[Federal Register Volume 64, Number 127 (Friday, July 2, 1999)]
[Rules and Regulations]
[Pages 36116-36175]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-16162]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8824]
RIN 1545-AU32


Regulations Under Section 1502 of the Internal Revenue Code of 
1986; Limitations on Net Operating Loss Carryforwards and Certain 
Built-in Losses and Credits Following an Ownership Change of a 
Consolidated Group

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final regulations regarding the 
operation of sections 382 and 383 of the Internal Revenue Code of 1986 
(relating to limitations on net operating loss carryforwards and 
certain built-in losses and credits following an ownership change) with 
respect to consolidated groups. The regulations include rules for 
determining whether a loss group or a loss subgroup has an ownership 
change, for computing a consolidated section 382 limitation or subgroup 
section 382 limitation, and for applying sections 382 and 383 to 
corporations that join or leave a group. The rules are necessary to 
provide guidance to such groups on the use of certain of their tax 
attributes.
DATES: Effective Dates: These regulations are effective June 25, 1999.
    Applicability Dates: For dates of application and special effective 
date rules, see Effective Dates under SUPPLEMENTARY INFORMATION.

FOR FURTHER INFORMATION CONTACT: Lee A. Kelley at (202) 622-7550 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information in these final regulations has been 
reviewed and, pending receipt and evaluation of public comments, 
approved by the Office of Management and Budget (OMB) under 44 U.S.C. 
3507 and assigned control number 1545-1218.
    The collections of information in this regulation are in 
Secs. 1.1502-20(g)(4), 1.1502-95(e)(8), 1.1502-95(f), and 1.1502-96(e). 
This information is required to assure that a section 382 limitation is 
properly determined and applied in cases of corporations that become or 
cease to be members of a consolidated group. The collection of 
information in Sec. 1.1502-98(e)(8) is mandatory. The other collections 
of information are required to obtain a benefit. The likely respondents 
are business or other for-profit institutions.
    Comments on the collection of information should be sent to the 
Office of Management and Budget, Attn: Desk Officer for the Department 
of the Treasury, Office of Information and Regulatory Affairs, 
Washington, DC 20503, with copies to the Internal Revenue Service, 
Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC 20224. 
Comments on the collection of information should be received by August 
31, 1999.
    Comments are specifically requested concerning:
    Whether the collection[s] of information is necessary for the 
proper performance of the functions of the Internal Revenue Service, 
including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the collection 
of information (see below);
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the collection[s] of information 
may be minimized, including through the application of automated 
collection techniques or other forms of information technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of service to provide information.
    Estimated total annual reporting burden: 662 hours.
    The estimated annual burden per respondent varies from 15 to 25 
minutes, depending on individual circumstances, with an estimated 
average of 20 minutes.
    Estimated number of respondents: 12,054.
    Estimated annual frequency of responses: On occasion.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    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.

[[Page 36117]]

Background

    On February 4, 1991, the IRS and Treasury issued three notices of 
proposed rulemaking, C0-132-87 (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 regarding the use of built-in deductions and net 
operating losses and capital losses, including the carryover and 
carryback of separate return limitation year (SRLY) losses of members 
of consolidated groups. A public hearing regarding the three sets of 
proposed regulations was held on April 8, 1991.
    On June 27, 1996, the IRS and Treasury published temporary 
regulations (TD 8678, 61 FR 33335) setting forth rules regarding the 
application of section 382 to affiliated groups of corporations filing 
consolidated returns. These regulations were substantially identical to 
the proposed regulations. A notice of proposed rulemaking cross-
referencing the temporary regulations was published in the Federal 
Register on the same day (CO-026-96, 61 FR 33391) and the proposed 
regulations published in 1991 were withdrawn. The IRS and Treasury also 
published temporary regulations regarding the SRLY limitation (TD 8677, 
61 FR 33321), and controlled group losses (TD 8679, 61 FR 33313). 
Notices of proposed rulemaking cross-referencing these temporary 
regulations were published on the same day (CO-025-96, 61 FR 33395 and 
CO-024-96, 61 FR 33393) and the proposed regulations published in 1991 
were withdrawn.
    This Treasury decision adopts the 1996 proposed regulations 
regarding the application of section 382 to affiliated groups of 
corporations filing consolidated returns. The principal changes to 
those proposed regulations are described below.
    As companions to this Treasury decision, the IRS and Treasury also 
are issuing final regulations relating to the application of sections 
382 and 383 by members of controlled groups, and relating to the SRLY 
limitation. See TD 8823 and TD 8825 published elsewhere in this issue 
of the Federal Register.

Explanation of Provisions

A. Overview

1. Sections 382 and 383
    Under section 382, if an ownership change occurs with respect to a 
loss corporation (as defined in section 382 and the regulations 
thereunder), the amount of the loss corporation's taxable income for a 
post-change year that may be offset by the net operating losses of the 
loss corporation arising before the ownership change is limited by an 
amount known as the section 382 limitation. The section 382 limitation 
for a taxable year of a loss corporation after an ownership change 
generally is equal to the fair market value of the corporation's stock 
immediately before the ownership change multiplied by the long-term tax 
exempt rate (a rate of return published periodically in the Internal 
Revenue Bulletin). See generally sections 382(b), (e), and (f). This 
limitation for a taxable year may be increased by certain items, such 
as an unused limitation from a prior taxable year and certain built-in 
gains recognized during the taxable year. See section 382(b)(2) and 
(h).
    In general, an ownership change involves an increase of more than 
50 percentage points in stock ownership by 5-percent shareholders 
during the testing period (usually the 3-year period ending on the date 
on which a loss corporation must make a determination whether it has 
had an ownership change). In determining whether an ownership change 
has occurred, all transactions occurring during the testing period that 
affect the stock ownership of any 5-percent shareholder whose 
percentage of stock ownership has increased as of the close of the 
testing date are taken into account. The determination of the 
percentage ownership interest of any shareholder is made on the basis 
of the ratio of the fair market value of the loss corporation stock 
owned by the shareholder to the total fair market value of the loss 
corporation's outstanding stock. Ordinarily, all stock of the loss 
corporation, except certain preferred stock described in section 
1504(a)(4), is taken into account. These rules are contained in 
Secs. 1.382-2 and 1.382-2T and relate to ownership changes of 
corporations without regard to whether the corporations file a separate 
return or join in filing a consolidated return.
2. General Description of Final Regulations
    This document contains two sets of rules. The first set of rules, 
set forth in Secs. 1.1502-91 through 1.1502-93, provide the tax 
treatment for net operating losses that arise in (and net unrealized 
built-in losses with respect to) years that are not separate return 
limitation years with respect to a consolidated group. (A separate 
return limitation year, or SRLY, generally is a taxable year of a 
subsidiary in which the subsidiary was not a member of the group). In 
general, these rules adopt a single entity approach to determine 
ownership changes and the section 382 limitations with respect to such 
losses.
    These final regulations also extend the single entity approach to 
loss subgroups within consolidated groups. A loss subgroup generally 
consists of two or more corporations that continue to be affiliated 
with each other after leaving one group and joining another where at 
least one of the corporations carries over losses from the first group 
to the second group. Thus, the single entity approach under the final 
regulations can apply, for example, to a consolidated group's 
acquisition of another consolidated group or of a chain of subsidiaries 
from another group.
    The second set of rules, set forth in Secs. 1.1502-94 and 1.1502-
95, applies to corporations that join or leave a consolidated group 
with respect to certain attributes (e.g., attributes other than those 
arising in a consolidated return year). In general, section 382 is 
applied separately with respect to those attributes because the 
attributes cannot be used by other members. Section 1.1502-96 contains 
miscellaneous rules.
    In general, Sec. 1.1502-98 provides that the rules contained in 
Secs. 1.1502-91 through 1.1502-96 also apply for purposes of section 
383, with adjustments to reflect that section 383 applies to credits 
and net capital losses.

