[Federal Register Volume 61, Number 125 (Thursday, June 27, 1996)]
[Rules and Regulations]
[Pages 33313-33321]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-15825]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8679]
RIN 1545-AU37


Regulations Under Section 382 of the Internal Revenue Code of 
1986; Application of Section 382 in Short Taxable Years and With 
Respect to Controlled Groups

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary regulations 
relating to limitations on net operating loss carryforwards and certain 
built-in losses following an ownership change and comply with the 
statutory direction under section 382(m) of the Internal Revenue Code 
to prescribe regulations concerning short taxable years and controlled 
groups. This document also contains amendments relating to the end of 
separate tracking of the stock ownership of loss corporations that 
cease to exist following a merger or similar transaction. The text of 
these temporary regulations also serves as the text of the proposed 
regulations set forth in the notice of proposed rulemaking on this 
subject in the Proposed Rules section of this issue of the Federal 
Register.

DATES: These regulations are effective June 27, 1996.
    For dates of application and special transition rules, see 
Effective Dates under SUPPLEMENTARY INFORMATION.

FOR FURTHER INFORMATION CONTACT: David B. Friedel at (202) 622-7550 
(not a toll-free number).

[[Page 33314]]

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these temporary 
regulations has been reviewed and approved by the Office of Management 
and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 
3507) under the control number 1545-1434. Section 1.382-8T(h) requires 
a response from certain corporations that are members of controlled 
groups. The IRS requires this information to assure compliance with 
section 382(m)(5) so that the value of a loss corporation that is a 
member of a controlled group is not taken into account more than once 
in computing a section 382 limitation. Responses to this collection of 
information are required to obtain a benefit (relating to the 
restoration of value for section 382 purposes).
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number.
    For further information concerning this collection of information, 
and where to submit comments on the collection of information and the 
accuracy of the estimated burden, and suggestions for reducing this 
burden, please refer to the preamble to the cross-referencing notice of 
proposed rulemaking published in the Proposed Rules section of this 
issue of the Federal Register.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any Internal Revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background and Explanation of Provisions

    On February 4, 1991, the IRS and Treasury issued three notices of 
proposed rulemaking, CO-132-87 (56 FR 4194), CO-077-90 (56 FR 4183), 
and CO-078-90 (56 FR 4228), setting forth rules regarding the 
application of sections 382 and 383 by consolidated groups and by 
controlled groups, and the carryover and carryback of losses to 
consolidated and separate return years.
    For reasons explained in the preamble to TD 8678 (published 
elsewhere in this issue of the Federal Register), the IRS and Treasury 
are issuing temporary amendments concerning the limitations on net 
operating loss carryforwards and certain built-in losses and credits 
following an ownership change of a consolidated group. The temporary 
regulations contained in this Treasury decision complement those other 
temporary regulations. They assure that the members of a controlled 
group cannot duplicate value in computing their respective section 382 
limitations, a result not permitted to members of a group filing 
consolidated returns. See Sec. 1.1502-93T.
    These temporary regulations are substantially identical to the 
rules proposed on January 29, 1991. One provision (relating to the 
effects of successive ownership changes) was moved from the 
consolidated return regulations to the section 382 regulations to 
clarify that it is applicable to all corporations. These temporary 
amendments do not address the numerous comments on the proposed 
regulations. Many of these comments are still under consideration.

Effective Dates

    The temporary amendments are generally effective as of January 1, 
1997. The final rules relating to the value of stock added to 
Sec. 1.382-2(a)(3)(i) and the temporary rules in Sec. 1.382-
2T(f)(1)(ii) (relating to the end of separate tracking of certain loss 
corporations) are generally effective as of January 29, 1991. The 
temporary rules in Sec. 1.382-5T (relating generally to short taxable 
years and successive ownership changes) generally apply to loss 
corporations that have an ownership change to which section 382(a), as 
amended by the Tax Reform Act of 1986, applies.

Special Analysis

    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 were sent 
to the Small Business Administration for comment on their impact on 
small business.

    Drafting Information: The principal author of the temporary 
regulations is David B. Friedel of the Office of Assistant Chief 
Counsel (Corporate), IRS. Other personnel from the IRS and Treasury 
participated in their development.

