in loss in 

assets because excess asset basis should 

not survive the transactions to which 

this rule applies. 

In considering this rule, the IRS and 

Treasury Department recognized that 

the reason for eliminating S’s attributes, 

including credits and deferred 

deductions, arises from the nature of the 

specified transactions, not from the 

amount of the member’s basis in the 

stock transferred in the transaction. 

Further, as provided in § 1.1502– 

19(a)(2)(ii), an excess loss account is 

treated as basis that is a negative 

amount and a reference to P’s basis in 

S’s stock includes a reference to P’s 

excess loss account. Accordingly, the 

IRS and Treasury Department have 

concluded that the elimination of S’s 

attributes should occur whenever one of 

the specified transactions occurs, 

without regard to the amount of the 

basis of the transferred share. Under 

such an approach, the treatment of S’s 

attributes following one of the specified 

transfers would be consistent 

irrespective of whether the aggregate 

basis in the members’ shares is a 

positive number (which produces a net 

loss or deduction), a negative number 

(an excess loss account, which produces 

income or gain under § 1.1502–19), or 

zero (which produces no income, gain, 

deduction or loss). 

Accordingly, these final regulations 

include a provision in § 1.1502–19 that 

applies to the same two transactions 

that will result in the complete 

elimination of S’s attributes when 

members have net loss on S stock. Thus, 

it will apply when a share of S stock is 

worthless under section 165, the 

requirements of § 1.1502–19(c)(1)(iii) are 

satisfied, members do not have a net 

deduction or loss on the S stock, and S 

continues as a member. It will also 

apply when S ceases to be a member, S 

has no separate return year, and 

members recognize an amount that is 

not a net loss on the subsidiary’s stock 

in the transaction. When it applies, it 

will eliminate S’s net operating loss 

carryovers, capital loss carryovers, and 

deferred deductions (including S’s share 

of such consolidated tax attributes), and 

S’s credits (including S’s share of 

consolidated credits). 

Under both the § 1.1502–36 and the 

§ 1.1502–19 elimination rules, attributes 

other than consolidated tax attributes 

(determined as of the event) are 

eliminated immediately before the event 

resulting in the application of the rule. 

Because consolidated tax attributes are 

first carried to the consolidated return 

year before being apportioned to a 

member’s first separate return year, the 

IRS and Treasury Department do not 

believe that any special timing rule is 

required regarding the elimination of 

the portion of any consolidated tax 

attributes attributable to the member 

under either of these rules. 

Mechanically, the elimination of the 

member’s portion of any consolidated 

tax attributes under either rule can only 

occur immediately after the close of the 

group’s tax year that includes the event. 

To clarify that there is no duplicative 

adjustment, these final regulations 

provide that the elimination of these 

attributes under either rule is not a 

noncapital, nondeductible expense. 

2. Other Sections Addressing Subsidiary 

Stock Loss: §§ 1.337(d)–1, 1.337(d)–2, 

1.1502–20, and 1.1502–35 

In general, transfers of loss shares of 

subsidiary stock on or after September 

17, 2008 will be subject to the Unified 

Loss Rule and not § 1.337(d)–1, 

§ 1.337(d)–2, § 1.1502–20, or § 1.1502– 

35. The IRS and Treasury Department 

do not expect that § 1.1502–20 will 

affect any transactions occurring on or 

after September 17, 2008. However, 

because of the binding-commitment 

transition rule, the IRS and Treasury 

Department expect there will be some 

transactions occurring on or after 

September 17, 2008 that will be subject 

to §§ 1.337(d)–1, 1.337(d)–2, and 

1.1502–35. In addition, dispositions 

subject to § 1.1502–35 will continue to 

be subject to the loss suspension and 

anti-loss reimportation rules in 

§ 1.1502–35. Accordingly, the IRS and 

Treasury Department are removing 

§ 1.1502–20 and retaining §§ 1.337(d)–1, 

1.337(d)–2, and 1.1502–35, subject to 

certain modifications described below. 

Under these final regulations, 

§§ 1.337(d)–1 and 1.337(d)–2 are 

modified to state explicitly that they do 

not apply to transactions subject to the 

Unified Loss Rule. However, those 

sections remain otherwise applicable. 

Section 1.1502–35 is also modified to 

state explicitly that it does not apply to 

transfers subject to the Unified Loss 

Rule. Although the provisions of 

§ 1.1502–35 are largely unchanged in 

these final regulations, there are some 

significant modifications, and those 

modifications are described in the 

following paragraphs. 

A. Ten-Year Termination of Application 

of § 1.1502–35 

Under the final regulations, the loss 

suspension rule is revised to provide 

that it ceases to apply ten years after the 

stock disposition that gave rise to the 

suspended loss. The purpose of this 

modification is to conform the loss 

suspension rule and the anti-loss 

reimportation rule. 

In addition, the general provisions of 

§ 1.1502–35 are revised to apply only to 

losses allowed within ten years of the 

date that they are recognized. Thus, if a 

loss is deferred and taken into account 

more than ten years after the 

disposition, or if an exchanged basis 

asset is sold at a loss more than ten 


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Federal Register / Vol. 73, No. 181 / Wednesday, September 17, 2008 / Rules and Regulations 53945 

years after the exchanged basis asset is 

acquired, the section will have no 

application to the loss. The purpose of 

this modification is to conform all 

application of § 1.1502–35 to the tenyear rule applicable to loss suspension 

and anti-loss reimportation. 

B. Location of Suspended Loss 

These final regulations modify 

§ 1.1502–35 to state explicitly that if M 

recognized a loss on S stock and the loss 

was suspended under § 1.1502–35(c), 

and if M ceases to be a member when 

S remains a member, then, immediately 

before M ceases to be a member, P is 

treated as succeeding to the loss in a 

transaction to which section 381(a) 

applies. Thus, the suspended loss is 

explicitly preserved for use by the group 

that disposed of the loss stock, and the 

location of the loss is specified. 

However, § 1.1502–35(c)(5)(i) provides 

that, ‘‘[t]o the extent not reduced * * *, 

any loss suspended * * * shall be 

allowed * * * on a return filed by the 

group of which the subsidiary was a 

member on the date of the disposition 

of subsidiary stock that gave rise to the 

suspended loss * * * for the taxable 

year that includes the day before the 

first date on which the subsidiary * * * 

is not a member of such group or the 

date the group is allowed a worthless 

stock loss * * *.’’ Further, § 1.1502– 

35(c)(3) provides that ‘‘any loss 

suspended * * * is treated as a 

noncapital, nondeductible expense of 

the member that disposes of subsidiary 

stock, incurred during the taxable year 

that includes the date of the disposition 

of stock [that gave rise to the suspended 

loss].’’ Accordingly, the IRS and 

Treasury Department believe these final 

regulations merely clarify the rule in 

§ 1.1502–35. 

C. Effect of Elimination of Reimported 

Item 

Under the anti-loss reimportation 

rule, a reimported item is generally 

eliminated immediately before it would 

be taken into account by the group. The 

regulations provided that the 

elimination of the item was a 

noncapital, nondeductible expense 

under §§ 1.1502–32(b)(2)(iii) and 

1.1502–32(b)(3)(iii). A practitioner 

suggested that this result would 

inappropriately reduce upper-tier stock 

basis and, as a result, would either 

create noneconomic gain or eliminate 

economic loss. The IRS and Treasury 

Department considered modifying this 

provision but have concluded that the 

elimination of a reimported item is 

similar to the expiration of a separate 

return limitation year loss and should 

be similarly treated. Accordingly, this 

rule is not modified in the final 

regulations. 

3. The Application of Section 362(e)(2) 

to Intercompany Transfers 

The proposed regulations included 

rules for suspending the application of 

section 362(e)(2) in the case of 

transactions between members of a 

consolidated group. The IRS and 

Treasury Department had proposed the 

rule because the interaction of section 

362(e)(2) and the consolidated return 

provisions (which already address 

duplication issues) causes significant 

distortions, administrative burden, and 

the potential for inappropriate loss 

disallowance and gain creation. In 

general, the proposed rules were 

intended to postpone the application of 

section 362(e)(2) to an intercompany 

transaction until the consolidated return 

provisions could no longer address the 

loss duplication created in the 

intercompany transaction. 

To implement such a regime, 

however, complex tracing rules would 

be necessary to identify the extent to 

which duplication is eliminated and to 

continuously monitor the extent to 

which duplication could continue to be 

eliminated by the consolidated return 

provisions. Although the intent was to 

simplify the application of section 

362(e)(2) in the consolidated return 

setting and to prevent the adjustments 

otherwise made under section 362(e)(2) 

from causing inappropriate results 

under the consolidated return 

provisions, commentators found these 

rules to be extremely complex and 

expect them to be extremely 

burdensome to administer. The IRS and 

Treasury Department concur with these 

views. 

Commentators offered two 

suggestions for addressing the concerns 

raised by the application of section 

362(e)(2) to intercompany transactions. 

The first suggestion was to treat 

intercompany section 362(e)(2) 

transactions as taxable transactions to 

the extent of the net loss in the 

transferred assets. Thus, the losses 

would not be duplicated and, because 

the transfers would be intercompany 

transactions, § 1.1502–13 would police 

the recognition of the losses. The 

rationale supporting this approach was 

that using a familiar regime 

(specifically, the intercompany 

transaction provisions of § 1.1502–13) 

would lessen the overall complexity of 

the provisions as well as the 

administrative burden placed on 

taxpayers and the government. 

Although this approach would be less 

burdensome than the approach in the 

proposed regulations, the IRS and 

Treasury Department are concerned that 

this approach would still impose an 

unnecessary administrative burden. 

Further, unlike either the general 

application of § 1.1502–13 to a 

nonrecognition transaction or the 

general application of section 362(e)(2), 

this approach would effectively 

preserve the original location of the net 

loss in the transferred assets. 

The second suggestion was to modify 

the consolidated return provisions to 

make section 362(e)(2) generally 

inapplicable to intercompany 

transactions. Commentators stated that 

applying section 362(e)(2) to 

intercompany transactions gives rise to 

administrative burden and complexity 

even if the taxable intercompany 

transaction model were adopted. 

Further, they argued that applying 

section 362(e)(2) to intercompany 

transactions is unnecessary because the 

consolidated return regulations 

(including the Unified Loss Rule) are 

already structured to address 

duplication of loss (and gain) within the 

group (including its members and 

former members) in a manner and scope 

that has been determined appropriate in 

the consolidated return setting, given 

the competing single and separate entity 

policy issues. The application of section 

362(e)(2) to intercompany transactions 

is thus not only generally unnecessary 

and burdensome, it is disruptive of the 

balance struck in the various 

consolidated return provisions, most 

notably the investment adjustment rules 

in § 1.1502–32 and the Unified Loss 

Rule in § 1.1502–36. 

For these reasons, the IRS and 

Treasury Department have concluded 

that section 362(e)(2) should generally 

not apply to intercompany transactions. 

Accordingly, these final regulations add 

a new paragraph (h) in § 1.1502–80, 

which makes section 362(e)(2) generally 

inapplicable to intercompany 

transactions. The purpose of the 

provision is to allow the consolidated 

return provisions to address loss 

duplication. The IRS and Treasury 

Department are therefore withdrawing 

proposed § 1.1502–13(e)(4), which 

proposed the suspension of the 

application of section 362(e)(2) to 

intercompany transactions. 

Notwithstanding the decision to make 

section 362(e)(2) generally inapplicable 

to intercompany transactions, the IRS 

and Treasury Department are concerned 

that the inapplicability of section 

362(e)(2) could be used to reach 

inappropriate results. For example, 

assume M transfers a loss asset to S in 

exchange for new shares in a transaction 

to which section 351(a) applies, S has 

an asset with offsetting appreciation, 


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53946 Federal Register / Vol. 73, No. 181 / Wednesday, September 17, 2008 / Rules and Regulations 

and later M sells only the new shares 

received in exchange for the loss asset. 

If S has no aggregate inside loss, the 

Unified Loss Rule will not require any 

attribute reduction. Accordingly, if S 

remains a member, the group could 

obtain more than a single benefit for its 

economic loss. The final regulations 

therefore include an anti-abuse rule that 

provides for appropriate adjustments to 

be made to clearly reflect the income of 

the group if a taxpayer acts with a view 

to prevent the consolidated return 

provisions from properly addressing 

loss duplication. The final regulations 

also include an example that illustrates 

both an abusive fact pattern (similar to 

the one described) and a nonabusive 

fact pattern (similar to the one 

described, except that all the stock is 

sold). 

4. Proposed Revisions to the Investment 

Adjustment Provisions, § 1.1502–32 

In the January 2007 proposal, the IRS 

and Treasury Department proposed 

several modifications to the investment 

adjustment rules in § 1.1502–32. The 

principal modifications that were 

proposed related to the treatment of 

items attributable to property 

transferred in an intercompany section 

362(e)(2) transaction and to the 

treatment of items attributable to the 

application of § 1.1502–36(d). 

As discussed in section 3 of this 

preamble, these final regulations make 

section 362(e)(2) generally inapplicable 

to intercompany transactions. 

Accordingly, the IRS and Treasury 

Department are withdrawing proposed 

§ 1.1502–32(c)(1)(ii)(A) (regarding the 

allocation of items otherwise 

attributable to intercompany section 

362(e)(2) transactions). 

Proposed regulations addressing the 

treatment of items attributable to the 

application of § 1.1502–36(d) are 

finalized as § 1.1502–32(c)(1)(ii). The 

IRS and Treasury Department have 

clarified the language of the proposed 

rule, but have made no substantive 

change to that rule. 

In addition, the proposed regulations 

made various nonsubstantive 

modifications to the language of 

§ 1.1502–32 that were intended to 

simplify, clarify, and then conform 

various sections of the regulations. 

Those proposed changes are adopted 

without substantive change. 

5. Miscellaneous Amendments to Other 

Regulations 

In addition to the various provisions 

directly related to the treatment of 

losses on subsidiary stock and to the 

treatment of intercompany section 

362(e)(2) transactions, the January 2007 

proposal included a number of 

proposed modifications to regulations 

unrelated to subsidiary stock loss issues. 

The proposed revisions are described in 

Section I of the preamble to the January 

2007 proposal. These final regulations 

adopt those proposed regulations 

without substantive change. 

These final regulations also include 

several additional provisions that are 

either additional technical corrections 

to existing regulations or expansions of 

regulatory modifications proposed in 

the January 2007 proposal and adopted 

as final in this Treasury decision. 

A. Technical Amendment to § 1.1502– 

13(g)(3)(i)(B)(2) 

One commentator suggested an 

expansion of § 1.1502–13(g)(3)(i)(B)(2), 

which prevents the application of 

§ 1.1502–13(c)(6)(i) to items of income 

or gain attributable to the reduction in 

basis of an intercompany obligation by 

reason of sections 108 and 1017 and 

§ 1.1502–28 (and thereby prevents such 

items from being excluded from 

income). The commentator noted that 

the same rule should be applied to items 

of income or gain attributable to the 

reduction in basis of an intercompany 

obligation by reason of § 1.1502–36(d), 

in order to prevent the circumvention of 

the effects of attribute reduction. The 

IRS and Treasury Department agree that 

such a revision would be a helpful 

clarification and that change is 

incorporated in these final regulations. 

B. Amendments to § 1.1502–33(e) 

‘‘Whole-Group’’ Exception 

In the January 2007 proposal, 

modifications were proposed to the 

‘‘whole-group’’ exceptions in § 1.1502– 

13(j)(5) (excepting whole-group 

acquisitions from the general rule that 

deconsolidations require intercompany 

items to be taken into account) and 

§ 1.1502–19(c)(3) (excepting wholegroup acquisitions from the general rule 

that deconsolidations require excess 

loss accounts to be taken into account). 

In response to the proposed changes 

to the whole-group exceptions in 

§§ 1.1502–13 and 1.1502–19, 

commentators suggested that a similar 

revision would be appropriate for the 

whole-group exception in § 1.1502– 

33(e)(2). That rule excepts whole-group 

acquisitions from the general rule in 

§ 1.1502–33(e)(1) that eliminates a 

member’s earnings and profits upon 

deconsolidation. The IRS and Treasury 

Department agree that the same 

reasoning supports the modification of 

all three whole-group exceptions. 

Accordingly, these final regulations 

modify the whole-group exception in all 

three provisions, §§ 1.1502–13(j)(5), 

1.1502–19(c)(3), and 1.1502–33(e)(2), to 

allow for their application without 

regard to whether the acquirer is a 

member of a consolidated group prior to 

the acquisition. Further, these final 

regulations provide that taxpayers may 

elect to apply each of these modified 

whole-group exceptions retroactively. 

C. Anti-Duplicative Adjustments 

Provisions 

The January 2007 proposal included a 

set of modifications that was intended 

to simplify several existing provisions 

by removing all references to the 

continued applicability of the Code and 

all of the anti-duplicative adjustment 

rules, and including such rule in a 

single paragraph in § 1.1502–80. The 

IRS and Treasury Department believed 

this change would simplify the 

regulations, as well as remove any 

potential for inadvertent omission or 

negative implication in other provisions 

where such concepts are or should be 

applicable. 

Commentators questioned whether 

the removal of the discussion of the 

anti-duplicative adjustment rule in 

various sections of the consolidated 

return regulations would eliminate 

guidance that is helpful to taxpayers 

and that establishes certain policy 

determinations. The IRS and Treasury 

Department have considered these 

comments and concluded that it is 

appropriate to retain the antiduplicative adjustment rule in the 

various sections of the consolidated 

return regulations, but to add a cross 

reference to the rule in § 1.1502–80(a). 

To provide additional guidance in 

§ 1.1502–80(a), the final regulations 

provide that, in determining the 

application of the anti-duplicative 

adjustment rule, the purposes of the 

provisions and single-entity principles 

are taken into account. 

In addition, the final regulations 

modify the general anti-duplicative 

adjustment rule in § 1.1502–80 to clarify 

that its principles apply to adjustments, 

inclusions, and all similar items. 

D. Technical Correction to Text 

Example in § 1.1502–75(d)(1) 

A practitioner informed the IRS and 

Treasury Department that the rationale 

in the text example in § 1.1502–75(d)(1) 

needed modification. Section 1.1502– 

75(d)(1) provides that a group remains 

in existence for a tax year if the common 

parent remains as the common parent 

and at least one subsidiary that was 

affiliated with it at the end of the prior 

year remains affiliated with it at the 

beginning of the year. It then sets forth 

an example in which, at the end of 

1965, P is the common parent of a group 


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that includes S and, at the beginning of 

1966, P is still the common parent of a 

group that includes S. The example 

concludes that the group continues 

through 1966 even though P acquires 

another subsidiary and S leaves the 

group. 

The practitioner noted that the result 

is correct, but that the rationale is 

misleading and appears to be based on 

a prior formulation of the continuation 

of the group rule. Accordingly, these 

final regulations revise the analysis of 

this text example so that the rationale 

reflects the current continuation of the 

group rule. 

E. Amendment to the Section 358 Stock 

Basis Rules for Certain Triangular 

Reorganizations 

In addition to adopting the proposed 

technical correction to the crossreference paragraph in § 1.358–6(e), 

these final regulations add triangular G 

reorganizations (other than by statutory 

merger) to the definition of triangular 

reorganizations in § 1.358–6(b)(2). 

F. Request for Comments on Gain 

Duplication 

Finally, in the preamble to the 

January 2007 proposal, the IRS and 

Treasury Department requested 

comments on the need for a provision 

that would address the gain duplication 

that occurs when S stock is sold at a 

gain and that gain is attributable to 

unrecognized net appreciation in S’s 

assets. The IRS and Treasury 

Department have not previously 

addressed this form of gain duplication 

directly because taxpayers can structure 

their transactions to avoid duplicative 

recognition of the gain, for example, by 

selling assets directly or by electing to 

have their stock sales treated as assets 

sales under section 338. While it is 

believed that taxpayers generally have 

adequate means to mitigate this 

problem, comments were requested. 

In response, commentators expressed 

the view that the IRS and Treasury 

Department underestimate the 

frequency and extent of gain duplication 

and overestimate the efficacy of selfhelp mechanisms. 

Some commentators suggested that 

gain duplication could be addressed 

through a section 338-like election, 

pursuant to which gain recognized on 

subsidiary stock could be allocated to 

the basis of the subsidiary’s assets, at 

least to the extent necessary to bring the 

basis of the assets into conformity with 

the basis of the stock in the buyer’s 

hands. However, those commentators 

have explicitly stated that they are not 

urging this or any other particular 

model. Moreover, the IRS and Treasury 

Department have been advised that 

there is disagreement among 

commentators and practitioners as to 

whether the additional burden and 

complexity inherent in such additional 

rules would be warranted by the 

potential relief they could provide. 

Accordingly, the IRS and Treasury 

Department will continue to accept 

comments and consider this issue. 

Special Analyses 

It has been determined that this 

Treasury decision is not a significant 

regulatory action as defined in 

Executive Order 12866. Therefore, a 

regulatory assessment is not required. 

These regulations are necessary to 

provide taxpayers with immediate 

guidance regarding the tax 

consequences of a member’s transfer of 

loss shares of subsidiary stock to 

prevent the creation and recognition of 

noneconomic stock loss and prevent the 

group from obtaining more than one tax 

loss from a single economic loss. 

Further, these regulations are necessary 

to provide taxpayers with immediate 

guidance regarding various other 

provisions of the consolidated return 

regulations. Therefore, good cause is 

found for dispensing with a delayed 

effective date pursuant to 5 U.S.C. 

553(d)(3). 

Pursuant to section 7805(f) of the 

Internal Revenue Code, the notice of 

proposed rulemaking preceding these 

regulations was submitted to the Chief 

Counsel for Advocacy of the Small 

Business Administration for comment 

on its impact on small business. 

It is hereby certified that these 

regulations will not have a significant 

economic impact on a substantial 

number of small entities. This 

certification is based on the fact that 

these regulations primarily affect 

affiliated groups of corporations that 

have elected to file consolidated returns, 

which tend to be larger businesses. 

Moreover, the number of taxpayers 

affected is minimal. Therefore, a 

Regulatory Flexibility Analysis under 

the Regulatory Flexibility Act (5 U.S.C. 

chapter 6) is not required. 

Drafting Information 

The principal authors of these 

regulations are Marcie Barese, Sean 

Duffley, and Theresa Abell of the Office 

of Associate Chief Counsel (Corporate). 

However, other personnel from the IRS 

and Treasury Department participated 

in their development. 

List of Subjects 

26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

26 CFR Part 602 

Reporting and recordkeeping 

requirements. 

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 by adding entries 

in numerical order to read as follows: 

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

Section 1.1502–36 also issued under 26 

U.S.C. 1502 * * * 

Section 1.1502–36 also issued under 26 

U.S.C. 337(d). * * * 

■ Par. 2. Section 1.337(d)–1 is amended 

by adding two sentences at the end of 

paragraph (a)(1) to read as follows: 

§ 1.337(d)–1 Transitional loss limitation 

rule. 

(a) * * * (1) * * * However, for 

transactions involving loss shares of 

subsidiary stock occurring on or after 

September 17, 2008, see § 1.1502–36. 

Further, this section does not apply to 

a transaction that is subject to § 1.1502– 

36. 

* * * * * 

■ Par. 3. Section 1.337(d)–2 is amended 

by adding two sentences at the end of 

paragraph (a)(1) to read as follows: 

§ 1.337(d)–2 Loss limitation rules. 

(a) * * * (1) * * * However, for 

transactions involving loss shares of 

subsidiary stock occurring on or after 

September 17, 2008, see § 1.1502–36. 

Further, this section does not apply to 

a transaction that is subject to § 1.1502– 

36. 

* * * * * 

■ Par. 4. Section 1.358–6 is amended 

by: 

■ 1. Adding paragraph (b)(2)(v). 

■ 2. Revising paragraph (e). 

■ 3. Revising the heading for paragraph 

(f) and adding paragraph (f)(3). 

The additions and revisions read as 

follows: 

§ 1.358–6 Stock basis in certain triangular 

reorganizations. 

* * * * * 

(b) * * * 

(2) * * * 

(v) Triangular G reorganization. A 

triangular G reorganization is an 

acquisition by S (other than by statutory 

merger) of substantially all of T’s assets 

in a title 11 or similar case in exchange 

for P stock in a transaction that qualifies 

as a reorganization under section 


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368(a)(1)(G) by reason of the application 

of section 368(a)(2)(D). 

* * * * * 

(e) Cross-reference regarding 

triangular reorganizations involving 

members of a consolidated group. For 

rules relating to stock basis adjustments 

made as a result of a triangular 

reorganization in which P and S, or P 

and T, as applicable, are, or become, 

members of a consolidated group, see 

§ 1.1502–30. However, if a transaction is 

a group structure change, stock basis 

adjustments are determined under 

§ 1.1502–31 and not under § 1.1502–30, 

even if the transaction also qualifies as 

a triangular reorganization otherwise 

subject to § 1.1502–30. 

(f) Effective/applicability dates. * * * 

(3) Triangular G reorganization and 

special rule for triangular 

reorganizations involving members of a 

consolidated group. Paragraphs (b)(2)(v) 

and (e) of this section shall apply to 

triangular reorganizations occurring on 

or after September 17, 2008. However, 

taxpayers may elect to apply paragraph 

(b)(2)(v) of this section to triangular 

reorganizations occurring before 

September 17, 2008 and on or after 

December 23, 1994. 

■ Par. 5. Section 1.362–4 is added to 

read as follows: 

§ 1.362–4 Limitations on built-in loss 

duplication. 

(a) Purpose and scope—(1) In general. 

[Reserved]. 

(2) Intercompany transactions. For 

rules relating to the application of 

section 362(e)(2) to transfers between 

members of a consolidated group on or 

after October 22, 2004, see § 1.1502– 

80(h). 

(b) [Reserved]. 

■ Par. 6. Section 1.1502–13 is amended 

by: 

1. Revising the heading and adding a 

new first sentence in paragraph (a)(4). 

2. Revising paragraphs (f)(6)(ii), 

(g)(3)(ii)(B)(2), (j)(5)(i)(A). 

3. Revising the last sentence of 

paragraph (f)(6)(iv)(A). 

4. Removing the second sentence in 

paragraph (f)(6)(v). 

5. Revising the heading for paragraph 

(l) and adding two sentences at the end 

of paragraph (l)(1). 

The revisions and additions read as 

follows: 

§ 1.1502–13 Intercompany transactions. 

(a) * * * 

(4) Application of other rules of law. 

See § 1.1502–80(a) regarding the general 

applicability of other rules of law and a 

limitation on duplicative adjustments. 

* * * 

* * * * * 

(f) * * * 

(6) * * * 

(ii) Gain stock. For dispositions of P 

stock occurring before May 16, 2000, see 

§ 1.1502–13(f)(6)(ii) as contained in 26 

CFR part 1 in effect on April 1, 2000. 

For dispositions of P stock occurring on 

or after May 16, 2000, see § 1.1032–3. 

* * * * * 

(iv) * * * 

(A) * * * If P grants M an option to 

acquire P stock in a transaction meeting 

the requirements of § 1.1032–3, M is 

treated as having purchased the option 

from P for fair market value with cash 

contributed to M by P. 

* * * * * 

(g) * * * 

(3) * * * 

(ii) * * * 

(B) * * * 

(2) Paragraph (c)(6)(i) of this section 

(treatment of intercompany items if 

corresponding items are excluded or 

nondeductible) will not apply to 

exclude any amount of income or gain 

attributable to a reduction of the basis 

of an intercompany obligation pursuant 

to sections 108 and 1017 and § 1.1502– 

28 or to § 1.1502–36(d); and 

* * * * * 

(j) * * * 

(5) * * * 

(i) * * * 

(A) The acquisition of either the assets 

of the common parent of the terminating 

group in a reorganization described in 

section 381(a)(2), or the stock of the 

common parent of the terminating 

group; or 

* * * * * 

(l) Effective/applicability dates. * * * 

(1) * * * Paragraphs (a)(4), (f)(6)(ii), 

(f)(6)(iv)(A), (g)(3)(ii)(B)(2), and 

(j)(5)(i)(A) of this section apply with 

respect to transactions occurring on or 

after September 17, 2008. However, 

taxpayers may elect to apply paragraph 

(j)(5)(i)(A) of this section to transactions 

that occurred prior to September 17, 

2008. 

* * * * * 

■ Par. 7. Section 1.1502–19 is amended 

by: 

■ 1. Removing the language ‘‘P’’ 

throughout the entire section and 

adding ‘‘M’’ in its place. 

■ 2. Adding a new sentence at the end 

of paragraph (a)(1). 

■ 3. Revising paragraphs (a)(3), 

(c)(1)(iii)(A), and (c)(3)(i)(A). 

■ 4. Adding new paragraph (b)(1)(iv). 

■ 5. Revising the heading for paragraph 

(h) and adding three sentences at the 

end of paragraph (h)(1). 

The revisions and additions read as 

follows: 

§ 1.1502–19 Excess loss accounts. 

(a) In general—(1) Purpose. * * * 

This section also provides rules for 

eliminating losses and other attributes 

attributable to S in certain cases in 

which S stock becomes worthless or S 

ceases to be a member and does not 

have a separate return year. 

* * * * * 

(3) Application of other rules of law, 

duplicative recapture. See § 1.1502– 

80(a) regarding the general applicability 

of other rules of law and a limitation on 

duplicative adjustments and recapture. 

(b) * * * 

(1) * * * 

(iv) Reduction of attributes in the case 

of certain dispositions by worthlessness 

or where S ceases to be a member and 

does not become a nonmember. If this 

paragraph (b)(1)(iv) applies, any net 

operating or capital loss carryover that 

is attributable to S, including any losses 

that would be apportioned to S under 

the principles of § 1.1502–21(b)(2) if S 

had a separate return year, any deferred 

deductions attributable to S, including 

S’s portion of such consolidated tax 

attributes (for example, consolidated 

excess charitable contributions that 

would be apportioned to S under the 

principles of § 1.1502–79(e) if S had a 

separate return year), and any credit 

carryover attributable to S, including 

any consolidated credits that would be 

apportioned to S under the principles of 

§ 1.1502–79 if S had a separate return 

year, are eliminated. Attributes other 

than consolidated tax attributes 

(determined as of the disposition) are 

eliminated under this paragraph 

(b)(1)(iv) immediately before the 

disposition resulting in the application 

of this paragraph (b)(1)(iv). The 

elimination of attributes under this 

paragraph (b)(1)(iv) is not a noncapital, 

nondeductible expense described in 

§ 1.1502–32(b)(2)(iii). This paragraph 

(b)(1)(iv) applies if— 

(A) A share of S stock becomes 

worthless under section 165, the 

requirements of paragraph (c)(1)(iii) of 

this section are satisfied, M does not 

recognize a net deduction or loss on the 

S stock, and S is a member of the group 

on the day following the last day of the 

group’s taxable year during which the 

share becomes worthless; or 

(B) M recognizes any amount that is 

not a net deduction or loss on the stock 

of S in a transaction in which S ceases 

to be a member and does not become a 

nonmember. 

* * * * * 

(c) * * * 

(1) * * * 

(iii) * * * 

(A) All of S’s assets (other than its 

corporate charter and those assets, if 


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any, necessary to satisfy state law 

minimum capital requirements to 

maintain corporate existence) are 

treated as disposed of, abandoned, or 

destroyed for Federal income tax 

purposes (for example, under section 

165(a) or § 1.1502–80(c), or, if S’s asset 

is stock of a lower-tier member, the 

stock is treated as disposed of under this 

paragraph (c)). An asset of S is not 

considered to be disposed of or 

abandoned to the extent the disposition 

is in complete liquidation of S under 

section 332 or is in exchange for 

consideration (other than relief from 

indebtedness); 

* * * * * 

(3) * * * 

(i) * * * 

(A) The acquisition of either the assets 

of the common parent of the terminating 

group in a reorganization described in 

section 381(a)(2), or the stock of the 

common parent of the terminating 

group; or 

* * * * * 

(h) Effective/applicability dates—(1) 

* * * Paragraphs (a)(3), (c)(1)(iii)(A), 

and (c)(3)(i)(A) of this section apply 

with respect to determinations and 

transactions occurring on or after 

September 17, 2008. However, taxpayers 

may elect to apply paragraph (c)(3)(i)(A) 

of this section to transactions that 

occurred prior to September 17, 2008. 

The last sentence of paragraph (a)(1) and 

paragraph (b)(1)(iv) of this section 

applies with respect to dispositions on 

or after December 16, 2008. 

* * * * * 

§ 1.1502–20 [Removed] 

■ Par. 8. Section 1.1502–20 is removed. 

§ 1.1502–20T [Removed] 

■ Par. 9. Section 1.1502–20T is 

removed. 

■ Par. 10. Section 1.1502–21 is 

amended by: 

■ 1. Removing the last sentence of 

paragraph (b)(1). 

■ 2. Removing paragraph (b)(3)(v). 

■ 3. Revising paragraphs (b)(2)(ii)(A), 

(b)(2)(iv)(B)(2)(iv), and (h)(6). 

■ 4. Adding a new paragraph 

(b)(2)(iv)(B)(2)(v). 

■ 5. Revising the heading for paragraph 

(h) and adding new paragraph (h)(1)(iii). 

■ 6. Revising the first sentence of 

paragraph (h)(8). 

The revisions and addition reads as 

follows: 

§ 1.1502–21 Net operating losses. 

* * * * * 

(b) * * * 

(2) * * * 

(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, then are 

subject to reduction under section 108 

and § 1.1502–28 (regarding discharge of 

indebtedness income that is excluded 

from gross income under section 

108(a)), and then are subject to 

reduction under § 1.1502–36 (regarding 

transfers of loss shares of subsidiary 

stock). Only the amount that is neither 

absorbed by the group in that year nor 

reduced under section 108 and 

§ 1.1502–28 or under § 1.1502–36 may 

be carried to the corporation’s first 

separate return year. For rules 

concerning a member departing a 

subgroup, see paragraph (c)(2)(vii) of 

this section. 

* * * * * 

(iv) * * * 

(B) * * * 

(2) * * * 

(iv) Reduction of attributes for stock 

loss. If during a taxable year a member 

does not cease to be a member of the 

group and any portion of the CNOL 

attributable to any member is reduced 

under § 1.1502–36, the percentage of the 

CNOL attributable to each member as of 

immediately after the reduction of 

attributes under § 1.1502–36 shall be 

recomputed pursuant to paragraph 

(b)(2)(iv)(B)(2)(v) of this section. 

(v) Recomputed percentage. The 

recomputed percentage of the CNOL 

attributable to each member shall equal 

the unabsorbed CNOL attributable to the 

member at the time of the 

recomputation divided by the sum of 

the unabsorbed CNOL attributable to all 

of the members at the time of the 

recomputation. For purposes of the 

preceding sentence, a CNOL that is 

reduced under section 108 and 

§ 1.1502–28, or under § 1.1502–36, or 

that is otherwise permanently 

disallowed or eliminated, shall be 

treated as absorbed. 

* * * * * 

(h) Effective/applicability dates—(1) 

* * * 

(iii) Paragraphs (b)(2)(ii)(A) and 

(b)(2)(iv)(B)(2) of this section apply to 

taxable years for which the due date of 

the original return (without regard to 

extensions) is on or after September 17, 

2008. 

* * * * * 

(6) Certain prior periods. Paragraphs 

(b)(1), (b)(2)(iv)(A), (b)(2)(iv)(B)(1), and 

(c)(2)(vii) of this section apply to taxable 

years for which the due date of the 

original return (without regard to 

extensions) is after March 21, 2005. 

Paragraphs (b)(2)(ii)(A) and 

(b)(2)(iv)(B)(2) (as contained in 26 CFR 

part 1 revised as of April 1, 2008) apply 

to taxable years for which the due date 

of the original return (without regard to 

extensions) is on or after March 21, 

2005, and before September 17, 2008. 

Paragraph (b)(2)(ii)(A) of this section 

and § 1.1502–21T(b)(1), (b)(2)(iv), and 

(c)(2)(vii), as contained in 26 CFR part 

1 revised as of April 1, 2004, apply to 

taxable years for which the due date of 

the original return (without regard to 

extensions) is after August 29, 2003, and 

on or before March 21, 2005. For taxable 

years for which the due date of the 

original return (without regard to 

extensions) is on or before August 29, 

2003, see paragraphs (b)(1), (b)(2)(ii)(A), 

(b)(2)(iv), and (c)(2)(vii) of this section 

and § 1.1502–21T(b)(1) as contained in 

26 CFR part 1 revised as of April 1, 

2003. 

* * * * * 

(8) Losses treated as expired under 

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

losses treated as expired under 

§ 1.1502–35(f) on or after March 10, 

2006, see § 1.1502–21(b)(3)(v) as 

contained in 26 CFR part 1 in effect on 

April 1, 2006. * * * 

■ Par. 11. Section 1.1502–30 is 

amended by: 

■ 1. Revising paragraph (b)(4). 

■ 2. Revising the heading for paragraph 

(c) and adding a second sentence. 

The revision and addition reads as 

follows: 

§ 1.1502–30 Stock basis after certain 

triangular reorganizations. 

* * * * * 

(b) * * * 

(4) Application of other rules of law. 

If a transaction otherwise subject to this 

section is also a group structure change 

subject to § 1.1502–31, the provisions of 

§ 1.1502–31 and not this section apply 

to determine stock basis. See § 1.1502– 

80(a) regarding the general applicability 

of other rules of law and a limitation on 

duplicative adjustments. See § 1.1502– 

80(d) for the non-application of section 

357(c) to P. 

* * * * * 

(c) Effective/applicability date. * * * 

However, paragraph (b)(4) of this 

section applies to reorganizations 

occurring on or after September 17, 

2008. 

■ Par. 12. Section 1.1502–31 is 

amended by: 

■ 1. Revising paragraph (a)(2). 

■ 2. Revising the heading for paragraph 

(h) and revising paragraph (h)(1). 

■ 3. Removing paragraphs (i) and (j). 

The revisions read as follows: 


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§ 1.1502–31 Stock basis after a group 

structure change. 

(a) * * * 

(2) Application of other rules of law. 

If a transaction subject to this section is 

also a triangular reorganization 

otherwise subject to § 1.1502–30, the 

provisions of this section and not those 

of § 1.1502–30 apply to determine stock 

basis. See § 1.1502–80(a) regarding the 

general applicability of other rules of 

law and a limitation on duplicative 

adjustments. 

* * * * * 

(h) Effective/applicability dates—(1) 

General rule. This section applies to 

group structure changes that occur after 

April 26, 2004. However, a group may 

apply this section to group structure 

changes that occurred on or before April 

26, 2004, and in consolidated return 

years beginning on or after January 1, 

1995. In addition, paragraph (a)(2) of 

this section applies to group structure 

changes that occurred on or after 

September 17, 2008. Paragraph (e)(2) of 

this section applies to any original 

consolidated Federal income tax return 

due (without extensions) after June 14, 

2007. For original consolidated Federal 

income tax returns due (without 

extensions) after May 30, 2006, and on 

or before June 14, 2007, see § 1.1502– 

31T as contained in 26 CFR part 1 in 

effect on April 1, 2007. For original 

consolidated Federal income tax returns 

due (without extensions) on or before 

May 30, 2006, see § 1.1502–31 as 

contained in 26 CFR part 1 in effect on 

April 1, 2006. 

* * * * * 

■ Par. 13. Section 1.1502–32 is 

amended by: 

■ 1. Removing the language ‘‘P’’ 

throughout the entire section and 

adding ‘‘M’’ in its place. 

■ 2. Revising the heading, adding a new 

first sentence, and removing the last two 

sentences in paragraph (a)(2). 

■ 3. Revising paragraphs (b)(3)(ii)(C)(2), 

(c)(1), and (c)(2)(i). 

■ 4. Revising the first sentence of 

paragraphs (c)(2)(ii)(A) and (c)(3), and 

the first three sentences of paragraph 

(c)(4)(i), introductory text. 

■ 5. Removing paragraphs (b)(3)(iii)(C) 

and (b)(3)(iii)(D). 

■ 6. Revising the heading for paragraph 

(h) and adding paragraph (h)(9). 

The revisions and addition read as 

follows: 

§ 1.1502–32 Investment adjustments. 

(a) * * * 

(2) Application of other rules of law, 

duplicative adjustments. See § 1.1502– 

80(a) regarding the general applicability 

of other rules of law and a limitation on 

duplicative adjustments. * * * 

* * * * * 

(b) * * * 

(3) * * * 

(ii) * * * 

(C) * * * 

(2) Expired loss carryovers. If the 

amount of the discharge exceeds the 

amount of the attribute reduction under 

sections 108 and 1017, and § 1.1502–28, 

the excess nevertheless is treated as 

applied to reduce tax attributes to the 

extent a loss carryover attributable to S 

expired without tax benefit, the 

expiration was taken into account as a 

noncapital, nondeductible expense 

under paragraph (b)(3)(iii) of this 

section, and the loss carryover would 

have been reduced had it not expired. 

* * * * * 

(c) Allocation of adjustments among 

shares of stock—(1) In general—(i) 

Distributions. The adjustment that is 

described in paragraph (b)(2)(iv) of this 

section (negative adjustments for 

distributions) is allocated to the shares 

of S stock to which the distribution 

relates. 

(ii) Special rules applicable in the 

case of certain loss transfers of 

subsidiary stock—(A) Losses 

reattributed pursuant to an election 

under § 1.1502–36(d)(6)—(1) General 

rule. If a member transfers loss shares of 

S stock and the common parent elects 

under § 1.1502–36(d)(6) to reattribute all 

or a portion of S’s attributes, S’s 

resulting noncapital, nondeductible 

expense is allocated to all loss shares of 

S stock transferred by members in the 

transaction. The expense is allocated 

among those S shares in proportion to 

the loss in the shares. The tier-up of that 

expense is included in the remaining 

adjustment (see paragraph (c)(1)(iii) of 

this section). 

