[Code of Federal Regulations]
[Title 26, Volume 12]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.1502-47]
[Page 432-450]
TITLE 26--INTERNAL REVENUE
CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
(CONTINUED)
PART 1_INCOME TAXES--Table of Contents
Sec. 1.1502-47 Consolidated returns by life- nonlife groups.
(a) Scope--(1) In general. Under section 1504(b)(2), insurance
companies that are taxed under section 802 or 821 (relating respectively
to life insurance companies and to certain mutual insurance companies)
are not treated as includible corporations for purposes of determining
under section 1504(a) the existence of an affiliated group and the
composition of its membership. Section 1504(c)(2) provides an election
whereby certain life insurance companies and mutual insurance companies
may be treated as includible corporations, and thus members, of a group
composed of other includible corporations. This section provides
regulations for the making of this election and for the determination of
an electing group's composition and its consolidated tax liability.
(2) General method of consolidation--(i) Subgroup method. The
regulations adopt a subgroup method to determine consolidated taxable
income. One subgroup
[[Page 433]]
is the group's nonlife companies (including those taxable under section
821). The other subgroup is the group's life insurance companies.
Initially, the nonlife subgroup computes nonlife consolidated taxable
income and the life subgroup computes consolidated partial life
insurance company taxable income. A subgroup's income may in effect be
reduced by a loss of the other subgroup. The life subgroup losses
consist of consolidated loss from operations and life consolidated net
capital loss. The nonlife subgroup losses consist of nonlife
consolidated net operating loss and nonlife consolidated net capital
loss. Consolidated taxable income is therefore defined in pertinent part
as the sum of nonlife consolidated taxable income and consolidated
partial life insurance company taxable income reduced by life subgroup
losses or nonlife subgroup losses.
(ii) Subgroup loss. A subgroup loss does not actually affect the
computation of nonlife consolidated taxable income or consolidated
partial life insurance company taxable income. It merely constitutes a
bottom-line adjustment in reaching consolidated taxable income.
Furthermore, one subgroup's loss must first be carried back against
income of the same subgroup before it may be used as a setoff against
the second subgroup income in the taxable year the loss arose. (See
section 1503(c)(1)). The carryback of the losses from one subgroup may
not be used to offset income of the other subgroup in the year to which
the loss is to be carried. This carryback of the first subgroup's loss
may ``bump'' the second subgroup's loss that in effect previously
reduced the income of the first subgroup. The second subgroup's loss
that is bumped in appropriate cases may in effect reduce a succeeding
year's income of the second or first subgroup. This approach gives the
group the tax savings of the use of losses but the bumping rule assures
that insofar as possible life deductions will be matched against life
income and nonlife deductions against nonlife income.
(iii) Carryover of subgroup loss. A subgroup's loss may be used in a
succeeding year, but in any particular succeeding year the loss must be
used to reduce the income of the same subgroup before it may be used as
a setoff against the other subgroup's income.
(3) Authority. This section is prescribed under the authority of
sections 1502, 1503(c), 1504(c)(2), and 7805(b).
(4) Other provisions. The provisions of Sec. Sec. 1.1502-1 through
1.1502-80 apply unless this section provides otherwise. Further, unless
otherwise indicated in this section, a term used in this section has the
same meaning as in sections 801-844.
(b) Effective date. This section is effective for taxable years for
which the due date (without extensions) for filing returns is after
March 14, 1983.
(c) Cross references. The following table provides cross references
for some of the definitions and operating rules that are relevant in
making the election and determining the group's composition and its tax
liability:
Item and Paragraph
General definitions (d).
Eligible corporation (Five-year rules) (d)(12).
Election (e).
Consolidated taxable income (g).
Nonlife consolidated taxable income (h).
Consolidated partial life insurance company taxable income (j).
Nonlife subgroup losses (m).
Life subgroup losses (n).
Alternative tax (o).
(d) Definitions. For purposes of this section:
(1) Life insurance company. The term ``life company'' means a life
insurance company as defined in section 801. Section 801 applies to each
company separately.
(2) Mutual insurance company. The term ``mutual company'' means a
mutual insurance company taxable under section 821(a)(1).
(3) Life insurance company taxable income. The term ``life insurance
company taxable income'' is referred to as LICTI. The terms ``TII'',
``GO'', and ``LO'' refer, respectively, to taxable investment income
(section 804), gain from operations (section 809), and loss from
operations (section 812). The term ``consolidated partial LICTI'' refers
to consolidated LICTI without section 802(b)(3).
(4) Group. The term ``group'' means an affiliated group of
corporations (as
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defined in section 1504(a)). Unless otherwise indicated in this section,
a group's composition is determined without section 1504(b)(2).
(5) Member. The term ``member'' means a corporation (including the
common parent) that is an includible corporation in the group. A life
company or mutual company is tentatively treated as a member for any
taxable year for purposes of determining if it is an eligible
corporation under paragraph (d)(12) of this section and therefore if it
is an includible corporation under section 1504(c)(2). If such a company
is eligible and includible (under section 1504(c)(2)), it will actually
be treated as a member of the group.
(6) Life member. A life member is a member of the group that is a
life company.
(7) Nonlife member. A nonlife member is a member of the group that
is not a life company.
(8) Life subgroup. A life subgroup is composed of those members that
are life members. If the group has only one life member, it constitutes
a life subgroup.
(9) Nonlife subgroup. A nonlife subgroup is composed of those
members that are nonlife members. If the group has only one nonlife
member, it constitutes a nonlife subgroup.
(10) Separate return year. The term ``separate return year'' means a
taxable year of a corporation for which it files a separate return or
for which it joins in the filing of a consolidated return by another
group. For purposes of this subparagraph (10), the term ``group'' is
defined with regard to section 1504(b)(2) for years in which an election
under section 1504(c)(2) is not in effect. Thus, a separate return year
includes a taxable year for which that election is not in effect.
(11) Separate return limitation year. Section 1.1502-1(f)(2)
provides exceptions to the definition of the term ``separate return
limitation year''. For purposes of applying those exceptions to this
section, for taxable years ending after December 31, 1980, the term
``group'' is defined without regard to section 1504(b)(2) and the
definition in this subparagraph (11) applies separately to the nonlife
subgroup in determining nonlife consolidated taxable income under
paragraph (h) of this section and to the life subgroup in determining
consolidated partial LICTI under paragraph (j) of this section.
Paragraph (m)(3)(ix) of this section defines the term ``separate return
limitation year'' for purposes of determining whether the losses of one
subgroup may be used against the income of the other subgroup.
(12) Eligible corporations--(i) In general. A corporation is an
eligible corporation for a taxable year of a group only if, throughout
every day of the base period the corporation:
(A) Was in existence and a member of the group determined without
the exclusions in section 1504(b)(2) (see paragraphs (d)(12) (iii)
through (vi) of this section),
(B) Was engaged in the active conduct of a trade or business
(``active business''),
(C) Did not experience a change in tax character (see paragraph
(d)(12)(vii) of this section), and
(D) Did not undergo disproportionate asset acquisitions (see
paragraph (d)(12)(viii) of this section).
(ii) Base period. The base period consists of the common parent's
five taxable years immediately preceding the group's taxable year for
which the consolidated return and the determination of eligibility are
made. Eligibility is determined for each consolidated return year
beginning with the first year for which the election under section
1504(c)(2) is effective.
(iii) In existence. Except as provided in paragraphs (d)(12) (v) and
(vi) of this section, a corporation organized after the base period
begins is not eligible even though it is a member of the group
immediately after its organization. For purposes of this subdivision
(iii), a corporation that was a party to a reorganization described in
section 368(a)(1)(F) shall be treated as the same entity both before and
after the reorganization.
(iv) Membership period. Except as provided in paragraphs (d)(12) (v)
and (vi) of this section, a corporation must have been a member of the
group throughout the base period to be eligible. Thus, an ineligible
corporation includes one whose stock was acquired from outside the group
at any time
[[Page 435]]
during the base period or one which was a member of a different group
(whether by application of reverse acquistion rules in Sec. 1.1502-
75(d)(3) or otherwise) at any time during the base period. For purposes
of this subdivision (iv), the common parent of a group is treated as
constituting a group (and hence is a member) during any period when it
was not a member of an affiliated group within the meaning of section
1504(a) (applied without section 1504(b)(2)).
(v) Tacking rule. The period during which an ``old'' corporation is
in existence and a member of the group engaged in active business is
included in (or ``tacks'' onto) the period for the ``new'' corporation
if the following five conditions listed in this subdivision (v) are met.
For purposes of this subparagraph (12), a ``new'' corporation is a
corporation (whether or not newly organized) during the period its
eligibility depends upon the tacking rule. The five conditions are as
follows:
(A) The first condition is that, at any time, 80 percent or more of
the new corporation's assets it acquired (other than in the ordinary
course of its trade or business) where acquired from the old corporation
in one or more transactions described in section 351(a) or 381(a). This
asset test is applied by using the fair market values of assets on the
date they were acquired and without regard to liabilities. Assets
acquired in the ordinary course of business will be excluded from total
assets only if they were acquired after the new corporation became a
member of the group (determined without section 1504(b)(2)). In
addition, assets that the old corporation acquired from outside the
group in transactions not conducted in the ordinary course of its trade
or business are not included in the 80 percent (but are included in
total assets) if the old corporation acquired those assets within five
calendar years before the date of their transfer to the new corporation.
