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FINANCINGS, REORGANIZATIONS AND
RESTRUCTURINGS 2012
The Section 382 Consolidated Return Regulations
By
Mark J. Silverman
Steptoe & Johnson LLP
Washington, D.C
Copyright © 2012, Mark J. Silverman, All Rights Reserved.
TABLE OF CONTENTS
Internal Revenue Service Circular 230 Disclosure: As provided
for in IRS regulations, advice (if any) relating to federal
taxes that is contained in this document (including attachments)
is not intended or written to be used, and cannot be used, for
the purpose of (1) avoiding penalties under the Internal Revenue
Code or (2) promoting, marketing or recommending to another
party any plan or arrangement addressed herein.
I.
OVERVIEW OF SECTION 382................................... 6
A. Required Change in Ownership.............................. 6
B. Consequences of an Ownership Change....................... 7
C. Losses Subject to Limitation.............................. 8
D. Example................................................... 9
E. Effective Dates.......................................... 10
II.
CONSOLIDATED RETURN ISSUES -- OVERVIEW................... 10
III. RULES PERTAINING TO LOSS GROUPS.......................... 16
A. Definition of Loss Group................................. 16
B. Determining if a Loss Group Has an Ownership Change...... 18
C. Effect of an Ownership Change............................ 33
IV. WHAT HAPPENS WHEN MULTIPLE CORPORATIONS JOIN A GROUP? -THE LOSS SUBGROUP RULES....................................... 40
A. Definition of Loss Subgroup.............................. 40
B. Determining if a Loss Subgroup Has an Ownership Change... 46
C. Effect of an Ownership Change............................ 53
V.
WHAT HAPPENS WHEN CORPORATIONS JOIN A GROUP AND SUBGROUPING
DOES NOT APPLY?............................................... 56
A. Definition of New Loss Member............................ 56
B. Determining if a New Loss Member Has an Ownership Change. 57
C. Effect of an Ownership Change............................ 57
D. Illustrations............................................ 58
VI.
OWNERSHIP CHANGE OF SUBSIDIARY ON A SEPARATE ENTITY BASIS 59
A. Ownership Change Determination........................... 59
B. Effect of the Ownership Change........................... 62
C. Relationship to General Ownership Change Rules........... 63
- 2 -
VII. END OF SEPARATE TRACKING (THE "FOLD IN RULES") AND
SUBSEQUENT OWNERSHIP CHANGES.................................. 63
A. End of Separate Tracking................................. 63
B. Subsequent Ownership Changes............................. 66
VIII.
BUILT-IN GAINS AND LOSSES -- SPECIAL RULES ........... 66
A. Determining if a Consolidated Group Has a Net Unrealized
Built-in Gain or Loss.................................... 66
B. Intercompany Transactions................................ 69
C. Exchanged Basis Property................................. 69
D. Determination of Whether a Loss Subgroup Has a Net
Unrealized Built-In Loss................................. 69
E. Special Problems......................................... 70
IX. WHAT HAPPENS WHEN A CORPORATION LEAVES A GROUP OR
SUBGROUP?..................................................... 72
A. Leaving a Loss Group..................................... 72
B. Leaving or Ceasing to be a Member of a Loss Subgroup..... 81
C. Filing the Election to Apportion......................... 83
D. Coordination with Loss Disallowance Rules................ 85
X.
TITLE 11 OR SIMILAR CASES................................ 88
XI.
COORDINATION WITH SECTION 383............................ 88
XII. CONTROLLED GROUP RULES................................... 88
A. Background............................................... 88
B. Section 382 Limitation with Respect to Controlled
Group Loss............................................... 89
C. Restoration of Value..................................... 92
D. Disposal and Reacquisition of Controlled Group Stock..... 95
E. Rules Preventing Double Reduction........................ 95
F. Coordination with Consolidated Section 382 Regulations... 95
XIII.
REVISED SEPARATE RETURN LIMITATION YEAR RULES ........ 96
A. Overview................................................. 96
B. Revision of SRLY Computation............................. 97
C. SRLY Limitation Computed on Cumulative Basis............. 97
D. SRLY Subgroups.......................................... 100
E. Built-In Gain and Loss.................................. 101
- 3 -
F. Overlap Rule............................................ 101
- 4 -
- 5 -
The Section 382
Consolidated Return Regulations
I.
OVERVIEW OF SECTION 382
A key element in planning many transactions is the survival
and subsequent use of net operating loss ("NOL")
carryovers. The Tax Reform Act of 1986, P.L. 99-514, made
sweeping changes in the rules governing the use and
availability of NOL carryovers following certain changes in
the stock ownership of a loss corporation. In particular,
section 382 was substantially altered.
A.
Required Change in Ownership
1.
Section 382 ("section 382") applies only after a
change, however effected, in ownership of more
than 50 percent of the stock (by value) in a loss
corporation over a prescribed period of time.
See section 382(g).
a.
Such a change is referred to as an
"ownership change." The date on which an
ownership change occurs is referred to as
the "change date." See section 382(j).
b.
An ownership change may occur either through
an "owner shift involving a 5-percent
shareholder," an "equity structure shift,"
or a combination of the two. See section
382(g).
c.
In general, a "loss corporation" is a
corporation entitled to use NOL carryovers,
having an NOL in the year of the ownership
change, or having a net unrealized built-in
loss. See section 382(k)(1).
2.
In general, the change in ownership of the loss
corporation must occur within a three-year
testing period ending on the day of any owner
shift or equity structure shift. Section
382(i)(1).
3.
Under the statute, the loss corporation must
track the stock ownership of 5-percent
shareholders.
- 7 a.
To determine who the 5-percent shareholders
are, the corporation must determine which
ownership interests in the corporation
constitute "stock." See section 382(k)(6);
Treas. Reg. § 1.382-2(f)(18).
b.
The corporation must then determine who owns
the stock. For purposes of determining
stock ownership, the constructive ownership
rules of section 318 apply with certain
modifications. See section 382(l)(3)(A);
Treas. Reg. § 1.382-2(h).
c.
Finally, once the constructive ownership
rules have been applied, the corporation can
determine its 5-percent shareholders based
on the percentage of stock that they own.
d.
B.
(1)
A 5-percent shareholder is any person
holding 5-percent or more (by value) of
the loss corporation stock at any time
during the testing period. See section
382(k)(6)(C) and (7); Treas. Reg. §
1.382-2(g).
(2)
Shareholders who own less than 5
percent are aggregated and treated as
one 5-percent shareholder. See section
382(g)(4); Treas. Reg. § 1.382-2(j).
If the aggregate stock ownership of one or
more of the 5-percent shareholders has
increased by more than 50 percentage points
during the testing period, then an ownership
change has occurred. See section 382(g)(1);
Treas. Reg. § 1.382-2(a)(1) and (c).
Consequences of an Ownership Change
1.
If an ownership change occurs, section 382 places
an annual limit on the amount of post-change
taxable income which may be offset by the loss
corporation's pre-change NOL carryovers.
a.
This limitation -- known as the section 382
limitation -- is an amount equal to the
product of a prescribed rate of return and
- 8 the value of the loss corporation.
382(b)(1).
2.
C.
Section
(1)
The prescribed rate of return is the
long-term tax-exempt rate of return.
Section 382(f).
(2)
The value of the loss corporation, in
general, is measured by the value of
the corporation's stock immediately
before the ownership change. Section
382(e)(1).
b.
If the loss corporation has a net unrealized
built-in gain the annual limitation may be
increased by recognized built-in gains of
the loss corporation. Section 382(h)(1)(A).
c.
If income is less than the section 382
limitation, the unused section 382
limitation amount may be carried forward to
subsequent years. Section 382(b)(2).
If an ownership change occurs, the loss
corporation must satisfy the continuity of
business enterprise requirement applicable to
reorganizations throughout the two-year period
beginning on the change date. Otherwise, its
loss carryovers, in effect, will be eliminated.
Section 382(c)(1).
Losses Subject to Limitation
1.
In general, losses incurred prior to the
ownership change are subject to the section 382
limitations. That is, loss carried forward from
previous years to the year of change, certain
built-in losses and losses incurred during the
year of change are subject to section 382. These
losses are referred to as "pre-change losses."
See sections 382(d)(1) and (h)(1)(B).
2.
Losses generated in the year of change are
allocated to the periods before and after the
change. That portion allocated to the period
after the ownership change is not subject to
limitation; that portion allocated to the period
prior to the ownership change is subject to the
- 9 section 382 limitations, i.e., those losses may
only offset income to the extent of the section
382 limitation. See section 382(d)(1)(B).
D.
Example
1.
Fact Pattern
On January 1, 1991, L corporation is wholly owned
by individual A. A has held all of the L stock
since L's formation in 1985. L has a $200 NOL
carryover from a previous year. On December 31,
1994, A sells all of his stock to B for $500 (the
fair market value of L). At that time, the longterm tax-exempt rate for section 382 purposes is
5 percent. During 1995, L generates $200 in
taxable income.
A
L
stock
B
L
($200)
loss
2.
Tax Consequences Under Section 382
a.
The sale of all of the L stock by A to B is
an ownership change which triggers section
382. The sale resulted in a more than 50
percentage point change in L stock ownership
during the three-year testing period ending
on December 31, 1994. Therefore, section
382 applies.
b.
Under section 382, income generated after
December 31, 1994 may be offset by L's NOL
carryover only to the extent of $25 (the
product of L's value ($500) and the rate
prescribed under section 382 (5 percent)).
(1)
Thus, with respect to 1995, L may not
fully offset its $200 taxable income
- 10 with its $200 NOL carryover. Only $25
of its 1995 taxable income may be
offset by the NOL carryover.
(2)
c.
E.
L has an NOL carryover to 1996 of $175
($200 - $25).
If B caused L to sell all of its assets
(assume at their book value) within two
years of the change date, L's NOL carryover
would be eliminated (because the continuity
of business enterprise requirement would not
be met).
Effective Dates
In general, the section 382 rules apply to ownership
changes that occur on or after January 1, 1987. The
earliest testing period begins on May 6, 1986.
II.
CONSOLIDATED RETURN ISSUES -- OVERVIEW
A.
Prior to January 1991, the application of section 382
to consolidated groups was uncertain. In enacting
section 382, Congress merely indicated that the CRCO
(consolidated return change of ownership) rules
(Treas. Reg. §§ 1.1502-1(g) and -21(d)) and the
separate return limitation year (“SRLY”) rules (Treas.
Reg. §§ 1.1502-1(f) and -21(c)) would continue to
apply. No other guidance was provided.
B.
Application of section 382 in a consolidated return
context turns upon one overall policy decision:
whether section 382 should apply to an affiliated
group filing consolidated returns on a "single entity"
basis, whether it should apply on a "member-by-member"
basis, or whether a combination of these two
approaches is best.
1.
This policy decision must be made at two levels.
That is, first it must be decided whether the
section 382(g) ownership change test should be
applied on a single entity or a member-by-member
basis. Second, it must be decided whether the
operating provisions of section 382 (i.e., the
annual limitation under section 382(a)) should be
applied on a single entity or member-by-member
basis.
- 11 2.
C.
Also, one approach may be applied with respect to
consolidated net operating losses and a different
approach may be applied with respect to losses
incurred in separate return limitation years
("SRLY" losses).
On January 29, 1991, Treasury issued proposed
regulations (the "former proposed regulations")
regarding the application of section 382 to
corporations filing consolidated returns. 56 Fed.
Reg. 4194 (February 4, 1991).
1.
These regulations generally adopted the single
entity approach with respect to losses that are
not SRLY losses.
a.
b.
2.
The single entity approach applies to
determine ownership changes and the section
382 limitation with respect to such losses.
(1)
This treatment reflects the general
approach of the consolidated return
regulations, which treats the members
of a consolidated group as divisions of
a single taxpayer with the common
parent as the sole agent for each
member of the group. See Preamble to
the former proposed regulations.
(2)
This treatment also reflects the
ability of consolidated group members
to use each other's losses.
The single entity approach fosters the
neutrality principle in that consolidated
losses of one member could offset income of
another member before an ownership change,
and can do so after an ownership change as
well, subject only to restrictions that
would be imposed on a stand-alone
corporation.
The regulations also generally adopted the single
entity approach with respect to loss subgroups
(as to losses that were not SRLY losses of the
subgroup).
- 12 3.
D.
At the same time, Treasury also issued proposed
regulations that would have substantially amended the
existing consolidated return regulations. 56 Fed.
Reg. 4228 (February 4, 1991).
1.
E.
The former proposed regulations generally
followed a separate entity approach, however,
with respect to corporations that join or leave a
consolidated group. According to the Preamble,
section 382 applies separately with respect to
such members because their losses cannot be used
by other members.
The regulations revised the SRLY rules to apply
on a "subgroup" basis rather than on a
"fragmentation" (i.e., on a member-by-member)
basis.
a.
Two or more corporations that are members of
a consolidated group can offset one
corporation's income against the other's
losses, and vice versa.
b.
It was thought to be more appropriate and
consistent with the single entity approach
that the SRLY rules be applied to those
members forming or leaving a group on an
aggregate or subgroup basis, rather than on
a member-by-member basis.
2.
The proposed SRLY regulations retained
apportionment of consolidated net operating
losses for members leaving the group. There had
been prior speculation that the regulations would
provide that consolidated net operating losses
would stay with the common parent.
3.
The CRCO rules were repealed, subject to
transition rules. The continued application of
the CRCO rules caused considerable confusion,
since those rules generally paralleled the
ownership change rules of section 382 before its
amendment by the Tax Reform Act of 1986.
On August 8, 1991, the IRS issued Notice 91-27, 1991-2
C.B. 629, which proposed transitional relief relating
to the built-in gain and loss rules, as well as
- 13 clarifying the effective date for amendments to the
SRLY rules.
F.
New Temporary and Proposed Regulations
Substantial uncertainty arose as a result of the
effective date of the former proposed regulations,
which generally were proposed to be effective for
consolidated return years ending on or after January
29, 1991. Because of the potentially retroactive
application of the proposed regulations, taxpayers
could not be sure which approach would govern their
use of losses for years after January 29, 1991. To
resolve this uncertainty, the proposed regulations
were withdrawn on June 27, 1996 and replaced by
temporary regulations (the "temporary regulations").
61 Fed. Reg. 33,313 (June 27, 1996). The temporary
regulations were issued primarily to address effective
date concerns, are substantially identical to the
former proposed regulations, and do not address
comments received regarding the former proposed
regulations. Instead, the temporary regulations were
also issued as proposed regulations (the "new proposed
regulations") and may be amended to reflect comments
at a future date.
G.
Effective Dates
The temporary regulations are generally effective for
consolidated return years beginning on or after
January 1, 1997. In contrast to the former proposed
regulations, this effective date also applies to the
amendments to the SRLY and built-in deduction rules.
Under the former proposed regulations, the amendments
to the SRLY and built-in deduction rules applied only
to losses and deductions of corporations that became
members after the effective date without regard to
when such losses arose; losses and deductions of
members acquired prior to that date remained subject
to the old regime. In contrast, under the temporary
regulations, the amendments to the SRLY and built-in
deduction rules apply to losses and deductions carried
to years after the effective date, regardless of when
such losses or deductions arose.
H.
Transitional Effective Dates
A consolidated group may elect to apply the temporary
regulations to years ending on or after January 29,
- 14 1991 and before January 1, 1997 if three conditions
are met: (1) the temporary regulations must be
consistently applied on the group's return (original
or amended) for each such year for which the statute
of limitations does not preclude the filing of an
amended return; (2) the temporary SRLY and built-in
deduction rules must be applied only to losses of
corporations becoming members and acquisitions
occurring on or after January 29, 1991; and (3)
adjustments must be made to the earliest subsequent
open year to reflect any inconsistency in a closed
year.
I.
J.
On June 25, 1999, Treasury issued new final
regulations that modify the temporary regulations.
1.
In T.D. 8823, 64 Fed. Reg. 36092 (Jul. 2, 1999),
Treasury finalized the SRLY rules with one
significant modification. The final regulations
generally eliminate the SRLY limitation when its
application overlaps with the section 382
limitation. See Part XIV.F.
2.
In T.D. 8824, 64 Fed. Reg. 36116 (Jul. 2, 1999),
Treasury finalized the rules provided in the
temporary regulations on the operation of section
382 with respect to consolidated groups. New
provisions in the final regulations include: (a)
an election to treat the subgroup parent
requirement as satisfied (See Part IV.A.3); (b)
changes in the supplemental change method (See
Part III.B.2); and (c) the apportionment of a
group’s net unrealized built-in gain to a
departing member (See Part X.A.4.e).
3.
In T.D. 8825, 64 Fed. Reg. 36175 (Jul. 2, 1999),
Treasury finalized the temporary regulations with
respect to the application of section 382 to
controlled groups, with some modifications,
including the addition of a presumption that
certain built-in losses are attributable to tax
years before the tax year at issue. See Part
XIII.B.
An Overview of the Final Regulations
1.
The Consolidated Section 382 Regulations
- 15 -
2.
a.
Treas. Reg. § 1.1502-90 -- Table of Contents
b.
Treas. Reg. § 1.1502-91 -- Contains the
definitions of loss group and loss subgroup,
pre-change consolidated and subgroup
attributes; sets forth rules on the effect
of section 382 and rules regarding built-in
gains and losses.
c.
Treas. Reg. § 1.1502-92 -- Contains rules
for determining whether an ownership change
of a loss group or loss subgroup has
occurred.
d.