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 
removing the entries for ``1.382-2'' and ``1.382-2T'' and adding 
entries in numerical order to read as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.382-2 also issued under 26 U.S.C. 382(k)(1), (l)(3), 
(m), and 26 U.S.C. 383.
    Section 1.382-2T also issued under 26 U.S.C. 382(g)(4)(C), (i), 
(k)(1) and (6), (l)(3), (m), and 26 U.S.C. 383.* * *
    Section 1.382-5T also issued under 26 U.S.C. 382(m).* * *

    Section 1.382-8T also issued under 26 U.S.C. 382(m).* * *
    Par. 2. Section 1.382-1 is amended by:
    a. Adding an entry for Sec. 1.382-2, paragraph (a)(1)(iv).
    b. Revising the entry for Sec. 1.382-2, paragraph (a)(3)(i).
    c. Adding entries for Sec. 1.382-2T, paragraphs (f)(1)(i) through 
(f)(1)(iii).
    d.- Adding entries for Secs. 1.382-5T and 1.382-8T.


Sec. 1.382-1  Table of contents.

* * * * *


Sec. 1.382-2  General rules for ownership change.

    (a) * * *
    (1) * * *
    (iv) End of separate accounting for losses and credits of 
distributor or transferor loss corporation.
* * * * *


Sec. 1.382-2T  Definition of ownership change under section 382, as 
amended by the Tax Reform Act of 1986 (temporary).

* * * * *
    (f) * * *
    (1) * * *
    (i) In general.
    (ii) End of separate accounting for losses and credits of 
distributor or transferor loss corporation.
    (iii) Application to other successor corporations.
* * * * *


Sec. 1.382-5T  Section 382 limitation (temporary).

    (a) Scope.
    (b) Computation of value.
    (c) Short taxable year.
    (d) Successive ownership changes and absorption of a section 382 
limitation.
    (1) In general.
    (2) Recognized built-in gains and losses.

[[Page 33315]]

    (3) Effective date.
    (e) Controlled groups.
    (f) Effective date.
* * * * *


Sec. 1.382-8T  Controlled groups (temporary).

    (a) Introduction.
    (b) Controlled group loss and controlled group with respect to a 
controlled group loss.
    (c) Computation of value.
    (1) Reduction in value.
    (2) Restoration of value.
    (3) Reduction in value by the amount restored.
    (4) Appropriate adjustments.
    (5) Certain reductions in the value of members of a controlled 
group.
    (d) No double reduction.
    (e) Definitions and nomenclature.
    (1) Definitions in Section 382 and the regulations thereunder.
    (2) Controlled group.
    (3) Component member.
    (4) Predecessor and successor corporation.
    (f) Coordination between consolidated groups and controlled groups.
    (g) Examples.
    (h) Time and manner of filing election to restore.
    (1) Statement required.
    (2) Revocation of election.
    (3) Filing by component member.
    (i) [Reserved]
    (j) Effective date.
    (1) In general.
    (2) Transition rule.
    (i) In general.
    (ii) Special transition rules for controlled groups that had 
ownership changes before January 29, 1991.
    (3) Amended returns.
    Par. 3. Section 1.382-2 is amended as follows:
    (a) The first sentence of paragraph (a)(1)(iii) is amended by 
removing the language ``Pre-change losses'' and adding ``Except as 
provided in Sec. 1.382-2T(f)(1)(ii), pre-change losses'' in its place.
    (b) Paragraph (a)(1)(iv) is added.
    (c) The text of Sec. 1.382-2T(f)(18)(i) is redesignated as the text 
of Sec. 1.382-2(a)(3)(i).
    (d) Newly designated paragraph (a)(3)(i) is amended by adding three 
sentences at the end.
    The additions read as follows:


Sec. 1.382-2  General rules for ownership change.

    (a) * * *
    (1) * * *
    (iv) End of separate accounting for losses and credits of 
distributor or transferor loss corporation. For further guidance, see 
Sec. 1.382-2T(f)(1)(ii).
* * * * *
    (3) * * * (i) * * * Solely for purposes of determining the 
percentage of stock owned by a person, each share of all the 
outstanding shares of stock that have the same material terms is 
treated as having the same value. Thus, for example, a control premium 
or blockage discount is disregarded in determining the percentage of 
stock owned by any person. The previous two sentences of this paragraph 
(a)(3)(i) apply to any testing date occurring on or after January 29, 
1991.
* * * * *
    Par. 4. Section 1.382-2T is amended as follows:
    (a) Paragraph (e)(2)(iv) Example (1) is amended by removing the 
last sentence.
    (b) Paragraph (e)(2)(iv) Example (2)(ii) is amended by adding a 
sentence at the end.
    (c) Paragraph (e)(2)(iv) Example (2)(iii) is amended by removing 
the language ``, but must be separately accounted for under Sec. 1.382-
2(a)(1)(iii) of this section'' from the last sentence.
    (d) The text following the heading of paragraph (f)(1) is 
designated as paragraph (f)(1)(i) and a heading for newly designated 
paragraph (f)(1)(i) is added.
    (e) Paragraphs (f)(1)(ii) and (f)(1)(iii) are added.
    (f) Paragraph (f)(4) is amended by removing the word ``loss'' and 
by adding two sentences at the end.
    (g) Paragraph (f)(5) is amended by adding two sentences at the end.
    (h) A sentence is added after the heading of paragraph (f)(18)(i).
    (i) Paragraph (h)(2)(i)(A) is amended by adding the language ``and 
solely for the purposes of determining whether a loss corporation has 
an ownership change'' immediately after ``except as otherwise provided 
in this section,''.
    The additions read as follows:


Sec. 1.382-2T  Definitions of ownership change under section 382, as 
amended by the Tax Reform Act of 1986 (temporary).

