[Federal Register Volume 63, Number 7 (Monday, January 12, 1998)]
[Rules and Regulations]
[Pages 1740-1746]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-43]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 8751]
RIN 1545-AV30
Consolidated Returns--Limitations on the Use of Certain Losses
and Credits; Overall Foreign Loss Accounts
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
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SUMMARY: This document contains temporary amendments to the
consolidated return regulations. The temporary amendments govern the
use of tax credits of a consolidated group and its members. They also
concern the recharacterization of certain foreign source income because
of a prior overall foreign loss. The text of the 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 amendments are effective January 12, 1998.
For dates of application, see the Effective Dates portion of the
preamble under SUPPLEMENTARY INFORMATION.
FOR FURTHER INFORMATION CONTACT: Concerning the temporary regulations
in general, Roy A. Hirschhorn, (202) 622-7770; concerning amendments
related to
[[Page 1741]]
foreign tax credits and foreign losses, Seth Goldstein (202) 622-3850.
SUPPLEMENTARY INFORMATION:
Background and Explanation of Provisions
A. In General
On June 27, 1996, the IRS and Treasury published in the Federal
Register a Treasury decision containing temporary regulations which, in
part, provide rules governing the absorption of certain tax attribute
carryovers and carrybacks from separate return limitation years
(SRLYs), terminate the consolidated return change of ownership rules,
and make minor changes to the computation of net section 1231 gains and
losses for a group. The Treasury decision adopted without substantive
change rules that were proposed in 1991. The 1996 temporary regulations
are effective for consolidated return years beginning on or after
January 1, 1997.
The 1996 temporary regulations significantly modify SRLY loss rules
which had been in place since 1966. The 1966 SRLY rules employed a
member-by-member and year-by-year approach to determine the limitation
on SRLY attributes. The 1996 temporary regulations adopted a subgroup
and cumulative approach. See the preamble to NPRM for CO-078-90 (56 FR
4228), reprinted at 1991-1 C.B. 757. The 1996 temporary regulations,
however, only apply the new approach to net operating loss and net
capital loss carryovers and carrybacks. They do not change regulations
containing limitations on the absorption of the following other tax
attribute carryovers and carrybacks from SRLYs: general business
credits (Sec. 1.1502-3), foreign tax credits (Sec. 1.1502-4), and
overall foreign losses (OFLs) (Sec. 1.1502-9).
On December 30, 1992, the IRS and Treasury published in the Federal
Register a notice of proposed rulemaking containing rules regarding a
group's computation of its alternative minimum tax and minimum tax
credits. See 57 FR 62251, as corrected by 58 FR 8027, reprinted at
1993-1 C.B. 799. The proposed regulations (Prop. Reg. Sec. 1.1502-55)
do not address the application of SRLY limitations to the minimum tax
credit.
B. Extension of 1996 Principles
The IRS and Treasury believe that it is appropriate to apply a
single set of SRLY principles to all attributes that are subject to
SRLY limitations. Unnecessary complexity would result from applying
different principles to different attributes. In addition, the IRS and
Treasury believe that the subgroup and cumulative principles embodied
in the 1996 temporary regulations more appropriately reflect the use of
attributes brought into a consolidated group by SRLY members than do
the member-by-member and year-by-year rules of the 1966 regulations.
Accordingly, this document extends the principles of the 1996 temporary
regulations to the general business credit and the minimum tax credit.
In doing so, the IRS and Treasury have not attempted to address the
issues which some commentators have raised with respect to the
application of the SRLY limitations in general. Rather, those issues
will be addressed in connection with a review of comments received in
response to the 1991 proposed regulations, the 1996 temporary
regulations and to the temporary regulations contained in this
document, prior to the expiration of the 1996 temporary regulations in
1999.
In general, a group may include a member's SRLY credits in the
applicable consolidated section 38 credit or minimum tax credit for a
consolidated return year based on the member's contributions to the
consolidated section 38(c) or consolidated section 53(c) limitation for
all consolidated return years. The contribution is based on the
aggregate of the member's share of the group's tax liability for
relevant years. Such share is measured under the principles of section
1552 and the percentage method under Sec. 1.1502-33(d)(3), assuming a
100% allocation of any decreased tax liability. The contribution may be
a negative number, for example, for a year in which the overall loss of
the member offsets the income of other members. In the case of the
minimum tax credit, the temporary regulations provide an adjustment to
avoid double counting for years in which the SRLY member contributes to
the group's AMT liability.