Treas. Reg. § 1.1502-93 -- Includes rules
for the calculation of loss group and loss
subgroup section 382 limitations.
e.
Treas. Reg. § 1.1502-94 -- Sets forth rules
that apply when corporations join a
consolidated group.
f.
Treas. Reg. § 1.1502-95 -- Contains rules
that apply when a corporation ceases to be a
member of a loss group or loss subgroup.
g.
Treas. Reg. § 1.1502-96 -- Describes
treatment under section 382 of certain SRLY
losses treated as consolidated losses
("fold-in" rules), ownership change of
subsidiary if certain persons hold options
pursuant to a plan or arrangement, and
continuing application of limitations
following ownership changes.
h.
Treas. Reg. § 1.1502-97 -- Deals with
special rules in Title 11 cases and is
Reserved.
i.
Treas. Reg. § 1.1502-98 -- Describes
coordination with section 383.
j.
Treas. Reg. § 1.1502-99 -- Contains the
effective date rules.
The New Consolidated Return Rules
- 16 The new regulations make significant changes to
the existing consolidated return regulations.
The major changes include the following.
3.
a.
Treas. Reg. § 1.1502-1 -- amending certain
key definitions.
b.
Treas. Reg. § 1.1502-15 -- amending the
built-in loss rules.
c.
Treas. Reg. § 1.1502-21 -- amending the SRLY
rules with respect to net operating losses.
d.
Treas. Reg. § 1.1502-22 -- amending the SRLY
rules with respect to capital losses.
e.
Treas. Reg. § 1.1502-23 -- amending the
rules with respect to net section 1231 gains
and losses.
Additional Regulations
Additional regulations were also released at the
same time as the final regulations. These
regulations made the following changes.
a.
Treas. Reg. § 1.382-2 -- amends several key
definitions in the temporary section 382
regulations, in particular the definition of
"successor" and "predecessor" corporations.
b.
Treas. Reg. § 1.382-5 -- provides rules for
computing the section 382 limitation in the
case of short years and successive ownership
changes.
c.
Treas. Reg. § 1.382-8 -- provides rules for
determining the value of a loss corporation
that is a member of a controlled group.
III. RULES PERTAINING TO LOSS GROUPS
The final regulations contain a series of rules that apply
section 382 to a consolidated group (referred to as a "loss
group"). The focus of the regulations in this regard
generally is to apply the single entity concept with
respect to consolidated attributes of the group, as opposed
to attributes that arose in separate return years.
A.
Definition of Loss Group
- 17 The first step is to determine whether a group is a
loss group. Under Treas. Reg. § 1.1502-91(c)(1), a
loss group is a consolidated group that meets one of
three tests:
–
the group is entitled to use a net operating
loss carryover to the taxable year that did
not arise (and is not treated as arising) in
a SRLY;
–
the group has a consolidated net operating
loss for the taxable year in which a testing
date of the common parent occurs (determined
by treating the common parent as a loss
corporation); or
–
the group has a net unrealized built-in
loss, determined by treating the date on
which the determination is made as though it
were a change date.
1.
Example 1. Individual A owns all the stock of
corporation L, which owns all the stock of L1. L
and L1 file a consolidated return, and incur
consolidated net operating losses. The L group
is a loss group because it is entitled to use
losses that are not SRLY losses.
2.
Example 2. Corporation L owns 60 percent of the
stock of corporation L1. Individual A owns the
other 40 percent. Both L and L1 have net
operating loss carryovers arising in 1994. On
December 31, 1994, A sells her L1 stock to L. L
and L1 file a consolidated return for 1995.
A
L
60%
40%
L1
a.
L
L1
L and L1 compose a loss group. The L loss
group is entitled to use L's carryover from
1994. L's loss from 1994 is not SRLY
because of the so-called "lonely parent"
rule. See Treas. Reg. § 1.1502-1(f)(2)(i).
- 18 b.
3.
B.
Note that L1 has not undergone an ownership
change for purposes of section 382 because
there has only been a 40 percentage point
increase in L's percentage interest in L1.
However, as discussed below, L1's carryover
from 1994 is a SRLY loss and is thus subject
to the SRLY limitations. Treas. Reg. §
1.1502-91(c)(2).
Suppose that, in the example above,
only 40 percent and A 60 percent of
purchase of all the L1 stock from A
a loss group. L1's carryover still
subject to the SRLY limitation. In
would undergo an ownership change.
L had owned
L1. L's
still creates
would be
addition, L1
a.
As will be discussed below, L1's loss would
be subject to a section 382 limitation based
on L1's value before the ownership change.
b.
If the L group were to subsequently undergo
an ownership change, L1's loss carryover
would be treated as a consolidated (nonSRLY) net operating loss subject to an
additional section 382 limitation calculated
for the entire group. Treas. Reg. § 1.150296(a) (discussed below in more detail at
Part VII.).
Determining if a Loss Group Has an Ownership Change
The final regulations contain two methods for
determining if a loss group has an ownership change:
(1) the "parent change" method and (2) a variation of
that approach, the "supplemental" method.
1.
Parent Change Method
Under the regulations, the general rule is that a
loss group has an ownership change if the loss
group's common parent undergoes an ownership
change -- as determined under section 382(g) and
Temp. Treas. Reg. § 1.382-2T. Treas. Reg. §
1.1502-92(b)(1)(i). Under the parent change
method, the determination of whether the loss
group has an ownership change is not affected by
transfers of ownership interests in a subsidiary.
- 19 a.
The regulations provide that for purposes of
determining whether the common parent has an
ownership change:
(1)
Consolidated net operating losses, net
operating loss carryovers and net
unrealized built-in losses are treated
as losses of the common parent; and
(2)
Only consolidated (non-SRLY, nonsubgroup) attributes are taken into
account in determining the earliest day
that the testing period for the common
parent can begin. Treas. Reg. §
1.1502-92(b)(1)(i).
b.
In other words, the regulations focus on
consolidated attributes, treating the common
parent as if it incurred the consolidated
losses and marking the beginning of the
testing period -- for purposes of section
382(i)(3) (mandating a shorter testing
period where losses arise in the normal
three-year testing period) -- with respect
to such losses. This reflects the single
entity approach as it applies to
consolidated attributes.
c.
Example 3. Individual A owns the stock of
corporation L. L owns 80 percent and
individual B owns 20 percent of corporation
L1. The L group has a consolidated net
operating loss carryover from 1995
attributable to L1. On August 15, 1996, A
sells 51 percent of the L stock to
individual C.
A
B
C
A
$1000 FMV
49%
51%
$120 FMV
$480 FMV
80%
B
L
L
80%
20%
- 20 -
L
L
20%
L1
(1)
(2)
L1
Under the parent change method, section
382(g) is applied to L (the common
parent) to determine whether it (and
therefore the L loss group) has an
ownership change with respect to L1's
loss carryover from 1995.
(a)
Here, the L group has an ownership
change as a result of the sale of
the L stock to C. Thus, section
382 generally will apply to L and
L1 as a group.
(b)
Section 382 applies to L1 even
though more than 50 percent of the
L1 stock ownership did not change
(only 40.8 percent (51 percent x
80 percent) changed). See Treas.
Reg. § 1.1502-92(b)(2) Ex. (1).
By contrast, if A sold only 49 percent
of the L stock to C, and thereafter B
sold his L1 stock to D, no ownership
change would result under this method.
(a)
The parent change method looks
solely at changes in ownership of
the common parent. See Treas.
Reg. § 1.1502-92(b)(2) Ex. (2).
(b)
B's sale would not be taken into
account in determining if L (and
thus the L loss group) has an
ownership change under the parent
change method. But see Treas.
Reg. § 1.1502-92(c) discussed at
Part III.B.2., below (supplemental
ownership change method when both
parent and subsidiary stock are
acquired by a five-percent
- 21 shareholder and certain other
conditions are met).
2.
Supplemental Method (The "Throw-Up" Rule)
The regulations contain a "supplemental" method
for determining if a loss group has had an
ownership change. The supplemental method
imposes an ownership change on the entire group
based on investment in the common parent and
other group members. For reasons described
below, this rule is also known as the "throw-up"
rule.
a.
When Does the Supplemental Method Apply?
(1)
In General
The supplemental method applies to a
loss group if:
(a)
Any 5-percent shareholder of the
common parent increases its
percentage ownership in both the
common parent and a subsidiary of
the loss group (other than by
direct or indirect acquisition of
the common parent stock);
(b)
The increases occur within a 3
year period or, if shorter, the
period beginning on the first day
following the most recent
ownership change of the loss
group; and
(c)
Either (i) the common parent has
actual knowledge of the increase
in the 5-percent shareholder’s
ownership interest in the
subsidiary’s stock, or (ii) the 5percent shareholder of the parent
is also a 5-percent shareholder of
the subsidiary whose percentage
increase in the ownership of the
subsidiary’s stock would be taken
into account in determining if the
subsidiary has an ownership
- 22 change. Treas. Reg. § 1.150292(c)(2).
(2)
Special Anti-Abuse Rules
The regulations contain a number of
special anti-abuse rules to be applied
in determining if the supplemental
method applies.
(a)
(3)
That is, in applying the general
rule above, Treas. Reg. § 1.150292(c)(3)(i) provides that if any
person acting pursuant to a plan
or arrangement with a 5-percent
shareholder of the common parent
increases its ownership in the
subsidiary and the 5-percent
shareholder increases its
percentage ownership interest in
the common parent pursuant to the
same plan or arrangement, then
such increases in the stock of the
subsidiary will be attributed to
the 5-percent shareholder of the
common parent.
Special Operating Rules
For purposes of determining if the
supplemental method applies to a loss
group, the constructive ownership rules
of section 382(l)(3) and Treas. Reg. §§
1.382-2(h) and 1.382-4(d) apply.
(4)
Relation to Parent Change Method
The supplemental method applies in
addition to, not instead of, the parent
change method. Treas. Reg. § 1.1502-92
(c)(1). Thus, section 382 will apply
to a loss group if an ownership change
occurs under either method.
(5)
Illustration of the Problem
L, L1 and L2 compose a loss group. All
the L stock is owned by individual A.
- 23 The L stock is worth $300 (including
the value of L1 and L2), the L1 stock
is worth $200 (including the value of
L2), and the L2 stock is worth $100.
On June 1, 1993, A sells 45 percent of
the L stock to individual B for $135.
On December 31, 1993, L1 issues 20
percent of its stock to B for $50 cash.
After the stock issuance, the L stock
is still worth $300, the L1 stock is
worth $250, and the L2 stock is worth
$100.
A
A
B
55%
L
45%
FMV $300
L
FMV $200
L1
L1
FMV $100
L2
L2
20%
80%
(a)
Neither purchase by B results in
an ownership change of the loss
group under the parent change
method, because there has been no
ownership change of the common
parent, L. (Note, however, that
if L1 and L2 were a loss subgroup,
that subgroup would have undergone
an ownership change as a result of
the stock issuance to B, assuming
the subgroup had not had an
ownership change in connection
with joining the L group.)
(b)
Arguably, an ownership change of
the loss group has occurred, since
B owns $185 in value of stock of a
group with a total value of $350
($185 equals (45% x $300) + (20% x
$250)).
(c)
Treasury viewed this as a possibly
abusive situation, which would not
- 24 result in an ownership change
under the parent change method.
b.
How Does the Supplemental Method Operate?
Under the supplemental method, the parent
change rules are used to determine if the
common parent has an ownership change, with
the following modifications.
(1)
The supplemental method tests whether
the common parent has an ownership
change by treating the common parent as
though it had issued its own stock to
the person acquiring the subsidiary
stock. In other words, such subsidiary
stock is "thrown up" to the parent and
deemed issued by the parent.
(a)
The common parent is treated as
issuing an amount of stock equal
to the value of the subsidiary
stock represented by the
percentage increase in the
acquiring person's ownership of
the subsidiary (determined on a
separate entity basis). Treas.
Reg. § 1.1502-92(c)(4)(ii).
(b)
Although this language is not
entirely clear, it apparently
means that if a subsidiary is
worth $100 and a person acquires
20 percent of the subsidiary
stock, then the parent will be
treated as issuing $20 worth of
its own stock to the acquiring
person (not stock representing 20
percent of the parent's value).
(c)
Note that the supplemental change
method only requires the "throw
up" of the subsidiary stock
acquired by any person pursuant to
a plan or arrangement with the 5percent shareholder, not other
minority shareholders.
- 25 (d)
In addition, only the increase in
the acquiring person's interest
during the testing period is
apparently considered.
(2)
Similar principles apply if the
increase in percentage ownership is
effected by a redemption or similar
transaction. Treas. Reg. § 1.1502-92
(c)(4)(ii).
(3)
Further, additional testing dates are
created to include each day on which
there is an increase in ownership of
the stock of a subsidiary and the first
day of the first consolidated return
year for which the group is a loss
group. Treas. Reg. § 1.150292(c)(4)(i).
(4)
For purposes of applying the ownership
change rules, stock deemed issued under
the supplemental method on a specific
testing date is not treated as issued
in a testing period that does not
include such testing date. Treas. Reg.
§ 1.1502-92(c)(4)(iii).
(5)
These modifications to the parent
change method do not apply if the
deemed issuance of stock would not
cause the loss group to have an
ownership change before the day (if
any) on which the subsidiary ceases to
be a member of the loss group. Treas.
Reg. § 1.1502-92(c)(4)(iv).
(6)
If any 5-percent shareholder of the
common parent increases its percentage
ownership in the subsidiary stock
(other than by acquisition of common
parent stock) before the 5-percent
shareholder increases its percentage
ownership interest in the stock of the
common parent, then the deemed issuance
of stock is treated as occurring on the
date the 5-percent shareholder
increases its percentage ownership in
- 26 the common parent stock, in an amount
equal to the value of the subsidiary
stock on the date it was acquired.
Treas. Reg. § 1.1502-92(c)(4)(v).
(7)
c.
To prevent duplicative counting of
stock, appropriate adjustments must be
made if two or more 5-percent
shareholders are treated as increasing
their percentage ownership interests
pursuant to the same plan or
arrangement. Treas. Reg. § 1.150292(c)(4)(vi).
Illustrations
(1)
A
L
Example 4. A owns all the stock of L.
L is a loss corporation. On July 16,
1995, L transfers $100 of assets to a
newly created subsidiary, S, in
exchange for S stock. L and S
thereafter file consolidated returns.
On November 23, 1995, B contributes
cash to L in exchange for a 45 percent
stock interest in L and contributes
cash to S in exchange for a 20 percent
stock interest in S. L and S are worth
$200 and $100, respectively, prior to
the contributions by B, and $364 and
$125 thereafter.
A
L
$200 FMV A
$200
FMV
$164 FMV
55%
B
L
S
$100 FMV
80%
20%
$100 FMV
$25 FMV
S
- 27 -
(2)
(a)
B is a 5-percent shareholder who
has increased his ownership
interest in both L and S. The
supplemental rules thus apply.
See Treas. Reg. § 1.1502-92(c)(5)
Ex. (1).
(b)
Accordingly, L is treated as if it
had issued to B an additional $25
of its own stock. Therefore, L is
considered to have $389 of stock
outstanding ($200 initial value
plus $164 contribution by B plus
$25 of S stock "thrown up" to B).
(c)
No ownership change results under
the supplemental method because
B's interest has increased by only
$189 ($164 + $25) of the total
value in L of $389, or 48.6
percent.
(d)
Because B is a 5-percent of both L
and S during the testing period
and B’s increase in its percentage
ownership in the S stock would be
taken into account in determining
if S had an ownership change, it
is not relevant whether L has
actual knowledge of B’s
acquisition of the S stock. See
Treas. Reg. §1.1502-92(c)(2).
Example 5. Assume in the above
example, that B purchases a 20 percent
interest in S from L for $20. L is
treated as if it issued to B $20 of its
own stock, and is considered to have
$384 of stock outstanding ($200 initial
value plus $164 contribution by B plus
$20 of S stock "thrown up"). Under
this scenario, no ownership change
occurs, since B is deemed to own $184
- 28 ($164 + $20) or 47.9 percent of L's
total $384 value.
(3)
(4)
Example 6. If B purchases 45 percent
of the L stock from A for $90 (rather
than making a capital contribution to
L) and purchases 25 percent of the S
stock from L for $25, an ownership
change would result under the
supplemental rules. B will be deemed
to own $115 ($90 + $25) or 51 percent
of L's total $225 value.
(a)
Importantly, in Example 6 above,
while the loss group has undergone
an ownership change, B has not
acquired effective control of the
common parent. B only owns 45
percent of the L stock.
(b)
It might have been more
appropriate for the regulations to
have applied the supplemental
rules only in situations where the
person obtains more than a 50
percent interest in the common
parent (i.e., where B increases
ownership in the common parent
from 25 to 65 percent, or from 55
to 90 percent).
(c)
However, ownership changes under
section 382 are based on movements
in a corporation's "stock"
interests, as measured by value.
Section 382 is not concerned with
shifts in control.
Example 7. Individual A owns the stock
of L, which in turn owns the stock of
L1. The L group is a loss group. As
part of a plan, A sells 49 percent of
the L stock to B on October 4, 1995,
and, on November 6, 1995, L1 issues a
20 percent stock interest to the
public. See Treas. Reg. § 1.150292(c)(5) Ex. (2).
- 29 -
A
A
51%
L
B
49%
PUBLIC
L
20%
L1
L1
(a)
The regulations indicate that
because the acquisition of L stock
by B and the issuance of L1 stock
occurred pursuant to a plan and L
has actual knowledge of the plan,
the supplemental method will apply
to determine whether the L group
has had an ownership change.