* * * * *
    (e) * * *
    (2) * * *
    (iv) * * *
    Example (2) * * *
    (ii) * * * See paragraph (f)(1)(ii) of this section for rules that 
end separate accounting for L1's pre-change losses on any testing 
date occurring on or after January 29, 1991.
    (f) * * *
    (1) * * *
    (i) In general. * * *
    (ii) End of separate accounting for losses and credits of 
distributor or transferor loss corporation. The separate tracking of 
owner shifts of the stock of an acquiring corporation required by 
Sec. 1.382-2(a)(1)(iii) with respect to the net operating loss 
carryovers and other attributes described in Sec. 1.382-2(a)(1)(ii) 
ends when a fold-in event occurs. A fold-in event is either an 
ownership change of the distributor or transferor corporation in 
connection with, or after, the transaction to which section 381(a) 
applies, or a period of 5 consecutive years following the section 
381(a) transaction during which the distributor or transferor 
corporation has not had an ownership change. Starting on the day after 
the earlier of the change date (but not earlier than the day of the 
section 381(a) transaction) or the last day of the 5 consecutive year 
period, the losses and other attributes of the distributor or 
transferor corporation are treated as losses and attributes of the 
acquiring corporation for purposes of determining whether an ownership 
change occurs with respect to such losses. Also, for purposes of 
determining the beginning of the acquiring corporation's testing 
period, such losses are considered to arise either in a taxable year 
that begins not earlier than the later of the day following the change 
date or the day of the section 381(a) transaction, or in a taxable year 
that begins 3 years before the end of the 5 consecutive year period. 
Pre-change losses of a distributor or transferor corporation that are 
subject to a limitation under section 382 continue to be subject to the 
limitation notwithstanding the occurrence of a fold-in event. Any 
ownership change that occurs in connection with, or subsequent to, the 
section 381 transaction may result in an additional, lesser limitation 
with respect to such pre-change losses. This paragraph (f)(1)(ii) 
applies to any testing date occurring on or after January 29, 1991.
    (iii) Application to other successor corporations. Section 1.382-
2(a)(1) (relating to the definition of loss corporation) and this 
paragraph (f)(1) also apply, as the context may require, to successor 
corporations other than successors in section 381(a) transactions. For 
example, if a corporation receives assets from the loss corporation 
that have basis in excess of value, the recipient corporation's basis 
for the assets is determined, directly or indirectly, in whole or in 
part, by reference to the loss corporation's basis, and the amount by 
which basis exceeds value is material, the recipient corporation is a 
successor corporation subject to Sec. 1.382-2(a)(1) and this paragraph 
(f)(1). This paragraph (f)(1)(iii) applies to any testing date 
occurring on or after January 1, 1997.
* * * * *

[[Page 33316]]

    (4) Successor corporation. * * * A successor corporation also 
includes, as the context may require, a corporation which receives an 
asset or assets from another corporation if the corporation's basis for 
the asset(s) is determined, directly or indirectly, in whole or in 
part, by reference to the other corporation's basis and the amount by 
which basis differs from value is, in the aggregate, material. The 
previous sentence of this paragraph (f)(4) applies to any testing date 
occurring on or after January 1, 1997.
    (5) Predecessor corporation. * * * A predecessor corporation also 
includes, as the context may require, a corporation which transfers an 
asset or assets to another corporation if the transferee's basis for 
the asset(s) is determined, directly or indirectly, in whole or in 
part, by reference to the corporation's basis and the amount by which 
basis differs from value is, in the aggregate, material. The previous 
sentence of this paragraph (f)(5) applies to any testing date occurring 
on or after January 1, 1997.
* * * * *
    (18) * * * (i) * * * For further guidance, see Sec. 1.382-
2(a)(3)(i).
* * * * *
    Par. 5. Sections 1.382-5T and 1.382-8T are added to read as 
follows:


Sec. 1.382-5T  Section 382 limitation (temporary).

