[Federal Register: March 14, 2003 (Volume 68, Number 50)]
[Rules and Regulations]
[Page 12287-12300]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14mr03-3]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 9048]
RIN 1545-BB95
Guidance Under Section 1502; Suspension of Losses on Certain
Stock Dispositions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
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SUMMARY: This document contains final and temporary regulations under
section 1502 that redetermine the basis of stock of a subsidiary member
of a consolidated group immediately prior to certain transfers of such
stock and certain deconsolidations of a subsidiary member. In addition,
this document contains temporary regulations that suspend certain
losses recognized on the disposition of stock of a subsidiary member.
The regulations apply to corporations filing consolidated returns. The
text of the temporary regulations serves as the text of the proposed
regulations set forth in the Proposed Rules section of this issue of
the Federal Register.
DATES: Effective date: These regulations are effective March 14, 2003.
Applicability Date: For dates of applicability, see Sec. Sec.
1.1502-21T(h)(7), 1.1502-32T(h)(6), and 1.1502-35T(j).
FOR FURTHER INFORMATION CONTACT: Aimee K. Meacham, (202) 622-7530 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
These regulations are being issued without prior notice and public
procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553).
For this reason, the collection of information contained in these
temporary regulations has been reviewed and, pending receipt and
evaluation of public comments, approved by the Office of Management and
Budget (OMB) under 44 U.S.C. 3507 and assigned control number 1545-
1828. Responses to this collection of information are voluntary.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid OMB control number.
For further information concerning this collection of information,
and where to submit comments on the collection of information and the
accuracy of the estimated burden, and suggestions for reducing this
burden, please refer to the cross-referencing notice of proposed
rulemaking published in the Proposed Rules section of this issue of the
Federal Register.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background and Explanation of Provisions
On October 18, 2002, the IRS and Treasury Department issued a
notice of proposed rulemaking (REG-131478-02, 2002-47 I.R.B. 892 [67 FR
65060]) that included proposed regulations reflecting the principle set
forth in Notice 2002-18 (2002-12 I.R.B. 644) that a consolidated group
should not be able to obtain more than one tax benefit from a single
economic loss. The rules in the proposed regulations were intended to
address at least two situations in which a group may obtain more than
one tax benefit from a single economic loss. In one situation, a group
first recognizes and absorbs a subsidiary member's inside loss (e.g., a
loss carryforward, a deferred deduction, or a loss inherent in an
asset) and a member of the group later recognizes a loss on the
subsidiary member's stock that is duplicative of the previously
recognized and absorbed inside loss. In the second situation, a member
of the group recognizes a loss on a non-deconsolidating disposition of
the subsidiary member's stock, the stock loss duplicates an
unrecognized or unabsorbed loss of the subsidiary member, and the group
later recognizes and absorbs the subsidiary's inside loss.
The proposed regulations consist primarily of two rules: a basis
redetermination rule and a loss suspension rule. The proposed
regulations also include a basis reduction rule that addresses certain
cases of loss duplication that are not within the scope of the loss
suspension rule, such as losses arising from the worthlessness of
subsidiary member stock.
No public hearing regarding the proposed regulations was requested
or held. Comments, however, were submitted.
The IRS and Treasury Department have studied, and are continuing to
study, the comments received. The IRS and Treasury Department believe
that the comments received, as well as the issues more generally raised
by Notice 2002-18 and the proposed regulations, require significant
further consideration. Accordingly, the IRS and Treasury Department
will continue to study these issues and, as more fully set forth below,
request comments on, and suggestions for possible alternative
approaches to, the issues addressed in the regulations. Nonetheless,
the IRS and Treasury Department believe that immediately effective
rules are necessary to address the duplication of loss within a
consolidated group so as to clearly reflect the income tax liability of
the group. Accordingly, the IRS and Treasury Department are
promulgating the proposed regulations as temporary regulations in this
Treasury decision. The temporary regulations are substantially similar
to the proposed regulations, but reflect certain revisions that were
made based on comments received. The following sections describe these
revisions.
A. Application of Basis Redetermination Rule Upon Deconsolidation of a
Subsidiary Member
The proposed regulations require the reallocation of the basis of
subsidiary member stock held by members of the
[[Page 12288]]
group upon certain dispositions and deconsolidations of subsidiary
member stock. The rule applies differently when the subsidiary remains
a member of the group from when the subsidiary does not remain a member
of the group. The IRS and Treasury Department received several
technical comments regarding the basis redetermination rule applicable
when a subsidiary member leaves the group. The temporary regulations
revise that rule in a manner that addresses these comments and
clarifies its application.
In particular, under the temporary regulations, subject to certain
exceptions, the rule applies upon a deconsolidation of a subsidiary
member when any stock of the subsidiary member owned by a member of the
group has a basis in excess of value. The revised rule generally
applies regardless of whether the subsidiary member is deconsolidated
as a result of a transfer of a gain share, a transfer of a loss share,
or a stock issuance because, in each case, the effect is the same,
i.e., each share of subsidiary member stock owned by group members is
deconsolidated. Further, in computing the basis that is reallocated,
the revised rule takes into account all loss on members' shares of the
subsidiary's stock and all prior negative basis adjustments to members'
shares of the subsidiary stock that are not loss shares. The revised
rule reflects that, unless all deconsolidations and all deconsolidated
shares are treated similarly, opportunities to duplicate losses will
continue to exist.
B. Application of Loss Suspension Rule
Under the loss suspension rule, if, after application of the basis
redetermination rule, a member of a consolidated group recognizes a
loss on the disposition of stock of a subsidiary member of the same
group, and the subsidiary member is a member of the same group
immediately after the disposition, then the selling member's stock loss
is suspended to the extent of the duplicated loss with respect to such
stock. Because a suspended stock loss reflects the subsidiary member's
unrecognized or unabsorbed deductions and losses, under the proposed
regulations, the suspended loss is reduced, with the result that it
will not later be allowed, as the subsidiary member's deductions and
losses are taken into account (i.e., absorbed) in determining the
group's consolidated taxable income (or loss). One comment received
regarding the proposed regulations was that, in certain cases, the loss
suspension rule could disallow a tax loss for an economic loss. This
result was not intended. Accordingly, these temporary regulations
include two changes from the proposed regulations that are intended to
prevent this result.
First, the temporary regulations provide that the amount by which a
suspended stock loss is reduced cannot exceed the excess of the amount
of the subsidiary member's items of loss and deduction over the amount
of such items that are taken into account in determining the basis
adjustments made to stock of the subsidiary member (or any successor)
owned by members of the group under the investment adjustment rules.
Second, they also include a provision stating that the loss
suspension rule is not to be applied in a manner that permanently
disallows an otherwise allowable deduction for an economic loss.
Whether the loss suspension rule has resulted in such a disallowance is
determined on the earlier of the date of the deconsolidation of the
subsidiary (or any successor) the stock of which gave rise to the
suspended stock loss and the date on which the stock of such subsidiary
is determined to be worthless. When it is determined that the
application of the loss suspension rule has permanently disallowed a
deduction for an economic loss, the taxpayer will be permitted to treat
the suspended stock loss as restored to the extent of such
disallowance. The restoration of the suspended loss is deemed to occur
immediately prior to the deconsolidation of the subsidiary or the
determination of worthlessness.
C. Basis Reduction Rule for Worthless Stock and Stock of a Subsidiary
With No Separate Return Year
The proposed regulations include a basis reduction rule intended to
prevent the duplication of unabsorbed losses generated by a subsidiary
member and loss with respect to the stock of that member if either (i)
the stock of the subsidiary member becomes worthless or (ii) the stock
of the subsidiary is disposed of and, immediately after the
disposition, the subsidiary is no longer a member of the group and does
not have a separate return year. Under this rule, immediately before a
determination of worthlessness, or immediately before a disposition of
a subsidiary that is not followed by a separate return year, the basis
of the subsidiary's stock is reduced by the amount of any loss
carryforwards that would be treated as attributable to the subsidiary
under the principles of Sec. 1.1502-21. This provision was included
because neither situation was subject to the loss suspension rule and,
without such a rule, taxpayers might take the position that a group is
entitled to a subsidiary member's loss carryforwards even after the
group has enjoyed full basis recovery through a worthless stock or
other deduction. Such a result, however, would be in contravention of
the principles of Notice 2002-18.
The proposed provision raised questions about the operation of the
existing rules governing this situation. Commentators contended that
the basis reduction rule could deny the group a single tax loss for its
economic loss. As stated above, the proposed regulations, including the
basis reduction rule, were not intended to disallow a tax loss for an
economic loss, but rather were intended only to ensure that a group
obtains no more than a single tax loss for an economic loss.
The temporary regulations address this situation by providing that
the unabsorbed losses generated by the subsidiary do not remain
available to the group. Specifically, the temporary regulations provide
that, if stock of a subsidiary member is treated as worthless under
section 165 (taking into account the provisions of Sec. 1.1502-80(c)),
or if a member of a group disposes of subsidiary member stock and on
the following day the subsidiary is not a member of the group and does
not have a separate return year, then all losses treated as
attributable to the subsidiary member under the principles of Sec.
1.1502-21, after computing the taxable income of the group, the
subsidiary member, or a group of which the subsidiary member was
previously a member for the taxable year that includes the
determination of worthlessness or the disposition and any prior taxable
year, shall be treated as expired, but not as absorbed by the group, as
of the beginning of the group's taxable year that follows the taxable
year that includes the determination of worthlessness or the
disposition. Under this rule, the stock loss (or reduced stock gain),
unreduced by any loss carryforwards attributable to the subsidiary
member, is allowed. Moreover, because the losses are treated as
expired, there is no possibility of a later, duplicative use of the
loss carryforwards. This approach is consistent with the nature of a
loss realized upon such a determination or disposition, i.e., a loss on
an investment in the subsidiary member.
Because the provisions of the proposed regulations raised questions
about the operation of the existing rules, the temporary regulations
include a special election for determinations of worthlessness and
dispositions that occurred on or after March 7, 2002, and
[[Page 12289]]
before March 14, 2003. In such cases, as an alternative to the
treatment described above, the common parent of the group may make an
irrevocable election to reattribute to itself all or a portion of the
losses attributable to the subsidiary member under the principles of
Sec. 1.1502-21. For purposes of applying the investment adjustment
rules to stock of the subsidiary member owned by the group, the
reattributed losses are treated as absorbed by the group immediately
prior to the allowance of any loss or inclusion of any income or gain
with respect to the determination of worthlessness or the disposition.
The common parent, however, is treated as succeeding to the
subsidiary's losses in a transaction described in section 381.
The IRS and Treasury Department request comments regarding whether
a subsidiary member the stock of which is determined to be worthless
(under the standards of Sec. 1.1502-80(c)) should be treated as a new
corporation for purposes of the Internal Revenue Code as of the date of
the determination of worthlessness. In addition, the IRS and Treasury
Department request comments regarding the desirability of further
clarification or changes regarding the standards that govern
determinations of worthlessness and the deductibility of losses (or the
inclusion of excess loss accounts) when stock of a subsidiary member is
determined to be worthless.