(b)
The same 5-percent shareholder has
not increased its percentage
interest in both the parent and
subsidiary, so that the
supplemental rules would not apply
but for the plan or arrangement
exception.
(c)
However, this example seems illsuited to illustrate the above
stated rule.
i)
The 5-percent shareholder is
treated as increasing its
percentage interest in the
subsidiary only to the extent
that there is a person acting
pursuant to a plan or
arrangement with the 5percent shareholder that
increases its ownership
interest in the parent.
Treas. Reg. § 1.150292(c)(3)(i).
- 30 ii)
3.
The parties acting pursuant
to the plan, L, L1 or A, have
not increased their ownership
interests. Further, it is
difficult to conceive a plan
or arrangement between the 5percent shareholder and a
large public group.
Change in Identity of the Common Parent
The regulations also provide rules concerning
changes of identity of the common parent when the
loss group continues in existence.
a.
Treas. Reg. § 1.1502-92(b)(3) provides that
for purposes of determining whether a loss
group has an ownership change, if the common
parent of a loss group is succeeded or
acquired by a new common parent, then the
new common parent is treated as a
continuation of the former common parent.
Appropriate adjustments must be made to take
into account owner shifts in the former
common parent during the testing period.
Treas. Reg. § 1.1502-92(b)(3)(i).
b.
Examples of such cases are where the new
common parent acquires the old common parent
in a reverse acquisition, and where the old
common parent ceases to exist.
(1)
Example 8. L and L1 compose a loss
group. All the L stock is owned by A.
On August 26, 1992, A sells 30 percent
of the L stock to B. On July 16, 1993,
A and B transfer their L stock for a
like percentage of stock in a newly
created holding company, HC, and HC, L
and L1 file consolidated returns. The
formation of the holding company
qualifies as a reverse acquisition
under Treas. Reg. § 1.1502-75(d)(3)(i),
and the loss group is treated as
remaining in existence. HC is the new
common parent of the loss group. On
November 11, 1994, A sells 25 percent
of the HC stock to B.
- 31 -
cnol
L
L1
A
B
70% 30%
L
cnol
A
B
A
70% 30%
L1
(2)
A
B
45% 55%
HC
HC
L
L
L1
L1
(a)
HC is treated as a continuation of
L because it succeeded the common
parent and did not terminate the
group. HC's testing period begins
on January 1, 1992, the first day
of the taxable year of the L loss
group in which the consolidated
NOL arose.
(b)
B's acquisition on November 11,
1994 results in an ownership
change. See Treas. Reg. § 1.150292(b)(3)(iii) Ex. (1).
Example 9. L and L1 compose a loss
group. A, B and C own equal shares of
L's stock. On May 2, 1995, L is merged
into P, a corporation owned by D. A, B
and C each receive 30 percent of the P
stock, and D retains 10 percent. L1
thereafter files consolidated returns
with P. The merger of L into P
qualifies as a reverse acquisition with
the L group treated as remaining in
existence, P taking the place of L as
the new common parent.
- 32 BEFORE
B
C
A
D
D
10%
L
30%
30%
C
30%
P
P
L1
4.
AFTER
B
A
L1
(a)
No ownership change of the loss
group results since D is the only
shareholder that has increased her
ownership in the continuing loss
group during the testing period,
and the increase is only 10
percent. See Treas. Reg. §
1.1502-92(b)(3)(iii) Ex. (2).
(b)
Any NOL's belonging to P as it
enters the group will be subject
to the SRLY rules. In addition, P
has undergone an ownership change
with respect to such NOL's. See
Treas. Reg. § 1.1502-92(b)(3)(iii)
Ex. (2)(iv). See also Treas. Reg.
§ 1.1502-94, discussed at Part V.,
below.
Testing Period Following an Ownership Change
If a loss group has an ownership change, the
testing period for determining a subsequent
ownership change with respect to the pre-change
consolidated attributes will begin no earlier
than the first day following the loss group's
most recent change date. Treas. Reg. § 1.150292(d).
5.
Filing of Information Statement
The common parent of the loss group must file the
information statement described in Treas. Reg. §
1.382-2(a)(2)(ii) for a consolidated return year
because of any owner shift, equity structure
shift, or other transaction that gives rise to a
testing date (see Temp. Treas. Reg. § 1.3822T(a)(2)(i)):
- 33 -
C.
a.
With respect to the common parent's stock
and a subsidiary's stock (taken into account
under the supplemental ownership change
method); and
b.
With respect to an ownership change
described in Treas. Reg. § 1.1502-96(b)
(relating to ownership changes of
subsidiaries, see discussion at Part VI,
below). Treas. Reg. § 1.1502-92(e)(1).
Effect of an Ownership Change
1.
Limit on Consolidated Taxable Income
Following an ownership change of a loss group,
the amount of consolidated taxable income for any
post-change year that can be offset by "prechange consolidated attributes" cannot exceed the
"consolidated section 382 limitation" for such
year. Treas. Reg. § 1.1502-91(a)(1).
a.
Pre-Change Consolidated Attributes
(1)
(2)
For this purpose, a "pre-change
consolidated attribute" of a loss group
is:
(a)
Any current year loss or loss
carryover not arising in a SRLY
that is allocable to the period
ending on or before the change
date; or
(b)
Any recognized built-in loss of
the loss group. Treas. Reg. §
1.1502-91(e)(1).
Example 10. The L group has a
consolidated net operating loss arising
in 1994 that is carried over to 1995.
The L loss group has an ownership
change at the beginning of 1995.
(a)
The net operating loss carryover
of the L loss group from 1994 did
not arise in a SRLY. Therefore,
it is a pre-change consolidated
attribute of the L group.
- 34 (b)
(3)
b.
The amount of consolidated taxable
income of the L group for 1995
that may be offset by this loss
carryover may not exceed the
consolidated section 382
limitation of the L group for that
year computed as provided in
Treas. Reg. § 1.1502-93. See
Treas. Reg. § 1.1502-91(e)(2).
NOTE: The Supreme Court recently
affirmed that a loss group’s
Consolidated Net Operating Loss
(“CNOL”) must be calculated on a
“single-entity” basis pursuant to
Treas. Reg. § 1.1502-21(f). United
Dominion Industries, Inc. v. United
States, 121 S. Ct. 1934 (2001).
The Consolidated Section 382 Limitation
(1)
In General
(a)
The "consolidated section 382
limitation" for any post-change
year is an amount equal to the
"value of the loss group"
multiplied by the long-term taxexempt rate that applies with
respect to the ownership change.
Treas. Reg. § 1.1502-93(a)(1).
(b)
As with ownership changes outside
of the consolidated return
context, adjustments to the
consolidated section 382
limitation may be required. For
example, the following adjustments
may be necessary:
--adjustments under section
382(b)(2) (unused section 382
limitation);
--section 382(b)(3)(B) (postchange year that includes change
date);
- 35 -
--section 382(m)(2) (short taxable
years); and,
--section 382(h) (recognized
built-in gains and section 338
gains). Id.
(c)
(2)
The consolidated section 382
limitation also can be reduced to
the extent apportioned to
departing members of the group.
See Part IX., below.
Value of Loss Group
In computing the consolidated section
382 limitation, the "value of the loss
group" is the value of the stock of
each member immediately before the
ownership change, other than stock that
is owned directly or indirectly by
another member. Treas. Reg. § 1.150293(b)(1).
(3)
(a)
A member is considered to own
indirectly stock of another member
through a nonmember only if the
member has a 5-percent or greater
ownership interest in the
nonmember. Treas. Reg. § 1.150293(b)(1)(ii).
(b)
Stock includes stock described in
section 1504(a)(4) and Treas. Reg.
§ 1.382-2(f)(18)(ii) and (iii).
Treas. Reg. § 1.150293(b)(1)(iii).
Adjustments to Value
The value of a loss group is adjusted
by any rule in section 382 that would
apply to stand-alone corporations.
- 36 (a)
(b)
c.
For example, the value of the loss
group is adjusted to take into
account redemptions and corporate
contractions (382(e)(2)), certain
capital contributions (382(l)(1)),
and ownership of substantial
nonbusiness assets (382(l)(4)).
Treas. Reg. § 1.1502-93(b)(2)(i).
i)
The anti-stuffing rules of
section 382(l)(1) would apply
with respect to capital
contributions made to any
member of the loss group by a
person or entity not included
in the loss group. Id.
ii)
The rules of section
382(l)(4) would apply to the
loss group in the aggregate.
Id.
The value of the loss group is
also adjusted to the extent
necessary to prevent duplication
of the value of stock of a member.
For example, the principles of
Treas. Reg. § 1.382-8 may apply in
determining the value of a group
of members that are not included
in the determination of whether
the group has a net unrealized
built-in gain or loss under Treas.
Reg. § 1.1502-91(b)(2)(ii).
Illustrations
(1)
Example 11. Individual A owns the
stock of corporation L. L owns 80
percent and individual B owns 20
percent of corporation L1. The L group
has a consolidated net operating loss
carryover from 1994. The value of the
L stock (which includes the value of L1
held by L) is $1,000. The total value
of the L1 stock is $600, and the value
of the L1 stock held by B is $120. On
August 15, 1995, A sells 51 percent of
- 37 the L stock to individual C. The longterm tax-exempt rate is 10 percent.
B
A
A
CNOL
L
$480 FMV
$120 FMV
L1
(2)
B
C
51%
49%
$1000 FMV
L
80% 20%
L1
(a)
The L group has an ownership
change as a result of the sale of
the L stock to C. See Treas. Reg.
§ 1.1502-92(b)(2) Ex. (1).
(b)
The section 382 limitation with
respect to the 1994 consolidated
NOL is $112. This equals the
value of L stock ($1,000) plus the
value of the L1 stock held by B
($120) multiplied by the long-term
tax-exempt rate (10 percent).
Example 12. L, L1 and L2 compose a
loss group. Individual B owns all the
L stock. L1 has outstanding common
stock and section 1504(a)(4) preferred
stock. A owns 10 percent of the L1
common stock and all the L1 preferred.
L2 is owned 50 percent by L1 and 50
percent by L. B sells all of the L
stock to C. The value of the L stock
is $100 (including L's interest in L1
and L2). The value of the L1 common
stock is $40 and the L1 preferred stock
is $30.
- 38 B C
FMV $100
A
L
FMV $4
10%
90%
1504(a)(4) stock
FMV $30
100%
L1
50%
50%
L2
(a)
The L group undergoes an ownership
change as the result of B's sale
of L stock to C.
(b)
In determining value, the L group
cannot include the value of stock
of any member that is owned
directly or indirectly by another
member.
(c)
(3)
i)
Thus, the value of the L1 and
L2 stock held by L is
ignored.
ii)
The value of the L2 stock
held by L1 is also ignored.
Accordingly, the value of the L
group taken into account for
purposes of the group section 382
limitation is $134. This is the
value of the L stock ($100) plus
the value of the L1 common stock
owned by A (10 percent of $40)
plus the value of the preferred
stock owned by A ($30). See
Treas. Reg. § 1.1502-93(b)(3) Ex.
(1).
Example 13. L and L1 compose a
consolidated group. The value of L's
stock is $100. L owns 80 shares (80
percent) and corporation M owns 20
shares (20 percent) of the L1 stock. L
- 39 owns 79 percent of the stock of
corporation M. The 20 shares of L1
stock not owned directly by L have a
fair market value of $20. Assume that
the L group has an ownership change.
FMV $100
L
79%
Public M
21%
M
80%
20% FMV $20
L1
2.
(a)
Because L owns more than 5 percent
of the ownership interests in M (a
nonmember) L is considered to own
indirectly 15.8 shares of the L1
stock held by M (79 percent x 20
shares). These shares cannot be
included in the value of the L
group.
(b)
Thus, in this case, the value of
the L group for purposes of the
section 382 limitation is $104.20.
(c)
This equals the value of the L
stock ($100) plus the value of the
L1 stock not owned directly or
indirectly by L -- the stock owned
by Public M (21 percent X $20, or
$4.20). Treas. Reg. § 1.150293(b)(3) Ex. (2).
Recognized Built-in Gains
If a loss group has a net unrealized built-in
gain, any recognized built-in gain of the loss
group will increase the consolidated section 382
limitation. Treas. Reg. § 1.1502-93(c)(1).
- 40 3.
IV.
Continuity of Business Enterprise
a.
Under Treas. Reg. § 1.1502-93(d)(1), a loss
group is treated as a single enterprise for
purposes of determining whether it satisfies
the continuity of business enterprise
requirement in section 382(c)(1).
b.
The regulations give an example of a loss
group composed of three corporations, each
operating an historic business. The three
businesses have equal value.
(1)
In the example, two of the businesses
are discontinued after the ownership
change. One corporation continues its
historic business for the two-year
period following the change date.
(2)
The example concludes that the
continuity of business enterprise
requirement is met by the continued
operation of the remaining business.
See Treas. Reg. § 1.1502-93(d)(2). Cf.
Treas. Reg. § 1.368-1(d)
WHAT HAPPENS WHEN MULTIPLE CORPORATIONS JOIN A GROUP? -THE LOSS SUBGROUP RULES
The regulations also apply to loss subgroups. The loss
subgroup rules were intended to parallel the rules
applicable to loss groups, and are similar in many respects
to the loss group rules.
A.
Definition of Loss Subgroup
There are two definitions of a loss subgroup, one for
net operating loss carryovers and one for net
unrealized built-in losses. Treas. Reg. § 1.150291(d).
1.
Subgroup for Loss Carryovers
a.
Two or more corporations that become members
of a consolidated group compose a loss
subgroup if:
- 41 --they were affiliated with each other in
another group (whether or not the group was
a consolidated group);
--they bear a relationship to each other
described in section 1504(a)(1) immediately
after they become members of the group; and
--at least one of the members carries over a
non-SRLY net operating loss with respect to
the former group. Treas. Reg. § 1.150291(d)(1).
b.
2.
The necessity of the section 1504(a)(1)
relationship has been questioned by many
commentators. It is noteworthy that the new
SRLY subgroup rules do not require a section
1504(a)(1) relationship. See Part XIV.,
below.
Subgroup for Net Unrealized Built-In Losses
A loss subgroup can be formed with respect to net
unrealized built-in losses as well.
a.
Two or more corporations that become members
of a consolidated group compose a loss
subgroup if they:
--have been continuously affiliated with
each other for the five consecutive year
period ending immediately before they become
members of the group;
--bear a relationship to each other
described in section 1504(a)(1) immediately
after becoming members of the group; and
--have a net unrealized built-in loss on the
day they become members of the group
treating that day as a change date. Treas.
Reg. § 1.1502-91(d)(2).
- 42 b.
c.
3.
The determination of whether a corporation
meets the five-year affiliation requirement
described above is made with reference to
any predecessor corporation. See Treas.
Reg. § 1.1502-91(j).
(1)
A predecessor or successor is a
transferor or distributor, or
distributee or transferee,
respectively, of assets to a member to
which section 381 applies. Treas. Reg.
§§ 1.382-2(a)(5), (6).
(2)
In addition, the regulations add a new
definition of predecessor or successor
to include, as the context may require,
the transferor or transferee of assets
if basis is determined, in whole or in
part, by reference to the basis of the
assets of the transferor or
distributor, but only if the amount by
which basis and value differ, in the
aggregate, is material. Treas. Reg. §§
1.382-2(a)(5), (6). This definition
applies only with respect to testing
dates on or after January 1, 1997.
(a)
This definition would encompass,
among other transactions, section
351 transfers.
(b)
Under the former proposed
regulations, this applied only in
the case of built-in loss assets;
if value exceeded basis the
transferor was not a predecessor.
(c)
See PLR 9715035 (Jan. 14, 1997)
for an example of the application
of the predecessor/successor rule.
A corporation apparently can be a member of
a subgroup with respect to loss carryovers,
but not a member of a subgroup with respect
to net unrealized built-in losses.
Election to treat loss subgroup parent
requirement as satisfied
- 43 -
4.
5.
a.
If two or more corporations become members
of a consolidated group at the same time and
were affiliated with each other immediately
before becoming members of the group, and
the common parent of the group makes an
election with respect to those new members,
then such corporations are deemed to bear a
section 1504(a)(1) relationship to each
other immediately after becoming members of
the group. Treas. Reg. § 1.150291(d)(4)(i).
b.
The common parent’s election includes all
corporations that become members of the
current group at the same time and that were
affiliated with each other immediately
before becoming members of the current
group. Treas. Reg. § 1.1502-91(d)(4)(ii).
Anti-Abuse Rule
a.
Importantly, corporations will not compose a
loss subgroup if any one of them is formed,
acquired or availed of with the principal
purpose of avoiding the application of or
increasing any limitation under section 382.
Treas. Reg. § 1.1502-91(d)(5).
b.
The purported members of such a loss
subgroup will have section 382 apply
separately to them under Treas. Reg. §
1.1502-94. Id. See discussion at Part V.,
below.
c.
However, the prohibited purpose will not be
found solely because, in connection with
becoming members of the group, the members
are rearranged to bear the required section
1504(a)(1) relationship. Id.
Examples of Loss Subgroups
a.
Example 1. P owns all the stock of L, which
in turn owns all the stock of L1. The P
group has a consolidated net operating loss
that arose in 1994 and is carried to 1995.