    (a) Scope. Following an ownership change, the section 382 
limitation for any post-change year is an amount equal to the value of 
the loss corporation multiplied by the long-term tax-exempt rate that 
applies with respect to the ownership change, and adjusted as required 
by section 382 and the regulations thereunder. See, for example, 
section 382(b)(2) (relating to the carryforward of unused section 382 
limitation), section 382(b)(3)(B) (relating to the section 382 
limitation for the post-change year that includes the change date), 
section 382(m)(2) (relating to short taxable years), and section 382(h) 
(relating to recognized built-in gains and section 338 gains).
    (b) Computation of value. [Reserved]
    (c) Short taxable year. The section 382 limitation for any post-
change year that is less than 365 days is the amount that bears the 
same ratio to the section 382 limitation determined under section 
382(b)(1) as the number of days in the post-change year bears to 365. 
The section 382 limitation, as so determined, is adjusted as required 
by section 382 and the regulations thereunder. This paragraph (c) does 
not apply to a 52-53 week taxable year that is less than 365 days 
unless a return is required under section 443 (relating to short 
periods) for such year.
    (d) Successive ownership changes and absorption of a section 382 
limitation--(1) In general. If a loss corporation has two (or more) 
ownership changes, any losses attributable to the period preceding the 
earlier ownership change are treated as pre-change losses with respect 
to both ownership changes. Thus, the later ownership change may result 
in a lesser (but never in a greater) section 382 limitation with 
respect to such losses. In any case, the amount of taxable income for 
any post-change year that can be offset by pre-change losses may not 
exceed the section 382 limitation for such ownership change, reduced by 
the amount of taxable income offset by pre-change losses subject to any 
earlier ownership change(s).
    (2) Recognized built-in gains and losses. [Reserved]
    (3) Effective date. This paragraph (d) applies to taxable years of 
a loss corporation beginning on or after January 1, 1997.
    (e) Controlled groups. See Sec. 1.382-8T for rules for determining 
the value of a loss corporation that is a member of a controlled group.
    (f) Effective date. Except as otherwise provided, this section 
applies to a loss corporation that has an ownership change to which 
section 382(a), as amended by the Tax Reform Act of 1986, applies.


Sec. 1.382-8T  Controlled groups (temporary).

    (a) Introduction. This section provides rules to adjust the value 
of a loss corporation that is a member of a controlled group of 
corporations on a change date so that the same value is not included 
more than once in computing the limitations under section 382 for the 
loss corporations that are members of the controlled group. In general, 
the adjustment is made under paragraph (c) of this section by reducing 
the value of the loss corporation by the value of the stock of each 
component member of the controlled group that the loss corporation owns 
immediately after the ownership change. The loss corporation's value 
may, however, be increased under paragraph (c) of this section by any 
amount of value that the other member elects to restore to the loss 
corporation.
    (b) Controlled group loss and controlled group with respect to a 
controlled group loss. A controlled group loss is a pre-change loss (or 
a net unrealized built-in loss) of a loss corporation that is 
attributable to a taxable year of the corporation with respect to which 
the corporation is a component member of a controlled group (as defined 
by paragraphs (e) (2) and (3) of this section). 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 of a 
controlled group that includes the loss corporation both--
    (1) With respect to the taxable year to which the controlled group 
loss is attributable; and
    (2) On the date the loss corporation has an ownership change.
    (c) Computation of value. For purposes of computing the limitation 
under section 382 with respect to each controlled group loss, the value 
of the stock of each component member of the controlled group with 
respect to that loss is determined immediately before the ownership 
change, and is adjusted by applying the following rules:
    (1) Reduction in value. The value of the stock of each component 
member is reduced by the value (immediately before the ownership change 
and without regard to any restoration of value or other adjustment 
under this section) of the stock of any other component member directly 
owned by the component member immediately after the ownership change.
    (2) Restoration of value. After the value of the stock of each 
component member is reduced pursuant to paragraph (c)(1) of this 
section, the value of the stock of each component member is increased 
by the amount of value, if any, restored to the component member by 
another component member (the electing member) pursuant to this 
paragraph (c)(2). The electing member may elect to restore value to 
another component member in an amount that does not exceed the lesser 
of--
    (i) The sum of--
    (A) The value, determined immediately before the ownership change, 
of the electing member's stock (after adjustment under paragraph (c)(1) 
of this section and before any restoration of value under this 
paragraph (c)(2)); plus
    (B) Any amount of value restored to the electing member by another 
component member under this paragraph (c)(2); or
    (ii) The value, determined immediately before the ownership change, 
of the electing member's stock (without regard to any adjustment under 
this section) that is directly owned by the other component member 
immediately after the ownership change.
    (3) Reduction in value by the amount restored. The value of the 
stock of the electing member is reduced by any

