[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