[Federal Register: September 4, 2003 (Volume 68, Number 171)]
[Rules and Regulations]
[Page 52487-52496]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04se03-5]
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DEPARTMENT OF TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9089]
RIN 1545-BC39
Guidance Under Section 1502; Application of Section 108 to
Members of a Consolidated Group
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Temporary regulations.
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SUMMARY: This document contains temporary regulations under section
1502 that govern the application of section 108 when a member of a
consolidated group realizes discharge of indebtedness income. These
temporary regulations affect corporations filing consolidated returns.
The text of the temporary regulations also serves as the text of the
proposed regulations set forth in the notice of proposed rulemaking on
this subject in the Proposed Rules section in this issue of the Federal
Register.
[[Page 52488]]
DATES: Effective Date: These regulations are effective August 29, 2003.
FOR FURTHER INFORMATION CONTACT: Amber Renee Cook or Marie C. Milnes-
Vasquez at (202) 622-7530 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Section 61(a)(12) of the Internal Revenue Code provides that gross
income includes income from the discharge of indebtedness, except as
provided by law. Section 108(a) provides that gross income of a C
corporation does not include any amount that would otherwise be
includible in gross income by reason of the discharge, in whole or in
part, of indebtedness of the taxpayer if the discharge occurs in a
title 11 case (section 108(a)(1)(A)), the discharge occurs when the
taxpayer is insolvent, but only to the extent of the insolvency
(section 108(a)(1)(B)), or the indebtedness discharged is qualified
farm indebtedness (section 108(a)(1)(C)).
Although section 108 does not require certain taxpayers to include
discharge of indebtedness income in gross income, it does require the
reduction of tax attributes. Section 108(b)(1) provides that if a
taxpayer excludes an amount from gross income under section
108(a)(1)(A), (B), or (C), the taxpayer must reduce its tax attributes
by the amount excluded. Absent an election under section 108(b)(5)
(described below), pursuant to section 108(b)(2), tax attributes are
reduced in the following order: net operating losses and net operating
loss carryovers, general business credits under section 38, minimum tax
credits under section 53(b), net capital losses and capital loss
carryovers, asset basis, passive activity loss and credit carryovers
under section 469(b), and foreign tax credits and foreign tax credit
carryovers. Section 108(b)(5) provides that the taxpayer may elect to
apply any portion of excluded discharge of indebtedness income to first
reduce basis in depreciable assets under the rules of section 1017. Any
amount of debt discharge that remains after attribute reduction is not
includible in income. See H.R. Rep. 96-833 at 11 (1980); S. Rep. No.
96-1035 at 12 (1980).
These provisions are designed to ``preserve the debtor's `fresh
start' after bankruptcy.'' H.R. Rep. 96-833 at 9 (1980); see S. Rep.
No. 96-1035 at 10 (1980). In addition, they are intended to ``carry out
the Congressional intent of deferring, but eventually collecting within
a reasonable period, tax on ordinary income realized from debt
discharge.'' H.R. Rep. 96-833 at 9 (1980); see S. Rep. No. 96-1035 at
10 (1980). By making attributes unavailable to offset income in later
years, the provisions offer the debtor a temporary, rather than a
permanent, deferral of tax.
Questions have arisen regarding the application of section 108 when
the taxpayer with discharge of indebtedness income that is excluded
from gross income is a member of a consolidated group. In particular,
questions have arisen regarding the determination of the attributes
that are available for reduction in a consolidated group and the method
for reducing those attributes. These regulations provide guidance
regarding those questions.
Explanation of Provisions
A. Application of Section 108(a)(1)(B)
As described above, pursuant to section 108(a)(1)(B), gross income
of an insolvent C corporation does not include any amount that would
otherwise be includible in gross income by reason of the discharge, in
whole or in part, of indebtedness of the taxpayer, but only to the
extent of the insolvency. The IRS and Treasury believe that computing
the amount of the insolvency for purposes of section 108(a)(1)(B) with
respect to only the debtor member reflects that, without an agreement
that provides otherwise, the assets of members other than the debtor
member will not be available to satisfy claims of the creditors of the
debtor member. Therefore, these temporary regulations provide that the
amount of discharge of indebtedness income excluded from gross income
in the case in which the debtor is insolvent is determined based on the
assets and liabilities of only the member with discharge of
indebtedness income.
B. Application of Section 108(b)
1. Consolidated Approach
The IRS and Treasury Department have considered a separate entity
approach and various consolidated approaches to the application of the
attribute reduction rules of section 108(b) in the consolidated group
context. As explained below, these regulations adopt a consolidated
approach that reduces all attributes that are available to the debtor.
The IRS and Treasury Department have rejected a separate entity
approach. Such an approach would reduce only the attributes
attributable to the member with excluded discharge of indebtedness
income. The IRS and Treasury Department have rejected this approach
because it fails to take into account the fact that consolidated
attributes that are attributable to other members will be available to
offset income of the debtor member as long as the debtor is a member of
the group. A separate entity approach could result in the permanent
exclusion of discharge of indebtedness income when there are other
attributes available to the debtor member.
In the view of the IRS and Treasury Department, the policies
underlying section 108 require a consolidated approach that reduces all
attributes that are available to the debtor. An approach that does not
reduce all of such attributes is inconsistent with Congressional intent
that income realized from debt discharge generally be deferred and not
permanently eliminated. Furthermore, reducing all of the consolidated
attributes available to the debtor member reflects the principle
enunciated by the Supreme Court in United Dominion Indus., Inc. v.
United States, 532 U.S. 822 (2001), that, in general, the only net
operating loss of a consolidated group or its members for a
consolidated return year is the consolidated net operating loss.
Consistent with United Dominion, the tax attributes subject to
reduction under section 108(b) when the debtor is a member of a
consolidated group include the group's consolidated attributes in their
entirety. Therefore, these temporary regulations provide for the
reduction of consolidated net operating losses and all other
consolidated tax attributes, including consolidated tax attributes that
are attributable to members other than the debtor member.
When the debtor is a member of a consolidated group, consolidated
tax attributes attributable to other members may be used to offset
income of the debtor member. That ability may enable the debtor member
to offset future income with the consolidated attributes attributable
to other members. As a result, unless such other attributes are
reduced, discharge of indebtedness income that is excluded from gross
income may never result in taxable income.
Unlike consolidated attributes, the basis of assets held by members
other than the debtor member is not directly available to offset income
of the debtor member. In fact, the basis of assets held by members
other than the debtor member may never give rise to an attribute that
could be directly available to offset income of a member of the group
for a consolidated return year. Therefore, as explained below, these
temporary regulations provide for a reduction of basis of assets of
members other than the debtor member only in limited circumstances.
[[Page 52489]]
2. Ordering Rule
Under these temporary regulations, the attributes attributable to
the debtor member are first subject to reduction. For this purpose,
attributes attributable to the debtor member include (1) consolidated
attributes attributable to the debtor member, (2) attributes that arose
in separate return limitation years of the debtor member, and (3) the
basis of property of the debtor member. The amount of a consolidated
attribute attributable to the debtor member is determined pursuant to
the principles of Sec. 1.1502-21(b). To the extent that the excluded
discharge of indebtedness income exceeds the attributes attributable to
the debtor member, these temporary regulations require the reduction of
consolidated attributes attributable to other members and attributes
attributable to members other than the debtor member that arose (or are
treated as arising) in a separate return limitation year to the extent
that the debtor member is a member of the separate return limitation
year subgroup with respect to such attribute.