B. Amendments to the Proposed Regulations

1. Definition of a Loss Subgroup, Sec. 1.1502-91(d)
    Under the proposed regulations, a loss subgroup is composed of 
members of one group (the former group) that become members of another 
consolidated group. In the case of a net operating loss carryover, the 
members of a group compose a loss subgroup if (i) They were affiliated 
with each other in another group, (ii) they bear a relationship to each 
other described in section 1504(a)(1) immediately after they become 
members of the group (the subgroup parent requirement), and (iii) at 
least one of the members carries over a net operating loss arising in a 
year that is not a SRLY (and is not treated as a SRLY under proposed 
Sec. 1.1502-21(c)) with respect to the former group. In the case of a 
net unrealized built-in loss (NUBIL), the members of a group compose a 
loss subgroup if they (i) Have been continuously affiliated with each 
other for the 5 consecutive year period ending immediately before they 
become members of the group (the five-year affiliation requirement), 
(ii) meet the subgroup parent requirement, and (iii) have, in the 
aggregate, a NUBIL. A

[[Page 36118]]

member ceases to be included in a loss subgroup when it files a 
separate return, or when a member breaks the relationship described in 
section 1504(a)(1) to the loss subgroup parent, regardless of whether 
that member leaves the current group or remains in the consolidated 
group.
Retention of the Subgroup Percent Requirement in General
    Commentators suggested that the final regulations should eliminate 
the subgroup parent requirement in order to provide a single subgroup 
definition for the SRLY limitation and for the section 382 limitation. 
Other commentators recommended eliminating the requirement following an 
ownership change of the loss subgroup.
    Like a loss group, a loss subgroup has an ownership change if the 
loss subgroup parent has an ownership change (the parent change 
method). The parent change method, adopted for its administrative 
simplicity, looks only to ownership shifts of the parent corporation in 
determining whether the consolidated group (or loss subgroup) has an 
ownership change. Owner shifts of minority stock of subsidiary members 
are not taken into account. Application of the parent change method to 
loss subgroups eliminates the administrative burdens associated with a 
rule that would mandate separate tracking of the minority stock of each 
subgroup member for determining whether an ownership change of the loss 
subgroup has occurred.
    The IRS and the Treasury have determined that, in circumstances 
where owner shifts of a loss subgroup must continue to be tracked, the 
parent change method should continue to apply for determining whether a 
subgroup has an ownership change. Accordingly, in general, these final 
regulations retain the subgroup parent requirement. Also, these final 
regulations retain the general rule that a member ceases to be a member 
of the loss subgroup on the first day that it ceases to bear a 
relationship described in section 1504(a)(1) to the loss subgroup 
parent. The final regulations, however, provide an election to treat 
the subgroup parent requirement as satisfied, and provide certain 
exceptions for ceasing to be a member of a loss subgroup when a member 
breaks the relationship described in section 1504(a)(1) to the loss 
subgroup parent, but remains within the current consolidated group.
Election to Treat Subgroup Parent Requirement As Satisfied
    The subgroup parent requirement may preclude subgroup treatment in 
instances where single entity principles make such treatment 
conceptually appropriate. For example, brother-sister corporations with 
net operating loss carryovers that are not SRLY losses with respect to 
the former group are not a loss subgroup even if the same acquirer 
acquires both corporations at the same time. However, single entity 
principles support treating the brother-sister corporations as a 
subgroup because they were affiliated with each other in the former 
group and remain affiliated in the current group.
    To extend single entity treatment in such cases would require a 
mechanism other than the parent change method to track owner shifts of 
the loss subgroup. Some commentators suggested permitting the parent of 
the current group to designate the subgroup parent. Under this 
approach, such designation would be respected unless the designation is 
made with a principal purpose of avoiding an ownership change.
    The IRS and the Treasury believe that the ability to designate the 
subgroup parent presents opportunities for avoiding or lessening the 
impact of section 382. Also, a principal purpose standard is not an 
effective mechanism for preventing inappropriate designations because 
the only purpose of such designation is to apply the ownership change 
rules of section 382.
    The IRS and Treasury recognize, however, that it is appropriate to 
extend subgroup treatment to the extent that single entity principles 
support such treatment, and to the extent that subgroup treatment does 
not compromise the determination whether a subgroup has an ownership 
change. Also, the IRS and Treasury recognize that, in certain 
circumstances, taxpayers may prefer more stringent ownership change 
rules if they can obtain the benefit of subgroup treatment. Finally, 
the IRS and Treasury recognize that the ability of brother-sister 
corporations to constitute a section 382 subgroup may be necessary in 
order for section 382 subgroups to conform with SRLY subgroups, thus 
permitting application of the rule that eliminates a separate SRLY 
limitation where the application of SRLY and section 382 overlap. See 
Secs. 1.1502-15(g), 1.1502-21(g) and 1.1502-22(g).
    Accordingly, these final regulations provide that two or more 
corporations that become members of a consolidated group at the same 
time and that were affiliated with each other immediately before 
becoming members of the group are deemed to meet the subgroup parent 
requirement immediately after they become members of the group if the 
common parent of the acquiring group makes an election under 
Sec. 1.1502-91(d)(4) with respect to those members. An election 
includes all corporations that become members of the current group at 
the same time and that were affiliated with each other immediately 
before they become members of the current group. The election applies 
solely for purposes of satisfying the subgroup parent requirement, and 
does not apply in determining whether members meet the other 
requirements for inclusion in a loss subgroup. Although the election 
applies solely for purposes of Secs. 1.1502-91 through 1.1502-96 and 
Sec. 1.1502-98, the election may affect whether a SRLY limitation 
overlaps with application of section 382.
    If the common parent makes an election under Sec. 1.1502-91(d)(4), 
each of the members with respect to which the election is made (and 
that is included in the loss subgroup) is treated as the loss subgroup 
parent for purposes of determining if the loss subgroup has an 
ownership change on, or after, becoming members of the current group. 
If, however, a member with respect to which the election is made has an 
ownership change upon (or after) ceasing to be a member of the current 
group, that ownership change does not cause an ownership change of a 
loss subgroup comprised of one or more of its members that remain 
members of the current group.
Exceptions for Ceasing To Be a Member of a Loss Subgroup When a Member 
Breaks the Section 1504(a)(1) Relationship With the Loss Subgroup 
Parent, Sec. 1.1502-95(d)(1)
    In general, under Sec. 1.1502-95(d)(1)(ii), these final regulations 
provide that a member ceases to be a member of the loss subgroup on the 
first day that it ceases to bear a relationship described in section 
1504(a)(1) to the loss subgroup parent. Continued affiliation through a 
loss subgroup parent is central to the operation of the parent change 
method to loss subgroups.
    Under certain circumstances, however, separate tracking of the loss 
subgroup parent terminates, eliminating the need for members to 
maintain a section 1504(a)(1) relationship through a loss subgroup 
parent. Section 1.1502-96(a) provides, in part, that ownership shifts 
of a loss subgroup cease to be separately tracked if there is an 
ownership change of the loss subgroup