(2) Reattribution of attributes of a 

subsidiary that is lower-tier to S. If a 

member transfers loss shares of S stock 

and the common parent elects under 

§ 1.1502–36(d)(6) to reattribute 

attributes of a subsidiary (S2) that is 

lower-tier to S, S2’s resulting 

noncapital, nondeductible expense is 

allocated among S2 shares held by 

members as of the transaction, other 

than those transferred in the transaction 

and with respect to which gain or loss 

was recognized (recognition transfer), in 

a manner that permits the full amount 

of the expense to tier up and be applied 

to the bases of the loss shares of S stock 

transferred by members in the 

transaction. The expense is allocated 

among those S2 shares with positive 

basis in a manner that, first, reduces the 

bases of S2’s preferred shares to 

equalize and then eliminate loss and, 

second, reduces the bases of S2’s 

common shares in a manner that 

reduces disparity among the bases of 

those common shares to the greatest 

extent possible. The noncapital, 

nondeductible expense applied to the 

S2 shares tiers up and is applied to the 

stock of any subsidiaries that are lowertier to S (middle-tier subsidiaries) in a 

manner that will permit the full amount 

of this expense to be applied to reduce 

the bases of the loss shares of S stock 

transferred by members in the 

transaction. Similar to the allocation 

among the S2 shares, the tier-up of this 

expense is allocated among the middletier subsidiary shares held by members 

as of the transaction, other than those 

transferred in a recognition transfer, in 

a manner that permits the full amount 

of the expense to tier up and be applied 

to the bases of the loss shares of S stock 

transferred by members in the 

transaction. The tier-up of this expense 

is allocated among those middle-tier 

subsidiary shares with positive basis in 

a manner that, first, reduces the bases of 

the middle-tier subsidiary’s preferred 

shares to equalize and then eliminate 

loss and, second, reduces the bases of 

the middle-tier subsidiary’s common 

shares in a manner that reduces 

disparity among the bases of those 

common shares to the greatest extent 

possible. The tier-up of this expense is 

allocated to the loss shares of S stock 

transferred by members in the 

transaction in the same manner as 

provided in paragraph (c)(1)(ii)(A)(1) of 

this section, and thereafter the tier-up of 

that expense is included in the 

remaining adjustment (see paragraph 

(c)(1)(iii) of this section). 

(3) Example. The following example 

illustrates the rules of this paragraph 

(c)(1)(ii)(A). 

Example. Assume P owns M1, P and M1 

own M2, M2 owns S, M1 and S own S1, and 

M1 and S1 own S2. If S sells a portion of the 

S1 shares at a gain and M2 sells all of the 

S stock at a net loss (after adjusting the basis 

for the gain recognized by S on the sale of 

the S1 shares), and P elects under § 1.1502– 

36(d)(6) to reattribute attributes of S2, the 

resulting noncapital, nondeductible expense 

is allocated entirely to the S2 shares held by 

S1 with positive basis in a manner that 

reduces the disparity in those bases to the 

greatest extent possible. The tier-up of this 

amount is allocated entirely to the S1 shares 

held by S (excluding the S1 shares sold) with 

positive basis in a manner that reduces the 

disparity in those bases to the greatest extent 

possible. The tier-up of this amount is 

allocated to the loss shares of S stock sold by 

M2 in proportion to the loss in those shares. 

The tier-up of this amount is then included 

in the remaining adjustment and tiers up 

from M2 to M1 and P, and from M1 to P 

under the general rules of this section. 


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(B) Tier-up of reallocated investment 

adjustments subject to prior use 

limitation. If the reallocation of an 

investment adjustment under § 1.1502– 

36(b)(2) is subject to the prior use 

limitation in § 1.1502–36(b)(2)(iii)(B)(2), 

no amount of the tier-up of such 

reallocated investment adjustment shall 

be allocated to any share whose prior 

use resulted in the application of the 

limitation. Thereafter, the tier-up of this 

amount is included in the remaining 

adjustment (see paragraph (c)(1)(iii) of 

this section). 

(iii) Remaining adjustment. The 

remaining adjustment is the adjustment 

that consists of the items described in 

paragraphs (b)(2)(i) through (b)(2)(iii) of 

this section (adjustments for taxable 

income or loss, tax-exempt income, and 

noncapital, nondeductible expenses), 

including adjustments to lower-tier 

stock basis that tier up under paragraph 

(a)(3)(iii) of this section, but only to the 

extent not specially allocated under 

paragraph (c)(1)(ii) of this section. The 

remaining adjustment is allocated 

among the shares of S stock as provided 

in paragraphs (c)(2) through (c)(4) of this 

section. If the remaining adjustment is 

positive, it is allocated first to any 

preferred stock as provided in paragraph 

(c)(3) of this section, and then to the 

common stock as provided in paragraph 

(c)(2) of this section. If the remaining 

adjustment is negative, it is allocated 

only to common stock as provided in 

paragraph (c)(2) of this section. 

(iv) Nonmember shares. No 

adjustment under this section that is 

allocated to a share for the period it is 

owned by a nonmember affects the basis 

of the share. 

(v) Cross-references. See paragraph 

(c)(4) of this section for the reallocation 

of adjustments, and paragraph (d) of this 

section for definitions. See § 1.1502– 

19(d) for special allocations of basis 

determined or adjusted under the 

Internal Revenue Code (Code) with 

respect to excess loss accounts. 

(2) Common stock—(i) Allocation 

within a class. The remaining 

adjustment described in paragraph 

(c)(1)(iii) of this section that is allocable 

to a class of common stock is generally 

allocated equally to each share within 

the class. However, if a member has an 

excess loss account in a share of a class 

of common stock at the time a positive 

remaining adjustment is to be allocated, 

the portion of the positive remaining 

adjustment allocable to the member 

with respect to the class is allocated first 

to equalize and then eliminate that 

member’s excess loss accounts. It is then 

allocated equally among the members’ 

shares in that class. Similarly, the 

portion of any negative remaining 

adjustment allocable to the member 

with respect to the class is allocated 

equally to the member’s shares with 

positive bases, eliminating all positive 

basis in shares of the class before 

creating or increasing any excess loss 

accounts. After positive basis is 

eliminated, any remaining portion of the 

negative remaining adjustment is 

allocated to equalize the member’s 

excess loss accounts in the shares of that 

class to the greatest extent possible. 

Distributions and any adjustments or 

determinations under the Internal 

Revenue Code (for example, under 

section 358, including any 

modifications under § 1.1502–19(d)) are 

taken into account before the allocation 

is made under this paragraph (c)(2)(i). 

(ii) * * * 

(A) * * * If S has more than one class 

of common stock, the extent to which 

the remaining adjustment described in 

paragraph (c)(1)(iii) of this section is 

allocated to each class is determined, 

based on consistently applied 

assumptions, by taking into account the 

terms of each class and all other facts 

and circumstances relating to the overall 

economic arrangement. * * * 

* * * * * 

(3) * * * If the remaining adjustment 

described in paragraph (c)(1)(iii) of this 

section is positive, it is allocated to 

preferred stock to the extent required 

(when aggregated with prior allocations 

to the preferred stock during the period 

that S is a member of the consolidated 

group) to reflect distributions described 

in section 301 (and all other 

distributions treated as dividends) to 

which the preferred stock becomes 

entitled, and arrearages arising, during 

the period that S is a member of the 

consolidated group. * * * 

* * * * * 

(4) * * * (i) * * * A member’s basis 

in each share of S preferred and 

common stock must be redetermined 

whenever necessary to determine the 

tax liability of any person. See 

paragraph (b)(1) of this section. The 

redetermination is made by reallocating 

S’s adjustments described in paragraphs 

(c)(1)(ii)(B) (specially allocated 

adjustments for tier-up of reallocated 

investment adjustments subject to prior 

use limitation) and (c)(1)(iii) (remaining 

adjustments) of this section for each 

consolidated return year (or other 

applicable period) of the group by 

taking into account all of the facts and 

circumstances affecting allocations 

under this paragraph (c) as of the 

redetermination date with respect to all 

of the S shares. * * * 

* * * * * 

(h) Effective/applicability date. * * * 

(9) Allocations of investment 

adjustments, including adjustments 

attributable to certain loss transfers; 

certain conforming amendments. 

Paragraphs (a)(2), (b)(3)(ii)(C)(2), (c)(1), 

(c)(2)(i), (c)(2)(ii)(A), (c)(3), and (c)(4)(i) 

of this section are applicable for 

determinations of the basis of stock of 

a subsidiary on or after September 17, 

2008. 

* * * * * 

§ 1.1502–32T [Removed] 

■ Par. 14. Section 1.1502–32T is 

removed. 

■ Par. 15. Section 1.1502–33 is 

amended by: 

■ 1. Revising the heading and adding a 

new first sentence to paragraph (a)(2). 

■ 2. Revising paragraph (e)(2)(i)(A). 

■ 3. Revising the heading for paragraph 

(j) and adding two sentences to the end 

of paragraph (j)(1). 

The additions and revision read as 

follows: 

§ 1.1502–33 Earnings and profits. 

(a) * * * 

(2) Application of other rules of law, 

duplicative adjustments. See § 1.1502– 

80(a) regarding the general applicability 

of other rules of law and a limitation on 

duplicative adjustments. * * * 

* * * * * 

(e) * * * 

(2) * * * 

(i) * * * 

(A) The acquisition of either the assets 

of the common parent of the terminating 

group in a reorganization described in 

section 381(a)(2), or the stock of the 

common parent of the terminating 

group; or 

* * * * * 

(j) Effective/applicability date—(1) 

* * * Paragraphs (a)(2) and (e)(2)(i)(A) 

of this section apply with respect to 

determinations of the earnings and 

profits of a member in consolidated 

return years beginning on or after 

September 17, 2008. However, taxpayers 

may elect to apply paragraph (e)(2)(i)(A) 

of this section with respect to 

determinations of the earnings and 

profits of a member in consolidated 

return years beginning prior to 

September 17, 2008. 

* * * * * 

■ Par. 16. Section 1.1502–35 is 

amended by: 

■ 1. Revising paragraphs (a), (c)(3), 

(c)(4)(i), (c)(5)(i), (g)(3), (g)(6), (h), and 

(j). 

■ 2. Revising the heading of paragraph 

(c)(8). 

■ 3. Removing paragraph (k). 


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53952 Federal Register / Vol. 73, No. 181 / Wednesday, September 17, 2008 / Rules and Regulations 

§ 1.1502–35 Transfers of subsidiary stock 

and deconsolidations of subsidiaries. 

(a) In general—(1) Purpose. The 

purpose of this section is to prevent a 

group from obtaining more than one tax 

benefit from a single economic loss. The 

provisions of this section shall be 

construed in a manner that is consistent 

with that purpose and in a manner that 

reasonably carries out that purpose. 

(2) Dates of applicability. This section 

applies if— 

(i) On or after March 7, 2002, a 

member recognizes a loss on the 

disposition of a share of stock of a 

subsidiary (or, on or after April 10, 

2007, a share of stock of a former 

subsidiary) or a carryover basis asset 

(subject to paragraph (c)(6) of this 

section), 

(ii) The member’s loss on the share of 

subsidiary stock or the carryover basis 

asset is allowed on or before the date 

that is ten years after the disposition of 

the share or carryover basis asset, and 

(iii) If the disposition is of a share of 

subsidiary stock, it is not a transfer to 

which § 1.1502–36 applies. 

* * * * * 

(c) * * * 

(3) Treatment of suspended loss—(i) 

General rule. For purposes of the rules 

of § 1.1502–32, any loss suspended 

pursuant to paragraph (c)(1) or (c)(2) of 

this section is treated as a noncapital, 

nondeductible expense of the member 

that disposes of subsidiary stock, 

incurred during the taxable year that 

includes the date of the disposition of 

stock to which paragraph (c)(1) or (c)(2) 

of this section applies. See § 1.1502– 

32(b)(3)(iii)(C). Consequently, the basis 

of a higher-tier member’s stock of the 

member that disposes of subsidiary 

stock is reduced by the suspended loss 

in the year it is suspended. 

(ii) Location of suspended loss 

following deconsolidation of selling 

member. If a member recognizes a loss 

that is suspended under this paragraph 

(c) but that member ceases to be a 

member of the group before the loss is 

allowable, the common parent is treated 

as succeeding to the loss in a transaction 

to which section 381(a) applies. 

(4) Reduction of suspended loss—(i) 

General rule. The amount of any loss 

suspended pursuant to paragraph (c)(1) 

or (c)(2) of § 1.1502–35 shall be reduced, 

but not below zero, by the subsidiary’s 

(and any successor’s) items of deduction 

and loss, and the subsidiary’s (and any 

successor’s) allocable share of items of 

deduction and loss of all lower-tier 

subsidiaries, that are allocable to the 

period beginning on the date of the 

disposition that gave rise to the 

suspended loss and ending on the day 

before the first date on which the 

subsidiary (and any successor) is not a 

member of the group of which it was a 

member immediately prior to the 

disposition (or any successor group), 

and that are taken into account in 

determining consolidated taxable 

income (or loss) of such group for any 

taxable year that includes any date on 

or after the date of the disposition and 

before the first date on which the 

subsidiary (and any successor) is not a 

member of such group; provided, 

however, that such reduction shall not 

exceed the excess of the amount of such 

items over the amount of such items 

that are taken into account in 

determining the basis adjustments made 

under § 1.1502–32 to stock of the 

subsidiary (or any successor) owned by 

members of the group. The preceding 

sentence shall not apply to items of 

deduction and loss to the extent that the 

group can establish that all or a portion 

of such items was not reflected in the 

computation of the duplicated loss with 

respect to the subsidiary on the date of 

the disposition of stock that gave rise to 

the suspended loss. 

* * * * * 

(5) Allowable loss—(i) General rule. 

To the extent not reduced under 

paragraph (c)(4) of this section, any loss 

suspended pursuant to paragraph (c)(1) 

or (c)(2) of this section shall be allowed, 

to the extent otherwise allowable under 

applicable provisions of the Internal 

Revenue Code and regulations, on a 

return filed by the group of which the 

subsidiary was a member on the date of 

the disposition of subsidiary stock that 

gave rise to the suspended loss (or any 

successor group) for the taxable year 

that includes the earlier of— 

(A) The day before the first date on 

which the subsidiary (and any 

successor) is not a member of such 

group or the date the group is allowed 

a worthless stock loss under section 165 

(taking into account the provisions of 

§ 1.1502–80(c)) with respect to all of the 

subsidiary stock owned by members 

and; 

(B) The date that is ten years after the 

date of the disposition of subsidiary 

stock that gave rise to the suspended 

loss. 

* * * * * 

(8) No elimination of economic loss. 

* * * 

* * * * * 

(g) * * * 

(3) Anti-loss reimportation rule—(i) 

Conditions for application. This 

paragraph (g)(3) applies when— 

(A) A member of a group (selling 

group) recognized and was allowed a 

loss with respect to a share of stock of 

S, a subsidiary or former subsidiary of 

the selling group; 

(B) That stock loss was duplicated (in 

whole or in part) in S’s attributes 

(duplicating items) at the earlier of the 

time that the loss was recognized or that 

S ceased to be a member; and 

(C) Within ten years of the date that 

S ceased to be a member, there is a 

reimportation event. For this purpose, a 

reimportation event is any event after 

which a duplicating item is a 

reimported item. A reimported item is 

any duplicating item that is reflected in 

the attributes of any member of the 

selling group, including S, or, if not 

reflected in the attributes, would be 

properly taken into account by any 

member of the selling group (for 

example as the result of a carryback). 

(ii) Effect of application. Immediately 

before the time that a reimported item 

(or any portion of a reimported item) 

would be properly taken into account 

(but for the application of this paragraph 

(g)(3)), such item (or such portion of the 

item) is reduced to zero and no 

deduction or loss is allowed, directly or 

indirectly, with respect to that item. 

(iii) Operating rules. For purposes of 

this paragraph (g)(3)— 

(A) The terms member, subsidiary, 

and group include their predecessors 

and successors to the extent necessary 

to effectuate the purposes of this 

section; and 

(B) The reduction of a reimported 

item (other than duplicating items that 

are carried back to a consolidated return 

year of the selling group) is a 

noncapital, nondeductible expense 

within the meaning of § 1.1502– 

32(b)(3)(iii). 

* * * * * 

(6) General anti-avoidance rule. If a 

taxpayer acts with a view to avoid the 

purposes of this section, appropriate 

adjustments will be made to carry out 

the purposes of this section. 

(h) Application of other rules of law. 

See § 1.1502–80(a) regarding the general 

applicability of other rules of law. 

* * * * * 

(j) Effective/applicability dates. This 

section applies with respect to stock 

transfers, deconsolidations of 

subsidiaries, determinations of 

worthlessness, and stock dispositions 

on or after September 17, 2008. For 

prior law, see §§ 1.1502–35 and 1.1502– 

35T as contained in 26 CFR part 1 in 

effect on April 1, 2008. 

§ 1.1502–35T [Removed] 

■ Par. 17. Section 1.1502–35T is 

removed. 

■ Par. 18. Section 1.1502–36 is added to 

read as follows: 


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Federal Register / Vol. 73, No. 181 / Wednesday, September 17, 2008 / Rules and Regulations 53953 

§ 1.1502–36 Unified loss rule. 

(a) In general—(1) Scope. This section 

provides rules for adjusting members’ 

bases in stock of a subsidiary (S) and for 

reducing S’s attributes when a member 

(M) transfers a loss share of S stock. See 

paragraph (f) of this section for 

definitions of the terms used in this 

section, including transfer and value. 

(2) Purpose. The rules in this section 

have two principal purposes. The first is 

to prevent the consolidated return 

provisions from reducing a group’s 

consolidated taxable income through 

the creation and recognition of 

noneconomic loss on S stock. The 

second is to prevent members 

(including former members) of the 

group from collectively obtaining more 

than one tax benefit from a single 

economic loss. Additional purposes are 

set forth in other paragraphs of this 

section. The rules of this section must 

be interpreted and applied in a manner 

that is consistent with and reasonably 

carries out the purposes of this section. 

(3) Overview—(i) General application 

of section. This section applies when M 

transfers a share of S stock and, after 

taking into account the effects of all 

applicable rules of law (even if the 

adjustments required by such provisions 

are not deemed effective until after the 

transfer, such as certain adjustments 

required under sections 108 and 1017 

and § 1.1502–28), the share is a loss 

share. When this section applies, 

paragraph (b) of this section applies first 

and may redetermine members’ bases in 

their shares of S stock. If the transferred 

share is a loss share after any basis 

redetermination under paragraph (b) of 

this section, paragraph (c) of this section 

applies and may reduce M’s basis in the 

transferred loss share. If the transferred 

share is a loss share after any basis 

reduction required by paragraph (c) of 

this section, paragraph (d) of this 

section applies and may reduce 

attributes of S and subsidiaries that are 

lower-tier to S. Although the 

determination of whether there is a 

transfer of a loss share is made as of the 

transfer, this section applies, and any 

adjustments it requires are given effect, 

immediately before the transfer. 

Paragraphs (e), (f), and (g) of this section 

provide general operating rules 

(including rules for transfers of S stock 

between members), definitions, and an 

anti-abuse rule, respectively. 

(ii) Stock of multiple subsidiaries 

transferred in the transaction—(A) 

Initial application of section to 

transferred shares in lowest tier. If 

shares of stock of more than one 

subsidiary are transferred in a 

transaction, the application of this 

section begins at the lowest tier. If no 

transferred shares of stock of the lowesttier subsidiary (S2) are loss shares, any 

gain recognized with respect to the S2 

shares immediately tiers up and adjusts 

members’ bases in subsidiary stock 

under § 1.1502–32. However, if any of 

the transferred S2 shares are loss shares, 

paragraph (b) of this section applies 

with respect to those shares. If, after the 

application of paragraph (b) of this 

section, any transferred S2 shares are 

still loss shares, paragraph (c) of this 

section applies with respect to those 

shares. If, after the application of 

paragraph (c) of this section, any 

transferred S2 shares are still loss shares 

and P makes an election under 

paragraph (d)(6) of this section with 

respect to those S2 shares, then 

paragraph (d) of this section applies 

with respect to those shares, but only to 

the extent necessary to give effect to the 

election. After taking into account the 

effects of any adjustments required by 

this initial application of this section, 

recognized gain or loss is computed on 

all transferred S2 shares. Any 

adjustments under paragraph (b) or (c) 

of this section, the effect of any election 

under paragraph (d)(6) of this section, 

any gain or loss recognized on the 

transferred S2 shares (whether allowed 

or disallowed), and any other related or 

resulting adjustments then tier-up and 

apply to adjust members’ bases in 

subsidiary stock under § 1.1502–32. 

(B) Initial application of section to 

transferred shares in higher tiers. After 

taking into account the effects of any 

adjustments described in paragraph 

(a)(3)(ii)(A) of this section, transferred 

shares in the next higher tier, and then 

in each next higher tier successively, 

other than the transferred loss shares at 

the highest tier, are treated in the 

manner described in paragraph 

(a)(3)(ii)(A) of this section. 

(C) Application of section to 

transferred shares in highest tier. After 

paragraphs (b) and (c) of this section, 

and, to the extent necessary to give 

effect to any election under paragraph 

(d)(6) of this section, paragraph (d) of 

this section, have been applied to or 

with respect to all lower-tier transferred 

loss shares, and after all lower-tier 

adjustments have been taken into 

account (whether resulting from the 

application of paragraph (b) or (c) of this 

section, an election under paragraph 

(d)(6) of this section, the recognition of 

gain or loss on a transfer, or otherwise), 

paragraphs (b), then (c), and then (d) of 

this section apply with respect to the 

highest-tier shares that are transferred 

loss shares. 

(D) Final application of section to 

transferred shares in lower tiers. After 

paragraph (d) of this section has been 

applied with respect to transferred loss 

shares in the highest tier, it is applied 

with respect to transferred shares in 

each next lower tier, successively, to the 

extent such shares are loss shares after 

the application of paragraph (d) of this 

section. 

(4) Other rules of law and 

coordination with deferral and 

disallowance provisions. In general, this 

section applies and has effect 

immediately upon the transfer of a loss 

share even if the loss is deferred, 

disallowed, or otherwise not taken into 

account under any other applicable 

rules of law. However, see paragraph 

(e)(3) of this section for special rules 

applicable to shares of S stock 

transferred in an intercompany 

transaction. See section § 1.1502–80(a) 

for the general applicability of other 

rules of law and a limitation on 

duplicative adjustments. 

(5) Nomenclature, factual 

assumptions adopted in this section. 

Unless otherwise stated, for purposes of 

this section, the following nomenclature 

and assumptions are adopted. P is the 

common parent of a consolidated group 

of which S, M, and M1 are members. X 

is not a member of the P group. If a 

corporation has preferred stock 

outstanding, it is stock described in 

section 1504(a)(4). The examples set 

forth the only facts, elections, and 

activities relevant to the example. All 

transactions are between unrelated 

persons and are independent of each 

other. Tax liabilities and their effect, 

and the application of any other loss 

disallowance or deferral provisions of 

the Internal Revenue Code (Code) or 

regulations, including but not limited to 

section 267, are disregarded. All persons 

report on a calendar year basis and use 

the accrual method of accounting. All 

parties comply with filing and other 

requirements of this section and all 

other provisions of the Code and 

regulations. 

(b) Basis redetermination to reduce 

disparity—(1) In general—(i) Purpose 

and scope. The rules of this paragraph 

(b) reduce the extent to which there is 

disparity in members’ bases in shares of 

S stock. These rules supplement the 

operation of the investment adjustment 

system; their purpose is to prevent the 

realization of noneconomic loss and 

facilitate the elimination of duplicated 

loss when members hold S shares with 

disparate bases. The rules of this 

paragraph (b) only reallocate investment 

adjustments previously applied to 

members’ bases in shares of S stock, 

thus they do not alter the aggregate 

amount of basis in shares of S stock held 

by members or the aggregate amount of 


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53954 Federal Register / Vol. 73, No. 181 / Wednesday, September 17, 2008 / Rules and Regulations 

investment adjustments applied to 

shares of S stock. 

(ii) Special rules for applicability of 

redetermination rule. Notwithstanding 

the general rule in paragraph (b)(2) of 

this section, members’ bases in shares of 

S stock are not redetermined under this 

paragraph (b) if— 

(A) There is no disparity among 

members’ bases in shares of S common 

stock and no member owns a share of 

S preferred stock with respect to which 

there is unrecognized gain or loss; or 

(B) All the shares of S stock held by 

members are transferred to one or more 

nonmembers, become worthless under 

section 165 (taking into account the 

provisions of § 1.1502–80(c)), or a 

combination thereof, in one fully 

taxable transaction. However, in such a 

case, P may elect to redetermine such 

bases under this paragraph (b). Such an 

election is made in the manner provided 

in paragraph (e)(5) of this section. If 

stock of more than one subsidiary is 

transferred in the transaction, the 

election may be made with respect to 

one or more of such subsidiaries. 

(iii) Investment adjustment. For 

purposes of this paragraph (b), the term 

investment adjustment includes 

adjustments specially allocated under 

§ 1.1502–32(c)(1)(ii)(B) and remaining 

adjustments described in § 1.1502– 

32(c)(1)(iii). In applying any provision 

of this section, the term includes all 

such adjustments reflected in the basis 

of the share as of the application of the 

provision, whether originally allocated 

under § 1.1502–32 or otherwise. The 

term therefore includes adjustments 

previously reallocated to the share, and 

it does not include adjustments 

previously reallocated from the share, 

whether pursuant to this section or any 

other provision of law. It also includes 

the proportionate amount of 

adjustments reflected in the exchanged 

basis of a share, such as the basis 

determined under section 358 in 

connection with a reorganization or a 

transaction qualifying under section 

355. 

(2) Basis redetermination rule. If M 

transfers a loss share of S stock, all 

members’ bases in all their shares of S 

stock are subject to redetermination 

under this paragraph (b). The 

determination of whether a share is a 

loss share is made as of the transfer, 

taking into account the effects of all 

applicable rules of law. The 

redeterminations are made immediately 

before applying paragraph (c) of this 

section and in accordance with the 

following: 

(i) Decreasing the bases of transferred 

loss shares—(A) Removing positive 

investment adjustments from 

transferred loss shares of common 

stock. M’s basis in each of its transferred 

loss shares of S common stock is first 

reduced, but not below value, by 

removing positive investment 

adjustments previously applied to the 

basis of the share. The positive 

investment adjustments removed from 

transferred loss shares of S common 

stock are reallocated under paragraph 

(b)(2)(ii) of this section after negative 

investment adjustments are reallocated 

under paragraph (b)(2)(i)(B) of this 

section. 

(B) Reallocating negative investment 

adjustments from shares of S common 

stock. If a transferred share is still a loss 

share after applying paragraph 

(b)(2)(i)(A) of this section, M’s basis in 

the share is reduced, but not below 

value, by reallocating negative 

investment adjustments to the 

transferred loss share (whether common 

or preferred stock) from members’ 

shares of S common stock that are not 

transferred loss shares. The adjustments 

reallocated under this paragraph 

(b)(2)(i)(B) are reallocated and applied 

first to M’s bases in transferred loss 

shares of S preferred stock and then to 

M’s bases in transferred loss shares of S 

common stock. Reallocations under this 

paragraph (b)(2)(i)(B) are made in a 

manner that, to the greatest extent 

possible, reduces the disparity among 

members’ bases in all transferred loss 

shares of S preferred stock, and reduces 

the disparity among members’ bases in 

all shares of S common stock. 

(ii) Increasing the bases of gain 

preferred and all common shares—(A) 

Preferred stock. After the application of 

paragraph (b)(2)(i) of this section, the 

positive investment adjustments 

removed from transferred loss shares of 

S common stock under paragraph 

(b)(2)(i)(A) of this section are reallocated 

and applied to increase, but not above 

value, members’ bases in shares of S 

preferred stock (without regard to 

whether such shares are transferred in 

the transaction). Reallocations under 

this paragraph (b)(2)(ii)(A) are made in 

a manner that, to the greatest extent 

possible, reduces the disparity among 

members’ bases in all shares of S 

preferred stock. 

(B) Common stock. Any positive 

investment adjustments removed from 

transferred loss shares of S common 

stock under paragraph (b)(2)(i)(A) of this 

section and not reallocated and applied 

to S preferred shares are reallocated and 

applied to increase members’ bases in 

shares of S common stock. Reallocations 

are made to shares of S common stock 

without regard to whether a particular 

share is a loss share or a transferred 

share, and without regard to the share’s 

value. Reallocations under this 

paragraph (b)(2)(ii)(B) are made in a 

manner that, to the greatest extent 

possible, reduces the disparity among 

members’ bases in all shares of S 

common stock. 

(iii) Operating rules—(A) Method. In 

general, reallocations should be made 

first with respect to the earliest available 

adjustments. However, the overall 

application of this paragraph (b) to a 

transaction must be made in a manner 

that, to the greatest extent possible, 

reduces basis disparity (as provided in 

paragraphs (b)(2)(i)(B) and (b)(2)(ii) of 

this section). The specific reallocation of 

an investment adjustment under this 

paragraph (b) may be made using any 

reasonable method or formula that is 

consistent with the provisions of this 

paragraph (b)(2) and furthers the 

purposes of this section. 

(B) Limits on reallocation—(1) 

Restriction to members’ outstanding 

shares. Investment adjustments can only 

be reallocated to shares that were held 

by members at the time the adjustment 

was originally applied. 

(2) Limitation by prior use—(i) In 

general. In order to prevent the 

reallocation of investment adjustments 

from either increasing or decreasing 

members’ aggregate bases in subsidiary 

stock, no investment adjustment 

(positive or negative) may be reallocated 

under this paragraph (b)(2) to the extent 

that it was (or would have been) used 

prior to the time that it would otherwise 

be reallocated under this paragraph 

(b)(2). For this purpose, an investment 

adjustment was used (or would have 

been used) to the extent that it was 

reflected in (or would have been 

reflected in) the basis of a share of 

subsidiary stock and the basis of that 

share has already been taken into 

account, directly or indirectly, in 

determining income, gain, deduction, or 

loss (including by affecting the 

application of this section to a prior 

transfer of subsidiary stock) or in 

determining the basis of any property 

that is not subject to § 1.1502–32. 

However, if the prior use was in an 

intercompany transaction, an 

investment adjustment may be 

reallocated to the extent that § 1.1502– 

13 has prevented the gain or loss on the 

transaction from being taken into 

account. (In that case, appropriate 

adjustments must be made to the 

intercompany item from the prior 

intercompany transaction that has not 

yet been taken into account.) Further, if 

an investment adjustment was reflected 

in (or would have been reflected in) the 

basis of a share that has been taken into 

account, the limitation on reallocation 

under this paragraph (b)(2)(iii)(B)(2) 


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does not apply to the extent the basis of 

that share would not change as a result 

of the reallocation (for example, because 

the reallocation is between shares that 

are both lower-tier to the share with the 

previously used basis). See § 1.1502– 

32(c)(1)(ii)(B) regarding special 

allocations applicable to the tier-up of 

the reallocated investment adjustment if 

the reallocation is limited under this 

paragraph (b)(2)(iii)(B)(2) due to prior 

use at a higher tier. 

(ii) Example. The application of this 

paragraph (b)(2)(iii)(B)(2) is illustrated 

by the following example: 

Example. (i) Facts. P owns all 20 shares of 

M stock, and 10 shares of S stock. M owns 

the remaining 10 shares of S stock. In year 

1, S recognizes $200 of income that results 

in a $10 positive investment adjustment 

being allocated to each share of S stock. The 

group does not recognize any other items. 

The $100 positive adjustment to M’s basis in 

the S stock tiers up, and results in a $5 

positive adjustment to each share of M stock. 

In year 2, P sells one share of M stock and 

recognizes a gain. In year 3, M sells one loss 

share of S stock, and this paragraph (b) 

applies and requires a reallocation of the year 

1 positive investment adjustment applied to 

the basis of the transferred S share. 

(ii) Application of limitation by prior use. 

M’s basis in the transferred loss share of S 

stock reflects a $10 positive investment 

adjustment attributable to S’s year 1 income. 

Under the general rule of this paragraph (b), 

that $10 would be subject to reallocation to 

reduce basis disparity. However, that $10 

adjustment had originally tiered up to adjust 

P’s basis in its M shares and, as a result, $.50 

of that adjustment was reflected in P’s basis 

in each share of M stock. When P sold the 

share of M stock, the basis of that share 

(which included the tiered-up $.50) was used 

in determining the gain on the sale. Thus, 

$.50 of the $10 investment adjustment 

originally allocated to the transferred S share 

that tiered-up to the sold M share was 

previously used and, as such, cannot be 

reallocated in a manner that would (if it were 

the original allocation) affect the basis of the 

sold M share. Accordingly, no more than 

$9.50 of the adjustment to M’s transferred S 

share could be reallocated to P’s shares of S 

stock. If so, under the special allocation rule 

in § 1.1502–32(c)(1)(ii)(B), the tier-up of this 

$9.50 would only be allocated among P’s 

remaining 19 shares of M stock. 

Alternatively, all $10 of the investment 

adjustment could be reallocated to M’s other 

S shares (because the tier-up to P’s M shares 

would have been the same regardless which 

of M’s shares of S stock were adjusted). 

(iii) Application of limitation where 

adjustment would have been used. The facts 

are the same as in paragraph (i) of this 

Example except that M does not sell any 

shares of S stock and, in year 3, P sells a loss 

share of S stock. As in paragraph (i) of this 

Example, when P sold the share of M stock, 

the basis of that share was used in 

determining the gain on the share. When P 

sells the loss share of S stock, the $10 

positive investment adjustment from S’s year 

1 income cannot be reallocated in a manner 

that would (if it were the original adjustment) 

affect the basis of the sold M share. If this $10 

positive investment adjustment had 

originally been allocated to the S shares held 

by M, $.50 of the $10 investment adjustment 

would have tiered up to the M share that P 

sold, would have been reflected in P’s basis 

in that M share, and would have been used 

in determining P’s gain or loss on the sale. 

Accordingly, up to $9.50 of the $10 

investment adjustment applied to the basis of 

P’s transferred S share could be reallocated 

to M’s shares of S stock. If so, under the 

special allocation rule in § 1.1502– 

32(c)(1)(ii)(B), the tier-up of this $9.50 would 

only be allocated among P’s remaining 19 

shares of M stock. Alternatively, all $10 of 

the investment adjustment could be 

reallocated to P’s other S shares. 

(3) Examples. The general application 

of this paragraph (b) is illustrated by the 

following examples: 

Example 1. Transfer of stock received in 

section 351 exchange. (i) Redetermination to 

prevent noneconomic loss. (A) Facts. For 

many years, M has owned two assets, Asset 

1 and Asset 2. On January 1, year 1, M 

receives the only four outstanding shares of 

S common stock (Block 1 shares) in exchange 

for Asset 1, which has a basis and value of 

$80. Section 351 applies to the exchange and, 

therefore, under section 358, M’s aggregate 

basis in the Block 1 shares is $80 ($20 per 

share). On July 1, year 2, M receives another 

share of S common stock (Block 2 share) in 

exchange for Asset 2, which has a basis of $0 

and value of $20. Section 351 applies to this 

exchange and, under section 358, M’s basis 

in the Block 2 share is $0. On October 1, year 

3, S sells Asset 2 for $20, recognizing a $20 

gain. On December 31, year 3, M sells one of 

its Block 1 shares to X for $20. After taking 

into account the effects of all applicable rules 

of law, M’s basis in each Block 1 share is $24 

(M’s original $20 basis increased under 

§ 1.1502–32 by $4, the share’s allocable 

portion of the $20 gain recognized on the sale 

of Asset 2). In addition, M’s basis in its Block 

2 share is $4 (M’s original $0 basis increased 

under § 1.1502–32 by $4 (the share’s 

allocable portion of the $20 gain recognized 

on the sale of Asset 2)). M’s sale of the Block 

1 share is a transfer of a loss share and 

therefore subject to this section. 

(B) Basis redetermination under this 

paragraph (b). Under this paragraph (b), M’s 

bases in all its shares of S stock are subject 

to redetermination. First, paragraph 

(b)(2)(i)(A) of this section applies to reduce 

M’s basis in the transferred loss share, but 

not below value, by removing positive 

investment adjustments applied to the basis 

of the share. Accordingly, M’s basis in the 

transferred Block 1 share is reduced by $4 

(the amount of the positive investment 

adjustment applied to the share), from $24 to 

$20. Even if there were negative investment 

adjustments applied to adjust the bases of 

nontransferred common shares, no further 

reduction to the basis of the share would be 

required under this paragraph (b) because the 

basis of the transferred share is then equal to 

the share’s value. Under paragraph 

(b)(2)(ii)(B) of this section, the positive 

investment adjustment removed from the 

transferred loss share is reallocated and 

applied to increase M’s bases in its S 

common shares in a manner that reduces 

disparity in M’s bases in all the S common 

shares, to the greatest extent possible. 

Accordingly, the $4 positive investment 

adjustment removed from the Block 1 share 

is reallocated and applied to the basis of the 

Block 2 share, increasing it from $4 to $8. 

(C) Application of paragraphs (c) and (d) 

of this section. Because M’s sale of the Block 

1 share is not a transfer of a loss share after 

the application of this paragraph (b), neither 

paragraph (c) of this section nor paragraph 

(d) of this section applies to the transfer. 

(ii) Redetermination to eliminate 

duplicated loss. (A) Facts. The facts are the 

same as in paragraph (i)(A) of this Example 

1, except that, at the time of the second 

contribution, the value of Asset 1 had 

declined to $20 and so, instead of 

contributing Asset 2, M contributed Asset 3 

to S in exchange for the Block 2 share. At the 

time of that exchange, Asset 3 had a basis 

and value of $5. On October 1, year 3, S sells 

Asset 1 for $20, recognizing a $60 loss that 

is absorbed by the group. On December 31, 

year 3, M sells one of its Block 1 shares to 

X for $5. After taking into account the effects 

of all applicable rules of law, M’s basis in 

each Block 1 share is $8 (M’s original $20 

basis decreased under § 1.1502–32 by $12 

(the share’s allocable portion of the $60 loss 

recognized on the sale of Asset 1)). M’s basis 

in its Block 2 share is an excess loss account 

of $7 (M’s original basis of $5 reduced under 

§ 1.1502–32 by $12, the share’s allocable 

portion of the loss recognized on the sale of 

Asset 1). M’s sale of the Block 1 share is a 

transfer of a loss share and therefore subject 

to this section. 

(B) Basis redetermination under this 

paragraph (b). Under this paragraph (b), M’s 

bases in all its shares of S stock are subject 

to redetermination. There are no positive 

investment adjustments and so there is no 

adjustment under paragraph (b)(2)(i)(A) of 

this section. However, under paragraph 

(b)(2)(i)(B) of this section, M’s basis in the 

transferred Block 1 share is reduced, but not 

below value, by reallocating negative 

investment adjustments from common shares 

that are not transferred loss shares. In total, 

there were $48 of negative investment 

adjustments applied to common shares that 

are not transferred loss shares. Accordingly, 

M’s basis in the Block 1 share is reduced by 

$3, from $8 to its value of $5. Under 

paragraph (b)(2)(i)(B) of this section, the 

negative investment adjustments applied to 

the transferred share are reallocated from 

(and therefore cause an increase in the basis 

of) S common shares that are not transferred 

loss shares in a manner that reduces disparity 

among members’ bases in all S common 

shares to the greatest extent possible. 

Accordingly, the $3 negative investment 

adjustment reallocated and applied to the 

transferred Block 1 share is reallocated 

entirely from the Block 2 share, increasing 

the basis in the Block 2 share from an excess 

loss account of $7 to an excess loss account 

of $4. 

(C) Application of paragraphs (c) and (d) 

of this section. Because M’s sale of the Block 


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1 share is not a transfer of a loss share after 

the application of this paragraph (b), neither 

paragraph (c) of this section nor paragraph 

(d) of this section applies to the transfer. 

(iii) Nonapplicability of redetermination 

rule to sale of entire interest. The facts are the 

same as in paragraph (ii)(A) of this Example 

1, except that, on December 31, year 3, M 

sells all its shares of S stock to X for $25. M’s 

sale of the S stock to X is a transfer of all of 

the shares of S stock held by members to one 

or more nonmembers in one fully taxable 

transaction and, therefore, basis is not 

redetermined under this paragraph (b). 

Accordingly, the sale of the Block 1 shares 

remains a transfer of loss shares and, as such, 

subject to paragraphs (c) and (d) of this 

section. However, paragraphs (c)(7) and 

(d)(3)(i)(A) of this section apply netting 

principles to prevent adjustments under 

either paragraph (c) or paragraph (d) of this 

section, respectively. Alternatively, the group 

could elect to apply this paragraph (b). In 

that case, the $12 negative adjustment 

applied to the Block 2 shares would be 

reallocated to the Block 1 shares with the 

result that there would be no loss (or gain) 

on any of the transferred shares following the 

application of this paragraph (b). In that case, 

there would be no further application of this 

section to the transfer. 

(iv) Transfer of entire interest, partially 

taxable. The facts are the same as in 

paragraph (iii) of this Example 1, except that, 

instead of selling the Block 2 share to X, M 

contributes the share to a nonmember in a 

section 351 exchange that is part of the same 

transaction. Although all the S shares held by 

members are transferred in the transaction, 

not all the shares are transferred to one or 

more nonmembers in one fully taxable 

transaction. Therefore, paragraph (b)(1)(ii)(B) 

of this section does not apply and M must 

redetermine its bases in its shares of S stock 

under this paragraph (b). In total, there were 

$12 of negative investment adjustments 

applied to common shares that are not 

transferred loss shares (the Block 2 share, a 

gain share). Accordingly, M’s basis in each of 

the Block 1 shares is reduced by $3, from $8 

to its value of $5. Under paragraph (b)(2)(i)(B) 

of this section, the negative investment 

adjustments applied to the transferred shares 

are reallocated from (and therefore cause an 

increase in the basis of) S shares that are not 

transferred loss shares in a manner that 

reduces disparity among members’ bases in 

all S common shares to the greatest extent 

possible. Accordingly, the $12 negative 

investment adjustment reallocated and 

applied to the transferred Block 1 shares is 

reallocated entirely from the Block 2 share, 

increasing the basis in the Block 2 share from 

an excess loss account of $7 to a basis of $5. 