D. Deferral and Elimination of Gain
One comment noted that the basis redetermination rule of the
proposed regulations could be used to shift the location of gain and
loss within a consolidated group and even to eliminate gain in a manner
that is unintended and contrary to the purposes underlying section
337(d). The following example illustrates this concern.
P, the common parent of a consolidated group, owns all of the stock
of S1 and S2. The S2 stock has a basis of $400 and a value of $500. S1
owns 50% of the stock of the S3 common stock with a basis of $150 and
value equal to such amount. S2 owns the remaining 50% of the S3 common
stock with a basis of $100 and a value of $200 and one share of S3
preferred stock with a basis of $10 and a value of $9. P intends to
sell all of its S2 stock to an unrelated buyer that does not want to
acquire S3. P, therefore, engages in the following steps to dispose of
S2 without recognizing a substantial portion of the built-in gain in
S2. First, P causes a recapitalization of S3 in which S2's S3 common
stock is exchanged for new S3 preferred shares. P then sells all of its
S2 stock. Although the sale does not deconsolidate S3 (because all the
S3 common stock is still held by S1), it does deconsolidate the S3
preferred shares held by S2, including the one share with a built-in
loss. Accordingly, under the proposed regulations, the bases of all
shares of S3 stock must be redetermined immediately before P's sale of
S2. Under the basis redetermination rule, the total basis of S3 stock
held by members of the P group is allocated first to the S3 preferred
shares, up to their value of $209, and then to the remaining shares of
S3 common held by S1. S2's aggregate basis in the S3 preferred stock is
increased from $110 to $209. This increase tiers up and increases P's
basis in the S2 stock from $400 to $499. Accordingly, P will recognize
only $1 of gain on the sale of its S2 stock. Afterwards, P can cause S3
to redeem its preferred stock for $209. S2 will recognize no gain or
loss from the redemption. Although the unrecognized gain is preserved
in P's basis in S1, and S1's basis in S3, the group can defer or avoid
recognizing that gain.
In this case, there is no significant duplication of loss.
Moreover, the steps were structured with a view to avoiding the
recognition of gain on a disposition of stock. The IRS and Treasury
Department do not intend that the basis redetermination rule be applied
to defer or eliminate gain in such cases. The IRS and Treasury
Department considered adopting a mechanical test to prevent the
application of the basis redetermination rule in such cases. They
concluded that such a rule would not provide the flexibility necessary
to obtain an appropriate balancing of the concerns underlying this
regulation and those underlying section 337(d). Therefore, these
temporary regulations include an anti-abuse rule that provides that, if
a transaction is structured with a view to, and has the effect of,
deferring or avoiding the recognition of gain on a disposition of stock
by invoking application of the basis redetermination rule, and the
stock loss attributable to the transferred shares or the duplicated
loss of the subsidiary member that is reflected in subsidiary member
stock owned by members of the group is not significant, the basis
redetermination and loss suspension rules will not apply.
E. Request for Comments
As described above, the IRS and Treasury Department are continuing
to study the comments received regarding the proposed regulations. In
addition, the IRS and Treasury Department are considering alternative
regimes that would prevent the duplication of loss within the group.
In particular, the IRS and Treasury Department are studying a
comment that suggested applying the principles of section 704(c) to
allocate negative investment adjustments arising from loss items at the
subsidiary member level where there have been transfers of loss
property to the subsidiary member. The comment asserts that this
approach would address the case where the recognition and absorption of
the inside loss precedes the recognition of the stock loss. The IRS and
Treasury Department are concerned that this alternative approach
addresses only duplicative losses that arise as a result of
contributions of loss property, not duplicative losses that arise as a
result of a loss incurred by a subsidiary member. In addition, the IRS
and Treasury Department are concerned that the application of the
principles of section 704(c) may be complex, especially in cases where
there have been issuances of subsidiary member stock at different
times. The IRS and Treasury Department request comments regarding how
the principles of section 704(c) should be applied in the consolidated
return context to prevent the duplication of loss.
The IRS and Treasury Department are also studying a suggestion that
the type of transaction in which the stock loss is recognized prior to
the absorption of the inside loss be addressed by a rule that allows
the stock loss but limits the use of the subsidiary member's items of
loss and deduction if there have been contributions of loss property
with respect to the subsidiary member and there is any loss duplication
at the subsidiary member level at the time the stock loss is
recognized. That rule would not permit the use of the subsidiary's
items of loss and deduction that are duplicative of the stock loss to
offset income of another member of the group, but would permit such
items to offset income of the subsidiary.
This rule effectively would permit the acceleration of stock loss.
The IRS and Treasury Department request comments regarding whether
permitting such acceleration would clearly reflect the income of the
group.
In addition, because this rule would permit the subsidiary's losses
to offset its items of income and gain, it would not prevent the
duplication of losses within the group to that extent. The IRS and
Treasury Department request comments regarding whether this duplication
is appropriate given that the benefits associated with the subsidiary
and its shareholder being members of the group (e.g., positive basis
[[Page 12290]]
adjustments to the shareholder member's stock of the subsidiary member
that reflect income of the subsidiary member and the group's ability to
use the loss recognized by another member to offset income of the
subsidiary member of the group) have been enjoyed by the group.
Finally, this rule would address only cases of duplication where
there have been contributions of loss property. As described above, the
IRS and Treasury Department are concerned that contributions of loss
property are not the only types of transactions in which a group can
obtain more than one tax benefit from a single economic loss.
The IRS and Treasury Department are considering a variation of this
suggested rule to address the situation where the stock loss is
recognized prior to the absorption of the inside loss. This variation
would allow the stock loss when recognized, but would disallow the
inside losses of the subsidiary to the extent that such losses reflect
losses that were duplicate losses at the time of the recognition of the
stock loss. Such losses may be attributable to contributed property or
losses that arose in the subsidiary member. The IRS and Treasury
Department request comments regarding this variation.
Finally, the IRS and Treasury Department continue to request
comments regarding any other approaches that could be implemented to
address the duplication of loss within a consolidated group.
Special Analyses
In Rite Aid Corp. v. United States, 255 F.3d 1357 (Fed. Cir. 2001),
the United States Court of Appeals for the Federal Circuit held that
the duplicated loss component of Sec. 1.1502-20 was an invalid
exercise of regulatory authority. In response to the Rite Aid decision,
the IRS and Treasury Department issued Notice 2002-11 (2002-7 I.R.B.
526), stating that the interests of sound tax administration would not
be served by the continued litigation of the validity of the duplicated
loss component of Sec. 1.1502-20. Notice 2002-11 also announced that
because of the interrelationship in the operation of all of the loss
disallowance factors, new rules governing loss disallowance on sales of
subsidiary stock by members of consolidated groups should be
implemented.
In Notice 2002-18 (2002-12 I.R.B. 644), the IRS and Treasury
Department stated that regulations would be promulgated that would
defer or otherwise limit the utilization of a loss on stock (or another
asset that reflects the basis of stock) in transactions that facilitate
the group's utilization of a single economic loss more than once.
Notice 2002-18 further stated that such regulations would apply to
dispositions occurring on or after March 7, 2002. These temporary
regulations implement Notice 2002-18 and are necessary to provide
taxpayers with immediate guidance regarding stock basis and allowable
loss in connection with transfers of subsidiary member stock.
Accordingly, good cause is found for dispensing with a delayed
effective date pursuant to 5 U.S.C. 553(d)(3).
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. It is hereby
certified that these regulations do not have a significant impact on a
substantial number of small entities. This certification is based on
the fact that these regulations will primarily affect affiliated groups
of corporations, which tend to be larger businesses. Moreover, the
number of taxpayers affected and the average burden are minimal.
Therefore, a Regulatory Flexibility Analysis is not required. Pursuant
to section 7805(f) of the Internal Revenue Code, these regulations will
be submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on their impact on small businesses.
Drafting Information
The principle author of these regulations is Aimee K. Meacham of
the Office of 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.
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 in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1502-21T(b)(1) and (b)(3)(v) also issued under 26
U.S.C. 1502. * * *
Section 1.1502-32T(a)(2), (b)(3)(iii)(C), (b)(3)(iii)(D), and
(b)(4)(vi) also issued under 26 U.S.C. 1502. * * *
Section 1.1502-35T also issued under 26 U.S.C. 1502. * * *
Par. 2. In the list below, for each section indicated in the left
column, remove the wording indicated in the middle column, and add the
wording indicated in the right column.
------------------------------------------------------------------------
Affected section Remove Add
------------------------------------------------------------------------
Sec. 1.267(f)-1(k)........ Sec. Sec. Sec. Sec.
1.337(d)-1, Sec. 1.337(d)-2T, 1.1502-
Sec. 1.337(d)-2, 13(f)(6), and
1.1502-13(f)(6), 1.1502-35T.
and 1.1502-20.
Sec. 1.597-3(e)........... Loss disallowance. [Reserved].
For purposes of
Sec. 1.1502-20,
FFA and the amount
described in Sec.
1.597-4(g)(3) are
treated as an
extraordinary gain
disposition within
the meaning of Sec.
1.1502-
20(c)(2)(i) and a
Taxable Transfer is
treated as an
applicable asset
acquisition under
section 1060(c)
within the meaning
of Sec. 1.1502-
20(c)(2)(i)(A)(4).
Sec. 1.597-4(g)(2)(v), (See Sec. Sec. (See Sec. Sec.
second sentence. 1.337(d)-1 and 1.337(d)-2T and
1.1502-20 for 1.1502-35T(f) for
potential rules applicable
limitations on the when a member of a
group's worthless consolidated group
stock deduction). is entitled to a
worthless stock
deduction with
respect to stock of
another member of
the group.)
Sec. 1.1502-11(b)(3)(ii) See also Sec. See also Sec. Sec.
Example (c), third sentence. 1.1502-20 for rules 1.337(d)-2T and
applicable to 1.1502-35T for
losses from the rules relating to
sale of stock of basis adjustments
subsidiaries. and allowance of
stock loss on
dispositions of
stock of a
subsidiary member.
[[Page 12291]]
Sec. 1.1502-12(r)......... For rulings relating See Sec. Sec.
to loss 1.337(d)-2T and
disallowance or 1.1502-35T(f) for
basis reduction on rules relating to
the disposition or basis adjustments
deconsolidation of and allowance of
stock of a stock loss on
subsidiary, see dispositions of
Sec. Sec. stock of a
1.337(d)-1, subsidiary member.
1.337(d)-2 and
1.1502-20.
Sec. 1.1502-13(f)(7), See also Sec. ....................
Example 1(e), sixth 1.1502-20(b)
sentence. (additional stock
basis reductions
applicable to
certain
deconsolidations).
Sec. 1.1502-15(b)(2)(iii), (e.g., under Sec. (e.g., under Sec.
first sentence. 1.1502-20 or Sec. 1.337(d)-2T,
section 267). 1.1502-35T, or
section 267)
Sec. 1.1502-21(b)(2)(i), For rules permitting ....................
third sentence. the reattribution
of losses of a
subsidiary to the
common parent when
loss is disallowed
on the disposition
of subsidiary
stock, see Sec.
