[Federal Register Volume 59, Number 119 (Wednesday, June 22, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-14970]


[[Page Unknown]]

[Federal Register: June 22, 1994]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8546]
RIN 1545-AL58

 

Limitations on Corporate Net Operating Loss

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains final income tax regulations providing 
rules for allocating net operating loss or taxable income, and net 
capital loss or gain, within the taxable year in which a loss 
corporation has an ownership change under section 382 of the Internal 
Revenue Code of 1986. These regulations permit the loss corporation to 
elect to allocate these amounts between the period ending on the change 
date and the period beginning on the day after the change date as if 
its books were closed on the change date.

EFFECTIVE DATE: These regulations are effective June 22, 1994.
    For dates of applicability of these regulations, see the EFFECTIVE 
DATE paragraph in the SUPPLEMENTARY INFORMATION portion of the 
preamble.

FOR FURTHER INFORMATION CONTACT: Roberta F. Mann of the Office of 
Assistant Chief Counsel (Corporate), Office of Chief Counsel, IRS, 1111 
Constitution Avenue, NW, Washington, DC 20224 (Attention: 
CC:DOM:CORP:5) or telephone 202-622-7550 (not a toll- free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act (44 U.S.C. 3504(h)) 
under control number 1545-1381. The estimated annual burden per 
respondent is estimated to be 0.1 hour.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be directed to the Internal 
Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP, 
Washington, DC 20224, and to the Office of Management and Budget, 
Attention: Desk Officer for the Department of the Treasury, Office of 
Information and Regulatory Affairs, Washington, DC 20503.

Background

    This document contains final regulations to be added to the Income 
Tax Regulations (26 CFR part 1) under section 382 of the Internal 
Revenue Code. The final regulations provide rules for the allocation of 
net operating loss or taxable income and net capital loss or gain 
within the taxable year in which a loss corporation has an ownership 
change. Proposed regulations on this subject were set forth in a notice 
of proposed rulemaking published in the Federal Register on November 
19, 1992 (57 FR 54535). The IRS received public comments on the 
proposed regulations. No public hearing was requested and none was 
held. Having considered the comments submitted, the IRS and the 
Treasury Department adopt the proposed regulations as revised by this 
Treasury decision.

Explanation of Provisions

    Following an ownership change, section 382 limits the amount of 
post-change income that may be offset by a corporation's pre-change 
loss. Sections 382(b)(3)(A) and (d)(1) require that, except as provided 
in section 382(h)(5) (relating to certain built-in gains and losses) 
and in regulations, taxable income or net operating loss must be 
allocated ratably to each day in the change year for purposes of 
applying the section 382 limitation. Under section 383, similar rules 
apply with respect to pre-change capital losses and certain pre-change 
credits.
    The proposed regulations provide rules for allocation of net 
operating loss or taxable income, and net capital loss or gain, within 
the change year. The proposed regulations generally provide that a loss 
corporation may allocate such items between the pre-change period and 
the post-change period (1) by ratably allocating an equal portion to 
each day in the change year, or (2) if it so elects, based on a closing 
of its books as of the change date. The final regulations adopt the 
proposed regulations with few changes. The most significant comments 
and changes are described below.

A. Consistency Rules for Consolidated and Controlled Groups

    The proposed regulations provide consistency rules for corporations 
that are members of consolidated groups or controlled groups. These 
consistency rules are based on proposed regulations applying section 
382 to consolidated and controlled groups. The consistency rules 
contained in the proposed regulations have been revised in the final 
regulations because the proposed consolidated and controlled group 
regulations have not been finalized yet. The final regulations provide 
that if a closing-of-the-books election is made with respect to an 
ownership change occurring during a consolidated return year, all 
allocations with respect to that ownership change must be consistent 
with the election. Further consideration will be given to consistency 
rules for consolidated groups in the development of final regulations 
applying section 382 to these groups. -