Because M’s transfer is not a transfer of loss 

shares after the application of this paragraph 

(b), neither paragraph (c) of this section nor 

paragraph (d) of this section applies to the 

transfer. 

Example 2. Redetermination increases 

basis of transferred loss share. (i) Facts. On 

January 1, year 1, M owns all 10 outstanding 

shares of S common stock. Five of the shares 

have a basis of $20 per share (Block 1 shares) 

and five of the shares have a basis of $10 per 

share (Block 2 shares). S’s only asset, Asset 

1, has a basis of $50. S has no other 

attributes. On October 1, year 1, S sells Asset 

1 for $100, recognizing a $50 gain. On 

December 31, year 2, M sells one Block 1 

share and one Block 2 share to X for $10 per 

share. After taking into account the effects of 

all applicable rules of law, M’s basis in each 

Block 1 share is $25 (M’s original $20 basis 

increased under § 1.1502–32 by $5, the 

share’s allocable portion of the $50 gain 

recognized on the sale of Asset 1), and M’s 

basis in each Block 2 share is $15 (M’s 

original $10 basis increased under § 1.1502– 

32 by $5, the share’s allocable portion of the 

$50 gain recognized on the sale of Asset 1). 

M’s sale of the Block 1 and Block 2 shares 

is a transfer of loss shares and therefore 

subject to this section. 

(ii) Basis redetermination under this 

paragraph (b). Under this paragraph (b), M’s 

bases in all its shares of S stock are subject 

to redetermination. First, paragraph 

(b)(2)(i)(A) of this section applies to reduce 

M’s basis in the transferred Block 1 and 

Block 2 shares, but not below value, by 

removing the positive investment 

adjustments applied to the bases of the 

transferred loss shares. Accordingly, the basis 

of the transferred Block 1 share is reduced by 

$5, from $25 to $20. The basis of the 

transferred Block 2 share is also reduced by 

$5, from $15 to $10. (Although the 

transferred Block 1 share is still a loss share, 

there is no reduction to its basis under 

paragraph (b)(2)(i)(B) of this section because 

there were no negative investment 

adjustments applied to the bases of the S 

common shares that are not transferred loss 

shares.) Next, paragraph (b)(2)(ii)(B) of this 

section applies to reallocate and apply the 

$10 of positive investment adjustments 

removed from the transferred loss shares to 

increase M’s bases in its S common shares in 

a manner that reduces the disparity in its 

bases in all S common shares to the greatest 

extent possible. Accordingly, of the $10 of 

positive investment adjustments to be 

reallocated, $6 is reallocated and applied to 

the basis of the transferred Block 2 share 

(increasing it from $10 to $16) and $4 is 

reallocated and applied equally to the basis 

of each of the four retained Block 2 shares 

(increasing the basis of each from $15 to $16). 

After giving effect to the reallocations under 

this paragraph (b), M’s basis in each retained 

Block 1 share is $25, M’s basis in the 

transferred Block 1 share is $20, and M’s 

basis in each Block 2 share is $16. 

(iii) Application of paragraph (c) of this 

section. After the application of this 

paragraph (b), M’s sale of the Block 1 and 

Block 2 shares is still a transfer of loss shares 

and, accordingly, subject to paragraph (c) of 

this section. No adjustment is required to the 

basis of the transferred Block 1 share under 

paragraph (c) of this section because, after its 

basis is redetermined under this paragraph 

(b), the net positive adjustment to the basis 

of the share is $0. See paragraph (c)(3) of this 

section. However, under paragraph (c) of this 

section M’s basis in the transferred Block 2 

share is reduced by $6 (the lesser of its net 

positive adjustment, $6, and its 

disconformity amount, $6), from $16 to $10, 

its value. See paragraph (c)(2) of this section. 

(iv) Application of paragraph (d) of this 

section. After the application of paragraph (c) 

of this section, M’s sale of the Block 1 share 

is still a transfer of a loss share and, 

accordingly, subject to paragraph (d) of this 

section. No adjustment is required under 

paragraph (d) of this section because there is 

no aggregate inside loss. See paragraph 

(d)(3)(iii) of this section. Because M’s sale of 

the Block 2 share is no longer a transfer of 

a loss share after the application of paragraph 

(c) of this section, paragraph (d) of this 

section does not apply to the transfer of the 

Block 2 share. 

Example 3. Tiered subsidiaries. (i) Transfer 

of all shares of common stock. (A) Facts. P 

owns the sole outstanding share of S stock 

with a basis of $100, and the sole outstanding 

share of M stock with a basis of $300. M has 

$200 and owns an asset with a basis of $0. 

S owns one asset, Asset 1, with a basis of 

$100. At a time when Asset 1 has a value of 

$200, S issues a second share of common 

stock to M in exchange for $200. Later S sells 

Asset 1 for $200, recognizing a $100 gain. 

After taking into account the effects of all 

applicable rules of law, P’s basis in its S 

stock is $150 (P’s original $100 basis 

increased under § 1.1502–32 by $50, the 

share’s allocable portion of the $100 gain 

recognized on the sale of Asset 1), M’s basis 

in its S stock is $250 (M’s original $200 basis 

increased under § 1.1502–32 by $50, the 

share’s allocable portion of the $100 gain 

recognized on the sale of Asset 1), and P’s 

basis in its M stock is $350 (P’s original $300 

basis increased under § 1.1502–32 by $50, the 

tier-up of M’s increase in its basis in its S 

stock). P then sells its M share and its S share 

to X for $300 and $200, respectively. M and 

S are not members of the same consolidated 

group immediately after the sale. Therefore, 

the M share and both of the S shares are 

transferred in the transaction. Regarding P’s 

sale of its share of S stock and its share of 

M stock, see paragraph (f)(10)(i)(A) of this 

section (ceasing to own a share in a taxable 

transaction) and paragraph (f)(10)(i)(C) of this 

section (nonmember acquires share); 

regarding M’s share of S stock, see paragraph 

(f)(10)(i)(B) of this section (ceasing to be 

members of the same group). The application 

of this section begins with respect to the 

stock of S, the subsidiary at the lowest tier 

in which there is a transfer of subsidiary 

stock. See paragraph (a)(3)(ii) of this section. 

Although both P and M transfer their S 

shares, only M’s S share is a loss share. Thus, 

only M’s transfer is a transfer of a loss share 

of S stock and only M’s transfer is subject to 

this section. 

(B) Application of section to transferred S 

shares. Although only M’s transfer is subject 

to this section, all members’ bases in their 

shares of S stock are subject to 

redetermination under this paragraph (b). 

First, paragraph (b)(2)(i)(A) of this section 

applies to reduce M’s basis in its transferred 

S share, but not below value, by removing the 

positive investment adjustment applied to 

that share. Accordingly, the basis of M’s S 

share is reduced by $50, from $250 to $200 

(under § 1.1502–32, that redetermination 

adjustment tiers up to reduce P’s basis in its 

M stock by $50, from $350 to $300). Because 

there are no negative adjustments to 

reallocate under paragraph (b)(2)(i)(B) of this 

section, paragraph (b)(2)(ii)(B) of this section 


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then applies to reallocate and apply the $50 

positive investment adjustment removed 

from the transferred loss S share to increase 

P’s basis in its S share in a manner that 

reduces disparity among members’ bases in 

all S common shares to the greatest extent 

possible. Accordingly, all $50 of the positive 

investment adjustment is reallocated and 

applied to P’s basis in its S share (increasing 

the basis from $150 to $200). Because M’s 

transfer of its S share is not a transfer of a 

loss share after the application of this 

paragraph (b), neither paragraph (c) of this 

section nor paragraph (d) of this section 

applies to that transfer. 

(C) Application of section to transfers at 

next higher tier. After the adjustments to M’s 

share of S stock are given effect, P’s transfer 

of its share of M stock is not a transfer of a 

loss share and so this section does not apply 

to that transfer. 

(D) Result of application of section. After 

the application of this section, P recognizes 

no gain or loss on its sale of either the S share 

or the M share. In addition, the unrecognized 

(noneconomic) loss in M’s basis in its S share 

is eliminated. The results would be the same 

if, in addition to the facts in paragraph (i)(A) 

of this Example 3, M transferred its S share 

to a X in a fully taxable transaction and, as 

permitted under paragraph (b)(1)(ii)(B) of this 

section, P elected to redetermine basis under 

this paragraph (b). 

(ii) Transfer of less than all lower-tier 

shares of stock. (A) Facts. The facts are the 

same as in paragraph (i)(A) of this Example 

1, except that M and S are members of the 

same consolidated group immediately after 

the sale. Therefore, in this case, M’s S share 

is not transferred and so this section has no 

application with respect to M’s S share. P’s 

transfer of its S share is not a transfer of a 

loss share and so is also not subject to this 

section. However, P’s sale of its share of M 

stock is a transfer of a loss share and is 

subject to this section. 

(B) Basis redetermination under this 

paragraph (b). Although P’s transfer of its 

share of M stock is subject to this section, 

this paragraph (b) does not apply to the 

transfer because there is only one share of M 

stock outstanding (and so there can be no 

disparity among members’ bases in common 

shares and there are no outstanding preferred 

shares with respect to which there can be 

unrecognized gain or loss). Accordingly, after 

the application of this paragraph (b), P’s sale 

of its M share is still a transfer of a loss share 

and therefore subject to paragraph (c) of this 

section. 

(C) Application of paragraphs (c) and (d) 

of this section. Under paragraph (c) of this 

section, P must reduce its basis in its M share 

by $50, the lesser of its net positive 

adjustment ($50, see paragraph (c)(3) of this 

section) and its disconformity amount ($150, 

see paragraphs (c)(4), (c)(5), and (c)(6) of this 

section). As a result, the share is no longer 

a loss share and the transfer is not subject to 

paragraph (d) of this section. 

(D) Result of application of section. After 

the application of this section, P recognizes 

a $50 gain on its sale of the S share and no 

loss on its sale of the M share. Although there 

is unrecognized loss preserved in M’s basis 

in its S share, if M later transfers the share 

when it is a loss share, that transfer will be 

subject to this section. 

Example 4. Application to outstanding 

common and preferred shares. (i) Facts. P 

owns all the stock of M and all eight 

outstanding shares of S common stock. S also 

has two shares of nonvoting preferred stock 

outstanding; the preferred shares each have 

a $100 annual, cumulative preference as to 

dividends. M owns one of the preferred 

shares (PS1) and P owns the other (PS2). On 

January 1, year 1, the bases and values of the 

outstanding S shares are: 

Preferred Common 

PS1 

(M) 

PS2 

(P) 

CS1 

(P) 

CS2 

(P) 

CS3 

(P) 

CS4 

(P) 

CS5 

(P) 

CS6 

(P) 

CS7 

(P) 

CS8 

(P) 

Basis ................................................................. 1250 990 1025 710 550 400 375 250 215 100 

Value ................................................................ 1000 1000 375 375 375 375 375 375 375 375 

(A) As of January 1, year 1, there are no 

arrearages on the preferred stock. In year 1, 

S has a $1100 capital loss and $100 of 

ordinary income. The group absorbs the loss 

and the negative remaining adjustment of 

$1000 is allocable entirely to the common 

stock, equally to each common share ($125 

per share). See § 1.1502–32(c)(1)(iii) and 

(c)(2). 

(B) In year 2, S has $700 of ordinary 

income and a $100 ordinary loss. Also, on 

October 1, year 2, S declares and makes a 

$200 dividend distribution with respect to 

the preferred stock ($100 per share). Under 

§ 1.1502–32(c)(1)(i), a negative adjustment of 

$100 is first allocated to each of the preferred 

shares to reflect the declaration of the 

dividend. The $600 positive remaining 

adjustment determined under § 1.1502– 

32(c)(1)(iii) (reflecting S’s net income 

reduced by the distribution) is then allocated 

to each of the preferred shares to the extent 

of its entitlement to dividends accruing in 

year 1 and year 2 ($200 per share). See 

§ 1.1502–32(c)(1)(iii) and (c)(3). The $200 of 

the positive remaining adjustment not 

allocated to the preferred shares is then 

allocated to the common stock, equally to 

each common share ($25 per share). See 

§ 1.1502–32(c)(1)(iii) and (c)(2). After taking 

into account the effects of all applicable rules 

of law, the adjusted bases and the values of 

the shares as of January 1, year 3, are: 

Preferred Common 

PS1 

(M) 

PS2 

(P) 

CS1 

(P) 

CS2 

(P) 

CS3 

(P) 

CS4 

(P) 

CS5 

(P) 

CS6 

(P) 

CS7 

(P) 

CS8 

(P) 

Basis ............................................. 1250 990 1025 710 550 400 375 250 215 100 

Year 1§ 1.1502–32 adjustments .. N/A N/A ¥125 ¥125 ¥125 ¥125 ¥125 ¥125 ¥125 ¥125 

Year 2§ 1.1502–32 adjustments .. ¥100 ¥100 +25 +25 +25 +25 +25 +25 +25 +25 

+200 +200 

+100 +100 

Adjusted basis .............................. 1350 1090 925 610 450 300 275 150 115 0 

Value ............................................ 1100 1100 275 275 275 275 275 275 275 275 

Unrecognized gain/(loss) ............. (250) 10 (650) (335) (175) (25) 0 125 160 275 

(C) On January 1, year 3, M sells PS1 for 

$1100 and P sells CS2 for $275. The sales of 

PS1 and CS2 are transfers of loss shares and 

therefore subject to this section. 

(ii) Basis redetermination under this 

paragraph (b). Under this paragraph (b), all 

members’ bases in shares of S stock are 

subject to redetermination in accordance 

with the following: 

(A) Removing positive investment 

adjustments from transferred loss common 

shares. First, paragraph (b)(2)(i)(A) of this 

section applies to reduce P’s basis in CS2, but 

not below value, by removing the positive 

investment adjustment applied to the basis of 

the share. Accordingly, P’s basis in CS2 is 

reduced by $25, from $610 to $585. 


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53958 Federal Register / Vol. 73, No. 181 / Wednesday, September 17, 2008 / Rules and Regulations 

(B) Reallocating negative investment 

adjustments from common shares that are 

not transferred loss shares. Because the 

transferred shares remain loss shares after the 

removal of positive investment adjustments, 

their bases are further reduced under 

paragraph (b)(2)(i)(B) of this section, but not 

below value, by reallocating negative 

investment adjustments applied to common 

shares that are not transferred loss shares. 

Reallocations are made first to preferred 

shares and then to the common shares, in a 

manner that reduces disparity among 

members’ bases in transferred loss preferred 

shares, and reduces disparity among 

members’ bases in all common shares, to the 

greatest extent possible. The loss on PS1 is 

$250, the remaining loss on CS2 is $310, and 

the total amount of negative investment 

adjustments applied to shares that are not 

transferred loss shares is $875 (the sum of the 

negative adjustments applied to all common 

shares other than CS2). Thus, $250 of 

negative investment adjustments are 

reallocated and applied to the basis of PS1, 

reducing it to the share’s value, $1100. The 

negative investment adjustments are 

reallocated from the common shares that are 

not transferred loss shares in a manner that 

reduces disparity among members’ bases in 

all common shares to the greatest extent 

possible. The negative investment 

adjustments may be reallocated to PS1 from 

the common shares that are not transferred 

loss shares as follows: $125 from each of CS7 

and CS8. Such reallocations increase the 

basis of CS7 by $125, from $115 to $240, and 

increase the basis of CS8 by $125, from $0 

to $125. Negative investment adjustments are 

then reallocated to CS2 from the common 

shares that are not transferred loss shares in 

a manner that reduces disparity among 

members’ bases in all common shares to the 

greatest extent possible. The negative 

investment adjustments may be reallocated to 

CS2 from the other common shares as 

follows: $80 from CS4, $105 from CS5, and 

$125 from CS6. Such reallocations reduce the 

basis of CS2 by $310, from $585 to $275, 

increase the basis of CS4 by $80, from $300 

to $380, increase the basis of CS5 by $105, 

from $275 to $380, and increase the basis of 

CS6 by $125, from $150 to $275. However, 

there may be other reasonable reallocations. 

(C) Increasing basis by reallocated positive 

investment adjustments. Under paragraph 

(b)(2)(ii)(A) of this section, the $25 positive 

investment adjustment removed from CS2 

(the transferred loss common share) is then 

reallocated and applied to increase the basis 

of preferred shares, but not above value. 

Accordingly, $10 of that amount is 

reallocated to PS2, increasing its basis from 

$1090 to $1100, its value. Under paragraph 

(b)(2)(ii)(B) of this section, the remaining $15 

is reallocated and applied to the common 

shares in a manner that reduces disparity 

among members’ bases in all common shares 

to the greatest extent possible. The $15 

positive investment adjustment that is 

reallocated to common shares may be 

reallocated entirely to CS8, increasing its 

basis from $125 to $140. However, there may 

be other reasonable reallocations. 

(D) Summary of the reallocation of 

adjustments. The adjustments made under 

this paragraph (b) are: 

Preferred Common 

PS1 

(M) 

PS2 

(P) 

CS1 

(P) 

CS2 

(P) 

CS3 

(P) 

CS4 

(P) 

CS5 

(P) 

CS6 

(P) 

CS7 

(P) 

CS8 

(P) 

Adjusted basis before redetermination .................................... 1350 1090 925 610 450 300 275 150 115 0 

Removing positive adjustments 

from transferred loss shares .... .............. .............. .............. ¥25 

Reallocating negative adjustments ........................................ ¥250 .............. .............. ¥310 .............. +80 +105 +125 +125 +125 

Applying positive adjustments removed from transferred loss 

shares ....................................... .............. +10 .............. .............. .............. .............. .............. .............. .............. +15 

Basis after redetermination .......... 1100 1100 925 275 450 380 380 275 240 140 

Value ............................................ 1100 1100 275 275 275 275 275 275 275 275 

Gain/(loss) .................................... 0 0 (650) 0 (175) (105) (105) 0 35 135 

(iii) Application of paragraphs (c) and (d) 

of this section. Because M’s sale of PS1 and 

P’s sale of CS2 are not transfers of loss shares 

after the application of this paragraph (b), 

paragraphs (c) and (d) of this section do not 

apply. 

(iv) Higher-tier effects. The $250 reduction 

in the basis of PS1 under this paragraph (b) 

is a noncapital, nondeductible expense under 

§ 1.1502–32(b)(3)(iii)(B) that will be included 

in the year 3 investment adjustment to be 

applied to P’s basis in its M stock. 

(c) Stock basis reduction to prevent 

noneconomic loss—(1) In general. The 

rules of this paragraph (c) reduce M’s 

basis in a transferred share of S stock to 

prevent noneconomic stock loss and 

thus promote the clear reflection of the 

group’s income. These rules limit the 

reduction to M’s basis in the S share to 

the amount of net unrealized 

appreciation reflected in the share’s 

basis as of the transfer (the 

disconformity amount). These rules also 

limit the reduction to M’s basis in the 

S share to the portion of the share’s 

basis that is attributable to investment 

adjustments made pursuant to the 

consolidated return regulations. 

(2) Basis reduction rule. This 

paragraph (c) applies if M transfers a 

share of S stock and, after taking into 

account the effects of all applicable 

rules of law, including any adjustments 

under paragraph (b) of this section, the 

share is a loss share. Under this 

paragraph (c), M’s basis in the share is 

reduced, but not below value, by the 

lesser of— 

(i) The share’s net positive adjustment 

(as defined in paragraph (c)(3) of this 

section); and 

(ii) The share’s disconformity amount 

(as defined in paragraph (c)(4) of this 

section). 

(3) Net positive adjustment. A share’s 

net positive adjustment is the greater 

of— 

(i) Zero; and 

(ii) The sum of all investment 

adjustments reflected in the basis of the 

share. The term investment adjustment 

has the same meaning as in paragraph 

(b)(1)(iii) of this section, except that it 

includes all adjustments specially 

allocated under § 1.1502–32(c)(1)(ii). 

(4) Disconformity amount. A share’s 

disconformity amount is the excess, if 

any, of— 

(i) M’s basis in the share; over 

(ii) The share’s allocable portion of S’s 

net inside attribute amount (as defined 

in paragraph (c)(5) of this section). 

(5) Net inside attribute amount. S’s 

net inside attribute amount is 

determined as of the transfer, taking into 

account all applicable rules of law (even 

if the adjustments required by such 

rules are not deemed effective until after 

the transfer, such as certain adjustments 

required under sections 108 and 1017 

and § 1.1502–28). S’s net inside attribute 

amount is the sum of S’s net operating 

and capital loss carryovers, deferred 

deductions, money, and basis in assets 

other than money, reduced by the 

amount of S’s liabilities. For this 

purpose, S’s basis in any share of lowertier subsidiary stock is generally S’s 

basis in that share, adjusted to reflect 

any gain or loss recognized in the 


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transaction with respect to the share and 

any other related or resulting 

adjustments to the basis of the share. 

However, see paragraph (c)(6) of this 

section for special rules regarding the 

computation of S’s net inside attribute 

amount for purposes of this paragraph 

(c) if S holds stock of a subsidiary that 

is not transferred in the transaction. See 

paragraph (f) of this section for 

definitions of ‘‘allocable portion,’’ 

‘‘deferred deduction,’’ ‘‘liability,’’ ‘‘loss 

carryover,’’ and other relevant terms. 

(6) Determination of S’s net inside 

attribute amount if S owns stock of a 

lower-tier subsidiary—(i) Overview. If a 

loss share of S stock is transferred when 

S holds a share of stock of another 

subsidiary (S1) and the S1 share is not 

transferred in the same transaction, S’s 

net inside attribute amount is 

determined by treating S’s basis in its S1 

share as tentatively reduced under this 

paragraph (c)(6). The purpose of this 

rule is to reduce the extent to which 

S1’s investment adjustments increase 

noneconomic loss on S stock (as a result 

of S1’s recognition of items that are 

indirectly reflected in a member’s basis 

in a share of S stock). 

(ii) General rule for nontransferred 

shares of lower-tier subsidiary stock. For 

purposes of determining the 

disconformity amount of a share of S 

stock, S’s basis in a nontransferred share 

of S1 stock is treated as reduced by the 

share’s tentative reduction amount. The 

tentative reduction amount is the lesser 

of the S1 share’s net positive adjustment 

and the S1 share’s disconformity 

amount. 

(iii) Multiple tiers of nontransferred 

shares. If S directly or indirectly owns 

nontransferred shares of stock of 

subsidiaries in multiple tiers, then, 

subject to the limitations in paragraph 

(c)(6)(iv) of this section (regarding 

nontransferred shares that are lower-tier 

to transferred shares), the rules of this 

paragraph (c)(6) first apply to determine 

the tentatively reduced basis of stock of 

the subsidiary at the lowest tier. These 

rules then apply to determine the 

tentatively reduced basis of 

nontransferred shares of stock of 

subsidiaries successively at each next 

higher tier that is lower-tier to S. The 

tentative reductions at each tier are 

treated as noncapital, nondeductible 

expenses that tier up under the 

principles of § 1.1502–32, and, as such, 

result in a tentative reduction of basis 

and any net positive adjustment of 

subsidiary shares that are lower-tier to 

S. 

(iv) Nonapplicability of tentative basis 

reduction rule to transferred shares. The 

tentative basis reduction rule in this 

paragraph (c)(6) does not apply to any 

share of stock of a lower-tier subsidiary 

(S1) that is transferred in the same 

transaction in which the S share is 

transferred. Further, for purposes of 

determining the S share’s disconformity 

amount, the tentative basis reduction 

rule in this paragraph (c)(6) only applies 

with respect to stock of a lower-tier 

subsidiary if such stock is lower-tier to 

a nontransferred S1 share. The purpose 

of this rule is to prevent tentative 

adjustments to the bases of lower-tier 

shares if this paragraph (c) has already 

applied with respect to the shares, 

without regard to whether such 

application resulted in the reduction of 

the basis of any share. 

(v) Example. The rules of this 

paragraph (c)(6) are illustrated by the 

following example: 

Example. (i) Facts. M owns the sole 

outstanding share of S stock, S owns the sole 

outstanding share of S1 stock, S1 owns all 

five outstanding shares of S2 stock (the bases 

of which are equal), and S2 owns the sole 

outstanding share of S3 stock. The basis of 

each of the shares reflects its allocable 

portion of a $5 positive investment 

adjustment attributable to income recognized 

by S3. The basis of the S share exceeds its 

value by $10 and the basis of the S1 share 

exceeds its value by $5. The basis of each S2 

share is $1 less than its value. In one 

transaction, M sells its S share to X, S1 issues 

new shares in an amount that prevents S and 

S1 from being members of the same group, 

and S1 sells one of its S2 shares to an 

unrelated individual. S1, S2, and S3 elect to 

file a consolidated return following the 

transaction. 

(ii) General applicability of section. As a 

result of the transaction, there is a transfer of 

the S share and the S2 share that was sold 

(because both shares were sold to 

nonmembers) and of the S1 share (because S 

and S1 cease to be members of the same 

group as a result of the stock issuance). The 

transfer of the S2 share is not a transfer of 

a loss share, and so this section does not 

apply to that transfer. The transfers of the S 

and S1 shares are transfers of loss shares, and 

so this section applies to those transfers. The 

S3 share and the four retained S2 shares are 

not transferred in the transaction. Under 

paragraph (a)(3)(ii)(A) of this section, this 

section applies first to the transfer of the S1 

share because it is the lowest-tier transferred 

loss share. 

(iii) Application of paragraph (b) of this 

section and this paragraph (c) to transfer of 

S1 stock. First, the $1 gain recognized on the 

transfer of the S2 share tiers up to adjust the 

basis of each upper-tier share. The 

transferred S1 share is still a loss share (by 

$4) and is therefore subject to this section. 

Although the transfer is subject to paragraph 

(b) of this section, there is no basis 

redetermination under paragraph (b) of this 

section because there is only one share of S1 

stock outstanding (and so there can be no 

disparity among members’ bases in common 

shares and there are no outstanding preferred 

shares with respect to which there can be 

unrecognized gain or loss). See paragraph 

(b)(1)(ii)(A) of this section. Therefore, after 

the application of paragraph (b) of this 

section, the S1 share is still a loss share and, 

as such, subject to this paragraph (c). In 

determining the amount of any basis 

reduction under this paragraph (c), the 

disconformity amount of the S1 share is 

computed by comparing S’s basis in its S1 

share to S1’s net inside attribute amount 

(because there is only one S1 share 

outstanding, the entire amount is allocable to 

that share). In determining S1’s net inside 

attribute amount, the tentative reduction rule 

in this paragraph (c)(6) applies to 

nontransferred lower-tier shares (provided 

they are lower-tier to nontransferred shares). 

Thus, the rule applies to S1’s four retained 

shares of S2 stock and to S2’s share of S3 

stock. The tentative reduction begins at the 

lowest level (S2’s share of S3 stock) and any 

tentative reduction amount tiers up as a 

noncapital, nondeductible expense under the 

principles of § 1.1502–32, tentatively 

reducing the bases of any upper tier 

nontransferred shares that are lower-tier to 

the transferred loss share (the S1 share). 

Accordingly, each of S1’s nontransferred 

share of S2 stock is tentatively reduced by its 

portion of the tentative reduction to S2’s 

share of S3 stock. S1 then applies the 

tentative reduction rule to its four 

nontransferred S2 shares. S1’s net inside 

attribute amount is the sum of its basis in 

each of its nontransferred S2 shares, as 

tentatively reduced under this paragraph 

(c)(6) and S1’s actual basis in the transferred 

S2 share, increased to reflect the gain 

recognized on the sale of that share. After the 

application of this paragraph (c) to the 

transfer of the S1 share, paragraph (b) of this 

section applies to M’s transfer of the S share. 

(iv) Application of section to transfer of S 

stock. Because the S share is still a loss share 

after applying paragraph (b) of this section 

and this paragraph (c) to the transfer of the 

S1 stock, this section applies to M’s transfer 

of the S share. Although paragraph (b) of this 

section applies to the transfer, there is no 

basis redetermination under paragraph (b) of 

this section because there is only one share 

of S stock outstanding (and so there can be 

no disparity among members’ bases in 

common shares and there are no outstanding 

preferred shares with respect to which there 

can be unrecognized gain or loss). See 

paragraph (b)(1)(ii)(A) of this section. 

Therefore, after the application of paragraph 

(b) of this section, the share is still a loss 

share and, as such, subject to this paragraph 

(c). In determining the disconformity amount 

of the S share, S’s net inside attribute amount 

is determined using S’s actual basis in the 

transferred S1 stock (after any reduction 

under this paragraph (c)), because the 

tentative reduction rule in this paragraph 

(c)(6) does not apply to shares that are 

transferred in the transaction. All other 

shares are lower-tier to the transferred S1 

share and are therefore also not subject to 

tentative reduction for purposes of 

determining the disconformity amount of the 

S share. After the application of this 

paragraph (c) to the transfer of the S share, 

paragraph (d) of this section applies with 

respect to M’s transfer of the S share. After 

the application of paragraph (d) of this 


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53960 Federal Register / Vol. 73, No. 181 / Wednesday, September 17, 2008 / Rules and Regulations 

section with respect to the transfer of the S 

share, if the S1 share is still a loss share, 

paragraph (d) of this section applies with 

respect to S’s transfer of the S1 share. 

(7) Netting of gains and losses taken 

into account—(i) General rule. Solely 

for purposes of computing the basis 

reduction required under this paragraph 

(c), the basis of each transferred loss 

share of S stock is treated as reduced 

proportionately (as to loss) by the 

amount of income or gain taken into 

account by members with respect to 

transferred shares of S stock, provided 

that— 

(A) The shares are transferred in one 

transaction; and 

(B) The gain is taken into account as 

of the transaction. 

(ii) Example. The netting rule of this 

paragraph (c)(7) is illustrated by the 

following example: 

Example. Disposition of gain and loss 

shares. (i) Facts. M owns the only three 

outstanding shares of S stock. Share A has a 

basis of $54, Share B has a basis of $100, and 

Share C has a basis of $80. In the same 

transaction, M sells all three S shares to X for 

$60 each. M realizes a gain of $6 on Share 

A, a loss of $40 on Share B, and a loss of $20 

on Share C. M’s sales of Share B and Share 

C are transfers of loss shares and therefore 

subject to this section. M’s sale is a transfer 

of all of the shares of S stock held by 

members to one or more nonmembers in one 

fully taxable transaction and, therefore, basis 

is not redetermined under paragraph (b) of 

this section. See paragraph (b)(1)(ii)(B) of this 

section. The transfer is then subject to this 

paragraph (c). However, for this purpose, M 

treats its bases in Share B and Share C as 

reduced by the $6 gain taken into account on 

Share A. The gain is allocated to Share B and 

Share C proportionately based on the amount 

of loss in each share. Thus, $4 of gain ($40/ 

$60 x $6) is treated as allocated to Share B 

and $2 of gain ($20/$60 x $6) is treated as 

allocated to Share C. Accordingly, M 

computes the basis reduction required under 

this paragraph (c) by treating its basis in 

Share B as $96 ($100 less $4) and its basis 

in Share C as $78 ($80 less $2). If, after the 

application of this paragraph (c), the sales of 

Share B and Share C are still transfers of loss 

shares, then the transfers are subject to 

paragraph (d) of this section. (Although the 

bases of Share B and Share C are not actually 

reduced by any portion of the gain, paragraph 

(d)(3)(i)(A) of this section applies netting 

principles to limit adjustments under 

paragraph (d) of this section.) 

(ii) Disposition of stock with deferred gain. 

The facts are the same as in paragraph (i) of 

this Example, except that M sells the gain 

share to another member. Under § 1.1502–13, 

M’s gain recognized on Share A is not taken 

into account in the taxable year of the 

transfer and therefore cannot be treated as 

reducing M’s loss recognized on Share B and 

Share C for purposes of this paragraph (c). 

The applicability of this section to the 

transfer of Share A is determined as of the 

time that the intercompany item (the gain on 

M’s sale to the other member) is taken into 

account; see paragraph (e)(3) of this section. 

However, if Share B (instead of Share A) 

were sold to a member, the entire gain on 

Share A would be treated as reducing the loss 

on Share C for purposes of applying this 

paragraph (c); see paragraph (e)(3) of this 

section. 

(8) Examples. The application of this 

paragraph (c) is illustrated by the 

following examples. 

Example 1. Appreciation reflected in stock 

basis at acquisition. (i) Appreciation 

recognized as gain. (A) Facts. On January 1, 

year 1, M purchases the sole outstanding 

share of S stock for $100. At that time, S 

owns two assets, Asset 1 with a basis of $0 

and a value of $40, and Asset 2 with a basis 

and value of $60. In year 1, S sells Asset 1 

for $40, recognizing a $40 gain. On December 

31, year 1, M sells its S share for $100. After 

taking into account the effects of all 

applicable rules of law, M’s basis in the S 

share is $140 (M’s original $100 basis 

increased under § 1.1502–32 by $40, the 

share’s allocable portion of the gain 

recognized on the sale of Asset 1). M’s sale 

of the S share is a transfer of a loss share and 

therefore subject to this section. 

(B) Application of paragraph (b) of this 

section. Although the transfer is subject to 

this section, there is no basis redetermination 

under paragraph (b) of this section because 

there is only one share of S stock outstanding 

(and so there can be no disparity among 

members’ bases in common shares and there 

are no outstanding preferred shares with 

respect to which there can be unrecognized 

gain or loss). See paragraph (b)(1)(ii)(A) of 

this section. Therefore, after the application 

of paragraph (b) of this section, the share is 

still a loss share and, as such, subject to this 

paragraph (c). 

(C) Basis reduction under this paragraph 

(c). Under this paragraph (c), M’s basis in the 

S share, $140, is reduced, but not below 

value, $100, by the lesser of the share’s net 

positive adjustment and disconformity 

amount. The share’s net positive adjustment 

is the greater of zero and the sum of all 

investment adjustments (as defined in 

paragraph (b)(1)(iii) of this section) applied to 

the basis of the share. The only investment 

adjustment applied to the basis of the share 

is the $40 adjustment attributable to the gain 

recognized on the sale of Asset 1. Thus, the 

share’s net positive adjustment is $40. The 

share’s disconformity amount is the excess, 

if any, of its basis, $140, over its allocable 

portion of S’s net inside attribute amount. S’s 

net inside attribute amount is the sum of S’s 

money ($40 from the sale of Asset 1) and S’s 

basis in Asset 2, $60, or $100. The share is 

the only outstanding S share and so its 

allocable portion of the $100 net inside 

attribute amount is the entire $100. Thus, the 

share’s disconformity amount is $40, the 

excess of $140 over $100. The lesser of the 

net positive adjustment, $40, and the share’s 

disconformity amount, $40, is $40. 

Accordingly, immediately before the 

application of paragraph (d) of this section, 

M’s basis in the share is reduced by $40, from 

$140 to $100. 

(D) Application of paragraph (d) of this 

section. Because M’s sale of the S share is not 

a transfer of a loss share after the application 

of this paragraph (c), paragraph (d) of this 

section does not apply to the transfer. 

(ii) Appreciation recognized as income 

earned in the consumption of built-in gain. 

The facts are the same as in paragraph (i)(A) 

of this Example 1, except that, instead of 

selling Asset 1, the value of Asset 1 is 

consumed in the production of $40 of income 

in year 1 (reducing the value of Asset 1 to 

$0). Because the net positive adjustment 

includes items of income as well as items of 

gain, the results are the same as those 

described in paragraph (i) of this Example 1. 

(iii) Post-acquisition appreciation 

eliminates stock loss. The facts are the same 

as in paragraph (i)(A) of this Example 1 

except that, in addition, the value of Asset 2 

increases to $100 before the stock is sold. As 

a result, M sells the S share for $140. Because 

M’s sale of the S share is not a transfer of a 

loss share, this section does not apply to the 

transfer, notwithstanding that P’s basis in the 

S share was increased by the gain recognized 

on Asset 1. 

(iv) Distributions. (A) Facts. The facts are 

the same as in paragraph (i)(A) of this 

Example 1 except that, in addition, S 

declares and makes a $10 dividend 

distribution before the end of year 1. As a 

result, the value of the share decreases and 

M sells the share for $90. After taking into 

account the effects of all applicable rules of 

law, M’s basis in the S share is $130 (M’s 

original $100 basis increased under § 1.1502– 

32 by $30, the $10 distribution on the share 

reduced by the share’s allocable portion of 

the $40 gain recognized on the sale of Asset 

1). M’s sale of the S share is a transfer of a 

loss share and therefore subject to this 

section. 

(B) Application of paragraph (b) of this 

section. Although the transfer is subject to 

this section, there is no basis redetermination 

under paragraph (b) of this section for the 

reasons set forth in paragraph (i)(B) of this 

Example 1. Therefore, after the application of 

paragraph (b) of this section, the share is still 

a loss share and, as such, subject to this 

paragraph (c). 

(C) Basis reduction under this paragraph 

(c). Under this paragraph (c), M’s basis in the 

S share, $130, is reduced, but not below 

value, $90, by the lesser of the share’s net 

positive adjustment and disconformity 

amount. The share’s net positive adjustment 

is $40 (the sum of all investment adjustments 

(as defined in paragraph (b)(1)(iii) of this 

section) applied to the basis of the share). 

The share’s disconformity amount is the 

excess of its basis, $130, over its allocable 

portion of S’s net inside attribute amount. S’s 

net inside attribute amount is $90, the sum 

of S’s money ($30, the $40 sale proceeds less 

the $10 distribution) and S’s basis in Asset 

2, $60. The share is the only outstanding S 

share and so its allocable portion of the $90 

net inside attribute amount is the entire $90. 

The lesser of the share’s net positive 

adjustment, $40, and its disconformity 

amount, $40, is $40. Accordingly, 

immediately before the application of 

paragraph (d) of this section, the basis in the 

share is reduced by $40, from $130 to $90. 

(D) Application of paragraph (d) of this 

section. Because M’s sale of the S share is not 


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a transfer of a loss share after the application 

of this paragraph (c), paragraph (d) of this 

section does not apply to the transfer. 

Example 2. Loss of appreciation reflected 

in basis. (i) Facts. On January 1, year 1, M 

purchases the sole outstanding share of S 

stock for $100. At that time, S owns two 

assets, Asset 1 with a basis of $0 and a value 

of $40, and Asset 2 with a basis and value 

of $60. The value of Asset 1 declines to $0 

and M sells its S share for $60. After taking 

into account the effects of all applicable rules 

of law, M’s basis in the S share is $100. M’s 

sale of the S share is a transfer of a loss share 

and therefore subject to this section. 

(ii) Application of paragraph (b) of this 

section. Although the transfer is subject to 

this section, there is no basis redetermination 

under paragraph (b) of this section because 

there is only one share of S stock outstanding 

(and so there can be no disparity among 

members’ bases in common shares and there 

are no outstanding preferred shares with 

respect to which there can be unrecognized 

gain or loss). See paragraph (b)(1)(ii)(A) of 

this section. Therefore, after the application 

of paragraph (b) of this section, the share is 

still a loss share and, as such, subject to this 

paragraph (c). 

(iii) Basis reduction under this paragraph 

(c). Under this paragraph (c), M’s $100 basis 

in the S share is reduced, but not below its 

$60 value by the lesser of the share’s net 

positive adjustment and disconformity 

amount. There were no investment 

adjustments applied to M’s basis in the share 

and so the share’s net positive adjustment is 

$0. Thus, although the share’s disconformity 

amount is $40 (the excess of M’s $100 basis 

in the share over the share’s $60 allocable 

portion of S’s net inside attribute amount), no 

basis reduction is required under this 

paragraph (c). 

(iv) Application of paragraph (d) of this 

section. After the application of this 

paragraph (c), M’s sale of the S share is still 

a transfer of a loss share, and, accordingly, 

subject to paragraph (d) of this section. No 

adjustment is required under paragraph (d) of 

this section because there is no aggregate 

inside loss. See paragraph (d)(3)(iii) of this 

section. 

Example 3. Items accruing after S becomes 

a member. (i) Recognition of loss accruing 

after S becomes a member. (A) Facts. On 

January 1, year 1, M purchases the sole 

outstanding share of S stock for $100. At that 

time, S owns two assets, Asset 1, with a basis 

of $0 and a value of $40, and Asset 2, with 

a basis and value of $60. In year 1, S sells 

Asset 1 for $40, recognizing a $40 gain. Also 

in year 1, the value of Asset 2 declines and 

S sells Asset 2 for $20, recognizing a $40 loss 

that is absorbed by the group. On December 

31, year 1, M sells its S share for $60. After 

taking into account the effects of all 

applicable rules of law, M’s basis in the S 

share is $100 (M’s original $100 basis, 

unadjusted under § 1.1502–32 because the 

$40 gain recognized on the sale of Asset 1 

and the $40 loss on the sale of Asset 2 net, 

resulting in an adjustment of $0). M’s sale of 

the S share is a transfer of a loss share and 

therefore subject to this section. 

(B) Application of paragraph (b) of this 

section. Although the transfer is subject to 

this section, there is no basis redetermination 

under paragraph (b) of this section because 

there is only one share of S stock outstanding 

(and so there can be no disparity among 

members’ bases in common shares and there 

are no outstanding preferred shares with 

respect to which there can be unrecognized 

gain or loss). See paragraph (b)(1)(ii)(A) of 

this section. Therefore, after the application 

of paragraph (b) of this section, the share is 

still a loss share and, as such, subject to this 

paragraph (c). 

(C) Basis reduction under this paragraph 

(c). Under this paragraph (c), M’s basis in the 

S share is reduced, but not below the share’s 

$60 value, by the lesser of the share’s net 

positive adjustment and disconformity 

amount. The share’s net positive adjustment 

is $0. Thus, although the share has a 

disconformity amount of $40 (the excess of 

M’s basis in the share, $100, over the share’s 

allocable portion of S’s net inside attribute 

amount, $60), no basis reduction is required 

under this paragraph (c). 