[[Page 33317]]

amount of value that the electing member elects to restore under 
paragraph (c)(2) of this section to another component member.
    (4) Appropriate adjustments. Appropriate additional adjustments 
consistent with paragraphs (c)(1), (2), and (3) of this section must be 
made to prevent any duplication of value. Thus, for example, 
adjustments must be made to reflect--
    (i) Any indirect ownership interest in another component member;
    (ii) Any cross ownership of stock by component members of the 
controlled group with respect to the controlled group loss; and
    (iii) Any value used to determine a limitation under section 382 
with respect to controlled group losses from the same period.
    (5) Certain reductions in the value of members of a controlled 
group. A loss corporation that has an ownership change is required to 
make adjustments consistent with this paragraph (c) with respect to its 
stock if the stock of another corporation in which it had a direct or 
indirect ownership interest was disposed of before the ownership 
change, and;
    (i) Both corporations were component members of a controlled 
group--
    (A) With respect to a taxable year to which a controlled group loss 
of the loss corporation is attributable; and
    (B) At any time during the 2 year period before the ownership 
change; and
    (ii) Both corporations are component members of a controlled group 
at any time during the 2 year period following the ownership change.
    (d) No double reduction. To the extent consistent with the purposes 
of this section, section 382 and this section shall not be applied to 
duplicate a reduction in the value of a loss corporation. Thus, for 
example, if the value of a loss corporation is reduced under section 
382(l)(1) to reflect a capital contribution of stock of a component 
member, it is not again reduced by such amount under paragraph (c)(1) 
of this section. If this paragraph (d) applies to prevent a reduction 
in value from being duplicated, the application of the other rules of 
this section, such as those relating to the restoration of value, is 
correspondingly limited in a manner consistent with the principles of 
this section.
    (e) Definitions and nomenclature--(1) Definitions in section 382 
and the regulations thereunder. Except as otherwise provided, the 
definitions and nomenclature contained in section 382 and the 
regulations thereunder apply to this section.
    (2) Controlled group. Controlled group has the same meaning as 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).
    (3) Component member. Component member has the same meaning as in 
section 1563(b), determined by substituting ``December 31 (or the 
change date, if earlier)'' for ``December 31'' each place it appears, 
and without regard to section 1563 (b)(2), (b)(3)(C), and (b)(4).
    (4) Predecessor and successor corporation. As the context may 
require, a reference to a corporation, or component member includes a 
reference to a predecessor or successor corporation.
    (f) Coordination between consolidated groups and controlled groups. 
Some or all of the component members of a controlled group may also be 
members of a consolidated group, and a controlled group loss may be 
subject to a consolidated section 382 limitation or subgroup section 
382 limitation determined under Sec. 1.1502-93T. Except as otherwise 
provided in this paragraph (f) and Secs. 1.1502-91T through 1.1502-99T, 
Sec. 1.1502-93T applies instead of this section when both sections, by 
their terms, are otherwise applicable. This section is applicable and 
may require an adjustment to value if a member of a consolidated group, 
a loss group, or a loss subgroup (as those terms are defined in 
Secs. 1.1502-1(h) and 1.1502-91T) is also a component member of a 
controlled group with respect to a controlled group loss. Solely for 
purposes of applying this section, a consolidated group, loss group, or 
loss subgroup is treated as a single corporation. Thus to determine the 
limitation with respect to any portion of the pre-change consolidated 
attributes or pre-change subgroup attributes of the loss group or loss 
subgroup that is a controlled group loss, the consolidated section 382 
limitation or subgroup section 382 limitation is computed by treating 
the loss group or the loss subgroup as a single corporation, and 
adjusting value in accordance with paragraph (c) of this section. See 
paragraph (g) Example 4 of this section.
    (g) Examples. For purposes of the examples in this section, unless 
otherwise stated, the nomenclature and assumptions of the examples in 
Sec. 1.382-2T(b) apply, all corporations file separate income tax 
returns on a calendar year basis, the only 5-percent shareholder of a 
corporation is a public group, and the facts set forth the only owner 
shifts with respect to the corporations during the testing period.

    -Example 1. Controlled group with respect to a controlled group 
loss. (a) Public L owns all of the L stock, L and Public L1 own 30 
percent and 70 percent, respectively, of the L1 stock, and L1 owns 
all of the corporation T stock. L1 has a net operating loss arising 
in Year 1 that is carried over to Year 4. L has a net operating loss 
arising in Year 2 that is carried over to Year 4. On August 1, Year 
3, L acquires 30 percent of the stock of L1, thereby increasing its 
percentage ownership interest in L1 to 60 percent. On December 1, 
Year 3, L1 purchases all of the stock of corporation S from Public 
S. On November 1, Year 4, P acquires all of the L stock. The 
acquisition by P of all of the L stock on November 1, Year 4, causes 
ownership changes of both L and L1 under the rules of Sec. 1.382-2T. 
The following is a graphic illustration of these facts.