This document also adds an example to Sec. 1.1502-21T(c)(1) and
Sec. 1.1502-23T(b). The examples assist taxpayers in computing their
cumulative registers by illustrating the concept of cumulative
contribution to consolidated net capital gain and consolidated taxable
income and the character of section 1231 items for purposes of the
relevant registers.
C. Treatment of Foreign Tax Credits, OFLs and SLLs
In considering the application of the new SRLY principles in the
temporary regulations to credits in general, the IRS and Treasury
considered extending these principles to foreign tax credits (FTCs),
and to those losses associated with the FTC regime, namely, overall
foreign losses (OFLs) and separate limitation losses (SLLs). The IRS
and Treasury were concerned that continued application of the
principles of the 1966 regulations (member-by-member and year-by-year)
to these foreign attributes, and especially to OFL and SLL accounts,
could lead to inappropriate results. Taxpayers might adopt structures
in an attempt to achieve indefinite postponement of the recapture of
SRLY OFLs and SLLs. Such postponement would frustrate the neutrality
principle that the SRLY rules are intended to serve (i.e., that the
decision to join a new affiliated group should generally be unaffected
by considerations relating to the absorption of pre-affiliation
attributes).
While it was clear that application of the 1966 principles to OFLs
and SLLs should not continue, it was less clear that application of the
subgroup and cumulative principles of the temporary regulations would
address all concerns. The subgroup and cumulative principles are meant
to more closely parallel the absorption that would have taken place had
the member (or subgroup) continued filing separate returns. The
interaction of the FTC regime (with its multiple baskets) and other
provisions of the Internal Revenue Code affecting international
transactions, such as, for example, section 864(e)(1) which allocates
the interest expense of a member to income in various baskets based on
the group's asset allocation, can make it difficult to determine what
the member has contributed to the group. Furthermore, even with the
adoption of the subgroup and cumulative principles, taxpayers would
likely have the ability to transfer controlled foreign corporations to
new members or to cause operations to be assumed by new members,
thereby delaying indefinitely the recapture of OFLs and SLLs subject to
SRLY.
The IRS and Treasury have decided, therefore, that the principles
of SRLY are not served by applying SRLY limitations to OFL and SLL
accounts of corporations joining a group. Thus, this document amends
portions of Sec. 1.1502-9 to eliminate SRLY restrictions on OFL
recapture. A new member's SRLY OFL account will be added to the similar
consolidated OFL account of the group. For similar reasons, and to
avoid an imbalance in the application of the FTC regime, the IRS and
Treasury have decided that SRLY limitations should not apply to FTCs of
corporations joining a group. This document also amends Sec. 1.1502-
4(f) such that, in the future, there will be no SRLY limitation on the
use of a member's separate year FTCs by the group. Other limitations on
[[Page 1742]]
the use of separate year FTCs continue to apply. See, for example,
section 383.
These amendments apply to corporations becoming members of a group.
They do not address the apportionment of attributes to corporations
that cease to members of a group. Therefore, they only partially
address the issues presented in applying the OFL and SLL rules to
groups. In particular, the IRS and Treasury recognize that the
retention of the notional account system of Sec. 1.1502-9 for members
that cease to be members is inconsistent with the rationale for
removing the SRLY limitation for FTCs and OFL accounts. The notional
account system may result in a member's taking from the group an OFL or
SLL account that is unrelated to the member's activities and future
income. Accordingly, the IRS and Treasury expect in the near future to
issue additional amendments to Sec. 1.1502-9. One approach under
consideration would replace the notional account system with a new
system that apportions accounts to a departing member based on the
member's share of group assets that would produce income subject to
recapture.
Effective Date
The temporary amendments are applicable to consolidated return
years beginning on or after January 1, 1997.