The availability of tax attributes attributable to other members of
a consolidated group to reduce the future income of the debtor member
creates the possibility of shifting the location of tax attributes and
future tax liability. Preserving the location of tax items within the
group is a fundamental policy underlying the consolidated return
regulations which is reflected in a number of such regulations. See,
e.g., Sec. 1.1502-13 (regarding intercompany transactions); Sec.
1.1502-21 (regarding the use of attributes that arise in separate
return limitation years). Location is particularly important when a
member leaves the group and no longer shares the attributes
attributable to it with, or uses the attributes attributable to, the
other members. This sharing of tax attributes can shift the location of
items within the group, affecting the amount of consolidated tax
attributes that a member takes with it when it leaves the group.
The IRS and Treasury Department did not adopt an alternative
consolidated approach that would require the reduction of consolidated
attributes attributable to other members prior to the reduction of all
of the attributes attributable to the debtor member. Such an approach
would not preserve the location of income in the debtor member
resulting from the reduction of attributes as effectively as the
approach adopted in these temporary regulations. For example, a
reduction of the consolidated attributes attributable to each member
before the reduction of all of the attributes attributable to the
debtor member could cause a shifting of the tax burden if the debtor
member subsequently leaves the group. In that case, the debtor member
may take with it a larger portion of the consolidated attributes than
it otherwise would, while a portion of the consolidated attributes
attributable to other members would be reduced. The larger portion of
the consolidated attributes that the debtor member would take with it
would be available to offset future income of the debtor member, while
the remaining members of the group would bear a higher tax burden as a
result of the unavailability of those consolidated attributes.
These temporary regulations achieve the dual objectives of
subjecting the entire amount of consolidated attributes to reduction
and preserving the location of future income that is deferred by first
reducing attributes attributable to the debtor member, including
consolidated attributes, in the order prescribed in section 108(b) and
then reducing the remaining amount of consolidated attributes. This
ordering rule reduces the potential to shift the location of attributes
within the group.
3. Look-Through Rule
The adopted approach include a look-through rule that applies if
the attribute of the debtor member reduced is the basis of stock of
another member of the group. In these cases, corresponding adjustments
must be made to the attributes attributable to the lower-tier member.
To effect those corresponding adjustments, these temporary regulations
treat the lower-tier member as a debtor member that has discharge of
indebtedness income that is excluded from gross income in the amount of
the stock basis reduction for purposes of the rules relating to the
reduction of the attributes attributable to a debtor member. For this
purpose, the consolidated attributes attributable to the lower-tier
member (determined pursuant to the principles of Sec. 1.1502-21(b)) as
well as the lower-tier member's separate attributes (including
attributes that arose in separate return limitation years and asset
basis) are available for reduction. The look-through rule is consistent
with the treatment of a group as a single taxpayer under a number of
the consolidated return regulations, including the provisions allowing
the consolidated tax attributes attributable to one member of a group
to offset income of other members of the group and the investment
adjustment rules that adjust the basis of subsidiary stock to reflect
the income and absorbed losses of the subsidiary.
C. Corresponding Amendments
Included in these temporary regulations are amendments to certain
provisions of the consolidated return regulations that reflect the
attribute reduction rules that apply when the debtor is a member of a
consolidated group. The following paragraphs describe these amendments.
1. The Investment Adjustment Rules
Under Sec. 1.1502-32(b)(3)(ii)(C), discharge of indebtedness
income of a subsidiary that is excluded from gross income is treated as
tax-exempt income for purposes of the investment adjustment rules only
to the extent it is applied to reduce attributes. For this purpose, a
discharge of indebtedness is treated as applied to reduce tax
attributes only to the extent the attribute reduction is taken into
account as a noncapital, nondeductible expense under Sec. 1.1502-32.
The investment adjustment rules of Sec. 1.1502-32 do not apply to
affect the basis of the stock of the common parent of a group.
Therefore, to the extent that discharge of indebtedness income reduces
consolidated attributes that are attributable to the common parent, no
positive basis adjustment is made to the stock of the subsidiary.
Furthermore, because the reduction of a tax credit is not a noncapital,
nondeductible expense, to the extent that the discharge of indebtedness
income reduces a tax credit, no positive basis adjustment is made to
the stock of the subsidiary.
The IRS and Treasury Department believe that a positive basis
adjustment should be made to the basis of the stock of a debtor
subsidiary even if the discharge of indebtedness income reduces an
attribute that is attributable to the common parent. This position is
consistent with the approach of Sec. 1.1502-32 that income of a
subsidiary that is offset by net operating losses generated by the
common parent results in an increase in the basis of the subsidiary
stock. In addition, the IRS and Treasury Department believe that a
positive basis adjustment should be made to the basis of the stock of a
debtor subsidiary even if the discharge of indebtedness income reduces
a credit of any member. Accordingly, these temporary regulations treat
as tax-exempt income discharge of indebtedness income that is excluded
from gross income to the extent that such excluded income reduces tax
attributes, including tax attributes attributable to the common parent
and any other attribute the reduction of which is not treated as a
noncapital, nondeductible expense, such as a credit.
[[Page 52490]]
2. The Excess Loss Account Rules
Under Sec. 1.1502-19, an excess loss account attributable to
subsidiary stock must be included in income when an indebtedness of
that subsidiary is discharged and any part of the amount discharged is
not included in gross income and is not treated as tax-exempt income
under Sec. 1.1502-32. This rule may require inclusion of an excess
loss account in income in an amount that is substantially greater than
the amount discharged that is not treated as tax-exempt income.
The IRS and Treasury Department believe that requiring the
inclusion of the excess loss account in income only to the extent of
the amount discharged that is not treated as tax-exempt income is
consistent with the policies underlying section 108 and the
consolidated return regulations. Accordingly, these temporary
regulations modify the rules of Sec. 1.1502-19 to provide that the
excess loss account must be included in income only to the extent that
any amount discharged that is excluded from gross income is not treated
as tax-exempt income.
3. Rules Governing Apportionment of Net Operating Losses
The temporary regulations also include modifications to the rules
of Sec. 1.1502-21 relating to the amount of consolidated net operating
losses apportioned to a subsidiary when a consolidated net operating
loss is absorbed and when a subsidiary departs from the group. These
modifications take into account the reduction of the net operating
losses attributable to that member that occurs as a result of discharge
of indebtedness.
D. Request for Comments
The IRS and Treasury Department are considering adopting rules
under section 1502 (and possibly other Code sections) to address the
effect of transitory transactions and other transactions designed to
avoid the application of the rules concerning attribute reduction.
Comments are requested regarding whether such a rule should be adopted
and the appropriate scope of such a rule. Even in the absence of such a
rule, such transactions may be challenged under existing law. If the
IRS and Treasury Department determine such a rule is necessary to
protect the policies underlying section 108 and the consolidated return
regulations, the IRS and Treasury Department are prepared to promulgate
such a rule with retroactive effect to discharges of indebtedness that
occur after August 29, 2003.
Effective Dates
The temporary regulations related to the application of section
108(b) when a member of a consolidated group realizes discharge of
indebtedness income that is excluded from gross income apply to
discharges of indebtedness that occur after August 29, 2003. The
amendments to the investment adjustment rules apply with respect to
determinations of stock basis in consolidated return years the original
return for which is due (without extensions) after August 29, 2003. The
amendments to the excess loss account rules apply to dispositions of
subsidiary stock after August 29, 2003. However, taxpayers may apply
the amendments to the investment adjustment rules and the excess loss
account rules retroactively. Finally, the amendments to the net
operating loss rules apply only to taxable years the original return
for which the due date (without extensions) is after August 29, 2003.