[[Page 36119]]

within six months before, on, or after becoming members of the group, 
or if a period of five years elapses after becoming members of group 
during which time the loss subgroup does not have an ownership change 
(a fold-in event).
    Also, an election under Sec. 1.1502-91(d)(4) obviates the need for 
a section 1504(a)(1) relationship through a loss subgroup common parent 
because each member is separately tracked as if it were the loss 
subgroup parent.
    In circumstances where the necessity of a section 1504(a)(1) 
relationship through a loss subgroup parent is eliminated, the IRS and 
the Treasury believe that a subgroup member should not cease to be a 
member of the subgroup solely because it ceases to bear such a 
relationship. Accordingly, these final regulations provide two 
exceptions to the general rule of Sec. 1.1502-95(d)(1)(ii). The first 
exception applies to the members of the loss subgroup if an election 
under Sec. 1.1502-91(d)(4) applies to them. The second exception 
applies to loss subgroup members following a fold-in event.
Members Excluded or Included From a Subgroup With a Principal Purpose 
of Avoiding a Limitation, Sec. 1.1502-91(d)(5)
    Proposed Sec. 1.1502-91(d)(5) provides that corporations do not 
compose a loss subgroup if any one of them is formed, acquired, or 
availed of with a principal purpose of avoiding the application of, or 
increasing any limitation under, section 382. This rule does not apply 
solely because, in connection with becoming members of the group, the 
members of a group are rearranged to satisfy the subgroup parent 
requirement. The final regulations retain these provisions, and, in 
conformity with the anti-abuse rule for SRLY subgroups, provide that 
any member excluded from a loss subgroup, if excluded with a principal 
purpose of avoiding or increasing a section 382 limitation, is treated 
as included in the loss subgroup. This rule does not apply solely 
because a group does not rearrange members of a group to satisfy the 
subgroup parent requirement.
2. Definition of Loss Subgroup With a NUBIL, Sec. 1.1502-91(d)(2)
    Commentators criticized the five-year affiliation requirement for 
adding complexity to the regulations. For instance, the five-year 
affiliation requirement can cause application of section 382 and SRLY 
on a single entity basis with respect to members of a loss subgroup 
with a net operating loss carryover that arose within the former group 
(because an NOL loss subgroup does not require five years of 
affiliation), but on a separate entity basis for those same members 
with respect to built-in losses.
    The IRS and Treasury have determined, however, that the five-year 
affiliation requirement is a necessary feature of the NUBIL subgroup 
rules. Just as the NOL subgroup rules apply only to loss carryovers 
that arise in (or have folded into) the former group, so should the 
NUBIL subgroup rules apply only to built-in losses that accrue within 
(or have folded into) the former group. Because an accurate method of 
determining economic accrual (e.g., tracing) would present significant 
problems for tax administration and for compliance by taxpayers, the 
IRS and Treasury believe that the five-year affiliation requirement is 
the best available proxy for determining when built-in attributes 
arise.
    Absent a five-year affiliation requirement, taxpayers could 
effectively traffic in net unrealized built-in losses without being 
subject to any limitation (other than one imposed under an applicable 
``principal purpose'' anti-abuse rule). A selling group could acquire a 
new member with a NUBIG and sell both that recently-acquired NUBIG 
member and the member containing the desired NUBIL to the prospective 
buyer. To the extent that the NUBIG offset the NUBIL and the 
corporations were structured to satisfy the requirements for subgroup 
treatment, recognized built-in losses would escape any limitation and 
could be freely absorbed by the acquiring group.
    Furthermore, the absence of a five-year affiliation requirement 
could be used to circumvent a SRLY limitation applicable to a NUBIL if 
built-in losses are recognized. For instance, if a member comes into a 
group with a NUBIL and without an ownership change, recognition of that 
NUBIL would be subject to a SRLY limitation during the following five 
years and the loss could not be freely absorbed by the income of the 
other members of the group. However, if all the members of the group 
were included in a NUBIL subgroup upon being acquired by a second group 
two years into that five-year period, that member's recognized built-in 
losses immediately thereafter would be subject either to a SRLY or 
section 382 limitation computed with respect to all the members of the 
former group (thus increasing the rate at which such losses can be 
utilized) or, in the event that the acquired corporations have an 
aggregate NUBIG, to no limitation whatsoever.
    Some commentators contended that the five-year affiliation 
requirement (and the time period required for a fold-in event under 
Sec. 1.1502-96(a)) should be reduced to three years, based on the 
duration of the testing period for an ownership change under section 
382.
    However, a five-year (rather than a three-year) affiliation 
requirement is necessary to ensure that taxpayers cannot shorten the 
five-year recognition period for the SRLY limitation, as described 
above. Also, the IRS and Treasury believe that the five-year 
recognition period for the SRLY limitation should be maintained because 
it mirrors the statutorily-mandated five-year recognition period of 
section 382(h)(7). In general, Treasury and the IRS believe that it is 
important to conform the application of section 382 and the SRLY rules 
where possible, particularly in the light of the rule eliminating 
application of SRLY where its application overlaps with that of section 
382.
    Moreover, the five-year affiliation requirement is consistent with 
Congress' indication in section 384(a) of the point at which it is 
appropriate for built-in attributes of a member to be treated as 
attributes of the group. Under certain circumstances, section 384(a) 
prevents the recognized built-in gain of one corporation from 
offsetting preacquisition losses of another corporation, if such gain 
is recognized within a five-year period following the acquisition date. 
Similarly, section 384(b) provides that section 384(a) does not apply 
to prevent the recognized built-in gain of one corporation from 
offsetting the preacquisition losses of another corporation if the gain 
corporation and the loss corporation were members of the same 
controlled group (as defined in section 384(b)(2)) for the five-year 
period ending on the acquisition date.
    For these reasons, the final regulations do not reduce the duration 
of the affiliation requirement from five years to three years.
    Commentators requested clarification that an acquiring group takes 
into account application of the fold-in rules of Sec. 1.1502-96(a) in 
the former group in determining which members are included in a loss 
subgroup. A new example under Sec. 1.1502-96(a)(3), and a cross-
reference in a new Sec. 1.1502-91(g)(3) to the fold-in rules, clarifies 
this treatment. Thus, a corporation whose NUBIL folded in to a former 
group is deemed to have a five-year affiliation with the common parent 
of that group (and is deemed to have affiliation histories with other 
group members). A special rule provides that the

[[Page 36120]]