(B) The second condition is that at the end of the taxable year
during which the first condition is first met, the old corporation and
the new corporation must both have the same tax character. For purposes
of this paragraph (d)(12), a corporation's tax character is the section
under which it would be taxed (i.e., sections 11, 802, 821, or 831) if
it filed a separate return. If the old corporation is not in existence
(or adopts a plan of complete liquidation) at the end of that taxable
year, this subdivision (v)(B) will apply to the old corporation's
taxable year immediately preceding the beginning of the taxable year
during which the first condition is first met.
(C) The third condition is that, if the old and new corporation are
life insurance companies, the transfer (or transfers) is not reasonably
expected (at the time of the transfer) to result in the separation of
profitable activities from loss activities.
(D) The fourth condition is that, at the end of the taxable year
during which the first condition is first met, the new corporation does
not undergo a disproportionate asset acquisition under paragraph
(d)(12)(viii) of this section.
(E) The fifth condition is that, if there is more than one old
corporation, the first three conditions apply to all of the
corporations. Thus, the second condition (tax character) must be met by
all of the old corporations transferring assets taken into account in
meeting the test in paragraph (d)(12)(v)(A) of this section.
(vi) Old group remaining in existence. If the common parent of a
group (or a new common parent) became the common parent in a transaction
described in Sec. 1.1502-75 (d)(2) or (d)(3) where a group remained in
existence, then paragraph (d)(12) (ii) through (iv) of this section
apply by treating that common parent as if it were also the previous
common parent of the group that remains in existence. If this paragraph
(d)(12)(vi) applies to a transaction, the tacking rule in paragraph
(d)(12)(v) of this section does not apply to the transaction.
(vii) Change in tax character. A corporation must not experience
during the base period a change in tax character (as defined in
paragraph (d)(12)(v)(B) of this section) if the change is attributable
to an acquisition of assets from outside the group in transactions not
conducted in the ordinary course of its trade or business. However, if a
new corporation relies on
[[Page 436]]
the tacking rules in paragraph (d)(12)(v) of this section, this
paragraph (d)(12)(vii) shall apply during the base period and the
current consolidated return year and even if the change in tax character
is attributable to an asset acquisition from within the group.
(viii) Disproportionate asset acquisition. To be eligible, a
corporation must not undergo during the base period disproportionate
asset acquisitions which are attributable to an acquisition (or a series
of acquisitions) of assets from outside the group in transactions not
conducted in the ordinary course of its trade or business (special
acquisition). Whether special acquisitions are disproportionate is
determined at the end of each base period. Whether an acquisition
results in a disproportionate asset acquisition depends on all of the
facts and circumstances including the following factors and rules:
(A) One factor is the portion of the insurance reserves (i.e., total
reserves in section 801 (c)) of the acquiring company at the end of the
base period which is attributable to special acquisitions.
(B) A second factor is the portion of the fair market value of the
assets (without reduction for liabilities) of the acquiring company at
the end of the base period that is attributable to special acquisitions.
(C) A third factor is the portion of the premiums generated during
the last taxable year of the base period which are attributable to
special acquisitions.
(D) A corporation will not experience a disproportionate asset
acquisition unless 75 percent of one factor (whether or not listed in
this subdivision (viii)) is attributable to special acquisitions.
(E) Money or other property contributed to a corporation by a
shareholder that is not a member of the group (without section
1504(b)(2)) is not a special acquisition.
(F) If a new corporation relies on the tacking rules in paragraph
(d)(12)(v) of this section, this subdivision (viii) applies to that
corporation during a consolidated return year. Thus, if at any time
during a consolidated return year, a new corporation undergoes a
disproportionate asset acquisition, the corporation becomes ineligible
at that time.
(13) Ineligible corporation. A corporation that is not an eligible
corporation is ineligible. If a life company or mutual company is
ineligible, it is not treated under section 1504(c)(2) as an includible
corporation. Losses of a nonlife member arising in years when it is
ineligible may not be used under section 1503(c)(2) and paragraph (m) of
this section to set off the income of a life member. If a life or mutual
company is ineligible and is the common parent of the group (without
section 1504(b)(2)), the election under section 1504(c)(2) may not be
made.
(14) Illustrations. The following examples illustrate this paragraph
(d). In each example, L indicates a life company, another letter
indicates a nonlife company, and each corporation uses the calendar year
as its taxable year.
Example (1). P has owned all of the stock of S since 1913. On
January 1, 1980, P purchased all of the stock of L1 which
owns all of the stock of L2 and S2. L1
and L2 are treated as members for purposes of determining if
they are eligible for 1982. However, for 1982, L1,
L2, and S2 are ineligible because none of them has
been a member of the group for P's five taxable years preceding 1982.
For 1982, L1 and L2 may elect to file a
consolidated return because they constitute an affiliated group under
section 1504(c)(1), and P and S may file a consolidated return.
Example (2). Since 1974, P has been a mutual insurance company
owning all the stock of L1. In 1980, P transfers assets to
S1., a new stock casualty company subject to taxation under
section 831(a). For 1982, only P and L1 are eligible
corporations. The tacking rule in paragraph (d)(12)(v) of this section
does not apply in 1982 because the old corporation (P) and the new
corporation (S1) do not have the same tax character. The
result would be the same if P were a life company.
Example (3). Since 1974, L has owned all the stock of L1
which has owned all the stock of S1, a stock casualty
company. L1 writes some accident and health insurance
business. In 1980, L1 transfers this business, and
S1 transfers some of its business, to a new stock casualty
company, S2., in a transaction described in section 351 (a).
The property transferred to S2. by L1 had a fair
market value of $50 million. The property transferred by S1
had a fair market value of $40 million. S2. is ineligible for
1982 because the tacking rule in paragraph (d)(12)(v) of this section
does not apply. The old corporations (L1 and S1)
and the new corporation (S2.) do not all have the same tax
character. See subparagraph
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(d)(12)(v)(B) and (E) of this section. The result would be the same if
L1 transferred other property (e.g., stock and securities)
with the same value, rather than accident and health insurance
contracts, to S2.
Example (4). Since 1974, P has owned all the stock of S and
L1. L1 is a large life company engaged in active
business since 1974. On January 1, 1982, L1 transfers in a
section 351 (a) transaction assets (not acquired from outside the group)
to a new life company, L2. For 1982, L2 is
eligible because under paragraph (d)(12)(v) of this section,
L2 is considered to have been in existence and a member of
the group engaged in the active business since 1974 which is the period
L1, the old corporation, was in existence and a member of the
group so engaged.
Example (5). The facts are the same as in example (4). Assume that
the fair market value of the assets L1 transferred to
L2 was $10 million on January 1, 1982 and that L2
acquired no other assets prior to June 30, 1983. Assume further that on
January 1, 1983, L1 acquires (other than in the ordinary
course of its trade or business) assets having a fair market value of
$40 million from L3, an unrelated life company. On June 30,
1983, L1 transfers those assets to L2.
L2 becomes ineligible on June 30, 1983. Since by fair market
values, 80 percent (i.e., 40/50) of L2's assets are
attributable to special acquisitions, L2 has undergone a
disproportionate asset acquisition at that time. See paragraph
(d)(12)(viii)(B), (D), and (F) of this section.
Example (6). The facts are the same as in example (5) except that
L1 transfers assets (other than life insurance contracts)
having a fair market value of $40 million to L2 and
L2 purchases the assets of L3 on June 30, 1983.
the result of the 1983 acquisition is the same as in example (5).
Example (7). The facts are the same as in example (5) except the
acquired assets acquired by L2 in 1983 from L1
have a fair market value of $20 million. In 1983, L2 had $1
million of premiums on its pre-existing contracts but premiums generated
by the acquired business for the entire year would have been $2 million.
L2 is eligible in 1983 because it did not experience a
disproportionate asset acquisition on June 30, 1983.
Example (8). Since 1974, L, a State A corporation, has owned all of
the stock of L1 and S1. On January 1, 1982, L
merges into L3, a smaller State B corporation, which owns the
stock of S2. The transaction is a reverse acquisition
described in Sec. 1.1502-75(d)(3) and the group of which L was the
common parent remains in existence. Under paragraph (d)(12)(vi) of this
section, L3 is eligible for 1982. However, S2 is
ineligible in 1982 under paragraph (d)(12)(iv) of this section.
Example (9). The facts are the same as in example (8) except that L
acquires the stock of L3. L3 and S2 are
both ineligible for 1982. On January 1, 1983, the fair market value of
L3's assets are $5 million (without liabilities) and on that
date L transfers assets (not acquired from outside the group) having a
fair market value of $95 million (without liabilities) to L3.