1.1502-20(g).
Sec. 1.1502- Sec. 1.1502-20(b), Sec. 1.1502-35T(b)
32(b)(3)(iii)(B), third or Sec. 1.1502- or (f)(2)
sentence. 20(g).
Sec. 1.1502-32(b)(5)(ii), See also Sec. ....................
Example 2(b), last sentence. 1.1502-20(b)
(possible stock
basis reduction on
the deconsolidation
of S).
Sec. 1.1502-32(e)(2), (Section Sec. ....................
Example 4(a), fourth 1.1502-20(b) does
sentence. not reduce P's
basis in the S
stock as a result
of S's
deconsolidation).
Sec. 1.1502-80(c), last See Sec. 1.1502- See Sec. 1.1502-
sentence. 11(c) and 1.1502-20 11(c) and 1.1502-
for additional 35T for additional
rules relating to rules relating to
stock loss. stock loss.
Sec. 1.1502-91(h)(2), (unless disallowed (unless disallowed
first sentence. under Sec. 1.1502- under Sec.
20 or otherwise). 1.337(d)-2T, 1.1502-
35T, or otherwise)
------------------------------------------------------------------------
Par. 3. Section 1.1502-21 is amended by:
1. Revising paragraph (b)(1).
2. Adding paragraphs (b)(3)(v) and (h)(7).
The revisions and addition read as follows:
Sec. 1.1502-21 Net operating losses.
* * * * *
(b) * * *
(1) [Reserved]. For further guidance, see Sec. 1.1502-21T(b)(1).
* * * * *
(3) * * *
(v) [Reserved]. For further guidance, see Sec. 1.1502-
21T(b)(3)(v).
* * * * *
(h) * * *
(7) [Reserved]. For further guidance, see Sec. 1.1502-21T(h)(7).
Par. 4. Section 1.1502-21T is revised to read as follows:
Sec. 1.1502-21T Net operating losses (temporary).
(a) [Reserved]. For further guidance, see Sec. 1.1502-21(a).
(b) [Reserved]. For further guidance, see Sec. 1.1502-21(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. Additional rules 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 Example 2 of paragraph (c)(1)(iii)
of this section 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).
(b)(2) through (b)(3)(iv) [Reserved]. For further guidance, see
Sec. 1.1502-21(b)(2) through (b)(3)(iv).
(b)(3)(v) Losses treated as expired under Sec. 1.1502-35T(f)(1).
No loss treated as expired by Sec. 1.1502-35T(f)(1) may be carried
over to any consolidated return year of the group.
(c) through (h)(6) [Reserved]. For further guidance, see Sec.
1.1502-21(c) through (h)(6).
(h)(7) 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.
Par. 5. Section 1.1502-32 is amended by:
1. Revising paragraph (a)(2).
2. Adding paragraphs (b)(3)(iii)(C), (b)(3)(iii)(D), (b)(4)(vi),
and (h)(6).
The revision and additions read as follows:
Sec. 1.1502-32 Investment adjustments.
* * * * *
(a)(2) [Reserved]. For further guidance, see Sec. 1.1502-
32T(a)(2).
(b)(3)(iii)(C) and (D) [Reserved]. For further guidance, see Sec.
1.1502-32T(b)(3)(iii)(C) and (D).
* * * * *
(b)(4)(vi) [Reserved]. For further guidance, see Sec. 1.1502-
32T(b)(4)(vi).
* * * * *
(h)(6) [Reserved]. For further guidance, see Sec. 1.1502-
32T(h)(6).
Par. 6. Section 1.1502-32T is revised to read as follows:
Sec. 1.1502-32T Investment adjustments (temporary).
(a) and (a)(1) [Reserved]. For further guidance, see Sec. 1.1502-
32(a) and (a)(1).
(a)(2) Application of other rules of law. The rules of this section
are in addition to other rules of law. See, e.g., section 358 (basis
determinations for distributees), section 1016 (adjustments to basis),
Sec. 1.1502-11(b) (limitations on the use of losses), Sec. 1.1502-19
(treatment of excess loss accounts), Sec. 1.1502-31 (basis after a
group structure change), and Sec. 1.1502-35T (additional rules
relating to stock loss, including losses attributable to worthlessness
and certain dispositions not followed by a separate return year). P's
basis in S's stock must not be adjusted under this section and other
rules of law in a manner that has the effect of duplicating an
adjustment. For example, if pursuant to Sec. 1.1502-35T(c)(3) and
paragraph (b)(3)(iii)(C) of this section the basis in stock is reduced
to take into account a loss suspended under Sec. 1.1502-35T(c)(1),
such basis shall not be further reduced to take into account such loss,
or a portion of such loss, if any, that is later allowed pursuant to
Sec. 1.1502-35T(c)(5). See also paragraph (h)(5) of this section for
basis
[[Page 12292]]
reductions applicable to certain former subsidiaries.
(b) through (b)(3)(iii)(B) [Reserved]. For further guidance, see
Sec. 1.1502-32(b) through (b)(3)(iii)(B).
(b)(3)(iii)(C) Loss suspended under Sec. 1.1502-35T(c). Any loss
suspended pursuant to Sec. 1.1502-35T(c) is treated as a noncapital,
nondeductible expense incurred during the taxable year that includes
the date of the disposition to which such section applies. See Sec.
1.1502-35T(c)(3). Consequently, the basis of a higher-tier member's
stock of P is reduced by the suspended loss in the year it is
suspended.
(D) Loss disallowed under Sec. 1.1502-35T(g)(3)(iii). Any loss or
deduction the use of which is disallowed pursuant to Sec. 1.1502-
35T(g)(3)(iii) (other than a loss or deduction described in Sec.
1.1502-35T(g)(3)(i)(B)(11)), and with respect to which no waiver
described in paragraph (b)(4) of this section is filed, is treated as a
noncapital, nondeductible expense incurred during the taxable year that
such loss would otherwise be absorbed. See Sec. 1.1502-35T(g)(3)(iv).
(b)(4) through (b)(4)(v) [Reserved]. For further guidance, see
Sec. 1.1502-32(b)(4) through (b)(4)(v).
(b)(4)(vi) Special rules in the case of certain transactions
subject to Sec. 1.1502-35T. If a member of a consolidated group
transfers stock of a subsidiary member and such stock has a basis that
exceeds its value immediately before such transfer or a subsidiary
member is deconsolidated and any stock of such subsidiary member owned
by members of the group immediately before such deconsolidation has a
basis that exceeds its value, all members of the group are subject to
the provisions of Sec. 1.1502-35T(b), which generally require a
redetermination of members' basis in all shares of subsidiary stock. In
addition, if stock of a subsidiary member is treated as worthless under
section 165 (taking into account the provisions of Sec. 1.1502-80(c)),
or if a member of a group disposes of subsidiary member stock and on
the following day the subsidiary is not a member of the group and does
not have a separate return year, and the common parent makes an
election under Sec. 1.1502-35T(f)(2) to reattribute to itself the
losses treated as attributable to such subsidiary member, Sec. 1.1502-
35T(f)(2) requires a reduction of members' basis in shares of
subsidiary stock.
(c) through (h)(5)(ii) [Reserved]. For further guidance, see Sec.
1.1502-32(c) through (h)(5)(ii).
(h)(6) Loss suspended under Sec. 1.1502-35T(c) or disallowed under
Sec. 1.1502-35T(g)(3)(iii). Paragraphs (a)(2), (b)(3)(iii)(C),
(b)(3)(iii)(D) and (b)(4)(vi) of this section are effective on and
after March 7, 2002, and expire on March 11, 2006.
Par. 7. Section 1.1502-35T is added to read as follows:
Sec. 1.1502-35T Transfers of subsidiary member stock and
deconsolidations of subsidiary members (temporary).
(a) 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 consistent
with that purpose and in a manner that reasonably carries out that
purpose.
(b) Redetermination of basis on certain nondeconsolidating
transfers of subsidiary member stock and on certain deconsolidations of
subsidiary members--(1) Redetermination of basis on certain
nondeconsolidating transfers of subsidiary member stock. Except as
provided in paragraph (b)(3)(i) of this section, if, immediately after
a transfer of stock of a subsidiary member that has a basis that
exceeds its value, the subsidiary member remains a member of the group,
then the basis in each share of subsidiary member stock owned by each
member of the group shall be redetermined in accordance with the
provisions of this paragraph (b)(1) immediately before such transfer.
All of the members' bases in the shares of subsidiary member stock
immediately before such transfer shall be aggregated. Such aggregated
basis shall be allocated first to the shares of the subsidiary member's
preferred stock that are owned by the members of the group immediately
before such transfer, in proportion to, but not in excess of, the value
of those shares at such time. After allocation of the aggregated basis
to all shares of the preferred stock of the subsidiary member pursuant
to the preceding sentence, any remaining basis shall be allocated among
all common shares of subsidiary member stock held by members of the
group immediately before the transfer, in proportion to the value of
such shares at such time.
(2) Redetermination of basis on certain deconsolidations of
subsidiary members.--(i) Allocation of reallocable basis amount. Except
as provided in paragraph (b)(3)(ii) of this section, if, immediately
before a deconsolidation of a subsidiary member, any share of stock of
such subsidiary owned by a member of the group has a basis that exceeds
its value, then the basis in each share of the subsidiary member's
stock owned by each member of the group shall be redetermined in
accordance with the provisions of this paragraph (b)(2) immediately
before such deconsolidation. The basis in each share of the subsidiary
member's stock held by members of the group immediately before the
deconsolidation that has a basis in excess of value at such time shall
be reduced, but not below such share's value, in a manner that, to the
greatest extent possible, causes the ratio of the basis to the value of
each such share to be the same; provided, however, that the aggregate
amount of such reduction shall not exceed the reallocable basis amount
(as computed pursuant to paragraph (b)(2)(ii) of this section). Then,
to the extent of the reallocable basis amount, the basis of each share
of the preferred stock of the subsidiary member that are held by
members of the group immediately before the deconsolidation shall be
increased, but not above such share's value, in a manner that, to the
greatest extent possible, causes the ratio of the basis to the value of
each such share to be the same. Then, to the extent that the
reallocable basis amount does not increase the basis of shares of
preferred stock of the subsidiary member pursuant to the third sentence
of this paragraph (b)(2)(i), such amount shall increase the basis of
all common shares of the subsidiary member's stock held by members of
the group immediately before the deconsolidation in a manner that, to
the greatest extent possible, causes the ratio of the basis to the
value of each such share to be the same.
(ii) Calculation of reallocable basis amount. The reallocable basis
amount shall equal the lesser of--
(A) The aggregate of all amounts by which, immediately before the
deconsolidation, the basis exceeds the value of a share of subsidiary
member stock owned by any member of the group at such time; and
(B) The total of the subsidiary member's (and any predecessor's)
items of deduction and loss, and the subsidiary member's (and any
predecessor's) allocable share of items of deduction and loss of all
lower-tier subsidiary members, that were taken into account in
computing the adjustment under Sec. 1.1502-32 to the bases of shares
of stock of the subsidiary member (and any predecessor) held by members
of the group immediately before the deconsolidation, other than shares
that have bases in excess of value immediately before the
deconsolidation.