In 1995, P sells all the L stock to
individual A, and L and L1 thereafter file
- 44 consolidated returns. A portion of the 1994
consolidated NOL carryover is allocated to L
and L1 under Treas. Reg. § 1.1502-21(b). L
and L1 compose a loss subgroup with L as the
loss subgroup parent. See Treas. Reg. §
1.1502-91(d)(7) Ex. (1).
CNOL
P
A
L
L
L1
L1
b.
Example 2. P is the common parent of an
affiliated group consisting of P, L, L1, L2
and L3, as indicated below. P sells all of
its L and L1 stock to New P.
CNOL
P
L1
L
L2
New P
60%
40%
L3
-21T
L
-21T
L2
-21T
40%
60%
-21T
L1
L3
(1)
Assuming the other prerequisites are
met, only L and L2 compose a loss
subgroup in this example. Neither L1
nor L3 bear a relationship described in
section 1504(a)(1) with any of the
other former members. See Treas. Reg.
§ 1.1502-91(d)(7) Ex. (2). (Note that
New P can make an election to treat the
1504(a)(1) ownership requirement as
satisfied. See Treas. Reg. § 1.150291(d)(7) Ex. (4).)
(2)
A different result obtains if, prior to
the sale, P transfers the L1 stock to
- 45 L. In that case, L, L1, L2 and L3
would compose a loss subgroup. Treas.
Reg. § 1.1502-91(d)(7) Ex. (3). The
regulations expressly sanction
restructuring to meet the requisite
relationship. See Treas. Reg. §
1.1502-91(d)(5).
P
New P
L
L2
L1
60%
40%
L3
c.
Example 3. P owns all the stock of L, which
in turn owns all the stock of L1. The P
group has a consolidated net operating loss
carryover from 1991 that it carries to 1994.
In 1992, L acquires the stock of S. In
1994, P sells the L stock to New P. A
portion of the net operating loss carryover
is allocated to L.
CNOL
- 46 -
P
P
New P
L
L
L
L1
L1
S
L1
S
L, L1 and S would compose a loss subgroup, even
though none of the loss is apportioned to L1 or
S, and even though S was not part of the group
when the NOL was incurred.
B.
Determining if a Loss Subgroup Has an Ownership
Change
1.
Parent Change Method
Under the regulations, the parent change method
is applied at the loss subgroup level by
reference to the loss subgroup parent.
a.
More specifically, a loss subgroup has an
ownership change if the "loss subgroup
parent" has an ownership change. Treas.
Reg. § 1.1502-92(b)(1)(ii). A "loss
subgroup parent" is the corporation that
bears the same relationship to the other
members of the loss subgroup as a common
parent bears to the members of a group.
Treas. Reg. § 1.1502-91(d)(3).
(1)
For purposes of determining if the loss
subgroup parent has an ownership
change, the subgroup's losses (or a net
unrealized built-in loss) are treated
as losses of the loss subgroup parent.
Treas. Reg. § 1.1502-92(b)(1)(ii)(A).
- 47 -
b.
(2)
The day that the members of the loss
subgroup become members of the group
(or of the loss subgroup) is treated as
a testing date. Treas. Reg. § 1.150292(b)(1)(ii)(B).
(3)
Only those attributes that make the
group a loss subgroup are taken into
account for determining the earliest
day that the testing period can begin.
Treas. Reg. § 1.1502-92(b)(1)(ii)(C).
If the common parent elects to treat the
loss subgroup parent requirement as
satisfied under Treas. Reg. § 1.150291(d)(4) (see Part IV.A.3., above), then, to
determine whether the loss subgroup has an
ownership change on or after the members
join the group, each member of the loss
subgroup is treated as the loss subgroup
parent. Treas. Reg. § 1.150292(b)(1)(iii)(A).
(1)
c.
If a member that is treated as a loss
subgroup parent under the above rule
has an ownership change upon (or after)
ceasing to be a member of the current
group then the above stated rule is not
applicable. Treas. Reg. § 1.150292(b)(1)(iii)(B).
Example 4. P is the common parent of a loss
group. P owns the stock of L. L owns 80
percent and individual A owns 20 percent of
L1. The P group has a consolidated NOL
arising in 1994 that is carried over to
1995. On September 9, 1995, P sells 51
percent of the L stock to individual B, and
L1 is apportioned a part of the consolidated
NOL. L and L1 file a consolidated return
for the their first taxable year after the
sale to
B.
- 48 -
1995
B
1994
A
P
49%
L
CNOL
P
A
51%
20%
80%
L1
L
20%
80%
L1
2.
(1)
L and L1 compose a loss subgroup on the
day that they become members of the L
group.
(2)
The section 382 rules are applied at
the subgroup level to determine whether
L (and thus the L loss subgroup) has an
ownership change with respect to the
NOL carryover from 1994.
(3)
As a result of P's sale of L stock to
B, L (and therefore the L loss
subgroup) has an ownership change with
respect to the consolidated losses that
arose in the P group. See Treas. Reg.
§ 1.1502-92(b)(2) Ex. (3).
Supplemental Method
The supplemental method for determining if an
ownership change has occurred also applies to
loss subgroups. The same principles outlined
above in Part III.B.2. apply.
a.
Thus, the supplemental method looks to
whether a 5-percent shareholder of the loss
subgroup parent increases its interest in
both the loss subgroup parent and a
subsidiary of the loss subgroup during the
requisite testing period. See Treas. Reg. §
1.1502-92(c)(2).
- 49 -
3.
b.
For this purpose, a subsidiary of a loss
subgroup includes any member other than the
loss subgroup parent. Treas. Reg. § 1.150292(c)(3)(iii).
c.
The loss subgroup parent is treated as
issuing its own stock to the person
increasing its interest in a subsidiary.
Treas. Reg. § 1.1502-92(c)(4)(ii).
d.
The special anti-abuse rules described in
Part III.B.2.a.(2), above, apply with
reference to the loss subgroup parent.
Contemporaneous Ownership Changes
a.
A loss subgroup can undergo an ownership
change simultaneously with the loss group of
which it is part.
b.
Example 5. L and L1 are a consolidated
group. The L group has a consolidated NOL
arising in 1993 that is carried to 1994.
The L stock is owned 35 percent by
corporation M and 65 percent by individual
B. A owns all the M stock. On May 19,
1994, B sells 45 percent of the L stock to
M. Thereafter, M, L and L1 file
consolidated returns, and the M group incurs
a consolidated net operating losses in 1994
that is carried to 1995. On June 9, 1995, A
sells 70 percent of the M stock to C.
- 50 1993
A
1994
B
M
A
M
80%
65%
35%
B
20%
1995
C
B
30% 70%
A
20%
M
80%
L
L
L
L1
L1
L1
(1)
L and L1 compose a loss subgroup on
May 19, 1994, the day they join the M
group.
(a)
Section 382(g) applies to L to
determine if L (and thus the L
loss subgroup) has an ownership
change with respect to loss
carryovers from 1993.
(b)
The sale of L stock to M does not
result in an ownership change
since there has only been a 45
percentage point change.
(c)
However, the former L group's
consolidated losses will be
subject to the SRLY rules.
(2)
A's sale of M stock to C on June 9,
1995 results in an ownership change of
the L loss subgroup. A section 382
subgroup limitation based on the value
of the L subgroup will apply with
respect to the NOL carryover from 1993.
(3)
In addition, section 382(g) must be
applied to determine whether M (and
thus the M loss group) has an ownership
change with respect the NOL carryover
from 1994.
- 51 -
4.
(a)
A's sale of stock to C also
results in an ownership change of
the M group. See Treas. Reg. §
1.1502-92(b)(2) Ex. (4).
(b)
A consolidated section 382
limitation based on the value of
M, L and L1 will apply to the M
group's consolidated losses.
Change in Identity of Loss Subgroup Parent
Special rules apply in the case of a newlycreated loss subgroup parent.
a.
Treas. Reg. § 1.1502-92(b)(3)(ii) states
that for purposes of determining if a loss
subgroup has an ownership change, if the
member that is the loss subgroup parent has
not been the loss subgroup parent for at
least three years as of the testing date,
appropriate adjustments must be made to take
into account owner shifts of loss subgroup
members.
b.
Example 6. P, L and L1 compose a loss group
with respect to a NOL carryover arising in
1993. On January 19, 1994, L issues a 20
percent stock interest to B. On February 5,
1995, P forms a new holding company, HC,
contributes its L stock to the new
subsidiary, and distributes the HC stock to
its sole shareholder, A. P apportions a
part of the 1993 NOL carryover to L and L1.
- 52 -
1993
CN
OL
A
1994 A
P
P
80%
B
20%
1995
P
B
A
HC
80%
20%
L
L
-21T
L1
L1
-21T
L
L1
(1)
HC, L and L1 compose a loss subgroup
with respect to the 1993 NOL carryover
apportioned to L and L1.
(2)
HC was not the loss subgroup parent for
three years prior to the testing date
on February 5, 1995. The regulations
provide that adjustments must be made
to the percentage ownership of HC to
take into account owner shifts of other
members of the former group.
(3)
Thus, the owner shift that resulted
from the sale of the 20 percent
interest to B "must be taken into
account" in determining if the HC loss
subgroup has an ownership change.
Treas. Reg. § 1.1502-92(b)(3)(iii) Ex.
(3).
(4)
The regulations do not specify how the
adjustment is to be made. Perhaps L is
treated as having a 20 percent shift in
stock ownership.
(5)
Perhaps, the L stock owned by B is
"thrown up" to HC. See Treas. Reg.
§ 1.1502-92(c) and discussion at Part
III.B.2., above. In that case, if A
sells more than 37.5 percent of the HC
stock to B or another person (assuming
- 53 constant values), an ownership change
of the HC loss subgroup would result.
The regulations should indicate whether
the principles of the supplemental
rules are intended to apply.
5.
Filing of Information Statement
The common parent of a group that has a loss
subgroup must file an information statement with
respect to loss subgroups. Treas. Reg. § 1.150292(e)(2).
C.
a.
Instead of filing separate statements with
respect to each loss subgroup parent, the
common parent may file a single statement
with respect to itself and any loss
subgroups. Id.
b.
The single statement must identify each loss
subgroup parent and indicate which loss
subgroups, if any, have undergone ownership
changes during the consolidated return year.
Id.
c.
The loss subgroup parent is still required
to maintain the records necessary to
determine if the loss subgroup has had an
ownership change. Id.
d.
Once the subgroup attributes are treated as
consolidated attributes under Treas. Reg. §
1.1502-96(a) (discussed at Part VII.,
below), only the common parent statement
need be filed. Id.
Effect of an Ownership Change
The rules that apply to the consolidated section 382
limitation generally also apply to loss subgroups.
1.
Limitation on Consolidated Taxable Income
Following an ownership change of a loss subgroup,
the amount of consolidated taxable income for any
post-change year that can be offset by "prechange subgroup attributes" cannot exceed the
"subgroup section 382 limitation" for such year.
Treas. Reg. § 1.1502-91(a)(1).
- 54 a.
Pre-Change Subgroup Attribute
(1)
(2)
For this purpose, Treas. Reg. § 1.150291(f)(1) defines a "pre-change subgroup
attribute" of a loss subgroup generally
as:
(a)
Any net operating loss carryover
that did not arise in a SRLY
(determined with reference to the
former group); and
(b)
Any recognized built-in loss of a
loss subgroup.
Example 7. L is not a member of an
affiliated group. L has a net
operating loss arising in 1994 that is
carried to 1995. During 1995, L
acquires all the stock of L1 which has
a net operating loss carryover arising
in 1994. L and L1 file a consolidated
return for 1995. During 1995, the L
group has a consolidated net operating
loss that is carried to 1996. At the
beginning of 1996, corporation M
acquires all the stock of L, resulting
in an ownership change of the L group.
M, L, and L1 file a consolidated return
for 1996.
(a)
Following M's acquisition of the L
stock, L and L1 compose a loss
subgroup.
(b)
L's loss carryover arising in 1994
and the 1995 consolidated net
operating loss that is apportioned
to L and L1 under Treas. Reg. §
1.1502-21(b) and carried to the M
group's 1996 consolidated return
year are pre-change subgroup
attributes because they did not
arise in a SRLY with respect to
the L group (the former group).
(c)
The amount of consolidated taxable
income of the M group for 1996
- 55 that may be offset by these losses
may not exceed the subgroup
section 382 limitation of the L
loss subgroup for that year.
(d)
b.
2.
In contrast, L1's net operating
loss carryover from 1994 is not a
pre-change subgroup attribute
because it arose in a taxable year
that was a SRLY with respect to
the L group. Section 382 applies
separately to L1's net operating
loss carryover from 1994. See
Part V., below. Treas. Reg. §
1.1502-91(f)(2).
Subgroup Section 382 Limitation
(1)
The "subgroup section 382 limitation"
is an amount equal to the "value of the
loss subgroup" multiplied by the longterm tax-exempt rate that applies to
the ownership change. Treas. Reg. §
1.1502-93(a).
(2)
The "value of the loss subgroup" is
determined using the same principles
that apply to determine the value of a
loss group. See Part III.C.1.b.,
above.
Built-In Gains and Losses
If a loss subgroup has a net unrealized built-in
gain, the recognized built-in gains of the loss
subgroup will increase the subgroup section 382
limitation. Treas. Reg. § 1.1502-93(c).
3.
Continuity of Business Enterprise
As with loss groups, the continuity of business
enterprise test is applied to a loss subgroup on
a single entity basis. Treas. Reg. § 1.150293(d).
- 56 V.
WHAT HAPPENS WHEN CORPORATIONS JOIN A GROUP AND SUBGROUPING
DOES NOT APPLY?
Special rules apply if a member joins a consolidated group,
and the member is not included in a loss subgroup. Section
382 generally applies to such members (referred to as "new
loss members") on a separate entity basis.
A.
Definition of New Loss Member
1.
In General
According to Treas. Reg. § 1.1502-94(a)(1), a
corporation is a "new loss member" if it:
2.
a.
carries over a net operating loss that arose
in a SRLY with respect to the current group
and that is not part of a loss subgroup; or
b.
has a net unrealized built-in loss (treating
the day it becomes a member of the group as
the change date) that is not taken into
account in determining whether the
corporation is part of a loss subgroup.
Illustrations
a.
Example 1. L is a loss corporation.
Individual A and corporation P each own 50
percent of L's stock. On December 19, 1993,
P purchases 30 percent of the L stock from
A. L is a new loss member with respect to
the P group because it (1) has loss
carryovers arising in a SRLY; and (2) is not
part of a loss subgroup. See Treas. Reg. §
1.1502-94(b)(4) Ex. (1).
b.
Example 2. L and L1 are loss corporations
with no common ownership. On December 31,
1991, P purchases all the stock of L and L1
and contributes the L1 stock to L.
(1)
L and L1 are new loss members because
they both have net operating losses
arising in SRLYs. In addition, even
though they bear the required
relationship to be a subgroup, they
were not affiliated with each other in
- 57 another group so as to be a loss
subgroup.
(2)
B.
Suppose, in Example 2 above, that L and
L1 had been affiliated with loss group
P1, and P had purchased the L and L1
stock from P1. L had SRLY loss
carryovers from being a member of the X
group, and L1 had SRLY loss carryovers
from being a member of the Y group. L
and L1 would both be new loss members,
unless a portion of P1's consolidated
NOL is allocated to L and L1, in which
case L and L1 would compose a loss
subgroup.
Determining if a New Loss Member Has an Ownership
Change
1.
In General
Section 382 applies to a new loss member on a
separate entity basis to determine whether the
member has an ownership change and the
corresponding section 382 limitation. Treas.
Reg. § 1.1502-94(b)(1).
2.
C.
Filing of Information Statement
a.
The common parent must file the information
statement required by Treas. Reg. § 1.3822(a)(2)(ii) with respect to owner shifts or
equity structure shifts of the new loss
member. Treas. Reg. § 1.1502-94(d).
b.
Instead of filing a separate statement for
each loss member, the common parent may file
its statement and identify each new loss
member and state which new loss members have
undergone ownership changes during the year.
Id.
Effect of an Ownership Change
1.
Limitation on Consolidated Taxable Income
If an ownership change occurs with respect to a
new loss member, the amount of consolidated
taxable income for a post-change year that may be
- 58 offset by the new loss member's "pre-change
separate attributes" cannot exceed the member's
separately computed section 382 limitation.
Treas. Reg. § 1.1502-94(b)(1). (Note that the
SRLY rules would also apply to the new loss
member's losses).
a.
Pre-Change Separate Attribute
A pre-change separate attribute is: (i) a
loss carryover that arose in a SRLY and that
is not an attribute of a loss subgroup, or
(ii) any recognized built-in loss of a new
loss member. Treas. Reg. § 1.1502-94(b)(3).
b.
2.
Section 382 Limitation
(1)
The section 382 limitation with respect
to a new loss member generally is
computed in the same fashion as a
stand-alone corporation.
(2)
However, the value of the new loss
member is adjusted to the extent
necessary to prevent duplication in
value of the stock of a member. Treas.
Reg. § 1.382-8.
Built-In Gain or Loss
The built-in gain and loss rules of Treas. Reg. §
1.1502-91(g) and (h) and Treas. Reg. § 1.150293(c) apply to a new loss member on a separate
entity basis, as the context may require. Treas.
Reg. § 1.1502-94(c).
D.
Illustrations
1.
Example 3. L is a loss corporation. L is owned
equally by individual A and corporation P. P
buys 30 percent of the L stock from A. P and L
thereafter file consolidated returns.