L and L3 are life companies at the end of 1983. L3
is eligible in 1983 under the tacking rule in paragraph (d)(12)(v) of
this section. S2 is ineligible in that year. The result would
be the same if L3 was not a life company prior to January 1,
1983. See paragraph (d)(12)(v)(B) of this section.
Example (10). Since 1974, P has owned all of the stock of
S1 and L1. On January 1, 1982, L1
incorporates L2 and transfers cash and securities to
L2. L2 begins writing a new line of specialty life
insurance products and it qualifies as a life company for calendar year
1982. L2 generates a loss from operations (section 812)
attributable to its writing of new business. For 1982, L2 is
ineligible under paragraph (d)(12)(v)(C) of this section.
Example (11). The facts are the same as in example (10) except that
L1 transfers to L2 a block of insurance contracts
that generated losses for L1 and continued to generate losses
for L2, producing a loss from operations. L2 is
ineligible in 1982 under paragraph (d)(12)(v)(C) of this section.
Example (12). Since 1974, X, a foreign corporation, has owned all
the stock of S2 and S1, and S1 has
owned all of the stock of L1. On January 1, 1982, X
incorporates a new U.S. company P, and transfers the stock of
S1 and S2 to P. Assume that under Sec. 1.1502-
75(d)(3) (relating to reverse acquisitions), the S1-
L1 affiliated group remains in existence. Under paragraph
(d)(12)(vi) of this section, P, S1, and L1 are
eligible but S2 is ineligible. The result would be the same
if X were an individual.
Example (13). The facts are the same as in example (12) except that
X owns all of the stock of S1, L1, and
S2. In addition, on January 1, 1982, X transfers the stock of
S1 and S2 to L1. L1 is
eligible in 1982 under paragraph (d)(12)(iv) of this section.
L1 would still be eligible even if it owned a subsidiary
during the base period but sold the subsidiary prior to January 1, 1982.
S1 and S2 are ineligible in 1982.
Example (14). Since 1974, S1 has owned all of the stock
of L1. S2, an unrelated company, has owned all of
the stock of L2 and S3 for 10 years. S1
and S2 are active stock casualty companies and not holding
companies. On January 1, 1982, S1 and S2 merge
into a new casualty company, S, in a transaction described in Sec.
1.1502-75(d)(3) so that the group of which S1 was the common
parent remains in existence. S and L1 are eligible in 1982
under paragraph (d)(12)(vi) of this section. L2 and
S3 are ineligible.
Example (15). The facts are the same as in example (14) except that
S2 (the first corporation in Sec. 1.1502-75(d)(3)) acquires
the stock of S1 in exchange for the stock of S2.
[[Page 438]]
The result is that only S2, S1, and L1
are eligible in 1982.
Example (16). Since 1974, S had owned all of the stock of
L1. L1 is a large life company. On January 1,
1982, L1 incorporates L2 and transfers $40 million
in cash and securities to L2 in a transaction described in
section 351(a). On March 1, 1982, L2 purchases the assets of
L3, an unrelated life company. The purchased assets have a
fair market value (without liabilities) of $30 million on March 1, 1982.
L2 is ineligible for 1982 because the tacking rule in
paragraph (d)(12)(v) of this section does not apply. L2
experienced a disproportionate asset acquisition in 1982. See paragraph
(d)(12)((v)(D) of this section.
(e) Election--(1) In general. The election under section 1504(c)(2)
may not be made if the group's common parent is an ineligible life
company or an ineligible mutual company. The election under section
1504(c)(2) may only be made by the common parent of the group (as
defined in section 1504(c)(2) without the exclusions in section
1504(b)(2)). For example, assume that P owns all of the stock of
L1, an eligible life company, which owns the stock of
S1. Assume further that P also owns the stock of
L2, an ineligible life member, which (for more than five
years) has owned the stock of a nonlife company, S2. Only P
may make the election and, if it does so, P, L1, and
S1 may file a consolidated return under this section.
L2 may not make the election under section 1504(c)(2) and may
not file a consolidated return with S2.
(2) How election is made--(i) General rule. The election under
section 1504(c)(2) is generally made by the group's common parent in the
same manner (and it has the same effect) as the election to file a
consolidated return is made under Sec. 1.1502-75 (a) and (b) for a
group which did not file a consolidated return for the immediately
preceding taxable year. The procedure for making the election under
section 1504(c)(2) is the same whether or not a consolidated return was
filed by the life members or the nonlife members for the immediately
preceding taxable year.
(ii) Special rule. Notwithstanding the general rule, however, if the
nonlife members in the group filed a consolidated return for the
immediately preceding taxable year and had executed and filed a Form
1122 that is effective for the preceding year, then such members will be
treated as if they filed a Form 1122 when they join in the filing of a
consolidated return under section 1504(c)(2) and they will be deemed to
consent to the regulations under this section. However, an affiliation
schedule (Form 851) must be filed by the group and the life members must
execute a Form 1122 in the manner prescribed in Sec. 1.1502-75(h)(2).
(3) Irrevocability. Except as provided in Sec. 1.1502-75(c) and
paragraph (e)(4) of this section, the election under section 1504(c)(2)
is irrevocable.
(4) Permission to discontinue--(i) General rule. A ``section
1504(c)(2) group'' with a common parent that has made the election to
file a consolidated return under section 1504(c)(2) in a previous
taxable year is granted permission to elect (under Sec. 1.1502-
75(c)(2)(ii)) to discontinue filing such a consolidated return for that
group's first taxable year for which the regulations under this section
are effective. This election to discontinue shall be exercised in the
time and manner prescribed in Sec. 1.1502-75(c)(3), except that the
group's common parent shall exercise this election to discontinue (and
the other members of the section 1504(c)(2) group must comply with this
election) by filing appropriate returns. For purposes of this paragraph
(e)(4), an appropriate return is either a separate return or a
consolidated return that is filed by newly exercising the privilege
under Sec. 1.1502-75(a)(1).
(ii) Types of groups. (A) A ``section 1504(c)(2) group'' is an
affiliated group which files or filed a consolidated return pursuant to
an election under section 1504(c)(2).
(B) A ``limited group'' is an affiliated group (determined without
section 1504(c)(2)) having at least one member which was a member of a
section 1504(c)(2) group on the date that the section 1504(c)(2) group
elected to discontinue under paragraph (e)(4)(i) of this section.
(iii) Effect on restoration rules. If a group ceases to file a
consolidated return or terminates or if a member leaves the group,
certain items of income, gain, or loss on transactions between members
are taken into account under Sec. Sec. 1.1502-13, 1.1502-18, and
1.1502-19 (``restoration rules''). For purposes of
[[Page 439]]
applying these restoration rules solely by reason of an election under
paragraph (e)(4)(i) or (e)(4)(v)(A) of this section to discontinue
filing consolidated returns as a section 1504(c)(2) group, the following
rules apply:
(A) The section 1504(c)(2) group shall not be considered to
terminate and no member of that group shall be treated as ceasing to be
a member.
(B) Members of that section 1504(c)(2) group that are included in
the consolidated return of a limited group for the first taxable year
for which the discontinuance is effective shall be considered to be
filing a consolidated return as a continuation of the section 1504(c)(2)
group. However, a corporation that is not a member of a particular
limited group for that taxable year is considered to have a separate
return year (and, for purposes of Sec. 1.1502-19(c), not to be a member
of a group filing a consolidated return) with respect to that limited
group's members.
(C) Section 1.1502-13 shall be applied without regard to paragraph
(f)(1)(vii).
(iv) Illustrations. The following examples illustrate paragraph
(e)(4)(i)-(iii) of this section. In these examples, L indicates a life
company and another letter indicates a nonlife company. All corporations
use the calendar year as the taxable year. For all taxable years
involved, P owns all the stock of L1 and of S, L1
owns all the stock of L2, L2 owns all the stock of
L3, and S owns all the stock of L4. For 1981, P
makes the life-nonlife election of section 1504(c)(2) and L4
is an eligible corporation. For 1982, P makes the election to
discontinue filing consolidated returns under section 1504(c)(2) in
accordance with the permission granted in this paragraph (e)(4).
Example (1). L1, L2, and L3 were
eligible members. For 1982, P and S may either file separate returns or
may file, as a limited group, a consolidated return. Similarly,
L1, L2, and L3 may either file separate
returns or may file a consolidated return as a limited group under
section 1504(c)(1). L4 must file a separate return.
Example (2). For 1981, L1 was an ineligible member and
L1, L2, and L3 filed a consolidated
return under section 1504(c)(1). For 1982, L1, L2,
and L3 must continue filing a consolidated return under
section 1504(c)(1).
Example (3). For 1981, L1 was an eligible member and
L2 and L3 were ineligible members. For 1982,
L1, L2, and L3 either must each file a
separate return or must file a consolidated return as a limited group
under section 1504(c)(1) having L1 as a common parent.
Example (4). The facts are the same as in example (3). Assume
further that for 1981, L2 and L3 file a
consolidated return. During 1981, intercompany transactions (see Sec.
1.1502-13) occur in the life-nonlife group between P and L1,
between P and S, and between S and L4 and occur in the
ineligible life subgroup between L2 and L3. For
1982, the restoration rules of Sec. 1.1502-13, as modified by paragraph
(e)(4)(iii)(B) of this section, will be applicable as indicated in the
following table:
------------------------------------------------------------------------
Intercompany transactions between Sec. 1.1502-13
------------------------------------------------------------------------
P and L1............................... Yes.