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 temporary
regulations are necessary to provide taxpayers with immediate guidance
regarding the application of section 108 when a member of a
consolidated group has discharge of indebtedness income that is
excluded from gross income. Current circumstances have made the
application of section 108 in the consolidated group context an issue
that needs to be addressed at this time. In addition, consolidated
groups may be taking positions that are inconsistent with the policies
underlying section 108 and the principle enunciated by the Supreme
Court in United Dominion Indus., Inc. v. United States, 532 U.S. 822
(2001). Accordingly, good cause is found for dispensing with notice and
public procedure pursuant to 5 U.S.C. 553(b)(B) and with a delayed
effective date pursuant to 5 U.S.C. 553(d)(3). For applicability of the
Regulatory Flexibility Act, please refer to the cross-reference notice
of proposed rulemaking published elsewhere in this issue of the Federal
Register. Pursuant to section 7805(f) of the Internal Revenue Code,
these temporary regulations will be submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on their
impact on small business.
Drafting Information
Various personnel from the IRS and Treasury Department participated
in the development of the regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Amendments to the Regulations
0
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by removing
the two entries for Sec. 1.1502-32T and adding the following entries
in numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1502-19T also issued under 26 U.S.C. 1502. * * *
Section 1.1502-28T also issued under 26 U.S.C. 1502. * * *
Section 1.1502-32T also issued under 26 U.S.C. 1502. * * *
0
Par. 2. Section 1.1502-19 is amended as follows:
0
1. Paragraph (b)(1) is revised.
0
2. The headings for paragraphs (h)(2) and (h)(2)(i) are revised.
0
3. Paragraph (h)(2)(ii) is redesignated as paragraph (h)(2)(iii).
0
4. New paragraph (h)(2)(ii) is added.
The revisions and addition read as follows:
Sec. 1.1502-19 Excess loss accounts.
* * * * *
(b) * * * (1) [Reserved]. For further guidance, see Sec. 1.1502-
19T(b)(1).
* * * * *
(h) * * *
(2) Dispositions of stock--(i) Dispositions of stock before
effective date. * * *
(ii) Application of special limitation. [Reserved]. For further
guidance, see Sec. 1.1502-19T(h)(2)(ii).
* * * * *
0
Par. 3. Section 1.1502-19T is added to read as follows:
Sec. 1.1502-19T Excess loss accounts (temporary).
(a) [Reserved]. For further guidance, see Sec. 1.1502-19(a).
(b) Excess loss account taken into account as income or gain--(1)
Operating rules--(i) General rule. Except as provided in paragraph
(b)(1)(ii) of this section, if P is treated under Sec. 1.1502-19 as
disposing of a share of S's stock, P takes into account its excess loss
account in the share as income or gain from the disposition.
(ii) Special limitation on amount taken into account.
Notwithstanding
[[Page 52491]]
paragraph (b)(1)(i) of this section, if P is treated as disposing of a
share of S's stock as a result of the application of Sec. 1.1502-
19(c)(1)(iii)(B), the aggregate amount of its excess loss account in
the shares of S's stock that P takes into account as income or gain
from the disposition shall not exceed the amount of S's indebtedness
that is discharged that is neither included in gross income nor treated
as tax-exempt income under Sec. 1.1502-32T(b)(3)(ii)(C)(1). If more
than one share of S's stock has an excess loss account, such excess
loss accounts shall be taken into account pursuant to the preceding
sentence, to the extent possible, in a manner that equalizes the excess
loss accounts in S's shares that have an excess loss account.
(iii) Treatment of disposition. Except as provided in Sec. 1.1502-
19(b)(4), the disposition is treated as a sale or exchange for purposes
of determining the character of the income or gain.
(b)(2) through (h)(2)(i) [Reserved]. For further guidance, see
Sec. 1.1502-19(b)(2) through (h)(2)(i).
(h)(2)(ii) Application of special limitation. If P was treated as
disposing of stock of S because S was treated as worthless as a result
of the application of Sec. 1.1502-19(c)(1)(iii)(B) after August 29,
2003 and in a consolidated return year beginning on or after January 1,
1995, the amount of P's income, gain, deduction, or loss, and the stock
basis reflected in that amount, are determined or redetermined with
regard to paragraph (b)(1)(ii) of this section. If P was treated as
disposing of stock of S because S was treated as worthless as a result
of the application of Sec. 1.1502-19(c)(1)(iii)(B) on or before August
29, 2003 and in a consolidated return year beginning on or after
January 1, 1995, the group may determine or redetermine the amount of
P's income, gain, deduction, or loss, and the stock basis reflected in
that amount with regard to paragraph (b)(1)(ii) of this section.
(h)(2)(iii) through (h)(3) [Reserved]. For further guidance, see
Sec. 1.1502-19(h)(2)(iii) through (h)(3).
0
Par. 4. Section 1.1502-21 is amended as follows:
0
1. Paragraphs (b)(2)(iv) and (c)(2)(vii) are revised.
0
2. Paragraphs (h)(6) and (h)(7) are redesignated as paragraphs (h)(7)
and (h)(8).
0
3. New paragraph (h)(6) is added.
0
4. Newly designated paragraph (h)(8) is revised.
The revision and additions read as follows:
Sec. 1.1502-21 Net operating losses.
* * * * *
(b) * * *
(2) * * *
(iv) [Reserved]. For further guidance, see Sec. 1.1502-
21T(b)(2)(iv).
* * * * *
(c) * * *
(2) * * *
(vii) [Reserved]. For further guidance, see Sec. 1.1502-
21T(c)(2)(vii).
* * * * *
(h) * * *
(6) [Reserved]. For further guidance, see Sec. 1.1502-21T(h)(6).
* * * * *
(8) [Reserved]. For further guidance, see Sec. 1.1502-21T(h)(8).
0
Par. 5. Section 1.1502-21T is amended as follows:
0
1. Paragraphs (b)(1) through (b)(3)(ii)(B) are revised.
0
2. Paragraphs (c) through (h)(7) are revised.
0
3. Paragraph (h)(8) is added.
The revisions and addition read as follows:
Sec. 1.1502-21T Net operating losses (temporary).
* * * * *
(b) * * * (1) Carryovers and carrybacks generally. The net
operating loss carryovers and carrybacks to a taxable year are
determined under the principles of section 172 and this section. Thus,
losses permitted to be absorbed in a consolidated return year generally
are absorbed in the order of the taxable years in which they arose, and
losses carried from taxable years ending on the same date, and which
are available to offset consolidated taxable income for the year,
generally are absorbed on a pro rata basis. In addition, the amount of
any CNOL absorbed by the group in any year is apportioned among members
based on the percentage of the CNOL attributable to each member as of
the beginning of the year. The percentage of the CNOL attributable to a
member is determined pursuant to paragraph (b)(2)(iv)(B) of this
section. Additional rules provided under the Internal Revenue Code or
regulations also apply. See, e.g., section 382(l)(2)(B) (if losses are
carried from the same taxable year, losses subject to limitation under
section 382 are absorbed before losses that are not subject to
limitation under section 382). See Sec. 1.1502-21(c)(1)(iii), Example
2, for an illustration of pro rata absorption of losses subject to a
SRLY limitation. See paragraph (b)(3)(v) of this section regarding the
treatment of any loss that is treated as expired under Sec. 1.1502-
35T(f)(1).