(3) Exceptions to application of redetermination rules. (i)
Paragraph (b)(1) of this section shall not apply to a transfer of
subsidiary member stock if--
(A) During the taxable year of such transfer, in one or more fully
taxable transactions, the members of the group
[[Page 12293]]
dispose of all of the shares of the subsidiary member stock that they
own immediately before the transfer, other than the shares the transfer
of which would otherwise trigger the application of paragraph (b)(1) of
this section, to a person or persons that are not members of the group;
(B) During the taxable year of such transfer, the members of the
group are allowed a worthless stock loss under section 165(g) (taking
into account the provisions of Sec. 1.1502-80(c)) with respect to all
of the shares of subsidiary member stock that they own immediately
before the transfer, other than the shares the transfer of which would
otherwise trigger the application of paragraph (b)(1) of this section;
or
(C) Such transfer is to a member of the group and section 332
(provided the stock is transferred to an 80-percent distributee),
section 351, or section 361 applies to such transfer.
(ii) Paragraph (b)(2) of this section shall not apply to a
deconsolidation of a subsidiary member if--
(A) During the taxable year of such deconsolidation, in one or more
fully taxable transactions, the members of the group dispose of all of
the shares of the subsidiary member stock that they own immediately
before the deconsolidation to a person or persons that are not members
of the group;
(B) Such deconsolidation results from a fully taxable disposition,
to a person or persons that are not members of the group, of some of
the shares of the subsidiary member, and, during the taxable year of
such deconsolidation, the members of the group are allowed a worthless
stock loss under section 165(g) with respect to all of the shares of
subsidiary member stock that they own immediately after the
deconsolidation; or
(C) The deconsolidation of the subsidiary member results from the
deconsolidation of a higher-tier subsidiary member and, immediately
after the deconsolidation of the subsidiary member, none of the stock
of the subsidiary member is owned by a group member.
(4) Special rule for lower-tier subsidiaries. If, immediately after
a transfer of subsidiary member stock or a deconsolidation of a
subsidiary member, a lower-tier subsidiary member some of the stock of
which is owned by the subsidiary member is a member of the group, then,
for purposes of applying paragraph (b) of this section, the subsidiary
member shall be treated as having transferred its stock of the lower-
tier subsidiary member. This principle shall apply to stock of
subsidiary members that are owned by such lower-tier subsidiary member.
(5) Stock basis adjustments for higher-tier stock. The basis
adjustments required under this paragraph (b) result in basis
adjustments to higher-tier member stock. The adjustments are applied in
the order of the tiers, from the lowest to highest. For example, if a
common parent owns stock of a subsidiary member that owns stock of a
lower-tier subsidiary member and the subsidiary member recognizes a
loss on the disposition of a portion of its shares of the lower-tier
subsidiary member stock, the common parent must adjust its basis in its
subsidiary member stock under the principles of Sec. 1.1502-32 to
reflect the adjustments that the subsidiary member must make to its
basis in its stock of the lower-tier subsidiary member.
(6) Ordering rules. (i) The rules of this paragraph (b) apply after
the rules of Sec. 1.1502-32 are applied.
(ii) The rules of this paragraph (b) apply before the rules of
Sec. 1.337(d)-2T and paragraph (c) of this section are applied.
(iii) Paragraph (b) of this section (and any resulting basis
adjustments to higher-tier member stock made pursuant to paragraph
(b)(5) of this section) applies to redetermine the basis of stock of a
lower-tier subsidiary member before paragraph (b) of this section
applies to a higher-tier member of such lower-tier subsidiary member.
(c) Loss suspension--(1) General rule. Any loss recognized by a
member of a consolidated group with respect to the disposition of a
share of subsidiary member stock shall be suspended to the extent of
the duplicated loss with respect to such share of stock if, immediately
after the disposition, the subsidiary is a member of the consolidated
group of which it was a member immediately prior to the disposition (or
any successor group).
(2) Special rule for lower-tier subsidiaries. This paragraph (c)(2)
applies if neither paragraph (c)(1) nor (f) of this section applies to
a member's disposition of a share of stock of a subsidiary member (the
departing member), a loss is recognized on the disposition of such
share, and the departing member owns stock of one or more other
subsidiary members (a remaining member) that is a member of such group
immediately after the disposition. In that case, such loss shall be
suspended to the extent the duplicated loss with respect to the
departing member stock disposed of is attributable to the remaining
member or members.
(3) Treatment of suspended loss. For purposes of the rules of Sec.
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 member 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 Sec.
1.1502-32T(b)(3)(iii)(C). Consequently, the basis of a higher-tier
member's stock of the member that disposes of subsidiary member stock
is reduced by the suspended loss in the year it is suspended.
(4) Reduction of suspended loss--(i) General rule. The amount of
any loss suspended pursuant to paragraphs (c)(1) and (c)(2) of this
section shall be reduced, but not below zero, by the subsidiary
member's (and any successor's) items of deduction and loss, and the
subsidiary member's (and any successor's) allocable share of items of
deduction and loss of all lower-tier subsidiary members, 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 member (or 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 member
(or 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 Sec. 1.1502-32 to stock
of the subsidiary member (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 member on the date of the
disposition of stock that gave rise to the suspended loss.
(ii) Operating rules--(A) Year in which deduction or loss is taken
into account. For purposes of paragraph (c)(4)(i) of this section, a
subsidiary member's (or any successor's) deductions and losses are
treated as taken into account when and to the extent they are absorbed
by the subsidiary member (or any successor) or
[[Page 12294]]
any other member. To the extent that the subsidiary member's (or any
successor's) deduction or loss is absorbed in the year it arises or is
carried forward and absorbed in a subsequent year (e.g., under section
172, 465, or 1212), the deduction is treated as taken into account in
the year in which it is absorbed. To the extent that a subsidiary
member's (or any successor's) deduction or loss is carried back and
absorbed in a prior year (whether consolidated or separate), the
deduction or loss is treated as taken into account in the year in which
it arises and not in the year in which it is absorbed.
(B) Determination of items that are allocable to the post-
disposition, pre-deconsolidation period. For purposes of paragraph
(c)(4)(i) of this section, the determination of whether a subsidiary
member's (or any successor's) items of deduction and loss and allocable
share of items of deduction and loss of all lower-tier subsidiary
members are allocable to the period beginning on the date of the
disposition of subsidiary stock that gave rise to the suspended loss
and ending on the day before the first date on which the subsidiary
member (or any successor) is not a member of the consolidated group of
which it was a member immediately prior to the disposition (or any
successor group) is determined pursuant to the rules of Sec. 1.1502-
76(b)(2), without regard to Sec. 1.1502-76(b)(2)(ii)(D), as if the
subsidiary member ceased to be a member of the group at the end of the
day before the disposition and filed separate returns for the period
beginning on the date of the disposition and ending on the day before
the first date on which it is not a member of such group.
(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 thereunder, 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 day before the first date
on which the subsidiary (or any successor) is not a member of such
group or the date the group is allowed a worthless stock loss under
section 165(g) (taking into account the provisions of Sec. 1.1502-
80(c)) with respect to all of the subsidiary member stock owned by
members.
(ii) No tiering up of certain adjustments. No adjustments shall be
made to a member's basis of stock of a subsidiary member (or any
successor) for a suspended loss that is taken into account under
paragraph (c)(5)(i) of this section. See Sec. 1.1502-32T(a)(2).
(iii) Statement of allowed loss. Paragraph (c)(5)(i) of this
section applies only if the separate statement required under this
paragraph (c)(5)(iii) is filed with, or as part of, the taxpayer's
return for the year in which the loss is allowable. The statement must
be entitled ``ALLOWED LOSS UNDER Sec. 1.1502-35T(c)(5)'' and must
contain the name and employer identification number of the subsidiary
the stock of which gave rise to the loss.
(6) Special rule for dispositions of certain carryover basis
assets. If--
(i) A member of a group recognizes a loss on the disposition of an
asset other than stock of a subsidiary member;
(ii) Such member's basis in the asset disposed of was determined,
directly or indirectly, in whole or in part, by reference to the basis
of stock of a subsidiary member and, at the time of the determination
of the member's basis in the asset disposed of, there was a duplicated
loss with respect to such stock of the subsidiary member; and
(iii) Immediately after the disposition, the subsidiary member is a
member of such group, then such loss shall be suspended pursuant to the
principles of paragraphs (c)(1) and (c)(2) of this section to the
extent of the duplicated loss with respect to such stock at the time of
the determination of basis of the asset disposed of. Principles similar
to those set forth in paragraphs (c)(3), (c)(4), and (c)(5) of this
section shall apply to a loss suspended pursuant to this paragraph
(c)(6).
(7) Coordination with loss deferral, loss disallowance, and other
rules--(i) In general. Loss recognized on the disposition of subsidiary
member stock or another asset is subject to redetermination, deferral,
or disallowance under other applicable provisions of the Internal
Revenue Code and regulations thereunder, including sections 267(f) and
482. Paragraphs (c)(1), (c)(2), and (c)(6) of this section do not apply
to a loss that is disallowed under any other provision. If loss is
deferred under any other provision, paragraphs (c)(1), (c)(2), and
(c)(6) of this section apply when the loss would otherwise be taken
into account under such other provision. However, if an overriding
event described in paragraph (c)(7)(ii) of this section occurs before
the deferred loss is taken into account, paragraphs (c)(1), (c)(2), and
(c)(6) of this section apply to the loss immediately before the event
occurs, even though the loss may not be taken into account until a
later time.
(ii) Overriding events. For purposes of paragraph (c)(7)(i) of this
section, the following are overriding events--
(A) The stock ceases to be owned by a member of the consolidated
group;
(B) The stock is canceled or redeemed (regardless of whether it is
retired or held as treasury stock); or
(C) The stock is treated as disposed of under Sec. 1.1502-
19(c)(1)(ii)(B) or (c)(1)(iii).
(8) Application. This paragraph (c) shall not be applied in a
manner that permanently disallows a deduction for an economic loss,
provided that such deduction is otherwise allowable. If the application
of any provision of this paragraph (c) results in such a disallowance,
proper adjustment may be made to prevent such a disallowance. Whether a
provision of this paragraph (c) has resulted in such a disallowance is
determined on the date on which the subsidiary (or any successor) the
disposition of the stock of which gave rise to a suspended stock loss
is not a member of the group or the date the group is allowed a
worthless stock loss under section 165(g) (taking into account the
provisions of Sec. 1.1502-80(c)) with respect to all of such
subsidiary member stock owned by members. Proper adjustment in such
cases shall be made by restoring the suspended stock loss immediately
before the subsidiary ceases to be a member of the group or the group
is allowed a worthless stock loss under section 165(g) (taking into
account the provisions of Sec. 1.1502-80(c)) with respect to all of
such subsidiary member stock owned by members, to the extent that its
reduction pursuant to paragraph (c)(4) of this section had the result
of permanently disallowing a deduction for an economic loss.