BILLING CODE 4830-01-U

[[Page 33318]]

[GRAPHIC] [TIFF OMITTED] TR27JN96.000



BILLING CODE 4830-01-C

[[Page 33319]]

    (b)(1) Under paragraph (b) of this section, the Year 1 net 
operating loss carryover of L1 is a controlled group loss because L1 
is a component member of a controlled group with respect to Year 1, 
the year to which the loss is attributable. L1 and T compose a 
controlled group with respect to the net operating loss carryover 
because L1 and T are component members of a controlled group both--
    (A) With respect to the taxable year to which L1's net operating 
loss carryover is attributable (i.e., Year 1); and
    (B) On November 1, Year 4, L1's change date. Although L and S 
are component members of L1's controlled group on L1's change date, 
they are not component members of the controlled group with respect 
to the Year 1 net operating loss carryover because they were not 
component members with respect to the year to which the net 
operating loss carryover is attributable.
    (2) The value of L1's stock must therefore be adjusted in 
accordance with paragraph (c) of this section to take into account 
an adjustment with respect to the T stock (but not the S stock) in 
computing L1's limitation under section 382 with respect to its net 
operating loss carryover.
    (c) Although L is a member of a controlled group composed of L, 
L1, S, and T on November 1, Year 4, L's change date, it is not a 
component member of a controlled group with respect to Year 2, the 
taxable year to which its net operating loss carryover is 
attributable. Therefore, L's Year 2 net operating loss carryover is 
not a controlled group loss under paragraph (b) of this section and 
the value of L's stock is not adjusted in accordance with paragraph 
(c) of this section to compute L's limitation under section 382 with 
respect to the Year 2 net operating loss carryover.
    Example 2. Adjustments to value of the controlled group members. 
(a) Since Year 1, A has owned all of the stock of L, L and B have 
owned 80 percent and 20 percent, respectively, of the stock of 
corporation P, and P and C have owned 75 percent and 25 percent, 
respectively, of the stock of L1. L and L1 each has a net operating 
loss for the Year 6 taxable year that is carried over to its 
respective Year 7 taxable year. On December 1, Year 7, A sells all 
of the L stock to D. The sale results in ownership changes of both L 
and L1. Immediately before the ownership changes, the total value of 
the L1 stock is $40, the total value of the P stock (including the 
value of its L1 stock) is $100, and the total value of the L stock 
(including the value of the P stock) is $200. The following is a 
graphic illustration of these facts.

BILLING CODE 4830-01-U
[GRAPHIC] [TIFF OMITTED] TR27JN96.001


BILLING CODE 4830-01-C
    (b) Under paragraph (b) of this section, the Year 6 net 
operating loss carryovers of each of L and L1 are controlled group 
losses because each of L and L1 is a component member of a 
controlled group with respect to Year 6, the year to which the 
losses are attributable. L, P, and L1 compose controlled groups with 
respect to both Year 6 net operating loss carryovers because L, P, 
and L1 are component members of a controlled group both-- -
    (1) With respect to the taxable years to which the net operating 
loss carryovers are attributable (i.e., Year 6); and
    (2) On December 1, Year 7, the change date.
    (c) The value of the stock of L1 for purposes of determining its 
limitation under section 382 with respect to its net operating loss 
carryover from Year 6 is $40. L1 does not elect to restore any value 
to P under paragraph (c)(2) of this section.
    (d) The value of the stock of P ($100) is reduced under 
paragraph (c)(1) of this section by the value of the stock of L1 
that it directly owns, $30 (75% x $40). Following the adjustment, 
the value of the stock of P is $70. P elects to restore this entire 
$70 of value to L.
    (e) The value of the stock of L, $200, is reduced under 
paragraph (c)(1) of this section by the value of the stock of P it 
directly owns, i.e., $80 (80% x $100), and increased under paragraph 
(c)(2) of this section by the amount P elects to restore to L, i.e., 
$70. Thus, the value of the L stock for purposes of determining L's 
limitation under section 382 with respect to its net operating loss 
carryover from Year 6 is $190 ($200-$80+$70).
    Example 3. Limitation on restoration of value. (a) The facts are 
the same as in Example 2, except that L1 elects to restore $20 to P. 
For purposes of determining L1's limitation under section 382 with 
respect to the Year 6 net operating loss carryover, the value of the 
stock of L1 is $20 ($40-$20) because the value of its stock is 
reduced under paragraph (c)(3) of this section by the $20 of value 
it elects to restore to P.
    (b) The value of the stock of P ($100) is reduced under 
paragraph (c)(1) of this section by the value of the L1 stock it 
directly owns ($30), and is increased under paragraph (c)(2) of this 
section by the value that L1 elects to restore to P ($20). Thus, the 
value of the P stock is $90 ($100-$30+$20).
    (c)(1) P elects to restore to L the maximum value permitted 
under this section. The value of the stock of L, $200, is reduced 
under paragraph (c)(1) of this section by the value of the P stock 
it directly owns ($80), and is increased by the value that P elects 
to restore to L. P may elect to restore to L the lesser of--
    (A) The sum of the value of its stock immediately after 
adjustment under paragraph (c)(1) of this section (i.e., $70) plus 
the value restored to it by L1 (i.e., $20) (a total of $90); or
    (B) The value of the P stock (without regard to the adjustment 
required by paragraphs (c) (1) and (2) of this section) that is 
directly owned by L immediately before the ownership change (i.e., 
$80).
    (2) Thus, $80 is the maximum amount that P may elect to restore 
to L. Following the restoration of value by P, the value of the L 
stock for purposes of determining L's limitation under section 382 
is $200 ($200 -$80 + $80).
    Example 4. Coordination with consolidated return regulations. 
(a) P and its wholly owned subsidiary L file a consolidated return. 
L owns 79 percent of the outstanding