(2) (i) through (iii) [Reserved]. For further guidance, see Sec.
1.1502-21(b)(2) (i) through (iii).
(iv) Operating rules--(A) Amount of CNOL attributable to a member.
The amount of a CNOL that is attributable to a member shall equal the
product of the CNOL and the percentage of the CNOL attributable to such
member.
(B) Percentage of CNOL attributable to a member--(1) In general.
Except as provided in paragraph (b)(2)(iv)(B)(2) of this section, the
percentage of the CNOL attributable to a member shall equal the
separate net operating loss of the member for the year of the loss
divided by the sum of the separate net operating losses for that year
of all members having such losses. For this purpose, the separate net
operating loss of a member is determined by computing the CNOL by
reference to only the member's items of income, gain, deduction, and
loss, including the member's losses and deductions actually absorbed by
the group in the taxable year (whether or not absorbed by the member).
(2) Special rule. If during a taxable year either a member realizes
discharge of indebtedness income that is excluded from gross income
under section 108(a) and such amount reduces any portion of the CNOL
attributable to such member pursuant to section 108 and Sec. 1.1502-
28T, or a member that had a separate net operating loss for the year of
the CNOL ceases to be a member, the percentage of the CNOL attributable
to each member as of the first day of the following taxable year shall
be recomputed. In addition, if a portion of the CNOL attributable to a
member for a taxable year is carried back to a separate return year,
the percentage of the CNOL attributable to each member as of the first
day of the taxable year following the taxable year of the CNOL shall be
recomputed. In each case, such recomputed percentage shall equal the
unabsorbed CNOL attributable to the member on the first day of the
following taxable year divided by the sum of the unabsorbed CNOL
attributable to all of the members on the first day of the following
taxable year. For purposes of the preceding sentence, a CNOL that is
reduced pursuant to section 108 and Sec. 1.1502-28T or that is
otherwise permanently disallowed or eliminated shall be treated as
absorbed.
(b)(2)(v) through (b)(3)(ii)(B) [Reserved]. For further guidance,
see Sec. 1.1502-21(b)(2)(v) through (b)(3)(ii)(B).
* * * * *
(c)(1) through (c)(2)(vi) [Reserved]. For further guidance, see
Sec. 1.1502-21(c)(1) through (c)(2)(vi).
(vii) Corporations that leave a SRLY subgroup. If a loss member
ceases to be affiliated with a SRLY subgroup, the amount of the
member's remaining
[[Page 52492]]
SRLY loss from a specific year is determined pursuant to the principles
of Sec. 1.1502-21(b)(2)(ii)(A) and Sec. 1.1502-21T(b)(2)(iv).
(c)(2)(viii) through (h)(5) [Reserved]. For further guidance, see
Sec. 1.1502-21(c)(2)(viii) through (h)(5).
(6) Certain prior periods. Paragraphs (b)(1), (b)(2)(iv), and
(c)(2)(vii) of this section shall only apply to taxable years the
original return for which the due date (without extensions) is after
August 29, 2003. For taxable years the original return for which the
due date (without extensions) is on or before August 29, 2003, see
paragraphs (b)(1), (b)(2)(iv), and (c)(2)(vii) of Sec. 1.1502-21 and
paragraph (b)(1) of Sec. 1.1502-21T as contained in 26 CFR part 1
revised April 1, 2003.
(7) [Reserved]. For further guidance, see Sec. 1.1502-21(h)(7).
(8) Losses treated as expired under Sec. 1.1502-35T(f)(1).
Paragraph (b)(3)(v) of this section is effective for losses treated as
expired under Sec. 1.1502-35T(f)(1) on and after March 7, 2002, and no
later than March 11, 2006.
0
Par. 6. Section 1.1502-28T is added to read as follows:
Sec. 1.1502-28T Consolidated section 108 (temporary).
(a) In general. This section sets forth rules for the application
of section 108(a) and the reduction of tax attributes pursuant to
section 108(b) when a member of the group realizes discharge of
indebtedness income that is excluded from gross income under section
108(a) (excluded COD income).
(1) Application of section 108(a). Section 108(a)(1)(B) is applied
separately to each member that realizes excluded COD income. Therefore,
the limitation of section 108(a)(3) on the amount of discharge of
indebtedness income that is treated as excluded COD income is
determined based on the assets (including stock and securities of other
members) and liabilities (including liabilities to other members) of
only the member that realizes excluded COD income.
(2) Reduction of tax attributes attributable to the debtor--(i) In
general. With respect to a member that realizes excluded COD income in
a taxable year, the tax attributes attributable to that member (and its
direct and indirect subsidiaries to the extent required by section
1017(b)(3)(D) and paragraph (a)(3) of this section), including basis of
assets and losses and credits arising in separate return limitation
years, shall be reduced as provided in sections 108 and 1017 and this
section. Basis of subsidiary stock, however, shall not be reduced below
zero.
(ii) Consolidated tax attributes attributable to a member. For
purposes of this section, the amount of a consolidated tax attribute
that is attributable to a member shall be determined pursuant to the
principles of Sec. 1.1502-21T(b)(2)(iv). In addition, if the member is
a member of a separate return limitation year subgroup, the amount of a
tax attribute that arose in a separate return limitation year that is
attributable to that member shall also be determined pursuant to the
principles of Sec. 1.1502-21T(b)(2)(iv).
(3) Look-through rules--(i) Priority of section 1017(b)(3)(D). If a
member treats stock of a subsidiary as depreciable property pursuant to
section 1017(b)(3)(D), the basis of the depreciable property of such
subsidiary shall be reduced pursuant to section 1017(b)(3)(D) prior to
the application of paragraph (a)(3)(ii) of this section.
(ii) Application of additional look-through rule. If the basis of
stock of a member (the lower-tier member) that is owned by another
member is reduced pursuant to section 108, section 1017, and paragraph
(a)(2) of this section (but not as a result of treating subsidiary
stock as depreciable property pursuant to section 1017(b)(3)(D)),
solely for purposes of sections 108 and 1017 and this section other
than paragraphs (a)(4) and (b)(1) of this section, the lower-tier
member shall be treated as realizing excluded COD income. The amount of
such excluded COD income shall be the amount of such basis reduction.
Accordingly, the tax attributes attributable to such lower-tier member
shall be reduced as provided in sections 108 and 1017 and this section.
To the extent that the excluded COD income realized by the lower-tier
member pursuant to this paragraph (a)(3) does not reduce a tax
attribute attributable to the lower-tier member, such excluded COD
income shall not be applied to reduce tax attributes attributable to
any member under paragraph (a)(4) of this section.
(4) Reduction of certain tax attributes attributable to other
members. To the extent that, pursuant to paragraph (a)(2) of this
section, the excluded COD income is not applied to reduce the tax
attributes attributable to the member that realizes the excluded COD
income, after the application of paragraph (a)(3) of this section, such
amount shall be applied to reduce the remaining consolidated tax
attributes of the group as provided in section 108 and this section.
Such amount also shall be applied to reduce the tax attributes
attributable to members that arose (or are treated as arising) in a
separate return limitation year to the extent that the member that
realizes excluded COD income is a member of the separate return
limitation year subgroup with respect to such attribute. The reduction
of each tax attribute pursuant to the two preceding sentences shall be
made in the order prescribed in section 108 and pursuant to Sec.