(D) Application of paragraph (d) of this 

section. After the application of this 

paragraph (c), M’s sale of the S share is still 

a transfer of a loss share, and, accordingly, 

subject to paragraph (d) of this section. No 

adjustment is required under paragraph (d) of 

this section because there is no aggregate 

inside loss. See paragraph (d)(3)(iii) of this 

section. 

(ii) Recognition of gain accruing after S 

becomes a member. (A) Facts. The facts are 

the same as in paragraph (i)(A) of this 

Example 3, except that M does not sell the 

S share and S does not sell either asset in 

year 1. In addition, in year 2, the value of 

Asset 1 declines to $0, the value of Asset 2 

returns to $60, and S creates Asset 3 (with 

a basis of $0). In year 3, S sells Asset 3 for 

$40, recognizing a $40 gain. On December 31, 

year 3, M sells its S share for $100. After 

taking into account the effects of all 

applicable rules of law, M’s basis in the S 

share is $140 (M’s original $100 basis 

increased under § 1.1502–32 by $40 (the 

share’s allocable portion of the gain 

recognized on the sale of Asset 3 in year 3)). 

M’s sale of the S share is a transfer of a loss 

share and therefore subject to this section. 

(B) Application of paragraph (b) of this 

section. Although the transfer is subject to 

this section, there is no basis redetermination 

under paragraph (b) of this section for the 

reasons set forth in paragraph (i)(B) of this 

Example 3. Therefore, after the application of 

paragraph (b) of this section, the share is still 

a loss share and, as such, subject to this 

paragraph (c). 

(C) Basis reduction under this paragraph 

(c). Under this paragraph (c), M’s basis in the 

S share, $140, is reduced, but not below 

value, $100, by the lesser of the share’s net 

positive adjustment and disconformity 

amount. The share’s net positive adjustment 

is $40 (the year 3 investment adjustment). 

The share’s disconformity amount is the 

excess of its basis, $140, over its allocable 

portion of S’s net inside attribute amount. S’s 

net inside attribute amount is $100, the sum 

of S’s money ($40 from the sale of Asset 3) 

and its basis in its assets ($60 (the sum of 

Asset 1’s basis of $0 and Asset 2’s basis of 

$60)). S’s $100 net inside attribute amount is 

allocable entirely to the sole outstanding S 

share. Thus, the share’s disconformity 

amount is the excess of $140 over $100, or 

$40. The lesser of the share’s net positive 

adjustment, $40, and its disconformity 

amount, $40, is $40. Accordingly, the basis 

in the share is reduced by $40, from $140 to 

$100. 

(D) Application of paragraph (d) of this 

section. Because M’s sale of the S share is not 

a transfer of a loss share after the application 

of this paragraph (c), paragraph (d) of this 

section does not apply to the transfer. 

(iii) Recognition of income earned after S 

becomes a member. The facts are the same 

as in paragraph (ii)(A) of this Example 3, 

except that instead of creating Asset 3, S 

earns $40 of income from services provided 

in year 3. Because the net positive 

adjustment includes items of income as well 

as items of gain, the results are the same as 

those described in paragraph (ii) of this 

Example 3. 

Example 4. Computing the disconformity 

amount. (i) Unrecognized loss reflected in 

stock basis. (A) Facts. M owns the sole 

outstanding share of S stock with a basis of 

$100. S owns two assets, Asset 1 with a basis 

of $20 and a value of $60, and Asset 2 with 

a basis of $60 and a value of $40. In year 1, 

S sells Asset 1 for $60, recognizing a $40 

gain. On December 31, year 1, M sells the S 

share for $100. After taking into account the 

effects of all applicable rules of law, M’s 

basis in the S share is $140 (M’s original $100 

basis increased under § 1.1502–32 by $40, the 

share’s allocable portion of the gain 

recognized on the sale of Asset 1). M’s sale 

of the S share is a transfer of a loss share and 

therefore subject to this section. 

(B) Application of paragraph (b) of this 

section. Although the transfer is subject to 

this section, there is no basis redetermination 

under paragraph (b) of this section because 

there is only one share of S stock outstanding 

(and so there can be no disparity among 

members’ bases in common shares and there 

are no outstanding preferred shares with 

respect to which there can be unrecognized 

gain or loss). See paragraph (b)(1)(ii)(A) of 

this section. Therefore, after the application 

of paragraph (b) of this section, the share is 

still a loss share and, as such, subject to this 

paragraph (c). 

(C) Basis reduction under this paragraph 

(c). Under this paragraph (c), M’s basis in the 

S share, $140, is reduced, but not below the 

share’s $100 value, by the lesser of the 

share’s net positive adjustment and 

disconformity amount. The share’s net 

positive adjustment is $40 (the year 1 

investment adjustment). The share’s 

disconformity amount is the excess of its 

basis, $140, over its allocable portion of S’s 

net inside attribute amount. S’s net inside 

attribute amount is $120, the sum of S’s 

money ($60 from the sale of Asset 1) and S’s 

basis in Asset 2, $60. S’s net inside attribute 

amount is allocable entirely to the sole 

outstanding S share. Thus, the share’s 

disconformity amount is $20, the excess of 

$140 over $120. The lesser of the share’s net 

positive adjustment, $40, and its 

disconformity amount, $20, is $20. 

Accordingly, the basis in the share is reduced 

by $20, from $140 to $120. 


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(D) Application of paragraph (d) of this 

section. After the application of this 

paragraph (c), M’s sale of the S share is still 

a transfer of a loss share, and, accordingly, 

S’s attributes (to the extent of the $20 

duplicated loss) are subject to reduction 

under paragraph (d) of this section. 

(ii) Loss carryover. The facts are the same 

as in paragraph (i)(A) of this Example 4, 

except that Asset 2 has a basis of $0 (rather 

than $60) and S has a $60 loss carryover (as 

defined in paragraph (f)(6) of this section). 

The analysis is the same as paragraph (i) of 

this Example 4. Furthermore, the analysis of 

the application of this paragraph (c) would be 

the same if the $60 loss carryover were 

subject to a section 382 limitation from a 

prior ownership change, or if, instead, the 

$60 loss carryover were subject to the 

limitation in § 1.1502–21(c) on losses carried 

from separate return limitation years. 

(iii) Liabilities. The facts are the same as in 

paragraph (i)(A) of this Example 4, except 

that S borrows $100 before M sells the S 

share. S’s net inside attribute amount 

remains $120, computed as the sum of S’s 

money ($160, $60 from the sale of Asset 1 

plus the $100 borrowed) and S’s basis in 

Asset 2, $60, less its liabilities, $100. Thus, 

the S share’s disconformity amount remains 

the excess of $140 over $120, or $20. The 

results are the same as in paragraph (i) of this 

Example 4. 

Example 5. Computing the allocable 

portion of the net inside attribute amount. (i) 

Facts. On January 1, year 1, M owns all five 

outstanding shares of S stock with a basis of 

$20 per share. S owns Asset with a basis of 

$0. In year 1, S sells Asset for $100, 

recognizing a $100 gain. On December 31, 

year 1, M sells one of the S shares, Share 1, 

for $20. After taking into account the effects 

of all applicable rules of law, M’s basis in 

Share 1 is $40 (M’s original $20 basis 

increased under § 1.1502–32 by $20 (the 

share’s allocable portion of the gain 

recognized on the sale of Asset)). M’s sale of 

Share 1 is a transfer of a loss share and 

therefore subject to this section. 

(ii) Application of paragraph (b) of this 

section. Although the transfer is subject to 

this section, basis is not redetermined under 

paragraph (b) of this section because there is 

no disparity among M’s bases in shares of S 

common stock and there are no shares of S 

preferred stock outstanding (so there can be 

no unrecognized gain or loss with respect to 

preferred shares). See paragraph (b)(1)(ii)(A) 

of this section. After the application of 

paragraph (b) of this section, M’s sale of 

Share 1 is still a transfer of a loss share and 

therefore subject to this paragraph (c). 

(iii) Basis reduction under this paragraph 

(c). Under this paragraph (c), M’s $40 basis 

in Share 1 is reduced, but not below its $20 

value by the lesser of the share’s net positive 

adjustment and disconformity amount. Share 

1’s net positive adjustment is $20 (the year 

1 investment adjustment). Share 1’s 

disconformity amount is the excess of its $40 

basis over its allocable portion of S’s net 

inside attribute amount. S’s net inside 

attribute amount is equal to the amount of S’s 

money ($100 from the sale of the asset). 

Share 1’s allocable portion of S’s $100 net 

inside attribute amount is $20 (1/5 x $100). 

Thus, Share 1’s disconformity amount is the 

excess of $40 over $20, or $20. The lesser of 

the share’s $20 net positive adjustment and 

its $20 disconformity amount is $20. 

Accordingly, the basis in the share is reduced 

by $20, from $40 to $20. 

(iv) Application of paragraph (d) of this 

section. Because M’s sale of Share 1 is not a 

transfer of a loss share after the application 

of this paragraph (c), paragraph (d) of this 

section does not apply to the transfer. 

Example 6. Liabilities. (i) In general. (A) 

Facts. On January 1, year 1, M purchases the 

sole outstanding share of S stock for $100. At 

that time, S owns Asset, with a basis of $0 

and value of $100, and $100 cash. S also has 

a $100 liability. In year 1, S declares and 

makes a $60 dividend distribution to M and 

recognizes $20 of income. The value of Asset 

declines to $60 and, on December 31, year 1, 

M sells the S share for $20. After taking into 

account the effects of all applicable rules of 

law, M’s basis in the S share is $60 (M’s 

original $100 basis decreased under 

§ 1.1502–32 by $40 (the net of the $60 

distribution and the $20 income recognized)). 

M’s sale of the S share is a transfer of a loss 

share and therefore subject to this section. 

(B) Application of paragraph (b) of this 

section. Although the transfer is subject to 

this section, there is no basis redetermination 

under paragraph (b) of this section because 

there is only one share of S stock outstanding 

(and so there can be no disparity among 

members’ bases in common shares and there 

are no outstanding preferred shares with 

respect to which there can be unrecognized 

gain or loss). See paragraph (b)(1)(ii)(A) of 

this section. Therefore, after the application 

of paragraph (b) of this section, the share is 

still a loss share and, as such, subject to this 

paragraph (c). 

(C) Basis reduction under this paragraph 

(c). Under this paragraph (c), M’s basis in the 

S share, $60, is reduced, but not below value, 

$20, by the lesser of the share’s net positive 

adjustment and disconformity amount. The 

share’s net positive adjustment is $20 (the 

year 1 investment adjustment, as defined in 

paragraph (b)(1)(iii) of this section). The 

share’s disconformity amount is the excess of 

its basis, $60, over its allocable portion of S’s 

net inside attribute amount. S’s net inside 

attribute amount is negative $40, computed 

as the sum of S’s money ($60 ($100 less the 

$60 distribution plus the $20 income 

recognized)) and S’s basis in Asset, $0, less 

S’s liability, $100. S’s net inside attribute 

amount is allocable entirely to the sole 

outstanding S share. Thus, the share’s 

disconformity amount is the excess of $60 

over negative $40, or $100. The lesser of the 

share’s net positive adjustment, $20, and its 

disconformity amount, $100, is $20. 

Accordingly, the basis in the share is reduced 

by $20, from $60 to $40. 

(D) Application of paragraph (d) of this 

section. After the application of this 

paragraph (c), the S share is still a loss share 

and, accordingly, S’s attributes are subject to 

reduction under paragraph (d) of this section. 

No adjustment is required under paragraph 

(d) of this section, however, because there is 

no aggregate inside loss. See paragraph 

(d)(3)(iii) of this section. 

(ii) Excluded cancellation of indebtedness 

income—insufficient attributes available for 

reduction under sections 108 and 1017, and 

§ 1.1502–28. (A) Facts. The facts are the same 

as in paragraph (i)(A) of this Example 6, 

except that M does not sell the S share. 

Instead, in year 4, Asset is destroyed in a fire 

and S spends its $60 on deductible expenses 

that are not absorbed by the group. S’s loss 

becomes part of the consolidated net 

operating loss (CNOL). In year 5, S becomes 

insolvent and S’s debt is discharged. Because 

of S’s insolvency, S’s discharge of 

indebtedness income is excluded under 

section 108 and, as a result, S’s attributes are 

subject to reduction under sections 108 and 

1017, and § 1.1502–28. S’s only attribute is 

the portion of the CNOL attributable to S, 

$60, and it is reduced to $0. There are no 

other consolidated attributes. In year 5, the 

S stock (which is treated as a capital asset) 

becomes worthless under section 165, taking 

into account § 1.1502–80(c). After taking into 

account the effects of all applicable rules of 

law, M’s basis in the S share is $60 (M’s 

original $100 basis decreased under 

§ 1.1502–32 by the year 1 investment 

adjustment of $40 (the net of the $60 

distribution and the $20 income recognized). 

The investment adjustment for year 5 is $0 

(the net of the $60 tax exempt income from 

the excluded COD applied to reduce 

attributes and the $60 noncapital, 

nondeductible expense from the reduction of 

S’s portion of the CNOL)). Under paragraph 

(f)(10)(i)(D) of this section, a share is 

transferred on the last day of the taxable year 

during which it becomes worthless under 

section 165 if the share is treated as a capital 

asset, or the date the share becomes 

worthless if the share is not treated as a 

capital asset, taking into account § 1.1502– 

80(c). Accordingly, M transfers the loss share 

of S stock on December 31, year 5, and the 

transfer is therefore subject to this section. 

(B) Application of paragraph (b) of this 

section. Although the transfer is subject to 

this section, there is no basis redetermination 

under paragraph (b) of this section for the 

reasons set forth in paragraph (i)(B) of this 

Example 6. Therefore, after the application of 

paragraph (b) of this section, the share is still 

a loss share and, as such, subject to this 

paragraph (c). 

(C) Basis reduction under this paragraph 

(c). Under this paragraph (c), M’s basis in its 

S share, $60, is reduced, but not below value, 

$0, by the lesser of the share’s net positive 

adjustment and disconformity amount. The 

share’s net positive adjustment is $20 (the 

year 1 investment adjustment, as defined in 

paragraph (b)(1)(iii) of this section). The 

share’s disconformity amount is the excess of 

its basis, $60, over its allocable portion of S’s 

net inside attribute amount. S’s net inside 

attribute amount is $0. (The effects of the 

attribute reduction required under sections 

108 and 1017 and § 1.1502–28 are taken into 

account in applying this section; therefore, 

for purposes of this section, S’s portion of the 

CNOL is treated as eliminated under section 

108 and § 1.1502–28.) S’s net inside attribute 

amount is allocable entirely to the sole 

outstanding S share. Thus, the share’s 

disconformity amount is the excess of $60 

over $0, or $60. The lesser of the share’s net 

positive adjustment, $20, and its 

disconformity amount, $60, is $20. 


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Accordingly, the basis in the share is reduced 

by $20, from $60 to $40, immediately before 

the transfer. 

(D) Application of paragraph (d) of this 

section. After the application of this 

paragraph (c), the S share is still a loss share, 

and, accordingly, S’s attributes are subject to 

reduction under paragraph (d) of this section. 

No adjustment is required under paragraph 

(d) of this section, however, because there is 

no aggregate inside loss. See paragraph 

(d)(3)(iii) of this section. 

(iii) Excluded cancellation of indebtedness 

income—full attribute reduction under 

sections 108 and 1017, and § 1.1502–28 

(using attributes attributable to another 

member). (A) Facts. The facts are the same as 

in paragraph (ii)(A) of this Example 6 except 

that M loses the $60 distributed in year 1 and 

the group does not absorb the loss. Thus, as 

of December 31, year 5, the CNOL is $120, 

attributable $60 to S and $60 to P. As a result, 

under § 1.1502–28(a)(4), after the portion of 

the CNOL attributable to S is reduced to $0, 

the remaining $40 of excluded COD applies 

to the portion of the CNOL attributable to P, 

reducing it from $60 to $20. After taking into 

account the effects all applicable rules of law, 

M’s basis in the S share at the end of year 

5 is $100 (M’s original $100 basis decreased 

under § 1.1502–32 by $40 at the end of year 

1 and then increased under § 1.1502–32 by 

$40 at the end of year 5 (the net of the $100 

tax exempt income from the excluded COD 

applied to reduce attributes and the $60 

noncapital, nondeductible expense from the 

reduction of S’s portion of the CNOL)). Under 

paragraph (f)(10)(i)(D) of this section, a share 

is transferred on the last day of the taxable 

year during which it becomes worthless 

under section 165 if the share is treated as 

a capital asset, or the date the share becomes 

worthless if the share is not treated as a 

capital asset, taking into account § 1.1502– 

80(c). Accordingly, M transfers the loss share 

of S stock on December 31, year 5, and the 

transfer is therefore subject to this section. 

(B) Application of paragraph (b) of this 

section. Although the transfer is subject to 

this section, there is no basis redetermination 

under paragraph (b) of this section for the 

reasons set forth in paragraph (i)(B) of this 

Example 6. Therefore, after the application of 

paragraph (b) of this section, the share is still 

a loss share and, as such, subject to this 

paragraph (c). 

(C) Basis reduction under this paragraph 

(c). Under this paragraph (c), M’s basis in the 

S share, $100, is reduced, but not below 

value, $0, by the lesser of the share’s net 

positive adjustment and disconformity 

amount. The share’s net positive adjustment 

is $60 (the sum of the year 1 investment 

adjustment, as defined in paragraph (b)(1)(iii) 

of this section, $20, and the year 5 

investment adjustment, $40). The share’s 

disconformity amount is the excess of its 

basis, $100, over its allocable portion of S’s 

net inside attribute amount. S’s net inside 

attribute amount is $0 (taking into account 

the effects of the attribute reduction required 

under sections 108 and 1017 and § 1.1502– 

28). S’s net inside attribute amount is 

allocable entirely to the sole outstanding S 

share. The share’s disconformity amount is 

therefore $100. The lesser of the share’s net 

positive adjustment, $60, and its 

disconformity amount, $100, is $60. 

Accordingly, M’s basis in the share is 

reduced by $60, from $100 to $40, 

immediately before the transfer. 

(D) Application of paragraph (d) of this 

section. After the application of this 

paragraph (c), the S share is still a loss share, 

and, accordingly, S’s attributes are subject to 

reduction under paragraph (d) of this section. 

No adjustment is required under paragraph 

(d) of this section, however, because there is 

no aggregate inside loss. See paragraph 

(d)(3)(iii) of this section. 

Example 7. Lower-tier subsidiary (no 

transfer of lower-tier stock). (i) Facts. M owns 

the sole outstanding share of S stock with a 

basis of $160. S owns two assets, Asset 1 

with a basis and value of $100, and the sole 

outstanding share of S1 stock with a basis of 

$60. S1 owns one asset, Asset 2, with a basis 

of $20 and value of $60. In year 1, S1 sells 

Asset 2 to X for $60, recognizing a $40 gain. 

On December 31, year 1, M sells its S share 

to Y, a member of another consolidated 

group, for $160. After taking into account the 

effects of all applicable rules of law, M’s 

basis in the S share is $200 (M’s original $160 

basis increased under § 1.1502–32 by $40 (to 

reflect the tier-up of the adjustment to S’s 

basis in the S1 stock for the gain recognized 

on S1’s sale of Asset 2)). M’s sale of the S 

share is a transfer of a loss share and 

therefore subject to this section. (S does not 

transfer the S1 share because S and S1 are 

members of the same group following the 

transfer. See paragraph (f)(10) of this section.) 

(ii) Application of paragraph (b) of this 

section. Although the transfer is subject to 

this section, there is no basis redetermination 

under paragraph (b) of this section because 

there is only one share of S stock outstanding 

(and so there can be no disparity among 

members’ bases in common shares and there 

are no outstanding preferred shares with 

respect to which there can be unrecognized 

gain or loss). See paragraph (b)(1)(ii)(A) of 

this section. Therefore, after the application 

of paragraph (b) of this section, the share is 

still a loss share and, as such, subject to this 

paragraph (c). 

(iii) Basis reduction under this paragraph 

(c). (A) In general. Under this paragraph (c), 

M’s basis in the S share, $200, is reduced, but 

not below value, $160, by the lesser of the 

share’s net positive adjustment and 

disconformity amount. The S share’s net 

positive adjustment is $40. The share’s 

disconformity amount is the excess of its 

basis, $200, over the share’s allocable portion 

of S’s net inside attribute amount. S’s net 

inside attribute amount is the sum of S’s 

basis in Asset 1, $100, and S’s basis in the 

S1 share. 

(B) S’s basis in the S1 share. Although S’s 

actual basis in the S1 share is $100 (S’s 

original $60 basis increased under § 1.1502– 

32 by $40 (the share’s allocable portion of the 

gain recognized on the sale of Asset 2)), for 

purposes of computing the S share’s 

disconformity amount, S’s net inside 

attribute amount is determined by treating 

S’s basis in the S1 share as tentatively 

reduced by the lesser of the S1 share’s net 

positive adjustment and the S1 share’s 

disconformity amount. The S1 share’s net 

positive adjustment is $40 (the year 1 

investment adjustment). The S1 share’s 

disconformity amount is the excess of its 

basis, $100, over the share’s allocable portion 

of S1’s net inside attribute amount. S1’s net 

inside attribute amount is equal to the 

amount of S1’s money ($60 from the sale of 

Asset 2), and is allocable entirely to the sole 

outstanding S1 share. Thus, the S1 share’s 

disconformity amount is the excess of $100 

over $60, or $40. The lesser of the S1 share’s 

net positive adjustment, $40, and its 

disconformity amount, $40, is $40. 

Accordingly, for purposes of computing the 

disconformity amount of the S share, S’s net 

inside attribute amount is determined by 

treating S’s basis in its S1 share as tentatively 

reduced by $40, from $100 to $60. 

(C) The disconformity amount of M’s S 

share. S’s net inside attribute amount is 

treated as the sum of its basis in Asset 1, 

$100, and its tentatively reduced basis in the 

S1 share, $60, or $160. S’s net inside attribute 

amount is allocable entirely to the sole 

outstanding S share. Thus, the S share’s 

disconformity amount is the excess of $200 

over $160, or $40. 

(D) Amount of reduction. M’s basis in its 

S share is reduced by the lesser of the S 

share’s net positive adjustment, $40, and 

disconformity amount, $40, or $40. 

Accordingly, M’s basis in the S share is 

reduced by $40, from $200 to $160. 

(E) Effect on S’s basis in its S1 share. The 

tentative reduction under this paragraph (c) 

has no effect on S’s actual basis in the S1 

share. Thus, after the application of this 

paragraph (c), S owns the S1 share with a 

basis of $100 (S’s original $60 basis increased 

under § 1.1502–32 by $40 (the share’s 

allocable portion of the gain recognized on 

the sale of Asset 2)). 

(iv) Application of paragraph (d) of this 

section. Because M’s sale of the S share is not 

a transfer of a loss share after the application 

of this paragraph (c), paragraph (d) of this 

section does not apply to the transfer. 

(d) Attribute reduction to prevent 

duplication of loss—(1) In general. The 

rules of this paragraph (d) reduce 

attributes of S and its lower-tier 

subsidiaries to the extent they duplicate 

a net loss on shares of S stock 

transferred by members in one 

transaction. This rule furthers singleentity principles by preventing S (or its 

lower-tier subsidiaries) from using 

deductions and losses to the extent that 

the group or its members (including 

former members) have either used, or 

preserved for later use, a corresponding 

loss in S shares. 

(2) Attribute reduction rule—(i) 

General rule. If a transferred share is a 

loss share after taking into account the 

effects of all applicable rules of law, 

including any adjustments under 

paragraph (b), (c), or (d)(5)(iii) of this 

section, S’s attributes are reduced by S’s 

attribute reduction amount immediately 

before the transfer. S’s attribute 

reduction amount is determined under 

paragraph (d)(3) of this section and 


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applied in accordance with the 

provisions of paragraphs (d)(4), (d)(5), 

and (d)(6) of this section. In addition, 

paragraph (d)(7) of this section provides 

for additional attribute reduction in the 

case of certain transfers due to 

worthlessness and certain transfers not 

followed by a separate return year. 

(ii) Attribute reduction amount less 

than five percent of value. This 

paragraph (d) generally does not apply 

to a transaction if the aggregate attribute 

reduction amount in the transaction is 

less than five percent of the aggregate 

value of the shares transferred by 

members in the transaction. However, in 

such a case, P may elect to apply this 

paragraph (d) to the transaction. If such 

an election is made, this paragraph (d) 

will apply with respect to the entire 

aggregate attribute reduction amount 

determined in the transaction. Such an 

election is made in the manner provided 

in paragraph (e)(5) of this section. 

(3) Attribute reduction amount—(i) In 

general. S’s attribute reduction amount 

is the lesser of— 

(A) The net stock loss (as defined in 

paragraph (d)(3)(ii) of this section); and 

(B) S’s aggregate inside loss (as 

defined paragraph (d)(3)(iii) of this 

section). 

(ii) Net stock loss. The net stock loss 

is the excess, if any, of— 

(A) The aggregate basis of all shares of 

S stock transferred by members in the 

transaction; over 

(B) The aggregate value of those 

shares. 

(iii) Aggregate inside loss—(A) In 

general. S’s aggregate inside loss is the 

excess, if any, of— 

(1) S’s net inside attribute amount; 

over 

(2) The value of all outstanding shares 

of S stock. 

(B) Net inside attribute amount. S’s 

net inside attribute amount generally 

has the same meaning as in paragraph 

(c)(5) of this section. However, if S 

holds stock of a lower-tier subsidiary, 

the provisions of paragraph (d)(5) of this 

section (and not the provisions of 

paragraph (c)(6) of this section) modify 

the computation of S’s net inside 

attribute amount for purposes of this 

paragraph (d). 

(iv) Lower-tier subsidiaries. See 

paragraph (d)(5) of this section for 

special rules relating to the application 

of this paragraph (d) if S owns shares of 

stock of a subsidiary. 

(4) Application of attribute reduction 

amount—(i) Attributes available for 

reduction. S’s attributes available for 

reduction under this paragraph (d) are— 

(A) Category A. Capital loss 

carryovers; 

(B) Category B. Net operating loss 

carryovers; 

(C) Category C. Deferred deductions; 

and 

(D) Category D. Basis of assets other 

than assets identified as Class I assets in 

§ 1.338–6(b)(1). 

(ii) Rules of application—(A) Category 

A, Category B, and Category C attributes. 

S’s attribute reduction amount is first 

allocated and applied to reduce the 

attributes in Category A, Category B, and 

Category C. 

(1) Attribute reduction amount less 

than total attributes in Category A, 

Category B, and Category C. If S’s 

attribute reduction amount is less than 

S’s total attributes in Category A, 

Category B, and Category C, all of S’s 

attribute reduction amount will be 

applied to reduce such attributes. 

However, P may specify the allocation 

of S’s attribute reduction amount among 

such attributes. An election to specify 

the allocation of S’s attribute reduction 

amount is made in the manner provided 

in paragraph (e)(5) of this section. To 

the extent that P does not specify an 

allocation of S’s attribute reduction 

amount, S’s attribute reduction amount 

will be applied to reduce any Category 

A attributes not reduced as a result of 

the specific allocation of S’s attribute 

reduction amount, from oldest to 

newest, until they are eliminated. Then, 

any remaining attribute reduction 

amount will be applied to reduce any 

Category B attributes not reduced as a 

result of the specific allocation of S’s 

attribute reduction amount, from oldest 

to newest, until they are eliminated. 

Finally, any remaining attribute 

reduction amount will be applied to 

reduce any Category C attributes not 

reduced as a result of the specific 

allocation of S’s attribute reduction 

amount, proportionately. 

(2) Attribute reduction amount not 

less than the total attributes in Category 

A, Category B, and Category C. If S’s 

attribute reduction amount equals or 

exceeds S’s total attributes in Category 

A, Category B, and Category C, all such 

attributes are eliminated and any 

remaining attribute reduction amount is 

allocated and applied as provided in 

paragraphs (d)(4)(ii)(B) and (d)(4)(ii)(C) 

of this section. 

(B) Category D attributes. Any 

attribute reduction amount not applied 

to reduce S’s Category A, Category B, 

and Category C attributes is allocated 

and applied as provided in this 

paragraph (d)(4)(ii)(B) and, to the extent 

applicable, paragraph (d)(5) of this 

section. 

(1) Allocation if S holds stock of 

another subsidiary. If S holds shares of 

stock of another subsidiary, the attribute 

reduction amount not applied to reduce 

S’s Category A, Category B, and 

Category C attributes is first allocated 

between S’s shares of lower-tier 

subsidiary stock and S’s other Category 

D assets in the manner provided in 

paragraph (d)(5)(ii) of this section. S’s 

attribute reduction amount allocated to 

shares of lower-tier subsidiary stock is 

applied to reduce S’s bases in those 

shares, becomes an attribute reduction 

amount of the lower-tier subsidiary, 

and, subject to certain limitations, 

reduces the lower-tier subsidiary’s 

attributes. See paragraphs (d)(5)(iii) 

through (d)(5)(vi) of this section. 

(2) Allocation and application of 

attribute reduction amount not applied 

to lower-tier subsidiary stock. Any 

portion of S’s attribute reduction 

amount not applied to reduce S’s 

Category A, Category B, and Category C 

attributes and not allocated to lower-tier 

subsidiary stock is allocated to S’s 

Category D assets other than lower-tier 

subsidiary stock in the manner provided 

in this paragraph (d)(4)(ii)(B)(2). Such 

amount is first allocated to S’s bases (if 

any) in its assets identified as Class VII 

assets in § 1.338–6(b)(2)(vii). If the 

attribute reduction amount allocated to 

Class VII assets is less than S’s aggregate 

basis in those assets, it is applied 

proportionately (by basis) to reduce the 

bases of such assets. If the attribute 

reduction amount allocated to Class VII 

assets equals or exceeds S’s aggregate 

basis in those assets, it is applied to 

reduce the bases of such assets to zero. 

Any remaining attribute reduction 

amount is then allocated and applied in 

the same manner to reduce S’s bases (if 

any) in assets identified as Class VI 

assets in § 1.338–6(b)(2)(vi), and then to 

reduce S’s bases (if any) in its assets 

identified in § 1.338–6(b)(2) as Class V, 

Class IV, Class III, and Class II, 

successively. 

(C) Attribute reduction amount 

exceeding attributes available for 

reduction. If the amount to be allocated 

and applied to attributes in Category D 

other than lower-tier subsidiary stock 

exceeds the amount of attributes in that 

category, then— 

(1) To the extent of any liabilities of 

S that are not taken into account for tax 

purposes before the transfer, such 

excess amount is suspended. The 

suspended amount is applied 

proportionately to reduce any amounts 

attributable to S that would be 

deductible or capitalizable as a result of 

such liabilities being taken into account 

by S or any other person. Solely for 

purposes of this paragraph 

(d)(4)(ii)(C)(1) and paragraph 

(d)(5)(ii)(B) of this section, the term 

liability means any liability or 


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obligation the satisfaction of which 

would be required to be capitalized as 

an assumed liability by a person that 

purchased all of S’s assets and assumed 

all of S’s liabilities in a single 

transaction. 

(2) To the extent such excess amount 

is greater than any amount suspended 

under paragraph (d)(4)(ii)(C)(1) of this 

section, it is disregarded and has no 

further effect. 

(iii) Time and effect of attribute 

reduction. In general, the reduction of 

attributes is effective immediately 

before the transfer of a loss share of S 

stock. If the reduction to a member’s 

basis in a share of lower-tier subsidiary 

stock exceeds the basis of that share, to 

the extent the excess is not restored 

under paragraph (d)(5)(vi) of this section 

it is an excess loss account in that share 

(and such excess loss account is not 

taken into account under § 1.1502–19 or 

otherwise as a result of the transaction). 

The reductions to attributes required 

under this paragraph (d)(4), including 

by reason of paragraph (d)(5)(v) of this 

section (tier down of attribute reduction 

amounts to lower-tier subsidiaries), are 

not noncapital, nondeductible expenses 

described in § 1.1502–32(b)(2)(iii). 

(5) Special rules applicable if S holds 

stock of another subsidiary. If S holds 

shares of stock of any other subsidiary 

(S1) as of a transfer of loss shares of S 

stock, the rules of this paragraph (d)(5) 

apply with respect to each such 

subsidiary. 

(i) Treatment of lower-tier subsidiary 

stock for computation of S’s attribute 

reduction amount. For purposes of 

determining S’s net inside attribute 

amount and attribute reduction amount 

under paragraph (d)(3) of this section— 

(A) Single share. All of S’s shares of 

S1 stock held as of the transfer of S 

stock (whether or not transferred in, or 

held by S immediately after, the 

transaction) are treated as a single share 

of stock (generally referred to as the S1 

stock); and 

(B) Deemed basis. S’s basis in its S1 

stock is treated as its deemed basis in 

the stock, which is equal to the greater 

of— 

(1) The sum of S’s basis in each share 

of S1 stock (adjusted to reflect any gain 

or loss recognized on the transfer of any 

S1 shares in the transaction, whether 

allowed or disallowed); and 

(2) The portion of S1’s net inside 

attribute amount allocable to S’s shares 

of S1 stock. 

(C) Multiple tiers. For purposes of 

computing deemed basis under 

paragraph (d)(5)(i)(B) of this section, a 

subsidiary’s basis in stock of a lower-tier 

subsidiary is the deemed basis in that 

lower-tier subsidiary stock. Thus, if 

stock is held in multiple tiers, the 

computation of deemed basis begins at 

the lowest tier, so that the computation 

of deemed basis at each tier takes into 

account the deemed basis of all lowertier shares. 

(ii) Allocation of S’s attribute 

reduction amount between lower-tier 

subsidiary stock and other Category D 

assets. The portion of S’s attribute 

reduction amount that is not applied to 

reduce S’s Category A, Category B, and 

Category C attributes must be allocated 

between each of S’s deemed single 

shares of S1 stock and all of S’s other 

Category D assets. For this purpose, S’s 

Category D assets other than lower-tier 

subsidiary stock are treated as one asset 

with a basis equal to the aggregate bases 

of all Category D assets other than 

lower-tier subsidiary stock (non-stock 

Category D asset). S’s attribute reduction 

amount is allocated proportionately (by 

basis) between (among) the non-stock 

Category D asset and S’s deemed single 

share(s) of S1 stock. (See paragraphs 

(d)(4)(ii)(B)(2) and (d)(4)(ii)(C) of this 

section regarding the portion of S’s 

attribute reduction amount allocated to 

the Category D assets other than lowertier subsidiary stock.) For this purpose, 

S’s basis in each deemed single share of 

S1 stock is its deemed basis (determined 

under paragraphs (d)(5)(i)(B) and 

(d)(5)(i)(C) of this section), reduced by— 

(A) The value of S’s transferred shares 

of S1 stock; and 

(B) The nontransferred S1 shares’ 

allocable portion of the excess of S1’s 

non-loss assets over S1’s liabilities 

(including liabilities described in 

paragraph (d)(4)(ii)(C)(1) of this section). 

For this purpose, S1’s non-loss assets 

are— 

(1) S1’s assets identified as Class I 

assets in § 1.338–6(b)(1), 

(2) The value of S1’s transferred 

shares of lower-tier subsidiary stock, 

and 

(3) The nontransferred lower-tier 

subsidiary shares’ allocable portions of 

lower-tier non-loss assets (net of 

liabilities, including liabilities described 

in paragraph (d)(4)(ii)(C)(1) of this 

section) of all lower-tier subsidiaries. 

(iii) Application of attribute reduction 

amount to S’s S1 stock. The portion of 

S’s attribute reduction amount allocated 

under paragraph (d)(5)(ii) of this section 

to each deemed single share of S1 stock 

(allocated attribute reduction amount) is 

apportioned among, and applied to 

reduce S’s bases in, individual S1 shares 

in accordance with the following— 

(A) No portion of the allocated 

attribute reduction amount is 

apportioned to an individual share of 

transferred S1 stock if gain or loss is 

recognized on its transfer (recognition 

transfer); 

(B) The allocated attribute reduction 

amount is apportioned among all of S’s 

other shares of S1 stock in a manner 

that, first reduces the loss in and 

disparity among S’s bases in loss shares 

of S1 preferred stock to the greatest 

extent possible, and then reduces the 

disparity among S’s bases in the shares 

of S1 common stock (other than those 

transferred in a recognition transfer) to 

the greatest extent possible; 

(C) The allocated attribute reduction 

amount apportioned to an individual S1 

share is applied to reduce the basis of 

that share to, but not below, value if the 

share is either a preferred share or a 

common share that is transferred other 

than in a recognition transfer; and 

(D) The allocated attribute reduction 

amount apportioned to an individual S1 

share is applied to reduce the basis of 

that share without regard to value if the 

share is a common share that is not 

transferred in the transaction. 

(iv) Unapplied allocated attribute 

reduction amount. Any portion of the 

allocated attribute reduction amount 

that is not applied to reduce S’s basis in 

a share of S1 stock has no effect on any 

other attributes of S, it is not a 

noncapital, nondeductible expense of S, 

and it does not cause S to recognize 

income or gain. However, such amounts 

continue to be part of the allocated 

attribute reduction amount for purposes 

of the tier down rule in paragraph 

(d)(5)(v) of this section. 

(v) Tier down of attribute reduction 

amount—(A) General rule. The 

allocated attribute reduction amount of 

each deemed single share of S1 stock is 

an attribute reduction amount of S1 

(tier-down attribute reduction amount). 

Accordingly, the tier-down attribute 

reduction amount, in combination with 

any attribute reduction amount 

computed with respect to the 

transferred S1 shares (if any) (direct S1 

attribute reduction amount), applies to 

reduce S1’s attributes under the 

provisions of this paragraph (d). The 

tier-down attribute reduction amount is 

an attribute reduction amount of S1 that 

must be allocated to S1’s assets, and 

may become an allocated attribute 

reduction amount of lower-tier 

subsidiary stock (and thus a tier-down 

attribute reduction amount of a lowertier subsidiary), even if its application to 

S1’s attributes is limited under 

paragraph (d)(5)(v)(B) of this section. 

(B) Conforming limitation on 

reduction of lower-tier subsidiary’s 

attributes. Notwithstanding the general 

rule in paragraph (d)(5)(v)(A) of this 

section, and unless P elects otherwise in 

the manner provided in paragraph (e)(5) 


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of this section, the application of S1’s 

tier-down attribute reduction amount to 

S1’s attributes is limited to an amount 

equal to the excess of the portion of S1’s 

net inside attribute amount that is 

allocable to all S1 shares held by 

members as of the transaction (whether 

or not transferred in the transaction) 

over the sum of— 

(1) Any direct S1 attribute reduction 

amount; 

(2) The aggregate value of all S1 

shares transferred by members in the 

transaction with respect to which gain 

or loss was recognized (recognition 

transfer); 

(3) The sum of all members’ bases 

(after any reduction under this section, 

including this paragraph (d)) in any 

shares of S1 stock transferred by 

members in the transaction (other than 

in a recognition transfer), reduced by 

any direct S1 attribute reduction 

amount computed with respect to the 

transfer of such S1 shares; and 

(4) The sum of all members’ bases 

(after any reduction under this section, 

including this paragraph (d)) in any 

nontransferred shares of S1 stock held 

as of the transaction. 

(vi) Stock basis restoration—(A) In 

general. After paragraph (d)(5)(v) of this 

section has applied with respect to all 

shares of subsidiary stock transferred in 

the transaction, lower-tier subsidiary 

stock basis is restored under this 

paragraph (d)(5)(vi). Under this 

paragraph (d)(5)(vi), the reductions to 

members’ bases in shares of lower-tier 

subsidiary stock under paragraph 

(d)(5)(iii) of this section are reversed to 

the extent necessary to restore such 

bases to an amount that conforms the 

basis of each such share to its allocable 

portion of the subsidiary’s net inside 

attribute amount, taking into account 

any reductions under this paragraph (d). 

Restoration adjustments are first made 

at the lowest tier and then at each next 

higher tier successively. Restoration 

adjustments do not tier up to affect the 

bases of higher-tier shares. Rather, 

restoration is computed and applied 

separately at each tier. For purposes of 

this rule, when computing a 

subsidiary’s net inside attribute 

amount— 

(1) The subsidiary’s basis in stock of 

a lower-tier subsidiary is the actual 

basis of the stock after application of 

this paragraph (d); and 

(2) Any attribute reduction amount 

allocated to the subsidiary’s Category D 

assets other than lower-tier subsidiary 

stock that is suspended under paragraph 

(d)(4)(ii)(C)(1) of this section is treated 

as reducing the subsidiary’s net inside 

attribute amount. 

(B) Election not to restore basis. 

Notwithstanding paragraph (d)(5)(vi)(A) 

of this section, P may elect not to restore 

basis in stock of a lower-tier subsidiary 

that was reduced under paragraph 

(d)(5)(iii) of this section. An election not 

to restore lower-tier subsidiary stock 

basis is made in the manner provided in 

paragraph (e)(5) of this section. 

(6) Elections to reduce the potential 

for loss duplication—(i) In general. 

Notwithstanding the general operation 

of this paragraph (d), P may elect to 

reduce the potential for loss 

duplication, and thereby reduce or 

avoid attribute reduction. To the extent 

of S’s attribute reduction amount 

tentatively computed without regard to 

any election under this paragraph (d)(6), 

P may elect— 

(A) To reduce all or any portion 

(including any portion in excess of a 

specified amount) of members’ bases in 

transferred loss shares of S stock; 

(B) To reattribute all or any portion 

(including any portion in excess of a 

specified amount) of S’s Category A, 

Category B, and Category C attributes 

(including such attributes of lower-tier 

subsidiaries), to the extent they would 

otherwise be subject to reduction under 

this paragraph (d); or 

(C) Any combination thereof. 

