[Title 26 CFR 1.1502-19]
[Code of Federal Regulations (annual edition) - April 1, 2002 Edition]
[Title 26 - INTERNAL REVENUE]
[Chapter I - INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY]
[Subchapter A - INCOME TAX (CONTINUED)]
[Part 1 - INCOME TAXES]
[Sec. 1.1502-19 - Excess loss accounts.]
[From the U.S. Government Printing Office]


26INTERNAL REVENUE122002-04-012002-04-01false1.1502-19Sec. 1.1502-19INTERNAL REVENUEINTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURYINCOME TAX (CONTINUED)INCOME TAXES
Sec. 1.1502-19  Excess loss accounts.

    (a) In general--(1) Purpose. This section provides rules for a 
member (P) to include in income its excess loss account in the stock of 
another member (S). The purpose of the excess loss account is to 
recapture in consolidated taxable income P's negative adjustments with 
respect to S's stock (e.g., under Sec. 1.1502-32 from S's deductions, 
losses, and distributions), to the extent the negative adjustments 
exceed P's basis in the stock.
    (2) Excess loss accounts--(i) In general. P's basis in S's stock is 
adjusted under the consolidated return regulations and other rules of 
law. Negative adjustments may exceed P's basis in S's stock. The 
resulting negative amount is P's excess loss account in S's stock. For 
example:
    (A) Once P's negative adjustments under Sec. 1.1502-32 exceed its 
basis in S's stock, the excess is P's excess loss account in the S 
stock. If P has further adjustments, they first increase or decrease the 
excess loss account.
    (B) If P forms S by transferring property subject to liabilities in 
excess of basis, Sec. 1.1502-80(d) provides for the nonapplicability of 
section 357(c) and the resulting negative basis under section 358 is P's 
excess loss account in the S stock.
    (ii) Treatment as negative basis. P's excess loss account is treated 
for all Federal income tax purposes as basis that is a negative amount, 
and a reference to P's basis in S's stock includes a reference to P's 
excess loss account.
    (3) Application of other rules of law. The rules of this section are 
in addition to other rules of law. See, e.g., Secs. 1.1502-32 
(investment adjustment rules establishing and adjusting excess loss 
accounts) and 1.1502-80(d) (nonapplicability of section 357(c)). The 
provisions of this section and other rules of law must not be applied to 
recapture the same amount more than once. For purposes of this section, 
the definitions in Sec. 1.1502-32 apply.
    (b) Excess loss account taken into account as income or gain--(1) 
General rule. If P is treated under this section as disposing of a share 
of S's stock, P takes into account its excess loss account in the share 
as income or gain from the disposition. Except as provided in paragraph 
(b)(4) of this section, the disposition is treated as a sale or exchange 
for purposes of determining the character of the income or gain.
    (2) Nonrecognition or deferral--(i) In general. P's income or gain 
under paragraph (b)(1) of this section is subject to any nonrecognition 
or deferral rules applicable to the disposition. For example, if S 
liquidates and the exchange of P's stock in S is subject to section 332, 
or P transfers all of its assets (including S's stock) to S in a 
reorganization to which section 361(a) applies, P's income or gain from 
the excess loss account is not recognized under these rules.
    (ii) Nonrecognition or deferral inapplicable. If P's income or gain 
under paragraph (b)(1) of this section is from a disposition described 
in paragraph (c)(1) (ii) or (iii) of this section (relating to 
deconsolidations and worthlessness), the income or gain is taken into 
account notwithstanding any nonrecognition or deferral rules (even if 
the disposition is also described in paragraph (c)(1)(i) of this 
section). For example, if P transfers S's stock to a nonmember in a 
transaction to which section 351 applies, P's income or gain

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from the excess loss account is taken into account.
    (3) Tiering up in chains. If the stock of more than one subsidiary 
is disposed of in the same transaction, the income or gain under this 
section is taken into account in the order of the tiers, from the lowest 
to the highest.