1.1502-21T(b)(1). Except to the extent that the member that realizes
excluded COD income is a member of the separate return limitation year
subgroup with respect to a tax attribute that arose (or is treated as
arising) in a separate return limitation year, such attribute is not
subject to reduction pursuant to this paragraph (a)(4). In addition,
basis in assets is not subject to reduction pursuant to this paragraph
(a)(4). Finally, to the extent that the realization of excluded COD
income by a member pursuant to paragraph (a)(3) does not reduce a tax
attribute attributable to such lower-tier member, such excess shall not
be applied to reduce tax attributes attributable to any member pursuant
to this paragraph (a)(4).
(b) Special rules--(1) Multiple debtor members--(i) Reduction of
tax attributes attributable to debtor members prior to reduction of
consolidated tax attributes. If in a single taxable year multiple
members realize excluded COD income, paragraphs (a)(2) and (3) of this
section shall apply with respect to the excluded COD income of each
such member prior to the application of paragraph (a)(4) of this
section.
(ii) Reduction of higher-tier debtor's tax attributes. If in a
single taxable year multiple members realize excluded COD income and
one such member is a higher-tier member of another such member,
paragraphs (a)(2) and (3) of this section shall be applied with respect
to the excluded COD income of the higher-tier member before such
paragraphs are applied to the excluded COD income of the other such
member. A member (the first member) is a higher-tier member of another
member (the second member) if the first member is the common parent or
investment adjustments under Sec. 1.1502-32 or Sec. 1.1502-32T with
respect to the stock of the second member would affect investment
adjustments with respect to the stock of the first member.
(iii) Reduction of additional tax attributes. If more than one
member realizes excluded COD income that has not been applied to reduce
a tax attribute attributable to such member (the remaining COD amount)
and the remaining tax attributes available for reduction under
paragraph (a)(4) of this section are less than the aggregate of the
remaining COD amounts, after the application of paragraph (a)(2) of
this
[[Page 52493]]
section, each such member's remaining COD amount shall be applied on a
pro rata basis (based on the relative remaining COD amounts), pursuant
to paragraph (a)(4) of this section, to reduce such remaining available
tax attributes.
(2) Election under section 108(b)(5). Any member that realizes
excluded COD income may make the election described in section
108(b)(5). The election is made separately for each member. Therefore,
an election may be made for one member that realizes excluded COD
income (either actually or pursuant to paragraph (a)(3) of this
section) while another election, or no election, may be made for
another member that realizes excluded COD income (either actually or
pursuant to paragraph (a)(3) of this section). See Sec. 1.108-4 for
rules relating to the procedure for making an election under section
108(b)(5).
(3) Limitation of section 1017(b)(2). The limitation of section
1017(b)(2) on the reduction in basis of property shall be applied by
reference to the aggregate of the basis of the property held by the
member that realizes excluded COD income, not the aggregate of the
basis of the property held by all of the members of the group, and the
liabilities of such member, not the aggregate liabilities of all of the
members of the group.
(c) Examples. The principles of paragraphs (a) and (b) of this
section are illustrated by the following examples. Unless otherwise
indicated, no election under section 108(b)(5) has been made. The
examples are as follows:
Example 1. (i) Facts. P is the common parent of a consolidated
group that includes subsidiaries S1 and S2. P owns 80 percent of the
stock of S1 and 100 percent of the stock of S2. In Year 1, the P
group sustained a $250 consolidated net operating loss. Under the
principles of Sec. 1.1502-21T(b)(2)(iv), of that amount, $125 was
attributable to P and $125 was attributable to S1. On Day 1 of Year
2, S2 joined the P group. As of the beginning of Year 2, S2 had a
$50 net operating loss carryover from Year 1, a separate return
limitation year. In Year 2, the P group sustained a $200
consolidated net operating loss. Under the principles of Sec.
1.1502-21T(b)(2)(iv), of that amount, $90 was attributable to P, $70
was attributable to S1, and $40 was attributable to S2. In Year 3,
S2 realized $200 of excluded COD income from the discharge of non-
intercompany indebtedness. After the discharge of this indebtedness,
S2 had no liabilities. In that same year, the P group sustained a
$50 consolidated net operating loss, of which $40 was attributable
to S1 and $10 was attributable to S2 under the principles of Sec.
1.1502-21T(b)(2)(iv). As of the beginning of Year 4, S2 had Asset A
with a basis of $40 and a fair market value of $10.
(ii) Analysis--(A) Reduction of tax attributes attributable to
debtor. Pursuant to paragraph (a)(2) of this section, the tax
attributes attributable to S2 must first be reduced to take into
account its excluded COD income in the amount of $200.
(1) Reduction of net operating losses. Pursuant to section
108(b)(2)(A), the net operating loss and the net operating loss
carryovers of S2 are reduced. Pursuant to section 108(b)(4)(B) and
paragraph (a) of this section, the net operating loss and the net
operating loss carryovers attributable to S2 under the principles of
Sec. 1.1502-21T(b)(2)(iv) are reduced first. Accordingly, the
consolidated net operating loss for Year 3 is reduced by $10, the
portion of the consolidated net operating loss attributable to S2,
to $40. Then, again pursuant to section 108(b)(4)(B), S2's net
operating loss carryover of $50 from its separate return limitation
year is reduced to $0. Finally, the consolidated net operating loss
carryover from Year 2 is reduced by $40, the portion of that
consolidated net operating loss carryover attributable to S2, to
$160.
(2) Reduction of basis. Following the reduction of the net
operating loss and the net operating loss carryovers attributable to
S2, S2 reduces its basis in its assets pursuant to section 1017 and
Sec. 1.1017-1. Accordingly, S2 reduces its basis in Asset A by $40,
from $40 to $0.
(B) Reduction of remaining consolidated tax attributes. The
remaining $60 of excluded COD income then reduces consolidated tax
attributes pursuant to paragraph (a)(4) of this section. In
particular, the remaining $40 consolidated net operating loss for
Year 3 is reduced to $0. Then, the consolidated net operating loss
carryover from Year 1 is reduced by $20 from $250 to $230. Pursuant
to paragraph (a)(4) of this section, a pro rata amount of the
consolidated net operating loss carryover from Year 1 that is
attributable to each of P and S1 is treated as reduced. Therefore,
$10 of the consolidated net operating loss carryover from Year 1
that is attributable to each of P and S1 is treated as reduced.
Example 2. (i) Facts. P is the common parent of a consolidated
group that includes subsidiaries S1 and S2. P owns 100 percent of
the stock of S1 and S1 owns 100 percent of the stock of S2. None of
P, S1, or S2 has a separate return limitation year. In Year 1, the P
group sustained a $50 consolidated net operating loss. Under the
principles of Sec. 1.1502-21T(b)(2)(iv), of that amount, $10 was
attributable to P, $20 was attributable to S1, and $20 was
attributable to S2. In Year 2, the P group sustained a $70
consolidated net operating loss. Under the principles of Sec.