corporation is not deemed to have been previously affiliated with 
another corporation that joined the former group at the same time, but 
was not taken into account in determining a NUBIL limitation, even if 
in fact the two corporations were previously affiliated.
3. Members Included--Determination Whether a Consolidated Group Has a 
NUBIL, Sec. 1.1502-91(g)(2)(ii)
    Proposed Sec. 1.1502-91(g)(2)(i) provides, in part, that the 
members included in the determination whether a consolidated group has 
a NUBIG or NUBIL are all members of the group on the day the 
determination is made, other than a new loss member with a NUBIL, and 
members included in a NUBIL subgroup.
    The IRS and Treasury have determined that the reasons for applying 
a five-year affiliation requirement to subgroups are equally relevant 
to groups. Accordingly, these final regulations provide that the 
members included in the determination whether a consolidated group has 
a NUBIL are the common parent and all other members that have been 
affiliated with the common parent for the five consecutive year period 
ending on the day that the determination is made.
    In certain cases, a member (or loss subgroup) can join a 
consolidated group with a NUBIG, but have a NUBIL on the date the 
consolidated group determines whether it has a NUBIL. The IRS and 
Treasury have determined that, in such cases, it is appropriate for the 
built-in attribute of the member to be included in the group's 
determination because it is clear that such NUBIL arose when it was a 
group member. Accordingly, the final regulations include in the 
determination whether a group has a NUBIL any member that has a NUBIL 
on the date the determination is made, and that is neither a new loss 
member with a NUBIL nor a member of a NUBIL loss subgroup. The final 
regulations also include members in the group's determination whether 
the group has a NUBIL if such member(s) joined the consolidated group 
with a NUBIL, and, in the aggregate, have a NUBIG on the day that such 
determination is made.
4. Members Included--Determination Whether a Consolidated Group (or 
Loss Subgroup) With a Net Operating Loss Has a NUBIG, Sec. 1.1502-
91(g)(2)(i)
    Proposed Sec. 1.1502-93(c) provides that if a loss group (or loss 
subgroup) has a NUBIG, any recognized built-in gain of the loss group 
(or loss subgroup) is taken into account under section 382(h) in 
determining the consolidated section 382 limitation (or subgroup 
section 382 limitation) (emphasis added).
    Commentators suggested that this provision, considered together 
with the five-year affiliation requirement, makes it unclear whether an 
NOL loss subgroup with members that do not satisfy the five-year 
affiliation requirement can use a NUBIG, if recognized, to increase the 
loss subgroup's section 382 limitation.
    The IRS and Treasury have determined that the concerns forming the 
basis of the five-year affiliation requirement for determining whether 
a loss subgroup has a NUBIL do not extend to the determination whether 
a net operating loss carryover group (or loss subgroup) has a NUBIG. 
For example, unlike a NUBIL that can be eliminated by a NUBIG without 
an immediate tax cost, recognized built-in gains exact such a cost and, 
therefore, do not present the same planning opportunities. Accordingly, 
these final regulations provide that the members included in the 
determination whether an NOL loss group (or loss subgroup) has a NUBIG 
are all members of the group (or loss subgroup) on the day that the 
determination is made.
    Section 1.1502-91(g)(2)(v) provides, in part, that in determining 
whether an NOL loss group has a NUBIG which, if recognized, increases 
the consolidated section 382 limitation, the group includes all of its 
members on the day the determination is made. However, for purposes of 
determining whether a group has a net unrealized built-in loss, not all 
members of the consolidated group may be included. Thus, a consolidated 
group may have recognized built-in gains that increase the amount of 
consolidated taxable income that may be offset by its pre-change net 
operating loss carryovers that did not arise (and are not treated as 
arising) in a SRLY, and also may have recognized built-in losses the 
absorption of which is limited. Similar results may obtain for loss 
subgroups. In such cases, Sec. 1.1502-93(c)(2) prohibits the use of 
recognized built-in gains to increase the amount of consolidated 
taxable income that can be offset by recognized built-in losses.
5. Recognized Built-in Gain or Loss on the Disposition of an 
Intercompany Obligation of a Member, Sec. 1.1502-91(h)(2)
    Proposed Sec. 1.1502-91(h)(2) provides that gain or loss recognized 
by a member on the disposition of stock of another member or of an 
intercompany obligation is treated as recognized built-in gain or loss 
under section 382(h)(2)(unless disallowed under Sec. 1.1502-20 or 
otherwise), even though gain or loss on such stock or obligation is not 
included in the determination of the group's NUBIG or NUBIL immediately 
before the ownership change. The IRS and Treasury have determined that 
such treatment may lead to inappropriate results. For instance, if a 
bad debt deduction is treated as a recognized built-in loss, 
application of a section 382 limitation to that loss may prevent the 
proper offset of cancellation of indebtedness income against the bad 
debt deduction. Accordingly, Sec. 1.1502-91(h)(2) of the final 
regulations treats gain or loss recognized on the disposition of an 
intercompany obligation as recognized built-in gain or loss only to the 
extent that the transaction gives rise to aggregate income or loss 
within the consolidated group.
6. Ownership Change Determination--The Parent Change Method, 
Sec. 1.1502-92
    Proposed Sec. 1.1502-92 provides rules for determining an ownership 
change of a loss group (or a loss subgroup). A loss group (or loss 
subgroup) has an ownership change only if the common parent has an 
ownership change under the parent change method. Out of concern that 
taxpayers could exploit the parent change method's failure to account 
for minority shifts of stock, the proposed regulations adopted a 
supplemental change method that does take into account minority shifts 
of stock under certain circumstances.
    Under the proposed regulations, the supplemental method applies if 
a person who is a 5-percent shareholder of the common parent (including 
any person acting pursuant to a plan or arrangement with such 5-percent 
shareholder) increases its percentage ownership both in the common 
parent and in any subsidiary of the group within the same testing 
period. In that event, the loss group (or loss subgroup) must also 
determine whether it had an ownership change under the rules for the 
parent change method by treating the common parent as though it had 
issued to the person who acquires (or is deemed to acquire) the 
subsidiary stock an amount of its own stock (by value) that equals the 
value of the subsidiary stock represented by the percentage increase in 
that person's ownership of the subsidiary (determined on a separate 
entity basis).
    Section 1.1502-92(c), Example 2 of the proposed regulations 
illustrates application of the supplemental change method. In Example 
2, A owns all the stock of L, a loss group parent, and L owns all of 
the stock of L1. As part of a plan, A sells 49 percent of the L stock

[[Page 36121]]