- 59 Before
P
A
50%
50%
NOL
2.
VI.
After
P
A
20%
L
80%
SRLY
L
a.
L is a new loss member because it has loss
carryovers that arose in a SRLY and L is not
included in a loss subgroup.
b.
L does not undergo an ownership change as a
result of P's purchase of L stock. However,
L's losses will be subject to the separate
return year (SRLY) limitations. See Treas.
Reg. § 1.1502-94(b)(4) Ex. (1).
Example 4. L is a loss corporation. Individual
A owns 80 percent and corporation P owns 20
percent of L. P purchases all the L stock owned
by A. L undergoes an ownership change as a
result of P's purchase.
a.
L will be subject to both a separately
computed section 382 limitation and the SRLY
rules. See Treas. Reg. § 1.1502-94(b)(4)
Ex. (3).
b.
If the P group subsequently undergoes an
ownership change, L's loss carryovers will
be treated as consolidated NOL carryovers
for purposes of the P group's limitation.
See Treas. Reg. § 1.1502-96(a), discussed at
Part VII., below.
OWNERSHIP CHANGE OF SUBSIDIARY ON A SEPARATE ENTITY
BASIS
A.
Ownership Change Determination
1.
In General
a.
The regulations also provide rules whereby a
member will undergo an ownership change on a
separate entity basis, notwithstanding that
- 60 it is still a member of a consolidated
group.
2.
b.
As discussed below, this rule applies where
more than 20 percent of a subsidiary's stock
is subject to an option, or where there is a
certain plan or arrangement in effect to
acquire subsidiary stock.
c.
If Treas. Reg. § 1.1502-96(b) applies, the
ownership change is determined on a separate
entity basis by treating the subsidiary as
not being a member of the consolidated
group. Treas. Reg. § 1.1502-96(b)(1).
Options to Acquire Subsidiary Stock
In the first scenario, an ownership change will
apply separately with respect to a subsidiary
upon the deemed exercise of an option or options
held by a person (or persons acting pursuant to a
plan or arrangement) to acquire more than 20
percent of the stock of the subsidiary. Treas.
Reg. § 1.1502-96(b)(1)(i).
a.
b.
As a general matter, an option to acquire
subsidiary stock would be irrelevant under
the parent change method, which looks only
to the parent's stock.
(1)
However, the power to acquire more than
20 percent of the subsidiary's stock
necessarily carries with it the power
to cause deconsolidation.
(2)
Because section 382 applies on a
separate entity basis to a member
leaving a group (see discussion at Part
IX., below), Treasury apparently felt
it was appropriate to test on a
separate entity basis once a person had
an option the exercise of which would
cause deconsolidation.
Generally, the option to acquire subsidiary
stock must be held by a single person.
Options held by different persons are
- 61 aggregated only if there is a plan or
arrangement.
3.
c.
Under the former proposed regulations, the
option rule did not apply to a bilateral
contract to purchase stock of a subsidiary
if the stock was actually acquired pursuant
to the contract within one year of the
deemed exercise. See former Prop. Treas.
Reg. § 1.1502-96(b)(2). This rule is now
contained in Treas. Reg. § 1.382-4(d)(7),
which supersedes the option arbitration
rules of Temp. Treas. Reg. § 1.382-2T(h)(4)
for testing dates on or after November 5,
1992.
d.
Example 1. L owns the stock of L1, which
owns the stock of L2. L, L1 and L2 compose
a loss group. On August 26, 1994,
corporation M enters into a contract to
purchase all the L1 stock from L. The sale
closes on November 22, 1995. L1 and L2 are
treated as separate corporations and each
undergoes an ownership change on August 26,
1994. The one-year rule does not apply
because the sale was not completed within
one year of the deemed exercise of the
option. See former Prop. Treas. Reg. §
1.1502-96(b)(3) Ex. (1); Treas. Reg. 1.3824(d)(7)(i).
Plan or Arrangement to Avoid an Ownership Change
a.
In the second scenario, an ownership change
will occur separately as to a subsidiary
where there is a more than 50 percentage
point increase by one or more 5-percent
shareholders in a subsidiary during the
testing period through acquisitions (or
deemed acquisitions) of stock in the
subsidiary or higher-tier members, if such
shareholders are acting pursuant to a plan
or arrangement to avoid an ownership change
of the subsidiary. Treas. Reg. § 1.150296(b)(1)(ii).
b.
Example 2. L owns all the stock of L1,
which owns the stock of L2, which owns the
- 62 stock of L3, which owns the stock of L4.
L1, L2, and L3 own no assets other than the
stock of their respective subsidiaries.
Pursuant to a plan to avoid the section 382
limitations, individuals A, B, C and D
acquire 20 percent of the stock of L1, L2,
L3 and L4 respectively. L4 has an ownership
change as a result of the acquisitions. See
Treas. Reg. § 1.1502-96(b)(4).
A
L
B
C
L1
20%
L2
CNOL
D
20%
20%
L3
20%
L4
B.
(1)
The acquisitions by A, B, C, and D
pursuant to the plan have increased
their respective percentage ownership
interests in L4 by approximately 10,
13, 16, and 20 percentage points, for a
total of approximately 59 percentage
points during the testing period.
(2)
This percentage ownership interest in
L4 causes a separate ownership change
of L4.
Effect of the Ownership Change
1.
In General
a.
If a subsidiary has a separate ownership
change, the amount of taxable income for any
post-change year that may be offset by the
- 63 pre-change losses of the subsidiary cannot
exceed the section 382 limitation for the
subsidiary. Treas. Reg. § 1.150296(b)(2)(i).
b.
2.
For purposes of this limitation, the value
of the subsidiary is determined solely by
reference to the value of the subsidiary's
stock. Id.
Pre-Change Losses
The pre-change losses of a subsidiary are:
C.
a.
Its allocable part of any consolidated net
operating loss which is attributable to it
under Treas. Reg. § 1.1502-21(b) (determined
on the last day of the consolidated return
year that includes the change date) that is
not carried back and absorbed in a taxable
year prior to the year including the change
date;
b.
Its net operating loss carryovers that arose
(or are treated as having arisen) in a SRLY;
and
c.
Its recognized built-in loss with respect to
its separately computed net unrealized
built-in loss, if any, determined on the
change date. Treas. Reg. § 1.150296(b)(2)(ii).
Relationship to General Ownership Change Rules
If an increase in percentage interest causes an
ownership change with respect to a particular
attribute under both the general rule (Treas. Reg. §
1.1502-92) and under the special rules described above
(Treas. Reg. § 1.1502-96(b)), then the general rules
will control. Treas. Reg. § 1.1502-96(b)(3).
VII. END OF SEPARATE TRACKING (THE "FOLD IN RULES") AND
SUBSEQUENT OWNERSHIP CHANGES
A.
End of Separate Tracking
- 64 The regulations contain special rules (referred to as
the "fold-in" rules) to terminate separate tracking of
the SRLY attributes of a member or loss subgroup.
1.
When Does Separate Tracking Cease
In general, the separate tracking of SRLY losses
of a member or loss subgroup (or net unrealized
built-in loss) will cease upon the occurrence of
one of the following two events:
2.
a.
An ownership change of the member or loss
subgroup within six months before, on, or
after, becoming a member of the consolidated
group. (Treas. Reg. § 1.1502-96(a)(1)(i));
or
b.
A period of five consecutive years following
the day that the member or loss subgroup
becomes a member of the consolidated group,
during which time the member or loss
subgroup has not had an ownership change.
Treas. Reg. § 1.1502-96(a)(1)(ii).
Impact of the Fold-In Rules
a.
b.
If separate tracking of attributes ceases
(due to an ownership change or expiration of
the five-year period), then as of such time:
(1)
An NOL carryover of the member or loss
subgroup that arose in a SRLY is
treated as if it were a consolidated
NOL, Treas. Reg. § 1.1502-96(a)(2)(i);
and
(2)
The separately computed net unrealized
built-in loss of the member or subgroup
is taken into account in determining
the loss group's net unrealized builtin loss, Treas. Reg. § 1.150296(a)(2)(ii).
For transactions to which Treas. Reg. §
1.1502-96(a) applies, to determine the
beginning of the loss group's testing
period, the member's or loss subgroup's NOL
carryovers (or net unrealized built-in loss)
are considered to arise:
- 65 -
c.
(1)
In a taxable year that begins on the
later of the day after the change date
or the day the member or loss subgroup
joins the group, if there has been an
ownership change of the member within
six months before, on, or after joining
the group; or
(2)
In a taxable year that begins three
years before the end of the five
consecutive year period, in a case
where the five-year rule applies.
Treas. Reg. § 1.1502-96(a)(4).
Treas. Reg. § 1.1502-96(a)(2) further states
that the fold-in rule applies for purposes
of determining whether there is an ownership
change with respect to the "folded in"
attributes. Thus, as stated in the
regulations, on any day after the change
date or the end of the five-year period:
(1)
The group is not required to track
separately the stock of the new loss
member or subgroup parent to determine
if there is an ownership change with
respect to the NOL carryover and/or the
net unrealized built-in loss. Treas.
Reg. § 1.1502-96(a)(2)(i)(A) and (ii)
(A).
(2)
In determining whether the group is a
loss group, the member’s NOL carryover
and/or net unrealized built-in loss is
taken into account. Treas. Reg.
§1.1502-96(a)(2)(i)(B) and (ii)(B).
(3)
There is an ownership change with
respect to the non-consolidated
attributes only if the group has an
ownership change and, if the attribute
is a net unrealized built-in loss, the
group is a loss group. Treas. Reg.
§ 1.1502-96(a)(2)(i)(C) and (ii)(C).
(4)
If the group has an ownership change,
the NOL carryover and/or net unrealized
built-in loss and assets are pre-change
- 66 consolidated attributes subject to the
loss group's consolidated section 382
limitation. Treas. Reg. § 1.150296(a)(2)(i)(D) and (ii)(D).
d.
B.
Subsequent Ownership Changes
1.
Treas. Reg. § 1.1502-96(c) provides that a loss
corporation or loss subgroup subject to a section
382 limitation remains subject to that limitation
whether or not it joins or ceases to be a member
of a consolidated group.
a.
2.
VIII.
A.
The rules in Treas. Reg. § 1.1502-96(a)
apply only for purposes of the consolidated
section 382 regulations (Treas. Reg. §§
1.1502-91 -- 1.1502-95 and Treas. Reg. §
1.1502-98). Treas. Reg. § 1.1502-96(a)(5).
Therefore, attributes that are treated as
consolidated attributes under Treas. Reg. §
1.1502-96(a) will still be subject to the
SRLY rules.
An ownership change that occurs after an
earlier ownership change may result in an
additional, lesser (but never in a greater)
section 382 limitation with respect to the
previously limited losses. Treas. Reg. §
1.382-5(d).
This provision may suggest that the initially
computed section 382 limitation continues to
apply with respect to the non-consolidated
attributes, notwithstanding the rules in Treas.
Reg. § 1.1502-96(a). Indeed, Treas. Reg. §
1.1502-96(c) provides that a loss corporation (or
loss subgroup) that is subject to a section 382
limitation with respect to its pre-change losses
continues to be subject to the limitation
regardless of whether it becomes a member or
ceases to be a member of a consolidated group.
BUILT-IN GAINS AND LOSSES -- SPECIAL RULES
Determining if a Consolidated Group Has a Net
Unrealized Built-in Gain or Loss
1.
In General
- 67 -
2.
a.
Under Treas. Reg. § 1.1502-91(g)(1), the
determination whether a consolidated group
has a net unrealized built-in gain or loss
is determined on an aggregate basis.
b.
Each includible member of the group
separately computes its built-in gain or
loss, and these amounts are netted together
to arrive at the group's net unrealized
built-in gain or loss.
c.
The 15 percent/$10 million threshold of
section 382(h)(3)(B) is also computed on an
aggregate basis. Treas. Reg. § 1.150291(g)(1).
Members Included
a.
In determining whether a consolidated group
has a net unrealized built-in gain, all
members of the group on the day the
determination is made are included. Treas.
Reg. § 1.1502-91(g)(2)(i).
b.
The members included in determining whether
the consolidated group has a net unrealized
built-in loss are:
(1)
The common parent and all other members
affiliated with the common parent for
the five-year period ending on the day
the determination is made;
(2)
Any other member that has a net
unrealized built-in loss and that is
neither a new loss member nor a member
of a loss subgroup;
(3)
Any new loss member that has a net
unrealized built-in gain; and
(4)
The members of a loss subgroup if the
members of the subgroup have, in the
aggregate, a net unrealized built-in
gain on the day that the determination
is made. Treas. Reg. § 1.150291(g)(2)(ii).
- 68 -
3.
4.
c.
If, within the previous five years, the
common parent became the common parent of an
existing group in a transaction described in
Treas. Reg. § 1.1502-75(d)(2)(ii) or (3)
(transfer of assets to subsidiary or reverse
acquisitions), appropriate adjustments must
be made in applying the five year period to
prevent corporations that have not been
members of the group for five years from
being included. Treas. Reg. § 1.150291(g)(6).
d.
For purposes of the net unrealized built-in
gain determination, the group includes all
members on the day the determination is
made. On the other hand, for purposes of
the net built-in loss, not all members of
the group may be included. Thus, a
consolidated group may have recognized
built-in gains that increase its SRLY
limitation and also may have recognized
built-in losses the absorption of which is
limited. Treas. Reg. § 1.1502-91(g)(2)(v).
Anti-Stuffing Rule
a.
A member may not take into account assets
acquired with a principal purpose to affect
the amount of its net unrealized built-in
gain or loss. Treas. Reg. § 1.150291(g)(4).
b.
Similarly, a group may not take account
built-in gain or loss with respect to a
member acquired with a principal purpose to
affect the amount of its net unrealized
built-in gain or loss. Id.
Stock or Debt of Members
a.
Net unrealized built-in gain or loss with
respect to stock or debt of group members is
not taken into account in computing net
unrealized built-in gain or loss. Treas.
Reg. § 1.1502-91(g)(1).
b.
However, gain or loss on disposition of
stock or debt of a member is taken into
- 69 account, unless disallowed, in determining
recognized built-in gain or loss under
section 382(h)(2). Treas. Reg. § 1.150291(h)(2).
5.
Duplication of Value
A member's separately computed net unrealized
built-in gain or loss is adjusted to prevent
duplication attributable to the member's indirect
ownership interest in another member through a
non-member, if the member has a five percent or
greater interest in the nonmember. Treas. Reg. §
1.1502-91(g)(3).
B.
Intercompany Transactions
Gain or loss that is deferred is treated as recognized
built-in gain or loss only to the extent restored
during the recognition period. Treas. Reg. § 1.150291(h)(3).
C.
Exchanged Basis Property
An asset will be treated as held from the beginning of
the recognition period if its adjusted basis is
determined, indirectly or directly, in whole or in
part, with reference to the basis of another asset
that was held from the beginning of the recognition
period. Treas. Reg. § 1.1502-91(h)(4).
D.
Determination of Whether a Loss Subgroup Has a Net
Unrealized Built-In Loss
1.
The principles that apply in determining if a
consolidated group has a net unrealized built-in
gain or loss also apply to loss subgroups.
2.
In determining whether a loss subgroup has a net
unrealized built-in gain, all members of the loss
subgroup on the day the determination is made are
included. Treas. Reg. § 1.1502-91(g)(2)(iii).
3.
The members included in determining whether a
loss subgroup has a net unrealized built-in loss
are those members that have been continuously
affiliated with each other for the five
- 70 consecutive year period ending immediately before
they become members of the group and bear a
relationship to each other described in section
1504(a)(1) immediately after they join the group.
Treas. Reg. § 1.1502-91(g)(2)(iv).
4.
E.
On October 24, 2011, the IRS issued proposed
regulations that would revise Treas. Reg. §
1.1502-91(g) by adding a rule that would apply
when any member of the consolidated group
directly or indirectly takes any amount of gain
or loss into account with respect to a share of
stock of an included subsidiary, whether or not
this amount is absorbed. When the rule applies,
the loss group would be required to redetermine
NUBIG or NUBIL to include any unduplicated builtin gain or loss with respect to the share. The
proposed regulations would apply to amounts taken
into account with respect to a share of stock of
an included subsidiary on or after the date final
regulations are published, but only for ownership
changes occurring on or after October 24, 2011.
Special Problems
A number of problems arose in applying the
consolidated section 382 built-in gain or loss rules
under the former proposed regulations, one of which is
illustrated in the following example.
Example. X corporation is owned by individual A. X
owns corporation Y, the assets of which have a $100
built-in gain, and corporation Z, the assets of which
have a $50 built-in loss. X, Y and Z have been
continuously affiliated for 5 years. X forms holding
company H, and contributes the Y and Z stock to H. X
sells the H stock to corporation P.
X
Y
$100 BIG
BIL
Z
$50
Y
X
P
H
H
Z
Y
Z
- 71 a.
H, Y and Z
1504(a)(1)
However, H
affiliated
have the requisite section
relationship for subgrouping.
has not been continuously
for 5 years with the prior group.
b.
Under the former proposed regulations, H
could not be considered the successor of X
to tack the affiliation period (unless the
basis of the Y and Z stock exceeded the
value by a material amount). Prior Temp.
Treas. Reg. § 1.382-2T(f)(4).
c.
Therefore, the built-in gain and loss would
be computed on a separate entity basis, and
Y's built-in gain would not be able to
offset Z's built-in loss, even though the
corporations have been affiliated for the
requisite period.
d.