1.1502-21T(b)(2)(iv), of that amount, $30 was attributable to P, $30
was attributable to S1, and $10 was attributable to S2. In Year 3,
S1 realized $170 of excluded COD income from the discharge of non-
intercompany indebtedness. After the discharge of this indebtedness,
S1 and S2 had no liabilities. In that same year, the P group
sustained a $50 consolidated net operating loss, of which $10 was
attributable to S1 and $40 was attributable to S2 under the
principles of Sec. 1.1502-21T(b)(2)(iv). As of the beginning of
Year 4, S1's sole asset was the stock of S2, and S1 had a $80 basis
in the S2 stock. In addition, at the beginning of Year 4, S2 had an
asset with a $0 basis and a $10 value.
(ii) Analysis--(A) Reduction of tax attributes attributable to
debtor. Pursuant to paragraph (a)(2) of this section, the tax
attributes attributable to S1 must first be reduced to take into
account its excluded COD income in the amount of $170.
(1) Reduction of net operating losses. Pursuant to section
108(b)(2)(A), the net operating loss and the net operating loss
carryovers of S1 are reduced. Pursuant to section 108(b)(4)(B) and
paragraph (a) of this section, the net operating loss and the net
operating loss carryovers attributable to S1 under the principles of
Sec. 1.1502-21T(b)(2)(iv) are reduced first. Accordingly, the
consolidated net operating loss for Year 3 is reduced by $10, the
portion of the consolidated net operating loss for Year 3
attributable to S1, to $40. Then, the consolidated net operating
loss carryover from Year 1 is reduced by $20, the portion of that
consolidated net operating loss carryover attributable to S1, to
$30, and the consolidated net operating loss carryover from Year 2
is reduced by $30, the portion of that consolidated net operating
loss carryover attributable to S1, to $40.
(2) Reduction of basis. Following the reduction of the net
operating loss and the net operating loss carryovers attributable to
S1, S1 reduces its basis in its assets pursuant to section 1017 and
Sec. 1.1017-1. Accordingly, S1 reduces its basis in the stock of S2
by $80, from $80 to $0.
(3) Tiering down of stock basis reduction. Pursuant to paragraph
(a)(3) of this section, for purposes of sections 108 and 1017 and
this section, S2 is treated as realizing $80 of excluded COD income.
Accordingly, the consolidated net operating loss for Year 3 is
reduced by an additional $40, the portion of the consolidated net
operating loss for Year 3 attributable to S2, to $0. Then, the
consolidated net operating loss carryover from Year 1 is reduced by
$20, the portion of that consolidated net operating loss carryover
attributable to S2, to $10. Then, the consolidated net operating
loss carryover from Year 2 is reduced by $10, the portion of that
consolidated net operating loss carryover attributable to S2, to
$30. S2's remaining $10 of excluded COD income does not reduce
consolidated tax attributes attributable to P or S1 under paragraph
(a)(4) of this section.
(B) Reduction of remaining consolidated tax attributes. Finally,
pursuant to paragraph (a)(4) of this section, S1's remaining $30 of
excluded COD income reduces the remaining consolidated tax
attributes. In particular, the remaining $10 consolidated net
operating loss carryover from Year 1 is reduced by $10 to $0, and
the remaining $30 consolidated net operating loss carryover from
Year 2 is reduced by $20 to $10.
Example 3. (i) Facts. P is the common parent of a consolidated
group that includes subsidiaries S1, S2, and S3. P owns 100 percent
of the stock of S1, S1 owns 100 percent of the stock of S2, and S2
owns 100 percent of the stock of S3. In Year 1, the P group
sustained a $150 consolidated net operating loss. Under the
principles of Sec. 1.1502-21T(b)(2)(iv), of that amount, $50 was
attributable to S2, and $100 was attributable to S3. In Year 2, the
P group
[[Page 52494]]
sustained a $50 consolidated net operating loss. Under the
principles of Sec. 1.1502-21T(b)(2)(iv), of that amount, $40 was
attributable to S1 and $10 was attributable to S2. In Year 3, S1
realized $170 of excluded COD income from the discharge of non-
intercompany indebtedness. After the discharge of this indebtedness,
S1, S2, and S3 had no liabilities. In that same year, the P group
sustained a $50 consolidated net operating loss, of which $10 was
attributable to S1, $20 was attributable to S2, and $20 was
attributable to S3 under the principles of Sec. 1.1502-
21T(b)(2)(iv). At the beginning of Year 4, S1's only asset was the
stock of S2, with a basis of $120, and S2's only asset was the stock
of S3 with a basis of $180 and a value of $10. None of P, S1, or S2
had a separate return limitation year.
(ii) Analysis--Reduction of tax attributes attributable to
debtor. Pursuant to paragraph (a)(2) of this section, the tax
attributes attributable to S1 must first be reduced to take into
account its excluded COD income in the amount of $170.
(A) Reduction of net operating losses. Pursuant to section
108(b)(2)(A), the net operating loss and the net operating loss
carryovers of S1 are reduced. Pursuant to section 108(b)(4)(B) and
paragraph (a) of this section, the net operating loss and the net
operating loss carryovers attributable to S1 under the principles of
Sec. 1.1502-21T(b)(2)(iv) are reduced first. Pursuant to section
108(b)(4)(B), S1's net operating loss for the taxable year of the
discharge is reduced first. Accordingly, the consolidated net
operating loss for Year 3 is reduced by $10, the portion of the
consolidated net operating loss attributable to S1, to $40. Then,
again pursuant to section 108(b)(4)(B), the consolidated net
operating loss carryover from Year 2 is reduced by $40, the portion
of that consolidated net operating loss carryover attributable to
S1, to $10.
(B) Reduction of basis. Following the reduction of the net
operating loss and the net operating loss carryovers attributable to
S1, S1 reduces its basis in its assets pursuant to section 1017 and
Sec. 1.1017-1. Accordingly, S1 reduces its basis in the stock of S2
by $120, from $120 to $0.
(C) Tiering down of stock basis reduction to S2. Pursuant to
paragraph (a)(3) of this section, for purposes of sections 108 and
1017 and this section, S2 is treated as realizing $120 of excluded
COD income. Pursuant to section 108(b)(2)(A), therefore, the net
operating loss and net operating loss carryovers of S2 are reduced.
Pursuant to section 108(b)(4)(B) and paragraph (a) of this section,
the net operating loss and the net operating loss carryovers
attributable to S2 under the principles of Sec. 1.1502-
21T(b)(2)(iv) are reduced. Pursuant to section 108(b)(4)(B), S2's
net operating loss for the taxable year of the discharge is reduced.
Accordingly, the consolidated net operating loss for Year 3 is
further reduced by $20, the portion of the consolidated net
operating loss attributable to S2, to $20. Then, again pursuant to
section 108(b)(4)(B), the consolidated net operating loss carryover
from Year 1 is reduced by $50, the portion of that consolidated net
operating loss carryover attributable to S2, to $100. Then, again
pursuant to section 108(b)(4)(B), the consolidated net operating
loss carryover from Year 2 is further reduced by $10, the portion of
that consolidated net operating loss carryover attributable to S2,
to $0. Following the reduction of the net operating loss and the net
operating loss carryovers attributable to S2, S2 reduces its basis
in its assets pursuant to section 1017 and Sec. 1.1017-1.
Accordingly, S2 reduces its basis in its S3 stock by $40 to $140.
(D) Tiering down of stock basis reduction to S3. Pursuant to
paragraph (a)(3) of this section, for purposes of sections 108 and
1017 and this section, S3 is treated as realizing $40 of excluded
COD income. Pursuant to section 108(b)(2)(A), therefore, the net
operating loss and the net operating loss carryovers of S3 are
reduced. Pursuant to section 108(b)(4)(B) and paragraph (a) of this
section, the net operating loss and the net operating loss
carryovers attributable to S3 under the principles of Sec. 1.1502-
21T(b)(2)(iv) are reduced. Pursuant to section 108(b)(4)(B), S3's
net operating loss for the taxable year of the discharge is reduced.