to B on October 7, Year 2, and L1 issues new stock representing a 20 
percent ownership interest in L1 to the public on November 6, Year 2. 
The example concludes that ``because the issuance of L1 stock to the 
public occurs in connection with B's acquisition of L stock pursuant to 
a plan,'' the supplemental change method applies to the public offering 
of L1 stock.
    Commentators suggest that the ``plan or arrangement'' language 
sweeps too broadly, and that only plans to avoid section 382 should be 
subject to this rule. Commentators also contend that Example 2 is 
beyond the scope of the operative rule because the facts do not 
demonstrate a plan or arrangement with a 5-percent shareholder.
    The IRS and Treasury believe that it is appropriate to apply the 
supplemental change method to certain acquisitions of a loss group in 
which the plan is not between the 5-percent shareholder of the loss 
group parent and another person to increase their interests in the loss 
group. For example, if an individual buys 50 percent or less of the 
stock of a loss group parent, and as part of the same plan, causes a 
public offering out of a subsidiary, the supplemental change method 
should apply to that offering. (Conversely, the supplemental change 
method should not apply unless the 5-percent shareholder's increase in 
the stock of parent or subsidiary is related to the increase by another 
person because those increases are pursuant to the same plan.)
    Accordingly, these final regulations provide that a 5-percent 
shareholder of the common parent (or loss subgroup parent) is treated 
as increasing its ownership interest in the stock of a subsidiary to 
the extent, if any, that the percentage ownership interest of another 
person or persons in the stock of the subsidiary is increased pursuant 
to a plan or arrangement under which the 5-percent shareholder 
increases its percentage ownership interest in the common parent (or 
loss subgroup parent).
    To alleviate concerns that the supplemental change method is overly 
broad, the final regulations limit the scope of the supplemental change 
method through application of the rules of Sec. 1.382-2T(k). The final 
regulations provide that the supplemental change method will apply if 
the common parent (or loss subgroup parent) has actual knowledge of the 
increase in the 5-percent shareholder's ownership interest in the stock 
of the subsidiary (or has actual knowledge of the plan or arrangement) 
before the date that the group's income tax return is filed for the 
taxable year that includes the date of that increase or, if, at any 
time during the testing period, the 5-percent shareholder of the common 
parent is also a 5-percent shareholder of the subsidiary (determined 
without regard to a deemed acquisition of subsidiary stock under the 
plan or arrangement rule) whose percentage increase in the ownership of 
the stock of the subsidiary would be taken into account in determining 
if the subsidiary has an ownership change. For purposes of determining 
the 5-percent shareholders of the subsidiary, the principles of 
Sec. 1.382-2T(k), including the duty to inquire, apply to the common 
parent (or loss subgroup parent).
    Several additional changes to the supplemental change method were 
made in response to comments. Section 1.1502-92(c)(4)(iii) clarifies 
that stock treated as issued under the supplemental change method is 
not treated as issued in testing periods that do not include the 
testing date on which the parent stock is deemed to be issued. Section 
1.1502-92(c)(4)(ii) provides that stock is not treated as issued if a 
deemed issuance of parent stock would not cause the loss group (or loss 
subgroup) to have an ownership change before the day on which the 
subsidiary leaves the loss group (or loss subgroup).
    To avoid retroactive changes in ownership, Sec. 1.1502-92(c)(4)(v) 
provides that if the supplemental change method applies to an 
acquisition of subsidiary stock before the first date that the 5-
percent shareholder increases its percentage ownership interest in the 
stock of the common parent (or loss subgroup parent), then the deemed 
issuance of stock is treated as occurring on the first such date. 
However, the value of the subsidiary stock is the value of such stock 
on the date it was acquired. In addition, Sec. 1.1502-92(c)(4)(vi) 
provides that if two or more 5-percent shareholders are treated as 
increasing their percentage ownership interests pursuant to a single 
plan or arrangement described above, appropriate adjustments must be 
made so that the amount of stock treated as issued is not taken into 
account more than one time.
    Commentators also requested that the supplemental change method 
apply only if the acquisitions of parent stock and subsidiary stock are 
with a principal purpose of avoiding or lessening the impact of section 
382. The IRS and Treasury believe that if the same 5-percent 
shareholder increases in the stock of both a subsidiary and the common 
parent within the same testing period, the supplemental change method 
should apply without further evidence of an avoidance purpose. 
Similarly, a plan or arrangement under which a 5-percent shareholder 
and another person both increase their interests in the loss group is 
sufficient proof of an avoidance purpose that the supplemental change 
method properly applies without further inquiry.
7. Consolidated Section 382 Limitation, Sec. 1.1502-93
    Proposed Sec. 1.1502-93 provides rules for computing the 
consolidated section 382 limitation following an ownership change of a 
loss group. The value of the loss group is the value, immediately 
before the ownership change, of the stock (including stock described in 
section 1504(a)(4)) of each member of the loss group, other than stock 
that is owned directly or indirectly by a member. Section 1.1502-
93(b)(2) provides that this value is adjusted under any rule in section 
382 (such as section 382(l)(1), relating to certain capital 
contributions) requiring an adjustment to value for purposes of 
computing the section 382 limitation. The section 382 limitation, as so 
determined, is further adjusted as required by section 382 and the 
regulations thereunder (such as section 382(m)(2), relating to a short 
taxable year). Similar rules apply in determining the section 382 
limitation for a loss subgroup.
    In response to comments, the final regulations make several 
clarifications with respect to circumstances that require an adjustment 
to the value of a loss group or loss subgroup.
    Section 1.1502-93(b)(2)(i) provides that, for purposes of section 
382(e)(2), redemptions and corporate contractions that do not effect a 
transfer of value outside of the loss group (or loss subgroup) are 
disregarded. For purposes of section 382(l)(1), capital contributions 
between members of the loss group (or loss subgroup) (or a contribution 
of stock to a member made solely to satisfy the loss subgroup parent 
requirement of Secs. 1.1502-91(d)(1)(ii) or 1.1502-91(d)(2)(ii)), are 
not taken into account. Also, the substantial nonbusiness asset test of 
section 382(l)(4) is applied on a group (or subgroup) basis, and is not 
applied separately to its members.
    Section 1.1502-93(b)(2)(ii) provides rules that apply to prevent 
duplication of value of the group (or loss subgroup) and to prevent 
duplication of the section 382 limitation. This section provides that 
appropriate adjustments must be made to the extent necessary to prevent 
any duplication of the value of the stock of a member, even though 
corporations that do not file

[[Page 36122]]

consolidated returns may not be required to make such an adjustment. In 
making these adjustments, the group (or loss subgroup) may apply the 
principles of Sec. 1.382-8 (relating to controlled groups of 
corporations) in determining the value of a loss group (or loss 
subgroup) even if that section would not apply if separate returns were 
filed. Also, the principles of Sec. 1.382-5(d) (relating to successive 
ownership changes and absorption of a section 382 limitation) may apply 
to adjust the consolidated section 382 limitation (or subgroup section 
382 limitation) of a loss group (or loss subgroup) to avoid a 
duplication of value if there are simultaneous (rather than successive) 
ownership changes.
    One commentator suggested that contributions of assets by the 
selling group to a departing member or loss subgroup generally should 
not be subject to section 382(l)(1). The IRS and Treasury have 
determined that, unlike transfers of stock or assets that do not effect 
a transfer of value into a loss subgroup, capital contributions that 
constitute a transfer of value into a loss group or to a departing 
member should continue to be subject to section 382(l)(1).
    A new Sec. 1.1502-93(c)(2) provides that appropriate adjustments 
must be made so that any recognized built-in gain of a member that 
increases more than one section 382 limitation (whether consolidated, 
subgroup, or separate) does not effect a duplication in the amount of 
consolidated taxable income that can be offset by pre-change net 
operating losses. In addition, recognized built-in gains may not 
increase the amount of consolidated taxable income that can be offset 
by recognized built-in losses.
8. Ceasing To Be a Member of a Consolidated Group (or Loss Subgroup), 
Sec. 1.1502-95
Elective Apportionment of NUBIG
    In general, the common parent of a consolidated group may elect to 
apportion all or part of each element (the value element and the 
adjustment element) of a consolidated section 382 limitation to a 
former member or loss subgroup. The proposed regulations do not provide 
that the common parent may elect to apportion all or part of a loss 
group's NUBIG.
    Under section 382(h)(1)(A), if a consolidated group has a NUBIG 
immediately before an ownership change, the section 382 limitation for 
any recognition period taxable year is increased by the recognized 
built-in gain for such taxable year. This increase cannot exceed the 
NUBIG, reduced by recognized built-in gains for prior years ending in 
the recognition period.
    Commentators suggest that, like the value element and the 
adjustment element of the consolidated section 382 limitation, the 
common parent should be able to apportion any part or all of the 
group's NUBIG to a departing member (or loss subgroup). The final 
regulations adopt this recommendation.
    In general, Sec. 1.1502-95(c)(2)(ii) provides that the amount of 
the loss group's NUBIG that may be apportioned to one or more former 
members that cease to be members during the same consolidated return 
year cannot exceed the loss group's excess, immediately after the close 
of that year, of net unrealized built-in gain over recognized built-in 
gain, determined under section 382(h)(1)(A)(ii) (relating to a 
limitation on recognized built-in gain). In general, NUBIG apportioned 
to a former member reduces the amount of NUBIG that the group can avail 
itself of in subsequent taxable years.
    For purposes of determining the extent to which the former member's 
section 382 limitation can be increased by recognized built-in gains, 
the amount of NUBIG apportioned is treated as if it were an amount 
determined under section 382(h) with respect to the former member. The 
former member's five-year recognition period begins on the group's (or 
loss subgroup's) change date.
Default Apportionment of Zero Section 382 Limitation and NUBIG When a 
Member Ceases To Be a Member of a Group (or Loss Subgroup), 
Sec. 1.1502-95(c)(2)(ii)
    Section 1.1502-95(c)(1) provides that the common parent may elect 
to apportion all or any part of a consolidated section 382 limitation 
to a former member (or a loss subgroup) when the member or loss 
subgroup leaves the group. If the common parent does not make an 
apportionment of the applicable section 382 limitation(s) or of a NUBIG 
that the member recognizes during the recognition period, the former 
member or loss subgroup has a consolidated section 382 limitation of 
zero with respect to pre-change attributes (the zero default rule).
    Commentators suggested that the zero default rule may be a trap for 
the unwary. For instance, under the proposed regulations, a subgroup 
member that ceases to bear a section 1504(a)(1) to the subgroup parent 
is subject to the zero default rule, even if that member remains within 
the current consolidated group.
    The IRS and Treasury recognize that any default rule will benefit 
some taxpayers while operating to the detriment of others. For example, 
a default apportionment of a section 382 limitation or NUBIG based on 
the departing member's contribution to the group's net operating loss 
carryover could cause some apportioned limitation to go unused if that 
member becomes subject to a new section 382 limitation upon departing 
the group. By contrast, a rule providing that the default limitation is 
capped by the amount of any subsequent section 382 limitation, would be 
difficult to administer. Because the consequences of applying any 
default rule depend on the particular facts of a transaction, including 
the relative income generation of the departing and remaining members, 
the IRS and Treasury believe that the simplicity of the zero default 
rule makes the rule preferable to other alternatives.
    Also, the IRS and the Treasury believe that the new exceptions to 
ceasing to be a member of a loss subgroup substantially reduce the 
likelihood that the zero default rule will yield unexpected results. 
For example, an acquisition of a loss subgroup typically will cause an 
ownership change of the loss subgroup. Following that ownership change, 
a member that remains within the current group now can break the 
section 1504(a)(1) relationship to the loss subgroup parent without 
ceasing to be a member of the loss subgroup. Accordingly, these final 
regulations retain the zero default rule when a member ceases to be a 
member of a group (or loss subgroup). The zero default rule also 
applies to a NUBIG.
Mandatory Apportionment of a Group's NUBIL to a Departing Member, 
Sec. 1.1502-95(e)
    In general, a group has a NUBIL if the adjusted bases of the assets 
of members included in such determination under Sec. 1.1502-91(g) 
exceed their fair market value immediately before the change date. 
Similar rules apply to loss subgroups. Subject to the limitations of 
section 382(h)(2)(B), NUBILs recognized within the five year period 
beginning on the change date are subject to the consolidated section 
382 limitation. The proposed regulations do not provide rules for 
apportioning a group's NUBIL to a former member (or loss subgroup). The 
IRS and Treasury believe that a mandatory apportionment of the group's 
NUBIL is necessary to ensure that the group's NUBIL, if recognized by 
the former member (or loss subgroup) during the recognition period, 
remains subject to the consolidated section 382 limitation. One 
commentator suggests that a former member (or loss group)