P and S, if they file:
Separate returns..................... Yes.
A consolidated return................ No.
S and L4............................... Yes.
L2 and L3, if L1, L2, and L3 file:
Separate returns..................... Yes.
A consolidated return................ No.
------------------------------------------------------------------------
(v) Additional rules. (A) If a group with a taxable year ending in
the month of December, 1982, had made the election under section
1504(c)(2) for a taxable year ending prior to December 1, 1982, and if
that group meets the conditions of subdivision (vi) of this paragraph
(e)(4), then the common parent may elect to discontinue filing a
consolidated return for its taxable year ending in the month of
December, 1982 (and other members of the section 1504(c)(2) group must
comply with this election) by filing appropriate returns (see paragraph
(e)(4)(i) of this section) before September 16, 1983.
(B) If a group made the election under section 1504(c)(2) for its
taxable year ending in the month of December, 1982, and if that group
meets the conditions of subdivision (vi) of this paragraph (e)(4), then
the common parent may elect to withdraw the section 1504(c)(2) election
(and all other members of the group determined without section
1504(b)(2) comply with the election) by filing before September 16,
1983, any returns for the appropriate taxable years that would have been
filed had the section 1504(c)(2) election never been made.
(vi) A group referred to at subdivision (v)(A) or (B) of this (e)(4)
meets the conditions of this subdivision (vi) if it--
[[Page 440]]
(A) filed before March 16, 1983, a return for its taxable year
ending in the month of December, 1982, and
(B) had not been granted an extension of time beyond March 15, 1983,
for the filing of that return.
(vii) Interest. For purposes of section 6601(a), interest runs from
the original due date (without extensions) for the filing of such
returns as are filed pursuant to an election (to discontinue or withdraw
as the case may be) under this paragraph (e)(4).
(5) Consent to regulations. If a group does not discontinue filing a
consolidated return under paragraph (e)(4) of this section but continues
to file a consolidated return for the group's first taxable year for
which the regulations under this section are first effective, the
members of the group will be deemed to have consented to the regulations
under this section.
(6) Cross reference. If an election is made under section
1504(c)(2), see Sec. 1.1502-75 (e) and (f) for rules that apply for not
including (or including) a member or a nonmember in the consolidated
return.
(f) Effect of election. If the common parent makes the election
under section 1504(c)(2), the following rules apply:
(1) Termination of group. A mere election under section 1504(c)(2)
will not cause the creation of a new group or the termination of an
affiliated group that files a consolidated return in the immediately
preceding taxable year.
(2) Effect of eligibility. If a life member is eligible after an
election under section 1504(c)(2), it may not be included as a member of
an affiliated group as defined in section 1504(c)(1).
(3) Eligible and ineligible life companies. If any life company was
a member of an affiliated group of life companies (as defined in section
1504(c)(1)) but is ineligible for a taxable year for which the election
under section 1504(c)(2) is effective, that year is not a separate
return year merely by reason of the election under section 1504(c)(2) in
applying Sec. Sec. 1.1502-13, 1.1502-18, and 1.1502-19 to transactions
occurring in prior consolidated return years of that affiliated group.
In addition, if more than one ineligible life member of the group (as
defined in section 1504(c)(1)) joined in the filing of a consolidated
return in the taxable year immediately preceding the year for which the
election under section 1504(c)(2) is effective and, solely as a result
of the election, one of the ineligible life members becomes the common
parent of such a group (section 1504(c)(1)), the group must continue to
file a consolidated return. For example, assume that L1 owns
all of the stock of S1 and all of the stock of L2.
L2 owns the stock of L3. L1,
L2, and L3 are life companies and S1 is
a nonlife company. Assume further that in 1981, L1,
L2, and L3 file a consolidated return but
L1 makes the election under section 1504(c)(2) for 1982 and
L2 and L3 are ineligible. L2 and
L3 must continue to file a consolidated return in 1982.
Moreover, L2 could elect in 1982 to file a consolidated
return (section 1504(c)(1)) with L3 even if they did not file
a consolidated return in 1981 with L1.
(4) Inclusion of life company. If a life company is ineligible in
the consolidated return year for which the election is effective, it
will be treated as an includible corporation for the common parent's
first taxable year in which the company becomes eligible.
(5) Dividends received deduction. Section 243(b)(5) defines the term
affiliated group for purposes of the election to deduct 100 percent of
the qualifying dividends received by a member from another member of the
group. Section 246(b)(6) limits certain multiple tax benefits and the
deduction itself. Section 243(b) (5) and (6) do not apply to the mutual
companies and life companies that are eligible corporations. See section
1504(c)(2)(B)(i). Thus, the common parent of the group may elect to
deduct 100 percent of the qualifying dividends received from an
ineligible life company.
(6) Controlled group. Sections 1563 (a)(4), (b)(2)(D), and (b)(3)(C)
(insofar as it applies to corporations described in section
1563(b)(2)(D)) do not apply to any eligible or ineligible life company
that is a member of the group for a taxable year during which the
election is effective. See paragraph (d)(4) of this section for the
definition of group.
(7) Consolidated tax. The tax liability of a group for a
consolidated return year (before application of credits
[[Page 441]]
against that tax) is computed on a consolidated basis by adding together
the following taxes:
(i) The tax imposed under section 11 on consolidated taxable income
(as determined under paragraph (g) of this section). The taxes imposed
under sections 802(a), 821(a), and 831(a) will each be treated as a tax
imposed under section 11.
(ii) The tax imposed by section 1201 on consolidated net capital
gain (as determined under paragraph (o) of this section) in lieu of the
tax imposed under paragraph (f)(7)(i) of this section on that gain.
(iii) Any taxes described in Sec. 1.1502-2 (other than by
paragraphs (a), (f), and (h) thereof).
(g) Consolidated taxable income. The consolidated taxable income is
the sum of the following three amounts:
(1) Nonlife consolidated taxable income. The nonlife consolidated
taxable income (as defined in paragraph (h) of this section) of the
nonlife subgroup, as set off by the life subgroup losses as provided in
paragraph (n) of this section. The amount in this paragraph (g)(1) may
not be less than zero.
(2) Consolidated partial LICTI. The consolidated partial LICTI (as
defined in paragraph (j) of this section) of the life subgroup, as set
off by the nonlife subgroup losses as provided in paragraph (m) of this
section. The amount in this paragraph (g)(2) may not be less than zero.
(3) Surplus accounts. The sum of the amounts subtracted under
section 815 from the policyholders' surplus accounts of the life
members.
(h) Nonlife consolidated taxable income--(1) In general. Nonlife
consolidated taxable income is the consolidated taxable income of the
nonlife subgroup, computed under Sec. 1.1502-11 as modified by this
paragraph (h). For this purpose, separate taxable income of a member
includes separate mutual insurance company taxable income (as defined in
section 821(b)) and insurance company taxable income (as defined in
section 832).
(2) Nonlife consolidated net operating loss deduction--(i) In
general. In applying Sec. Sec. 1.1502-21 or 1.1502-21A (as
appropriate), the rules in this subparagraph (2) apply in determining
for the nonlife subgroup the nonlife net operating loss and the portion
of the nonlife net operating loss carryovers and carrybacks to the
taxable year.
(ii) Nonlife CNOL. The nonlife consolidated net operating loss is
determined under Sec. Sec. 1.1502-21(A)(f) or 1.1502-21(e) (as
appropriate) by treating the nonlife subgroup as the group.
(iii) Carryback. The nonlife consolidated net operating loss for the
nonlife subgroup is carried back under Sec. Sec. 1.1502-21A or 1.1502-
21 (as appropriate) to the appropriate years (whether consolidated or
separate) before the loss may be used as a nonlife subgroup loss under
paragraphs (g)(2) and (m) of this section to set off consolidated
partial LICTI in the year the loss arose. The election under section
172(b)(3)(C) to relinquish the entire carryback period for the net
operating loss of the nonlife subgroup may be made by the common parent
of the group. Furthermore, the election may be made even though the
election under section 812(b)(3) and paragraph (l)(3)(iii) of this
section is not made.
(iv) Subgroup rule. In determining the portion of the nonlife
consolidated net operating loss that is absorbed when the loss is
carried back to a consolidated return year beginning after December 31,
1981, Sec. Sec. 1.1502-21A or 1.1502-21 (as appropriate) is applied by
treating the nonlife subgroup as the group. Therefore, the absorption is
determined without taking into account any life subgroup losses that
were previously reported on a consolidated return as setting off nonlife
consolidated taxable income for the year to which the nonlife loss is
carried back.
(v) Carryover. The portion of the nonlife consolidated net operating
loss that is not absorbed in a prior year as a carryback, or as a
nonlife subgroup loss that set off consolidated partial LICTI for the
year the loss arose, constitutes a nonlife carryover under this
subparagraph (2) to reduce nonlife consolidated taxable income before
that portion may constitute a nonlife subgroup loss that sets off
consolidated partial LICTI for a particular year.