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 is hereby certified that
these regulations do not have a significant economic impact on a
substantial number of small entities. This certification is based on
the fact that these regulations principally affect persons filing
consolidated federal income tax returns that have carryover or
carryback of credits from separate return limitation years. Available
data indicates that many consolidated return filers are large companies
(not small businesses). In addition, the data indicates that an
insubstantial number of consolidated return filers that are smaller
companies have credit carryovers or carrybacks, and thus even fewer of
these filers have credit carryovers or carrybacks that are subject to
the separate return limitation year rules. Therefore, a Regulatory
Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. Pursuant to section 7805(f) of the Internal
Revenue Code, the notice of proposed rulemaking accompanying these
regulations is being sent to the Small Business Administration for
comment on their impact on small businesses.
Drafting Information
The principal author of these regulations is Roy A. Hirschhorn of
the Office of Assistant Chief Counsel (Corporate). Other personnel from
the IRS and Treasury participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding
entries in numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1502-3T also issued under 26 U.S.C. 1502.
Section 1.1502-9T also issued under 26 U.S.C. 1502. * * *
Section 1.1502-55T also issued under 26 U.S.C. 1502. * * *
Par. 2. Section 1.1502-3 is amended by adding paragraphs (c)(3) and
(e)(3) and by designating the text following the heading of paragraph
(d) as paragraph (d)(1) and adding paragraph (d)(2) to read as follows:
Sec. 1.1502-3 Consolidated investment credit.
* * * * *
(c) * * *
(3) Social effective date. This paragraph (c) applies to
consolidated return years beginning before January 1, 1997. See
Sec. 1.1502-3T(c) for the rule that limits the group's use of a section
38 credit carryover or carryback from a SRLY for a consolidated return
year beginning on or after January 1, 1997. For taxable years not
subject to Sec. 1.1502-3T(c), prior law applies. See Sec. 1.1502-3(c)
in effect prior to January 12, 1998 (Sec. 1.1502-3(c) as contained in
the 26 CFR part 1 edition revised April 1, 1997) for prior law.
(d) Examples. (1) * * *
(2) Examples (2) and (3) of this paragraph (d) do not apply to
consolidated return years beginning on or after January 1, 1997. For
consolidated return years beginning on or after January 1, 1997, see
Sec. 1.1502-3T(d).
(e) * * *
(3) Special effective date. This paragraph (e) applies to a
consolidated return change of ownership that occurred before January 1,
1997.
* * * * *
Par. 3. Section 1.1502-3T is added to read as follows:
Sec. 1.1502-3T Consolidated investment credit (temporary).
(a) and (b) [Reserved]. For further guidance, see Sec. 1.1502-3 (a)
and (b).
(c) Limitation on tax credit carryovers and carrybacks from
separate return limitation years--(1) General rule. The aggregate of a
member's unused section 38 credits arising in SRLYs that are included
in the consolidated section 38 credits for all consolidated return
years of the group may not exceed--
(i) The aggregate for all consolidated return years of the member's
contributions to the consolidated section 38(c) limitation for each
consolidated return year; reduced by--
(ii) The aggregate of the member's section 38 credits arising and
absorbed in all consolidated return years (whether or not absorbed by
the member).
(2) Computational rules--(i) Member's contribution to the
consolidated section 38(c) limitation. If the consolidated section
38(c) limitation for a consolidated return year is determined by
reference to the consolidated tentative minimum tax (see section
38(c)(1)(A)), then a member's contribution to the consolidated section
38(c) limitation for such year equals the member's share of the
consolidated net income tax minus the member's share of the
consolidated tentative minimum tax. If the consolidated section 38(c)
limitation for a consolidated return year is determined by reference to
the consolidated net regular tax liability (see section 38(c)(1)(B)),
then a member's contribution to the consolidated section 38(c)
limitation for such year equals the member's share of the consolidated
net income tax minus 25 percent of the quantity which is equal to so
much of the member's share of the consolidated net regular tax
liability less its portion of the $25,000 amount specified in section
38(c)(1)(B). The group computes the member's shares by applying to the
respective consolidated amounts the principles of section 1552 and the
percentage method under Sec. 1.1502-33(d)(3), assuming a 100%
allocation of any decreased tax liability. The group must make proper
adjustments so that taxes and credits not taken into account in
computing the limitation under section 38(c) are not taken into account
in computing the member's share of the consolidated net income tax,
etc. (See, for example, the taxes described in section 26(b) that are
[[Page 1743]]
disregarded in computing regular tax liability.) Also, the group may
apportion all or a part of the $25,000 amount (or lesser amount if
reduced by section 38(c)(3)) for any year to one or more members.