    (4) Insolvency--(i) In general. Gain under this section is treated 
as ordinary income to the extent of the amount by which S is insolvent 
(within the meaning of section 108(d)(3)) immediately before the 
disposition. For this purpose S's liabilities include any amount to 
which preferred stock would be entitled if S were liquidated immediately 
before the disposition, and any former liabilities that were discharged 
to the extent the discharge was treated as tax-exempt income under 
Sec. 1.1502-32(b)(3)(ii)(C) (special rule for discharges).
    (ii) Reduction for amount of distributions. The amount treated as 
ordinary income under this paragraph (b)(4) is reduced to the extent it 
exceeds the amount of P's excess loss account redetermined without 
taking into account S's distributions to P to which Sec. 1.1502-
32(b)(2)(iv) applies.
    (c) Disposition of stock. For purposes of this section:
    (1) In general. P is treated as disposing of a share of S's stock:
    (i) Transfer, cancellation, etc. At the time--
    (A) P transfers or otherwise ceases to own the share for Federal 
income tax purposes, even if no gain or loss is taken into account; or
    (B) P takes into account gain or loss (in whole or in part) with 
respect to the share.
    (ii) Deconsolidation. At the time--
    (A) P becomes a nonmember, or a nonmember determines its basis in 
the share (or any other asset) by reference to P's basis in the share, 
directly or indirectly, in whole or in part (e.g., under section 362); 
or
    (B) S becomes a nonmember, or P's basis in the share is reflected, 
directly or indirectly, in whole or in part, in the basis of any asset 
other than member stock (e.g., under section 1071).
    (iii) Worthlessness. At the time--
    (A) Substantially all of S's assets are treated as disposed of, 
abandoned, or destroyed for Federal income tax purposes (e.g., under 
section 165(a) or Sec. 1.1502-80(c), or, if S's asset is stock of a 
lower-tier member, the stock is treated as disposed of under this 
paragraph (c)). An asset of S is not considered to be disposed of or 
abandoned to the extent the disposition is in complete liquidation of S 
or is in exchange for consideration (other than relief from 
indebtedness);
    (B) An indebtedness of S is discharged, if any part of the amount 
discharged is not included in gross income and is not treated as tax-
exempt income under Sec. 1.1502-32(b)(3)(ii)(C); or
    (C) A member takes into account a deduction or loss for the 
uncollectibility of an indebtedness of S, and the deduction or loss is 
not matched in the same tax year by S's taking into account a 
corresponding amount of income or gain from the indebtedness in 
determining consolidated taxable income.
    (2) Becoming a nonmember. A member is treated as becoming a 
nonmember if it has a separate return year (including another group's 
consolidated return year). For example, S may become a nonmember if it 
issues additional stock to nonmembers, but S does not become a nonmember 
as a result of its complete liquidation. A disposition under paragraph 
(c)(1)(ii) of this section must be taken into account in the 
consolidated return of the group. For example, if a group ceases under 
Sec. 1.1502-75(c) to file a consolidated return as of the close of its 
consolidated return year, the disposition under paragraph (c)(1)(ii) of 
this section is treated as occurring immediately before the close of the 
year. If S becomes a nonmember because P sells S's stock to a nonmember, 
P's sale is a disposition under both paragraphs (c)(1) (i) and (ii) of 
this section. If a group terminates under Sec. 1.1502-75(d) because the 
common parent is the only remaining member, the common parent is not 
treated as having a deconsolidation event under paragraph (c)(1)(ii) of 
this section.
    (3) Exception for acquisition of group--(i) Application. This 
paragraph (c)(3) applies only if a consolidated group (the terminating 
group) ceases to exist as a result of--

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    (A) The acquisition by a member of another consolidated group of 
either the assets of the common parent of the terminating group in a 
reorganization described in section 381(a)(2), or the stock of the 
common parent of the terminating group; or
    (B) The application of the principles of Sec. 1.1502-75(d)(2) or 
(d)(3).
    (ii) General rule. Paragraph (c)(1)(ii) of this section does not 
apply solely by reason of the termination of a group in a transaction to 
which this paragraph (c)(3) applies, if there is a surviving group that 
is, immediately thereafter, a consolidated group. Instead, the surviving 
group is treated as the terminating group for purposes of applying this 
section to the terminating group. This treatment does not apply, 
however, to members of the terminating group that are not members of the 
surviving group immediately after the terminating group ceases to exist 
(e.g., under section 1504(a)(3) relating to reconsolidation, or section 
1504(c) relating to includible insurance companies).