(vi) Transitional rules. The nonlife consolidated net operating loss
deduction is subject to a transitional rule
[[Page 442]]
limitation in paragraph (h)(3) of this section.
(vii) Example. The following example illustrates this paragraph
(h)(2). In the example, L indicates a life company, another letter
indicates a nonlife company, and each corporation uses the calendar year
as its taxable year.
Example. P owns all of the stock of S and L1.
L1 owns all of the stock of L2. For 1982, the
group first files a consolidated return for which the election under
section 1504(c)(2) is effective. P and S filed consolidated returns for
1979 through 1981. In 1982, the P-S group sustains a nonlife
consolidated net operating loss. The loss is carried back to the
consolidated return years 1979, 1980, and 1981 of P and S by using the
principles of Sec. Sec. 1.1502-21A and 1.1502-79A and, because the
election in 1982 under section 1504(c)(2) does not result under
paragraph (f)(1) of this section in the creation of a new group or the
termination of the P-S nonlife group, the loss is absorbed on the
consolidated return in those years without regard to whether the loss in
1982 is attributable to P or S and without regard to their contribution
to consolidated taxable income in 1979, 1980, or 1981. The portion of
the loss not absorbed in 1979, 1980, and 1981 may serve as a nonlife
subgroup loss in 1982 that may set off the consolidated partial LICTI of
L1 and L2 under paragraphs (g)(2) and (m) of this
section.
(3) Transitional rule--(i) In general. The portion of the nonlife
consolidated net operating loss deduction in a consolidated return year
beginning after December 31, 1980 (referred to as ``post-1980 year'')
attributable to net operating losses sustained in separate return years
ending before January 1, 1981 (referred to as ``pre-1981 year''), is
subject to the rules and limitations in this subparagraph (3).
(ii) Separate nonlife groups. To determine the limitation, first,
identify for the post-1980 year one or more separate affiliated groups
of nonlife companies (as defined in section 1504 without section
1504(c)(2)). For this purpose, a single nonlife company may constitute a
separate affiliated group if (A) it is not otherwise a member of a
separate group or (B) it has a net operating loss sustained in the pre-
1981 year that may be carried over and that year is a separate return
limitation year (determined under Sec. 1.1502-1(f) without paragraph
(d)(11) of this section).
(iii) Carryover. Second, identify the pre-1981 year net operating
losses that may be carried over and that are attributable to each
separate affiliated group of nonlife companies. The separate return
limitation year rules in Sec. Sec. 1.1502-21A(c) or 1.1502-21(c) (as
appropriate) do not apply to any of these carryovers.
(iv) Limitation. Third, treat the last taxable year ending before
January 1, 1981, as if in that year there was a consolidated return
change of ownership of each such separate affiliated group of nonlife
companies and apply the consolidated return change of ownership
limitation in Sec. 1.1502-21A(d) to the losses of each group by
treating the members of each separate group as old members.
(v) Examples. The following examples illustrate this paragraph
(h)(3). In the examples L indicates a life company, another letter
indicates a nonlife company, and each corporation uses the calendar year
as its taxable year.
Example (1). Throughout all of 1982, P owns all of the stock of S
and L1 and L1 owns all of the stock of
L2 which in turn owns all of the stock of S1.
Thus, for 1982, there are two nonlife subgroups under this subparagraph
(3), P-S and S1. For 1981, P and S did not file a
consolidated return and for 1980 P has a net operating loss of $200,000.
Assume that P had no income in 1981. For 1982, the group makes an
election under section 1504(c)(2) to file a consolidated return and all
corporations are eligible corporations. The consolidated taxable income
for the nonlife subgroup for 1982 (determined without the consolidated
net operating loss deduction) recomputed by including only items of
income and deduction of P and S is $120,000. If $120,000 is the Sec.
1.1502-21(d)(2) amount for P and S, then the amount of P's net operating
loss for 1980 that may be carried over to P and S for 1982 cannot exceed
$120,000.
Example (2). (a) P owns all of the stock of S1. On
January 1, 1979, P purchased all of the stock of L1 which
owns all of the stock of L2 and S2. Prior to 1984,
all of the corporations filed separate returns. For 1984, the group
makes an election under section 1504(c)(2) to file a consolidated
return.
(b) 1981, 1982, and 1983 are not treated under paragraph (d)(11) of
this section as separate return limitation years of the P,
S1, and S2 nonlife subgroup. However, P and
S1 will be treated as old members under paragraph (h)(3)(iv)
of this section and under Sec. 1.1502-21A(d) with respect to their
losses in 1979 and 1980 (whether a consolidated return was filed or
separate returns were filed) so that the portion of nonlife consolidated
taxable income attributable to S2 may not absorb the
[[Page 443]]
losses of P or S1. The rules that apply to the P-
S1 nonlife subgroup for 1979 and 1980 apply in an identical
way to S2 by treating S2 as a subgroup separate
from the P-S1 nonlife subgroup. See section 1507(c)(2)(A) of
the Tax Reform Act of 1976.
(c) Similarly, L1 and L2 are treated as old
members under paragraphs (l)(3) and (h)(3)(iv) of this section for
losses arising in 1979 and 1980. However, since the L1--
L2 subgroup is also the life subgroup under paragraph (d)(8)
of this section, the limitation in paragraph (h)(3)(iv) of this section
does not affect the computation of consolidated partial LICTI for the
life subgroup.
(4) Nonlife consolidated capital gain net income or loss--(i) In
general. In applying Sec. Sec. 1.1502-22 or 1.1502-22A (as
appropriate),the rules in this subparagraph (4) apply in determining for
the nonlife subgroup the nonlife consolidated capital gain net income or
loss and the portion of the nonlife net capital loss carryovers and
carrybacks to the taxable year. In particular, the nonlife consolidated
capital gain net income and nonlife consolidated net capital loss are
determined under the principles of Sec. Sec. 1.1502-22 or 1.1502-
22A(a) (as appropriate) by treating the nonlife subgroup as the group.
(ii) Additional principles. In applying Sec. Sec. 1.1502-22A or
1.1502-22 to nonlife consolidated net capital loss carryovers and
carrybacks, the principles set forth in paragraphs (h)(2) (iii) through
(v) for applying Sec. Sec. 1.1502-21 or 1.1502-21A (as appropriate) to
nonlife consolidated net operating loss carryovers and carrybacks shall
also apply. Further, the portion of nonlife consolidated net capital
loss carryovers attributable to losses sustained in taxable years ending
before January 1, 1981, is subject to the limitations in paragraph
(h)(3) of this section applied by substituting ``net capital loss'' for
the term ``net operating loss'' and ``Sec. 1.1502-22A(d)'' for ``Sec.
1.1502-21A(d)''.
(iii) Special rules. The nonlife consolidated net capital loss is
reduced, for purposes of determining the carryovers and carrybacks under
Sec. Sec. 1.1502-22A(b)(1) or 1.1502-22(b) by the lesser of:
(A) The aggregate of the additional capital loss deductions allowed
under section 822(c)(6) or section 832(c)(5), or
(B) The nonlife consolidated taxable income computed without capital
gains and losses.
(i) [Reserved]
(j) Consolidated partial LICTI. [Reserved]
(k) Consolidated TII--(1) General rule. [Reserved]
(2) Separate TII. [Reserved]
(3) Company's share of investment yield. [Reserved]
(4) Life consolidated capital gain net income. [Reserved]
(5) Life consolidated net capital loss carryovers and carrybacks.
The life consolidated net capital loss carryovers and carrybacks for the
life subgroup are determined by applying the principles of Sec. Sec.
1.1502-22 or 1.1502-22A (as appropriate) as modified by the following
rules in this subparagraph (5):
(i) Life consolidated net capital loss is first carried back (or
apportioned to the life members for separate return years) to be
absorbed by life consolidated capital gain net income without regard to
any nonlife subgroup capital losses and before the life consolidated net
capital loss may serve as a life subgroup capital loss that sets off
nonlife consolidated capital gain net income in the year the life
consolidated net capital loss arose.
(ii) If a life consolidated net capital loss is not carried back or
is not a life subgroup loss that sets off nonlife consolidated capital
gain net income in the year the life consolidated net capital loss
arose, then it is carried over to the particular year under this
paragraph (k)(5) first against life consolidated capital gain net income
before it may serve as a life subgroup capital loss that sets off
nonlife consolidated capital gain net income in that particular year.
(iii) Section 818(f). Capital losses may not be deducted more than
once and capital gain will not be included more than once. See section
818(e) and also section 818(f).
(iv) Capital loss carryovers are subject to the transitional rule in
paragraph (k)(6) of this section.
(6) Transitional rule. The portion of the life consolidated capital
loss carryovers attributable to the net capital losses of the life
members sustained in separate return years ending before January 1,
1981, is subject to the same limitations as the capital losses of
nonlife members in paragraph
[[Page 444]]
(h)(4)(iii) of this section by applying the principles of paragraph
(h)(3) of this section to each separate affiliated group of life
companies.