(ii) Years included in computation. For purposes of computing the
limitation under this paragraph (c), the consolidated return years of
the group include only those years, including the year to which a
credit is carried, that the member has been continuously included in
the group's consolidated return, but exclude--
(A) For carryovers, any years ending after the year to which the
credit is carried; and
(B) For carrybacks, any years ending after the year in which the
credit arose.
(iii) Subgroups and successors. The SRLY subgroup principles under
Sec. 1.1502-21T(c)(2) apply for purposes of this paragraph (c). The
predecessor and successor principles under Sec. 1.1502-21T(f) also
apply for purposes of this paragraph (c).
(3) Effective date. This paragraph (c) applies to consolidated
return years beginning on or after January 1, 1997. However, a group
does not take into account a consolidated taxable year beginning before
January 1, 1997, in determining a member's (or subgroup's)
contributions to the consolidated section 38(c) limitation under this
paragraph (c). See also Sec. 1.1502-3(c).
(d) Example. (1) The following example illustrates the provisions
of paragraph (c) of this section:
Example. (i) P, the common parent of the P group, acquires all
the stock of T at the beginning of Year 2. T carries over an unused
section 38 general business credit from Year 1 of $100,000. The
table below shows the group's net consolidated income tax,
consolidated tentative minimum tax, and consolidated net regular tax
liabilities, and T's share of such taxes computed under the
principles of section 1552 and the percentage method under
Sec. 1.1502-33(d)(3), assuming a 100% allocation of any decreased
tax liability, for Year 2. (The effects of the lower section 11
brackets are ignored, there are no other tax credits affecting a
group amount or member's share, and $1,000s are omitted.)
BILLING CODE 4830-01-U
[GRAPHIC] [TIFF OMITTED] TR12JA98.000
BILLING CODE 4830-01-C
(ii) The amount of T's unused section 38 credits from Year 1
that are included in the consolidated section 38 credits for Year 2
may not exceed T's contribution to the consolidated section 38(c)
limitation. For Year 2, the group determines the consolidated
section 38(c) limitation by reference to consolidated tentative
minimum tax for Year 2. Therefore, T's contribution to the
consolidated section 38(c) limitation for Year 2 equals its share of
consolidated net income tax minus its share of consolidated
tentative minimum tax. T's contribution is $280,000 minus $160,000,
or $120,000. However, because the group has a consolidated section
38 limitation of zero, it may not include any of T's unused section
38 credits in the consolidated section 38 credits for Year 2.
(iii) The following table shows similar information for the
group for Year 3:
BILLING CODE 4830-01-U
[[Page 1744]]
[GRAPHIC] [TIFF OMITTED] TR12JA98.001
BILLING CODE 4830-01-C
(iv) The amount of T's unused section 38 credits from Year 1
that are included in the consolidated section 38 credits for Year 3
may not exceed T's aggregate contribution to the consolidated
section 38(c) limitation for Years 2 and 3. For Year 3, the group
determines the consolidated section 38(c) limitation by reference to
the consolidated tentative minimum tax for Year 3. Therefore, T's
contribution to the consolidated section 38(c) limitation for Year 3
equals its share of consolidated net income tax minus its share of
consolidated tentative minimum tax. Applying the principles of
section 1552 and Sec. 1.1502-33(d) (taking into account, for
example, that T's positive earnings and profits adjustment under
Sec. 1.1502-33(d) reflects its losses actually absorbed by the
group), T's contribution is $(105,000) minus $(40,000), or
$(65,000). T's aggregate contributions to the consolidated section
38(c) limitation for Years 2 and 3 is $120,000 + $(65,000), or
$55,000. The group may include $55,000 of T's Year 1 unused section
38 credits in its consolidated section 38 tax credit in Year 3.
(2) This paragraph (d) applies to consolidated return years
beginning on or after January 1, 1997. See also Sec. 1.1502-3(d) for
years prior to January 1, 1997.