B. Limitation Increase Rule

    In Notice 87-79, 1987-2 C.B. 387, the IRS announced its intention 
to issue regulations that would allow taxpayers to make a closing-of-
the-books election. The Notice stated that, prior to the issuance of 
regulations, taxpayers would be required to use the statutory ratable 
allocation method unless they obtained a private letter ruling allowing 
them to use a different method.
    Pursuant to Notice 87-79, the IRS issued a number of private letter 
rulings that authorized allocations based on a closing of the 
taxpayers' books. Some of these rulings allowed taxpayers to increase 
in their section 382 limitation to the extent that any net pre-change 
income was offset by net post-change loss in computing taxable income 
or loss for the change year. The purpose of the increased limitation 
was to put the taxpayer in a position similar to the position it would 
have been in had its taxable year ended on the change date.
    In the interest of simplicity, the proposed regulations do not 
include a rule providing for increases in the annual section 382 
limitation in cases in which net post-change loss offsets net pre-
change income. Several commentators questioned the failure to include a 
limitation increase rule.
    The final regulations retain the approach of the proposed 
regulations, in which change year income and losses may be netted 
together without limitation. This approach may be either favorable or 
unfavorable to taxpayers, depending on the circumstances. This approach 
is disadvantageous when it results in the netting of a post-change loss 
against pre-change income. Conversely, the approach is advantageous to 
taxpayers that are able to net a pre-change loss against post-change 
income without limitation. In these cases, if the taxpayers' year had 
ended on the change date, the loss so used would have been subject to 
the section 382 limitation.
    Adoption of a limitation increase rule would add significant 
complexity to the regulations. If taxpayers were protected from the 
disadvantages of netting a post-change loss against pre- change income, 
consistency would require that taxpayers not be allowed the benefit of 
netting pre-change loss against post- change income without limitation. 
In other words, detailed rules for applying the section 382 limitation 
within the change year to limit the use of a loss in the pre-change 
portion of the year against income in the post-change period would be 
necessary concomitants of a limitation increase rule. To avoid this 
complexity, the final regulations allow change year losses to offset 
change year income without limitation and do not include a limitation 
increase rule.

C. Additional Issues

    The preamble to the proposed regulations requested comments on the 
interaction of the ratable allocation rules under the proposed 
regulations and the built-in gain and loss rules under section 382(h), 
particularly with respect to extraordinary items (e.g., an asset sale 
not made in the ordinary course of business). A commentator recommended 
that the final regulations include both a rule for extraordinary items 
and the limitation increase rule (described in paragraph B above). 
After due consideration, the IRS and the Treasury Department decided 
that rules relating to extraordinary items would add unnecessary 
complexity to the final regulations. Thus, the final regulations do not 
contain special rules with respect to the allocation of extraordinary 
items. The IRS and the Treasury Department may give further 
consideration to the desirability of rules addressing extraordinary 
items.

D. Effective Date

    The regulations apply to ownership changes occurring on or after 
June 22, 1994.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in EO 12866. Therefore, a 
regulatory assessment is not required. It has also been determined that 
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) 
and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to 
these regulations, and, therefore, a Regulatory Flexibility Analysis is 
not required. Pursuant to section 7805(f) of the Internal Revenue Code, 
the notice of proposed rulemaking preceding these regulations was 
submitted to the Small Business Administration for comment on its 
impact on small business.

Drafting Information

    The principal author of these regulations is Roberta F. Mann, 
Office of the Assistant Chief Counsel (Corporate), IRS. However, other 
personnel from the IRS and Treasury Department participated in their 
development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
an entry in numerical order to read as follows:

    Authority: 26 U.S.C. 7805 * * * Sec. 1.382-6 also issued under 
26 U.S.C. 382(b)(3)(A), 26 U.S.C. 382(d)(1), 26 U.S.C. 382(m), and 
26 U.S.C. 383(d) * * *

    Par 2. Section 1.382-1 is amended by revising the entry for 
Sec. 1.382-6 and adding additional entries to read as follows:


Sec. 1.382-1  Table of contents.

* * * * *

Sec. 1.382-6  Allocation of income and loss to periods before and 
after the change date for purposes of section 382.

(a) General rule.
(b) Closing-of-the-books election.
    (1) In general.
    (2) Making the closing-of-the-books election.
    (i) Time and manner.
    (ii) Election irrevocable.
    (3) Special rules relating to consolidated and controlled 
groups.
    (i) Consolidated groups.
    (ii) Controlled groups.
(c) Operating rules for determining net operating loss, taxable 
income, net capital loss, modified capital gain net income, and 
special allocations.
    (1) In general.
    (2) Adjustment to net operating loss.
    (i) Determination of remaining capital gain.
    (ii) Reduction of net operating loss by remaining capital gain.
(d) Coordination with rules relating to the allocation of income 
under Sec. 1.1502-76(b).
(e) Allocation of certain credits.
(f) Examples.
(g) Definitions and nomenclature.
    (1) Change year.
    (2) Pre-change period.
    (3) Post-change period.
    (4) Modified capital gain net income.
(h) Effective date.
* * * * *
    Par. 3. The heading of Sec. 1.382-6 is revised, and the text of the 
section is added to read as follows:


Sec. 1.382-6  Allocation of income and loss to periods before and after 
the change date for purposes of section 382.