[[Page 33320]]

stock of L1. P acquired the stock of L in Year 1 and L acquired the 
stock of L1 in Year 2. The P consolidated group has a consolidated 
net operating loss arising in the Year 6 consolidated return year 
that is carried over to Year 8. L1 has a net operating loss arising 
in its Year 6 taxable year that is also carried over to Year 8. On 
January 1, Year 8, the P consolidated group has an ownership change 
under Sec. 1.1502-92T(b)(1)(i) and L1 has an ownership change under 
Sec. 1.382-2T.
    (b)(1) Under paragraph (b) of this section, the Year 6 net 
operating loss carryover of the P group is a controlled group loss 
because P, L, and L1 are component members of a controlled group 
with respect to Year 6, the year to which the loss is attributable. 
P, L, and L1 compose a controlled group with respect to the Year 6 
net operating loss carryover of the P loss group because they are 
component members of a controlled group both--
    (A) With respect to the taxable years to which the net operating 
loss carryover is attributable (i.e., Year 6); and -
    (B) On January 1, Year 8, the P group's change date.
    (2) Because P and L compose a loss group (within the meaning of 
Sec. 1.1502-91T(c)) with respect to its Year 6 net operating loss 
carryover, the P loss group must compute a consolidated section 382 
limitation with respect to its Year 6 net operating loss carryover 
as a result of the ownership change.
    (c) In computing the consolidated section 382 limitation under 
Sec. 1.1502-93T with respect to the Year 6 net operating loss 
carryover, the value of the P stock immediately before the ownership 
change is reduced under paragraphs (c)(1) and (f) of this section by 
the value immediately before the ownership change of the L1 stock 
directly owned by L immediately after the ownership change. L1 may, 
however, elect to restore such value to the P consolidated group to 
the extent permitted under paragraph (c)(2) of this section.
    Example 5. Appropriate adjustments for indirect ownership 
interest. (a) Individual A owns all of the stock of L, L owns an 80 
percent interest in the capital and profits of partnership PS, and 
PS owns 75 percent of the stock of L1. Both L and L1 have net 
operating losses for the Year 1 taxable year that are carried over 
to their respective Year 2 taxable years. On December 19, Year 2, A 
sells all of the L stock to an unrelated individual. The sale 
results in an ownership change of L and L1.
    (b) Under paragraph (b) of this section, the Year 1 net 
operating loss carryovers of each of L and L1 are controlled group 
losses because each of L and L1 is a component member of a 
controlled group with respect to Year 1, the year to which the 
losses are attributable. L and L1 compose controlled groups with 
respect to each corporation's net operating loss carryovers because 
L and L1 are component members of a controlled group both--
    (1) With respect to the taxable years to which the net operating 
loss carryovers are attributable (i.e., Year 1); and
    (2) On December 19, Year 2, the change date.
    (c) L has an indirect ownership interest in L1 which, under 
paragraph (c)(4) of this section, must be taken into account in 
applying this section. As a result, the value of the L stock for 
purposes of determining its limitation under section 382 with 
respect to the Year 1 net operating loss carryover must be reduced 
by the value of L's indirect ownership interest in the L1 stock (60 
percent) that it owns through PS immediately before the ownership 
change, and is increased by the amount (if any) that L1 elects to 
restore to L under paragraph (c)(2) of this section. The value of L1 
is reduced under paragraph (c)(3) of this section to the extent that 
L1 elects to restore value to L.