(e) and (f) [Reserved]. For further guidance, see Sec. 1.1502-3 (e)
and (f).
Par. 4. Section 1.1502-4 is amended by adding new paragraphs (f)(3)
and (g)(3) to read as follows:
Sec. 1.1502-4 Consolidated foreign tax credit.
* * * * *
(f) * * *
(3) Special effective date ending SRLY limitation. See Sec. 1.1502-
4T(f) for the rule that ends the SRLY limitation with respect to
foreign tax credits for consolidated return years beginning on or after
January 1, 1997.
(g) * * *
(3) Special effective date for CRCO limitation. See Sec. 1.1502-
4T(g)(3) for the rule that ends the CRCO limitation with respect to a
consolidated return change of ownership that occurred on or after
January 1, 1997.
* * * * *
Par. 5. Section 1.1502-4T is added to read as follows:
Sec. 1.1502-4T Consolidated foreign tax credit (temporary).
(a) through (e) [Reserved]. For further guidance, see Sec. 1.1502-4
(a) through (e).
(f) Limitation on unused foreign tax carryover or carryback from
separate return limitation years. Section 1.1502-4(f) does not apply to
consolidated return years beginning on or after January 1, 1997. For
consolidated return years beginning on or after January 1, 1997, a
group shall include an unused foreign tax of a member arising in a SRLY
without regard to the contribution of the member to consolidated tax
liability for the consolidated return year.
(g) (1) and (2) [Reserved]. For further guidance, see Sec. 1.1502-
4(g)(1) and (2).
(g)(3) Special effective date for CRCO limitation. Section 1.1502-
4(g) applies to a consolidated return change of ownership that occurred
before January 1, 1997.
Par. 6. In Sec. 1.1502-9, paragraph (a) is amended by adding a
sentence at the end of the paragraph to read as follows:
Sec. 1.1502-9 Application of overall foreign loss recapture rules to
corporations filing consolidated returns.
(a) In general. * * * See Sec. 1.1502-9T(b)(1)(v) for the rule that
ends the separate return limitation year limitation for consolidated
return years beginning on or after January 1, 1997.
* * * * *
Par. 7. Section 1.1502-9T is added to read as follows:
[[Page 1745]]
Sec. 1.1502-9T Application of overall foreign loss recapture rules to
corporations filing consolidated returns (temporary).
(a) and (b) introductory text through (b)(1)(iv) [Reserved]. For
further guidance, see Sec. 1.1502-9 (a) and (b) introductory text
through (b)(1)(iv).
(b)(1)(v) Special effective date for SRLY limitation. Sections
1.1502-9(b)(1) (iii) and (iv) apply only to consolidated return years
beginning before January 1, 1997. For consolidated return years
beginning on or after January 1, 1997, the rules of Sec. 1.1502-
9(b)(1)(ii) shall apply to overall foreign losses from separate return
years that are separate return limitation years. For purposes of
applying Sec. 1.1502-9(b)(1)(ii) in such years, the group treats a
member with a balance in an overall foreign loss account from a
separate return limitation year on the first day of the first
consolidated return year beginning on or after January 1, 1997, as a
corporation joining the group on such first day. An overall foreign
loss that is part of a net operating loss or net capital loss carryover
from a separate return limitation year of a member that is absorbed in
a consolidated return year beginning on or after January 1, 1997, shall
be added to the appropriate consolidated overall foreign loss account
in the year that it is absorbed. For consolidated return years
beginning on or after January 1, 1997, similar principles apply to
overall foreign losses when there has been a consolidated return change
of ownership (regardless of when the change of ownership occurred).
(b)(2) through (f) [Reserved]. For further guidance, see
Sec. 1.1502-9(b)(2) through (f).
Par. 8. In Sec. 1.1502-21T, paragraph (c)(1)(iii) is amended by
adding Example 5 to read as follows:
Sec. 1.1502-21T Net operating losses (temporary).