One solution to this problem was for H to
contribute the Y stock to Z, or vice versa.
Then, Y and Z will have a subgroup
relationship, and the built-in gain and loss
should offset each other. The former
proposed regulations sanctioned this
restructuring. Treas. Reg. § 1.150291A(d)(5).
P
H
Y
Z
e.
Under the final regulations, however, the
successor definition has been revised to
include any transferee corporation the basis
of whose assets is determined in whole or
part by the basis of the transferor
corporation if the basis differs materially
- 72 from value in the aggregate. See Treas.
Reg. § 1.382-2(a)(5) for the definition of
successor corporation. Thus, for testing
dates on or after January 1, 1997, the
problem has been resolved.
IX.
WHAT HAPPENS WHEN A CORPORATION LEAVES A GROUP OR
SUBGROUP?
A.
Leaving a Loss Group
1.
2.
Application of Section 382 to Member Leaving
Group
a.
Section 382 applies on a separate entity
basis to a corporation that ceases to be a
member of a consolidated group. Treas. Reg.
§ 1.1502-95(b)(1).
b.
However, if two or more corporations form a
loss subgroup immediately after departing
the group, section 382 generally will apply
on a subgroup basis to the departing
members. Treas. Reg. § 1.1502-95(b)(3).
Operating Rules
Treas. Reg. § 1.1502-95(b)(1) provides that for
purposes of determining whether a corporation
leaving a group has an ownership change:
3.
a.
Any portion of the consolidated NOL
apportioned to a departing member is treated
as an NOL arising on the first day of the
taxable year in which the loss arose;
b.
The testing period may include the period
during or before which the corporation was a
member of a group or loss subgroup; and
c.
The day the corporation ceases to be a
member of the consolidated group is treated
as a testing date.
Illustration
a.
Example 1. Individual A owns the stock of
L. L owns the stock of L1 and L2. L, L1
and L2 compose a loss group. In 1994, A
- 73 sells 30 percent of the L stock to B. In
1995, L sells 40 percent of the L2 stock to
C. L allocates a portion of the
consolidated NOL carryover to L2 under
Treas. Reg. § 1.1502-21(b).
A
70%
B
A
30%
70%
30%
CNOL
60%
L1
L2
L1
4.
C
L
L
L
B
A
L2
L1
40%
L2
b.
The date L2 leaves the group is a testing
date. The first day of the taxable year in
which the consolidated NOL carryover arose
begins the testing period.
c.
L2 has an ownership change as a result of
L's sale of L2 stock to C. B has increased
her ownership in L2 by 18 percentage points
(30% X 60%) and C has increased his
percentage ownership in L2 by 40 percentage
points. See Treas. Reg. § 1.1502-95(b)(4)
Ex. (1).
Apportionment of Section 382 Limitation
a.
In General
(1)
The common parent of the consolidated
group apportions to a departing member
or subgroup the consolidated net
operating loss attributable to the
departing member. Treas. Reg. §
1.1502-21(b).
(2)
The common parent may elect to
apportion part or all of a consolidated
section 382 limitation to a member or
subgroup leaving a consolidated group.
Treas. Reg. § 1.1502-95(c)(1).
- 74 -
b.
(3)
Absent apportionment of section 382
limitation to the departing member or
subgroup, the limitation attributable
to that member or subgroup will be
zero. See Treas. Reg. § 1.150295(b)(2)(ii).
(4)
It has been suggested that the rule
apportioning a zero section 382
limitation to a departing member
(absent an allocation by the common
parent) is a trap for the unwary.
(5)
The regulations should, in default of
allocation by the common parent,
allocate section 382 limitation on some
pro rata basis.
Apportionment of the Section 382 Limitation
The regulations divide the section 382
limitation into a "value element" and an
"adjustment element." The common parent may
apportion to the former member all or any
part of each element. Treas. Reg. § 1.150295(c)(2)(i).
c.
Value Element
(1)
The value element is the value of the
corporation multiplied by the long-term
tax-exempt rate. Treas. Reg. § 1.150295(c)(1)(i)(A).
(2)
The value element is computed without
regard to adjustments under:
(a)
section 382(b)(2) (carryforward of
unused section 382 limitation);
(b)
section 382(b)(3)(B) (carryforward
for post-change year that includes
the change date);
(c)
section 382(h) (built-in gains and
section 338 gains); and
- 75 (d)
d.
section 382(m)(2) (short taxable
years).
Adjustment Element
The adjustment element consists of the
limitation for the taxable year during which
the former member ceases to be a member of
the consolidated group that is attributable
to a carryover of unused section 382
limitation (section 382(b)(2) or recognized
built-in gains (section 382(h)). Treas.
Reg. § 1.1502-95(c)(1)(i)(B).
e.
Net Unrealized Built-in Gain
The total amount of the loss group’s net
unrealized built-in gain that may be
apportioned to departing members is limited
to the loss group’s excess of net unrealized
built-in gain over recognized built-in gain,
immediately after the close of the year that
the departing members cease to be members.
Treas. Reg. § 1.1502-95(c)(2)(ii).
(1)
f.
For this purpose, net unrealized builtin gain apportioned to former members
in prior consolidated return years is
treated as recognized built-in gain in
the prior years. Id.
Effect on Group
(1)
The value element and the adjustment
element apportioned to a departing
member or subgroup reduces the
consolidated 382 limitation for the
remaining members of the group. Treas.
Reg. § 1.1502-95(c)(3)(i).
(2)
In applying the limitation to the group
in taxable years after the departing
member leaves the group, the net builtin gain apportioned to a departing
member is treated as recognized builtin gain in a taxable year ending in the
recognition period. Treas. Reg. §
1.1502-95(c)(3)(ii).
- 76 (3)
g.
h.
Adjustments must also be made to the
consolidated section 382 limitation in
the year the member(s) leaves the group
to reflect the inclusion of the member
in the group for a portion of that
year. Treas. Reg. § 1.1502-95(c)(6).
Loss Group Terminates
(1)
If the loss group terminates and the
consolidated section 382 limitation is
not otherwise apportioned, the
limitation is deemed to be apportioned
to the loss subgroup that includes the
common parent. Treas. Reg. § 1.150295(c)(5).
(2)
If there is no loss subgroup that
includes the common parent, the
limitation is apportioned to the common
parent. Id.
Illustrations
(1)
Example 2. L owns the stock of L1,
which in turn owns the stock of L2.
In 1993, the L group had an ownership
change with respect to a consolidated
NOL carryover, and the consolidated
section 382 limitation is $100 with
respect to that carryover. On
December 31, 1994, L1 sells 25 percent
of the L2 stock to B. L2 has no SRLY
loss carryovers, nor does it have any
net unrealized built-in gain or loss.
(a)
Part of the consolidated NOL is
allocated to L2 under Treas. Reg.
§ 1.1502-21(b).
(b)
L may elect to apportion part of
the consolidated section 382
limitation to L2. If L fails to
apportion part of the 382
limitation, the consolidated NOL
will be worthless to L2, since its
382 limitation will be zero. See
- 77 Treas. Reg. § 1.1502-95(b)(4) Ex.
(2).
(2)
Example 3. The L group is a loss
group. L owns the stock of L1, which
owns the stock of L2. The L group has
a $200 consolidated NOL carryover. The
L group has an ownership change on
December 31, 1993. The consolidated
section 382 limitation is $10. On
August 29, 1995, L1 sells 30 percent of
the L2 stock to individual A. L2 is
apportioned $90 of the group's $200 NOL
and L elects to apportion to L2 $6 of
the $10 consolidated section 382
limitation. The L group also has
unused consolidated section 382
limitation of $4 from 1992.
CNOL
L
L1
L
L1
70%
L2
A
30%
L2
(a)
L2 has a section 382 limitation of
$6. However, for L2's short
taxable year ending December 31,
1993, the limitation is only $2
(124/365 x $6).
(b)
With respect to the L group, it
has a section 382 limitation of
$4. However, for the L group's
consolidated return year ending
December 31, 1993, the section
382 limitation is $8, to take into
account the part of the year that
L2 was a member of the group
(241/365 X $6). See Treas. Reg. §
1.1502-95(c)(7) Ex. (1).
- 78 -
i.
(c)
L may also allocate any or all of
the $4 unused section 382
limitation to L2. See Treas. Reg.
§ 1.1502-95(c)(7) Ex. (3).
(d)
If L does not apportion any of the
consolidated section 382
limitation to L2, L2's limitation
with respect to the $90 NOL will
be zero. See Treas. Reg. §
1.1502-95(c)(7) Ex. (2).
Allocation of Net Unrealized Built-in Loss
(1)
The regulations also provide rules for
allocating a loss group’s (or loss
subgroup’s) net unrealized built-in
loss when a member leaves the group (or
subgroup). Treas. Reg. § 1.1502-95(e).
(2)
A loss group’s (or loss subgroup’s) net
unrealized built-in loss must be
allocated if (a) the loss group (or
loss subgroup) has a net unrealized
built-it loss on a change date and (b)
the excess of the loss group’s (or loss
subgroup’s) net unrealized built-in
loss over its recognized built-in loss
is greater than zero, determined
immediately after the close of the
consolidated year in which the
departing member leaves the group.
Treas. Reg. § 1.1502-95(e)(1).
(a)
(3)
Any net unrealized built-in loss
previously allocated to departing
members is treated as recognized
built-in loss in the year(s) in
which it was allocated. Id.
Amount of allocation.
1.1502-95(e)(2).
(a)
Treas. Reg.
§
The amount of net unrealized
built-in loss allocated to a
departing member is equal to the
loss group’s (or loss subgroup’s)
net unrealized built-in loss over
- 79 its recognized built-in loss,
multiplied by a fraction.
(b)
(4)
The numerator of the fraction is
the departing member’s built-in
loss, on the change date, in its
assets held immediately after the
member leaves the group. The
denominator of the fraction is the
sum of the numerator plus the loss
group’s built-in loss, on the
change date, in its assets held
immediately after the close of the
taxable year in which the member
leaves the group.
Transferred basis property
For purposes of calculating the
numerator and/or denominator of the
above fraction, assets held by the
departing member immediately after
leaving the group (or by other members
immediately after the close of the
taxable year) include:
(5)
(a)
Transferred basis property that
was held by any member of the
group on the change date and that
is held by the departing member
immediately after leaving the
group (or by other members
immediately after the close of the
taxable year), and
(b)
Assets held at that time by any
member of the consolidated group
with respect to which gain or loss
has been deferred in an
intercompany transaction and has
not been taken into account.
Treas. Reg. § 1.1502-95(e)(2)(ii).
For purposes of calculating the
numerator and/or denominator of the
fraction, assets held by the departing
member immediately after leaving the
group (or by other members immediately
- 80 after the close of the taxable year) do
not include assets with respect to
which gain or loss has previously been
recognized and taken into account
during the recognition period. Treas.
Reg. § 1.1502-95(e)(2)(iii).
(6)
5.
If more than one member departs the
group in the same taxable year,
appropriate adjustments must be made to
the denominator of the fraction for
each member. With respect to each
departing member, such adjustments are
made by treating the other departing
members as if they had not left the
group during that year and as if the
assets held by the other departing
members are assets held by the group
immediately after the close of the
taxable year. Treas. Reg. § 1.150295(e)(2)(v).
Previous Ownership Change
If the loss group has undergone an ownership
change prior to the time the member or subgroup
leaves the group, Treas. Reg. § 1.1502-95(b)(2)
provides that:
a.
Any consolidated attribute that is subject
to a section 382 limitation continues to be
treated as a pre-change loss;
b.
The former member's section 382 limitation
with respect to the attribute is zero unless
the common parent apportions all or part of
the consolidated section 382 limitation to
the departing member;
c.
The testing period with respect to a
consolidated attribute begins no earlier
than the day following the loss group's most
recent change date;
d.
An ownership change occurring on or after
the day the former member departs the group
may result in an additional, lesser section
382 limitation.
- 81 e.
B.
Example 4. Assume the facts are the same as
in Example 2. L apportions to L2 $50 of the
consolidated section 382 limitation. L1
sells its remaining 75 percent interest in
L2 to C. L2 undergoes an ownership change
as a result of the sale to C, and L2's
section 382 limitation with respect to this
second ownership change is $30. See Treas.
Reg. § 1.1502-95(b)(4) Ex. (2).
(1)
In this case, $20 of the section 382
limitation apportioned to L2 is wasted
because L2 will be subject to the
lesser of the two limitations.
(2)
The election to apportion the 382
limitation cannot be revoked without
IRS consent, thus, L cannot merely
amend its return to reattribute $20 of
the section 382 limitation back to the
L group.
Leaving or Ceasing to be a Member of a Loss
Subgroup
1.
The regulations provide a general rule with
respect to leaving a loss subgroup, along with
several examples. Treas. Reg. § 1.1502-95(d).
2.
A corporation ceases to be a member of a loss
subgroup on the earlier of:
3.
a.
The first day of the first taxable year in
which it files a separate return; or
b.
The first day that it ceases to bear a
section 1504(a)(1) relationship to the loss
subgroup parent. Treas. Reg. § 1.150295(d)(1).
However, the above-stated general rule does not
apply to a member of a loss subgroup while that
member remains a member of such loss subgroup:
a.
If an election to treat the subgroup parent
requirement as satisfied applies to the
members of the loss subgroup;
- 82 -
4.
b.
If there is an ownership change of the loss
subgroup within six months before, on, or
after becoming members of the group,
starting on the day after the change date
but not earlier than the date the loss
subgroup becomes a member of the group; or
c.
Starting the day after the five year period
(which began the day that the loss subgroup
became members of the group) during which
the loss subgroup has not had an ownership
change. Treas. Reg. § 1.1502-95(d)(2).
Example 5. P, L, L1 and L2 compose a loss group.
In 1995, P sells all of the L stock to
corporation M. This causes an ownership change
with respect to the L loss subgroup. The
subgroup has a $100 subgroup section 382
limitation. In 1996, L1 sells 40 percent of the
L2 stock to individual A. L2 is apportioned a
part of the P group's consolidated NOL. The
section 382 limitation with respect to L2's
carryover loss is zero unless M apportions to L2
part of the $100 L subgroup limitation. See
Treas. Reg. § 1.1502-95(d)(3) Ex. (1).
A
P
M
M
L
L
L
L1
L1
L1
L2
L2
60%
5.
L2
40%
Example 6. Assume the same facts as in Example
5, except that L sells 40 percent of the L1 stock
to A. L1 and L2 are apportioned a part of the P
group NOL carryover. L1 and L2 have left the L
loss subgroup, and compose a new subgroup. M
must still apportion part of the L subgroup
section 382 limitation to the L1 subgroup or the
- 83 NOL will be useless.
95(d)(3) Ex. (2).
6.
Example 7. P, L1 and L2 compose a loss group.
All the P stock is owned by individual A. In
1994, corporation M acquires the P stock from A.
In 1995, P distributes the L2 stock to M.
A
M
P
P
L2
L1
C.
See Treas. Reg. § 1.1502-
L1
M
P
L2
L2
L1
a.
P, L1 and L2 compose a loss subgroup with
respect to the losses incurred prior to the
acquisition by M.
b.
L2 leaves the loss subgroup as a result of
the distribution by P. See Treas. Reg. §
1.1502-95(d)(3) Ex. (3).
c.
L2 does not cease to be a member of the P
loss subgroup because the P loss subgroup
had an ownership change upon becoming a
member of the M group and L2 remains in the
M group.
Filing the Election to Apportion
1.
The common parent of the group filing a
consolidated return must file an election to
apportion part of the consolidated section 382
limitation to a member leaving the group with its
income tax return for the year in which the
former member or new loss subgroup ceases to be a
member. Treas. Reg. § 1.1502-95(f)(1).
2.
The election must contain a reference that it is
an election to apportion a section 382 limitation
to a specific member and also contain:
- 84 a.
The date of the ownership change that
resulted in the limitation;
b.
The amount of the departing member’s prechange net operating loss carryovers and
taxable years in which they arose that will
be subject to the limitation that is being
apportioned to that member;
c.
The amount of any net unrealized built-in
loss allocated to the departing member
which, if recognized, can be a pre-change
attribute subject to the limitation that is
being apportioned;
d.
The amount of the consolidated section 382
limitation for the taxable year during which
the former member ceases to be a member of
the consolidated group;
e.
The amount of the loss group’s net
unrealized built-in gain that may be
apportioned to members that ceased to be
members during the consolidated return year;
f.
The amount of the value element and
adjustment element that is apportioned to
the former member;
g.
The amount of the loss group’s net
unrealized built-in gain that is apportioned
to the former member;
h.
The amount of any adjustment element
apportioned to the former member that is
attributable to recognized built-in gains;
and
i.
The name and employer identification number
of the common parent. Id.
3.
The election must be signed by both the parent
and the subsidiary. Treas. Reg. § 1.150295(f)(2).
4.
An election to apportion a section 382 limitation
is revocable only with the consent of the
Commissioner. Treas. Reg. § 1.1502-95(f)(4).
- 85 5.
D.
Importantly, only the common parent (not the loss
subgroup parent) can make the election to
apportion either a consolidated section 382
limitation or a subgroup section 382 limitation,
or a loss group’s or loss subgroup’s net
unrealized built-in gain. Treas. Reg. § 1.150295(a)(2).
Coordination with Former Loss Disallowance Rules
1.
History of Former Loss Disallowance Rules and
Unified Loss Rule
a.