    (d) Special allocation of basis adjustments or determinations. If a 
member has an excess loss account in shares of a class of S's stock at 
the time of a basis adjustment or determination under the Internal 
Revenue Code with respect to other shares of the same class of S's stock 
owned by the member, the adjustment or determination is allocated first 
to equalize and eliminate that member's excess loss account. For 
example, if P owns 50 shares of S's only class of stock with a $100 
basis and 50 shares with a $100 excess loss account, and P contributes 
$200 to S without receiving additional shares, the contribution first 
eliminates P's excess loss account, then increases P's basis in each 
share by $1. (If P transfers the $200 in exchange for an additional 100 
shares of S's stock in a transaction to which section 351 applies, P's 
excess loss account is first eliminated, and P's basis in the additional 
shares is $100.) See Sec. 1.1502-32(c) for similar allocations of 
investment adjustments to prevent or eliminate excess loss accounts.
    (e) Anti-avoidance rule. If any person acts with a principal purpose 
contrary to the purposes of this section, to avoid the effect of the 
rules of this section or apply the rules of this section to avoid the 
effect of any other provision of the consolidated return regulations, 
adjustments must be made as necessary to carry out the purposes of this 
section.
    (f) Predecessors and successors. For purposes of this section, any 
reference to a corporation (or to a share of the corporation's stock) 
includes a reference to a successor or predecessor (or to a share of 
stock of a predecessor or successor), as the context may require.
    (g) Examples. For purposes of the examples in this section, unless 
otherwise stated, P owns all 100 shares of the only class of S's stock 
and S owns all 100 shares of the only class of T's stock, the stock is 
owned for the entire year, T owns no stock of lower-tier members, the 
tax year of all persons is the calendar year, all persons use the 
accrual method of accounting, the facts set forth the only corporate 
activity, all transactions are between unrelated persons, and tax 
liabilities are disregarded. The principles of this section are 
illustrated by the following examples.

    Example 1. Taxable disposition of stock. (a) Facts. P has a $150 
basis in S's stock, and S has a $100 basis in T's stock. For Year 1, P 
has $500 of ordinary income, S has no income or loss, and T has a $200 
ordinary loss. S sells T's stock to a nonmember for $60 at the close of 
Year 1.
    (b) Analysis. Under paragraph (c) of this section, the sale is a 
disposition of T's stock at the close of Year 1 (the day of the sale). 
Under Sec. 1.1502-32(b), T's loss results in S having a $100 excess loss 
account in T's stock immediately before the sale. Under paragraph (b)(1) 
of this section, S takes into account the $100 excess loss account as an 
additional $100 of gain from the sale. Consequently, S takes into 
account a $160 gain from the sale in determining the group's 
consolidated taxable income. Under Sec. 1.1502-32(b), T's $200 loss and 
S's $160 gain result in a net $40 decrease in P's basis in S's stock as 
of the close of Year 1, from $150 to $110.
    (c) Intercompany sale followed by sale to nonmember. The facts are 
the same as in paragraph (a) of this Example 1, except that S sells T's 
stock to P for $60 at the close of Year 1, and P sells T's stock to a 
nonmember at a gain at the beginning of Year 5. Under paragraph (c) of 
this section, S's sale is treated as a disposition of T's stock at the 
close of Year 1 (the day of the sale). Under Sec. 1.1502-13 and 
paragraph (b)(2) of this section, S's $160 gain from the sale is 
deferred and taken into account in Year 5 as a result of P's sale of the 
T stock. Under Sec. 1.1502-32(b),

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the absorption of T's $200 loss in Year 1 results in P having a $50 
excess loss account in S's stock at the close of Year 1. In Year 5, S's 
$160 gain taken into account eliminates P's excess loss account in S's 
stock and increases P's basis in the stock to $110.