[[Page 36123]]

should be apportioned a group's NUBIL only if and when a former member 
that had a separately computed NUBIL that contributed to the group's 
NUBIL departs the group, and the contributed built-in loss has not 
fully been recognized. Adjustments would reflect intragroup transfers 
of assets occurring between the change date and the date that the 
former member departs.
    The IRS and Treasury believe that the suggested approach 
overemphasizes the location of assets with a NUBIG. For example, if a 
former member has a NUBIG determined on a separate entity basis, a 
recognized built-in loss of that member will not be limited, even if 
the former member is the first corporation to dispose of a built-in 
loss asset. The IRS and Treasury believe that subjecting the sale of 
built-in loss assets to the consolidated section 382 limitation, 
regardless of the location of built-in gain assets, more accurately 
reflects the NUBIL as a group attribute. Similarly, consistent with 
treatment of the NUBIL as a group attribute, the approach permits 
built-in gain to be sheltered by built-in loss only after the excess of 
built-in losses over built-in gains has been recognized. Accordingly, 
these final regulations adopt a model that apportions NUBIL based on 
the gross amount of built-in loss that the departing member contributed 
to the determination of the group's NUBIL.
    In general, Sec. 1.1502-95(f) provides that a departing member is 
allocated a portion of the group's (or loss subgroup's) NUBIL if, 
immediately after the close of the consolidated return year in which 
the departing member ceases to be a member, the amount of the loss 
group's (or loss subgroup's) excess of net unrealized built-in loss 
over recognized built-in loss (the remaining NUBIL balance) is greater 
than zero. In general, NUBIL apportioned to former members in prior 
taxable years is treated as recognized built-in loss in those years.
    The amount of NUBIL allocated to a departing member is equal to the 
remaining NUBIL balance multiplied by a fraction. The numerator of the 
fraction is the amount of the built-in loss, taken into account on the 
change date, in the assets held by the departing member immediately 
after the member ceases to be a member of the loss group (or loss 
subgroup). The denominator of the fraction is the sum of the numerator, 
plus the amount of the built-in loss, taken into account on the change 
date, in the assets held by the group immediately after the close of 
the taxable year in which the departing member ceases to be a member. 
(Fluctuations in value of the assets between the change date and the 
date that the member ceases to be a member of the group (or loss 
subgroup), or the close of the taxable year in which the member ceases 
to be a member of the loss group, are disregarded.) In general, 
adjustments are made for gain or loss that has been recognized during 
the recognition period, and for assets that are transferred basis 
property. The amount of the NUBIL allocated to a former member 
generally is treated as previously recognized built-in loss for 
purposes of applying the limitation of section 382(h)(1)(B)(ii) to a 
loss group's taxable years beginning after the year in which the former 
member ceases to be a member.
    For purposes of determining the amount of the former member's 
recognized built-in losses in any taxable year beginning after the 
former member ceases to be a member, the amount of the loss group's (or 
loss subgroup's) net unrealized built-in loss that is apportioned to 
the former member is treated as if it were an amount of net unrealized 
built-in loss determined under section 382(h)(1)(B)(i) with respect to 
such member, and that amount is not reduced under section 
382(h)(1)(B)(ii) by the loss group's (or loss subgroup's) recognized 
built-in losses.
    Subgroup principles apply to the allocation of a NUBIL. For 
example, if two or more members leave a loss group, and are members of 
a consolidated group, any allocation of the loss group's NUBIL is made 
on a subgroup basis. In general, the common parent may apportion all or 
any part of a consolidated section 382 limitation (or subgroup section 
382 limitation) under Sec. 1.1502-95(c) to a former member to which the 
group's NUBIL is allocated (or to a loss subgroup that includes that 
member).
9. Miscellaneous Rules, Sec. 1.1502-96
Fold-in rules do not apply to NUBIGs, Sec. 1.1502-96(a)
    Proposed Sec. 1.1502-96(a)(2) provides in part that, following a 
fold-in event described in Sec. 1.1502-96(a)(1), the member's 
separately computed NUBIG or NUBIL is included in the determination 
whether the group has a NUBIG or NUBIL.
    The IRS and Treasury believe that the ``fold-in'' of a member's 
NUBIG can lead to inappropriate results. For example, a consolidated 
group that acquires a corporation with a small net operating loss 
carryover and a large NUBIG can immediately offset the group's NUBIL 
with the NUBIG, if the member is acquired with an ownership change. 
Accordingly, the fold-in rules of Sec. 1.1502-96(a) do not apply to 
include a member's separately computed NUBIG in determining whether a 
group has a NUBIL. A member's NUBIG is only included in such 
determination if the member is included under Sec. 1.1502-91(g)(2).
Net Operating Loss Carryovers Reattributed Under Sec. 1.1502-20(g)
    Section 1.1502-20 of the regulations disallows a deduction for 
certain losses on the disposition of stock of a subsidiary. In general, 
under Sec. 1.1502-20(g), the common parent can reattribute to itself 
net operating loss carryovers or capital loss carryovers attributable 
to the subsidiary in an amount not to exceed the disallowed loss. 
Section 1.1502-20(g) further provides that the common parent succeeds 
to the reattributed losses as if the losses were succeeded to in a 
transaction described in section 381(a). Also, any owner shift of the 
subsidiary (including any deemed owner shift resulting from section 
382(g)(4)(D) or 382(l)(3)) in connection with the disposition is not 
taken into account under section 382 with respect to the reattributed 
losses. (Sec. 1.1502-20(g)(1)). The preamble to TD 8364 (56 FR 47379, 
September 19, 1991)(which added Sec. 1.1502-20), states that 
clarification regarding the application of section 382 to reattributed 
losses would be provided in connection with finalizing Secs. 1.1502-91 
through 1.1502-99. The preamble states that, for example, it is 
anticipated that proposed Sec. 1.1502-95 would be modified to permit 
the common parent to elect to retain all or part of a section 382 
limitation that applies to reattributed SRLY losses.
    A new Sec. 1.1502-96(d) provides rules relating to reattributed 
losses. This section generally provides that Secs. 1.1502-91 through 
1.1502-96 and Sec. 1.1502-98 apply to reattributed losses consistent 
with the provision of Sec. 1.1502-20(g) that treats the common parent 
as succeeding to the losses in a transaction to which section 381(a) 
applies. For example, if the reattributed loss is a pre-change 
attribute subject to a section 382 limitation, it remains subject to 
that limitation following the reattribution. Section 1.1502-96(d)(4) 
provides rules that allow the common parent to elect to apportion to 
itself all or part of any separate section 382 limitation or subgroup 
section 382 limitation to which the reattributed loss is subject. The 
apportionment is made under the principles of the rules of Sec. 1.1502-
95(c), relating to the apportionment of a consolidated section 382 
limitation to a member that leaves