In March 1990, Treasury issued controversial
temporary regulations that disallowed all
losses on the sale of a subsidiary's stock.
See former Temp. Treas. Reg. § 1.1502-20T.
In November 1990, the temporary regulations
were revoked, and replaced with slightly
more lenient proposed rules, which were
subsequently finalized in September 1991.
See Treas. Reg. § 1.1502-20. These rules
allowed certain losses on the sale of a
subsidiary’s stock. As described below,
these regulations were removed by the IRS,
effective for dispositions of stock
occurring on or after March 7, 2002.
b.
On March 12, 2002, the IRS promulgated new
temporary and proposed loss disallowance
regulations under sections 337(d) and 1502,
adding Temp. Treas. Reg. §§ 1.337(d)-2T,
1.1502-20T(i), and 1.1502-32T(b)(4)(v). See
67 Fed. Reg. 11,034 (Mar. 12, 2002). The
IRS subsequently amended these temporary and
proposed regulations. See 67 Fed. Reg.
37,998 (May 31, 2002); 69 Fed. Reg. 51,175
(Aug. 18, 2004); and 69 Fed. Reg. 51,419
(Aug. 26, 2004). On March 3, 2005, the IRS
promulgated final loss disallowance
regulations that adopted the temporary
regulations (as amended) without substantive
change. See 70 Fed. Reg. 10,319 (Mar. 3,
2005).
c.
On January 23, 2007, the Service published
proposed consolidated return loss
disallowance rules that would both implement
- 86 the repeal of the General Utilities doctrine
and address the duplication of losses by
members of a consolidated group. These
“Unified Loss Rules” were finalized in
Treas. Reg. § 1.1502-36 on September 17,
2008. The final regulations remove Treas.
Reg. § 1.1502-20 and provide that Treas.
Reg. §§ 1.337(d)-1, 1.337(d)-2, and 1.150235 do not apply to transactions subject to
the Unified Loss Rules.
T.D. 9424, 73
Fed. Reg. 53,933, 53,944 (Sept. 17, 2008);
Treas. Reg. §§ 1.337(d)-1(a)(1), 1.337(d)2(a)(1), 1.1502-35(a)(2)(iii), 1.1502-36.
d.
2.
The Treas. Reg. § 1.1502-36 Unified Loss
Rules apply to transfers of shares of
subsidiary stock on or after September 17,
2008, unless the transfer was made pursuant
to a binding agreement that was in effect
prior to September 17, 2008 and at all times
thereafter.
Application of Former Loss Disallowance Rules in
Treas. Reg. § 1.1502-20
a.
General Rule. Losses were disallowed,
except losses allowed to the extent that
they exceeded (i) extraordinary gain
dispositions, (ii) positive investment
adjustments, and (iii) duplicated losses.
Treas. Reg. § 1.1502-20(c)(1).
b.
If a loss was disallowed, the common parent
was entitled to some relief under Treas.
Reg. § 1.1502-20(g).
c.
Pursuant to Treas. Reg. § 1.1502-20(g), the
common parent was able to elect, generally,
to retain any or all of the subsidiary's
losses (including SRLY losses), up to the
amount of the disallowed loss, and was able
to specify the particular year and the
character of the loss subject to
attribution. The parent was also able to
reattribute to itself losses of a lower tier
subsidiary.
- 87 -
3.
d.
A reattributed loss was not subject to a
section 382 limitation (unless it was
previously subject to limitation), even
though the subsidiary had undergone an
ownership change in connection with the
transaction. Treas. Reg. § 1.1502-20(g)(1).
Reattributed SRLY losses retained their
character as SRLY losses. Treas. Reg. §
1.1502-20(g)(3) Ex. (3)(iv).
e.
As described above, the consolidated 382
rules permit apportionment of the section
382 limitation. Treas. Reg. § 1.1502-95(c).
As a result, the common parent could
allocate a section 382 limitation
commensurate with the apportioned loss, if
any, that accompanied the subsidiary.
Application of Subsequent Loss Disallowance Rules
in Treas. Reg. § 1.337(d)-2.
a.
4.
Contrary to Treas. Reg. § 1.1502-20(g),under
Treas. Reg. § 1.337(d)-2 the common parent
may not elect to retain losses attributable
to a subsidiary, even if the losses are
disallowed Treas. As a result, for years to
which Treas. Reg. § 1.337(d)-2 applies, the
common parent will not need to adjust the
apportionment of the section 382 limitation
between the common parent and the subsidiary
to provide for the reattribution of losses
to the common parent.
Application of Current Unified Loss Rule
a.
Treasury and the IRS have recently finalized
the Unified Loss Rule regulations that
replace both Treas. Reg. § 1.337(d)-2 and
Treas. Reg. § 1.1502-20. T.D. 9424, 73 Fed.
Reg. 53,933, 53,944 (Sept. 17, 2008). The
final Unified Loss Rule regulations do not
allow the common parent to elect to retain
losses attributable to a subsidiary in the
event the proposed regulations disallow
losses on the disposition of the subsidiary
stock. Treas. Reg. § 1.1502-36.
- 88 X.
XI.
TITLE 11 OR SIMILAR CASES
A.
Treas. Reg. § 1.1502-97 has been reserved for the
application of section 382 to consolidated groups in
Title 11 or similar cases.
B.
Even though the consolidated 382 regulations generally
adopt a single entity approach, Treasury officials
have indicated, and the Preamble to the proposed
regulations imply, that the Title 11 consolidated 382
regulations may take a separate entity approach.
COORDINATION WITH SECTION 383
A.
Treas. Reg. § 1.1502-98 provides that the rules of
sections 1.1502-91 through 1.1502-96 also apply for
purposes of section 383, with appropriate adjustments
to take into account that section 383 applies to net
capital losses and credits.
B.
For example, if a loss group has an ownership change
and has a carryover of unused business credits, the
amount of tax liability that can be offset by the
credits cannot exceed the consolidated section 383
credit limitation, determined by applying the
principles of Treas. Reg. § 1.383-1 and Treas. Reg. §
1.1502-93.
XII. CONTROLLED GROUP RULES
A.
Background
1.
An ownership change with respect to a nonconsolidated controlled group is determined on a
separate entity basis. In addition, a section
382 limitation is separately determined for each
member of the controlled group.
2.
However, section 382(m)(5), added by the
Technical and Miscellaneous Revenue Act of 1988,
gives the Commissioner authority to promulgate
regulations providing appropriate adjustments to
value, built-in gain or loss and other items so
that such items are not omitted or taken into
account more than once.
3.
The regulatory authority applies in the case of
any group of corporations described in section
- 89 1563(a) (a "controlled group of corporations"),
substituting 50 percent for 80 percent control.
See section 382(m)(5); Treas. Reg. § 1.3828(e)(2).
B.
a.
Simultaneous with the temporary consolidated
section 382 regulations, Treasury issued
Treas. Reg. § 1.382-8T (now Treas. Reg. §
1.382-8), concerning adjustments to value of
controlled groups of corporations.
b.
In general, the regulations reduce the value
of any loss corporation that is a member of
a controlled group by the value of the stock
of each component member owned by the loss
corporation immediately after the ownership
change. Treas. Reg. § 1.382-8(a).
Section 382 Limitation with Respect to Controlled
Group Loss
1.
For purposes of computing the section 382
limitation with respect to a "controlled group
loss," the value of the stock of the member
before the ownership change is reduced by the
value of the stock of any other directly owned
component member. Treas. Reg. § 1.382-8(c)(1).
2.
A "controlled group loss" is a pre-change loss or
net unrealized built-in loss attributable to a
taxable year of the corporation during which the
corporation is a component member of a controlled
group for that year. Treas. Reg. § 1.3828(b)(1).
a.
To address the issue of when a net
unrealized built-in loss accrues, the final
regulations provide for an irrebutable
presumption that certain built-in losses are
attributable to a period ending before the
taxable year in question. Treas. Reg. §
1.382-8(b)(2).
b.
In determining whether a net unrealized
built-in loss is attributable to a
particular taxable year (the “determination
year”), the final regulations deem the
built-in loss in a “prior change date asset"
- 90 to be attributable to a period ending before
the determination year. Id.
3.
4.
c.
A "prior change date asset" is any of the
loss corporation’s assets held at all times
during the period which begins on the change
date of its most recent ownership change
after 1986 and ends on the first day of the
determination year. Id.
d.
The built-in loss in a prior change date
asset is the adjusted basis of the asset on
the prior change date less the fair market
value of the asset on such date. Id.
The controlled group with respect to each
controlled group loss is composed of the loss
corporation and each other corporation that is a
component member both:
a.
With respect to the taxable year to which
the controlled group loss is attributable;
and
b.
On the date the loss corporation has an
ownership change. Treas. Reg. § 1.3828(b)(1).
Example 1. L, L1 and L2 are loss corporations
that do not file a consolidated return.
Individual A owns all the stock of L. L owns the
stock of L1, which in turn owns the stock of L2.
The value of L is $250 (including the value of L1
and L2), the value of L1 is $100, and the value
of L2 is $75. Individual A sells all her L stock
to individual B. As a result, L, L1 and L2
undergo an ownership change. The long-term taxexempt rate is 10 percent. Absent the
duplication in value rules, L would have a $25
section 382 limitation, L1 would have a $10
limitation, and L2 would have a $7.50 limitation.
- 91 A
5.
B
L
$250 FMV
L
L1
$100 FMV
L1
L2
$75 FMV
L2
a.
If L, L1 and L2 were a consolidated group,
the section 382 limitation for any group
losses would be limited to $250.
b.
It is clear that the group as a whole is
worth only $250, not $425. Stock ownership
in other members of the group increases the
aggregate limitation by $175.
c.
Congress and Treasury apparently felt that
permitting this duplication in value was
inappropriate.
d.
Example 2. Assume the same facts as in the
above fact pattern--L's value is $250, L1's
value is $100, and L2's value is $75, and
that each member's loss is a controlled
group loss (discussed below).
e.
For purposes of each member's section 382
limitation, L's value would be $150, L1's
value would be $25, and L2's value would be
$75.
Example 3. L is a loss corporation by reason of
a NOL carryover arising in 1992 that is carried
to 1994. L1 has a NOL arising in 1991 that is
carried to 1994. L is owned by Public L, and L1
is owned 30 percent by L and 70 percent by Public
L1. In 1993, L acquires 30 percent of the stock
of L1. Also in 1993, L purchases all the stock
of S. On November 1, 1994, corporation P acquired
all the L stock, resulting in an ownership change
of L and L1. See Treas. Reg. § 1.382-8(g) Ex.
(1).
- 92 PUBLIC L
PUBLIC L1
L
1992 NOL
60%
L1
1991 NOL
T
C.
P
PUBLIC L1
L
L
T
40%
L1
T
PUBLIC L PUBLIC L1
60%
PUBLIC L1
L
70%
30%
PUBLIC L
60%
40%
L1
T
S
L1
40%
S
a.
L was not part of a controlled group at the
time its 1992 NOL carryover arose, even
though it was part of a controlled group at
the time of the ownership change. Thus, the
value of L for purposes of its section 382
limitation does not need to be reduced by
the value of the L1 stock.
b.
L1's loss carryover from 1991 is a
controlled group loss with respect to T
because L1 and T were a controlled group (1)
at the time the NOL arose, and (2) at the
time of L1's ownership change.
c.
Thus, L1's section 382 limitation must be
reduced by the value of the T stock. L1
need not however, reduce its value by the
value of the S stock, because S was not part
of the group at the time NOL arose.
Restoration of Value
1.
The regulations permit a member (the “electing
member") to restore the value of its stock to
another member that owns its stock. The member
- 93 may elect to restore value to another member in
an amount not exceeding the lesser of:
2.
a.
The value of the electing member's stock
before the ownership change directly owned
by the other component member immediately
after the ownership change, plus any value
restored to the electing member by another
member; or
b.
The value of the electing member's stock
immediately before the ownership change
directly owned by the other component member
immediately after the ownership change,
without regard to any restoration of value.
Treas. Reg. § 1.382-8(c)(2).
c.
Any value restored to another member reduces
the value of the electing member. Treas.
Reg. § 1.382-8(c)(3).
d.
The regulations also provide for additional
adjustments to be made to prevent
duplication of value, including adjustments
to take into account indirect ownership in
another component member and cross
ownership. Treas. Reg. § 1.382-8(c)(4).
Example 4. Assume the same facts as in Example 1
above--L has $250 value, L1 has $100 value and L2
has $75 value. The value restoration election
permits the following alternative values, among
others, for purposes of the section 382
limitation. Of course, the number of
possibilities is limitless.
L
3.
$250
150
175
150
L1
0
100
0
50
L2
0
0
75
50
Example 5. Individual A owns all the stock of L,
which owns 80 percent of P, which in turn owns 75
percent of L1. Individual B owns the other 20
percent of P, and individual C owns the other 25
percent of L1. L and L1 each have a NOL
carryover from 1992 that is carried to 1993. On
- 94 December 1, 1993, A sells all the L stock to D,
resulting in an ownership change of L and L1.
Immediately before the ownership change, the
value of L is $200 (including the value of P and
L1), the value of P (including the value of L1)
is $100, and the value of L1 is $40.
A
B
C
D
B
C
L
L
$200 FMV
80%
20%
20%
80%
P
P
$100 FMV
25%
75%
$40 FMV
L1
25%
75%
L1
a.
The 1992 NOL carryovers of L and L1 are both
controlled group carryovers.
b.
The value of L1 for purposes of its section
382 limitation is $40 if it does not elect
to restore any value to P.
c.
The value of P is reduced by $30 (75% x $40
L1 value) to $70. P may elect to restore
this value to L, a wise choice since P is
not subject to any limitation and cannot
otherwise use the value.
d.
The value of L is reduced by $80 (80% x $100
P value) and increased by the $70 P elected
to restore to it. Thus, L's value is $190
for purposes of its section 382 limitation.
See Treas. Reg. § 1.382-8(g) Ex. (2).
e.
If L1 elects to restore $20 of value to P:
(1)
L1's value will be reduced to $20;
(2)
P's value will be $90 ($70 plus $20
restored by L1); and
- 95 (3)
D.
P may restore up to $80 of value to L,
this being the lesser of (a) the value
of its stock after the initial
adjustment ($70) plus any value
restored to it ($20), or (2) the value
of the P stock without regard to any
adjustments ($80). See Treas. Reg. §
1.382-8(g) Ex. (3).
Disposal and Reacquisition of Controlled Group Stock
A loss corporation that has an ownership change is
required to make an adjustment to value
(notwithstanding the controlled group and controlled
group loss requirements) if stock of another
corporation is disposed of before the ownership change
and:
E.
F.
1.
Both corporations were component members of a
controlled group with respect to a taxable year
to which a controlled group loss of the loss
corporation is attributable and at any time
during the two year period prior to the ownership
change; and
2.
Both corporations are component members of a
controlled group at any time during the two-year
period following the ownership change. Treas.
Reg. § 1.382-8(c)(5).
Rules Preventing Double Reduction
1.
The regulations provide that section 382 and the
controlled group rules should not be applied to
duplicate a reduction in value of the loss
corporation. The regulations use an example of a
contribution to capital of stock of a component
member. The value of such stock is not taken
into account under section 382(l)(1).
2.
The controlled group rules do not then apply to
further reduce the 382 limitation by the value of
the stock contributed. Treas. Reg. § 1.382-8(d).
Coordination with Consolidated Section 382 Regulations
- 96 -
XIII.
A.
1.
Generally, the consolidated section 382
regulations apply rather than the controlled
group rules to controlled group members that are
also members of a consolidated group. Treas.
Reg. § 1.382-8(f). This makes sense in that the
consolidated section 382 limitation is based on
the value of the entire loss group and avoids
duplication.
2.
The controlled group rules may apply, however, if
a member of a consolidated group, loss group, or
loss subgroup is also a member of a controlled
group with respect to a controlled group loss.
Treas. Reg. § 1.382-8(f).
3.
For purposes of applying the controlled group
rules, a consolidated group, loss group, or loss
subgroup is treated as a single corporation. Id.
4.
Example 6. P owns all the stock of L, and P and
L file a consolidated return. L owns 79 percent
of L1. The P group has a consolidated NOL
arising in 1992 that is carried to 1994. L1 also
has an NOL arising in 1992 that is carried to
1994. On January 1, 1994, the P group and L1
both undergo an ownership change. The
consolidated NOL is a controlled group loss with
respect to the P group and L1. In computing the
consolidated section 382 limitation, the P
group's value is reduced by the value of its L1
stock. L1 may, however, elect to restore value
to the P group. See Treas. Reg. § 1.382-8(g) Ex.
(4).
REVISED SEPARATE RETURN LIMITATION YEAR RULES
Overview
1.
On June 25, 1999, Treasury issued final
regulations eliminating the application of the
SRLY rules where such rules overlap with the
application of section 382. T.D. 8823, 1999-29
I.R.B. 34.
2.
Prior to the issuance of the final regulations,
Treasury issued extensive temporary amendments to
the SRLY rules. T.D. 8679, 1996-2 C.B. 25.
These rules were issued concurrent with the
- 97 temporary consolidated section 382 regulations.
The revisions added by the temporary amendments
to the SRLY rules, generally adopted in the final
regulations, fall into four basic categories:
B.
C.
a.
The SRLY limitation is computed based on the
member's items entering into consolidated
taxable income;
b.
The SRLY limitation uses a cumulative,
rather than an annual basis;
c.