(l) Consolidated GO or LO--(1) General rule. [Reserved]
(2) Separate GO. [Reserved]
(3) Consolidated operations loss deduction--(i) General rule. The
consolidated operations loss deduction is an amount equal to the
consolidated operations loss carryovers and carrybacks to the taxable
year. The provisions of Sec. Sec. 1.1502-21 or 1.1502-21A (as
appropriate) and section 812 apply to the extent not inconsistent with
this paragraph (l)(3).
(ii) Consolidated offset. For purposes of applying section 812 (b)
and (d), the term ``consolidated offset'' means the increase in the
consolidated operations loss deduction which reduces consolidated
partial LICTI to zero. For setoff of consolidated LO against nonlife
consolidated taxable income, see paragraph (n)(2) of this section.
(iii) Carrybacks. A consolidated LO is first carried back to be
absorbed by GO of a life member under section 809(d)(4) or consolidated
partial LICTI (as the case may be under section 818(f)(2)) for prior
consolidated return years (or apportioned to the life members for prior
separate return years) without regard to any nonlife subgroup losses
that were set off against consolidated partial LICTI and before the
consolidated LO may serve as a life subgroup loss to be set off against
nonlife consolidated taxable income in the year the consolidated LO
arose. The election to relinquish the entire carryback period for the
consolidated LO of the life subgroup may be made by the common parent of
the group. See section 812(b)(3). Furthermore, the election may be made
even though the election under section 172(b)(3)(C) and paragraph
(h)(2)(iii) of this section is not made.
(iv) Carryovers. If a consolidated LO is not carried back or is not
applied as a life subgroup loss that set off nonlife consolidated
taxable income in the year the consolidated LO arose, then it is carried
over to a particular year under this paragraph (l)(3) first against the
GO of a life member under section 809(d)(4) or consolidated partial
LICTI (as the case may be under section 818(f)(2)) before it may serve
as a life subgroup loss that may be set off against nonlife consolidated
taxable income for that particular year.
(v) Transitional rule. The portion of a consolidated operations loss
deduction that is attributable to LOs sustained in separate return years
ending before January 1, 1981, is subject to the same rules and
limitations that the nonlife consolidated net operating loss deduction
is subject to in paragraph (h)(3) of this section as applied by
identifying separate affiliated groups of life companies.
(4) Life consolidated capital gain net income or loss. Life
consolidated capital gain net income or loss is determined in the same
manner as under paragraph (k)(4) of this section. However, a life
member's company share is determined under section 809 (a) and (b)(3).
(m) Consolidated partial LICTI setoff by nonlife subgroup losses--
(1) In general. The nonlife subgroup losses consist of the nonlife
consolidated net operating loss and the nonlife consolidated net capital
loss. Under paragraph (g)(2) of this section, consolidated partial LICTI
is set off by the amounts of these two consolidated losses specified in
paragraph (m)(2) of this section. The setoff is subject to the rules and
limitations in paragraph (m)(3) of this section.
(2) Amount of setoff--(i) Current year. Consolidated partial LICTI
for the current taxable year is set off by the portion of the nonlife
consolidated net operating loss and nonlife consolidated net capital
loss arising in that year that cannot be carried back under paragraph
(h) of this section to prior taxable years (whether consolidated or
separate return years) of the nonlife subgroup.
(ii) Carryovers. The portion of the offsettable nonlife consolidated
net operating loss or nonlife consolidated net capital loss that has not
been used as a nonlife subgroup loss setoff against consolidated partial
LICTI in the year it arose may be carried over to succeeding taxable
years under the principles of Sec. Sec. 1.1502-21 or 1.1502-21A (as
appropriate) (relating to net operating loss deduction) or Sec. Sec.
1.1502-22 or 1.1502-22A (as appropriate) (relating to net capital loss
carryovers). However, in
[[Page 445]]
any particular succeeding year, the losses will be used under paragraph
(h) of this section in computing nonlife consolidated taxable income
before being used in that year as a nonlife subgroup loss that sets off
consolidated partial LICTI.
(3) Nonlife subgroup loss rules and limitations. The nonlife
subgroup losses are subject to the following operating rules and
limitations:
(i) Separate return years. The carryovers in paragraph (m)(2)(ii) of
this section may include net operating losses and net capital losses of
the nonlife members arising in separate return years ending after
December 31, 1980, that may be carried over to a succeeding year under
the principles (including limitations) of Sec. Sec. 1.1502-21 and
1.1502-22 (or Sec. Sec. 1.1502-21A and 1.1502-22A, as appropriate).
But see subdivision (ix) of this paragraph (m)(3).
(ii) Capital loss. Nonlife consolidated net capital loss sets off
consolidated partial LICTI only to the extent of life consolidated
capital gain net income (as determined under paragraph (l)(4) of this
section) and this setoff applies before any nonlife consolidated net
operating loss sets off consolidated partial LICTI.
(iii) Capital gain. Life consolidated capital gain net income is
zero in any taxable year in which the life subgroup has a consolidated
LO and, in any taxable year, it may not exceed consolidated partial
LICTI.
(iv) Ordering rule. Consolidated partial LICTI for a consolidated
return year is set off by nonlife subgroup losses for that year before
being set off (under paragraph (m)(2)(ii) of this section) by a
carryover of a nonlife subgroup loss to that year.
(v) Setoff at bottom line. The setoff of nonlife subgroup losses
against consolidated partial LICTI does not affect life member
deductions that depend in whole or in part on GO or TII. Thus, the
setoff does not affect the amount of consolidated partial LICTI (as
determined under paragraph (j) of this section) for any taxable year but
it merely constitutes an adjustment in arriving at the group's
consolidated taxable income under paragraph (g) of this section.
(vi) Ineligible nonlife member. (A) The offsetable nonlife
consolidated net operating loss that arises in any consolidated return
year (that may be set off against consolidated partial LICTI in the
current taxable year or in a succeeding taxable year) is the amount
computed under paragraph (h)(2)(ii) of this section reduced by the
ineligible NOL. For purposes of this subparagraph (3), the ``ineligible
NOL'' is in the year the loss arose the amount of the separate net
operating loss (determined under Sec. Sec. 1.1502-21(b) of any nonlife
member that is ineligible in that year (and not the portion of the
nonlife consolidated net operating loss attributable under Sec. Sec.
1.1502-21(b) to such a member). (B) The carryovers of offsetable nonlife
net operating losses under paragraph (m)(2)(ii) of this section do not
include an ineligible NOL arising in a consolidated return year or a
loss attributable to an ineligible member arising in a separate return
year. See section 1503(c)(2). (C) For absorption within the nonlife
subgroup of an ineligible NOL arising in a consolidated return year or a
loss of an ineligible member arising in a separate return year which is
not a separate return limitation year under paragraph (m)(3)(ix) of this
section, see paragraph (m)(3)(vii) of this section.
(vii) Absorption of ineligible NOL. (A) If all or a portion of a
nonlife member's ineligible NOL (determined under paragraph
(m)(3)(vi)(A) of this section) may be carried back or carried over under
paragraph (h)(2) of this section to a particular consolidated return
year of the nonlife subgroup (absorption year), then notwithstanding
Sec. 1.1502-21A(b)(3)(ii) or 1.1502-21(b), the amount carried to the
absorption year will be absorbed by that member's contribution (to the
extent thereof) to nonlife consolidated taxable income for that year.
(B) For purposes of (A) of this subdivision (vii), a member's
contribution to nonlife consolidated taxable income for an absorption
year is the amount of such income (computed without the portion of the
nonlife consolidated net operating loss deduction attributable to
taxable years subsequent to the year the loss arose), minus such
consolidated taxable income recomputed by
[[Page 446]]
excluding both that member's items of income and deductions for the
absorption year. The deductions of the member include the prior
application of this paragraph (m)(3)(vii) to the absorption of the
nonlife consolidated net operating loss deduction for losses arising in
taxable years prior to the particular loss year.
(viii) Election to relinquish carryback. The offsetable nonlife
consolidated net operating loss does not include the amount that could
be carried back under paragraph (h) (2) of this section but for the
common parent's election under section 172(b)(3)(C) to relinquish the
carryback. See section 1503(c)(1).
(ix) Separate return limitation year. The offsetable nonlife
consolidated net operating and capital loss carryovers do not include
any losses attributable to a nonlife member that were sustained (A) in a
separate return limitation year (determined without section 1504(b)(2))
of that member (or a predecessor), or (B) in a separate return year
ending after December 31, 1980, in which an election was in effect under
neither section 1504(c)(2) nor section 243(b)(2). For purposes of this
paragraph (m), a separate return limitation year includes a taxable year
ending before January 1, 1981. See section 1507(c)(2)(A) of the Tax
Reform Act of 1976 and Sec. Sec. 1.1502-15 and 1.1502-15A (including
applicable exceptions thereto).
(x) Percentage limitation. The offsetable nonlife consolidated net
operating losses that may be set off against consolidated partial LICTI
in a particular year may not exceed a percentage limitation. This
limitation is the applicable percentage in section 1503(c)(1) of the
lesser of two amounts.