(ii) Manner and effect of election. An 

election to reduce loss duplication 

under this paragraph (d)(6) is made in 

the manner provided in paragraph (e)(5) 

of this section. Although such elections 

are irrevocable, they have no effect— 

(A) If there is no attribute reduction 

amount; or 

(B) To the extent S’s attribute 

reduction amount is less than the 

amount specified in the election. 

(iii) Order of application—(A) Stock 

of one subsidiary transferred in the 

transaction. If shares of stock of only 

one subsidiary are transferred in the 

transaction, any stock basis reduction 

and reattribution of attributes (including 

from lower-tier subsidiaries) is deemed 

to occur immediately before the 

application of this paragraph (d). If a 

transferred share is still a loss share 

after giving effect to this election, the 

other provisions of this paragraph (d) 

then apply with respect to that share. 

(B) Stock of multiple subsidiaries 

transferred in the transaction. If shares 

of stock of more than one subsidiary are 

transferred in the transaction and 

elections under this paragraph (d)(6) are 

made with respect to transfers of stock 

of subsidiaries in multiple tiers, effect is 

given to the elections from the lowest 

tier to the highest tier in the manner 

provided in this paragraph (d)(6)(iii)(B). 

The amount of the election for the 

transfer at the lowest tier is determined 

by applying this paragraph (d) with 

respect to the transferred loss shares of 

this lowest-tier subsidiary immediately 

after applying paragraphs (b) and (c) of 

this section to the stock of such 

subsidiary. The effect of any stock basis 

reduction or reattribution of losses 

immediately tiers up under § 1.1502–32 

to adjust members’ bases in higher-tier 

shares. Elections and adjustments are 

then made with respect to transfers at 

each next higher tier successively. 

(iv) Special rules for reattribution 

elections—(A) In general. Because the 

reattribution election is intended to 

provide the group a means to retain 

certain S attributes, and not to change 

the location of attributes where S 

continues to be a member of the same 

group as P, the election to reattribute 

attributes may only be made if S 

becomes a nonmember (within the 

meaning of § 1.1502–19(c)(2)) as a result 

of the transaction and S does not 

become a member of any group that 

includes P. The election to reattribute 

S’s attributes can only be made for 

attributes in Category A, Category B, and 

Category C. The attributes that would 

otherwise be reduced under paragraph 

(d)(4) of this section may be reattributed 

to P. Accordingly, P may specify the 

attributes in Category A, Category B, and 

Category C to be reattributed. Such an 

election is made in the manner provided 

in paragraph (e)(5) of this section. To 

the extent that P elects to reattribute 

attributes but does not specify the 

attributes to be reattributed, any 

attributes not specifically reattributed 

will be reattributed in the default 

amount, order, and category described 

in paragraph (d)(4)(ii)(A)(1) of this 

section. P succeeds to reattributed 

attributes as if such attributes were 

succeeded to in a transaction to which 

section 381(a) applies. Any owner shift 

of the subsidiary (including any deemed 

owner shift resulting from section 

382(g)(4)(D) or section 382(l)(3)) in 

connection with the transaction is not 

taken into account under section 382 

with respect to the reattributed 

attributes. (See § 1.1502–96(d) for rules 

relating to section 382 and the 

reattribution of losses under this 

paragraph (d)(6).) The reattribution of 

S’s attributes is a noncapital, 

nondeductible expense described in 

§ 1.1502–32(b)(2)(iii). See § 1.1502– 

32(c)(1)(ii)(A) regarding special 

allocations applicable to such 

noncapital, nondeductible expense. If P 

elects to reattribute S attributes 

(including attributes of a lower-tier 

subsidiary) and reduce S stock basis, the 

reattribution is given effect before the 

stock basis reduction. 


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(B) Insolvency limitation. If S, or any 

higher-tier subsidiary, is insolvent 

within the meaning of section 108(d)(3) 

at the time of the transfer, S’s losses may 

be reattributed only to the extent they 

exceed the sum of the separate 

insolvencies of any subsidiaries (taking 

into account only S and its higher-tier 

subsidiaries) that are insolvent. For 

purposes of determining insolvency, 

liabilities owed to higher-tier members 

are not taken into account, and stock of 

a subsidiary that is limited and 

preferred as to dividends and that is not 

owned by higher-tier members is treated 

as a liability to the extent of the amount 

of preferred distributions to which the 

stock would be entitled if the subsidiary 

were liquidated on the date of the 

transfer. 

(C) Limitation on reattribution from 

lower-tier subsidiaries. P’s ability to 

reattribute attributes of lower-tier 

subsidiaries is limited under this 

paragraph (d)(6)(iv)(C) in order to 

prevent circular computations of the 

attribute reduction amount. 

Accordingly, attributes that would 

otherwise be reduced as a result of tierdown attribute reduction under 

paragraph (d)(5)(v) of this section may 

only be reattributed to the extent that 

the reduction in the basis of any lowertier subsidiary stock resulting from the 

noncapital, nondeductible expense (as 

allocated under § 1.1502– 

32(c)(1)(ii)(A)(2)) will not create an 

excess loss account in any such stock. 

(v) Special rules for stock basis 

reduction elections—(A) In general. An 

election to reduce basis in S stock is 

made with respect to all members’ bases 

in loss shares of S stock that are 

transferred in the transaction. The 

reduction is allocated among all such 

shares in proportion to the amount of 

loss on each share. This reduction in S 

stock basis is a noncapital, 

nondeductible expense described in 

§ 1.1502–32(b)(2)(iii) of the transferring 

member. 

(B) Adjustment to the attribute 

reduction amount. The attribute 

reduction amount (determined under 

paragraph (d)(3)(i) of this section) is 

treated as reduced by the amount of any 

elective reduction in the basis of the S 

stock under this paragraph (d)(6). 

Accordingly, the election to reduce 

stock basis under this paragraph (d)(6) 

is treated as reducing or eliminating the 

duplication even if the shares of S stock 

are loss shares after giving effect to the 

election. 

(C) Deemed stock basis reduction 

election in the case of certain 

disallowed stock losses. If there is a net 

stock loss in transferred shares after 

taking into account any actual elections 

under this paragraph (d)(6), and the 

stock loss would otherwise be 

permanently disallowed (for example, 

under section 311(a)), P will be deemed 

to have made a stock basis reduction 

election equal to such net stock loss. 

(7) Additional attribute reduction in 

the case of certain transfers due to 

worthlessness and certain transfers not 

followed by a separate return year—(i) 

In general. Notwithstanding any other 

provision of this paragraph (d), if a 

transfer is subject to this paragraph 

(d)(7) any of S’s Category A, Category B, 

and Category C attributes not otherwise 

reduced or reattributed under this 

paragraph (d), and any credit carryover 

attributable to S, including any 

consolidated credits that would be 

apportioned to S under the principles of 

§ 1.1502–79 if S had a separate return 

year, are eliminated. Attributes other 

than consolidated tax attributes are 

eliminated under this paragraph (d)(7)(i) 

immediately before the transfer subject 

to this paragraph (d)(7)(i). The 

elimination of attributes under this 

paragraph (d)(7)(i) is not a noncapital, 

nondeductible expense described in 

§ 1.1502–32(b)(2)(iii). 

(ii) Transfers subject to this paragraph 

(d)(7). A transfer is subject to this 

paragraph (d)(7) if— 

(A) M transfers a share of S stock 

solely by reason of a transfer defined in 

paragraph (f)(10)(i)(D) of this section 

(worthlessness where the provisions of 

§ 1.1502–80(c) are satisfied), M 

recognizes a net deduction or loss on 

the share, and S is a member of the 

group on the day following the last day 

of the group’s taxable year during which 

the share becomes worthless under 

section 165 (taking into account the 

provisions of § 1.1502–80(c)), or 

(B) M recognizes a net deduction or 

loss on the stock of S in a transaction 

in which S ceases to be a member and 

does not become a nonmember within 

the meaning of § 1.1502–19(c)(2). 

(iii) Example. The application of this 

paragraph (d) to transfers due to 

worthlessness and to loss transfers not 

followed by separate return years is 

illustrated by the following example. 

Example. (i) Worthlessness where S 

continues as a member. M owns the sole 

share of S stock. The share is worthless under 

section 165. In addition, S has disposed of all 

its assets within the meaning of § 1.1502– 

19(c)(1)(iii)(A) and therefore satisfies the 

provisions of § 1.1502–80(c). M claims a 

worthless securities deduction with respect 

to the share. The worthlessness is a transfer 

of the S share, a loss share, and therefore 

subject to this section. After the application 

of paragraphs (b) and (c) of this section, M’s 

basis in the share (and therefore M’s net stock 

loss) is $75. The portion of the consolidated 

net operating loss attributable to S is $100. 

Under the general rules of this paragraph (d), 

S’s attribute reduction amount is $75 (the 

lesser of M’s $75 net stock loss and S’s $100 

aggregate inside loss ($100 net inside 

attribute amount over $0 value of S share)). 

S’s attributes are reduced by $75, from $100 

to $25. In addition, if S remains a member 

of the P group, this paragraph (d)(7) applies 

to eliminate the remaining $25 of the 

consolidated net operating loss attributable to 

S because the S share is worthless, and M 

recognizes a deduction (taking into account 

§ 1.1502–80(c)) with respect to the share. 

Accordingly, after the application of this 

section, M recognizes a $75 worthless 

securities deduction, S has $0 net inside 

attributes, and the consolidated net operating 

loss is reduced by a total of $100. 

(ii) Dissolution of insolvent subsidiary. The 

facts are the same as in paragraph (i) of this 

Example, except that S is insolvent, does not 

dispose of all its assets within the meaning 

of § 1.1502–19(c)(1)(iii)(A), M causes S to be 

legally dissolved, and the S share held by M 

is cancelled without consideration. Under 

paragraph (d)(7)(ii)(B) of this section, the 

dissolution of S is subject to this paragraph 

(d)(7) and the result is the same as in 

paragraph (i) of this Example. The result 

would also be the same if instead of being 

legally dissolved, S was converted into an 

entity that is disregarded as separate from M. 

(iii) Stock cancelled in connection with a 

section 381(a) transaction with another 

member. M owns the sole share of S common 

stock with a basis of $75. M1 owns the sole 

share of S preferred stock. The value of S’s 

assets (net of liabilities) is less than the 

liquidation preference on the S preferred 

stock. In a reorganization described in 

section 368(a)(1)(D), S transfers all of its 

assets to M2 in exchange for M2 common 

stock and M2’s assumption of S’s liabilities, 

S distributes all of the M2 common stock 

received in the exchange to M1 in exchange 

for M1’s S preferred stock, the S common 

stock held by M is cancelled without 

consideration, and S ceases to exist. 

Notwithstanding that M is not entitled to 

treat its common share of S stock as 

worthless until § 1.1502–80(c) is satisfied, 

M’s share is transferred within the meaning 

of paragraph (f)(10)(i)(A) of this section 

because M ceases to own the share in a 

transaction in which, but for this section (and 

notwithstanding the deferral of any amount 

recognized on the transfer, other than by 

reason of § 1.1502–13), M would recognize a 

loss or deduction with respect to the share. 

Accordingly, there is a transfer of the S 

common share and this section applies to the 

transfer. There are no adjustments under 

paragraphs (b) or (c) of this section because 

no investment adjustments have been 

applied to the bases of the shares. The 

transfer of the S common stock is subject to 

the general rules of this paragraph (d), but is 

not subject to the additional attribute 

reduction under this paragraph (d)(7) because 

the transfer was not solely by reason of 

worthlessness where § 1.1502–80(c) is 

satisfied, and S did not cease to be a member 

because M2 is a successor to S. 

(iv) Stock cancelled in connection with a 

section 381(a) transaction with a 

nonmember. The facts are the same as in 


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paragraph (iii) of this Example, except that 

the S preferred share is held by X, instead of 

M2 acquiring S’s assets, S merges into Y in 

a reorganization described in section 

368(a)(1)(A), M1 receives all of the Y stock 

issued in the merger in exchange for M1’s S 

preferred stock, and Y does not become a 

member as a result of the transaction. M 

treats the cancelled S common stock as 

worthless, and § 1.1502–80(c) is satisfied 

because S ceases to be a member. In this case, 

there is a transfer of M’s S common share 

because it becomes worthless (taking into 

account § 1.1502–80(c)); because M ceases to 

own the share in a transaction in which, but 

for this section (and notwithstanding the 

deferral of any amount recognized on the 

transfer, other than by reason of § 1.1502–13), 

M would recognize a loss or deduction with 

respect to the share; and because M and S 

cease to be members of the same group. The 

transfer of the S common stock is subject to 

the general rules of this paragraph (d), but is 

not subject to the additional attribute 

reduction under this paragraph (d)(7) because 

the transfer was not solely by reason of 

worthlessness where § 1.1502–80(c) is 

satisfied and, although S did cease to be a 

member, S became a nonmember within the 

meaning of § 1.1502–19(c)(2) because Y is a 

successor to S. 

(8) Examples. The application of this 

paragraph (d) is illustrated by the 

following examples: 

Example 1. Computation of attribute 

reduction amount. (i) Transfer of all S shares. 

(A) Facts. M owns all 100 of the outstanding 

shares of S stock with a basis of $2 per share. 

S owns land with a basis of $100, has a $120 

loss carryover, and has no liabilities. Each 

share has a value of $1. M sells 30 of the S 

shares to X for $30. As a result of the sale, 

M and S cease to be members of the same 

group. Accordingly, all 100 of the S shares 

are transferred. See paragraphs (f)(10)(i)(A), 

(f)(10)(i)(B), and (f)(10)(i)(C) (with respect to 

the 30 S shares sold to X) of this section. M’s 

transfer of the S shares is a transfer of loss 

shares and therefore subject to this section. 

(B) Application of paragraphs (b) and (c) 

of this section. Although the transfer is 

subject to this section, there is no basis 

redetermination under paragraph (b) of this 

section because there is no disparity among 

M’s bases in shares of S common stock and 

there are no shares of S preferred stock 

outstanding (so there can be no unrecognized 

gain or loss on preferred stock). See 

paragraph (b)(1)(ii)(A) of this section. 

Therefore, after the application of paragraph 

(b) of this section, the share is still a loss 

share and, as such, subject to paragraph (c) 

of this section. No adjustment is required 

under paragraph (c) of this section because 

the net positive adjustment is $0. See 

paragraph (c)(3) of this section. Thus, after 

the application of paragraph (c) of this 

section, M’s transfer of the S shares is still 

a transfer of loss shares and, accordingly, 

subject to this paragraph (d). 

(C) Attribute reduction under this 

paragraph (d). Under this paragraph (d), S’s 

attributes are reduced by S’s attribute 

reduction amount. Paragraph (d)(3) of this 

section provides that S’s attribute reduction 

amount is the lesser of the net stock loss and 

S’s aggregate inside loss. The net stock loss 

is the excess of the $200 aggregate bases of 

the transferred shares over the $100 aggregate 

value of the transferred shares, or $100. S’s 

aggregate inside loss is the excess of its $220 

net inside attribute amount (the sum of the 

$100 basis in the land and the $120 loss 

carryover) over the $100 value of all 

outstanding S shares, or $120. The attribute 

reduction amount is therefore the lesser of 

the $100 net stock loss and the $120 

aggregate inside loss, or $100. Under 

paragraph (d)(4) of this section, S’s $100 

attribute reduction amount is allocated and 

applied to reduce S’s $120 loss carryover to 

$20. Under paragraph (d)(4)(iii) of this 

section, the reduction of the loss carryover is 

not a noncapital, nondeductible expense and 

has no effect on M’s basis in the S stock. 

(ii) Transfer of less than all S shares. (A) 

Facts. The facts are the same as in paragraph 

(i)(A) of this Example 1, except that M only 

sells 20 S shares to X. M’s sale of the 20 S 

shares is a transfer of loss shares and 

therefore subject to this section. See 

paragraph (f)(10)(i)(A) and (f)(10)(i)(C) of this 

section. (There is no transfer of the remaining 

shares because S and M remain members of 

the same group.) 

(B) Application of paragraphs (b) and (c) 

of this section. No adjustment is required 

under paragraph (b) or paragraph (c) of this 

section for the reasons set forth in paragraph 

(i)(B) of this Example 1. Thus, after the 

application of paragraph (c) of this section, 

M’s transfer of the S shares is still a transfer 

of loss shares and, accordingly, subject to this 

paragraph (d). 

(C) Attribute reduction under this 

paragraph (d). Under this paragraph (d), S’s 

attributes are reduced by S’s attribute 

reduction amount. Paragraph (d)(3) of this 

section provides that S’s attribute reduction 

amount is the lesser of the net stock loss and 

S’s aggregate inside loss. The net stock loss 

is $20, the excess of the $40 aggregate bases 

of the transferred shares over the $20 

aggregate value of the transferred shares. S’s 

aggregate inside loss is $120, the excess of its 

$220 net inside attribute amount (the sum of 

the $100 basis in the land and the $120 loss 

carryover) over the $100 value of all 

outstanding S shares. The attribute reduction 

amount is therefore $20, the lesser of the $20 

net stock loss and the $120 aggregate inside 

loss. Under paragraph (d)(4) of this section, 

S’s $20 attribute reduction amount is 

allocated and applied to reduce S’s $120 loss 

carryover to $100. 

Example 2. Proportionate allocation of 

attribute reduction amount. (i) Facts. M owns 

the sole outstanding share of S stock with a 

basis of $150. S owns land with a basis of 

$60, a factory with a basis of $30, publicly 

traded property with a basis of $30 and 

goodwill with a basis of $30. M sells its S 

share for $90. M’s sale of the S share is a 

transfer of a loss share and therefore subject 

to this section. See paragraphs (f)(10)(i)(A), 

(f)(10)(i)(B), and (f)(10)(i)(C) of this section. 

(ii) Application of paragraphs (b) and (c) 

of this section. Although the transfer is 

subject to this section, there is no basis 

redetermination under paragraph (b) of this 

section because there is only one share of S 

stock outstanding (and so there can be no 

disparity among members’ bases in common 

shares and there are no outstanding preferred 

shares with respect to which there can be 

unrecognized gain or loss). See paragraph 

(b)(1)(ii)(A) of this section. Therefore, after 

the application of paragraph (b) of this 

section, the share is still a loss share and, as 

such, subject to paragraph (c) of this section. 

No adjustment is required under paragraph 

(c) of this section because both the 

disconformity amount and the net positive 

adjustment are $0. See paragraph (c)(3) of 

this section. Thus, after the application of 

paragraph (c) of this section, M’s sale of the 

S share is still a transfer of a loss share and, 

accordingly, subject to this paragraph (d). 

(iii) Attribute reduction under this 

paragraph (d). Under paragraph (d)(3) of this 

section, S’s attribute reduction amount is 

determined to be $60, the lesser of the $60 

net stock loss ($150 basis over $90 value) and 

S’s $60 aggregate inside loss (the excess of S’s 

$150 net inside attribute amount (the $60 

basis of the land, plus the $30 basis of the 

factory, plus the $30 basis of the publicly 

traded property, plus the $30 basis of the 

goodwill) over the $90 value of the S share). 

Under paragraph (d)(4)(ii)(B)(2) of this 

section, the $60 attribute reduction amount is 

allocated and applied to reduce S’s bases in 

its Category D assets, S’s only attributes 

available for reduction, as follows: 

Available attributes, basis in Category D assets Attribute 

amount 

Allocable portion of 

attribute reduction 

amount 

Adjusted 

attribute 

amount 

Class VII, Goodwill .............................................................................................................. $30 $30 $0 

Class V: 

Land .............................................................................................................................. 60 (60/90 × 60) 40 20 

Factory .......................................................................................................................... 30 (30/90 × 60) 20 10 

Total Class V ......................................................................................................... 90 60 30 

Class II, publicly traded property ......................................................................................... 30 0 30 


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Available attributes, basis in Category D assets Attribute 

amount 

Allocable portion of 

attribute reduction 

amount 

Adjusted 

attribute 

amount 

Totals ..................................................................................................................... 150 60 90 

Example 3. Attribute reduction amount 

less than total attributes in Category A, 

Category B, and Category C. (i) No election 

to prescribe the allocation of S’s attribute 

reduction amount. (A) Facts. P owns the sole 

outstanding share of M stock with a basis of 

$1,000 and M owns the sole outstanding 

share of S stock with a basis of $210. M sells 

its S share to X for $100. M’s sale of the S 

share is a transfer of a loss share and 

therefore subject to this section. See 

paragraphs (f)(10)(i)(A), (f)(10)(i)(B), and 

(f)(10)(i)(C) of this section. At the time of the 

sale, S has no liabilities and the following 

attributes: 

Category Attribute Attribute amount 

Category A .............................................................................. Capital loss carryover ............................................................. $10 

Category B .............................................................................. NOL carryover ........................................................................ 200 

Category C ............................................................................. Deferred deductions ............................................................... 40 

Category D, Class V ............................................................... Basis in Land .......................................................................... 50 

Total Attributes ................................................................ ................................................................................................. 300 

(B) Application of paragraphs (b) and (c) 

of this section. Although the transfer is 

subject to this section, there is no basis 

redetermination under paragraph (b) of this 

section because there is only one share of S 

stock outstanding (and so there can be no 

disparity among members’ bases in common 

shares and there are no outstanding preferred 

shares with respect to which there can be 

unrecognized gain or loss). See paragraph 

(b)(1)(ii)(A) of this section. Therefore, after 

the application of paragraph (b) of this 

section, the share is still a loss share and, as 

such, subject to paragraph (c) of this section. 

No adjustment is required under paragraph 

(c) of this section because both the 

disconformity amount and the net positive 

adjustment are $0. See paragraph (c)(3) of 

this section. Thus, after the application of 

paragraph (c) of this section, M’s transfer of 

the S share is still a transfer of a loss share 

and, accordingly, subject to this paragraph 

(d). 

(C) Attribute reduction under this 

paragraph (d). (1) Computation of attribute 

reduction amount. Under paragraph (d)(3) of 

this section, S’s attribute reduction amount is 

the lesser of the $110 net stock loss ($210 

basis over $100 value) and S’s aggregate 

inside loss. S’s aggregate inside loss is $200 

(S’s $300 net inside attribute amount (the $10 

capital loss carryover, plus the $200 NOL 

carryover, plus the $40 deferred deductions, 

plus the $50 basis in land) less the $100 

value of all outstanding S shares). Thus, the 

attribute reduction amount is $110, the lesser 

of the $110 net stock loss and S’s $200 

aggregate inside loss. Under paragraph 

(d)(4)(ii)(A)(1) of this section, the $110 

attribute reduction amount is allocated and 

applied to reduce S’s attributes as follows: 

Category Attribute Attribute 

amount 

Allocation 

of attribute 

reduction 

amount 

Adjusted 

attribute 

amount 

Category A ................................................... Capital loss carryover .................................. $10 $10 $0

Category B ................................................... NOL carryover ............................................. 200 100 100 

Category C ................................................... Deferred deductions .................................... 40 0 40 

Category D, Class V .................................... Basis in land ................................................ 50 0 50 

Totals .................................................... ...................................................................... 300 110 190 

(ii) Election to prescribe the allocation of 

attribute reduction amount. (A) Facts. The 

facts are the same as in paragraph (i)(A) of 

this Example 3, except that P elects to 

allocate the attribute reduction amount to 

eliminate the Category C attributes, preserve 

the capital loss carryover, and reduce 

Category B attributes. 

(B) Application of paragraphs (b) and (c) 

of this section. No adjustment is required 

under paragraph (b) or paragraph (c) of this 

section for the reasons set forth in paragraph 

(i)(B) of this Example 3. Thus, after the 

application of paragraph (c) of this section, 

M’s sale of the S share is still a transfer of 

a loss share, and accordingly, subject to this 

paragraph (d). 

(C) Attribute reduction under this 

paragraph (d). For the reasons set forth in 

paragraph (i)(C) of this Example 3, under this 

paragraph (d)(3), S’s attribute reduction 

amount is determined to be $110. M elects 

to apply S’s $110 attribute reduction amount 

as follows: 

Category Attribute Attribute 

amount 

Allocation 

of attribute 

reduction 

amount 

Adjusted 

attribute 

amount 

Category A ...................................................... Capital loss carryover .................................... $10 $0 $10 

Category B ...................................................... NOL carryover ................................................ 200 70 130 

Category C ...................................................... Deferred deductions ....................................... 40 40 0 

Category D, Class V ....................................... Basis of land .................................................. 50 0 50 

Totals ....................................................... ......................................................................... 300 110 190 


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Example 4. Attributes attributable to 

liability not taken into account. (i) S operates 

one business. (A) Facts. On January 1, year 

1, M forms S by exchanging $150 for the sole 

outstanding share of S stock. In year 1, S 

earns $500, purchases land for $50, spends 

$100 to build a factory on that land, and then 

purchases publicly traded property for $250. 

In year 2, S earns a section 38 general 

business credit of $50. However, pollution 

generated by S’s business gives rise to an 

environmental remediation liability under 

Federal law that would be required to be 

capitalized if a person purchased S’s assets 

and assumed the liability. Before any 

amounts have been taken into account with 

respect to the environmental remediation 

liability, when the liability has a present 

value of $500, M sells its S share to X for 

$150. After giving effect to all other 

provisions of law, M’s basis in the S share 

is $650 (the original basis of $150 increased 

under § 1.1502–32 by $500 for the income 

earned). The sale is therefore a transfer of a 

loss share of subsidiary stock and subject to 

this section. See paragraphs (f)(10)(i)(A), 

(f)(10)(i)(B), and (f)(10)(i)(C) of this section. 

(B) Application of paragraphs (b) and (c) 

of this section. Although the transfer is 

subject to this section, there is no basis 

redetermination under paragraph (b) of this 

section because there is only one share of S 

stock outstanding (and so there can be no 

disparity among members’ bases in common 

shares and there are no outstanding preferred 

shares with respect to which there can be 

unrecognized gain or loss). See paragraph 

(b)(1)(ii)(A) of this section. Therefore, after 

the application of paragraph (b) of this 

section, the share is still a loss share and, as 

such, subject to paragraph (c) of this section. 

No adjustment to basis is made under 

paragraph (c) of this section because, 

although the net positive adjustment is $500, 

the disconformity amount is $0. See 

paragraph (c)(3) of this section. Thus, after 

the application of paragraph (c) of this 

section, M’s sale of the S share is still a 

transfer of a loss share and, accordingly, 

subject to this paragraph (d). 

(C) Attribute reduction under this 

paragraph (d). (1) Under paragraph (d)(3) of 

this section, S’s attribute reduction amount is 

the lesser of the $500 net stock loss ($650 

basis over $150 value) and the aggregate 

inside loss. The aggregate inside loss is $500, 

computed as the excess of S’s $650 net inside 

attribute amount (the sum of S’s $100 basis 

in the factory, $50 basis in the land, $250 

basis in the publicly traded property, and 

$250 cash remaining after the purchases) 

over the $150 value of the S share. Thus, S’s 

attribute reduction amount is $500, the lesser 

of the $500 net stock loss and the $500 

aggregate inside loss. Under paragraph 

(d)(4)(ii)(B)(2) of this section, S’s $500 

attribute reduction amount is allocated and 

applied to reduce S’s attributes as follows: 

Available attributes Attribute 

amount 

Allocable portion of 

attribute reduction 

amount 

Adjusted 

attribute 

amount 

Category D: 

Class V Assets: 

Basis of factory ...................................................................................................... $100 $100 $0 

Basis of land .......................................................................................................... 50 50 0 

Class II Assets: 

Publicly traded property ........................................................................................ 250 250 0 

(2) The remaining $100 attribute reduction 

amount is not applied to S’s $250 cash (Class 

I asset) or to S’s $50 general business tax 

credit. Under the general rule of this 

paragraph (d), that remaining $100 attribute 

reduction amount would have no further 

effect on S’s attributes. However, S has a 

$500 liability that has not been taken into 

account. Therefore, under paragraph 

(d)(4)(ii)(C)(1) of this section, the remaining 

$100 attribute reduction amount is 

suspended and will be allocated and applied 

to reduce any amounts that become 

deductible or capitalizable as a result of the 

environmental remediation liability later 

being taken into account. If the liability is 

satisfied for an amount that is less than $100, 

under paragraph (d)(4)(ii)(C)(2) of this section 

the remaining portion of that $100 suspended 

attribute reduction amount is disregarded 

and has no further effect. 

(ii) Lower-tier subsidiary with additional 

liability. (A) Facts. The facts are the same as 

in paragraph (i)(A) of Example 4, except that, 

in addition, S exchanged $50 for the sole 

outstanding share of stock of S1. S1 has $50 

and equipment with an aggregate basis of $0. 

S1 also has employee medical expense 

liabilities that have not been taken into 

account and that would be required to be 

capitalized if a person purchased S1’s assets 

and assumed the liabilities. At the time of the 

sale, S’s environmental remediation liability 

had a present value of $475 and S1’s 

employee medical expenses had a present 

value of $25. For the reasons set forth in 

paragraph (i)(A) of this Example 4, M’s sale 

of the S share is a transfer of a loss share and 

therefore subject to this section. 

(B) Application of paragraphs (b) and (c) 

of this section. No adjustment is made under 

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

for the reasons set forth in paragraph (i)(B) 

of this Example 4. Thus, after the application 

of paragraph (c) of this section, M’s sale of 

the S share is still a transfer of a loss share 

and, accordingly, subject to this paragraph 

(d). 

(C) Attribute reduction under this 

paragraph (d). (1) Computation of attribute 

reduction amount. Under paragraph (d)(3) of 

this section, S’s attribute reduction amount is 

the lesser of the $500 net stock loss ($650 

basis over $150 value) and the aggregate 

inside loss. The aggregate inside loss is the 

excess of S’s net inside attribute amount over 

the value of the S share. Under paragraphs 

(d)(3)(iii)(B) and (d)(5)(i)(B) of this section, 

S’s net inside attribute amount is determined 

by using S’s $50 deemed basis in the S1 share 

(the greater of S’s $50 actual basis in the 

share and S1’s $50 net inside attribute 

amount). Accordingly, S’s net inside attribute 

amount is $650 (the sum of its $100 basis in 

the factory, $50 basis in the land, $250 basis 

in the publicly traded property, $200 cash, 

and $50 deemed basis in its S1 share). The 

aggregate inside loss is $500, the excess of S’s 

$650 net inside attribute amount over the 

$150 value of the S share. Thus, S’s attribute 

reduction amount is $500, the lesser of the 

$500 net stock loss and S’s $500 aggregate 

inside loss. 

(2) Allocation, apportionment, and 

application of attribute reduction amount. 

Under paragraphs (d)(4) and (d)(5)(ii) of this 

section, S’s $500 attribute reduction amount 

is allocated proportionately (by basis) 

between its S1 share and its non-stock 

Category D asset (consisting of all S’s 

Category D assets other than its share of S1 

stock, with a basis equal to $600, the 

aggregate basis of S’s non-stock assets). 

However, under paragraph (d)(5)(ii) of this 

section, for purposes of allocating S’s 

attribute reduction amount between its nonstock Category D asset and the S1 share, S’s 

$50 deemed basis in its S1 share is treated 

as reduced by S1’s $25 net non-loss assets (its 

Class I asset, $50 cash over S1’s liabilities 

(which, for this purpose include the $25 of 

employee medical expense liabilities not 

taken into account as of the transfer)). As a 

result, S’s attribute reduction amount is 

allocated $480 (600/625 × 500) to S’s nonstock Category D asset and $20 (25/625 × 500) 

to the S1 share. The $480 attribute reduction 

amount allocated to S’s non-stock Category D 

asset produces the same reduction in the 

bases of S’s assets (other than the S1 stock) 

as in paragraph (i)(C) of this Example 4; in 

addition, the $80 attribute reduction amount 

not applied to reduce S’s attributes is 

suspended and applied to reduce any 

amounts that become deductible or 

capitalizable as a result of the environmental 

remediation liability later being taken into 

account. If the liability is satisfied for an 

amount that is less than $80, under 

paragraph (d)(4)(ii)(C)(2) of this section the 

remaining portion of that $80 suspended 

attribute reduction amount is disregarded 

and has no further effect. Because the S1 

share is not transferred within the meaning 

of paragraph (f)(10) of this section, the 

allocated attribute reduction amount 

apportioned to the S1 share is applied fully 

to reduce the basis of the S1 share to $30. See 

paragraph (d)(5)(iii) of this section. 


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(D) Tier down of S’s attribute reduction 

amount. The $20 portion of S’s attribute 

reduction amount allocated to the S1 share 

is an attribute reduction amount of S1. 

Because S1 holds only cash, it has no 

attributes available for reduction under this 

paragraph (d). However, because S1 has a $25 

liability not taken into account for tax 

purposes, paragraph (d)(4)(ii)(C)(1) of this 

section requires that $20 of the unapplied 

attribute reduction amount be suspended and 

then allocated and applied to reduce any 

amounts that become deductible or 

capitalizable as a result of the employee 

medical expense liabilities later being taken 

into account. If these liabilities are satisfied 

for an amount that is less than $20, under 

paragraph (d)(4)(ii)(C)(2) of this section the 

remaining portion of that $20 suspended 

attribute reduction amount is disregarded 

and has no further effect. 

Example 5. Wholly owned lower-tier 

subsidiary (no lower-tier transfer). (i) 

Application of conforming limitation. (A) 

Facts. M owns the sole outstanding share of 

S stock with a basis of $250. S owns Asset 

with a basis of $100 and the only two 

outstanding shares of S1 stock (Share A has 

a basis of $40 and Share B has a basis of $60). 

S1 owns Asset 1 with a basis of $50. M sells 

its S share to P1, the common parent of 

another consolidated group, for $50. The sale 

is a transfer of a loss share and therefore 

subject to this section. See paragraphs 

(f)(10)(i)(A), (f)(10)(i)(B), and (f)(10)(i)(C) of 

this section. 

(B) Application of paragraphs (b) and (c) 

of this section. Although the transfer is 

subject to this section, there is no basis 

redetermination under paragraph (b) of this 

section because there is only one share of S 

stock outstanding (and so there can be no 

disparity among members’ bases in common 

shares and there are no outstanding preferred 

shares with respect to which there can be 

unrecognized gain or loss). See paragraph 

(b)(1)(ii)(A) of this section. Therefore, after 

the application of paragraph (b) of this 

section, the share is still a loss share and, as 

such, subject to paragraph (c) of this section. 

No adjustment is required under paragraph 

(c) of this section because, although there is 

a $50 disconformity amount, the net positive 

adjustment is $0. See paragraph (c)(3) of this 

section. Thus, after the application of 

paragraph (c) of this section, M’s sale of the 

S share is still a transfer of a loss share and, 

accordingly, subject to this paragraph (d). 

(C) Attribute reduction under this 

paragraph (d). (1) Computation of attribute 

reduction amount. Under paragraph (d)(3) of 

this section, S’s attribute reduction amount is 

the lesser of M’s net stock loss and S’s 

aggregate inside loss. M’s net stock loss is 

$200 ($250 basis over $50 value). S’s 

aggregate inside loss is the excess of S’s net 

inside attribute amount over the value of the 

S share. Under paragraphs (d)(3)(iii)(B) and 

(d)(5)(i)(B) of this section, S’s net inside 

attribute amount is $200, computed as the 

sum of S’s $100 basis in Asset and its $100 

deemed basis in the deemed single share of 

S1 stock (computed as the greater of S’s $100 

aggregate basis in the S1 shares and S1’s $50 

basis in Asset 1). S’s aggregate inside loss is 

therefore $150, $200 net inside attribute 

amount over the $50 value of the S share. 

Accordingly, S’s attribute reduction amount 

is $150, the lesser of the $200 net stock loss 

and the $150 aggregate inside loss. 

(2) Allocation, apportionment, and 

application of S’s attribute reduction 

amount. Under paragraphs (d)(4) and 

(d)(5)(ii) of this section, S’s $150 attribute 

reduction amount is allocated 

proportionately (by basis) between Asset 

(non-stock Category D asset) with a basis of 

$100, and the S1 stock (treated as a single 

share with a deemed basis of $100). 

Accordingly, $75 of the attribute reduction 

amount ($100/$200 × $150) is allocated to 

Asset and $75 of the attribute reduction 

amount ($100/$200 × $150) is allocated to the 

S1 stock. The $75 of the attribute reduction 

amount allocated to Asset is applied to 

reduce S’s basis in Asset from $100 to $25. 

The $75 of the attribute reduction amount 

allocated to the S1 stock is first apportioned 

between the shares in a manner that reduces 

disparity to the greatest extent possible. 

Thus, of the total $75 allocated to the S1 

stock, $27.50 is apportioned to Share A and 

$47.50 is apportioned to Share B. Because 

neither of the S1 shares is transferred within 

the meaning of paragraph (f)(10) of this 

section, the allocated attribute reduction 

amount apportioned to each of the individual 

S1 shares is applied fully to reduce the basis 

of each share to $12.50. See paragraph 

(d)(5)(iii) of this section. As a result, 

immediately after the allocation, 

apportionment, and application of S’s 

attribute reduction amount, S’s basis in Asset 

is $25 and S’s basis in each of the S1 shares 

is $12.50. 

(3) Tier down of S’s attribute reduction 

amount, application of conforming 

limitation. Under paragraph (d)(5)(v)(A) of 

this section, the $75 portion of S’s attribute 

reduction amount allocated to the S1 stock is 

an attribute reduction amount of S1 

(regardless of the extent, if any, to which it 

is apportioned and applied to reduce the 

basis of any shares of S1 stock). Under the 

general rules of this paragraph (d), the $75 

tier-down attribute reduction amount would 

be allocated and applied to reduce S1’s basis 

in Asset 1 from $50 to $0. However, under 

paragraph (d)(5)(v)(B) of this section, S1’s 

attributes can be reduced by only $25, the 

excess of the $50 portion of S1’s net inside 

attribute amount that is allocable to all S1 

shares held by members as of the transaction 

over $25, the aggregate amount of members’ 

bases in nontransferred S1 shares after 

reduction under this paragraph (d). Thus, of 

S1’s $75 tier-down attribute reduction 

amount, only $25 is applied to reduce S1’s 

basis in Asset 1, from $50 to $25. The $50 

unapplied portion of the tier-down attribute 

reduction amount subject to the conforming 

limitation has no further effect. 

(ii) Application of basis restoration rule. 

(A) Facts. The facts are the same as in 

paragraph (i)(A) of this Example 5, except 

that S’s basis in Share A is $15 and S’s basis 

in Share B is $35, and S1’s basis in Asset 1 

is $100. 

(B) Basis redetermination and basis 

reduction under paragraphs (b) and (c) of 

this section. No adjustment is required under 

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

for the reasons set forth in paragraph (i)(B) 

of this Example 5. Thus, after the application 

of paragraph (c) of this section, M’s transfer 

of the S share is still a transfer of a loss share 

and, accordingly, subject to this paragraph 

(d). 

(C) Attribute reduction under this 

paragraph (d). (1) Computation of attribute 

reduction amount. Under paragraph (d)(3) of 

this section, S’s attribute reduction amount is 

the lesser of M’s net stock loss and S’s 

aggregate inside loss. M’s net stock loss is 

$200 ($250 basis over $50 value). S’s 

aggregate inside loss is the excess of S’s net 

inside attribute amount over the value of the 

S share. Under paragraphs (d)(3)(iii)(B) and 

(d)(5)(i)(B) of this section, S’s net inside 

attribute amount is $200, the sum of S’s $100 

basis in Asset and its $100 deemed basis in 

the deemed single share of S1 stock 

(computed as the greater of S’s $50 aggregate 

basis in the S1 shares and S1’s $100 basis in 

Asset 1). S’s aggregate inside loss is therefore 

$150, $200 net inside attribute amount over 

the $50 value of the S share. Accordingly, S’s 

attribute reduction amount is $150, the lesser 

of the $200 net stock loss and the $150 

aggregate inside loss. 

(2) Allocation, apportionment, and 

application of S’s attribute reduction 

amount. Under paragraphs (d)(4) and 

(d)(5)(ii) of this section, S’s $150 attribute 

reduction amount is allocated 

proportionately (by basis) between Asset 

(non-stock Category D asset) with a basis of 

$100, and the S1 stock (treated as a single 

share with a deemed basis of $100). 

Accordingly, $75 of the attribute reduction 

amount ($100/$200 × $150) is allocated to 

Asset and $75 of the attribute reduction 

amount ($100/$200 × $150) is allocated to the 

S1 stock. The $75 of the attribute reduction 

amount allocated to Asset is applied to 

reduce S’s basis in Asset from $100 to $25. 

The $75 of the attribute reduction amount 

allocated to the S1 stock is first apportioned 

between the shares in a manner that reduces 

disparity to the greatest extent possible. 

Thus, of the total $75 allocated to the S1 

stock, $27.50 is apportioned to Share A and 

$47.50 is apportioned to Share B. Because 

neither of the S1 shares is transferred within 

the meaning of paragraph (f)(10) of this 

section, the allocated attribute reduction 

amount apportioned to each of the individual 

S1 shares is applied fully to reduce the basis 

of each share to an excess loss account of 

$12.50. See paragraph (d)(5)(iii) of this 

section. As a result, immediately after the 

allocation, apportionment, and application of 

S’s attribute reduction amount, S’s basis in 

Asset is $25 and S’s basis in each of the S1 

shares is an excess loss account of $12.50. 

(3) Tier down of S’s attribute reduction 

amount. Under paragraph (d)(5)(v)(A) of this 

section, the $75 portion of S’s attribute 

reduction amount allocated to S1 stock is an 

attribute reduction amount of S1 (regardless 

of the extent, if any, to which it is 

apportioned and applied to reduce the basis 

of any shares of S1 stock). Accordingly, 

under the general rules of this paragraph (d), 

the $75 tier-down attribute reduction amount 

is applied to reduce S1’s basis in Asset 1 

from $100 to $25. 