    (d) Intercompany distribution followed by sale to a nonmember. The 
facts are the same as in paragraph (a) of this Example 1, except that 
the value of the T stock is $60 and S declares and distributes a 
dividend of all of the T stock to P at the close of Year 1, and P sells 
the T stock to a nonmember at a gain at the beginning of Year 5. Under 
paragraph (c) of this section, S's distribution is treated as a 
disposition of T's stock at the close of Year 1 (the day of the 
distribution). S's $100 excess loss account in T's stock is treated as 
additional gain under section 311(b) from the distribution. Under 
section 301(d), P's basis in the T stock is $60. Under Sec. 1.1502-13, 
and paragraph (b)(2) of this section, S's $160 gain from the 
distribution is deferred and taken into account in Year 5 as a result of 
P's sale of the T stock. Under Sec. 1.1502-32(b), T's $200 loss and S's 
$60 distribution result in P having a $110 excess loss account in S's 
stock at the close of Year 1. In Year 5, S's $160 gain taken into 
account eliminates P's excess loss account in S's stock and increases 
P's basis in the stock to $50.
    Example 2. Basis determinations under the Internal Revenue Code in 
intercompany reorganizations. (a) Facts. P owns all of the stock of S 
and T. P has a $150 basis in S's stock and a $100 excess loss account in 
T's stock. P transfers T's stock to S without receiving additional S 
stock, in a transaction to which section 351 applies.
    (b) Analysis. Under paragraph (c) of this section, P's transfer is 
treated as a disposition of T's stock. Under section 351 and paragraph 
(b)(2) of this section, P does not recognize gain from the disposition. 
Under section 358 and paragraph (a)(2)(ii) of this section, P's $100 
excess loss account in T's stock decreases P's $150 basis in S's stock 
to $50. In addition, S takes a $100 excess loss account in T's stock 
under section 362. (If P had received additional S stock, paragraph (d) 
of this section would not apply to shift basis from P's original S stock 
because the basis of the original stock is not adjusted or determined as 
a result of the contribution; but paragraph (d) would apply to shift 
basis if P had transferred S's stock to T in exchange for additional T 
stock, because the basis of the additional T stock would be determined 
when P has an excess loss account in its original T stock.)
    (c) Intercompany merger. The facts are the same as in paragraph (a) 
of this Example 2, except that T merges into S in a reorganization 
described in section 368(a)(1)(A) (and in section 368(a)(1)(D)), and P 
receives no additional S stock in the reorganization. Under section 354 
and paragraph (b)(2) of this section, P does not recognize gain. Under 
section 358 and paragraph (a)(2)(ii) of this section, P's $100 excess 
loss account in T's stock decreases P's $150 basis in the S stock to 
$50. (Similarly, if S merges into T and P does not receive additional T 
stock, P's $150 basis in S's stock eliminates P's excess loss account in 
T's stock, and increases P's basis in T's stock to $50.)
    (d) Liquidation of only subsidiary. Assume instead that P and S are 
the only members of the P group, P has a $100 excess loss account in S's 
stock, and S liquidates in a transaction to which section 332 applies. 
Under paragraph (c)(2) of this section, the liquidation is not a 
deconsolidation event under paragraph (c)(1)(ii) of this section merely 
because P is the only remaining member. Under section 332 and paragraph 
(b)(2) of this section, P does not recognize gain. Under section 334(b), 
P succeeds to S's basis in the assets it receives from S in the 
liquidation. (P would also not recognize gain if P transferred all of 
its assets (including S's stock) to S in a reorganization to which 
section 361(a) applied, because S would be a successor to P under 
paragraph (f) of this section.)
    Example 3. Section 355 distribution of stock with an excess loss 
account. (a) Facts. P has a $30 excess loss account in S's stock, and S 
has a $90 excess loss account in T's stock. S distributes the T stock to 
P in a transaction to which section 355 applies, and neither P nor S 
recognizes any gain or loss. At the time of the distribution, the T 
stock represents 33% of the value of the S stock. Following the 
distribution, P's basis in the S stock is allocated under Sec. 1.358-2 
in proportion to the fair market values of the S stock and the T stock.