    (h) Time and manner of filing election to restore--(1) Statement 
required. The election to restore value described in paragraph (c)(2) 
of this section must be in the form set forth below. It must be signed 
on behalf of both the electing member and the corporation to which such 
value is restored by persons authorized to sign their respective income 
tax returns. (The common parent of a consolidated group must make the 
election on behalf of the group.) It must be filed by the loss 
corporation with its income tax return for the taxable year in which 
the ownership change occurs (or with an amended return for such year 
filed on or before the due date (including extensions) of the income 
tax return of any component member with respect to the taxable year in 
which the ownership change occurs). The statement must provide that: 
``THIS IS AN ELECTION UNDER Sec. 1.382-8T OF THE INCOME TAX REGULATIONS 
TO RESTORE ALL OR PART OF THE VALUE OF [insert name and E.I.N. of the 
electing member] TO [insert name and E.I.N. of the corporation to which 
value is restored]. The statement must also--
    (i) Identify the change date for the loss corporation in connection 
with which the election is made;
    (ii) State the value of the electing member's stock (without regard 
to any adjustment under paragraph (c) of this section) immediately 
before the ownership change;
    (iii) State the amount of any reduction required under paragraph 
(c)(1) of this section with respect to stock of the electing member 
that is owned directly or indirectly by the corporation to which value 
is restored;
    (iv) State the amount of value that the electing member elects to 
restore to the corporation; and
    (v) State whether the value of either component member's stock was 
adjusted pursuant to paragraph (c)(4) of this section.
    (2) Revocation of election. An election made under this section is 
revocable only with the consent of the Commissioner.
    (3) Filing by component member. An electing member must attach a 
copy of the statement described in paragraph (h)(1) of this section to 
its income tax return (or amended return) for the taxable year which 
includes the change date in connection with which the election is made.
    (i) [Reserved] -
    (j) Effective date--(1) In general. This section applies to a loss 
corporation that has an ownership change with respect to a controlled 
group loss on or after January 1, 1997.
    (2) Transition rule--(i) In general. The members of a controlled 
group on January 1, 1997, that have had an ownership change with 
respect to a controlled group loss before January 1, 1997, must 
determine the limitations under section 382 for any post-change year 
with respect to controlled group losses by using a reasonable method to 
preclude the value of stock of a component member that was owned 
directly or indirectly by another member immediately after an ownership 
change from being taken into account more than once in determining the 
limitations under section 382 with respect to controlled group losses. 
If such a reasonable method was not used for a post-change year, 
subject to the exception in paragraph (j)(3) of this section, the 
members of the controlled group described in the preceding sentence 
must reduce their limitations under section 382 for post-change years 
for which the income tax return is filed after January 1, 1997, to 
recapture, as quickly as possible, any limitation that members took 
into account in excess of the amount that would be allowable under this 
section.
    (ii) Special transition rule for controlled groups that had 
ownership changes before January 29, 1991. For purposes of this 
section, in the case of an ownership change occurring before January 
29, 1991, the controlled group with respect to a controlled group loss 
does not include a corporation that is not a component member of the 
controlled group on January 29, 1991. Thus, in the case of an ownership 
change occurring before January 29, 1991, paragraph (c) of this section 
does not require that a loss corporation that is a component member of 
a controlled group to disregard the value of stock of another 
corporation directly owned immediately after the ownership change in 
determining the value of its own stock unless the other corporation is 
a component member of the controlled group on January 29, 1991.

[[Page 33321]]

    (3) Amended returns. A taxpayer that has had an ownership change 
before January 1, 1997, may file an amended return for any taxable year 
to modify the amount of a limitation under section 382 with respect to 
a controlled group loss only if--
    (i) The modification complies with the rules contained in this 
section for computing a limitation under section 382;
    (ii) Any other component member of the controlled group with 
respect to the controlled group loss who elects to restore value and 
whose taxable income is affected by the election to restore value also 
files amended returns that comply with such rules; and
    (iii) Corresponding adjustments are made in amended returns for all 
taxable years ending after December 31, 1986.

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

    Par. 6. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.

    Par. 7. In Sec. 602.101, paragraph (c) is amended by adding an 
entry in numerical order to the table to read as follows:


Sec. 602.101   OMB Control numbers.

* * * * *
    (c) * * *

------------------------------------------------------------------------
                                                             Current OMB
     CFR part or section where identified or described       control No.
------------------------------------------------------------------------
                                                                        
                  *        *        *        *        *                 
1.382.8T...................................................    1545-1434
                                                                        
                  *        *        *        *        *                 
------------------------------------------------------------------------

Margaret Milner Richardson,
Commissioner of Internal Revenue.

    Approved: May 31, 1996.

Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 96-15825 Filed 6-26-96; 8:45 am]
BILLING CODE 4830-01-U