[[Page 36124]]

the group. In certain cases, the section 382 limitation applicable to 
the reattributed loss is zero unless an apportionment of such 
limitation is made to the common parent. The election to apportion a 
section 382 limitation is made as part of the election to reapportion 
the loss. See Sec. 1.1502-20(g)(4), as amended by this document.
    As previously set forth in Sec. 1.1502-20(g), Sec. 1.1502-96(d) 
adopts the general rule that any owner shift of the subsidiary 
(including any deemed owner shift resulting from section 382(g)(4)(D) 
or 382(l)(3))in connection with the disposition of the subsidiary's 
stock) is not taken into account under section 382 with respect to the 
reattributed losses. The final regulations, however, modify the general 
rule to provide that any owner shift with respect to the successor 
corporation that is treated as continuing in existence under 
Sec. 1.382-2(a)(1)(ii) must be taken into account for such purpose if 
such owner shift is effected by the reattribution and any owner shift 
of the stock of the subsidiary not held directly or indirectly by the 
common parent would have been taken into account if such shift had 
occurred immediately before the reattribution. Such an owner shift may 
occur if the subsidiary has minority shareholders that, under 
Sec. 1.382-2(a)(1)(ii), are treated as decreasing their ownership in 
the reattributed loss, while the shareholders of the common parent 
increase their ownership interests in that loss.
    The final regulations provide that, in general, the value of the 
stock of the common parent is used to establish a section 382 
limitation for the reattributed loss with respect to an ownership 
change upon, or after, the reattribution. These rules coordinate the 
determination of the value of that stock with the capital contribution 
rules of section 382(l)(1), and also require appropriate adjustments so 
that value is not improperly omitted or duplicated as a result of the 
reattribution.

Effective Dates

Sections 1.1502-91 through 1.1502-96 and 1.1502-98

    Except as set forth below, Secs. 1.1502-91 through 1.1502-96 and 
1.1502-98 apply to testing dates that occur on or after June 25, 1999. 
Sections 1.1502-94 through 1.1502-96 also apply on any date on or after 
June 25, 1999 on which a corporation becomes a member of a group or on 
which a corporation ceases to be a member of a loss group (or a loss 
subgroup).
    A transition rule for net unrealized built-in loss provides that a 
consolidated group may apply Sec. 1.1502-91A(g) for the period ending 
on the day before June 25, 1999 to determine the earliest date that its 
testing period begins (treating the day before June 25, 1999 as the end 
of a taxable year.)
    The election under Sec. 1.1502-91(d)(4) to treat the subgroup 
parent requirement as satisfied is effective for corporations that 
become members of a consolidated group in taxable years for which the 
due date of the income tax return (without extensions) is after June 
25, 1999. Section 1.1502-95(d)(2)(ii) (relating to exceptions to 
ceasing to be a member of loss subgroup) applies to corporations that 
cease to bear a section 1504(a)(1) relationship to a loss subgroup 
parent in taxable years for which the due date of the income tax return 
(without extensions) is after June 25, 1999.
    The third sentence of Sec. 1.1502-91(d)(5) (relating to members 
excluded from a loss subgroup) applies to corporations that become 
members of a consolidated group on or after June 25, 1999.
    In the case of corporations that cease to be members of a loss 
group (or loss subgroup) before June 25, 1999, in a taxable year for 
which the due date of the income tax return (without extensions) is 
after June 25, 1999, Secs. 1.1502-95 (a), (b), (c) and (f) apply to 
those corporations if the common parent makes the election described in 
the second sentence of (c)(1) of that section in the time and manner 
prescribed in paragraph (f) of that section.
    Section 1.1502-96(d) applies to reattributions of net operating 
losses or net capital losses in taxable years for which the due date of 
the income tax return (without extensions) is after June 25, 1999; 
except that the election under Sec. 1.1502-96(d)(5) (relating to an 
election to reattribute section 382 limitation) can be made with any 
election under Sec. 1.1502-20(g)(4) to reattribute to the common parent 
a net operating loss or net capital loss that is timely filed on or 
after June 25, 1999.
    Sections 1.1502-91A through 1.1502-96A and 1.1502-98A apply to any 
testing date on or after January 1, 1997, and before June 25, 1999. 
Sections 1.1502-94A through 1.1502-96A also apply on any date on or 
after January 1, 1997, and before June 25, 1999, on which a corporation 
becomes a member of a group or on which a corporation ceases to be a 
member of a loss group (or a loss subgroup). For periods before January 
1, 1997, the transition rules in Sec. 1.1502-99A(c) continue to apply.
    The transition rules in Sec. 1.1502-99A for periods ending before 
January 1, 1997 also are clarified to provide that a member that ceases 
to be a member of a group does not have a zero section 382 limitation 
with respect to pre-change net operating losses allocated to that 
member.

Need for Immediate Guidance

    Because the temporary regulations are not applicable for taxable 
years ending after June 26, 1999, it is necessary to implement these 
final regulations without delay to ensure continuity of treatment of 
certain attributes and to ensure that there is no period within which 
the treatment of such attributes is inconsistent with the temporary 
regulations and these final regulations. See section 7805(e)(2). 
Accordingly, it is impracticable and contrary to the public interest to 
issue this Treasury decision subject to the effective date limitation 
of section 553(d) of title 5 of the United States Code (if applicable).

