[Federal Register Volume 63, Number 249 (Tuesday, December 29, 1998)]
[Rules and Regulations]
[Pages 71589-71591]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-33702]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8800]
RIN 1545-AW51


Consolidated Returns--Limitation on Recapture of 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 modify the 
date temporary regulations apply as published in the Federal Register 
on January 12, 1998, and modified by amendments published in the 
Federal Register on March 16, 1998, relating to a consolidated group's 
recapture of an overall foreign loss account arising in a separate 
return limitation year. The regulations affect consolidated groups that 
claim foreign tax credits. 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: Effective dates: These amendments are effective December 29, 
1998.
    Applicability dates: For dates of applicability of these 
regulations, see Sec. 1.1502-9T(b)(1)(v).

FOR FURTHER INFORMATION CONTACT: Trina Dang of the Office of Associate 
Chief Counsel (International), (202) 622-3850 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    As announced in Notice 98-40 (1998-35 I.R.B. 7), these temporary 
regulations permit taxpayers to elect to delay the effective date of 
Sec. 1.1502-9T, published in the Federal Register on January 12, 1998 
(TD 8751, 63 FR 1740), and modified by amendments published in the 
Federal Register on March 16, 1998 (TD 8766, 63 FR 12641).
    On January 12, 1998, Treasury and the IRS published in the Federal 
Register (TD 8751, 63 FR 1740) final, temporary and proposed 
regulations (the January 1998 regulations) relating to limitations on 
the use of certain tax credits and related attributes by corporations 
filing consolidated income tax returns. In general, the January 1998 
regulations relate to the separate return limitation year (SRLY) 
provisions for general business credits, alternative minimum tax 
credits, foreign tax credits and overall foreign loss accounts. The 
January 1998 regulations were generally applicable to consolidated 
return years beginning on or after January 1, 1997.
    On March 16, 1998, Treasury and the IRS published in the Federal 
Register (TD 8766, 63 FR 12641) final, temporary, and proposed 
regulations (the March 1998 regulations) modifying the effective date 
of the January 1998 regulations. The March 1998 regulations provide 
that the provisions of the January 1998 regulations will apply for 
consolidated return years for which the due date (without extensions) 
of the income tax return is after March 13, 1998. In lieu of applying 
this effective date, however, the March 1998 regulations permit a 
consolidated group to choose to apply the effective date provisions 
under the January 1998 regulations. The March 1998 regulations provide 
that taxpayers making this choice must apply all those effective date 
provisions for all relevant years. Thus, under the March 1998 
regulations, taxpayers are not permitted to apply one provision of the 
January 1998 regulations (e.g., the general business credit effective 
date) without applying all the other provisions (e.g., the foreign tax 
credit effective date).
    On May 7, 1998, a public hearing was held regarding the proposed 
January and March regulations. At the hearing and in written 
submissions, commentators expressed concern regarding the effective 
dates contained in the January 1998 and March 1998 regulations with 
respect to the overall foreign loss account provisions of Sec. 1.1502-
9T. The commentators' principal concern was that these effective dates 
resulted in adverse tax consequences not anticipated by taxpayers with 
respect to business transactions that occurred prior to the issuance of 
the January 1998 regulations. Treasury and the IRS now believe that 
certain of these consequences are inappropriate.
    Accordingly, on August 14, 1998, Treasury and the Service issued 
Notice 98-40 (1998-35 I.R.B. 7), announcing their intent to issue 
regulations providing relief from the application of Sec. 1.1502-9T 
(the overall foreign loss account provisions) for consolidated return 
years beginning before January 1, 1998.

Explanation of Provisions

    As announced in Notice 98-40, taxpayers are permitted to elect not 
to apply Sec. 1.1502-9T(b)(1)(v) to

[[Page 71590]]

consolidated return years beginning before January 1, 1998. Section 
1.1502-3T(c)(4) is amended to clarify that a taxpayer that chooses 
under the March 1998 regulations to apply the effective date provisions 
under the January 1998 regulations may also make the election referred 
to in Notice 98-40.
    To make the election, a taxpayer must write ``Election Pursuant to 
Notice 98-40'' across the top of page 1 of an original or amended tax 
return for each consolidated return year subject to the election. For 
the first consolidated return year to which the overall foreign loss 
provisions of Sec. 1.1502-9T apply (i.e., the first year beginning on 
or after January 1, 1998), such taxpayer must write ``Notice 98-40 
Election in Effect in Prior Years'' across the top of page 1 of the 
consolidated tax return for that year. For purposes of applying 
Sec. 1.1502-9T with respect to such year, any member with a balance in 
an overall foreign loss account from a separate return limitation year 
on the first day of such year shall be treated as joining the group on 
such first day.