(9) Ordering rule. The rules of this paragraph (c) apply after the
rules of paragraph (b) of this section and Sec. 1.337(d)-2T are
applied.
(d) Definitions--(1) Disposition. Disposition means any event in
which gain or loss is recognized, in whole or in part.
(2) Deconsolidation. Deconsolidation means any event that causes a
subsidiary member to no longer be a member of the consolidated group.
(3) Value. Value means fair market value.
(4) Duplicated loss--(i) In general. Duplicated loss is determined
immediately after a disposition and equals the excess, if any, of--
(A) The sum of--
[[Page 12295]]
(1) The aggregate adjusted basis of the subsidiary member's assets
other than any stock that subsidiary member owns in another subsidiary
member; and
(2) Any losses attributable to the subsidiary member and carried to
the subsidiary member's first taxable year following the disposition;
and
(3) Any deductions of the subsidiary member that have been
recognized but are deferred under a provision of the Internal Revenue
Code (such as deductions deferred under section 469); over
(B) The sum of--
(1) The value of the subsidiary member's stock; and
(2) Any liabilities of the subsidiary member that have been taken
account for tax purposes.
(ii) Special rules. (A) The amounts determined under paragraph
(d)(4)(i) (other than amounts described in paragraph (d)(4)(i)(B)(1))
of this section with respect to a subsidiary member include its
allocable share of corresponding amounts with respect to all lower-tier
subsidiary members. If 80 percent or more in value of the stock of a
subsidiary member is acquired by purchase in a single transaction (or
in a series of related transactions during any 12-month period), the
value of the subsidiary member's stock may not exceed the purchase
price of the stock divided by the percentage of the stock (by value) so
purchased. For this purpose, stock is acquired by purchase if the
transferee is not related to the transferor within the meaning of
sections 267(b) and 707(b)(1), using the language ``'10 percent'''
instead of ``'50 percent''' each place that it appears, and the
transferee's basis in the stock is determined wholly by reference to
the consideration paid for such stock.
(B) The amounts determined under paragraph (d)(4)(i) of this
section are not applied more than once to suspend a loss under this
section.
(5) Predecessor and Successor. A predecessor is a transferor of
assets to a transferee (the successor) in a transaction--
(i) To which section 381(a) applies;
(ii) In which substantially all of the assets of the transferor are
transferred to members in a complete liquidation;
(iii) In which the successor's basis in assets is determined
(directly or indirectly, in whole or in part) by reference to the
transferor's basis in such assets, but the transferee is a successor
only with respect to the assets the basis of which is so determined; or
(iv) Which is an intercompany transaction, but only with respect to
assets that are being accounted for by the transferor in a prior
intercompany transaction.
(6) Successor group. A surviving group is treated as a successor
group of a consolidated group (the terminating group) that ceases to
exist as a result of--
(i) The acquisition by a member of another consolidated group 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
(ii) The application of the principles of Sec. 1.1502-75(d)(2) or
(3).
(7) Preferred stock, common stock. Preferred stock and common stock
shall have the meanings set forth in Sec. 1.1502-32(d)(2) and (3),
respectively.
(8) Higher-tier. A subsidiary member is higher-tier with respect to
a member if or to the extent investment basis adjustments under Sec.
1.1502-32 with respect to the stock of the latter member would affect
investment basis adjustments with respect to the stock of the former
member.
(9) Lower-tier. A subsidiary member is lower-tier with respect to a
member if or to the extent investment basis adjustments under Sec.
1.1502-32 with respect to the stock of the former member would affect
investment basis adjustments with respect to the stock of the latter
member.
(e) Examples. For purposes of the examples in this section, all
groups file consolidated returns on a calendar-year basis, the facts
set forth the only corporate activity, all transactions are between
unrelated persons unless otherwise specified, and tax liabilities are
disregarded. The principles of paragraphs (a) through (d) of this
section are illustrated by the following examples:
Example 1. Nondeconsolidating sale of preferred stock of lower-
tier subsidiary member. (i) Facts. P owns 100 percent of the common
stock of each of S1 and S2. S1 and S2 each have only one class of
stock outstanding. P's basis in the stock of S1 is $100 and the
value of such stock is $130. P's basis in the stock of S2 is $120
and the value of such stock is $90. P, S1, and S2 are all members of
the P group. S1 and S2 form S3. In Year 1, in transfers to which
section 351 applies, S1 contributes $100 to S3 in exchange for all
of the common stock of S3 and S2 contributes an asset with a basis
of $50 and a value of $20 to S3 in exchange for all of the preferred
stock of S3. S3 becomes a member of the P group. In Year 3, in a
transaction that is not part of the plan that includes the
contributions to S3, S2 sells the preferred stock of S3 for $20.
Immediately after the sale, S3 is a member of the P group.
(ii) Application of basis redetermination rule. Because S2's
basis in the preferred stock of S3 exceeds its value immediately
prior to the sale and S3 is a member of the P group immediately
after the sale, all of the P group members' bases in the stock of S3
is redetermined pursuant to paragraph (b)(1) of this section. Of the
group members' total basis of $150 in the S3 stock, $20 is allocated
to the preferred stock, the fair market value of the preferred stock
on the date of the sale, and $130 is allocated to the common stock.
S2's sale of the preferred stock results in the recognition of $0 of
gain/loss. Pursuant to paragraph (b)(5) of this section, the
redetermination of S1's and S2's bases in the stock of S3 results in
adjustments to P's basis in the stock of S1 and S2. In particular,
P's basis in the stock of S1 is increased by $30 to $130 and its
basis in the stock of S2 is decreased by $30 to $90.
Example 2. Deconsolidating sale of common stock. (i) Facts. In
Year 1, in a transfer to which section 351 applies, P contributes
Asset A with a basis of $900 and a value of $200 to S in exchange
for one share of S common stock (CS1). In Years 2 and 3, in
successive but unrelated transfers to which section 351 applies, P
transfers $200 to S in exchange for one share of S common stock
(CS2), Asset B with a basis of $300 and a value of $200 in exchange
for one share of S common stock (CS3), and Asset C with a basis of
$1000 and a value of $200 in exchange for one share of S common
stock (CS4). In Year 4, S sells Asset A for $200, recognizing $700
of loss that is used to offset income of P recognized during Year 4.
As a result of the sale of Asset A, the basis of each of P's four
shares of S common stock is reduced by $175. Therefore, the basis of
CS1 is $725. The basis of CS2 is $25. The basis of CS3 is $125, and
the basis of CS4 is $825. In Year 5 in a transaction that is not
part of a plan that includes the Year 1 contribution, P sells CS4
for $200. Immediately after the sale of CS4, S is not a member of
the P group.
(ii) Application of basis redetermination rule. Because P's
basis in each of CS1 and CS4 exceeds its value immediately prior to
the deconsolidation of S, P's basis in its shares of S common stock
is redetermined pursuant to paragraph (b)(2) of this section.
Pursuant to paragraph (b)(2)(ii) of this section, the reallocable
basis amount is $350 (the lesser of $1150, the gross loss inherent
in the stock of S owned by P immediately before the sale, and $350,
the aggregate amount of S's items of deduction and loss that were
previously taken into account in the computation of the adjustment
to the basis of the stock of S that P did not hold at a loss
immediately before the deconsolidation). Pursuant to paragraph
(b)(2)(i) of this section, first, P's basis in CS1 is reduced from
$725 to $600 and P's basis in CS4 is reduced from $825 to $600.
Then, the reallocable basis amount increases P's basis in CS2 from
$25 to $250 and P's basis in CS3 from $125 to $250. P recognizes
$400 of loss on the sale of CS4. The loss suspension rule does not
apply because S is no longer a member of the P group. Thus, the loss
is allowable at that time.
Example 3. Nondeconsolidating sale of common stock. (i) Facts.
In Year 1, P forms S with a contribution of $80 in exchange for 80
shares of the common stock of S, which at that time represents all
of the outstanding
[[Page 12296]]
stock of S. S becomes a member of the P group. In Year 2, P
contributes Asset A with a basis of $50 and a value of $20 in
exchange for 20 shares of the common stock of S in a transfer to
which section 351 applies. In Year 3, in a transaction that is not
part of the plan that includes the Year 2 contribution, P sells the
20 shares of the common stock of S that it acquired in Year 2 for
$20. Immediately after the Year 3 stock sale, S is a member of the P
group. At the time of the Year 3 stock sale, S has $80 and Asset A.
In Year 4, S sells Asset A , the basis and value of which have not
changed since its contribution to S. On the sale of Asset A for $20,
S recognizes a $30 loss. The P group cannot establish that all or a
portion of the $30 loss was not reflected in the calculation of the
duplicated loss of S on the date of the Year 3 stock sale. The $30
loss is used on the P group return to offset income of P. In Year 5,
P sells its remaining S common stock for $80.
(ii) Application of basis redetermination and loss suspension
rules. Because P's basis in the common stock sold exceeds its value
immediately prior to the sale and S is a member of the P group
immediately after the sale, P's basis in all of the stock of S is
redetermined pursuant to paragraph (b)(1) of this section. Of P's
total basis of $130 in the S common stock, a proportionate amount is
allocated to each of the 100 shares of S common stock. Accordingly,
$26 is allocated to the common stock of S that is sold and $104 is
allocated to the common stock of S that is retained. On P's sale of
the 20 shares of the common stock of S for $20, P recognizes a loss
of $6. Because the sale of the 20 shares of common stock of S does
not result in the deconsolidation of S, under paragraph (c)(1) of
this section, that loss is suspended to the extent of the duplicated
loss with respect to the shares sold. The duplicated loss with
respect to the shares sold is $6. Therefore, the entire $6 loss is
suspended.
(iii) Effect of subsequent asset sale on stock basis. Of the $30
loss recognized on the sale of Asset A, $24 is taken into account in
determining the basis adjustments made under Sec. 1.1502-32 to the
stock of S owned by P. Accordingly, P's basis in its S stock is
reduced by $24 from $104 to $80.
(iv) Effect of subsequent asset sale on suspended loss. Because
P cannot establish that all or a portion of the loss recognized on
the sale of Asset A was not reflected in the calculation of the
duplicated loss of S on the date of the Year 3 stock sale and such
loss is allocable to the period beginning on the date of the Year 3
disposition of the S stock and ending on the day before the first
date on which S is not a member of the P group and is taken into
account in determining consolidated taxable income (or loss) of the
P group for a taxable year that includes a date on or after the date
of the Year 3 disposition and before the first date on which S is
not a member of the P group, such asset loss reduces the suspended
loss pursuant to paragraph (c)(4) of this section. The amount of
such reduction, however, cannot exceed $6, the excess of the amount
of such loss, $30, over the amount of such loss that is taken into
account in determining the basis adjustment made to the stock of S
owned by P, $24. Therefore, the suspended loss is reduced to zero.