Accordingly, the consolidated net operating loss for Year 3 is
further reduced by $20, the portion of the consolidated net
operating loss attributable to S3, to $0. Then, again pursuant to
section 108(b)(4)(B), the consolidated net operating loss carryover
from Year 1 is reduced by $20, the lesser of the portion of that
consolidated net operating loss carryover attributable to S3 and the
remaining excluded COD income, to $80.
Example 4. (i) Facts. P is the common parent of a consolidated
group that includes subsidiaries S1, S2, and S3. P owns 100 percent
of the stock of each of S1 and S2. Each of S1 and S2 owns stock of
S3 that represents 50 percent of the value of the stock of S3. In
Year 1, the P group sustained a $160 consolidated net operating
loss. Under the principles of Sec. 1.1502-21T(b)(2)(iv), of that
amount, $10 was attributable to P, $50 was attributable to S2, and
$100 was attributable to S3. In Year 2, the P group sustained a $110
consolidated net operating loss. Under the principles of Sec.
1.1502-21T(b)(2)(iv), of that amount, $40 was attributable to S1 and
$70 was attributable to S2. In Year 3, S1 realized $200 of excluded
COD income from the discharge of non-intercompany indebtedness, and
S2 realized $270 of excluded COD income from the discharge of non-
intercompany indebtedness. After the discharge of this indebtedness,
S1, S2, and S3 had no liabilities. In that same year, the P group
sustained a $50 consolidated net operating loss, of which $10 was
attributable to S1, $20 was attributable to S2, and $20 was
attributable to S3 under the principles of Sec. 1.1502-
21T(b)(2)(iv). At the beginning of Year 4, S1's basis in its S3
stock was $60, S2's basis in its S3 stock was $120, and S3 had one
asset with a basis of $200 and a value of $10. None of P, S1, S2, or
S3 had a separate return limitation year.
(ii) Analysis--Reduction of tax attributes attributable to
debtors. Pursuant to paragraph (b)(1)(i) of this section, the tax
attributes attributable to each of S1 and S2 are reduced pursuant to
paragraph (a)(2) of this section, and the tax attributes
attributable to S3 are reduced pursuant to paragraph (a)(3) of this
section so as to reflect a reduction of S1's and S2's basis in the
stock of S3 prior to the application of paragraph (a)(4) to reduce
additional tax attributes. Pursuant to paragraph (a)(2) of this
section, the tax attributes attributable to S1 and S2 must be
reduced to take into account their excluded COD income.
(A) Reduction of net operating losses generally. Pursuant to
section 108(b)(2)(A), the net operating losses and the net operating
loss carryovers of S1 and S2 are reduced. Pursuant to section
108(b)(4)(B) and paragraph (a) of this section, the net operating
losses and the net operating loss carryovers attributable to S1 and
S2 under the principles of Sec. 1.1502-21T(b)(2)(iv) are reduced
first.
(B) Reduction of net operating losses attributable to S1.
Pursuant to section 108(b)(4)(B), S1's net operating loss for the
taxable year of the discharge is reduced. Accordingly, the
consolidated net operating loss for Year 3 is reduced by $10, the
portion of the consolidated net operating loss attributable to S1,
to $40. Then, again pursuant to section 108(b)(4)(B), the
consolidated net operating loss carryover from Year 2 is reduced by
$40, the portion of that consolidated net operating loss carryover
attributable to S1, to $70.
(C) Reduction of net operating losses attributable to S2.
Pursuant to section 108(b)(4)(B), S2's net operating loss for the
taxable year of the discharge is reduced. Accordingly, the
consolidated net operating loss for Year 3 is further reduced by
$20, the portion of the consolidated net operating loss attributable
to S2, to $20. Then, pursuant to section 108(b)(4)(B), the
consolidated net operating loss carryover from Year 1 is reduced by
$50, the portion of that consolidated net operating loss carryover
attributable to S2, to $110. Then, again pursuant to section
108(b)(4)(B), the consolidated net operating loss carryover from
Year 2 is further reduced by $70, the portion of that consolidated
net operating loss carryover attributable to S2, to $0.
(D) Reduction of basis. Following the reduction of the net
operating losses and the net operating loss carryovers attributable
to S1 and S2, S1 and S2 must reduce their basis in their assets
pursuant to section 1017 and Sec. 1.1017-1. Accordingly, S1 reduces
its basis in the stock of S3 by $60, from $60 to $0, and S2 reduces
its basis in the stock of S3 by $120, from $120 to $0.
(E) Tiering down of basis reduction. Pursuant to paragraph
(a)(3) of this section, for purposes of sections 108 and 1017 and
this section, S3 is treated as realizing $180 of excluded COD
income. Pursuant to section 108(b)(2)(A), therefore, the net
operating loss and the net operating loss carryovers of S3 are
reduced, in the order indicated by section 108(b)(4)(B). Pursuant to
paragraph (a)(2) of this section the consolidated net operating loss
and any consolidated net operating loss carryovers that are
attributable to S3 under the principles of Sec. 1.1502-
21T(b)(2)(iv) are reduced. Accordingly, the consolidated net
operating loss for Year 3 is further reduced by $20, the portion of
the consolidated net operating loss attributable to S3, to $0. Then,
the consolidated net operating loss carryover from Year 1 is reduced
by $100, the portion
[[Page 52495]]
of that consolidated net operating loss carryover attributable to
S3, to $10. Following the reduction of the net operating loss and
the net operating loss carryover attributable to S3, S3 reduces its
basis in its asset pursuant to section 1017 and Sec. 1.1017-1.
Accordingly, S3 reduces its basis in its asset by $60, from $200 to
$140.
(F) Reduction of remaining consolidated tax attributes. Finally,
pursuant to paragraph (a)(4) of this section, the remaining $90 of
S1's excluded COD income and the remaining $10 of S2's excluded COD
income reduce the remaining consolidated tax attributes. In
particular, the remaining $10 consolidated net operating loss
carryover from Year 1 is reduced by $10 to $0. Because that amount
is less than the aggregate amount of remaining excluded COD income,
such income is applied on a pro rata basis to reduce the remaining
consolidated tax attributes. Accordingly, $9 of S1's remaining
excluded COD income and $1 of S2's remaining excluded COD income is
applied to reduce the remaining consolidated net operating loss
carryover from Year 1. Consequently, of S1's excluded COD income of
$200, only $119 is applied to reduce tax attributes, and, of S2's
excluded COD income of $270, only $261 is applied to reduce tax
attributes.
(d) Effective date. This section applies to discharges of
indebtedness that occur after August 29, 2003.
0
Par. 7. Section 1.1502-32 is amended as follows:
0
1. Paragraphs (b)(3)(ii)(C)(1) and (b)(3)(iii)(A) are revised.
0
2. Paragraph (b)(4)(vii) is added.
0
3. Paragraph (b)(5)(ii), Example 4, paragraphs (a), (b), and (c), are
revised.
0
4. Paragraph (h)(7) is added.
The revisions and additions read as follows:
Sec. 1.1502-32 Investment adjustments.