    (a) General rule. Except as provided in paragraphs (b) and (d) of 
this section, a loss corporation must allocate its net operating loss 
or taxable income (see section 382(k)(4)), and its net capital loss 
(see section 1222(10)) or modified capital gain net income (as defined 
in paragraph (g)(4) of this section), for the change year between the 
pre-change period and the post-change period by ratably allocating an 
equal portion to each day in the year.
    (b) Closing-of-the-books election--(1) In general. Subject to 
paragraphs (b)(3)(ii) and (d) of this section, a loss corporation may 
elect to allocate its net operating loss or taxable income and its net 
capital loss or modified capital gain net income for the change year 
between the pre-change period and the post-change period as if the loss 
corporation's books were closed on the change date. An election under 
this paragraph (b)(1) does not terminate the loss corporation's taxable 
year as of the change date (e.g., the change year is a single tax year 
for purposes of section 172).
    (2) Making the closing-of-the-books election--(i) Time and manner. 
A loss corporation makes the closing-of-the-books election by including 
the following statement on the information statement required by 
Sec. 1.382-2T(a)(2)(ii) for the change year: ``THE CLOSING-OF-THE-BOOKS 
ELECTION UNDER Sec. 1.382-6(b) IS HEREBY MADE WITH RESPECT TO THE 
OWNERSHIP CHANGE OCCURRING ON [INSERT DATE].'' The election must be 
made on or before the due date (including extensions) of the loss 
corporation's income tax return for the change year.
    (ii) Election irrevocable. An election under this paragraph (b) is 
irrevocable.
    (3) Special rules relating to consolidated and controlled groups--
(i) Consolidated groups. If an election under this paragraph (b) is 
made with respect to an ownership change occurring in a consolidated 
return year, all allocations under this section with respect to that 
ownership change must be consistent with the election.
    (ii) Controlled groups. If paragraph (b)(3)(i) of this section does 
not apply, and if, as part of the same plan or arrangement, two or more 
members of a controlled group (as defined in section 1563(a), 
determined by substituting ``50 percent'' for ``80 percent'' each place 
that it appears, and without regard to section 1563(a)(4)), have 
ownership changes and continue to be members of the controlled group 
(or become members of the same other controlled group), a closing-of-
the-books election applies only if the election is made by all members 
having the ownership changes.
    (c) Operating rules for determining net operating loss, taxable 
income, net capital loss, modified capital gain net income, and special 
allocations. For purposes of this section, for the change year--
    (1) In general--(i) Net operating loss or taxable income is 
determined without regard to gains or losses on the sale or exchange of 
capital assets; and
    (ii) Net operating loss or taxable income and net capital loss or 
modified capital gain net income are determined without regard to the 
section 382 limitation and do not include the following items, which 
are allocated entirely to the post-change period--
    (A) Any income, gain, loss, or deduction to which section 
382(h)(5)(A) applies; and
    (B) Any income or gain recognized on the disposition of assets 
transferred to the loss corporation during the post-change period for a 
principal purpose of ameliorating the section 382 limitation.
    (2) Adjustment to net operating loss--(i) Determination of 
remaining capital gain. The amount of modified capital gain net income 
(defined in paragraph (g)(4) of this section) allocated to each period 
is offset by capital losses to which section 382(h)(5)(A) applies and 
capital loss carryovers, subject to the section 382 limitation (in the 
case of modified capital gain net income allocated to the post-change 
period).
    (ii) Reduction of net operating loss by remaining capital gain. The 
amount of net operating loss allocated to each period is reduced (but 
not below zero) without regard to the section 382 limitation, first by 
the modified capital gain net income remaining in the same period, and 
then by the modified capital gain net income remaining in the other 
period.
    (d) Coordination with rules relating to the allocation of income 
under Sec. 1.1502-76(b). If Sec. 1.1502-76 applies (relating to the 
taxable year of members of a consolidated group), an allocation of 
items under paragraph (a) or (b) of this section is determined after 
applying Sec. 1.1502-76. Thus, if a short taxable year under 
Sec. 1.1502-76 is a change year for which an allocation under this 
section is to be made, the allocation under this section applies only 
to the items allocated to that short taxable year under Sec. 1.1502-76.
    (e) Allocation of certain credits. The principles of this section 
apply for purposes of allocating, under section 383, excess foreign 
taxes under section 904(c), current year business credits under section 
38, and the minimum tax credit under section 53. The loss corporation 
must use the same method of allocation (ratable allocation or closing-
of-the-books) for purposes of sections 382 and 383.
    (f) Examples. The rules of this section are illustrated by the 
following examples:

    Example 1. (i) Assume that the loss corporation, L, a calendar 
year taxpayer with a May 26, 1995, change date, determines a section 
382 limitation under section 382(b)(1) of $100,000. Thus, for the 
change year, its section 382 limitation is $100,000  x  (219/
365)=$60,000. L makes the closing-of-the- books election under 
paragraph (b) of this section.
    (ii) Assume that L has a $150,000 capital loss carryover (from 
its 1994 taxable year) and a $300,000 net operating loss carryover 
(from its 1994 taxable year) to the change year. L recognizes, in 
the pre-change period, $200,000 of ordinary loss, and, in the post-
change period, $150,000 of capital gain and $100,000 of ordinary 
income. Assume that section 382(h) does not apply to the capital 
gain or the ordinary income.
    (iii) L has a $100,000 net operating loss for the change year 
($200,000 pre-change loss less $100,000 post-change income), as 
determined under paragraph (c)(1)(i) of this section. Because L has 
no current year capital losses, L's $150,000 capital gain recognized 
in the post-change period is its modified capital gain net income 
for the change year (as defined at paragraph (g)(4) of this 
section). L allocates $100,000 of net operating loss to the pre-
change period and $150,000 of modified capital gain net income to 
the post-change period.
    (iv) Under paragraph (c)(2)(i) of this section, L uses its 
capital loss carryover to offset its modified capital gain net 
income allocated to the post-change period, subject to its section 
382 limitation. L's section 382 limitation is $60,000, so L uses 
$60,000 of its capital loss carryover to offset $60,000 of its 
$150,000 modified capital gain net income. L has absorbed its entire 
section 382 limitation for the change year and has $90,000 of 
modified capital gain net income remaining in the post-change 
period.
    (v) Under paragraph (c)(2)(ii) of this section, L offsets its 
$100,000 net operating loss allocated to the pre-change period by 
the $90,000 of modified capital gain net income remaining in the 
post-change period, without regard to the section 382 limitation, 
thereby reducing its pre-change net operating loss to $10,000.
    (vi) From its 1994 taxable year, L will carry over $90,000 of 
capital loss and $300,000 of net operating loss to its 1996 taxable 
year. From its 1995 taxable year, L will carry over $10,000 of net 
operating loss subject to the section 382 limitation to its 1996 
taxable year.
    Example 2. (i) Assume the facts of Example 1, except that L does 
not make the closing-of-the-books election under paragraph (b) of 
this section.
    (ii) L ratably allocates its $100,000 net operating loss and its 
$150,000 of modified capital gain net income for the change year. 
$40,000 of net operating loss ($100,000  x  (146/365)) and $60,000 
of modified capital gain net income ($150,000  x  (146/365)) are 
allocated to the pre-change period. $60,000 of net operating loss 
($100,000  x  (219/365)) and $90,000 of modified capital gain net 
income ($150,000  x  (219/365)) are allocated to the post-change 
period.
    (iii) Under paragraph (c)(2)(i) of this section, L uses its 
capital loss carryovers to offset modified capital gain net income. 
The capital loss carryovers offset the $60,000 modified capital gain 
net income allocated to the pre-change period without limitation. 
Subject to the section 382 limitation, the remaining $90,000 of 
capital loss carryovers offset the modified capital gain net income 
allocated to the post-change period. Accordingly, L uses $60,000 of 
its capital loss carryovers to offset $60,000 of its $90,000 
modified capital gain net income allocated to the post-change 
period. L has absorbed its entire section 382 limitation for the 
change year.
    (iv) Under paragraph (c)(2)(ii) of this section, L's $60,000 net 
operating loss allocated to the post-change period is offset by its 
remaining $30,000 of post-change modified capital gain net income, 
reducing its post-change net operating loss to $30,000.
    (v) From its 1994 taxable year, L will carry over $30,000 of 
capital loss and $300,000 of net operating loss to its 1996 taxable 
year. From its 1995 taxable year, L will carry over $70,000 of net 
operating loss ($40,000 pre-change +$30,000 post-change) to its 1996 
taxable year. The $40,000 pre-change portion of that carryover is 
subject to the section 382 limitation.

    (g) Definitions and nomenclature. The terms and nomenclature used 
in this section and not otherwise defined herein have the same meanings 
as in sections 382 and 383 and the regulations thereunder. For purposes 
of this section:
    (1) Change year. A loss corporation's taxable year that includes 
the change date is its change year.
    (2) Pre-change period. The pre-change period is the portion of the 
change year ending on the close of the change date.
    (3) Post-change period. The post-change period is the portion of 
the change year beginning with the day after the change date.
    (4) Modified capital gain net income. A loss corporation's modified 
capital gain net income is the excess of the gains from sales or 
exchanges of capital assets over the losses from such sales or 
exchanges for the change year, determined by excluding any short-term 
capital losses under section 1212.
    (h) Effective date. This section applies to ownership changes 
occurring on or after June 22, 1994.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

    Par. 4. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.


Sec. 602.101  [Amended]

    Par. 5. Section 602.101(c) is amended by adding the entry ``1.382-
6. . . .1545-1381'' in numerical order to the table.

    Dated: June 2, 1994.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
    Approved:
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 94-14970 Filed 6-21-94; 8:45 am]
BILLING CODE 4830-01-U