(v) Effect of subsequent stock sale. P recognizes $0 gain/loss
on the Year 5 sale of its remaining S common stock. No amount of
suspended loss remains to be allowed under paragraph (c)(5) of this
section.
Example 4. Nondeconsolidating sale of common stock of lower-tier
subsidiary. (i) Facts. In Year 1, P forms S1 with a contribution of
$200 in exchange for all of the common stock of S1, which represents
all of the outstanding stock of S1. In the same year, S1 forms S2
with a contribution of $80 in exchange for 80 shares of the common
stock of S2, which at that time represents all of the outstanding
stock of S2. S1 and S2 become members of the P group. In the same
year, S2 purchases Asset A for $80. In Year 2, S1 contributes Asset
B with a basis of $50 and a value of $20 in exchange for 20 shares
of the common stock of S2 in a transfer to which section 351
applies. In Year 3, S1 sells the 20 shares of the common stock of S2
that it acquired in Year 2 for $20. Immediately after the Year 3
stock sale, S2 is a member of the P group. At the time of the Year 3
stock sale, the bases and values of Asset A and Asset B are
unchanged. In Year 4, S2 sells Asset B for $45, recognizing a $5
loss. The P group cannot establish that all or a portion of the $5
loss was not reflected in the calculation of the duplicated loss of
S2 on the date of the Year 3 stock sale. The $5 loss is used on the
P group return to offset income of P. In Year 5, S1 sells its
remaining S2 common stock for $100.
(ii) Application of basis redetermination and loss suspension
rules. Because S1's basis in the S2 common stock sold exceeds its
value immediately prior to the sale and S2 is a member of the P
group immediately after the sale, S1's basis in all of the stock of
S2 is redetermined pursuant to paragraph (b)(1) of this section. Of
S1's total basis of $130 in the S2 common stock, a proportionate
amount is allocated to each of the 100 shares of S2 common stock.
Accordingly, a total of $26 is allocated to the common stock of S2
that is sold and $104 is allocated to the common stock of S2 that is
retained. On S1's sale of the 20 shares of the common stock of S2
for $20, S1 recognizes a loss of $6. Because the sale of the 20
shares of common stock of S2 does not result in the deconsolidation
of S2, under paragraph (c)(1) of this section, that loss is
suspended to the extent of the duplicated loss with respect to the
shares sold. The duplicated loss with respect to the shares sold is
$6. Therefore, the entire $6 loss is suspended. Pursuant to
paragraph (c)(3) of this section and Sec. 1.1502-32T(b)(3)(iii)(C),
the suspended loss is treated as a noncapital, nondeductible expense
incurred by S1 during the tax year that includes the date of the
disposition of stock to which paragraph (c)(1) of this section
applies. Accordingly, P's basis in its S1 stock is reduced from $200
to $194.
(iii) Effect of subsequent asset sale on stock basis. Of the $5
loss recognized on the sale of Asset B, $4 is taken into account in
determining the basis adjustments made under Sec. 1.1502-32 to the
stock of S2 owned by S1. Accordingly, S1's basis in its S2 stock is
reduced by $4 from $104 to $100 and P's basis in its S1 stock is
reduced by $4 from $194 to $190.
(iv) Effect of subsequent asset sale on suspended loss. Because
P cannot establish that all or a portion of the loss recognized on
the sale of Asset B was not reflected in the calculation of the
duplicated loss of S2 on the date of the Year 3 stock sale and such
loss is allocable to the period beginning on the date of the Year 3
disposition of the S2 stock and ending on the day before the first
date on which S2 is not a member of the P group and is taken into
account in determining consolidated taxable income (or loss) of the
P group for a taxable year that includes a date on or after the date
of the Year 3 disposition and before the first date on which S2 is
not a member of the P group, such asset loss reduces the suspended
loss pursuant to paragraph (c)(4) of this section. The amount of
such reduction, however, cannot exceed $1, the excess of the amount
of such loss, $5, over the amount of such loss that is taken into
account in determining the basis adjustment made to the stock of S2
owned by members of the P group, $4. Therefore, the suspended loss
is reduced to $5.
(v) Effect of subsequent stock sale. In Year 5, when S1 sells
its remaining S2 stock for $100, it recognizes $0 gain/loss.
Pursuant to paragraph (c)(5) of this section, the remaining $5 of
the suspended loss is allowed on the P group's return for Year 5
when S1 sells its remaining S2 stock.
Example 5. Deconsolidating sale of subsidiary member owning
stock of another subsidiary member that remains in group. (i) Facts.
In Year 1, P forms S1 with a contribution of Asset A with a basis of
$50 and a value of $20 in exchange for 100 shares of common stock of
S1 in a transfer to which section 351 applies. Also in Year 1, P and
S1 form S2. P contributes $80 to S2 in exchange for 80 shares of
common stock of S2. S1 contributes Asset A to S2 in exchange for 20
shares of common stock of S2 in a transfer to which section 351
applies. In Year 3, in a transaction that is not part of a plan that
includes the Year 1 contributions, P sells its 100 shares of S1
common stock for $20. Immediately after the Year 3 stock sale, S2 is
a member of the P group. At the time of the Year 3 stock sale, S1
owns 20 shares of common stock of S2, and S2 has $80 and Asset A. In
Year 4, S2 sells Asset A, the basis and value of which have not
changed since its contribution to S2. On the sale of Asset A for
$20, S2 recognizes a $30 loss. That $30 loss is used on the P group
return to offset income of P. In Year 5, P sells its S2 common stock
for $80.
(ii) Application of basis redetermination and loss suspension
rules. Pursuant to paragraph (b)(4) of this section, because
immediately before P's transfer of S1 stock S1 owns stock of S2
(another subsidiary member of the same group) that has a basis that
exceeds its value, paragraph (b) of this section applies as if S1
had transferred its stock of S2. Because S2 is a member of the group
immediately after the transfer of the S1 stock, the group member's
basis in the S2 stock is redetermined pursuant to paragraph (b)(1)
of this section immediately prior to the sale of the S1 stock. Of
the group members' total basis of $130 in the S2 stock, $26 is
[[Page 12297]]
allocated to S1's 20 shares of S2 common stock and $104 is allocated
to P's 80 shares of S2 common stock. Pursuant to paragraph (b)(5) of
this section, the redetermination of S1's basis in the stock of S2
results in an adjustment to P's basis in the stock of S1. In
particular, P's basis in the stock of S1 is decreased by $24 to $26.
On P's sale of its 100 shares of S1 common stock for $20, P
recognizes a loss of $6. Because S1 is not a member of the P group
immediately after P's sale of the S1 stock, paragraph (c)(1) of this
section does not apply to suspend such loss. However, because P
recognizes a loss with respect to the disposition of the S1 stock
and S1 owns stock of S2 (which is a member of the P group
immediately after the disposition), paragraph (c)(2) of this section
does apply to suspend up to $6 of that loss, an amount equal to the
amount by which the duplicated loss with respect to the stock of S1
sold is attributable to S2's adjusted basis in its assets, loss
carryforwards, and deferred deductions.
(iii) Effect of subsequent asset sale on stock basis. Of the $30
loss recognized on the sale of Asset A, $24 is taken into account in
determining the basis adjustments made under Sec. 1.1502-32 to the
stock of S2 owned by P. Accordingly, P's basis in its S2 stock is
reduced by $24 from $104 to $80.
(iv) Effect of subsequent asset sale on suspended loss. Because
P cannot establish that all or a portion of the loss recognized on
the sale of Asset A was not reflected in the calculation of the
duplicated loss of S2 on the date of the Year 3 stock sale and such
loss is allocable to the period beginning on the date of the Year 3
deemed disposition of the S2 stock and ending on the day before the
first date on which S2 is not a member of the P group and is taken
into account in determining consolidated taxable income (or loss) of
the P group for a taxable year that includes a date on or after the
date of the Year 3 deemed disposition and before the first date on
which S2 is not a member of the P group, such asset loss reduces the
suspended loss pursuant to paragraph (c)(4) of this section. The
amount of such reduction, however, cannot exceed $6, the excess of
the amount of such loss, $30, over the amount of such loss that is
taken into account in determining the basis adjustment made to the
stock of S2 owned by P, $24. Therefore, the suspended loss is
reduced to zero.
(v) Effect of subsequent stock sale. P recognizes $0 gain/loss
on the Year 5 sale of its remaining S2 common stock. No amount of
suspended loss remains to be allowed under paragraph (c)(5) of this
section.
Example 6. Loss recognized on asset with basis determined by
reference to stock basis of subsidiary member. (i) Facts. In Year 1,
P forms S with a contribution of $80 in exchange for 80 shares of
common stock of S which at that time represents all of the
outstanding stock of S. S becomes a member of the P group. In Year
2, P contributes Asset A with a basis of $50 and a value of $20 in
exchange for 20 shares of common stock of S in a transfer to which
section 351 applies. In Year 3, in a transaction that is not part of
a plan that includes the Year 1 and Year 2 contributions, P
contributes the 20 shares of S common stock it acquired in Year 2 to
PS, a partnership, in exchange for a 20 percent capital and profits
interest in a transaction described in section 721. Immediately
after the contribution to PS, S is a member of the P group. In Year
4, P sells its interest in PS for $20, recognizing a $30 loss.
(ii) Application of basis redetermination rule upon
nonrecognition transfer. Because P's basis in the S common stock
contributed to PS exceeds its value immediately prior to the
transfer and S is a member of the P group immediately after the
transfer, P's basis in all of the S stock is redetermined pursuant
to paragraph (b)(1) of this section. Of P's total basis of $130 in
the common stock of S, a proportionate amount is allocated to each
share of S common stock. Accordingly, $26 is allocated to the S
common stock that is contributed to PS and, under section 722, P's
basis in its interest in PS is $26.
(iii) Application of loss suspension rule on disposition of
asset with basis determined by reference to stock basis of
subsidiary member. P recognizes a $6 loss on its disposition of its
interest in PS. Because P's basis in its interest in PS was
determined by reference to the basis of S stock and at the time of
the determination of P's basis in its interest in PS such S stock
had a duplicated loss of $6, and, immediately after the disposition,
S is a member of the P group, such loss is suspended to the extent
of such duplicated loss. Principles similar to those of paragraphs
(c)(3), (c)(4), and (c)(5) of this section shall apply to such
suspended loss.
(f) Worthlessness and certain dispositions not followed by separate
return years--(1) General rule. Notwithstanding any other provision in
the regulations under section 1502, if stock of a subsidiary member is
treated as worthless under section 165 (taking into account the
provisions of Sec. 1.1502-80(c)), or if a member of a group disposes
of subsidiary member stock and on the following day the subsidiary is
not a member of the group and does not have a separate return year,
then all losses treated as attributable to the subsidiary member under
the principles of Sec. 1.1502-21(b)(2)(iv), after computing the
taxable income of the group, the subsidiary member, or a group of which
the subsidiary member was previously a member for the taxable year that
includes the determination of worthlessness or the disposition and any
prior taxable year, shall be treated as expired, but not as absorbed by
the group, as of the beginning of the group's taxable year that follows
the taxable year that includes the determination of worthlessness or
the disposition.