* * * * *
(c) * * *
(1) * * *
(iii) * * *
Example 5. Dual SRLY registers and accounting for SRLY losses
actually absorbed. (i) In Year 1, T sustains a $100 net operating
loss and a $50 net capital loss. At the beginning of Year 2, T
becomes a member of the P group. Both of T's carryovers from Year 1
are subject to SRLY limits under this paragraph (c) and Sec. 1.1502-
22T(c). The members of the P group contribute the following to the
consolidated taxable income for Years 2 and 3 (computed without
regard to T's CNOL deduction under Sec. 1.1502-21T or net capital
loss carryover under Sec. 1.1502-22T):
------------------------------------------------------------------------
P T
------------------------------------------------------------------------
Year 1 (SRLY).................... Ordinary........... ....... (100)
Capital............ ....... (50)
Year 2........................... Ordinary........... 30 60
Capital............ 0 (20)
Year 3........................... Ordinary........... 10 40
Capital............ 0 30
------------------------------------------------------------------------
(ii) For Year 2, the group computes separate SRLY limits for
each of T's SRLY carryovers from Year 1. Under normal Internal
Revenue Code rules, it determines its ability to use its capital
loss carryover before it determines its ability to use its ordinary
loss carryover. Under section 1211, because the group has no Year 2
capital gain, it cannot absorb any capital losses in Year 2. T's
Year 1 net capital loss and the group's Year 2 consolidated net
capital loss (all of which is attributable to T) are carried over to
Year 3.
(iii) Under this section, the aggregate amount of T's $100 NOL
carryover from Year 1 that may be included in the CNOL deduction of
the group for Year 2 may not exceed $60--the amount of the
consolidated taxable income computed by reference only to T's items,
including losses and deductions to the extent actually absorbed
(i.e., $60 of T's ordinary income for Year 2). Thus, the group may
include $60 of T's ordinary loss carryover from Year 1 in its Year 2
CNOL deduction. T carries over its remaining $40 of its Year 1 loss
to Year 3.
(iv) For Year 3, the group again computes separate SRLY limits
for each of T's SRLY carryovers from Year 1. The group has
consolidated net capital gain (without taking into account a net
capital loss carryover deduction) of $30. Under Sec. 1.1502-22T(c),
the aggregate amount of T's $50 capital loss carryover from Year 1
that may be included in computing the group s consolidated net
capital gain for all years of the group (here Years 2 and 3) may not
exceed $30 (the aggregate consolidated net capital gain computed by
reference only to T's items, including losses and deductions
actually absorbed (i.e., $30 of capital gain in Year 3)). Thus, the
group may include $30 of T's Year 1 capital loss carryover in its
computation of consolidated net capital gain for Year 3, which
offsets the group's capital gains for Year 3. T carries over its
remaining $20 of its Year 1 loss to Year 4. The group carries over
the Year 2 consolidated net capital loss to Year 4.
(v) Under this section, the aggregate amount of T's NOL
carryover from Year 1 that may be included in the CNOL deduction of
the group for Years 2 and 3 may not exceed $100, which is the amount
of the aggregate consolidated taxable income for Years 2 and 3
determined by reference only to T's items, including losses and
deductions actually absorbed (i.e., $60 of ordinary income in Year 2
plus $40 of ordinary income, $30 of capital gain, and $30 of SRLY
capital losses actually absorbed in Year 3). The group included $60
of T's ordinary loss carryover in its Year 2 CNOL deduction. It may
include the remaining $40 of the carryover in its Year 3 CNOL
deduction.
* * * * *
Par. 9. In Sec. 1.1502-23T, paragraphs (b) and (c) are redesignated
as paragraphs (c) and (d), and a new paragraph (b) is added to read as
follows:
Sec. 1.1502-23T Consolidated net section 1231 gain or loss
(temporary).
* * * * *
(b) Example. The following example illustrates the provisions of
this section:
Example. Use of SRLY registers with net gains and net losses
under section 1231. (i) In Year 1, T sustains a $20 net capital
loss. At the beginning of Year 2, T becomes a member of the P group.
T's capital loss carryover from Year 1 is subject to SRLY limits
under Sec. 1.1502-22T(c). The members of the P group contribute the
following to the consolidated taxable income for Year 2 (computed
without regard to T's net capital loss carryover under Sec. 1.1502-
22T):
------------------------------------------------------------------------
P T
------------------------------------------------------------------------
Year 1 (SRLY).................... Ordinary........... ....... .......