* * * * *
(b) * * *
(3) * * *
(ii) * * *
(C) * * *
(1) [Reserved]. For further guidance, see Sec. 1.1502-
32T(b)(3)(ii)(C)(1).
* * * * *
(iii) * * *
(A) [Reserved]. For further guidance, see Sec. 1.1502-
32T(b)(3)(iii)(A).
* * * * *
(4) * * *
(vii) [Reserved]. For further guidance, see Sec. 1.1502-
32T(b)(4)(vii).
(5) * * *
(ii) * * *
Example 4(a), (b), and (c) [Reserved]. For further guidance, see
Sec. 1.1502-32T(b)(5)(ii), Example 4(a), (b), and (c).
* * * * *
(h) * * *
(7) [Reserved]. For further guidance, see Sec. 1.1502-32T(h)(7).
0
Par. 8. Section 1.1502-32T is amended as follows:
0
1. Paragraphs (b) through (b)(3)(iii)(B) are revised.
0
2. Add and reserve paragraph (b)(3)(iv), and revise paragraphs (b)(4)
through (b)(4)(iv).
0
3. Add paragraph (b)(5) and revise paragraphs (c) through (h)(5)(ii).
0
4. Paragraph (h)(7) is added.
The revisions and addition read as follows:
Sec. 1.1502-32T Investment adjustments (temporary).
* * * * *
(b) through (b)(3)(ii)(B) [Reserved]. For further guidance, see
Sec. 1.1502-32(b) through (b)(3)(ii)(B).
(C) Discharge of indebtedness income--(1) In general. Discharge of
indebtedness income of S that is excluded from gross income under
section 108 is treated as tax-exempt income only to the extent the
discharge is applied to reduce tax attributes attributable to any
member of the group under section 108, section 1017, or Sec. 1.1502-
28T. If S is treated as realizing discharge of indebtedness income that
is excluded from gross income pursuant to Sec. 1.1502-28T(a)(3), S
shall not be treated as realizing excluded COD income for purposes of
the preceding sentence.
(b)(3)(ii)(C)(2) through (b)(3)(ii)(D) [Reserved]. For further
guidance, see Sec. 1.1502-32(b)(3)(ii)(C)(2) through (b)(3)(ii)(D).
(iii) Noncapital, nondeductible expenses--(A) In general. S's
noncapital, nondeductible expenses are its deductions and losses that
are taken into account but permanently disallowed or eliminated under
applicable law in determining its taxable income or loss, and that
decrease, directly or indirectly, the basis of its assets (or an
equivalent amount). For example, S's Federal taxes described in section
275 and loss not recognized under section 311(a) are noncapital,
nondeductible expenses. Similarly, if a loss carryover (e.g., under
section 172 or 1212) attributable to S expires or is reduced under
section 108(b) and Sec. 1.1502-28T, it becomes a noncapital,
nondeductible expense at the close of the last tax year to which it may
be carried. However, when a tax attribute attributable to S is reduced
as required pursuant to Sec. 1.1502-28T(a)(3), the reduction of the
tax attribute is not treated as a noncapital, nondeductible expense of
S. Finally, if S sells and repurchases a security subject to section
1091, the disallowed loss is not a noncapital, nondeductible expense
because the corresponding basis adjustments under section 1091(d)
prevent the disallowance from being permanent.
(b)(3)(iii)(B) [Reserved]. For further guidance, see Sec. 1.1502-
32(b)(3)(iii)(B).
* * * * *
(b)(3)(iv) through (b)(4)(iv) [Reserved]. For further guidance, see
Sec. 1.1502-32(b)(3)(iv) through (b)(4)(iv).
* * * * *
(b)(5)(i) through (b)(5)(ii), Example 3 [Reserved]. For further
guidance, see Sec. 1.1502-32(b)(5)(i) through (b)(5)(ii), Example 3.
Example 4. Discharge of indebtedness. (a) Facts. P forms S on
January 1 of Year 1 and S borrows $200. During Year 1, S's assets
decline in value and the P group has a $100 consolidated net
operating loss. Of that amount, $10 is attributable to P and $90 is
attributable to S under the principles of Sec. 1.1502-
21T(b)(2)(iv). None of the loss is absorbed by the group in Year 1,
and S is discharged from $100 of indebtedness at the close of Year
1. P has a $0 basis in the S stock. P and S have no attributes other
than the consolidated net operating loss. Under section 108(a), S's
$100 of discharge of indebtedness income is excluded from gross
income because of insolvency. Under section 108(b) and Sec. 1.1502-
28T, the consolidated net operating loss is reduced to $0.
(b) Analysis. Under Sec. 1.1502-32(b)(3)(iii)(B), the reduction
of $90 of the consolidated net operating loss attributable to S is
treated as a noncapital, nondeductible expense in Year 1 because
that loss is permanently disallowed by section 108(b) and Sec.
1.1502-28T. Under paragraph (b)(3)(ii)(C)(1) of this section, all
$100 of S's discharge of indebtedness income is treated as tax-
exempt income in Year 1 because the discharge results in a $100
reduction to the consolidated net operating loss. Consequently, the
loss and the cancellation of the indebtedness result in a net
positive $10 adjustment to P's basis in its S stock.
(c) Insufficient attributes. The facts are the same as in
paragraph (a) of this Example 4, except that S is discharged from
$120 of indebtedness at the close of Year 1. Under section 108(a),
S's $120 of discharge of indebtedness income is excluded from gross
income because of insolvency. Under section 108(b) and Sec. 1.1502-
28T, the consolidated net operating loss is reduced to $0 at the
close of Year 1. Under Sec. 1.1502-32(b)(3)(iii)(B), the reduction
of $90 of the consolidated net operating loss attributable to S is
treated as a noncapital, nondeductible expense. Under paragraph
(b)(3)(ii)(C)(1) of this section, only $100 of the discharge is
treated as tax-exempt income because only that amount is applied to
reduce tax attributes. The remaining $20 of discharge income
excluded under section 108(a) has no effect on P's basis in S's
stock.
(b)(5)(ii), Example 4(d) through (h)(5)(ii) [Reserved]. For
further guidance, see Sec. 1.1502-32(b)(5)(ii), Example 4(d)
through (h)(5)(ii).
* * * * *
(h)(7) Rules related to discharges of indebtedness excluded from
gross income. Paragraphs (b)(3)(ii)(C)(1), (b)(3)(iii)(A), and
[[Page 52496]]
(b)(5)(ii), Example 4, paragraphs (a), (b), and (c), of this section
apply with respect to determinations of the basis of the stock of a
subsidiary in consolidated return years the original return for
which is due (without extensions) after August 29, 2003. For
determinations in consolidated return years the original return for
which is due (without extensions) on or before August 29, 2003,
groups may apply paragraphs (b)(3)(ii)(C)(1), (b)(3)(iii)(A), and
(b)(5)(ii), Example 4, paragraphs (a), (b), and (c), of this section
without regard to the references to Sec. 1.1502-28T or,
alternatively, apply paragraphs (b)(3)(ii)(C)(1), (b)(3)(iii)(A),
and (b)(5)(ii), Example 4, paragraphs (a), (b), and (c), of Sec.
1.1502-32 as contained in 26 CFR part 1 edition revised as of April
1, 2003.
Robert E. Wenzel,
Deputy Commissioner for Services and Enforcement.
Approved: August 28, 2003.
Gregory F. Jenner,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 03-22453 Filed 8-29-03; 3:14 pm]
BILLING CODE 4830-01-P