    (b) Analysis. Under paragraph (c) of this section, S's distribution 
of the T stock is treated as a disposition. Under section 355(c) and 
paragraph (b)(2) of this section, S does not recognize any gain from the 
distribution. Under section 358, S's excess loss account in the T stock 
is eliminated, and P's $30 excess loss account in the S stock is treated 
as basis allocated between the S stock and the T stock based on their 
relative values. Consequently, P has a $20 excess loss account in the S 
stock and a $10 excess loss account in the T stock. (If P had a $30 
basis rather than a $30 excess loss account in the S stock, S would not 
recognize gain, its excess loss account in the T stock would be 
eliminated, and P's basis in the stock of S and T would be $20 and $10, 
respectively.)
    (c) Section 355 distribution to nonmember. The facts are the same as 
in paragraph (a) of this Example 3, except that P also distributes the T 
stock to its shareholders in a transaction to which section 355 applies. 
Under paragraph (c) of this section, P's distribution is treated as a 
disposition of T's stock. Under paragraph (b)(2) of this section, 
because P's

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disposition is described in paragraph (c)(1)(ii) of this section, P's 
$10 excess loss account in the T stock must be taken into account at the 
time of the distribution, notwithstanding the nonrecognition rules of 
section 355(c).
    Example 4. Deconsolidation of a member. (a) Facts. P has a $50 
excess loss account in S's stock, and S has a $100 excess loss account 
in T's stock. T issues additional stock to a nonmember and, as a 
consequence, T becomes a nonmember.
    (b) Analysis. Under paragraph (c)(2) of this section, S is treated 
as disposing of each of its shares of T's stock immediately before T 
becomes a nonmember. Under paragraph (b)(1) of this section, S takes 
into account its $100 excess loss account as gain from the sale or 
exchange of T's stock. Under Sec. 1.1502-32(b) of this section, S's $100 
gain eliminates P's excess loss account in S's stock and increases P's 
basis in S's stock to $50.
    (c) Deconsolidation of a higher-tier member. The facts are the same 
as in paragraph (a) of this Example 4, except that S (rather than T) 
issues the stock and, as a consequence, both S and T become nonmembers. 
Under paragraph (c)(2) of this section, P is treated as disposing of S's 
stock and S is treated as disposing of T's stock immediately before S 
and T become nonmembers. Under Sec. 1.1502-32(b) and paragraph (b)(3) of 
this section, because S and T become nonmembers in the same transaction 
and T is the lower-tier member, S is first treated under paragraph 
(b)(1) of this section as taking into account its $100 excess loss 
account as gain from the sale or exchange of T's stock. Under 
Sec. 1.1502-32(b), S's $100 gain eliminates P's excess loss account in 
S's stock and increases P's basis in S's stock to $50 immediately before 
S becomes a nonmember. Thus, only S's $100 gain is taken into account in 
the determination of the group's consolidated taxable income.
    (d) Intercompany gain and deconsolidation. The facts are the same as 
in paragraph (c) of this Example 4, except that T has $30 of gain that 
is deferred under Sec. 1.1502-13 and taken into account in determining 
consolidated taxable income immediately before T becomes a nonmember. 
Under Sec. 1.1502-32(b), T's $30 gain decreases S's excess loss account 
in T's stock from $100 to $70 immediately before S is treated as 
disposing of T's stock. Under paragraph (b)(1) of this section, S is 
treated as taking into account its $70 excess loss account as gain from 
the disposition of T's stock. Under Sec. 1.1502-32(b), S's $70 gain from 
the excess loss account and T's $30 deferred gain that is taken into 
account eliminate P's $50 excess loss account in S's stock and increase 
P's basis in S's stock to $50 immediately before S becomes a nonmember.
    Example 5. Worthlessness. (a) Facts. P forms S with a $150 
contribution, and S borrows $150. For Year 1, S has a $50 ordinary loss 
that is carried over as part of the group's consolidated net operating 
loss. For Year 2, P has $160 of ordinary income, and S has a $160 
ordinary loss. Under Sec. 1.1502-32(b), S's loss results in P having a 
$10 excess loss account in S's stock. During Year 3, the value of S's 
assets (without taking S's liabilities into account) continues to 
decline and S's stock becomes worthless within the meaning of section 
165(g) (without taking into account Sec. 1.1502-80(c)). For Year 4, S 
has $10 of ordinary income.