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 corporations filing 
consolidated federal income tax returns that have overall foreign 
losses 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 
overall foreign losses. Presumably, even fewer of these filers have 
overall foreign loss accounts 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. It has also been determined that under section 553(d) of the 
Administrative Procedure Act (5 U.S.C. chapter 5) these regulations 
should be effective immediately because they involve the applicability 
of regulations that modify the limitations on the use of certain tax 
attributes for taxable years for which a return is due after March 13, 
1998. 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 its impact on 
small businesses.

Drafting Information

    The principal author of these regulations is Trina Dang of the 
Office of Associate Chief Counsel (International). However, 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 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 1.1502-3T is amended by removing the last sentence 
of paragraph (c)(4) and adding two sentences in its place to read as 
follows:


Sec. 1.1502-3T  Consolidated investment credit (temporary).

* * * * *
    (c) * * *
    (4) * * * A consolidated group making this choice generally must 
apply all such paragraphs for all relevant years. However, a 
consolidated group making the election provided in Sec. 1.1502-
9T(b)(1)(vi) (electing not to apply Sec. 1.1502-9T(b)(1)(v) to years 
beginning before January 1, 1998) may nevertheless choose to apply all 
such paragraphs other than Sec. 1.1502-9T(b)(1)(v) for all relevant 
years.
* * * * *
    Par. 3. In Sec. 1.1502-9, paragraph (a) is amended by revising the 
last two sentences to read as follows:


Sec. 1.1502-9  Application of overall foreign loss recapture rules to 
corporations filing consolidated returns.

    (a) * * * See Sec. 1.1502-9T(b)(1)(v) for the rule that ends the 
separate return limitation year limitation for consolidated return 
years for which the due date of the income tax return (without 
extensions) is after March 13, 1998, and Sec. 1.1502-9T(b)(1)(vi) for 
an election to continue the separate return limitation year limitation 
for consolidated return years beginning before January 1, 1998. See 
also Sec. 1.1502-3T(c)(4) for an optional effective date rule 
(generally making the rules of paragraphs (b)(1)(iii) and (iv) of this 
section inapplicable for a consolidated return year beginning after 
December 31, 1996, if the due date of the income tax return (without 
extensions) for such year is on or before March 13, 1998).
* * * * *
    Par. 4. Section 1.1502-9T is amended by revising paragraph 
(b)(1)(v) and adding paragraph (b)(1)(vi) to read as follows:


Sec. 1.1502-9T  Application of overall foreign loss recapture rules to 
corporations filing consolidated returns (temporary).

* * * * *
    (b)(1)(v) Special effective date for SRLY limitation. Except as 
provided in paragraph (b)(1)(vi) of this section, Sec. 1.1502-
9(b)(1)(iii) and (iv) apply only to consolidated return years for which 
the due date of the income tax return (without extensions) is on or 
before March 13, 1998. For consolidated return years for which the due 
date of the income tax return (without extensions) is after March 13, 
1998, 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 for which the due date 
of the income tax return (without extensions) is after March 13, 1998, 
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 for which the due date of the 
income tax return (without extensions) is after March 13, 1998, shall 
be added to the appropriate consolidated overall foreign loss account 
in the year that it is absorbed. For consolidated return years for 
which the due date of the income tax return (without extensions) is 
after March 13, 1998, 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). See also 
Sec. 1.1502-3T(c)(4) for an optional effective date rule (generally 
making this paragraph (b)(1)(v) applicable to a consolidated return 
year beginning after December 31, 1996, if the due date of the income 
tax return (without extensions) for such year is on or before March 13, 
1998).

[[Page 71591]]

    (vi) Election to defer application of special effective date. A 
consolidated group may elect not to apply paragraph (b)(1)(v) of this 
section to consolidated return years beginning before January 1, 1998. 
To make this election, a consolidated group must write ``Election 
Pursuant to Notice 98-40'' across the top of page 1 of an original or 
amended tax return for each consolidated return year subject to the 
election. For the first consolidated return year to which the overall 
foreign loss provisions of paragraph (b)(1)(v) of this section apply 
(i.e., the first year beginning on or after January 1, 1998), such 
consolidated group must write ``Notice 98-40 Election in Effect in 
Prior Years'' across the top of page 1 of the consolidated tax return 
for that year. For purposes of applying Sec. 1.1502-9(b)(1)(ii) with 
respect to such year, any member with a balance in an overall foreign 
loss account from a separate return limitation year on the first day of 
such year shall be treated as joining the group on such first day.
* * * * *
    Approved: December 7, 1998.
Robert L. Wenzel,
Deputy Commissioner of Internal Revenue.

Donald C. Lubick,
Assistant Secretary of the Treasury.
[FR Doc. 98-33702 Filed 12-28-98; 8:45 am]
BILLING CODE 4830-01-P