The first amount is the sum of the offsetable nonlife consolidated net
operating losses under paragraph (m)(2) of this section that may serve
in the particular year (determined without this limitation) as a setoff
against consolidated partial LICTI. The second amount is consolidated
partial LICTI (as defined in paragraph (j) of this section) in the
particular year reduced by any nonlife consolidated net capital loss
that sets off consolidated partial LICTI in that year.
(xi) Further limitation. Any offsetable nonlife consolidated net
operating loss remaining after applying the percentage limitation that
is carried over to a succeeding taxable year may not be set off against
the consolidated partial LICTI attributable to a life member that was
not an eligible life member in the year the loss arose. See section
1503(c)(2).
(xii) Restoration rule. The carryback of a consolidated LO or life
consolidated net capital loss under paragraph (l) of this section that
reduces consolidated partial LICTI (or life consolidated capital gain
net income) for a prior year may reduce the amount of nonlife subgroup
losses that would offset consolidated partial LICTI in that prior year.
Thus, that amount may be carried over under paragraph (h) (2) or (4) of
this section from that prior year in determining nonlife consolidated
taxable income in a succeeding year or serve as offsetable nonlife
subgroup losses in a succeeding year.
(4) Acquired groups. [Reserved]
(5) Illustrations. The following examples illustrates this paragraph
(m). In the examples, L indicates a life company, another letter
indicates a nonlife company, and each corporation uses the calendar year
as its taxable year.
Example (1). P owns all of the stock of L and S. S owns all of the
stock of I, a nonlife member that is an ineligible corporation for 1982
under paragraph (d)(13) of this section. For 1982, the group elects
under section 1504(c)(2) to file a consolidated return. For 1982, assume
that any nonlife consolidated net operating loss may not be carried back
to a prior taxable year. Other facts are summarized in the following
table.
------------------------------------------------------------------------
Separate
taxable
income
(loss)
------------------------------------------------------------------------
P............................................................ $100
S............................................................ (100)
I............................................................ (100)
----------
Nonlife consolidated net operating loss.................. (100)
------------------------------------------------------------------------
Under paragraph (m)(3)(vi) of this section, P's separate income is
considered to absorb the loss of S, an eligible member, first and the
offsetable nonlife consolidated net operating loss is zero, i.e., the
consolidated net operating loss ($100) reduced by I's loss ($100). The
consolidated net operating loss ($100) may be carried over, but since it
is entirely attributable to I (an ineligible member) its use is subject
to the restrictions in paragraph (m)(3)(vi) of this section. The result
[[Page 447]]
would be the same if the group contained two additional members,
S1, an eligible member, and I1, an ineligible
member, where S1 had a loss of ($100) and I1 had
income of $100.
Example (2). The facts are the same as in example (1) except that
for 1982 S's separate net operating loss is $200. Assume further that
L's consolidated partial LICTI is $200. Under paragraph (m)(3)(vi) of
this section, the offsetable nonlife consolidated net operating loss is
$100, i.e., the nonlife consolidated net operating loss computed under
paragraph (h)(2)(ii) of this section ($200), reduced by the separate net
operating loss of I ($100). The offsetable nonlife consolidated net
operating loss that may be set off against consolidated partial LICTI in
1982 is $30, i.e., 30 percent of the lesser of the offsetable $100 or
consolidated partial LICTI of $200. See paragraph (m)(3)(x) of this
section. The nonlife subgroup may carry $170 to 1983 under paragraph
(h)(2) of this section against nonlife consolidated taxable income,
i.e., consolidated net operating loss ($200) less amount used in 1982
($30). Under paragraph (m)(2)(ii) of this section, the offsetable
nonlife consolidated net operating loss that may be carried to 1983 is
$70, i.e., $100 minus $30. The facts and results are summarized in the
table below.
----------------------------------------------------------------------------------------------------------------
(Dollars omitted)
-----------------------------------------------------------
Facts Offsetable Limit Unused loss
----------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d)
1. P................................................ 100 ............. ........... ...............
2. S................................................ (200) (100) ........... (70)
3. I................................................ (100) ............. ........... (100)
4. Nonlife subgroup................................. (200) (100) (100) (170)
5. L................................................ 200 ............. 200 ...............
6. 30% of lower of line 4(c) or 5(c)................ ............. ............. 30 ...............
7. Unused offsetable loss........................... ............. ............. ........... (70)
----------------------------------------------------------------------------------------------------------------
Accordingly, under paragrah (g) of this section (assuming no amount is
withdrawn from L's surplus accounts), consolidated taxable income is
$170, i.e., line 5 (a) minus line 6(c)).
Example (3). The facts are the same as in example (2) with the
following additions for 1983. The nonlife subgroup has nonlife
consolidated taxable income of $50 (all of which is attributable to I)
before the nonlife consolidated net operating loss deduction under
paragraph (h)(2) of this section. Consolidated partial LICTI is $100.
Under paragraph (h)(2) of this section, $50 of the nonlife consolidated
net operating loss carryover ($170) is used in 1983 and, under paragraph
(m)(3) (vi) and (vii) of this section, the portion used in 1982 is
attributable to I, the ineligible nonlife member. Accordingly, the
offsetable nonlife consolidated net operating loss from 1982 under
paragraph (m)(3)(ii) of this section is $70, i.e., the unused loss from
1982. The offsetable nonlife consolidated net operating loss in 1983 is
$24.50, i.e., 35 percent of the lesser of the offsetable loss of $70 or
consolidated partial LICTI of $100. Accordingly, under paragraph (g) of
this section (assuming no amount is withdrawn from L's surplus
accounts), consolidated taxable income is $75.50, i.e., consolidated
partial LICTI of $100 minus the offsetable loss of $24.50.
Example (4). P owns all of the stock of S and L. For 1982, all
corporations are eligible corporations, and the group elects under
section 1504(c)(2) to file a consolidated return, the nonlife
consolidated net operating loss is $100, and the nonlife consolidated
net capital loss is $50. Assume that the losses may not be carried back
and the capital losses are not attributable to built-in deductions under
paragraph (m)(3)(ix) of this section or under Sec. 1.1502-15A. Other
facts and the results are set forth in the following table:
------------------------------------------------------------------------
P-S L
------------------------------------------------------------------------
1. Nonlife consolidated net operating loss.......... ($100) .......
2. Nonlife consolidated capital loss................ (50) .......
3. Consolidated partial LICTI....................... ......... $100
4. Life consolidated capital gain net income ......... 50
included in line 3.................................
============
5. Offsetable:
(a) 30% of lower of line (1) or line (3)-(4)...... (15) .......
(b) Line 2........................................ (50) .......
------------
(c) Total......................................... (65) .......
6. Unused losses available to be carried over:
(a) From line 1 (line 1 minus line 5 (a))......... (85) .......
(b) From line 2 (line 2 minus line 5 (b))......... 0 .......
------------------------------------------------------------------------
Accordingly, under paragraph (g) of this section consolidated taxable
income is $35, i.e., line 3 minus line 5(c).
Example (5). The facts are the same as in example (4). Assume
further that for 1983 L has an LO that is carried back to 1982 and the
LO is large enough to reduce consolidated partial LICTI for 1982 to zero
as determined before any setoff for nonlife losses. Under paragraph
(m)(3)(xii) of this section, the nonlife consolidated net operating loss
of $15 and the nonlife consolidated net capital
[[Page 448]]
loss of $50 that were set off in 1982 respectively against consolidated
partial LICTI and life consolidated capital gain net income are
restored. These restored amounts may consititute part of the nonlife
consolidated net operating loss carryover to 1983 under paragraph (h)(2)
of this section or part of the nonlife net capital loss carryover to
1983 under paragraph (h)(4) of this section.
Example (6). The facts are the same as in example (5) except that
L's LO for 1983 as carried back reduces consolidated partial LICTI in
1982 from $100 to $25. Since consolidated partial LICTI of $100 in 1982
(before the carryback) included life consolidated capital gain net
income of $50, under paragraph (m)(3)(iii) of this section, the life
consolidated capital gain net income is $25, i.e., $50 but not more than
$25. Therefore, under paragraph (m)(3)(ii) of this section, the
offsetable nonlife capital loss in 1982 is $25 and, under paragraph (m)
(3)(xii) of this section, $25 of the $50 nonlife consolidated net
capital loss in 1982 may be carried under paragraph (h)(4) of this
section to 1983. No nonlife consolidated net operating loss is used as a
setoff against consolidated partial LICTI in 1982 under paragraph
(m)(3)(xii) of this section by reason of the carryback of the
consolidated LO from 1983 to 1982.
(n) Nonlife consolidated taxable income set off by life subgroup
losses--(1) In general. The life subgroup losses consist of the
consolidated LO and the life consolidated net capital loss (as
determined under paragraph (l)(4) of this section). Under paragraph
(g)(1) of this section, nonlife consolidated taxable income is set off
by the amounts of these two consolidated losses specified in paragraph
(n)(2) of this section.
(2) Amount of setoff. The portion of the consolidated LO or life
consolidated net capital loss that may be set off against nonlife
consolidated taxable income (determined under paragraph (h) of this
section) is determined by applying the rules prescribed in paragraphs
(m) (2) and (3) of this section in the following manner:
(i) Substitute the term ``life'' for ``nonlife'', and vice versa.