(4) Basis restoration. Under paragraph 

(d)(5)(vi)(A) of this section, after this 


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53972 Federal Register / Vol. 73, No. 181 / Wednesday, September 17, 2008 / Rules and Regulations 

paragraph (d) has been applied with respect 

to all transfers of subsidiary stock, any 

reduction made to the basis of a share of 

lower-tier subsidiary stock under paragraph 

(d)(5)(iii) of this section is reversed to the 

extent necessary to conform the basis of that 

share to the share’s allocable portion of the 

subsidiary’s net inside attribute amount (after 

reduction). S1’s net inside attribute amount 

after the application of this paragraph (d) is 

$25 and thus each of the two S1 share’s 

allocable portion of S1’s net inside attribute 

amount is $12.50. Accordingly, the 

reductions to Share A and to Share B under 

paragraph (d)(5)(iii) of this section are 

reversed to the extent necessary to restore the 

basis of each share to $12.50. Thus, $25 of 

the $27.50 of reduction to the basis of Share 

A, and $25 of the $47.50 of reduction to the 

basis of share B, is reversed, restoring the 

basis of each share to $12.50. 

Example 6. Multiple blocks of lower-tier 

subsidiary stock outstanding. (i) Excess loss 

account taken into account (transfer of 

upper-tier share causes disposition within 

the meaning of § 1.1502–19(c)(1)(ii)(B)). (A) 

Facts. M owns the sole outstanding share of 

S stock with a basis of $200. S holds all five 

outstanding shares of S1 common stock 

(Shares A, B, C, D, and E). S has an excess 

loss account of $20 in Share A and a positive 

basis of $20 in each of the other shares. The 

only investment adjustment applied to any 

S1 share was a negative $20 investment 

adjustment applied to Share A when it was 

the only outstanding share, and this amount 

tiered up and adjusted M’s basis in the S 

share. S1 owns one asset with a basis of $250. 

M sells its S share to P1, the common parent 

of a consolidated group, for $20. The sale of 

the S share is a disposition of Share A under 

§ 1.1502–19(c)(1)(ii)(B) (S1 becomes a 

nonmember because it will have a separate 

return year as a member of the P1 group). 

Accordingly, under § 1.1502–19(b)(1)(i) and 

paragraph (a)(3)(i) of this section, before the 

application of this section, S’s excess loss 

account in Share A is taken into account, 

increasing S’s basis in Share A to $0 and M’s 

basis in its S share to $220. After giving effect 

to the recognition of the excess loss account, 

M’s sale of the S share is a transfer of a loss 

share and therefore subject to this section. 

See paragraphs (f)(10)(i)(A), (f)(10)(i)(B), and 

(f)(10)(i)(C) of this section. 

(B) Basis redetermination and basis 

reduction under paragraphs (b) and (c) of 

this section. Although the transfer is subject 

to this section, there is no basis 

redetermination under paragraph (b) of this 

section because there is only one share of S 

stock outstanding (and so there can be no 

disparity among members’ bases in common 

shares and there are no outstanding preferred 

shares with respect to which there can be 

unrecognized gain or loss). See paragraph 

(b)(1)(ii)(A) of this section. Therefore, after 

the application of paragraph (b) of this 

section, the share is still a loss share and, as 

such, subject to paragraph (c) of this section. 

No adjustment is made under paragraph (c) 

of this section because, even though there is 

a disconformity amount of $140, the net 

positive adjustment is $0. See paragraph 

(c)(3) of this section. Thus, after the 

application of paragraph (c) of this section, 

M’s sale of the S share remains a transfer of 

a loss share and, accordingly, subject to this 

paragraph (d). 

(C) Attribute reduction under this 

paragraph (d). (1) Computation of attribute 

reduction amount. Under paragraph (d)(3) of 

this section, S’s attribute reduction amount is 

the lesser of M’s net stock loss and S’s 

aggregate inside loss. M’s net stock loss is 

$200 ($220 basis over $20 value). S’s 

aggregate inside loss is the excess of S’s net 

inside attribute amount over the value of the 

S share. Under paragraphs (d)(3)(iii)(B) and 

(d)(5)(i)(B) of this section, S’s net inside 

attribute amount is $250, S’s $250 deemed 

basis in the deemed single share of S1 stock 

(computed as the greater of S’s $80 aggregate 

basis in the S1 shares ($0 basis in Share A 

plus $20 basis in each of the four other 

shares) and S1’s $250 basis in its asset). S’s 

aggregate inside loss is therefore $230, $250 

net inside attribute amount over the $20 

value of the S share. Accordingly, S’s 

attribute reduction amount is $200, the lesser 

of the $200 net stock loss and the $230 

aggregate inside loss. 

(2) Allocation, apportionment, and 

application of S’s attribute reduction 

amount. Under paragraphs (d)(4) and 

(d)(5)(ii) of this section, S’s $200 attribute 

reduction amount is allocated entirely to the 

S1 stock (treated as a single share) and then 

apportioned among the shares in a manner 

that reduces disparity to the greatest extent 

possible. Thus, $24 is apportioned to Share 

A and $44 is apportioned to each of the other 

shares. Because none of the S1 shares are 

transferred within the meaning of paragraph 

(f)(10) of this section (notwithstanding that 

there is a disposition under § 1.1502– 

19(c)(1)(ii)(B)), the allocated attribute 

reduction amount apportioned to each of the 

individual S1 shares is applied fully to 

reduce the basis of each share to an excess 

loss account of $24. See paragraph (d)(5)(iii) 

of this section. 

(3) Tier down of S’s attribute reduction 

amount. Under paragraph (d)(5)(v)(A) of this 

section, the $200 of S’s attribute reduction 

amount allocated to the S1 shares is an 

attribute reduction amount of S1 (regardless 

of the extent, if any, to which it is 

apportioned and applied to reduce the basis 

of any shares of S1 stock). Under the general 

rules of this paragraph (d), S1’s $200 tierdown attribute reduction amount is allocated 

and applied to reduce S1’s basis in its asset 

from $250 to $50. 

(4) Basis restoration. Under paragraph 

(d)(5)(vi)(A) of this section, after this 

paragraph (d) has been applied with respect 

to all transfers of subsidiary stock, any 

reduction made to the basis of a share of 

lower-tier subsidiary stock under paragraph 

(d)(5)(iii) of this section is reversed to the 

extent necessary to conform the basis of that 

share to the share’s allocable portion of the 

subsidiary’s net inside attribute amount (after 

reduction). S1’s net inside attribute amount 

after the application of this paragraph (d) is 

$50 and thus each of the five S1 share’s 

allocable portion of S1’s net inside attribute 

amount is $10. Accordingly, the reductions 

to the bases of S1 shares under paragraph 

(d)(5)(iii) of this section are reversed to the 

extent necessary to restore (to the extent 

possible) the basis of each share to $10. Thus, 

$24 of the $24 of reduction to the basis of 

Share A is reversed, restoring the basis of 

Share A to $0, and $34 of the $44 of 

reduction to the basis of each other share is 

reversed, restoring the basis of each of those 

shares to $10. 

(ii) Sale of gain share to member. (A) Facts. 

The facts are the same as in paragraph (i)(A) 

of this Example 6, except that M owns Shares 

A, B, C, and D, S owns Share E, S has a 

liability of $20, and S1’s basis in its asset is 

$500. Also, as part of the transaction, S sells 

Share E to M for $40. Unlike under the facts 

of paragraph (i)(A) of this Example 6, there 

is no disposition of Share A within the 

meaning of § 1.1502–19(c)(1)(ii)(B) (S1 

continues to be a member of the group, and 

thus does not have a separate return year). As 

a result, the Share A excess loss account is 

not taken into account. Although S’s sale of 

Share E is a transfer of that share, the share 

is not a loss share and thus the transfer is not 

subject to this section. M’s sale of the S share, 

however, is a transfer of a loss share and 

therefore subject to this section. See 

paragraphs (f)(10)(i)(A), (f)(10)(i)(B), and 

(f)(10)(i)(C) of this section. 

(B) Transfer in lowest tier (gain share). S’s 

sale of Share E is the lowest-tier transfer in 

the transaction. Under paragraph (a)(3)(ii)(A) 

of this section, because there are no transfers 

of loss shares at that tier, no adjustments are 

required under paragraph (b) or (c) of this 

section. However, S’s gain recognized on the 

transfer Share E is computed and 

immediately adjusts members bases in 

subsidiary stock under § 1.1502–32 (because 

M and S are not members of the same group 

immediately after the transaction the sale is 

not an intercompany transaction subject to 

§ 1.1502–13). Accordingly, M’s basis in its S 

share is increased by $20, from $200 to $220. 

(C) Transfers in next higher tier, 

application of paragraphs (b) and (c) of this 

section. The next higher tier transfer is M’s 

sale of the S stock. The sale is a transfer of 

a loss share and therefore subject to this 

section. Although the transfer is subject to 

this section, there is no basis redetermination 

under paragraph (b) of this section because 

there is only one share of S stock outstanding 

(and so there can be no disparity among 

members’ bases in common shares and there 

are no outstanding preferred shares with 

respect to which there can be unrecognized 

gain or loss). See paragraph (b)(1)(ii)(A) of 

this section. Therefore, after the application 

of paragraph (b) of this section, the share is 

still a loss share and, as such, subject to 

paragraph (c) of this section. Under 

paragraph (c) of this section, M’s basis in its 

S share is decreased by $20, the lesser of S’s 

$200 disconformity amount (computed as the 

excess of M’s $220 basis in the S stock over 

S’s $20 net inside attribute amount 

(computed as the $20 basis in Share E, 

increased by $20 to reflect the gain 

recognized with respect to the share, less the 

$20 liability)), and the $20 net positive 

adjustment. Thus, after the application of 

paragraph (c) of this section, M’s basis in the 

S share is $200, and the sale remains a 

transfer of a loss share. There are no higher 

tier transfers and, therefore, M’s transfer of 

the S share is then subject to this paragraph 

(d). 


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(D) Attribute reduction under this 

paragraph (d). (1) Computation of attribute 

reduction amount. Under paragraph (d)(3) of 

this section, S’s attribute reduction amount is 

the lesser of M’s net stock loss and S’s 

aggregate inside loss. M’s net stock loss is 

$180 ($200 basis over $20 value). S’s 

aggregate inside loss is the excess of S’s net 

inside attribute amount over the value of the 

S share. Under paragraphs (d)(3)(iii)(B) and 

(d)(5)(i)(B) of this section, S’s net inside 

attribute amount is $80, computed as $100 

(S’s deemed basis in Share E (the greater of 

$40 (S’s $20 basis in Share E, adjusted for the 

$20 gain recognized with respect to the 

share), and Share E’s allocable portion of S1’s 

net inside attribute amount of $100 (1/5 of 

S1’s $500 basis in its asset)), less S’s $20 

liability. Accordingly, S’s aggregate inside 

loss is $60 ($80 net inside attribute amount 

over the $20 value of the S stock). S’s 

attribute reduction amount is therefore $60, 

the lesser of $180 net stock loss and $60 

aggregate inside loss. 

(2) Allocation, apportionment, and 

application of S’s attribute reduction 

amount. Under paragraphs (d)(4) and 

(d)(5)(ii) of this section, S’s $60 attribute 

reduction amount is allocated entirely to its 

S1 stock, Share E. However, because Share E 

was transferred within the meaning of 

paragraph (f)(10) of this section and gain was 

recognized on its transfer, none of the 

allocated amount is apportioned to, or 

applied to reduce the basis of Share E. See 

paragraph (d)(5)(iii)(A) of this section. Under 

paragraph (d)(5)(iv) of this section, the $60 

allocated attribute reduction amount not 

apportioned or applied to Share E has no 

effect on S or S’s attributes. 

(3) Tier down of S’s attribute reduction 

amount. Notwithstanding the fact that no 

portion of the allocated attribute reduction 

amount was apportioned to or applied to 

reduce the basis of Share E, the entire $60 

allocated attribute reduction amount is an 

attribute reduction amount of S1. See 

paragraphs (d)(5)(v)(A) of this section. Under 

the general rules of this paragraph (d), S1’s 

$60 tier-down attribute reduction amount is 

allocated and applied to reduce S1’s basis in 

its asset from $500 to $440. 

(4) Basis restoration. Under paragraph 

(d)(5)(vi)(A) of this section, after this 

paragraph (d) has been applied with respect 

to all transfers of subsidiary stock, any 

reduction made to the basis of a share of 

subsidiary stock under paragraph (d)(5)(iii) of 

this section is reversed to the extent 

necessary to conform the basis of that share 

to the share’s allocable portion of the 

subsidiary’s net inside attribute amount. No 

reduction was made to the basis of the S1 

stock under paragraph (d)(5)(iii) of this 

section. Therefore, no stock basis is increased 

under the basis restoration rule in paragraph 

(d)(5)(vi)(A) of this section. 

Example 7. Allocation of attribute 

reduction if lower-tier subsidiary has nonloss assets or liabilities. (i) S1 holds cash. (A) 

Facts. M owns the sole outstanding share of 

S stock with a basis of $800. S owns Asset 

with a basis of $400 and the sole outstanding 

share of S1 stock with a basis of $300. S1 

holds Asset 1 with a basis of $50, and $100 

cash. M sells its S share to P1, the common 

parent of a consolidated group, for $100. The 

sale is not a transfer of the S1 share because 

S and S1 are members of the same group 

following the transaction. However, the sale 

is a transfer of the S share, a loss share, and 

therefore subject to this section. See 

paragraphs (f)(10)(i)(A), (f)(10)(i)(B), and 

(f)(10)(i)(C) of this section. 

(B) Application of paragraphs (b) and (c) 

of this section. Although the transfer is 

subject to this section, there is no basis 

redetermination under paragraph (b) of this 

section because there is only one share of S 

stock outstanding (and so there can be no 

disparity among members’ bases in common 

shares and there are no outstanding preferred 

shares with respect to which there can be 

unrecognized gain or loss). See paragraph 

(b)(1)(ii)(A) of this section. Therefore, after 

the application of paragraph (b) of this 

section, the share is still a loss share and, as 

such, subject to the provisions of this 

paragraph (c). No adjustment is required 

under paragraph (c) of this section because, 

even though there is a disconformity amount 

of $100, the net positive adjustment is $0. 

See paragraph (c)(3) of this section. Thus, 

after the application of paragraph (c) of this 

section, M’s sale of the S share is still a 

transfer of a loss share and, accordingly, 

subject to this paragraph (d). 

(C) Attribute reduction under this 

paragraph (d). (1) Computation of attribute 

reduction amount. Under paragraph (d)(3) of 

this section, S’s attribute reduction amount is 

the lesser of M’s net stock loss and S’s 

aggregate inside loss. M’s net stock loss is 

$700 ($800 basis over $100 value). S’s 

aggregate inside loss is the excess of S’s net 

inside attribute amount over the value of the 

S share. Under paragraphs (d)(3)(iii)(B) and 

(d)(5)(i)(B) of this section, S’s net inside 

attribute amount is $700, the sum of its $400 

basis in Asset and its $300 deemed basis in 

the S1 share (computed as the greater of S’s 

$300 basis in the S1 share and S1’s $150 net 

inside attribute amount (reflecting the sum of 

S1’s $50 basis in Asset 1 and S1’s $100 

cash)). Therefore, S’s aggregate inside loss is 

$600 ($700 net inside attribute amount over 

the $100 value of the S stock). S’s attribute 

reduction amount is $600, the lesser of the 

$700 net stock loss and the $600 aggregate 

inside loss. 

(2) Allocation, apportionment, and 

application of S’s attribute reduction 

amount. Under paragraphs (d)(4) and 

(d)(5)(ii) of this section, S’s $600 attribute 

reduction amount is allocated 

proportionately (by basis) between S’s $400 

basis in Asset (non-stock Category D asset) 

and its deemed basis in the S1 share. 

However, under paragraph (d)(5)(ii) of this 

section, for purposes of allocating the 

attribute reduction amount, S’s $300 deemed 

basis in the S1 share is treated as reduced by 

S1’s net non-loss assets (its Class I asset, $100 

cash) to $200. Thus, the $600 is allocated 

$400 to Asset ($400/$600 × $600) and $200 

to the S1 share ($200/$600 × $600). The $400 

allocated to Asset is applied to reduce S’s 

basis in Asset from $400 to $0. Because the 

S1 share is not transferred within the 

meaning of paragraph (f)(10) of this section, 

the allocated attribute reduction amount 

apportioned to the S1 share is applied fully 

to reduce the basis of the S1 share to $100. 

See paragraph (d)(5)(iii) of this section. 

(3) Tier down of S’s attribute reduction 

amount. Under paragraph (d)(5)(v)(A) of this 

section, the $200 portion of S’s attribute 

reduction amount allocated to the S1 stock is 

an attribute reduction amount of S1 

(regardless of the extent, if any, to which it 

is apportioned and applied to reduce the 

basis of any shares of S1 stock). Under the 

general rules of this paragraph (d), S1’s $200 

tier-down attribute reduction amount is 

allocated and applied to reduce S1’s basis in 

Asset 1 (S1’s only attribute available for 

reduction) from $50 to $0. The $150 

unapplied attribute reduction amount is 

disregarded and has no further effect. 

(4) Basis restoration. Under paragraph 

(d)(5)(vi)(A) of this section, after this 

paragraph (d) has been applied with respect 

to all transfers of subsidiary stock, any 

reduction made to the basis of a share of 

subsidiary stock under paragraph (d)(5)(iii) of 

this section is reversed to the extent 

necessary to conform the basis of that share 

to the share’s allocable portion of the 

subsidiary’s net inside attribute amount. 

There is only one share of S1 stock 

outstanding and so S1’s entire $100 net 

inside attribute amount is allocable to that 

share. Because S’s $100 basis in the S1 share 

(as reduced under this paragraph (d)) is 

already conformed with its $100 allocable 

portion of S1’s net inside attribute amount, 

there is no restoration under paragraph 

(d)(5)(vi)(A) of this section. 

(ii) S1 borrows cash. The facts are the same 

as in paragraph (i)(A) of this Example 7 

except that, in addition, S1 borrows $50 from 

X immediately before M sells the S share. 

The computation of the attribute reduction 

amount is the same as in paragraph (i)(C) of 

this Example 7 (the $50 cash from the loan 

proceeds and the $50 liability offset in the 

computation of S1’s net inside attribute 

amount and so the net amount is unaffected, 

and the computation of S’s deemed basis in 

the S1 stock is unaffected). Similarly, for 

purposes of allocating the attribute reduction 

amount between the non-stock Category D 

asset and the S1 stock, paragraph (d)(5)(ii) of 

this section requires S’s deemed basis in the 

S1 share to be treated as reduced by S1’s net 

non-loss assets (S1’s non-loss assets over S1’s 

liabilities). Accordingly, the additional $50 

cash proceeds is offset by the $50 liability 

and there is no effect on the allocation of the 

attribute reduction amount. The results are 

the same as in paragraph (i) of this Example 

7. 

(iii) S1 has a liability not taken into 

account for tax purposes. (A) Facts. The facts 

are the same as in paragraph (ii) of this 

Example 7 except that, in addition, S1 has a 

$40 liability that is not taken into account for 

tax purposes as of the transfer and that would 

be required to be capitalized if a person 

purchased S1’s assets and assumed the 

liability. 

(B) Application of paragraphs (b) and (c) 

of this section. No adjustment is required 

under paragraph (b) or paragraph (c) of this 

section for the reasons set forth in paragraph 

(i)(B) of this Example 7. Thus, after the 

application of paragraph (c) of this section, 

P’s sale of the S share is still a transfer of a 


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loss share and, accordingly, subject to this 

paragraph (d). 

(C) Attribute reduction under this 

paragraph (d). (1) Computation of attribute 

reduction amount. The attribute reduction 

amount is the same as computed in 

paragraph (i)(C)(1) of this Example 7 (under 

paragraph (f)(5) of this section, the term 

liability does not include liabilities not taken 

into account for tax purposes and so the 

additional $40 liability not yet taken into 

account for tax purposes does not affect the 

computation of S’s attribute reduction 

amount). 

(2) Allocation, apportionment, and 

application of S’s attribute reduction 

amount. Under paragraphs (d)(4) and 

(d)(5)(ii) of this section, S’s $600 attribute 

reduction amount is allocated 

proportionately (by basis) between S’s $400 

basis in Asset 1 (non-stock Category D asset) 

and its deemed basis in the S1 share. 

However, under paragraph (d)(5)(ii) of this 

section, for purposes of allocating the 

attribute reduction amount, S’s $300 deemed 

basis in the S1 share is treated as reduced by 

S1’s net non-loss assets (S1’s non-loss assets 

over S1’s liabilities). For this purpose, the 

term liabilities includes liabilities not taken 

into account for tax purposes, as described in 

paragraph (d)(4)(ii)(C)(1) of this section 

(generally, liabilities that, if assumed in a 

purchase, would give rise to a capitalized 

amount when satisfied). Thus, for this 

purpose, S’s $300 deemed basis in the S1 

share is reduced by S1’s $60 net non-loss 

assets (the excess of S1’s $150 non-loss assets 

(its Class I asset, $150 cash) over S1’s $90 

liabilities ($50 loan and $40 liability not yet 

taken into account for tax purposes)), to 

$240. Accordingly, S’s $600 attribute 

reduction amount is allocated and applied 

$375 ($400/$640 × $600) to Asset (reducing 

S’s basis in Asset from $400 to $25) and $225 

($240/$640 × $600) to the S1 share. Because 

the S1 share is not transferred within the 

meaning of paragraph (f)(10) of this section, 

the allocated attribute reduction amount 

apportioned to the S1 share is applied fully 

to reduce the basis of the S1 share to $75. See 

paragraph (d)(5)(iii) of this section. 

(3) Tier down of S’s attribute reduction 

amount, application of conforming 

limitation. Under paragraph (d)(5)(v)(A) of 

this section, the $225 portion of S’s attribute 

reduction amount allocated to the S1 stock is 

an attribute reduction amount of S1 

(regardless of the extent, if any, to which it 

is apportioned and applied to reduce the 

basis of any shares of S1 stock). Under the 

general rules of this paragraph (d), S1’s $225 

tier-down attribute reduction amount would 

be allocated and applied to reduce S1’s 

attributes. However, under paragraph 

(d)(5)(v)(B) of this section, S1’s attributes can 

be reduced by only $75, the excess of the 

$150 portion of S1’s net inside attribute 

amount that is allocable to all S1 shares held 

by members as of the transaction over $75, 

the aggregate amount of members’ bases in 

nontransferred S1 shares, after reduction 

under this paragraph (d). Thus, of S1’s $225 

tier-down attribute reduction amount, $50 is 

applied to reduce S1’s basis in Asset 1, from 

$50 to $0. Although the $25 unapplied 

attribute reduction amount not subject to the 

conforming limitation would generally be 

disregarded without further effect, because 

S1 has a $40 liability not taken into account 

for tax purposes, paragraph (d)(4)(ii)(C)(1) of 

this section requires that the $25 of the 

unapplied attribute reduction amount not 

subject to the conforming limitation be 

suspended and then allocated and applied to 

reduce any amounts that become deductible 

or capitalizable as a result of that liability 

later being taken into account. If the liability 

is satisfied for an amount that is less than 

$25, under paragraph (d)(4)(ii)(C)(2) of this 

section the remaining portion of that $25 

suspended attribute reduction amount is 

disregarded and has no further effect. The 

$150 unapplied portion of the tier-down 

attribute reduction amount subject to the 

conforming limitation has no further effect. 

(4) Basis restoration. Under paragraph 

(d)(5)(vi)(A) of this section, after this 

paragraph (d) has been applied with respect 

to all transfers of subsidiary stock, any 

reduction made to the basis of a share of 

lower-tier subsidiary stock under paragraph 

(d)(5)(iii) of this section is reversed to the 

extent necessary to conform the basis of that 

share to the share’s allocable portion of the 

subsidiary’s net inside attribute amount. 

Paragraph (d)(5)(vi)(A) provides that, for this 

purpose, S1’s net inside attribute amount is 

its net inside attribute amount, taking into 

account any reductions under this paragraph 

(d) and treating it as reduced by any attribute 

reduction amount suspended under 

paragraph (d)(4)(ii)(C)(1) of this section. 

Because S’s $75 basis in its S1 stock (after 

application of this paragraph (d)) is already 

conformed with its $75 allocable portion of 

S1’s net inside attribute amount ($100 net 

inside attributes after reduction, reduced by 

S1’s $25 suspended attribute reduction 

amount), there is no restoration under 

paragraph (d)(5)(vi)(A) of this section. 

Example 8. Election to reduce stock basis 

or reattribute attributes under paragraph 

(d)(6) of this section. (i) Deconsolidating sale. 

(A) Facts. P owns the sole outstanding share 

of M stock with a basis of $1,000. M owns 

all 100 outstanding shares of S stock with a 

basis of $2.10 per share ($210 total). M sells 

all its S shares to X for $1 per share ($100 

total). M’s sale of the S shares is a transfer 

of loss shares and therefore subject to this 

section. See paragraphs (f)(10)(i)(A), 

(f)(10)(i)(B), and (f)(10)(i)(C) of this section. 

At the time of the sale, S has no liabilities 

and the following: 

Category Attribute Attribute 

amount 

Category A .................................................................................................. Capital loss carryover .................................................... $10 

Category B .................................................................................................. NOL carryover ............................................................... 90 

Category C .................................................................................................. Deferred deduction ........................................................ 40 

Total Category A, Category B, and Category C Attributes ................. ........................................................................................ 140 

Category D, Class V ................................................................................... Basis in land .................................................................. 70 

Total Attributes ..................................................................................... ........................................................................................ 210 

(B) Application of paragraphs (b) and (c) 

of this section. Although the transfer is 

subject to this section, there is no basis 

redetermination under paragraph (b) of this 

section because there is no disparity among 

M’s bases in shares of S common stock and 

there are no shares of S preferred stock 

outstanding (so there can be no unrecognized 

gain or loss with respect to preferred shares). 

See paragraph (b)(1)(ii)(A) of this section. No 

adjustment is required under paragraph (c) of 

this section because both the disconformity 

amount and the net positive adjustment are 

$0. See paragraph (c)(3) of this section. Thus, 

after the application of paragraph (c) of this 

section, M’s transfer of the S shares is still 

a transfer of loss shares and, accordingly, 

subject to this paragraph (d). 

(C) Attribute reduction under this 

paragraph (d). (1) Computation of attribute 

reduction amount. Under paragraph (d)(3) of 

this section, S’s attribute reduction amount is 

the lesser of the $110 net stock loss ($210 

aggregate basis over the $100 aggregate value) 

and S’s aggregate inside loss. S’s aggregate 

inside loss is $110 (S’s $210 net inside 

attribute amount (the $10 capital loss 

carryover, plus the $90 NOL carryover, plus 

the $40 deferred deduction, plus the $70 

basis in the land) over the $100 value of all 

outstanding S shares). S’s attribute reduction 

amount is $110, the lesser of the $110 net 

stock loss and the $110 aggregate inside loss. 

(2) Application of attribute reduction 

amount. (i) S’s $110 attribute reduction 

amount is applied as follows: 


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Category Attribute Attribute 

amount 

Allocation of 

attribute 

reduction 

amount 

Adjusted 

attribute 

amount 

Category A ...................................................... Capital loss carryover .................................... $10 $10 $0 

Category B ...................................................... NOL carryover ................................................ 90 90 0 

Category C ...................................................... Deferred deduction ......................................... 40 10 30 

Category D, Class V ....................................... Basis in land ................................................... 70 0 70 

Totals ....................................................... ......................................................................... 210 110 100 

(ii) Alternatively, under paragraph 

(d)(4)(ii)(A)(1) of this section, P could specify 

the allocation of S’s $110 attribute reduction 

amount among S’s $10 capital loss carryover, 

S’s $90 NOL carryover, and S’s $40 deferred 

deduction. 

(D) Results. The P group recognizes a $110 

loss on M’s sale of the S shares that is 

absorbed by the group, which reduces P’s 

basis in the M share under § 1.1502–32 from 

$1,000 to $890. Immediately after the 

transaction, the entities own the following: 

Entity Asset Basis 

P .......... M share .......................... $890 

Entity Asset Basis 

X .......... 100 S shares .................. 100 

S .......... Category C, deferred deduction.30 

Category D, Class V 

Asset (land).

70 

(E) Election to reduce stock basis. The facts 

are the same as in paragraph (i)(A) of this 

Example 8 except that P elects under 

paragraph (d)(6) of this section to reduce M’s 

basis in the S shares by the full attribute 

reduction amount of $110, in lieu of S 

reducing its attributes. The election is 

effective for all transferred loss shares and is 

allocated to those shares in proportion to the 

loss in each. See paragraph (d)(6)(v)(A) of 

this section. Accordingly, the basis of each of 

the 100 transferred shares is reduced from 

$2.10 to $1.00. After giving effect to the 

election, the S shares are not loss shares and 

this section has no further application to the 

transfer. The $110 reduction in M’s basis in 

the S shares pursuant to the election under 

paragraph (d)(6) of this section is a 

noncapital, nondeductible expense of M that 

will reduce P’s basis in the M share. See 

paragraph (d)(6)(v)(A) of this section. 

Immediately after the transaction, the entities 

own the following: 

Entity Asset Basis/ 

attribute 

P .......... M share .................................................................................................................................................................................. $890 

X .......... 100 S shares ......................................................................................................................................................................... 100 

S .......... Category A, capital loss carryover ........................................................................................................................................ 10 

Category B, NOL carryover ................................................................................................................................................... 90 

Category C, deferred deduction ............................................................................................................................................ 40 

Category D, Class V Asset (land) ......................................................................................................................................... 70 

(F) Election to reattribute losses. The facts 

are the same as in paragraph (i)(A) of this 

Example 8 except that P elects under 

paragraph (d)(6) of this section to reattribute 

S’s attributes. S’s attribute reduction amount 

is $110, and P can reattribute all or any 

portion of the attributes in Category A, 

Category B, and Category C to the extent of 

$110. P elects to reattribute the $90 NOL, 

and, as a result, S’s NOL is $0. Under 

paragraph (d)(6)(iv)(A) of this section, the 

reattribution of the $90 NOL is a noncapital, 

nondeductible expense of S. Under § 1.1502– 

32(c)(1)(ii)(A)(1) this $90 expense is allocated 

to the transferred loss shares of S stock in 

proportion to the loss in the shares, or $.90 

per share. Further, this expense tiers up 

under § 1.1502–32 and reduces P’s basis in 

the M stock by $90. After giving effect to the 

election, the P group would recognize a $20 

loss on M’s sale of the S shares, S would have 

an aggregate inside loss of $20 (S’s $120 net 

inside attribute amount (the $10 capital loss 

carryover, plus the $40 deferred deduction, 

plus the $70 basis in the land) over the $100 

value of all outstanding S shares), and S’s 

attribute reduction amount would be $20 

(applied $10 to the $10 capital loss carryover 

and $10 to the $40 deferred deduction). 

(Alternatively, under paragraph 

(d)(4)(ii)(A)(1) of this section, P could specify 

the allocation of S’s $20 attribute reduction 

amount between S’s $10 capital loss 

carryover and S’s $40 deferred deduction. 

Further, P could elect to reduce M’s 

remaining basis in the S shares by any 

amount up to the $20 attribute reduction 

amount, thereby reducing or eliminating S’s 

attribute reduction amount.) 

(ii) Nondeconsolidating sale. (A) Facts. The 

facts are the same as in paragraph (i)(A) of 

this Example 8, except that M only sells 20 

S shares ($20 total). 

(B) Application of paragraphs (b) and (c) 

of this section. No adjustment is required 

under paragraph (b) or paragraph (c) of this 

section for the reasons set forth in paragraph 

(i)(B) of this Example 8. Thus, after the 

application of paragraph (c) of this section, 

M’s sale of the S shares is still a transfer of 

loss shares and, accordingly, subject to this 

paragraph (d). 

(C) Attribute reduction under this 

paragraph (d). (1) Computation of attribute 

reduction amount. Under paragraph (d)(3) of 

this section, S’s attribute reduction amount is 

the lesser of the $22 net stock loss ($42 

aggregate basis over $20 aggregate value) and 

S’s $110 aggregate inside loss (as calculated 

in paragraph (i)(C)(1) of this Example 8). S’s 

attribute reduction amount is $22, the lesser 

of the $22 net stock loss and the $110 

aggregate inside loss. 

(2) Application of attribute reduction 

amount. (i) S’s $22 attribute reduction 

amount is applied as follows: 

Category Attribute Attribute 

amount 

Allocation of 

attribute 

reduction 

amount 

Adjusted 

attribute 

amount 

Category A ......................................................... Capital loss carryover ........................................ $10 $10 $0 

Category B ......................................................... NOL carryover ................................................... 90 12 78 

Category C ........................................................ Deferred deduction ............................................ 40 0 40 

Category D, Class V .......................................... Land ................................................................... 70 0 70 


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(ii) Alternatively, under paragraph 

(d)(4)(ii)(A)(1) of this section, P could specify 

the allocation of S’s $22 attribute reduction 

amount among S’s $10 capital loss carryover, 

S’s $90 NOL carryover, and S’s $40 deferred 

deduction. 

(D) Results. The P group recognizes a $22 

loss on M’s sale of the S shares that is 

absorbed by the group, which reduces P’s 

basis in the M share under § 1.1502–32 from 

$1,000 to $978. Immediately after the 

transaction, the entities have the following: 

Entity Asset Basis 

P .......... M share .......................................................................................................................................................................................... $978 

X .......... 20 S shares ................................................................................................................................................................................... 20 

S .......... Category B, NOL carryover ........................................................................................................................................................... 78 

Category C, deferred deduction .................................................................................................................................................... 40 

Category D, Class V Asset (land) ................................................................................................................................................. 70 

(E) Election to reduce stock basis. The facts 

are the same as paragraph (ii)(A) of this 

Example 8, except that P elects under 

paragraph (d)(6) of this section to reduce M’s 

basis in the S shares by the full attribute 

reduction amount of $22, in lieu of S 

reducing its attributes. The election is 

effective for all transferred loss shares and is 

allocated to such shares in proportion to the 

loss in each share. See paragraph (d)(6)(v)(A) 

of this section. Accordingly, the basis of each 

of the 20 transferred shares is reduced from 

$2.10 to $1.00. After giving effect to the 

election, the transferred S shares are not loss 

shares and this section has no further 

application to the transfer. The $22 reduction 

in M’s basis in the S shares pursuant to the 

election under paragraph (d)(6) of this 

section is a noncapital, nondeductible 

expense of M that will reduce P’s basis in the 

M share. See paragraph (d)(6)(v)(A) of this 

section. Immediately after the transaction, 

the entities have the following: 

Entity Asset Basis/ 

attribute 

P .......... M share ........................................................................................................................................................................ $978 

M ......... 80 S shares ................................................................................................................................................................. 168 

X .......... 20 S shares ................................................................................................................................................................. 20 

S .......... Category A, capital loss carryover .............................................................................................................................. 10 

Category B, NOL ......................................................................................................................................................... 90 

Category C, deferred deduction .................................................................................................................................. 40 

Category D Class V Asset (land) ................................................................................................................................ 70 

(F) Election to reattribute attributes. The 

facts are the same as paragraph (ii)(A) of this 

Example 8. Because S remains a member of 

the same group as P following M’s sale of S 

stock, P cannot elect under paragraph (d)(6) 

of this section to reattribute any portion of 

S’s attributes in lieu of attribute reduction. 

Example 9. Transfers at multiple tiers, gain 

and loss shares. (i) Facts. M owns the sole 

outstanding share of S stock with a basis of 

$700. S owns Asset 1 (basis of $170) and all 

ten outstanding shares of S1 common stock 

($170 basis in share 1, $10 basis in share 2, 

and $15 basis in each of share 3 through 

share 10). S1 owns the sole outstanding share 

of S2 ($0 basis), the sole outstanding share 

of S3 ($60 basis), and the sole outstanding 

share of S4 ($100 basis). S2’s sole asset is 

Asset 2 ($75 basis). S3’s sole asset is Asset 

3 ($75 basis). S4’s sole asset is Asset 4 ($80 

basis). In one transaction, M sells its S share 

to P1 (the common parent of a consolidated 

group) for $240, S sells S1 share 1 to X for 

$20, S contributes S1 share 2 to a partnership 

in a section 721 transaction, and S1 sells its 

S2 share to Y for $50. M’s sale of the S share 

and S1’s sale of the S2 share are transfers 

under paragraphs (f)(10)(i)(A), (f)(10)(i)(B), 

and (f)(10)(i)(C) of this section. S’s sale of S1 

share 1 to X is a transfer under paragraphs 

(f)(10)(i)(A) and (f)(10)(i)(C) of this section. 

S’s contribution of S1 share 2 to the 

partnership is a transfer under paragraph 

(f)(10)(i)(C) of this section. 

(ii) Transfer in lowest tier (gain share). S1’s 

sale of the S2 share is the lowest-tier transfer 

in the transaction. Under paragraph 

(a)(3)(ii)(A) of this section, because there are 

no transfers of loss shares at that tier, no 

adjustments are required under paragraph (b) 

or (c) of this section. However, S1’s gain 

recognized on the transfer of the S2 share is 

computed and immediately adjusts members 

bases in subsidiary stock under § 1.1502–32. 

Accordingly, $5 is allocated to each of 10 S1 

shares, increasing the basis of share 1 to 

$175, the basis of share 2 to $15, and the 

basis of each other share to $20. The $50 

applied to S’s bases in the S1 shares then 

tiers up to increase P’s basis in the S share 

from $700 to $750. 

(iii) Transfers in next highest tier (loss 

share). S’s sale of the S1 share 1 and S’s 

transfer of the S1 share 2 to a partnership are 

both transfers of stock in the next higher tier. 

However, only the S1 share 1 is a loss share 

and so this section only applies with respect 

to the transfer of that share. 

(A) Basis redetermination under paragraph 

(b) of this section. Under paragraph 

(b)(2)(i)(A) of this section, members’ bases in 

S1 shares are redetermined by first removing 

the positive investment adjustments applied 

to the bases of transferred loss common 

shares. Accordingly, the $5 positive 

investment adjustment applied to the basis of 

S1 share 1 is removed, reducing the basis of 

S1 share 1 from $175 to $170. Because there 

were no negative adjustments applied to the 

bases of S1 shares, there are no negative 

adjustments that can be reallocated to further 

reduce the basis of S1 share 1 under 

paragraph (b)(2)(i)(B) of this section. Finally, 

under paragraph (b)(2)(ii)(B) of this section, 

the $5 positive investment adjustment 

removed from S1 share 1 is reallocated and 

applied to increase the bases of other S1 

common shares in a manner that reduces 

disparity to the greatest extent possible. 

Accordingly, the entire $5 investment 

adjustment removed from S1 share 1 is 

reallocated and applied to increase the basis 

of S1 share 2, from $15 to $20. After basis 

is redetermined under paragraph (b) of this 

section, the S1 share 1 is still a loss share and 

therefore subject to basis reduction under 

paragraph (c) of this section. (Because the S1 

share 2 is not a loss share, this section does 

not apply with respect to the transfer of that 

share.) 

(B) Basis reduction under paragraph (c) of 

this section. No adjustment is required to the 

basis of S1 share 1 under paragraph (c) of this 

section. The S1 share 1 has a disconformity 

amount of $149. This $149 disconformity 

amount is computed as the excess of the $170 

basis in the S1 share 1 over the S1 share 1’s 

$21 allocable portion (1/10) of S1’s $210 net 

inside attribute amount. S1’s $210 net inside 

attribute amount is determined under 

paragraph (c)(5) of this section as the sum of 

$50 (S1’s $0 basis in the S2 share, adjusted 

for the $50 gain recognized with respect to 

that share), S1’s $60 basis in the S3 stock, 

and S1’s $100 basis in the S4 stock. (In 

computing the disconformity amount, the 

basis of the S2 share is not treated as 

tentatively reduced because that share is 

transferred in the transaction, and the bases 

of the S3 and S4 shares are not treated as 

tentatively reduced because no positive 

investment adjustments were applied to the 

bases of those shares.) However, the S1 share 

1’s net positive adjustment is $0 because the 

$5 positive investment adjustment originally 

allocated to S1 share 1 was reallocated to S1 

share 2 under paragraph (b) of this section. 

See paragraph (c)(3) of this section. No 

adjustment is required to the basis of S1 


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share 2 under paragraph (c) of this section 

because S1 share 2 is not a loss share. 

(C) Computation of loss, adjustments to 

stock basis. S recognizes a loss of $150 on the 

sale of the S1 share 1 ($170 basis over $20 

amount realized) that is absorbed by the 

group. Under § 1.1502–32, M’s basis in its S 

share is therefore decreased by $100, the net 

of the $150 loss recognized by S on the sale 

of the S1 share, and the $50 gain that tiered 

up from S1 (as a result of S1’s sale of the S2 

share). Following these adjustments, M’s 

basis in the S share is $600 and the sale of 

the S share is still a transfer of a loss share. 

(iv) Transfer in highest tier (loss share). 

The sale of the S share is a transfer in the 

next higher tier, which is the highest tier in 

this transaction. Because the sale is a transfer 

of a loss share, it is subject to this section. 

(A) Basis redetermination and basis 

reduction under paragraphs (b) and (c) of 

this section. Although the transfer is subject 

to this section, there is no basis 

redetermination under paragraph (b) of this 

section because there is only one share of S 

stock outstanding (and so there can be no 

disparity among members’ bases in common 

shares and there are no outstanding preferred 

shares with respect to which there can be 

unrecognized gain or loss). See paragraph 

(b)(1)(ii)(A) of this section. Therefore, after 

the application of paragraph (b) of this 

section, the share is still a loss share and, as 

such, subject to paragraph (c) of this section. 