Capital............ ....... (20)
Year 2........................... Ordinary........... 10 20
Capital............ 70 0
Sec. 1231......... (60) 30
------------------------------------------------------------------------
(ii) Under section 1231, if the section 1231 losses for any
taxable year exceed the section 1231 gains for such taxable year,
such gains and losses are treated as ordinary gains or losses.
Because the P group's section 1231 losses, $(60), exceed the section
1231 gains, $30, the P group's net loss is treated as an ordinary
loss. T's net section 1231 gain has the same character as the P
group's consolidated net section 1231 loss, so T's $30 of section
1231 income is treated as ordinary income for purposes of applying
Sec. 1.1502-22T(c). Under Sec. 1.1502-22T(c), the group's
consolidated net capital gain determined by reference only to T's
items is $0. None of T's capital loss carryover from Year 1 may be
taken into account in Year 2.
Par. 10. Section 1.1502-55T is added under the undesignated center
heading ``Special Taxes and Taxpayers'' to read as follows:
Sec. 1.1502-55T Computation of alternative minimum tax of consolidated
groups (temporary).
(a) through (h)(3) [Reserved].
(h)(4) Separate return year minimum tax credit.
(i) and (ii) [Reserved].
(iii)(A) Limitation on portion of separate return year minimum tax
credit arising in separate return limitation years. The aggregate of a
member's minimum tax credits arising in SRLYs that are included in the
consolidated minimum tax credits for all consolidated return years of
the group may not exceed--
(1) The aggregate for all consolidated return years of the member's
[[Page 1746]]
contributions to the consolidated section 53(c) limitation for each
consolidated return year; reduced by
(2) The aggregate of the member's minimum tax credits arising and
absorbed in all consolidated return years (whether or not absorbed by
the member).
(B) Computational rules--(1) Member's contribution to the
consolidated section 53(c) limitation. Except as provided in the
special rule of paragraph (h)(4)(iii)(B)(2) of this section, a member's
contribution to the consolidated section 53(c) limitation for a
consolidated return year equals the member's share of the consolidated
net regular tax liability minus its share of consolidated tentative
minimum tax. The group computes the member's shares by applying to the
respective consolidated amounts the principles of section 1552 and the
percentage method under Sec. 1.1502-33(d)(3), assuming a 100%
allocation of any decreased tax liability. The group makes proper
adjustments so that taxes and credits not taken into account in
computing the limitation under section 53(c) are not taken into account
in computing the member's share of the consolidated net regular tax,
etc. (See, for example, the taxes described in section 26(b) that are
disregarded in computing regular tax liability.)
(2) Adjustment for year in which alternative minimum tax is paid.
For a consolidated return year for which consolidated tentative minimum
tax is greater than consolidated regular tax liability, the group
reduces the member's share of the consolidated tentative minimum tax by
the member's share of the consolidated alternative minimum tax for the
year. The group determines the member's share of consolidated
alternative minimum tax for a year using the same method it uses to
determine the member's share of the consolidated minimum tax credits
for the year.
(3) Years included in computation. For purposes of computing the
limitation under this paragraph (h)(4)(iii), the consolidated return
years of the group include only those years, including the year to
which a credit is carried, that the member has been continuously
included in the group's consolidated return, but exclude any years
after the year to which the credit is carried.
(4) Subgroup principles. The SRLY subgroup principles under
Sec. 1.1502-21T(c)(2) apply for purposes of this paragraph (h)(4)(iii).
The predecessor and successor principles under Sec. 1.1502-21T(f) also
apply for purposes of this paragraph (h)(4)(iii).
(C) Effective date. This paragraph (h)(4)(iii) applies to
consolidated return years beginning on or after January 1, 1997.
However, a group does not take into account a consolidated taxable year
beginning before January 1, 1997, in determining a member's (or
subgroup's) contributions to the consolidated section 53(c) limitation
under paragraph (h)(4)(iii)(b) of this section.
Michael P. Dolan,
Deputy Commissioner of Internal Revenue.
Approved: December 11, 1997.
Donald C. Lubick,
Acting Assistant Secretary of the Treasury.
[FR Doc. 98-43 Filed 1-9-98; 8:45 am]
BILLING CODE 4830-01-U