(ii) Substitute the term ``nonlife consolidated taxable income'' for
``consolidated partial LICTI'', and vice versa.
(iii) Substitute the term ``consolidated LO'' for ``non-life
consolidated net operating loss'', ``paragraph (l)'' or ``paragraph
(j)'' for ``paragraph (h)'', and ``section 812(b)(3)'' for ``section
172(b)(3)(C)''.
(iv) Paragraphs (m)(3)(vi), (vii), (x), and (xi) of this section do
not apply to a consolidated LO.
(v) Capital losses may not be deducted more than once. See section
818(e) and also the requirements in section 818(f).
(vi) The setoff of life subgroup losses against nonlife consolidated
taxable income does not affect nonlife member deductions that depend in
whole or in part on taxable income.
(3) Illustrations. The following examples illustrate this paragraph
(n). In the examples, L indicates a life company, another letter
indicates a nonlife company, and each corporation uses the calendar year
as its taxable year.
Example (1). P, S, L1 and L2 constitute a
group that elects under section 1504(c)(2) to file a consolidated return
for 1982. In 1982, the nonlife subgroup consolidated taxable income is
$100 and there is $20 of nonlife consolidated net capital loss that
cannot be carried back under paragraph (h) of this section to taxable
years (whether consolidated or separate) preceding 1982. The nonlife
subgroup has no carryover from years prior to 1982. Consolidated LO is
$150 which under paragraph (l) of this section includes life
consolidated capital gain net income of $25. The $150 LO is carried back
under paragraph (l)(3) of this section to taxable years (whether
consolidated or separate) preceding 1982 before it may offset in 1982
nonlife consolidated taxable income. Since life consolidated capital
gain net income is zero for 1982, the nonlife capital loss offset is
zero.
Example (2). The facts are the same as in example (1). Assume
further that no part of the $150 consolidated LO for 1982 can be used by
L1 and L2 in years prior to 1982. For 1982, $100
of consolidated LO sets off the $100 nonlife consolidated taxable
income. The life subgroup carries under paragraph (l)(3) of this section
to 1983 $50 of the consolidated LO ($150 minus $100). See paragraph
(l)(3)(ii) of this section. The $50 carryover will be used in 1983
against life subgroup income before it may be used in 1983 to setoff
nonlife consolidated taxable income.
Example (3). (a) The facts are the same as in example (1), except
that for 1982 the nonlife consolidated taxable income is $150 and
includes nonlife consolidated capital gain net income of $50,
consolidated partial LICTI is $200, and a life consolidated net capital
loss is $50. Assume that the $50 life consolidated net capital loss sets
off the $50 nonlife consolidated capital gain net income. Consolidated
taxable income under paragraph (g) of this section is $300, i.e.,
nonlife consolidated taxable income ($150) minus the
[[Page 449]]
setoff of the life consolidated net capital loss ($50), plus
consolidated partial LICTI ($200).
(b) Assume that for 1983 the nonlife consolidated net operating loss
is $150. Under paragraph (h)(2) of this section, the loss may be carried
back to 1982 against nonlife consolidated taxable income. If P, the
common parent, does not elect to relinquish the carryback under section
172(b)(3)(C), the entire $150 must be carried back reducing 1982 nonlife
consolidated taxable income to zero and nonlife consolidated capital
gain net income to zero. Under paragraph (m)(3)(xii) of this section,
the setoff in 1982 of the nonlife consolidated capital gain net income
($50) by the life consolidated net capital loss ($50) is restored.
Accordingly, the 1982 life consolidated net capital loss may be carried
over by the life subgroup to 1983. Under paragraph (g) of this section,
after the carryback consolidated taxable income for 1982 is $200, i.e.,
nonlife consolidated taxable income ($0) plus consolidated partial LICTI
($200).
Example (4). The facts are the same as in example (3), except that P
elects under section 172 (b)(3)(C) to relinquish the carryback of $150
arising in 1983. The setoff in part (a) of example (3) is not restored.
However, the offsetable nonlife consolidated net operating loss for 1983
(or that may be carried forward from 1983) is zero. See paragraph
(m)(3)(viii) of this section. Nevertheless, the $150 nonlife
consolidated net operating loss may be carried forward to be used by the
nonlife group.
Example (5). P owns all of the stock of S1 and of
L1. On January 1, 1978, L1 purchases all of the
stock of L2. For 1982, the group elects under section
1504(c)(2) to file a consolidated return. For 1982, L1 is an
eligible corporation under paragraph (d)(12) of this section but
L2 is ineligible. Thus, L1 but not L2
is a member for 1982. For 1982, L2 sustains an LO that cannot
be carried back. For 1982, L2 is treated under paragraph
(f)(6) of this section as a member of a controlled group of corporations
under section 1563 with P, S, and L1. For 1983, L2
is eligible and is included on the group's consolidated return.
L2's LO for 1982 that may be carried to 1983 is not treated
under paragraph (d)(11) of this section as having been sustained in a
separate return limitation year for purposes of computing consolidated
partial LICTI of the L1-L2 life subgroup for 1983.
Furthermore, the portion of L2's LO not used under paragraph
(l)(3) of this section against life subgroup income in 1983 may be
included in offsetable consolidated operations loss under paragraph
(n)(2) and (m)(3)(i) of this section that reduces in 1983 nonlife
consolidated taxable income because L2's loss in 1982 was not
sustained in a separate return limitation year under paragraph (n)(2)
and (m)(3)(ix)(A) of this section or in a separate return year (1982)
when an election was in effect neither under section 1504(c)(2) nor
section 243(b)(2).
(o) Alternative tax--(1) In general. For purposes of the alternative
tax under paragraph (f)(7)(ii) of this section, consolidated net capital
gain is the sum of the following two amounts:
(i) The nonlife consolidated net capital gain reduced by any setoff
of a life consolidated net capital loss.
(ii) The life consolidated net capital gain reduced by any setoff of
a nonlife consolidated net capital loss.
(2) Net capital gain. For purposes of this paragraph (o):
(i) Nonlife consolidated net capital gain is computed under Sec.
Sec. 1.1502-41A or 1.1502-22T (as appropriate) except that it may not
exceed nonlife consolidated taxable income (computed under paragraph (h)
of this section).
(ii) Life consolidated net capital gain is computed under Sec.
Sec. 1.1502-41A or 1.1502-22T (as appropriate), applied in a manner
consistent with paragraph (l)(4) of this section, except that it may not
exceed consolidated partial LICTI (as determined under paragraph (j) of
this section).
(iii) Setoffs. Setoffs are determined under paragraphs (m) or (n) of
this section (as the case may be).
(p) Transitional rule for credit carryovers. For limitations on
credits arising in taxable years ending before January 1, 1981, that may
be carried over to taxable years beginning on or after that date,
section 1507(c)(2)(A) of the Tax Reform Act of 1976 and the principles
in paragraph (h)(3) of this section (relating to limitations on loss
carryovers) apply.
(q) Preemption. The rules in this section preempt any inconsistent
rules in other sections (Sec. 1.1502-1 through 1.1502-80) of the
consolidated return regulations. For example, the rules in paragraph
(m)(3)(vi) apply notwithstanding Sec. Sec. 1.1502-21A(b)(3) and 1.1502-
79A(a)(3) (or Sec. 1.1502-21, as appropriate).
(r) Other consolidation principles. The fact that this section
treats the life and nonlife members as separate groups in computing,
respectively, consolidated partial LICTI (or LO) and nonlife
consolidated taxable income (or loss) does not affect the usual rules in
Sec. Sec. 1.1502-0--1.1502-80 unless this section provides otherwise.
Thus, the usual rules in Sec. 1.1502-13 (relating to intercompany
transactions) apply to both
[[Page 450]]
the life and nonlife members by treating them as members of one
affiliated group.
(s) Filing requirements. Nonlife consolidated taxable income or loss
under paragraph (h) of this section shall be determined on a separate
Form 1120 or 1120 M and consolidated partial LICTI under paragraph (j)
of this section shall be determined on a separate Form 1120 L. The
consolidated return shall be made on a separate Form 1120, 1120 M, or
1120 L by the common parent (if the group includes a life company),
which shows the set-offs under paragraphs (g), (m), and (n) of this
section and clearly indicates by notation on the face of the return that
it is a life-nonlife consolidated return (if the group includes a life
company). See also Sec. 1.1502-75(j), relating to statements and
schedules for subsidiaries.
(Secs. 1502 and 7805 of the Internal Revenue Code of 1954 (68A Stat.
637, 917; 26 U.S.C. 1502, 7805))
[T.D. 7877, 48 FR 11441, Mar. 18, 1983, as amended by T.D. 7912, 48 FR
40215, Sept. 6, 1983; T.D. 8560, 59 FR 41674, Aug. 15, 1994; T.D. 8597,
60 FR 36679-36680, July 18, 1995; T.D. 8677, 61 FR 33324, June 27, 1996;
T.D. 8823, 64 FR 36100, July 2, 1999]