In addition, no adjustment is required under 

paragraph (c) of this section. The S share has 

a disconformity amount of $230. This $230 

disconformity amount is computed as the 

excess of the $600 basis in the S share over 

the S share’s $370 allocable portion (1/1) of 

S’s $370 net inside attribute amount. S’s $370 

net inside attribute amount is determined 

under paragraph (c)(5) of this section as the 

sum of $200 (S’s $170 basis in the S1 share 

1, adjusted for the $150 loss recognized with 

respect to that share, and S’s $20 basis in 

each of S1 share 2 through share 10), and S’s 

$170 basis in Asset 1. (In computing the 

disconformity amount, the bases of S1 share 

1 and share 2 are not treated as tentatively 

reduced because those shares are transferred 

in the transaction, and the bases of S1 share 

3 through share 10 are not treated as 

tentatively reduced because none of those 

shares have a disconformity amount—each 

share has a basis of $20 and a $21 allocable 

portion (1/10) of S1’s $210 net inside 

attribute amount, as determined in paragraph 

(iii)(B) of this Example 9.) However, the S 

share’s net positive adjustment is $0 (the S 

share’s net adjustment is negative $100). See 

paragraph (c)(3) of this section. Accordingly, 

the sale of the S share is still a transfer of a 

loss share. Because there are no higher-tier 

loss shares transferred in the transaction, this 

paragraph (d) then applies with respect to the 

transfer of the S share. 

(B) Attribute reduction under this 

paragraph (d). (1) Computation of S’s 

attribute reduction amount. Under paragraph 

(d)(3) of this section, S’s attribute reduction 

amount is the lesser of P’s net stock loss and 

S’s aggregate inside loss. P’s net stock loss is 

$360 ($600 basis over $240 amount realized). 

S’s aggregate inside loss is the excess of S’s 

net inside attribute amount over the value of 

the S share. S’s net inside attribute amount 

is the sum of its bases in its assets, treating 

its S1 shares as a single share (the S1 stock) 

and treating S’s deemed basis in the S1 stock 

as its basis in that stock. Under paragraph 

(d)(5)(i)(C) of this section, when subsidiaries 

are owned in multiple tiers, deemed basis is 

first determined for shares at the lowest tier, 

and then for stock in each next higher tier. 

Under paragraph (d)(5)(i)(B) of this section, 

S1’s deemed basis in the S2 stock is $75 

(computed as the greater of $50 (S1’s $0 basis 

in the S2 share, adjusted for the $50 gain 

recognized with respect to the share) and $75 

(S2’s net inside attribute amount, the basis in 

Asset 2)). S1’s deemed basis in the S3 stock 

is $75 (computed as the greater of $60 (S1’s 

basis in the S3 share) and $75 (S3’s net inside 

attribute amount, the basis in Asset 3)). S1’s 

deemed basis in the S4 stock is $100 

(computed as the greater of $100 (S1’s basis 

in the S4 share) and $80 (S4’s net inside 

attribute amount, the basis in Asset 4)). 

Accordingly, S1’s net inside attribute amount 

is $250 ($75 deemed basis in the S2 stock 

plus $75 deemed basis in the S3 stock plus 

$100 deemed basis in the S4 stock). S’s 

deemed basis in the S1 stock is the greater 

of the sum of S’s actual basis in each share 

of S1 stock (adjusted for any gain or loss 

recognized) and S1’s net inside attribute 

amount. S’s actual basis in the S1 stock, 

adjusted for the loss recognized, is $200 (the 

sum of S’s $170 basis in the S1 share 1, 

adjusted by the $150 loss recognized with 

respect to the share, and S’s $20 basis in each 

of S1 share 2 through share 10). Thus, S’s 

deemed basis in the S1 stock is $250, the 

greater of $200 (aggregate basis in S1 shares, 

adjusted for loss recognized) and $250 (S1’s 

net inside attribute amount). As a result, S’s 

net inside attribute amount is $420, the sum 

of S’s $250 deemed basis in the S1 stock and 

S’s $170 basis in Asset 1. Accordingly, the 

aggregate inside loss is $180, the excess of S’s 

$420 net inside attribute amount over the 

$240 value of all of the S stock. S’s attribute 

reduction amount is therefore $180, the 

lesser of the $360 net stock loss and the $180 

aggregate inside loss. 

(2) Allocation, apportionment, and 

application of S’s attribute reduction 

amount. Under paragraphs (d)(4) and 

(d)(5)(ii) of this section, S’s $180 attribute 

reduction amount is allocated 

proportionately (by basis) between Asset 1 

(non-stock Category D asset) and the S1 

stock. However, under paragraph (d)(5)(ii) of 

this section, for purposes of allocating S’s 

$180 attribute reduction amount between S’s 

non-stock Category D asset and the S1 stock, 

S’s $250 deemed basis in the S1 stock is 

reduced by the $40 value of the transferred 

S1 shares (S1 share 1 and share 2) and the 

nontransferred S1 shares’ $40 allocable 

portion (8/10) of S1’s $50 net non-loss assets. 

S1’s net non-loss assets is the $50 value of 

S1’s transferred S2 shares. (S1 has no other 

non-loss assets, and there are no non-loss 

assets held by lower-tier subsidiaries.) 

Accordingly, for this purpose, S’s deemed 

basis in the S1 stock is reduced by $80, from 

$250 to $170. Thus, $90 of the attribute 

reduction amount ($170/$340 × $180) is 

allocated to Asset 1 (reducing S’s basis in 

Asset 1 from $170 to $80) and $90 of the 

attribute reduction amount ($170/$340 × 

$180) is allocated to the S1 stock. Under 

paragraph (d)(5)(iii)(A) of this section, none 

of the $90 allocated attribute reduction 

amount is apportioned to S1 share 1 because 

loss is recognized on the transfer of S1 share 

1. Under paragraph (d)(5)(iii)(B) of this 

section, the $90 allocated attribute reduction 

amount is apportioned among the other nine 

shares of S1 common stock in a manner that 

reduces disparity to the greatest extent 

possible. Accordingly, of the total $90 

allocated amount, $10 is apportioned to each 

of the remaining nine shares of S1 stock. 

Under paragraph (d)(5)(iii)(C) of this section, 

the allocated attribute reduction amount 

apportioned to an individual share cannot be 

applied to reduce the basis of the share below 

its value if the share is transferred other than 

in a recognition transfer. Because the S1 

share 2 is transferred (contributed to the 

partnership) and the basis of S1 share 2 is 

already equal to its value, none of the $10 

allocated attribute reduction amount 

apportioned to S1 share 2 is applied to 

reduce its basis. Because none of S1 share 3 

through share 10 are transferred within the 

meaning of paragraph (f)(10) of this section, 

the $10 allocated attribute reduction amount 

apportioned to each of S1 share 3 through 

share 10 is applied fully to reduce the basis 

of each of those shares from $20 to $10. As 

a result, immediately after the allocation and 

application of S’s attribute reduction amount, 

S’s basis in Asset 1 is $80 ($170 minus $90), 

its bases in S1 share 1 and share 2 are not 

adjusted under paragraph (d)(5)(iii), and its 

basis in each of S1 share 3 through share 10 

is $10. Under paragraph (d)(5)(v)(A) of this 

section, the entire $90 of S’s attribute 

reduction amount that was allocated to the 

S1 stock is an attribute reduction amount of 

S1, regardless of the fact that none of the 

allocated amount was apportioned to S1 

share 1 and none of the amount apportioned 

to S1 share 2 was applied to reduce the basis 

of S1 share 2. 

(v) Attribute reduction under this 

paragraph (d) in next lower tier. (A) 

Computation of S1’s attribute reduction 

amount. S’s sale of S1 share 1 is a transfer 

of a loss share and it is in the next lower tier. 

Thus, this paragraph (d) next applies with 

respect to S’s transfer of S1 share 1. S1’s 

attribute reduction amount will include both 

the $90 attribute reduction amount that 

tiered down from S and any attribute 

reduction amount resulting from the 

application of this paragraph (d) with respect 

to S’s transfer of S1 share 1 and share 2 (S1’s 

direct attribute reduction amount). Under 

paragraph (d)(3) of this section, S1’s direct 

attribute reduction amount is the lesser of the 

net stock loss on transferred S1 shares and 

S1’s aggregate inside loss. The net stock loss 

on transferred S1 shares is $150, computed 

as the excess of S’s $190 adjusted bases in 

transferred shares of S1 stock ($170 in S1 

share 1 plus $20 in S1 share 2) over the $40 

aggregate value of those shares. S1’s aggregate 

inside loss is $50, the excess of S1’s $250 net 

inside attribute amount (as calculated in 

paragraph (iv)(B)(1) of this Example 9) over 

the $200 value of all outstanding S1 shares. 

Therefore, S1’s direct attribute reduction 

amount is $50, the lesser of the $150 net 


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stock loss and S1’s $50 aggregate inside loss. 

S1’s total attribute reduction amount is thus 

$140, the sum of the $90 tier-down attribute 

reduction amount and the $50 direct attribute 

reduction amount. 

(B) Allocation, apportionment, and 

application of S1’s attribute reduction 

amount. Under paragraphs (d)(4) and 

(d)(5)(ii) of this section, S1’s $140 attribute 

reduction amount is allocated 

proportionately (by basis) among the S2 

stock, the S3 stock, and the S4 stock. 

However, under paragraph (d)(5)(ii) of this 

section, for purposes of allocating S1’s $140 

attribute reduction amount among S1’s 

lower-tier subsidiary stock, S1’s $75 deemed 

basis in the S2 stock is reduced by the $50 

value of the transferred S2 share. 

Accordingly, for this purpose, S1’s deemed 

basis in the S2 stock is reduced by $50, from 

$75 to $25. Thus, $17.50 of S1’s attribute 

reduction amount ($25/$200 × $140) is 

allocated to the S2 stock, $52.50 of S1’s 

attribute reduction amount ($75/$200 × $140) 

is allocated to the S3 stock, and $70 of S1’s 

attribute reduction amount ($100/$200 × 

$140) is allocated to the S4 stock. Under 

paragraph (d)(5)(iii)(A) of this section, none 

of the $17.50 of S1’s attribute reduction 

amount allocated to S2 stock is apportioned 

to the S2 share because gain was recognized 

on the transfer of the S2 share. Because 

neither the S3 share nor the S4 share is 

transferred within the meaning of paragraph 

(f)(10) of this section, the $52.50 of S1’s 

attribute reduction amount allocated to the 

S3 stock, and the $70 of S1’s attribute 

reduction amount allocated to the S4 stock, 

is apportioned to and applied fully to reduce 

the basis of such shares. Thus, S1’s basis in 

the S3 share is reduced by $52.50, from $60 

to $7.50, and S1’s basis in the S4 stock is 

reduced by $70, from $100 to $30. (Note: The 

conforming limitation in paragraph 

(d)(5)(v)(B) of this section limits the 

application of the $90 tier down attribute 

reduction amount to $80, the amount by 

which the portion (10/10) S1’s $250 net 

inside attribute amount attributable to S1 

shares held by members exceeds $170 (the 

sum of the $50 direct attribute reduction 

amount, the $20 value of the S1 share 1 

transferred in a recognition transfer, the $20 

basis (after reduction) in the S1 share 2 

transferred other than in a recognition 

transfer, and the $80 aggregate basis (after 

reduction) in the nontransferred S1 shares 

held by members). However, the conforming 

limitation does not limit the application of 

S1’s $90 tier-down attribute reduction 

amount because none of the $17.50 of S1’s 

total attribute reduction amount allocated to 

the S2 share was applied to reduce the basis 

of the share. Accordingly, only $78.75 ($90— 

($17.50 × ($90/$140)) of the $90 tier-down 

attribute reduction was applied to reduce 

S1’s attributes.) Under paragraph (d)(5)(v)(A) 

of this section, the attribute reduction 

amount allocated to the S2 stock, the S3 

stock, and the S4 stock becomes an attribute 

reduction amount of S2, S3, and S4, 

respectively (even though the amount 

allocated to S2 stock was not apportioned to 

or applied to reduce the basis of the S2 

share). 

(vi) Attribute reduction under this 

paragraph (d) in lowest tier. Although the 

sale of the S2 share is a transfer of subsidiary 

stock at the next lower tier, the S2 share is 

not a loss share. Thus, this paragraph (d) 

does not apply with respect to that transfer. 

However, S2, S3, and S4 have attribute 

reduction amounts that tiered down from S1 

and that are applied to reduce attributes 

under this paragraph (d). 

(A) Tier down of S1’s attribute reduction 

amount to S2. Under the general rules of this 

paragraph (d), S2’s $17.50 tier-down attribute 

reduction amount is allocated and applied to 

reduce S2’s basis in Asset 2 from $75 to 

$57.50. 

(B) Tier down of S1’s attribute reduction 

amount to S3. Under the general rules of this 

paragraph (d), S3’s $52.50 tier-down attribute 

reduction amount is allocated and applied to 

reduce S3’s basis in Asset 3 from $75 to 

$22.50. 

(C) Tier down of S1’s attribute reduction 

amount to S4, application of conforming 

limitation. Under the general rules of this 

paragraph (d), S4’s $70 tier-down attribute 

reduction amount is allocated to, and would 

be applied to reduce, S4’s basis in Asset 4. 

However, under paragraph (d)(5)(v)(B) of this 

section, the reduction is limited to the excess 

of S4’s $80 net inside attribute amount over 

the $30 basis of the S4 share (after reduction 

under this paragraph (d)). As a result, only 

$50 (the excess of $80 over $30) of S4’s $70 

attribute reduction amount is applied to S4’s 

basis in Asset 4, reducing it from $80 to $30. 

The $20 unapplied portion of S4’s tier-down 

attribute reduction amount subject to the 

conforming limitation is disregarded and has 

no further effect. 

(vii) Application of basis restoration rule. 

Under paragraph (d)(5)(vi)(A) of this section, 

after this paragraph (d) has been applied with 

respect to all transfers of subsidiary stock, 

any reduction made to the basis of a share 

of lower-tier subsidiary stock under 

paragraph (d)(5)(iii) of this section is reversed 

to the extent necessary to conform the basis 

of that share to the share’s allocable portion 

of the subsidiary’s net inside attribute 

amount. Restoration adjustments are first 

made at the lowest tier and then at each next 

higher tier successively. 

(A) Basis restoration at lowest tier. The 

basis of the S2 share was not reduced under 

paragraph (d)(5)(iii) of this section and so 

there is no restoration of any basis in the S2 

share. S3’s $22.50 net inside attribute amount 

(after reduction under this paragraph (d)) 

exceeds S1’s $7.50 basis in the S3 share (after 

reduction under this paragraph (d)) by $15. 

To conform S1’s basis in the S3 share to S3’s 

net inside attribute amount, the $52.50 

reduction to the basis of the S3 share under 

paragraph (d)(5)(iii) of this section is reversed 

by $15 (restoring S1’s basis in the S3 share 

to $22.50). The restoration of S1’s basis in the 

S3 share does not tier up to affect the basis 

in stock of any other subsidiary. S1’s $30 

basis in the S4 share (after reduction under 

this paragraph (d)) is already conformed with 

S4’s $30 net inside attribute amount (after 

reduction under this paragraph (d)) and so 

there is no restoration of any basis in the S4 

share. 

(B) Basis restoration at next higher tier. 

Each share of S1 stock has an allocable 

portion of S1’s net inside attribute amount 

(after reduction) equal to $10.25 (1/10 × 

$102.50, the sum of S1’s $0 basis in the S2 

stock, adjusted for the $50 gain recognized 

with respect to the share, S1’s $22.50 basis 

in the S3 stock (after restoration), and S1’s 

$30 basis in the S4 stock). Neither S’s basis 

in S1 share 1 nor S’s basis in S1 share 2 was 

reduced under paragraph (d)(5)(iii) of this 

section. Accordingly, there is no restoration 

of any basis in either S1 share 1 or share 2. 

However, S’s basis in each of S1 share 3 

through share 10 was reduced under 

paragraph (d)(5)(iii) of this section by $10, 

from $20 to $10. Accordingly, the $10 

reduction to the basis of each of those shares 

is reversed to the extent of $.25, to restore the 

basis of each such share to $10.25 (its 

allocable portion of S1’s net inside attribute 

amount). 

(viii) Results. After the application of this 

section, P recognizes a loss of $360 on the 

sale of the S share, S recognizes a loss of 

$150 on the sale of S1 share 1, and S1 

recognizes a $50 gain on the sale of the S2 

share. Immediately after the transaction, the 

entities each directly own the following: 

Entity Asset Basis Value 

P1 ............................... S share .................................................................................................................................... $240 ........... $240 

P ................................. Proceeds of the sale of S share ............................................................................................. 240 ............. 240 

S ................................. Proceeds of sale of S1 share 1 .............................................................................................. 20 ............... 20 

Partnership interest received for S1 share 2 .......................................................................... 20 ............... 20 

S1 share 3 through share 10 .................................................................................................. 82 ($10.25 

per share).

....................

Asset 1 .................................................................................................................................... 80 ............... ....................

S1 ............................... Proceeds of sale of S2 share ................................................................................................. 50 ............... 50 

The S3 share .......................................................................................................................... 22.50 .......... ....................

The S4 share .......................................................................................................................... 30 ............... ....................

S2 ............................... Asset 2 .................................................................................................................................... 57.50 .......... ....................

S3 ............................... Asset 3 .................................................................................................................................... 22.50 .......... ....................

S4 ............................... Asset 4 .................................................................................................................................... 30 ............... ....................


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Entity Asset Basis Value 

X ................................. S1 share 1 .............................................................................................................................. 20 ............... 20 

Partnership ................. S1 share 2 .............................................................................................................................. 20 ............... 20 

Y ................................. The S2 share .......................................................................................................................... 50 ............... 50 

(e) Operating rules—(1) Predecessors, 

successors. This section applies to 

predecessor or successor persons, 

groups, and assets to the extent 

necessary to effectuate the purposes of 

this section. 

(2) Adjustments for prior transactions 

that altered stock basis or other 

attributes. In certain situations, M’s 

basis in S stock or S’s attributes may be 

adjusted in a manner that alters the 

relationship between stock basis and 

inside attributes and prevents that 

relationship from identifying the extent 

to which stock basis reflects 

unrecognized gain and duplicated loss. 

The provisions of this paragraph (e)(2) 

modify the computations in paragraphs 

(c) and (d) of this section to adjust for 

the effects of such adjustments. 

(i) Prior reductions to S’s basis in 

assets or other attributes pursuant to 

section 362(e)(2)(A). If M transferred 

loss property to S in an intercompany 

transaction subject to section 362(e)(2) 

(for example, if the transfer was prior to 

September 17, 2008, no election was 

made to apply § 1.1502–80(h), and, as a 

result, S’s attributes were reduced under 

section 362(e)(2)), then the 

disconformity amount of the S shares 

received in the section 362(e)(2) 

transaction is reduced by the amount 

that the basis in such shares would have 

been reduced under section 362(e)(2)(C) 

had such an election been made. In 

addition, for purposes of determining 

the attribute reduction amount under 

paragraph (d) of this section resulting 

from the transfer of any S shares 

received (or deemed received) in such a 

transfer, and for purposes of applying 

paragraph (d)(5)(v)(B) of this section 

(conforming limitation) to S, the bases 

in such shares is treated as reduced by 

the amount the bases in such shares 

would have been reduced under section 

362(e)(2)(C) had such an election been 

made. 

(ii) Prior reductions to the basis of any 

share of S stock pursuant to an election 

under section 362(e)(2)(C). If M 

transferred loss property to S in an 

intercompany transaction subject to 

section 362(e)(2) and the basis of any 

share of S stock was reduced as the 

result of an election under section 

362(e)(2)(C) (including in the hands of 

a predecessor, to the extent that the 

effect of the election remains reflected 

in the basis of the S stock), then, for 

purposes of computing either any S 

share’s disconformity amount or S’s 

aggregate inside loss, and for purposes 

of applying paragraph (d)(5)(vi)(A) of 

this section (stock basis restoration) to 

S, S’s net inside attribute amount is 

treated as reduced by the amount that 

S’s attributes would have been reduced 

under section 362(e)(2)(A) in the 

absence of an election under section 

362(e)(2)(C). Notwithstanding the 

general rule of this paragraph (e)(2)(ii), 

no reduction will be required to the 

extent that the group can establish that 

the net loss in the S shares transferred 

by M is no longer reflected in S’s net 

inside attributes. 

(iii) Other adjustments. Appropriate 

adjustments will be made in any other 

case in which an adjustment to S’s net 

inside attributes or to M’s basis in a 

share of S stock alters the relationship 

between such amounts, and the 

adjustment does not relate to the extent 

to which loss reflected in M’s basis in 

S stock is noneconomic or duplicated 

within the meaning of this section. 

(3) Special rules for subsidiary stock 

transferred in an intercompany 

transaction—(i) In general. This section 

applies with respect to M’s transfer of a 

share of S stock to another member in 

an intercompany transaction in which 

M’s intercompany item is deferred 

under § 1.1502–13 (and to any 

subsequent transfer of that share by a 

member) as of the time M’s 

intercompany item is taken into account 

under § 1.1502–13. In determining the 

application of this section, all 

transferor-members are treated as 

divisions of a single corporation. 

Appropriate adjustments will be made 

to the intercompany item(s), any 

member’s basis in an S share, to S’s 

attributes, or any combination thereof, 

to further the purposes of this section 

and § 1.1502–13. 

(ii) Certain prior intercompany 

transactions. If M transferred a share of 

S stock to another member before 

September 17, 2008 and M’s 

intercompany item related to the 

transfer is taken into account on or after 

September 17, 2008, P may elect to 

apply this paragraph (e)(3) to the 

transfer. The election is made in the 

manner provided in paragraph (e)(5) of 

this section. 

(iii) Examples. The application of this 

paragraph (e)(3) is illustrated by the 

following examples: 

Example 1. Intercompany sale with 

duplicated loss. (i) Buying member later sells 

at gain. (A) Facts. M owns the sole 

outstanding share of stock of S with a basis 

of $100. S has one asset with a basis of $100. 

M sells the S share to M1 for $70, recognizing 

a loss of $30. While owned by M1, S 

recognizes $10 of depreciation deductions 

that are absorbed by the group. S’s basis in 

the asset is reduced by $10 (from $100 to 

$90), and M1’s basis in the S stock is reduced 

under § 1.1502–32 by $10 (from $70 to $60). 

Later, M1 sells the S share to X, an unrelated 

person, for $80. 

(B) Analysis. M’s sale of its S share to M1 

is a transfer of the share, but this section 

applies as of the time M’s intercompany item 

is taken into account under § 1.1502–13, as 

if M and M1 were divisions of a single 

corporation. If M and M1 were divisions of 

a single corporation, the S share’s basis 

would be $90 ($100 reduced by $10 for the 

depreciation deductions absorbed by the 

group) and the group would recognize a $10 

loss on the sale of the share that is potentially 

subject to this section. Thus, the sale would 

be a transfer of a loss share (to the extent of 

$10) and would be subject to this section (to 

the extent of that $10). Although the transfer 

would be subject to this section, there would 

be no adjustment under paragraph (b) of this 

section (S has only one share outstanding 

and so there is no disparity in bases of 

common shares and no unrecognized gain or 

loss with respect to preferred) or under 

paragraph (c) of this section (S has no net 

positive adjustment). Thus, after the 

application of paragraph (c) of this section, 

the share would still be a loss share and 

would therefore be subject to paragraph (d) 

of this section. Under paragraph (d) of this 

section, S would be subject to $10 of attribute 

reduction (the lesser of the $10 net stock loss 

and S’s $10 aggregate inside loss), allocable 

to the basis in S’s asset. Accordingly, S’s 

basis in its asset is reduced by $10, from $90 

to $80, M takes its $30 intercompany stock 

loss into account, and M1 recognizes a $20 

stock gain. 

(ii) Selling member deconsolidates. 

Assume the same facts as in paragraph (i)(A) 

of this Example 1, except that M1 does not 

sell the S share and M ceases to be a member 

of the group when the value of the S share 

is $80. Under § 1.1502–13, M’s 

deconsolidation causes M’s intercompany 

loss to be taken into account and this section 

applies at that time. At the time that M 

deconsolidates, if M and M1 were divisions 

of a single corporation, the basis in the S 

share would be $90 ($100 reduced by $10 for 

the depreciation deductions absorbed by the 

group) and the group would recognize a $10 

loss on the sale of the share that is potentially 

subject to this section. Such a sale would be 

a transfer of a loss share (to the extent of $10) 

and would be subject to this section (to the 

extent of that $10). The analysis is then the 


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53980 Federal Register / Vol. 73, No. 181 / Wednesday, September 17, 2008 / Rules and Regulations 

same as in paragraph (i)(B) of this Example 

1. As a result, S’s basis in its asset is reduced 

from $90 to $80, M takes its $30 

intercompany stock loss into account, and 

M1 holds the S stock with a basis of $60 (and 

an unrecognized gain of $20). 

(iii) M1 sells the S share at a loss. Assume 

the same facts as in paragraph (i)(A) of this 

Example 1, except that S declines in value 

and M1 sells the S share to X for $50, 

realizing a $10 loss. In this case, if M and M1 

were divisions of a single corporation, the 

share’s basis would be $90 ($100 reduced by 

$10 for the depreciation deductions absorbed 

by the group) and the group would recognize 

a $40 loss on the sale of the share that is 

potentially subject to this section. Thus, the 

sale would be a transfer of a loss share (to 

the extent of $40) and would be subject to 

this section (to the extent of that $40). 

Although the transfer would be subject to 

this section, for the reasons set forth in 

paragraph (i)(B) of this Example 1, there 

would be no adjustment under either 

paragraph (b) or paragraph (c) of this section. 

Thus, after the application of paragraph (c), 

the share would still be a loss share and 

would therefore be subject to paragraph (d) 

of this section. Under paragraph (d) of this 

section, S would be subject to $40 of attribute 

reduction (the lesser of the $40 net stock loss 

and S’s $40 aggregate inside loss), allocable 

to the basis in S’s asset. Accordingly, S’s 

basis in its asset is reduced by $40, from $90 

to $50, M takes its $30 intercompany stock 

loss into account, and M1 recognizes a $10 

stock loss. 

Example 2. Intercompany sale of built-in 

gain stock. (i) Facts. M owns the sole 

outstanding share of stock of S with a basis 

of $100. S’s sole asset has a basis of $0. S 

sells its asset for $100 and recognizes a $100 

gain that increases M’s basis in its S share 

under § 1.1502–32 to $200. M sells the S 

share to M1 for $100 and recognizes a $100 

intercompany loss. Later, M1 sells the S 

share to X, an unrelated person, for $120. 

(ii) Analysis. M’s sale of the S share to M1 

is a transfer of the share, but this section 

applies as of the time M’s intercompany item 

is taken into account under § 1.1502–13, as 

if M and M1 were divisions of a single 

corporation. If M and M1 were divisions of 

a single corporation, the S share’s basis 

would be $200 ($100 increased by $100 for 

the gain recognized on the sale of the asset) 

and the group would recognize an $80 loss 

on the sale of the share that is potentially 

subject to this section. Thus, the sale would 

be a transfer of a loss share (to the extent of 

$80) and would be subject to this section (to 

the extent of that $80). Although the transfer 

would be subject to this section, there would 

be no adjustment under paragraph (b) of this 

section (S has only one share outstanding 

and so there is no disparity in bases of 

common shares and no unrecognized gain or 

loss with respect to preferred). Thus, after the 

application of paragraph (b), the share would 

still be a loss share and would therefore be 

subject to paragraph (c) of this section. Under 

paragraph (c) of this section, the basis in the 

S share would be reduced, but not below its 

$120 value, by the lesser of the $100 

disconformity amount and the $100 net 

positive adjustment that was applied to the 

share when held by M. Accordingly, the basis 

in the S share would be reduced by $80, to 

$120. Because the S share would not be a loss 

share after the application of paragraph (c) of 

this section, paragraph (d) of this section 

would not apply to the transfer. As a result, 

because the positive adjustment was applied 

to the share when held by M, M’s 

intercompany item is adjusted to reflect what 

it would have been had M’s basis in its S 

share been reduced by $80 immediately 

before its sale to M1. Thus, M’s intercompany 

loss is reduced to $20 and M takes this loss 

into account, and M1 recognizes a gain of 

$20. 

Example 3. Intercompany sale creates 

built-in gain stock. (i) Facts. M owns the sole 

outstanding share of stock of S with a basis 

of $0. S’s sole asset has a basis of $0. M sells 

the S share to M1 for $100 and recognizes a 

$100 intercompany gain. While owned by 

M1, S sells its asset for $100, recognizing a 

$100 gain that increases M1’s basis in the S 

share under § 1.1502–32 to $200. Later, M1 

sells the S share to X for $120. 

(ii) Analysis. M’s sale of its S share to M1 

is a transfer of the share, but this section 

applies as of the time M’s intercompany item 

is taken into account under § 1.1502–13, as 

if M and M1 were divisions of a single 

corporation. If M and M1 were divisions of 

a single corporation, the S share’s basis 

would be $100 ($0 increased by $100 for the 

gain recognized on the sale of the asset) and 

the group would recognize a $20 gain on the 

sale of the share. Thus, the sale would not 

be a transfer of a loss share and this section 

would not apply to the transfer. Accordingly, 

under this paragraph (e)(3), no portion of 

M1’s $80 loss is subject to this section. M 

takes its $100 intercompany stock gain into 

account, and M1 recognizes an $80 loss. 

Example 4. Disparate bases in members’ 

shares. (i) Facts. M holds Share A, one of the 

two outstanding shares of S stock, with a 

basis of $50 and M1 holds Share B, the other 

outstanding share of S stock with a basis of 

$0. S has $50 cash and an asset with a basis 

of $0. S sells the asset for $50, recognizing 

a $50 gain that increases M’s basis in its S 

share under § 1.1502–32 by $25 (from $50 to 

$75) and increases M1’s basis under 

§ 1.1502–32 by $25 (from $0 to $25). Later, 

M sells its Share A to M1 for $50 and 

recognizes a $25 intercompany loss. Later, 

M1 sells both S shares to X for $100. 

(ii) Analysis. M’s sale of its Share A to M1 

is a transfer of the share, but this section 

applies as of the time M’s intercompany item 

is taken into account under § 1.1502–13, as 

if M and M1 were divisions of a single 

corporation. If M and M1 were divisions of 

a single corporation, the basis of Share A 

would be $75 ($50 increased by $25 for its 

share of the gain recognized on the sale of the 

asset), the basis of Share B would be $25, and 

the group would recognize a $25 loss on the 

sale of Share A that is potentially subject to 

this section and a $25 gain on the sale of 

Share B. Thus, the sale would be a transfer 

of a loss share (to the extent of $25) and 

would be subject to this section (to the extent 

of that $25). Although the transfer is subject 

to this section, there would be no adjustment 

under paragraph (b) of this section (all S 

shares held by members are transferred to a 

nonmember in one taxable transaction). 

Thus, after the application of paragraph (b), 

Share A would still be a loss share and 

therefore subject to paragraph (c) of this 

section. Under paragraph (c)(7) of this 

section, the basis of Share A would be treated 

as reduced by the gain recognized and taken 

into account with respect to the transfer of 

Share B in the same transaction, and so Share 

A would not be a loss share for purposes of 

paragraph (c) of this section. Although the 

share would be a loss share after the 

application of paragraph (c) of this section, 

no adjustment would be required under 

paragraph (d) of this section because there 

would be no net stock loss in the transaction. 

Because no adjustment would be made under 

this section if M and M1 were divisions of 

a single corporation, M takes its $25 

intercompany stock loss into account and M1 

recognizes a gain of $25. Alternatively, if the 

group elects to apply paragraph (b) of this 

section, M’s intercompany item would be 

adjusted to reflect what it would have been 

had the $25 investment adjustment applied 

to Share A been reallocated to Share B, and 

M1’s basis in Share B would be increased by 

that amount. If so, M’s $25 intercompany loss 

would be reduced to zero, M1’s basis in 

Share B would be increased from $25 to $50, 

and there would be no gain or loss 

recognized on either share. 

Example 5. Subsidiary with built-in gain 

and built-in loss assets. (i) Facts. M owns the 

sole outstanding share of stock of S with a 

basis of $100. S has two assets, Asset 1 with 

a basis of $0 and Asset 2 with a basis of $80. 

M sells the S share to M1 for $90 and 

recognizes a $10 intercompany loss. While 

owned by M1, S sells Asset 1 for $60, 

recognizing a $60 gain that increases M1’s 

basis in the S share under § 1.1502–32 to 

$150. Later, M1 sells the S share to X for $90. 

(ii) Analysis. M’s sale of the S share to M1 

is a transfer of the share, but this section 

applies as of the time M’s intercompany item 

is taken into account under § 1.1502–13, as 

if M and M1 were divisions of a single 

corporation. If M and M1 were divisions of 

a single corporation, the S share’s basis 

would be $160 ($100 increased by $60 for the 

gain recognized on the sale of Asset 1) and 

the group would recognize a $70 loss on the 

sale of the share that is potentially subject to 

this section. Thus, the sale would be a 

transfer of a loss share (to the extent of $70) 

and would be subject to this section (to the 

extent of that $70). Although the transfer is 

subject to this section, there would be no 

adjustment under paragraph (b) of this 

section (S has only one share outstanding 

and so there is no disparity in bases of 

common shares and no unrecognized gain or 

loss with respect to preferred). Thus, after the 

application of paragraph (b), the share would 

still be a loss share and would therefore be 

subject to paragraph (c) of this section. Under 

paragraph (c) of this section, the basis in the 

S share would be reduced, but not below its 

$90 value, by the lesser of the $20 

disconformity amount ($160 stock basis over 

$140 net inside attribute amount) and the $60 

net positive adjustment that was applied to 

the share when held by M1. Accordingly, the 

basis in the S share would be reduced by $20, 

to $140. Because the S share would still be 


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a loss share after the application of paragraph 

(c) of this section, paragraph (d) of this 

section would apply to the transfer. Under 

paragraph (d) of this section, S would have 

an attribute reduction amount of $50, the 

lesser of the $50 net stock loss ($140 basis 

over $90 value) and S’s $50 aggregate inside 

loss (the excess of the sum of S’s $80 basis 

in Asset 2 and S’s $60 cash from the sale of 

Asset 1, over the $90 value of the S share). 

The adjustments required under this section 

are applied as follows: because the positive 

adjustment was applied to the share when 

held by M1, the $20 basis reduction required 

under paragraph (c) of this section is applied 

to M1’s basis in its S share immediately 

before its sale to X, reducing it from $150 to 

$130. In addition, pursuant to paragraph (d) 

of this section, S’s basis in Asset 2 is reduced 

by $50, from $80 to $30. M takes its $10 

intercompany stock loss into account and M1 

recognizes a loss of $40. 

(iii) Allocation of basis reduction. Assume 

the same facts as in paragraph (i) of this 

Example 5, except that, while S is held by 

M, S earns $30 (consuming a portion of Asset 

1) and, while S is held by M1, S earns $20 

(consuming a portion of Asset 1) and sells 

Asset 1 for $10. Thus, M’s basis in the S 

share immediately before the sale to M1 is 

$130, and M recognizes a $40 intercompany 

stock loss, and M1’s basis in the S share 

immediately before the sale to X is $120. The 

analysis regarding the application of this 

section is the same as in paragraph (ii) of this 

Example 5. On a separate entity basis, M’s 

basis in the S share would be subject to a $20 

reduction under paragraph (c) of this section 

(at the time M transferred the S share the 

share had a $30 net positive adjustment and 

a $20 disconformity amount), and M1’s basis 

in the S share would not be subject to 

reduction under paragraph (c) of this section 

(at the time M1 transferred the S share the 

share had a $30 net positive adjustment and 

a $20 negative disconformity amount). 

Therefore, the $20 basis reduction required 

under paragraph (c) of this section is 

allocated entirely to M. Accordingly, M’s 

intercompany item is adjusted to reflect what 

it would have been had the entire $20 basis 

reduction been applied to the S share while 

held by M, and M1’s basis in the S share is 

not reduced. Thus, M’s intercompany stock 

loss is reduced by $20 to $20 and M takes 

this loss into account, and M1 recognizes a 

$30 loss. S’s basis in Asset 2 is reduced by 

$50, from $80 to $30. 

(4) Limited application to multiplemember section 332 liquidations. If 

more than one member owns shares of 

S stock, paragraphs (c) and (d) of this 

section do not apply to any transfer of 

S shares resulting from a liquidation of 

S to which section 332 applies. 

(5) Form and manner of election(s) 

under this section. The elections 

provided in this section are irrevocable 

and made in the form of a statement 

titled ‘‘Section 1.1502–36 Statement.’’ 

The statement must be included on or 

with the group’s timely filed return 

(original or amended, if filed by the due 

date for the return, including 

extensions) for the taxable year of the 

transfer of the subsidiary stock to which 

the election relates or, in the case of an 

intercompany transfer, the year in 

which the intercompany item from the 

transfer is taken into account. The 

statement must include— 

(i) The name and employer 

identification number (E.I.N.) of each 

subsidiary with respect to which an 

election is being made; 

(ii) If P is electing under paragraph 

(b)(1)(ii) of this section to redetermine 

basis with respect to the transfer of 

stock of one or more subsidiaries, a 

statement that members’ bases in shares 

of [name of subsidiary or subsidiaries] 

stock are being redetermined 

notwithstanding that all members’ 

shares of [name of subsidiary or 

subsidiaries] are being transferred to one 

or more nonmembers in one fully 

taxable transaction; 

(iii) If P is electing under paragraph 

(d)(2)(ii) of this section (attribute 

reduction amount less than five percent 

of value) to apply the attribute reduction 

provisions, a statement that paragraph 

(d) of this section is being applied to the 

transfer of shares of stock of [names of 

all subsidiaries whose shares are 

transferred] notwithstanding that the 

aggregate attribute reduction amount in 

the transaction is less than five percent 

of the aggregate value of the stock of 

[names of all subsidiaries whose shares 

are transferred] transferred by members 

in the transaction; 

(iv) If P is electing under paragraph 

(d)(4)(ii)(A)(1) of this section to specify 

the allocation of the attribute reduction 

amount, a statement (for each subsidiary 

for which the election is being made) 

that the attribute reduction amount of 

[name of subsidiary] is being applied (or 

not applied) to reduce [identify the 

attributes in Category A, Category B, and 

Category C, and the amount of each, 

with respect to which the election is 

being made]; 

(v) If P is electing under paragraph 

(d)(5)(v)(B) of this section not to apply 

the conforming limitation on tier-down 

attribute reduction with respect to one 

or more subsidiaries, a statement that 

the conforming limitation in paragraph 

(d)(5)(v)(B) of this section is not being 

applied with respect to [name of 

subsidiary or subsidiaries]; 

(vi) If P is electing under paragraph 

(d)(5)(vi)(B) of this section not to restore 

lower-tier subsidiary stock basis with 

respect to one or more subsidiaries, a 

statement that members’ bases in [name 

of subsidiary or subsidiaries] is not 

being restored under paragraph 

(d)(5)(vi)(A) of this section; 

(vii) If P is electing under paragraph 

(d)(6) of this section to reattribute 

attributes, a statement (for each 

subsidiary for which the election is 

being made) that [identify the attributes 

in Category A, Category B, and Category 

C, and the amount of each or the 

amount in excess of an amount, with 

respect to which the election is being 

made] of [name of subsidiary] are being 

reattributed (or not) to P; 

(viii) If P is electing under paragraph 

(d)(6) of this section to reduce stock 

basis, a statement (for each subsidiary 

for which the election is being made) 

that members’ bases in shares of stock 

of [name of subsidiary] are being 

reduced by [specify amount or the 

amount in excess of an amount]; 

(ix) If P is electing under paragraph 

(e)(3)(ii) of this section to apply 

paragraph (e)(3) of this section to an 

intercompany transfer that occurred 

before September 17, 2008, a statement 

that paragraph (e)(3) of this section is 

being elected to apply to the transfer of 

stock of [name of subsidiary] by [name 

of transferor subsidiary] to [name of 

transferee subsidiary] on [date of 

transfer]; and 

(x) If P is electing under § 1.1502– 

96(d)(5) to reattribute to itself all or any 

part of a section 382 limitation, a 

statement that P is electing to reattribute 

a section 382 limitation with respect to 

losses of [name of subsidiary or, if two 

or more subsidiaries are members of a 

loss subgroup, the name of each 

subsidiary in the loss subgroup]. A 

separate statement is made for each 

subsidiary or loss subgroup for which 

an election is being made. Each 

statement must include— 

(A) The date of the ownership change 

giving rise to the separate section 382 

limitation or subgroup section 382 

limitation that is being apportioned; 

(B) The amount of the separate (or 

subgroup) section 382 limitation for the 

taxable year in which the reattribution 

occurs (determined without reference to 

any apportionment under this section or 

§ 1.1502–95(c)); and 

(C) The amount of each net operating 

loss carryover, capital loss carryover, or 

deferred deduction, and the year in 

which it arose, of the subsidiary (or 

subsidiaries) that is subject to the 

separate section 382 limitation or 

subgroup section 382 limitation that is 

being apportioned to the common 

parent, and the amount of the value 

element and adjustment element of that 

limitation that is apportioned to the 

common parent. 

(f) Definitions. In addition to the 

definitions in other paragraphs of this 

section and in other provisions of the 

regulations under section 1502, the 

following definitions apply for purposes 

of this section. 


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(1) Allocable portion has the same 

meaning as in § 1.1502–32(b)(4)(iii)(B). 

Thus, for example, within a class of 

stock, each share has the same allocable 

portion of the net inside attribute 

amount and, if there is more than one 

class of stock, the net inside attribute 

amount is allocated to each class by 

taking into account the terms of each 

class and all other facts and 

circumstances relating to the overall 

economic arrangement. 

(2) Deferred deduction means any 

deduction for expenses or loss that 

would be taken into account under 

general tax accounting principles as of 

the time of the transfer of the share, but 

that is nevertheless not taken into 

account immediately after the transfer 

by reason of the application of a deferral 

provision. Such provisions include, for 

example, sections 267(f) and 469, and 

§ 1.1502–13. ‘‘Deferred deduction’’ also 

includes S’s portion of such 

consolidated tax attributes, for example 

consolidated excess charitable 

contributions that would be apportioned 

to S under the principles of § 1.1502– 

79(e) if S had a separate return year. 

Additionally, it includes amounts 

equivalent to deductions, such as 

negative adjustments under section 475 

(mark to market accounting method for 

dealers in securities) and section 481 

(adjustments required by changes in 

method of accounting). 