    (b) Analysis. Under paragraph (c)(1)(iii)(A) of this section, P is 
not treated as disposing of S's stock in Year 3 solely because S's stock 
becomes worthless within the meaning of section 165(g) (taking S's 
liabilities into account). In addition, because S's stock is not treated 
as worthless, section 382(g)(4)(D) does not prevent the Year 1 
consolidated net operating loss carryover from offsetting S's $10 of 
income in Year 4.
    (c) Discharge of indebtedness. The facts are the same as in 
paragraph (a) of this Example 5, except that, instead of S's stock 
becoming worthless within the meaning of section 165(g), S's creditor 
discharges $40 of S's indebtedness during Year 3, S is insolvent by more 
than $40 before the discharge, the discharge is excluded from the P 
group's gross income under section 108(a), and $40 of the $50 
consolidated net operating loss carryover attributable to S is 
eliminated under section 108(b). Under Sec. 1.1502- 32(b)(3)(ii)(C), S's 
$40 of discharge income is treated as tax-exempt income because there is 
a corresponding decrease under Sec. 1.1502-32(b)(3)(iii) for elimination 
of the loss carryover. Under paragraph (c)(1)(iii)(B) of this section, P 
is treated as disposing of S's stock if the amount discharged is not 
included in gross income and is not treated as tax-exempt income under 
Sec. 1.1502-32(b)(3)(ii)(C). Because the discharge is treated as tax-
exempt income, P is not treated as disposing of S's stock by reason of 
the discharge.
    Example 6. Avoiding worthlessness. (a) Facts. P forms S with a $100 
contribution and S borrows $150. For Years 1 through 5, S has a $210 
ordinary loss that is absorbed by the group. Under Sec. 1.1502-32(b), 
S's loss results in P having a $110 excess loss account in S's stock. S 
defaults on the indebtedness, but the creditor does not discharge the 
debt (or initiate collection procedures). At the beginning of Year 6, S 
ceases any substantial operations with respect to the assets, but 
maintains their ownership with a principal purpose to avoid P's taking 
into account its excess loss account in S's stock.
    (b) Analysis. Under paragraph (c)(1)(iii)(A) of this section, P's 
excess loss account on each of its shares of S's stock ordinarily is 
taken into account at the time substantially all of S's assets are 
treated as disposed of, abandoned, or destroyed for Federal income tax 
purposes. Under paragraph (e) of this section, however, S's assets are 
not taken into

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account at the beginning of Year 6 for purposes of applying paragraph 
(c)(1)(iii)(A) of this section. Consequently, S is treated as worthless 
at the beginning of Year 6, and P's $110 excess loss account is taken 
into account.

    (h) Effective date--(1) Application. This section applies with 
respect to determinations of the basis of (including an excess loss 
account in) the stock of a member in consolidated return years beginning 
on or after January 1, 1995. If this section applies, basis (and excess 
loss accounts) must be determined or redetermined as if this section 
were in effect for all years (including, for example, the consolidated 
return years of another consolidated group to the extent adjustments 
during those consolidated return years are still reflected). Any such 
determination or redetermination does not, however, affect any prior 
period.
    (2) Dispositions of stock before effective date--(i) In general. If 
P was treated as disposing of stock of S in a tax year beginning before 
January 1, 1995 (including, for example, a deemed disposition because S 
was worthless) under the rules of this section then in effect, the 
amount of P's income, gain, deduction, or loss, and the stock basis 
reflected in that amount, are not redetermined under paragraph (h)(1) of 
this section. See paragraph (h)(3) of this section for the applicable 
rules.
    (ii) Intercompany amounts. For purposes of this paragraph (h)(2), a 
disposition does not include a transaction to which Sec. 1.1502-13, 
Sec. 1.1502-13T, Sec. 1.1502-14, or Sec. 1.1502-14T applies. Instead, 
the transaction is deemed to occur as the income, gain, deduction, or 
loss (if any) is taken into account.
    (3) Prior law. For prior determinations, see prior regulations under 
section 1502 as in effect with respect to the determination. See, e.g., 
Sec. 1.1502-19 as contained in the 26 CFR part 1 edition revised as of 
April 1, 1994.

[T.D. 8560, 59 FR 41677, Aug. 15, 1994, as amended by T.D. 8597, 62 FR 
12097, Mar. 14, 1997]