(2) Election in the case of determinations of worthlessness and
dispositions not followed by a separate return that occurred prior to
March 14, 2003. If stock of a subsidiary member is treated as worthless
under section 165 (taking into account the provisions of Sec. 1.1502-
80(c)) on or after March 7, 2002, and prior to March 14, 2003, or if a
member of a group disposes of subsidiary member stock on or after March
7, 2002, and prior to March 14, 2003 and on the following day the
subsidiary is not a member of the group and does not have a separate
return year, then, notwithstanding paragraph (f)(1) of this section,
the common parent may make an irrevocable election to reattribute to
itself all or any portion of the losses treated as attributable to such
subsidiary member under the principles of Sec. 1.1502-21(b)(2)(iv).
The election shall be in the form of a statement filed with or as part
of the group's return for the taxable year in which the worthlessness
is established or the disposition occurs. The statement shall be
entitled ``Election under Section 1.1502-35T(f)(2)'' and must state
that the common parent is making an irrevocable election under this
paragraph (f)(2) to reattribute to itself the losses of the subsidiary
member the stock of which is worthless or disposed of. In addition, it
must identify the subsidiary to which the election relates and the
portion of losses subject to the election. If the election provided in
this paragraph is made, the common parent shall be treated as
succeeding to the reattributed losses as if the losses were succeeded
to in a transaction described in section 381(a). For purposes of
applying the provisions of Sec. 1.1502-32, the reattributed losses
shall be treated as absorbed by the group immediately prior to the
allowance of any loss or inclusion of any income or gain with respect
to the determination of worthlessness or the disposition. In the case
of an election to reattribute less than all of the losses otherwise
treated as attributable to such subsidiary member under the principles
of Sec. 1.1502-21(b)(2)(iv), paragraph (f)(1) of this section shall
apply to that portion of the losses for which an election under this
paragraph (f)(2) is not made.
(g) Anti-avoidance rules--(1) Transfer of share without a loss in
avoidance. If a share of subsidiary member stock has a basis that does
not exceed its value and the share is transferred with a view to
avoiding application of the rules of paragraph (b) of this section
prior to the transfer of a share of subsidiary member stock that has a
basis that does exceed its value or a deconsolidation of a subsidiary
member, the rules of paragraph (b) of this section shall apply
immediately prior to the transfer of stock that has a basis that does
not exceed its value.
(2) Transfers of loss property in avoidance. If a member of a
consolidated group contributes an asset with a basis that exceeds its
value to a
[[Page 12298]]
partnership in a transaction described in section 721 or a corporation
that is not a member of such group in a transfer described in section
351, such partnership or corporation contributes such asset to a
subsidiary member in a transfer described in section 351, and such
contributions are undertaken with a view to avoiding the rules of
paragraph (b) or (c) of this section, adjustments must be made to carry
out the purposes of this section.
(3) Anti-loss reimportation--(i) Application. This paragraph (g)(3)
applies if--
(A) A member of a group recognizes and is allowed a loss on the
disposition of a share of stock of a subsidiary member with respect to
which there is a duplicated loss; and
(B) Within the 10-year period beginning on the date the subsidiary
member (or any successor) ceases to be a member of such group--
(1) The subsidiary member (or any successor) again becomes a member
of such group (or any successor group) when the subsidiary member (or
any successor) owns any asset that has a basis in excess of value at
such time and that was owned by the subsidiary member (or any
successor) on the date of a disposition of stock of such subsidiary
member (or any successor) and that had a basis in excess of value on
such date;
(2) The subsidiary member (or any successor) again becomes a member
of such group (or any successor group) when the subsidiary member (or
any successor) owns any asset that has a basis in excess of value at
such time and that has a basis that reflects, directly or indirectly,
in whole or in part, the basis of any asset that was owned by the
subsidiary member on the date of a disposition of stock of such
subsidiary member (or any successor) and that had a basis in excess of
value on such date;
(3) In a transaction described in section 381 or section 351, any
member of such group (or any successor group) acquires any asset of the
subsidiary member (or any successor) that was owned by the subsidiary
member (or any successor) on the date of a disposition of stock of such
subsidiary member (or any successor) and that had a basis in excess of
its value on such date, or any asset that has a basis that reflects,
directly or indirectly, in whole or in part, the basis of any asset
that was owned by the subsidiary member (or any successor) on the date
of a disposition of stock of such subsidiary member (or any successor)
and that had a basis in excess of its value on such date, and,
immediately after the acquisition of such asset, such asset has a basis
in excess of its value;
(4) The subsidiary member (or any successor) again becomes a member
of such group (or any successor group) when the subsidiary member (or
any successor) has a liability (within the meaning of section
358(h)(3)) that it had on the date of a disposition of stock of such
subsidiary member (or any successor) and such liability will give rise
to a deduction;
(5) In a transaction described in section 381 or section 351, any
member of such group (or any successor group) assumes a liability
(within the meaning of section 358(h)(3)) that was a liability of the
subsidiary member (or any successor) on the date of a disposition of
stock of such subsidiary member (or any successor);
(6) The subsidiary member (or any successor) again becomes a member
of such group (or any successor group) when the subsidiary member (or
any successor) has any losses or deferred deductions that were losses
or deferred deductions of the subsidiary member (or any successor) on
the date of a disposition of stock of such subsidiary member (or any
successor);
(7) The subsidiary member (or any successor) again becomes a member
of such group (or any successor group) when the subsidiary member (or
any successor) has any losses or deferred deductions that are
attributable to any asset that was owned by the subsidiary member (or
any successor) on the date of a disposition of stock of such subsidiary
member (or any successor) and that had a basis in excess of value on
such date;
(8) The subsidiary member (or any successor) again becomes a member
of such group (or any successor group) when the subsidiary member (or
any successor) has any losses or deferred deductions that are
attributable to any asset that had a basis that reflected, directly or
indirectly, in whole or in part, the basis of any asset that was owned
by the subsidiary member (or any successor) on the date of a
disposition of stock of such subsidiary member (or any successor) and
that had a basis in excess of value on such date;
(9) The subsidiary member (or any successor) again becomes a member
of such group (or any successor group) when the subsidiary member (or
any successor) has any losses or deferred deductions that are
attributable to a liability (within the meaning of section 358(h)(3))
that it had on the date of a disposition of stock of such subsidiary
member (or any successor);
(10) Any member of such group (or any successor group) succeeds to
any losses or deferred deductions of the subsidiary member (or any
successor) that were losses or deferred deductions of the subsidiary
member (or any successor) on the date of a disposition of stock of such
subsidiary member (or any successor), that are attributable to any
asset that was owned by the subsidiary member (or any successor) on the
date of a disposition of stock of such subsidiary member (or any
successor) and that had a basis in excess of value on such date, that
are attributable to any asset that had a basis that reflected, directly
or indirectly, in whole or in part, the basis of any asset that was
owned by the subsidiary member (or any successor) on the date of a
disposition of stock of such subsidiary member (or any successor) and
that had a basis in excess of value on such date, or that are
attributable to a liability (within the meaning of section 358(h)(3))
of the subsidiary member (or any successor) on the date of a
disposition of stock of such subsidiary member (or any successor); or
(11) Any losses or deferred deductions of the subsidiary member (or
any successor) that were losses or deferred deductions of the
subsidiary member (or any successor) on the date of a disposition of
stock of such subsidiary member (or any successor), that are
attributable to any asset that was owned by the subsidiary member (or
any successor) on the date of a disposition of stock of such subsidiary
member (or any successor) and that had a basis in excess of value on
such date, that are attributable to any asset that had a basis that
reflected, directly or indirectly, in whole or in part, the basis of
any asset that was owned by the subsidiary member (or any successor) on
the date of a disposition of stock of such subsidiary member (or any
successor) and that had a basis in excess of value on such date, or
that are attributable to a liability (within the meaning of section
358(h)(3)) of the subsidiary member (or any successor) on the date of a
disposition of stock of such subsidiary member (or any successor) are
carried back to a pre-disposition taxable year of the subsidiary
member.
(ii) Operating rules. (A) For purposes of paragraph (g)(3)(i)(B) of
this section, assets shall include stock and securities and the
subsidiary member (or any successor) shall be treated as having its
allocable share of losses and deferred deductions of all lower-tier
subsidiary members and as owning its allocable share of each asset of
all lower-tier subsidiary members.
[[Page 12299]]
(B) For purposes of paragraphs (g)(3)(i)(B)(6), (7), (8), and (9)
of this section, unless the group can establish otherwise, if the
subsidiary member (or any successor) again becomes a member of such
group (or any successor group) at a time when the subsidiary member (or
any successor) has any losses or deferred deductions, such losses and
deferred deductions shall be treated as losses or deferred deductions
that were losses or deferred deductions of the subsidiary member (or
any successor) on the date of a disposition of stock of such subsidiary
member (or any successor), losses or deferred deductions that are
attributable to assets that were owned by the subsidiary member (or any
successor) on the date of a disposition of stock of such subsidiary
member (or any successor) and that had bases in excess of value on such
date, losses or deferred deductions that are attributable to assets
that had bases that reflected, directly or indirectly, in whole or in
part, the bases of assets that were owned by the subsidiary member (or
any successor) on the date of a disposition of stock of such subsidiary
member (or any successor) and that had bases in excess of value on such
date, or losses or deferred deductions attributable to a liability
(within the meaning of section 358(h)(3)) of the subsidiary member (or
any successor) on the date of a disposition of stock of such subsidiary
member (or any successor).
(C) For purposes of paragraph (g)(3)(i)(B)(10) of this section,
unless the group can establish otherwise, if a member of such group (or
any successor group) succeeds to any losses or deferred deductions of
the subsidiary member (or any successor), such losses and deferred
deductions shall be treated as losses or deferred deductions that were
losses or deferred deductions of the subsidiary member (or any
successor) on the date of a disposition of stock of such subsidiary
member (or any successor), losses or deferred deductions that are
attributable to assets that were owned by the subsidiary member (or any
successor) on the date of a disposition of stock of such subsidiary
member (or any successor) and that had bases in excess of value on such
date, losses or deferred deductions that are attributable to assets
that had bases that reflected, directly or indirectly, in whole or in
part, the bases of assets that were owned by the subsidiary member (or
any successor) on the date of a disposition of stock of such subsidiary
member (or any successor) and that had bases in excess of value on such
date, or losses or deferred deductions attributable to a liability
(within the meaning of section 358(h)(3)) of the subsidiary member (or
any successor) on the date of a disposition of stock of such subsidiary
member (or any successor).