The SRLY limitation is applied on a subgroup
basis rather than on an entity basis; and
d.
The built-in gain and loss rules were
revised to conform with the section 382
built-in gain and loss rules.
Revision of SRLY Computation
1.
Under the old rules, the amount of the SRLY
limitation equaled the difference between (1) the
group's consolidated taxable income (excluding
the NOL deduction) and (2) the group's
consolidated taxable income excluding items of
gain and loss of the subsidiary. Prior Treas.
Reg. § 1.1502-21(c).
2.
Under the final regulations, the SRLY limitation
equals consolidated taxable income determined by
taking into account only the member's items of
income, gain, loss and deduction. Treas. Reg. §
1.1502-21(c)(1). This is a more direct, simpler
method of computing the limitation, which, as
intended, limits the SRLY carryover to the
member's income.
SRLY Limitation Computed on Cumulative Basis
1.
Under the old rules, a SRLY loss could not be
used in a year in which the group had income, but
the member did not, notwithstanding that in a
prior year the member had income that was offset
by the group's losses.
2.
The final regulations compute the SRLY limitation
on a cumulative basis, based on the member's
- 98 cumulative contribution to the group's
consolidated taxable income for all years during
which it was a member. Treas. Reg. § 1.150221(c)(1)(i).
3.
Example 1. P, the parent of an affiliated group
filing a consolidated return, owns stock in two
unaffiliated corporations, S and T. P acquires
the remaining stock of corporations S and T in a
transaction that does not result in an ownership
change of S or T. S carries over a SRLY NOL of
$100, and T carries over a SRLY NOL of $40. The
contribution to the P group's consolidated
taxable income for the three years after the
acquisition is as follows:
P
S ($100 NOL)
T ($40 NOL)
CTI
Year 1
Year 2
($100)
$85
($25)
($40)
$70
($30)
$10
$50
Year 3
$60
($15)
$20
$65
a.
With respect to S, in Year 1 it contributes
$85 to CTI. Because the group has a
consolidated loss, none of the SRLY NOL
would be absorbed. After Year 2, S's
cumulative contribution to CTI would be $55
($85 + ($30)). Because CTI in Year 2 is
$50, the use of S's SRLY NOL would be
limited to $50. After Year 3, S's
cumulative contribution to CTI is $40 ($85 +
($30) + ($15)). However, the $50 of SRLY
NOL absorbed in Year 2 must also be taken
into account, reducing S's cumulative
contribution to CTI to ($10), so that none
of S's SRLY NOL can be used in Year 3. Even
though the group has absorbed more of S's
SRLY NOL after Year 3 ($50) than S's
cumulative contribution to CTI ($40), there
is no requirement that the $10 excess be
recaptured.
b.
With respect to T, in Year 1 its
contribution to CTI is negative, and CTI
itself is also negative, so that none of T's
- 99 SRLY NOL would be absorbed. In Year 2, T
makes a positive contribution to CTI;
however, its cumulative contribution is
still negative (($25) + $10 = ($15)). In
Year 3, T would be able to absorb $5 of its
SRLY NOL (($25) + $10 + $20).
c.
d.
Below is a comparison of the results under
old SRLY and new SRLY. Note that S fares
better under the new rules, while the new
rules work to T's detriment.
Year 1
Year 2
Year 3
S (Old SRLY)
$0
$0
$0
(New SRLY)
$0
$50
$0
T (Old SRLY)
$0
$10
$20
(New SRLY)
$0
$0
$5
Several commentators developed the following
framework for applying the new rules.
Treatment of S
Year 1
(1) Cumulative contribution to CTI
(2) SRLY NOL absorbed (prior years)
(3) Total available cumulative excess
(4) Consolidated taxable income
(5) SRLY NOL absorbed (lesser of
lines (3) and (4) but not less
than zero)
Year 2
Year 3
$85
$0
$85
$55
$0
$55
$40
($50)
($10)
($40)
$0
$50
$50
$65
$0
- 100 Treatment of T
Year 1
(1) Cumulative contribution to CTI
($25)
(2) SRLY NOL absorbed (prior years)
$0
(3) Total available cumulative excess ($25)
(4) Consolidated taxable income
(5) SRLY NOL absorbed (lesser of
lines (3) and (4) but not less
than zero)
D.
($40)
$0
Year 2
Year 3
($15)
$0
($15)
$50
$0
$5
$0
$5
$65
$5
SRLY Subgroups
1.
The final regulations compute the SRLY limitation
on a subgroup, rather than an individual entity
basis, where applicable. See Treas. Reg. §
1.1502-21(c)(2). This is appropriate and highly
desirable in that had the subgroup members
remained in the group, each member's income and
loss could offset the income and loss of the
other members.
2.
A SRLY subgroup is not the same as a loss
subgroup under the section 382 consolidated
return regulations. In particular, only
affiliation in a prior group when the loss is
incurred is required (and continuous affiliation
thereafter). No section 1504(a)(1) relationship
among the subgroup members need be established.
3.
Example 2. Assume the same facts as in Example
1, except that S and T have been historically
affiliated with each other. Thus S and T's
contribution to consolidated taxable income would
be computed on a subgroup basis.
Year 1
Year 2
P($100)
$70
$60
S ($100 NOL)
$85
($30)
($15)
($25)
$10
$20
($40)
$50
$65
T
($40 NOL)
CTI
Year 3
- 101 Treatment of S-T Subgroup
Year 1
Year 2
Year 3
(1) Cumulative contribution to CTI
$60
(2) SRLY NOL absorbed (prior years)
$0
(3) Total available cumulative excess $60
$40
$0
$40
$45
($40)
$5
(4) Consolidated taxable income
(5) SRLY NOL absorbed (lesser of
lines (3) and (4) but not less
than zero)
$50
$40
$65
$5
E.
F.
($40)
$0
Built-In Gain and Loss
1.
The built-in gain and loss rules of Prior Treas.
Reg. § 1.1502-15 are revised to reflect the rules
in section 382(h). For example, built-in loss is
defined with reference to section 382(h)(3) (net
unrealized built-in loss), including the 15
percent/$10 million threshold. Treas. Reg. §
1.1502-15(b)(1).
2.
A corporation having a net unrealized built-in
loss when it joins the group will be subject to
the SRLY rules for its recognized built-in gains
and losses, notwithstanding that it has not
undergone an ownership change under section 382.
Treas. Reg. § 1.1502-21(b)(2)(i).
3.
The built-in gain and loss rules also apply on a
subgroup basis. Treas. Reg. § 1.1502-15(c)(1).
However, to be included in a built-in gain or
loss subgroup requires affiliation for 60
consecutive months prior to joining the group.
Treas. Reg. § 1.1502-15(c)(2).
Overlap Rule
1.
The SRLY limitation is not applicable to an NOL
carryover if there is an overlap with the section
382 limitation. Treas. Reg. § 1.1502-21(g)(1).
2.
With respect to an NOL carryover, an overlap of
the section 382 limitation and the SRLY
limitation occurs if a corporation becomes a
member of a consolidated group (the “SRLY event”)
within six months of the change date of an
- 102 ownership change (the “section 382 event”) which
results in a section 382 limitation. Treas. Reg.
§ 1.1502-21(g)(2)(ii)(A).
3.
a.
The Overlap Rule also includes NOLs that
arise during the six month period after a
section 382 event and before a SRLY event.
Treas. Reg. § 1.1502-21(g)(2)(ii)(B).
b.
Example 3. Individual A owns 100% of the
stock of corporation P which owns 100% of
the stock of corporation S. P and S file a
consolidated return. B, an individual
unrelated to A, owns all the stock of T. T
has a net operating loss of $100 in 2000.
On January 1, 2001, S acquires all the stock
of T from B.
(1)
The acquisition of the T stock by S
results in T becoming a member of the P
group (the SRLY event). Also, because
there was an ownership change of more
than 50 percentage points of the T
stock (the section 382 event), the
section 382 limitation applies.
(2)
The SRLY event and the change date of
the section 382 event occur on the same
date, January 1, 2001. Thus, there is
an overlap of the SRLY limitation and
the section 382 limitation.
(3)
Thus, under the Overlap Rule, in 2001,
the SRLY limitation does not apply to
the $100 NOL carryover. See Treas.
Reg. § 1.1502-21(g)(5) Ex. 1.
Operating Rules
a.
If the SRLY event occurs on the same date as
the section 382 event or within six months
after the section 382 event, then the
Overlap Rule applies beginning with the tax
year that includes the SRLY event. Treas.
Reg. § 1.1502-21(g)(3)(i).
(1)
Example 4. Individual A owns all the
stock of corporation P which owns all
- 103 the stock of corporation S. Individual
B, unrelated to A, owns all the stock
of T which incurs a $100 net operating
loss in 2000. On February 28, 2001, S
acquires 55% of the T stock, and on
June 30, 2001, S acquires an additional
35% of the T stock.
(2)
b.
(a)
The February 28, 2001 acquisition
results in an ownership change
(the section 382 event) of T. The
June 30, 2001 acquisition results
in T becoming a member of the P
group (the SRLY event).
(b)
Because the SRLY event occurs
within six months of the section
382 event, there is an overlap of
the SRLY limitation and the
section 382 limitation. Thus, the
SRLY limitation does not apply to
the net operating loss in 2001.
See Treas. Reg. § 1.1502-21(g)(5)
Ex. 2.
Example 5. The facts are the same as
in Example 2, except S acquires the T
stock on September 30, 2001, as opposed
to June 30, 2001.
(a)
The February 28, 2001 acquisition
results in an ownership change
(the section 382 event) of T.
(b)
The September 30, 2001 acquisition
results in T becoming a member of
the P group (the SRLY event).
(c)
Because the SRLY event occurs more
than six months after the change
date of the section 382 event,
there is no overlap and the
Overlap Rule does not apply. See
Treas. Reg. § 1.1502-21(g)(5) Ex.
3.
If the section 382 event occurs within six
months after the SRLY event, the Overlap
- 104 Rule applies with the first tax year
beginning after the section 382 event.
Treas. Reg. § 1.1502-21(g)(3)(ii).
(1)
4.
Example 6. P owns all of S and, since
1994, S has owned 40% of T. In 2000, T
incurs a net operating loss of $500
that is carried forward. On March 31,
2001, S acquires an additional 40% of
T’s stock. On August 31, 2001, S
acquires the remaining 20% of T stock.
(a)
The acquisition on March 31, 2001
is a SRLY event because it results
in T becoming a member of the P
group.
(b)
The August 31, 2001 acquisition is
a section 382 event because it
results in an ownership change of
T.
(c)
Because the section 382 event
occurs within six months after the
SRLY event, the Overlap Rule
applies.
(d)
Thus, the SRLY limitation will
apply in 2001. In 2002 (the year
after the section 382 event), the
unabsorbed portion of the NOL from
2000 will not be subject to a SRLY
limitation. See Treas. Reg.
§ 1.1502-21(g)(5) Ex. 4.
Subgroup Rules
a.
With respect to an NOL carryover for which
there is a SRLY subgroup and a section 382
loss subgroup (see Part IV.A.1., above), the
Overlap Rule applies to the SRLY subgroup,
not to its separate members. Treas. Reg.
§ 1.1502-21(g)(4).
b.
The Overlap Rule applies to an NOL carryover
only if:
- 105 (1)
All members of the SRLY subgroup with
respect to a particular carryover are
also included within a section 382 loss
subgroup with respect to such
carryover; and
(2)
All members of the section 382 loss
subgroup with respect to a particular
carryover are also members of the SRLY
subgroup with respect to such
carryover. Treas. Reg. § 1.150221(g)(4)(i).
(a)
In other words, the Overlap Rule
applies if the SRLY subgroup
members and the loss subgroup
members are coextensive.
(b)
With respect to NOL carryovers
that arise during the period
between the date of a section 382
event and the date of a later SRLY
event under Treas. Reg. § 1.150221(g)(2)(ii)(B), the Overlap Rule
only applies if all members of the
SRLY subgroup for that NOL
carryover are also members of a
SRLY subgroup to which the general
Overlap Rule of Treas. Reg. §
1.1502-21(g)(2)(ii)(A) applies.
Treas. Reg. § 1.1502-21(g)(4)(ii).
(c)
In order to provide a way to
conform SRLY subgroups and section
382 subgroups, the regulations
provide an election that allows
corporations to expand a newly
formed section 382 loss subgroup.
See Treas. Reg. § 1.1502-91(d)(4).
i)
Under these regulations, if
the common parent of a
section 382 loss subgroup
elects, two or more
corporations that become
members of the group at the
same time and that were
affiliated with each other
- 106 immediately before becoming
members of the group may be
treated as meeting the
subgroup parent requirement
(and thus may be treated as
members of the loss subgroup)
(see Part IV.A.3., above).
ii)
Thus, the regulations permit
brother-sister corporations
to be members of the section
382 loss subgroup if
necessary to match the SRLY
subgroup membership and fall
under the Overlap Rule.
iii) The election must be made by
the common parent of the loss
subgroup and filed with its
income tax return for the
year in which the members
with respect to whom the
election is made become
members of the group. Treas.
Reg. § 1.1502-96(e). The
election is irrevocable. Id.
c.
Example 7. Individual A owns all the stock
of S which owns all the stock of T. In
2000, the S group has a $200 NOL, of which
$100 is attributable to S and $100 is
attributable to T. Individual B, unrelated
to A, owns all the stock of P. On January
1, 2001, P acquires all the stock of S from
A.
(1)
P’s acquisition of the S stock results
in S and T becoming members of the P
group (the SRLY event). With respect
to the NOL carryover, S and T are a
SRLY subgroup.
(2)
P’s acquisition of the S stock results
in an ownership change of S, the parent
of the loss subgroup, which gives rise
to a section 382 limitation (the
section 382 event).
- 107 (3)
d.
e.
Because the SRLY event occurs on the
same date as the change date of the
section 382 event, overlap occurs.
Because the SRLY subgroup and loss
subgroup are coextensive, the Overlap
Rule applies and the SRLY limitation is
inapplicable to the $200 NOL carryover.
See Treas. Reg. § 1.1502-21(g)(5)
Ex. 5.
Example 8. Individual B owns all the stock
of P which owns all the stock of S and T.
In 2000, the P group has a $200 NOL, of
which $100 is attributable to S and $100 is
attributable to T. Individual A, unrelated
to B, owns all the stock of corporation X.
On January 1, 2002, X acquires all the stock
of S and T from P. X does not make an
election to treat the loss subgroup parent
requirement as having been satisfied (Treas.
Reg. § 1.1502-91(d)(4)).
(1)
X’s acquisition of S and T results in S
and T becoming members of the X group
(the SRLY event). With respect to the
$200 NOL, S and T are a SRLY subgroup.
(2)
Because S and T do not have a section
1504(a)(1) relationship, they do not
compose a loss subgroup. X’s
acquisition of S and T results in
separate ownership changes of S and T
(the section 382 events).
(3)
The SRLY event and the change dates of
the section 382 events occur on the
same date, thus there is overlap.
However, because the SRLY subgroup (S
and T) is not coextensive with the loss
subgroup with respect to the NOL
carryover, the Overlap Rule does not
apply. See Treas. Reg. § 1.150221(g)(5) Ex. 6.
Example 9. Individual A owns all the stock
of T and S. In 1992, T incurs a $100 NOL
that is carried forward. Individual B,
unrelated to A, owns all the stock of P. In
- 108 1993, S acquires all the stock of T and the
S group incurs a $200 NOL that is carried
forward. In 1999, P acquires all the stock
of S and T from A.
f.
(1)
S’s 1993 acquisition of the T stock
results in T becoming a member of the S
group (the SRLY event). But the
acquisition did not result in an
ownership change. Thus, the Overlap
Rule does not apply and T’s 1992 NOL is
subject to the SRLY rules.
(2)
P’s 1999 acquisition of S results in S
and T becoming members of the P group
(the SRLY event). With respect to the
1992 NOL, S and T do not compose a SRLY
subgroup. However, S and T do compose
a loss subgroup. P’s acquisition of S
results in an ownership change (the
section 382 event) with respect to the
1992 carryover.
(3)
The SRLY event and the change date of
the section 382 event occur on the same
date. Thus there is overlap. But,
because the SRLY subgroup and the loss
subgroup are not coextensive, the
Overlap Rule is not applicable to the
1992 NOL.
(4)
With respect to the 1993 NOL, S and T
compose a SRLY subgroup and a loss
subgroup. Thus, the Overlap Rule
applies and the 1993 NOL is not subject
to the SRLY limitation. See Treas.
Reg. § 1.1502-21(g)(5) Ex. 7.
Example 10. Individual A owns all the stock
of R and M. Individual B owns all the stock
of D. In 1995, D incurs a $100 NOL that is
carried forward. In 1997, R acquires all of
the stock of D from B. In 1999, M acquires
all of the stock of R.
(1)
R’s 1997 acquisition of D results in D
becoming a member of the R group (the
SRLY event) and also results in an
- 109 ownership change (the section 382
event). Thus, because the SRLY event
occurs on the same date as the change
date of the section 382 event, there is
an overlap. The Overlap Rule applies
and D’s NOL is not subject to the SRLY
limitation.
(2)
M’s 1999 acquisition of R results in R
and D becoming members of the M group
(the SRLY event). However there is no
ownership change under section 382 and,
thus, no section 382 event.
(3)
Thus, there is no overlap, and D’s NOL
is subject to the SRLY limitation in
the M group. See Treas. Reg. § 1.150221(g)(5) Ex. 8.