(3) Distribution has the same meaning 

as in § 1.1502–32(b)(3)(v). 

(4) Higher-tier, lower-tier. A 

subsidiary (S1) (and its shares of stock) 

is ‘‘higher-tier’’ with respect to another 

subsidiary (S2) (and its shares of stock) 

if investment adjustments made to the 

bases of shares of S2 stock under 

§ 1.1502–32 affect the investment 

adjustments made to the bases of shares 

of S1 stock. A subsidiary (S1) (and its 

shares of stock) is ‘‘lower-tier’’ with 

respect to another subsidiary (S) (and its 

shares of stock) if investment 

adjustments made to the bases of shares 

of S1 stock affect the investment 

adjustments made to the bases of shares 

of S stock. The term lowest-tier 

subsidiary generally refers to a 

subsidiary that owns no stock of another 

subsidiary. The term highest-tier 

subsidiary generally refers to a 

subsidiary the stock of which is not 

lower tier to any shares transferred in 

the transaction. 

(5) Liability means a liability that has 

been incurred within the meaning of 

section 461(h), except to the extent 

otherwise provided in paragraph 

(d)(4)(ii)(C)(1) of this section. 

(6) Loss carryover means any net 

operating or capital loss carryover that 

is attributable to S, including any losses 

that would be apportioned to S under 

the principles of § 1.1502–21(b)(2) if S 

had a separate return year. However, 

solely for purposes of applying 

paragraph (d) of this section, loss 

carryovers do not include the amount of 

any losses waived under § 1.1502– 

32(b)(4). 

(7) Loss share, gain share. A loss 

share is a share of stock with a basis that 

exceeds its value. A gain share is a share 

of stock with a value that exceeds its 

basis. 

(8) Preferred stock, common stock. 

Preferred stock and common stock have 

the same meanings as in § 1.1502– 

32(d)(2) and (3), respectively. 

(9) Transaction includes all the steps 

taken pursuant to the same plan or 

arrangement. 

(10) Transfer—(i) Definition. Except 

as provided in paragraph (f)(10)(ii) of 

this section, for purposes of this section, 

M transfers a share of S stock on the 

earliest of— 

(A) The date that M ceases to own the 

share as a result of a transaction in 

which, but for the application of this 

section (and notwithstanding the 

deferral of any amount recognized on 

the transfer, other than by reason of 

§ 1.1502–13), M would recognize 

income, gain, loss or deduction with 

respect to the share (see paragraph (e)(3) 

of this section in the case of a transfer 

in an intercompany transaction); 

(B) The date that M and S cease to be 

members of the same group; 

(C) The date that a nonmember 

acquires the share from M; and 

(D) The last day of the taxable year 

during which the share becomes 

worthless under section 165 (taking into 

account the provisions of § 1.1502– 

80(c)) if the share is treated as a capital 

asset, or the date the share becomes 

worthless (taking into account the 

provisions of § 1.1502–80(c)) if the share 

is not treated as a capital asset. 

(ii) Excluded transactions. 

Notwithstanding paragraph (f)(10)(i) of 

this section, M does not transfer a share 

of S stock if— 

(A) M ceases to own the share as a 

result of a transaction to which section 

381(a) applies and in which either a 

member acquires assets from S or S 

acquires assets from M, provided that— 

(1) M recognizes no income, gain, 

loss, or deduction with respect to the 

share, and 

(2) If the transaction is a liquidation 

to which section 332 applies, M is the 

only member that owns shares of S 

stock (if another member owns shares of 

S stock, see paragraph (e)(4) of this 

section for a limitation on the 

application of this section); or 

(B) M ceases to own the share as a 

result of a distribution of the share to a 

nonmember in a transaction to which 

section 355 applies, and in which the 

share is treated as qualified property for 

purposes of section 355(c) or section 

361(c). 

(11) Value means the amount 

realized, if any, or otherwise the fair 

market value. 

(g) Anti-abuse rule—(1) General rule. 

If a taxpayer acts with a view to avoid 

the purposes of this section or to apply 

the rules of this section to avoid the 

purposes of any other rule of law, 

appropriate adjustments will be made to 

carry out the purposes of this section or 

such other rule of law. 

(2) Examples. The following examples 

illustrate the principles of the anti-abuse 

rule in this paragraph (g). No 

implication is intended regarding the 

potential applicability of any other antiabuse rules: 

Example 1. Loss Trafficking. (i) Facts. M 

purchases the sole outstanding share of S 

stock for $100. At that time, S owns Asset 1 

with a basis of $0. S sells Asset 1 for $100. 

Later, S purchases the sole outstanding share 

of X stock, a corporation with losses, with a 

view to liquidating X in a transaction to 

which section 332 applies in order to reduce 

S’s disconformity amount. S purchases the X 

share for $1, and X has a $100 NOL and an 

asset with a basis of $1. Subsequently, M 

sells its S share for $100. After taking into 

account the effects of all applicable rules of 

law, M’s basis in the S share is $200 (M’s 

original $100 basis, increased under 

§ 1.1502–32 to reflect the $100 gain 

recognized on the sale of Asset 1). M’s sale 

of the S share is a transfer of a loss share and 

therefore subject to this section. 

(ii) Analysis. Although M’s transfer of the 

S share is subject to this section, there is no 

adjustment under paragraph (b) of this 

section (S has only one share outstanding 

and so there is no disparity in bases of 

common shares and no shares of S preferred 

stock outstanding (and so there is no 

unrecognized gain or loss on S preferred 

stock)). See paragraph (b)(1)(ii)(A) of this 

section. Accordingly, after the application of 

paragraph (b) of this section, M’s sale of the 

S share is still a transfer of a loss share and 

therefore subject to paragraph (c) of this 

section. Under paragraph (c) of this section, 

M’s $200 basis in the S share is reduced, but 

not below the share’s $100 value, by the 

lesser of the share’s net positive adjustment 

and disconformity amount. The share’s net 

positive adjustment is $100, the positive 

adjustment attributable to the gain 

recognized on the sale of Asset 1. The share’s 

disconformity amount is $0, the excess of M’s 

$200 basis in the S share over S’s $200 net 

inside attribute amount. Thus, the reduction 

to basis under paragraph (c) of this section 

would be $0. However, because S purchased 

the X stock and liquidated X with a view to 

avoiding the purposes of this section (by 

using X’s attributes to minimize the 

disconformity amount of the S share), the 


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attributes acquired from X are disregarded for 

purposes of applying this section. 

Accordingly, S’s net inside attribute amount 

is limited to the $100 of attributes S would 

have had absent the purchase of the X stock, 

S’s money ($100 from the sale of Asset 1). 

The loss share’s disconformity amount is 

therefore the excess of $200 over $100, or 

$100. The lesser of the share’s $100 net 

positive adjustment and $100 disconformity 

amount is $100. As a result, M’s $200 basis 

in the S share is reduced by $100, to $100, 

and M recognizes no gain or loss on the sale 

of the S share. 

Example 2. Use of a partnership to prevent 

current attribute reduction. (i) Facts. M owns 

all 5 outstanding shares of S common stock 

with a basis of $200 each. S owns Asset 1 

with a basis of $1000. In year 1, with a view 

to preventing a current reduction in the basis 

of Asset 1, S contributes Asset 1 to a 

partnership in a transaction in which S 

recognizes no gain or loss. On December 31, 

year 2, M sells one S share for $20. After 

taking into account the effects of all 

applicable rules of law, M’s basis in each S 

share is $200. M’s sale of the S share is a 

transfer of a loss share and therefore subject 

to this section. 

(ii) Analysis. Although M’s transfer of the 

S share is subject to this section, there is no 

basis redetermination under paragraph (b) of 

this section because there is no disparity 

among M’s bases in its shares of S common 

stock and there are no shares of S preferred 

stock outstanding (and so there is no 

unrecognized gain or loss on S preferred 

stock). See paragraph (b)(1)(ii)(A) of this 

section. Accordingly, after the application of 

paragraph (b) of this section, M’s sale of the 

S share is still a transfer of a loss share and 

therefore subject to paragraph (c) of this 

section. However, no adjustment is required 

under paragraph (c) of this section because 

both the disconformity amount and the net 

positive adjustment are $0. See paragraph 

(c)(3) of this section. Under paragraph (d) of 

this section, S’s attribute reduction amount is 

$180 (the lesser of the $180 net stock loss and 

S’s $900 aggregate inside loss ($1000 of 

attributes over $100 value of all of the S 

shares)). Absent the application of this 

paragraph (g), the $180 attribute reduction 

amount would be applied to reduce S’s basis 

in the partnership interest. However, because 

S acted with a view to avoiding a current 

reduction in the basis of Asset 1 under 

paragraph (d) of this section, this section is 

applied by treating S as if it held Asset 1 at 

the time of the stock sale. The basis of Asset 

1 is reduced by $180, to $820, effective 

immediately before the transfer to the 

partnership and, as a result, S’s basis in its 

partnership interest is $820. 

Example 3. Creation of an intercompany 

receivable to mitigate attribute reduction. (i) 

Facts. M owns all five outstanding shares of 

S common stock each with equal basis that 

exceeds value. S holds cash and Asset 1 with 

a basis that exceeds value. In year 1, with a 

view to mitigating a reduction in the basis of 

Asset 1, S lends the cash to M1. Asset 1 and 

the intercompany note received from M1 are 

assets of the same class under § 1.338–6(b)(2). 

On December 31, year 2, M sells one of its 

S shares and, without regard to this section, 

recognizes a loss. M’s sale of the S share is 

a transfer of a loss share and therefore subject 

to this section. 

(ii) Analysis. Although M’s transfer of the 

S share is subject to this section, no 

adjustment is required under paragraph (b) of 

this section because there is no disparity 

among M’s bases in shares of S common 

stock and there are no shares of S preferred 

stock outstanding (and so there is no 

unrecognized gain or loss on S preferred 

stock). See paragraph (b)(1)(ii)(A) of this 

section. Accordingly, after the application of 

paragraph (b) of this section, M’s sale of the 

S shares is still a transfer of a loss share and 

therefore subject to paragraph (c) of this 

section. However, there is no adjustment 

under paragraph (c) of this section because 

the net positive adjustment is $0. See 

paragraph (c)(3) of this section. Under 

paragraph (d) of this section, S’s attribute 

reduction amount would be applied to 

reduce S’s basis in Asset 1 and the 

intercompany receivable in proportion to 

basis. However, because S acted with a view 

to mitigating the reduction in the basis of 

Asset 1 under paragraph (d) of this section, 

this section is applied without regard to the 

intercompany receivable. Accordingly, S’s 

basis in Asset 1 is reduced by the full 

attribute reduction amount. 

Example 4. Use of a partnership to reduce 

net stock loss. (i) Facts. M owns all ten 

outstanding shares of S common stock, one 

share (Share 1) has a basis of $0, and one 

share (Share 2) has a basis of $160. S has an 

aggregate inside loss of $80. In one 

transaction and with a view to mitigating a 

reduction in S’s attributes, M contributes 

Share 1 to a partnership, recognizing no gain 

or loss, and sells Share 2 for $80. M’s 

contribution of Share 1 to the partnership is 

a transfer, but the share is not a loss share 

and so the transfer is not subject to this 

section. M’s sale of Share 2 is a transfer of 

a loss share and is therefore subject to this 

section. 

(ii) Analysis. Although M’s transfer of 

Share 2 is subject to this section, there is no 

adjustment under paragraph (b) of this 

section because there are no investment 

adjustments that have been applied to the 

shares. Accordingly, after the application of 

paragraph (b) of this section, M’s sale of 

Share 2 is still a transfer of a loss share and 

therefore subject to paragraph (c) of this 

section. There is no adjustment under 

paragraph (c) of this section because the net 

positive adjustment is $0. See paragraph 

(c)(3) of this section. Accordingly, after the 

application of paragraph (c) of this section, 

M’s sale of Share 2 is still a transfer of loss 

shares and therefore subject to paragraph (d) 

of this section. Under paragraph (d) of this 

section, the net stock loss would be 

determined to be $0, the excess of the $160 

aggregate basis in all of the transferred shares 

over the $160 aggregate value of those shares. 

S’s attribute reduction amount would be 

determined to be $0, the lesser of the $0 net 

stock loss and S’s $80 aggregate inside loss. 

Thus, there would be no reduction of 

attributes under this paragraph (d) of this 

section. However, because M acted with a 

view to reducing the attribute reduction 

amount by transferring a gain share to a 

partnership while avoiding the recognition of 

the gain on the share, this section is applied 

without regard to the transfer of the gain 

share. Accordingly, the net stock loss is 

determined to be $80, and the attribute 

reduction amount is determined to be $80. 

Example 5. Stuffing gain asset. (i) Facts. M 

owns the sole outstanding share of S stock 

(Share 1) with a basis of $100. S owns Asset 

1 a basis of $100 and a value of $20. With 

a view to avoid the purposes of this section, 

M transfers Asset 2 with a basis of $0 and a 

value of $80 to S in exchange for four 

additional shares of S stock (Share 2 through 

Share 5) in a transaction to which section 351 

applies. M later sells Share 1 to X for $20. 

M’s sale of Share 1 is a transfer of a loss share 

and therefore subject to this section. 

(ii) Analysis. Although M’s transfer of the 

Share 1 is subject to this section, there is no 

adjustment under paragraph (b) of this 

section because no investment adjustments 

have been applied to the basis of any S 

shares. Thus, after the application of 

paragraph (b) of this section, M’s sale of the 

S share is still a transfer of a loss share and 

therefore subject to paragraph (c) of this 

section. There is no adjustment under 

paragraph (c) of this section because the net 

positive adjustment is $0. Accordingly, after 

the application of paragraph (c) of this 

section, M’s sale of the S share is still a 

transfer of a loss share and therefore subject 

to paragraph (d) of this section. Under 

paragraph (d) of this section, S’s attribute 

reduction amount would be $0, the lesser of 

the $80 net stock loss and S’s $0 aggregate 

inside loss ($100 of attributes does not 

exceed the $100 value of all of the S shares). 

However, because M transferred Asset 2 to S 

with a view to avoid the purposes of this 

section, the application of this section to M’s 

transfer of Share 1 is made without regard to 

the transfer of Asset 2. Accordingly, under 

paragraph (d) of this section, S’s attribute 

reduction amount is $80, the lesser of the $80 

net stock loss and S’s $80 aggregate inside 

loss (computed without regard to Asset 2). 

S’s basis in Asset 1 is therefore reduced by 

$80, from $100 to $20, under paragraph (d) 

of this section. 

(iii) Transfer of all S shares. Assume the 

same facts as in paragraph (i) of this Example 

5, except that M sells all five S shares to X, 

recognizing both the gain and the loss on the 

S shares. The transfer of Share 1 is still a 

transfer of a loss share and therefore subject 

to this section. However, because all the 

shares are transferred the group’s income is 

clearly reflected. Therefore, the purposes of 

this section are not avoided and this section 

applies without modification. S’s attribute 

reduction amount is $0, the lesser of the $0 

net stock loss and S’s $0 aggregate inside 

loss. 

(h) Effective/applicability date. This 

section applies to transfers of shares of 

subsidiary stock on or after September 

17, 2008 unless the transfer was made 

pursuant to a binding agreement that 

was in effect prior to September 17, 

2008 and at all times thereafter. For 

transfers of shares of subsidiary stock 

that are not subject to this section, see 

§§ 1.337(d)–2 and 1.1502–35. 


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■ Par. 19. Section 1.1502–75 is 

amended by: 

■ 1. Revising paragraph (d)(1). 

■ 2. Adding paragraph (l). 

The revision and addition read as 

follows: 

§ 1.1502–75 Filing of consolidated returns. 

* * * * * 

(d) When a group remains in 

existence—(1) General rule. A group 

remains in existence for a tax year if the 

common parent remains as the common 

parent and at least one subsidiary that 

was affiliated with it at the end of the 

prior year remains affiliated with it at 

the beginning of the year, whether or 

not one or more corporations have 

ceased to be subsidiaries at any time 

after the group was formed. Thus, for 

example, assume that corporation P 

acquires the sole outstanding share of 

stock of S on January 1, year 1, and that 

P and S file a consolidated return for the 

year 1 calendar year. On May 1, year 2, 

P acquires the sole outstanding share of 

stock of S1 and, on July 1, year 2, P sells 

the S share. The group (consisting 

originally of P and S) remains in 

existence in year 2 because P remained 

the common parent and, S, a subsidiary 

that was affiliated with P at the end of 

year 1, remained affiliated with P at the 

beginning of year 2. 

* * * * * 

(l) Effective/applicability dates. 

Paragraph (d)(1) of this section applies 

to taxable years for which the due date 

of the original return (without regard to 

extensions) is on or after September 17, 

2008. 

■ Par. 20. Section 1.1502–80 is 

amended by: 

■ 1. Revising paragraph (a) and (c)(2). 

■ 2. Adding paragraph (h). 

The revisions and addition reads as 

follows: 

§ 1.1502–80 Applicability of other 

provisions of law. 

(a) In general—(1) Application of 

other provisions. The Internal Revenue 

Code (Code), or other law, shall be 

applicable to the group to the extent the 

regulations do not exclude its 

application. To the extent not excluded, 

other rules operate in addition to, and 

may be modified by, these regulations. 

Thus, for example, in a transaction to 

which section 381(a) applies, the 

acquiring corporation will succeed to 

the tax attributes described in section 

381(c). Furthermore, sections 269 and 

482 apply for any consolidated return 

year. However, in a recognition 

transaction otherwise subject to section 

1001, for example, the rules of section 

1001 continue to apply, but may be 

modified by the intercompany 

transaction regulations under § 1.1502– 

13. 

(2) No duplicative adjustments. 

Nothing in these regulations shall be 

interpreted or applied to require an 

adjustment, inclusion, or other item to 

the extent it would have the effect of 

duplicating any other adjustment, 

inclusion, or other item required under 

the Code or other rule of law, including 

other provisions of these regulations. 

(3) Application of single-entity 

principles. If two or more adjustments, 

inclusions, or other items are subject to 

paragraph (a)(2) of this section, the 

determination of which adjustment, 

inclusion, or other item is treated as 

applied or taken into account is made 

by taking into account the purposes of 

the provisions and applying singleentity principles as appropriate. 

(4) Effective/applicability dates. This 

paragraph (a) is applicable with respect 

to transactions and determinations on or 

after September 17, 2008. 

* * * * * 

(c) * * * 

(2) Cross reference. See § 1.1502–36 

for additional rules relating to 

worthlessness of subsidiary stock on or 

after September 17, 2008. 

* * * * * 

(h) Non-applicability of section 

362(e)(2)—(1) General rule. Section 

362(e)(2) does not apply to any 

intercompany transaction occurring on 

or after September 17, 2008. Taxpayers 

may apply this paragraph (h) to 

intercompany transactions occurring on 

or after October 22, 2004, and in such 

case, any election made under section 

362(e)(2)(C) will have no effect. The 

purpose of this paragraph (h) is to 

facilitate the application of the 

consolidated return provisions 

addressing the duplication of loss 

between members of a consolidated 

group. 

(2) Anti-abuse rule—(i) General rule. 

If a taxpayer engages in a transaction to 

which section 362(e)(2) would apply but 

for the application of paragraph (h)(1) of 

this section, and acts with a view to 

prevent the consolidated return 

provisions from properly addressing 

loss duplication, appropriate 

adjustments will be made to clearly 

reflect the income of the group. 

(ii) Example. The following example 

illustrates the principle of the anti-abuse 

rule in this paragraph (h)(2). 

Example. (A) Facts. P, the common parent 

of a consolidated group, owns the four 

outstanding shares of S stock (Share 1 

through Share 4) with an aggregate basis of 

$0 and value of $80. S owns Asset 1 with a 

basis of $0 and a value of $80. With a view 

to prevent the consolidated return provisions 

from addressing the duplication of loss, P 

transfers Asset 2 with a basis of $100 and a 

value of $20 to S in exchange for an 

additional share of S stock (Share 5) in a 

transaction to which section 351 applies. P 

later sells Share 5 to X, an unrelated person, 

for $20 at a time when S’s basis in Asset 2 

was still $100. The sale is a transfer of a loss 

share and therefore subject to § 1.1502–36. 

(B) Analysis. Although the sale would be 

subject to § 1.1502–36, that section would not 

prevent the stock loss or reduce S’s attributes 

(to prevent duplication of the stock loss) 

because neither § 1.1502–36(b) nor § 1.1502– 

36(c) would adjust the basis of the transferred 

share (because there are no investment 

adjustments) and § 1.1502–36(d) would not 

reduce S’s attributes (because S’s aggregate 

inside loss is $0). However, because P acted 

with a view to prevent the consolidated 

return provisions from addressing the 

duplication of the loss on Asset 2, P’s transfer 

of Asset 2 to S is subject to the anti-abuse 

rule in this paragraph (h)(2). Accordingly, 

effective immediately before the transfer of 

Share 5 to X, either P’s basis in Share 5 or 

S’s basis in Asset 2 must be adjusted to 

reflect what it would have been had section 

362(e)(2) been applied at the time P 

transferred Asset 2 to S (taking into account 

the interim facts and circumstances). 

Accordingly, S must either reduce its basis in 

Asset 2 by $80 to $20 (eliminating the 

duplicated loss) or P must reduce its basis in 

Share 5 by $80 to $20 (eliminating the 

duplicated loss). 

(C) Transfer of all S shares. Assume the 

same facts as those in paragraph (A) of this 

Example, except that P sells all five S shares 

to X. Although P’s transfer of Asset 2 to S 

results in the duplication of an $80 loss, 

because all the shares are transferred, the 

transaction does not prevent the consolidated 

return provisions from properly addressing 

loss duplication. P’s $80 duplicated loss is 

offset by an $80 duplicated gain, and the 

group recognizes the offsetting stock gain and 

loss. Accordingly, this paragraph (h)(2) does 

not apply to P’s transfer of Asset 2 to S. 

■ Par. 21. Section 1.1502–91 is 

amended by revising paragraph (h)(2) to 

read as follows: 

§ 1.1502–91 Application of section 382 

with respect to a consolidated group. 

* * * * * 

(h) * * * 

(2) Disposition of stock or an 

intercompany obligation of a member. 

Gain or loss recognized by a member on 

the disposition of stock (including stock 

described in section 1504(a)(4) and 

§ 1.382–2T(f)(18)(ii) and (iii)) of another 

member is treated as a recognized gain 

or loss for purposes of section 382(h)(2) 

(unless disallowed) even though gain or 

loss on such stock was not included in 

the determination of a net unrealized 

built-in gain or loss under paragraph 

(g)(1) of this section. Gain or loss 

recognized by a member with respect to 

an intercompany obligation is treated as 

recognized gain or loss only to the 

extent (if any) the transaction gives rise 


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Federal Register / Vol. 73, No. 181 / Wednesday, September 17, 2008 / Rules and Regulations 53985 

to aggregate income or loss within the 

consolidated group. The first sentence 

of this paragraph (h)(2) is applicable on 

or after September 17, 2008. 

* * * * * 

■ Par. 22. Section 1.1502–95 is 

amended by revising paragraph (d)(3), 

Example 6 to read as follows: 

§ 1.1502–95 Rules on ceasing to be a 

member of a consolidated group (or loss 

subgroup). 

* * * * * 

(d) * * * 

(3) * * * 

Example 6. Reattribution of net operating 

loss carryover under § 1.1502–36(d)(6). The 

facts are the same as in Example 3, except 

that, instead of distributing the L2 stock to 

M, P sells that stock to B, and, under 

§ 1.1502–36(d)(6), M reattributes $10 of L2’s 

net operating loss carryover to itself. Under 

§ 1.1502–36(d)(6)(iv)(A), M succeeds to the 

reattributed loss as if the loss were succeeded 

to in a transaction to which section 381(a) 

applies. M, as successor to L2, does not cease 

to be a member of the P loss subgroup. 

* * * * * 

■ Par. 23. Section 1.1502–96 is 

amended by revising paragraph (d) to 

read as follows: 

§ 1.1502–96 Miscellaneous rules. 

* * * * * 

(d) Losses reattributed under 

§ 1.1502–36(d)(6)—(1) In general. This 

paragraph (d) contains rules relating to 

net operating carryovers, capital loss 

carryovers, and deferred deductions 

(collectively, loss or losses) that are 

reattributed to the common parent 

under § 1.1502–36(d)(6). References in 

this paragraph (d) to a subsidiary are 

references to the subsidiary (or lowertier subsidiary) whose loss is 

reattributed to the common parent. 

(2) Deemed section 381(a) transaction. 

Under § 1.1502–36(d)(6)(iv)(A), the 

common parent succeeds to the 

reattributed losses as if the losses were 

succeeded to in a transaction to which 

section 381(a) applies. In general, 

§§ 1.1502–91 through 1.1502–95, this 

section, and § 1.1502–98 are applied to 

the reattributed losses in accordance 

with that characterization. See 

generally, § 1.382–2(a)(1)(ii) (relating to 

distributor or transferor loss 

corporations in transactions under 

section 381), § 1.1502–1(f)(4) (relating to 

the definition of predecessor and 

successor) and § 1.1502–91(j) (relating to 

predecessor and successor 

corporations). For example, if the 

reattributed loss is a pre-change 

attribute subject to a section 382 

limitation, it remains subject to that 

limitation following the reattribution. In 

certain cases, the limitation applicable 

to the reattributed loss is zero unless the 

common parent apportions all or part of 

the limitation to itself. (See paragraph 

(d)(4) of this section.) 

(3) Rules relating to owner shifts—(i) 

In general. Any owner shift of the 

subsidiary (including any deemed 

owner shift resulting from section 

382(g)(4)(D) or 382(l)(3)) in connection 

with the disposition of the stock of the 

subsidiary is not taken into account in 

determining whether there is an 

ownership change with respect to the 

reattributed loss. However, any owner 

shift with respect to the successor 

corporation that is treated as continuing 

in existence under § 1.382–2(a)(1)(ii) 

must be taken into account for such 

purpose if such owner shift is effected 

by the reattribution and an owner shift 

of the stock of the subsidiary not held 

directly or indirectly by the common 

parent would have been taken into 

account if such shift had occurred 

immediately before the reattribution. 

See paragraph (d)(3)(ii) Example 2 of 

this section. 

(ii) Examples. The following 

examples illustrate the principles of this 

paragraph (d)(3): 

Example 1. No owner shift for reattributed 

loss. (i) Facts. P, the common parent of a 

consolidated group, owns 60% of the stock 

of L, and B owns the remaining 40%. L has 

a net operating loss carryover of $100 from 

year 1 that it carries over to years 2, 3, and 

4. At the beginning of year 2, P purchases 

40% of the L stock from B, which does not 

cause an ownership change of L. On 

December 31, year 3, P sells all of the L stock 

to M. Pursuant to § 1.1502–36(d)(6), P 

reattributes $10 of L’s $100 net operating loss 

carryover to itself, and L carries $90 of its net 

operating loss carryover to its year 4. 

(ii) Analysis. The sale of the L stock to M 

does not cause an owner shift that is taken 

into account in determining if there is an 

ownership change with respect to the $10 

reattributed loss. Following the reattribution, 

§ 1.1502–94(b) continues to apply to 

determine if there is an ownership change 

with respect to the $10 reattributed loss, 

until, under paragraph (a) of this section, the 

loss is treated as described in § 1.1502– 

91(c)(1)(i). In applying § 1.1502–94(b), the 40 

percentage point increase by the P 

shareholders prior to the reattribution is 

taken into account. The sale of the L stock 

to M does cause an ownership change of L 

with respect to the $90 of its net operating 

loss that it carries over to year 4. 

Example 2. Owner shift for reattributed 

loss. The facts are the same as in Example 1, 

except that P only purchases 20% of the L 

stock from B and sells 80% of the L stock to 

M. L is a new loss member, and, under 

§ 1.1502–94(b)(1), an owner shift of the stock 

of L not held directly or indirectly by the 

common parent (the 20% of L stock still held 

by B) would have been taken into account if 

such shift had occurred immediately before 

the reattribution. Following the reattribution, 

§ 1.1502–94(b) continues to apply to 

determine if there is an ownership change 

with respect to the $10 reattributed loss, 

until, under paragraph (a) of this section, the 

loss is treated as described in § 1.1502– 

91(c)(1)(i). With respect to the $10 

reattributed loss, the P shareholders have 

increased their percentage ownership interest 

by 40 percentage points. The P shareholders 

have increased their ownership interests by 

20 percentage points as a result of P’s 

purchase of stock from B, and, under § 1.382– 

2(a)(1)(ii), are treated as increasing their 

interests by an additional 20 percentage 

points as a result of the reattribution. (The 

acquisition of the L stock by M does not, 

however, effect an owner shift for the $10 of 

reattributed loss.) The sale of the L stock to 

M causes an ownership change of L with 

respect to the $90 of net operating loss that 

L carries over to Year 4. 

(4) Rules relating to the section 382 

limitation—(i) Reattributed loss is a prechange separate attribute of a new loss 

member. If the reattributed loss is a prechange separate attribute of a new loss 

member that is subject to a separate 

section 382 limitation prior to the 

disposition of subsidiary stock, the 

common parent’s limitation with 

respect to that loss is zero, except to the 

extent that the common parent 

apportions to itself, under paragraph 

(d)(5) of this section, all or part of such 

limitation. A separate section 382 

limitation is the limitation described in 

§ 1.1502–94(b) that applies to a prechange separate attribute. 

(ii) Reattributed loss is a pre-change 

subgroup attribute. If the reattributed 

loss is a pre-change subgroup attribute 

subject to a subgroup section 382 

limitation prior to the disposition of 

subsidiary stock, and, immediately after 

the reattribution, the common parent is 

not a member of the loss subgroup, the 

section 382 limitation with respect to 

that loss is zero, except to the extent 

that the common parent apportions to 

itself, under paragraph (d)(5) of this 

section, all or part of the subgroup 

section 382 limitation. See, however, 

§ 1.1502–95(d)(3) Example 6, for an 

illustration of a case where the common 

parent, as successor to the subsidiary, is 

a member of the loss subgroup 

immediately after the reattribution. 

(iii) Potential application of section 

382(l)(1). In general, the value of the 

stock of the common parent is used to 

determine the section 382 limitation for 

an ownership change with respect to the 

reattributed loss that occurs at the time 

of, or after, the reattribution. For 

example, if the loss is a pre-change 

consolidated attribute, the value of the 

stock of the common parent is used to 

determine the section 382 limitation, 

and no adjustment to that value is 

required because of the deemed section 


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53986 Federal Register / Vol. 73, No. 181 / Wednesday, September 17, 2008 / Rules and Regulations 

381(a) transaction. However, if the loss 

is a pre-change separate attribute of a 

new loss member (or is a pre-change 

attribute of a loss subgroup member and 

the common parent was not the loss 

subgroup parent immediately before the 

reattribution), the deemed section 381(a) 

transaction is considered to constitute a 

capital contribution with respect to the 

new loss member (or loss subgroup 

member) for purposes of section 

382(l)(1). Accordingly, if that section 

applies because the deemed capital 

contribution is (or is considered under 

section 382(l)(1)(B) to be) part of a plan 

described in section 382(l)(1)(A), the 

value of the stock of the common parent 

after the deemed section 381(a) 

transaction must be adjusted to reflect 

the capital contribution. Ordinarily, this 

will require the value of the stock of the 

common parent to be reduced to an 

amount that represents the value of the 

stock of the subsidiary (or loss subgroup 

of which the subsidiary was a member) 

when the reattribution occurred. 

(iv) Duplication or omission of value. 

In determining any section 382 

limitation with respect to the 

reattributed loss and with respect to 

other pre-change losses, appropriate 

adjustments must be made so that value 

is not improperly omitted or duplicated 

as a result of the reattribution. For 

example, if the subsidiary has an 

ownership change upon its departure, 

and the common parent (as successor) 

has an ownership change with respect 

to the reattributed pre-change separate 

attribute upon its reattribution under 

paragraph (d)(3)(i) of this section, 

proper adjustments must be made so 

that the value of the subsidiary is not 

taken into account more than once in 

determining the section 382 limitation 

for the reattributed loss and the loss that 

is not reattributed. 

(v) Special rule for continuity of 

business requirement. If the reattributed 

loss is a pre-change attribute of new loss 

member and the reattribution occurs 

within the two-year period beginning on 

the change date, then, starting 

immediately after the reattribution, the 

continuity of business requirement of 

section 382(c)(1) is applied with respect 

to the business enterprise of the 

common parent. Similar principles 

apply if the reattributed loss is a prechange subgroup attribute and, on the 

day after the reattribution, the common 

parent is not a member of the loss 

subgroup. 

(5) Election to reattribute section 382 

limitation—(i) Effect of election. The 

common parent may elect to apportion 

to itself all or part of any separate 

section 382 limitation or subgroup 

section 382 limitation to which the loss 

is subject immediately before the 

reattribution. However, no net 

unrealized built-in gain of the member 

(or loss subgroup) whose loss is 

reattributed can be apportioned to the 

common parent. The principles of 

§ 1.1502–95(c) apply to the 

apportionment, treating, as the context 

requires, references to the former 

member as references to the common 

parent, and references to the 

consolidated section 382 limitation as 

references to the separate section 382 

limitation (or subgroup section 382 

limitation) that is being apportioned. 

Thus, for example, the common parent 

can reattribute to itself all or part of the 

value element or adjustment element of 

the limitation, and any part of such 

element that is apportioned requires a 

corresponding reduction in such 

element of the separate section 382 

limitation of the subsidiary whose loss 

is reattributed (or in the subgroup 

section 382 limitation if the reattributed 

loss is a pre-change subgroup attribute). 

Appropriate adjustments must be made 

to the separate section 382 limitation (or 

subgroup section 382 limitation) for the 

consolidated return year in which the 

reattribution is made to reflect that the 

reattributed loss is an attribute acquired 

by the common parent during the year 

in a transaction to which section 381(a) 

applies. The election is made by the 

common parent as part of the election 

to reattribute the loss. See § 1.1502– 

36(e)(5)(x) for the time and manner of 

making the election. 

(ii) Examples. The following 

examples illustrate the principles of this 

paragraph (d)(5): 

Example 1. Consequence of 

apportionment. (i) Facts. P, the common 

parent of a consolidated group, purchases all 

of the stock of L on December 31, year 1. L 

carries over a net operating loss arising in 

year 1 to each of the next 5 taxable years. The 

purchase of the L stock causes an ownership 

change of L, and results in a separate section 

382 limitation of $10 for L’s net operating 

loss carryover based on the value of the L 

stock. On July 2, year 3, P sells 30% of the 

L stock to A. Under § 1.1502–36(d)(6), P 

elects to reattribute to itself $110 of L’s $200 

net operating loss carryover. P also elects to 

apportion to itself $6 of the $10 value 

element of the separate section 382 

limitation. 

(ii) Analysis. (A) P’s separate section 382 

limitation. For the consolidated return years 

ending after December 31, year 3, P’s separate 

section 382 limitation with respect to the 

reattributed net operating loss carryover is 

$6, adjusted as appropriate for any short 

taxable year, unused section 382 limitation, 

or other adjustment. For the P group’s 

consolidated return year ending December 

31, year 3, the separate section 382 limitation 

for L’s net operating loss carryover is $8, the 

sum of $5 and $3. Five dollars of the 

limitation is the amount that bears the same 

relationship to $10 as the number of days in 

the period ending with the deemed section 

381(a) transaction, 183 days, bears to 365. 

Three dollars of the limitation is the amount 

that bears the same relationship to $6 as the 

number of days in the period between July 

3 and December 31, 182, bears to 365. 

(B) L’s separate section 382 limitation. For 

L’s taxable years ending after December 31, 

year 3, L’s separate section 382 limitation for 

its $90 of net operating loss carryover that 

was not reattributed to P is $4, adjusted as 

appropriate for any short taxable year, 

unused section 382 limitation, or other 

adjustment. For L’s short taxable year ending 

December 31, year 3, the section 382 

limitation for its $90 of net operating loss 

carryover is $2, the amount that bears the 

same relationship to $4 (the portion of the 

value element that was not apportioned to P), 

as the number of days during the short 

taxable year, 182 days, bears to 365. See 

§ 1.382–5(c). 

Example 2. No apportionment required for 

consolidated pre-change attribute. (i) Facts. 

P, the common parent of a consolidated 

group, forms L. For year 1, L has an operating 

loss of $70 that is not absorbed and is 

included in the group’s consolidated net 

operating loss that is carried over to 

subsequent years. On January 1 of year 3, A 

buys all of the P stock and the P group has 

an ownership change. The consolidated 

section 382 limitation based on the value of 

the P stock is $10. 

(ii) Analysis. On April 13 of year 4, P sells 

all of the stock of L to B and, under § 1.1502– 

36(d)(6), elects to reattribute to itself $45 of 

L’s net operating loss carryover. Following 

the reattribution, the $45 portion of the year 

1 net operating loss carryover retains its 

character as a pre-change consolidated 

attribute, and remains subject to so much of 

the $10 consolidated section 382 limitation 

as P does not elect to apportion to L under 

§ 1.1502–95(c). 

* * * * * 

■ Par. 24. Section 1.1502–99 is 

amended by revising the section 

heading and paragraph (b)(4) to read as 

follows: 

§ 1.1502–99 Effective/applicability dates. 

* * * * * 

(b) * * * 

(4) Reattribution of losses under 

§ 1.1502–36(d)(6). Section 1.1502–96(d) 

applies to reattributions of net operating 

loss carryovers, capital loss carryovers, 

and deferred deductions in connection 

with a transfer of stock to which 

§ 1.1502–36 applies, and the election 

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

election to reattribute section 382 

limitation) can be made with an election 

under § 1.1502–36(d)(6) to reattribute a 

loss to the common parent that is filed 

at the time and in the manner provided 

in § 1.1502–36(e)(5)(x). 

* * * * * 

■ Par. 25. For each section listed in the 

tables, remove the language in the 


jlentini on PROD1PC65 with RULES2
Federal Register / Vol. 73, No. 181 / Wednesday, September 17, 2008 / Rules and Regulations 53987 

‘‘Remove’’ column and add in its place the language in the ‘‘Add’’ column as set 

forth below: 

Section Remove Add 

§ 1.267(f)–1(k) .................................................... For additional rules applicable to the disposition or deconsolidation of the stock of members of consolidated groups, see 

§§ 1.337(d)–2, 1.1502–13(f)(6), and 

1.1502–35..

For additional rules applicable to the disposition, deconsolidation, or transfer of the 

stock of members of consolidated groups, 

see §§ 1.337(d)–2, 1.1502–13(f)(6), 1.1502– 

35, and 1.1502–36. 

§ 1.597–4(g)(2)(v), second parenthetical ........... §§ 1.337(d)–2 and 1.1502–35(f) ...................... § 1.337(d)–2, § 1.1502–35(f), and § 1.1502– 

36. 

§ 1.1502–11(b)(3)(ii), paragraph (c) in Example §§ 1.337(d)–2 and 1.1502–35 .......................... §§ 1.337(d)-2, 1.1502–35, and 1.1502–36. 

§ 1.1502–12(r) .................................................... §§ 1.337(d)–2 and 1.1502–35(f) for rules relating to basis adjustments and allowance of 

stock loss on dispositions of stock of a subsidiary member.

§§ 1.337(d)–2, 1.1502–35, and 1.1502–36 for 

rules relating to basis adjustments and allowance of stock loss on dispositions or 

transfers of subsidiary stock. 

§ 1.1502–15(b)(2)(iii) .......................................... §§ 1.337(d)–2, 1.1502–35, or ........................... § 1.337(d)–2, § 1.1502–35, § 1.1502–36, or 

§ 1.1502–21(b)(2)(iv)(B)(2)(i) .............................. (b)(2)(iv)(B)(2)(iv) ............................................. (b)(2)(iv)(B)(2)(v). 

§ 1.1502–21(b)(2)(iv)(B)(2)(ii) ............................. (b)(2)(iv)(B)(2)(iv) ............................................. (b)(2)(iv)(B)(2)(v). 

§ 1.1502–21(b)(2)(iv)(B) 

(2)(iii).

(b)(2)(iv)(B)(2)(iv) ............................................. (b)(2)(iv)(B)(2)(v). 

§ 1.1502–90 Table of Contents, under 

§ 1.1502–96(d).

§ 1.1502–20(g) ................................................. § 1.1502–36(d)(6). 

§ 1.1502–90 Table of Contents, under 

§ 1.1502–99(b)(4).

§ 1.1502–20(g) ................................................. § 1.1502–36(d)(6). 

PART 602—OMB CONTROL NUMBERS 

UNDER THE PAPERWORK 

REDUCTION ACT 

■ Par. 26. The authority citation for part 

602 continues to read as follows: 

Authority: 26 U.S.C. 7805. 

■ Par. 27. In § 602.101, paragraph (b) is 

amended as follows: 

■ 1. The following entries to the table 

are removed: 

§ 602.101 OMB Control Numbers. 

* * * * * 

(b) * * * 

CFR part or section where 

identified anddescribed 

Current OMB 

Control no. 

* * * * * 

§ 1.1502–20 .......................... 1545–1160; 

1545–1218 

§ 1.1502–20T ........................ 1545–1774 

§ 1.1502–32T ........................ 1545–1774 

§ 1.1502–35T ........................ 1545–2019 

■ 2. The following entry is added in 

numerical order to the table: 

§ 602.101 OMB Control Numbers. 

* * * * * 

(b) * * * 

CFR part or section where 

identified and described 

Current OMB 

Control No. 

* * * * * 

§ 1.1502–36 .......................... 1545–2096 

* * * * * 

Linda E. Stiff, 

Deputy Commissioner for Services and 

Enforcement. 

Approved: September 4, 2008. 

Eric Solomon, 

Assistant Secretary of the Treasury (Tax 

Policy). 

[FR Doc. E8–21006 Filed 9–9–08; 4:15 pm] 

BILLING CODE 4830–01–P 


jlentini on PROD1PC65 with RULES2