(D) For purposes of paragraph (g)(3)(i)(B)(11) of this section,
unless the group can establish otherwise, if any losses or deferred
deductions of the subsidiary member (or any successor) are carried back
to a pre-disposition taxable year of the subsidiary member, such losses
and deferred deductions shall be treated as losses or deferred
deductions that were losses or deferred deductions of the subsidiary
member (or any successor) on the date of a disposition of stock of such
subsidiary member (or any successor), losses or deferred deductions
that are attributable to assets that were owned by the subsidiary
member (or any successor) on the date of a disposition of stock of such
subsidiary member (or any successor) and that had a basis in excess of
value on such date, losses or deferred deductions that are attributable
to assets that had bases that reflected, directly or indirectly, in
whole or in part, the bases of assets that were owned by the subsidiary
member (or any successor) on the date of a disposition of stock of such
subsidiary member (or any successor) and that had a basis in excess of
value on such date, or losses or deferred deductions that are
attributable to a liability (within the meaning of section 358(h)(3))
of the subsidiary member (or any successor) on the date of a
disposition of stock of such subsidiary member (or any successor).
(iii) Loss disallowance. If this paragraph (g)(3) applies, then, to
the extent that the aggregate amount of loss recognized by members of
the group (and any successor group) on dispositions of the subsidiary
member stock was attributable to a duplicated loss of such subsidiary
member that was allowed, such group (or any successor group) will be
denied the use of--
(A) Any loss recognized that is attributable to, directly or
indirectly, an asset that was owned by the subsidiary member (or any
successor) on the date of a disposition of stock of such subsidiary
member (or any successor) and that had a basis in excess of value on
such date, to the extent of the lesser of the loss inherent in such
asset on the date of a disposition of the stock of the subsidiary
member (or any successor) and the loss inherent in such asset on the
date of the event described in paragraph (g)(3)(i)(B) of this section
that gives rise to the application of this paragraph (g)(3);
(B) Any loss recognized that is attributable to, directly or
indirectly, an asset that has a basis that reflects, directly or
indirectly, in whole or in part, the basis of any asset that was owned
by the subsidiary member (or any successor) on the date of a
disposition of stock of such subsidiary member (or any successor) and
that had a basis in excess of its value on such date, to the extent of
the lesser of the loss inherent in the asset that was owned by the
subsidiary member (or any successor) on the date of a disposition of
stock of such subsidiary member (or any successor) the basis of which
is reflected, directly or indirectly, in whole or in part, in the basis
of such asset on the date of the disposition and the loss inherent in
such asset on the date of the event described in paragraph (g)(3)(i)(B)
of this section that gives rise to the application of this paragraph
(g)(3);
(C) Any loss or deduction that is attributable to a liability
described in paragraph (g)(3)(i)(B)(4) or (5) of this section; and
(D) Any loss or deduction described in paragraph (g)(3)(i)(B)(6),
(7), (8), (9), (10), or (11) of this section, provided that a loss or
deferred deduction described in paragraph (g)(3)(i)(B)(11) of this
section shall be allowed to be carried forward to a post-disposition
taxable year of the subsidiary member.
(iv) Treatment of disallowed loss. For purposes of Sec. 1.1502-
32(b)(3)(iii), any loss or deduction the use of which is disallowed
pursuant to paragraph (g)(3)(iii) of this section (other than a loss or
deduction described in paragraph (g)(3)(i)(B)(11) of this section), and
with respect to which no waiver described in Sec. 1.1502-32(b)(4) is
filed, is treated as a noncapital, nondeductible expense incurred
during the taxable year that such loss would otherwise be absorbed.
(4) Avoidance of recognition of gain. (i) If a transaction is
structured with a view to, and has the effect of, deferring or avoiding
the recognition of gain on a disposition of stock by invoking the
application of paragraph (b)(1) of this section to redetermine the
basis of stock of a subsidiary member, and the stock loss that gives
rise to the application of paragraph (b)(1) of this section is not
significant, paragraphs (b) and (c) of this section shall not apply.
(ii) If a transaction is structured with a view to, and has the
effect of, deferring or avoiding the recognition of gain on a
disposition of stock by invoking the application of paragraph (b)(2) of
this section to redetermine the basis of stock of a subsidiary member,
and the duplicated loss of the subsidiary
[[Page 12300]]
member that is reflected in stock of the subsidiary member owned by
members of the group immediately before the deconsolidation is not
significant, paragraphs (b) and (c) of this section shall not apply.
(5) Examples. The principles of this paragraph (g) are illustrated
by the following examples:
Example 1. Transfers of property in avoidance of basis
redetermination rule. (i) Facts. In Year 1, P forms S with a
contribution of $100 in exchange for 100 shares of common stock of S
which at that time represents all of the outstanding stock of S. S
becomes a member of the P group. In Year 2, P contributes 20 shares
of common stock of S to PS, a partnership, in exchange for a 20
percent capital and profits interest in a transaction described in
section 721. In Year 3, P contributes Asset A with a basis of $50
and a value of $20 to PS in exchange for an additional capital and
profits interest in PS in a transaction described in section 721.
Also in Year 3, PS contributes Asset A to S and P contributes an
additional $80 to S in transfers to which section 351 applies. In
Year 4, S sells Asset A for $20, recognizing a loss of $30. The P
group uses that loss to offset income of P. Also in Year 4, P sells
its entire interest in PS for $40, recognizing a loss of $30.
(ii) Analysis. Pursuant to paragraph (g)(2) of this section, if
P's contributions of S stock and Asset A to PS were undertaken with
a view to avoiding the application of the basis redetermination or
the loss suspension rule, adjustments must be made such that the
group does not obtain more than one tax benefit from the $30 loss
inherent in Asset A.
Example 2. Transfers effecting a reimportation of loss. (i)
Facts. In Year 1, P forms S with a contribution of Asset A with a
value of $100 and a basis of $120, Asset B with a value of $50 and a
basis of $70, Asset C with a value of $90 and a basis of $100 in
exchange for all of the common stock of S and S becomes a member of
the P group. In Year 2, in a transaction that is not part of a plan
that includes the contribution, P sells the stock of S for $240,
recognizing a loss of $50. At such time, the bases and values of
Assets A, B, and C have not changed since their contribution to S.
In Year 3, S sells Asset A, recognizing a $20 loss. In Year 3, S
merges into M in a reorganization described in section 368(a)(1)(A).
In Year 8, P purchases all of the stock of M for $300. At that time,
M has a $10 net operating loss. In addition, M owns Asset D, which
was acquired in an exchange described in section 1031 in connection
with the surrender of Asset B. Asset C has a value of $80 and a
basis of $100. Asset D has a value of $60 and a basis of $70. In
Year 9, P has operating income of $100 and M recognizes $20 of loss
on the sale of Asset C. In Year 10, P has operating income of $50
and M recognizes $50 of loss on the sale of Asset D.
(ii) Analysis. P's $50 loss on the sale of S stock is entirely
attributable to duplicated loss. Therefore, pursuant to paragraph
(g)(3) of this section, assuming the P group cannot establish
otherwise, M's $10 net operating loss is treated as attributable to
assets that were owned by S on the date of the disposition and that
had bases in excess of value on such date. Without regard to any
other limitations on the group's use of M's net operating loss, the
P group cannot use M's $10 net operating loss pursuant to paragraph
(g)(3)(iii)(D) of this section. Pursuant to paragraph (g)(3)(iv) of
this section and Sec. 1.1502-32T(b)(3)(iii)(D), such loss is
treated as a noncapital, nondeductible expense of M incurred during
the taxable year that includes the day after the reorganization. In
addition, the P group is denied the use of $10 of the loss
recognized on the sale of Asset C. Finally, the P group is denied
the use of $10 of the loss recognized on the sale of Asset D.
Pursuant to paragraph (g)(3)(iv) of this section and Sec. 1.1502-
32T(b)(3)(iii)(D), each such disallowed loss is treated as a
noncapital, nondeductible expense of M incurred during the taxable
year that includes the date of the disposition of the asset with
respect to which such loss was recognized.
Example 3. Transfers to avoid recognition of gain. (i) Facts. P
owns all of the stock of S1 and S2. The S2 stock has a basis of $400
and a value of $500. S1 owns 50% of the stock of the S3 common stock
with a basis of $150. S2 owns the remaining 50% of the S3 common
stock with a basis of $100 and a value of $200 and one share of S3
preferred stock with a basis of $10 and a value of $9. P intends to
sell all of its S2 stock to an unrelated buyer. P, therefore,
engages in the following steps to dispose of S2 without recognizing
a substantial portion of the built-in gain in S2. First, P causes a
recapitalization of S3 in which S2's S3 common stock is exchanged
for new S3 preferred shares. P then sells all of its S2 stock.
Immediately after the sale of the S2 stock, S3 is a member of the P
group.
(ii) Analysis. Pursuant to paragraph (b)(4) of this section,
because S2 owns stock of S3 (another subsidiary member of the same
group) and, immediately after the sale of the S2 stock, S3 is a
member of the group, then for purposes of applying paragraph (b) of
this section, S2 is deemed to have transferred its S3 stock. Because
S3 is a member of the group immediately after the transfer of the S2
stock and the S3 stock deemed transferred has a basis in excess of
value, the group member's basis in the S3 stock is redetermined
pursuant to paragraph (b)(1) of this section immediately prior to
the sale of the S2 stock. Pursuant to paragraph (b)(1) of this
section, the total basis of S3 stock held by members of the P group
is allocated first to the S3 preferred shares, up to their value of
$209, and then to the remaining shares of S3 common held by S1. S2's
aggregate basis in the S3 preferred stock is increased from $110 to
$209. This increase tiers up and increases P's basis in the S2 stock
from $400 to $499. Accordingly, P will recognize only $1 of gain on
the sale of its S2 stock. However, because the recapitalization of
S3 was structured with a view to, and has the effect of, avoiding
the recognition of gain on a disposition of stock by invoking the
application of paragraph (b) of this section, paragraph (g)(4)(i) of
this section applies. Accordingly, paragraph (b) of this section
does not apply upon P's disposition of the S2 stock and P recognizes
$100 of gain on the disposition of the S2 stock.
(h) Application of other anti-abuse rules. The rules of this
section do not preclude the application of anti-abuse rules under other
provisions of the Internal Revenue Code and regulations thereunder.
(i) [Reserved].
(j) Effective date. This section, except for paragraph (g)(3) of
this section, applies with respect to stock transfers, deconsolidations
of subsidiary members, determinations of worthlessness, and stock
dispositions on or after March 7, 2002, and no later than March 11,
2006, but only if such events occur during a taxable year the original
return for which is due (without regard to extensions) after March 14,
2003. Paragraph (g)(3) of this section applies to events described in
paragraph (g)(3)(iii) of this section occurring on or after October 18,
2002, and no later than March 11, 2006, but only if such events occur
during a taxable year the original return for which is due (without
regard to extensions) after March 14, 2003.
PART 602--[AMENDED]
Par. 8. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 9. In Sec. 602.101, paragraph (b) is amended by adding an
entry to the table in numerical order for to read as follows:
Sec. 602.101 OMB Control numbers.
* * * * *
(b) * * *
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control No.
------------------------------------------------------------------------
* * * * *
1.1502-35T................................................. 1545-1828
* * * * *
------------------------------------------------------------------------
David A. Mader,
Assistant Deputy Commissioner of Internal Revenue.
Approved: March 7, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury.
[FR Doc. 03-6119 Filed 3-11-03; 1:04 pm]
BILLING CODE 4830-01-P