Special Analysis

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in EO 12866. 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 
net operating losses or other attributes that are subject to section 
382. 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 net operating losses or other attributes subject 
to section 382. Moreover, many of these corporations will not have 
ownership changes. 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 preceding these regulations was sent to the Small 
Business Administration for comment on its impact on small business.
    Drafting Information. The principal author of the final regulations 
is Lee A. Kelley 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:

[[Page 36125]]

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by 
removing the entries for sections 1.1502-91T, 1.1502-92T, 1.1502-93T, 
1.1502-94T, 1.1502-95T, 1.1502-96T, 1.1502-98T, and 1.1502-99T, and 
adding entries in numerical order to read in part as follows:

    Authority: 26 U.S. C. 7805 * * *
    Section 1.1502-91 also issued under 26 U.S.C. 382(m) and 26 
U.S.C. 1502.
    Section 1.1502-92 also issued under 26 U.S.C. 382(m) and 26 
U.S.C. 1502.
    Section 1.1502-93 also issued under 26 U.S.C. 382(m) and 26 
U.S.C. 1502.
    Section 1.1502-94 also issued under 26 U.S.C. 382(m) and 26 
U.S.C. 1502.
    Section 1.1502-95 also issued under 26 U.S.C. 382(m) and 26 
U.S.C. 1502.
    Section 1.1502-96 also issued under 26 U.S.C. 382(m) and 26 
U.S.C. 1502.
    Section 1.1502-98 also issued under 26 U.S.C. 382(m) and 26 
U.S.C. 1502.
    Section 1.1502-99 also issued under 26 U.S.C. 382(m) and 26 
U.S.C. 1502. * * *
Section 1.1502-91A also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
Section 1.1502-92A also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
Section 1.1502-93A also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
Section 1.1502-94A also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
Section 1.1502-95A also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
Section 1.1502-96A also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
Section 1.1502-98A also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
Section 1.1502-99A also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502. * * *

    Par. 2. In the list below, for each section indicated in the left 
column, remove the wording indicated in the middle column, and add the 
wording indicated in the right column.

------------------------------------------------------------------------
        Affected section                Remove                Add
------------------------------------------------------------------------
1.1502-91T(a)(1), first sentence  Secs.  1.1502-92T   Secs.  1.1502-92A
                                   and 1.1502-93T.     and 1.1502-93A.
1.1502-91T(a)(1), third sentence  Sec.  1.1502-92T..  Sec.  1.1502-92A.
1.1502-91T(a)(1), third sentence  Sec.  1.1502-93T..  Sec.  1.1502-93A.
1.1502-91T(a)(3)................  Secs.  1.1502-94T   Secs.  1.1502-94A
                                   and 1.1502-95T.     and 1.1502-95A.
1.1502-91T(b) introductory text.  Secs.  1.1502-92T   Secs.  1.1502-92A
                                   through 1.1502-     through 1.1502-
                                   99T.                99A.
1.1502-91T(b)(1)................  Secs.  1.1502-92T   Secs.  1.1502-92A
                                   through 1.1502-     through 1.1502-
                                   99T.                99A.
1.1502-91T(c)(2), second          Sec.  1.1502-96T(a  Sec.  1.1502-96A(a
 sentence.                         ).                  ).
1.1502-91T(c)(3), Example (b),    Sec.  1.1502-94T..  Sec.  1.1502-94A.
 second sentence.
1.1502-91T(d)(4), second          Sec.  1.1502-94T..  Sec.  1.1502-94A
 sentence.
1.1502-91T(d)(5), first sentence  Sec.  1.1502-95T(d  Sec.  1.1502-95A(d
                                   ).                  ).
1.1502-91T(d)(5), second          Sec.  1.1502-96T(a  Sec.  1.1502-96A(a
 sentence.                         ).                  ).
1.1502-91T(e)(2), Example(b),     Sec.  1.1502-93T..  Sec.  1.1502-93A.
 third sentence.
1.1502-91T(f)(2), Example(b)(2),  Sec.  1.1502-96T(a  Sec.  1.1502-96A(a
 first sentence.                   ).                  ).
1.1502-91T(f)(2), Example(b)(2),  Sec.  1.1502-92T(a  Sec.  1.1502-92A(a
 third sentence.                   )(2).               )(2).
1.1502-91T(f)(2), Example(b)(2),  Sec.  1.1502-93T..  Sec.  1.1502-93A.
 fourth sentence.
1.1502-91T(f)(2), Example(c),     Sec.  1.1502-96T(c  Sec.  1.1502-96A(c
 second sentence.                  ).                  ).
1.1502-91T(g)(1), last sentence.  Sec.  1.1502-94T(c  Sec.  1.1502-94A(c
                                   ).                  ).
1.1502-91T(g)(1), last sentence.  Sec.  1.1502-96T(a  Sec.  1.1502-96A(a
                                   ).                  ).
1.1502-91T(g)(2)(i)(A)..........  Sec.  1.1502-94T(a  Sec.  1.1502-94A(a
                                   )(1)(ii).           )(1)(ii).
1.1502-91T(g)(2)(i)(B)..........  Sec.  1.1502-91T(d  Sec.  1.1502-91A(d
                                   )(2).               )(2).
1.1502-91T(j), first sentence...  Secs.  1.1502-92T   Secs.  1.1502-92A
                                   through 1.1502-     through 1.1502-
                                   99T.                99A.
1.1502-92T(a), second sentence..  Sec.  1.1502-94T..  Sec.  1.1502-94A.
1.1502-92T(a), second sentence..  Sec.  1.1502-96T(b  Sec.  1.1502-96A(b
                                   ).                  ).
1.1502-92T(b)(1)(i)(A)..........  Sec.  1.1502-91T(c  Sec.  1.1502-91A(c
                                   ).                  ).
1.1502-92T(b)(1)(i)(B)..........  Sec.  1.1502-91T(c  Sec.  1.1502-91A(c
                                   ).                  ).
1.1502-92T(b)(1)(ii), second      Sec.  1.1502-95T(b  Sec.  1.1502-95A(b
 sentence.                         ).                  ).
1.1502-92T(b)(1)(ii)(A).........  Sec.  1.1502-91T(d  Sec.  1.1502-91A(d
                                   ).                  ).
1.1502-92T(b)(1)(ii)(C).........  Sec.  1.1502-91T(d  Sec.  1.1502-91A(d
                                   ).                  ).
1.1502-92T(b)(2) Example 1(a),    Sec.  1.1502-91T(c  Sec.  1.1502-91A(c
 sixth sentence.                   )(1).               )(1)
1.1502-92T(b)(2) Example 3(b),    Sec.  1.1502-91T(d  Sec.  1.1502-91A(d
 first sentence.                   )(1).               )(1).
1.1502-92T(b)(2) Example 4(b),    Sec.  1.1502-91T(d  Sec.  1.1502-91A(d
 first sentence.                   )(1).               )(1).
1.1502-92T(b)(3)(iii) Example     Sec.  1.1502-94T..  Sec.  1.1502-94A.
 2(d), fourth sentence.
1.1502-92T(b)(3)(iii) Example     Sec.  1.1502-91T(d  Sec.  1.1502-91A(d
 3(a), seventh sentence.           ).                  ).
1.1502-92T(b)(4), first sentence  Sec.  1.1502-96T(a  Sec.  1.1502-96A(a
                                   ).                  ).
1.1502-92T(b)(4), first sentence  Sec.  1.1502-96T(a  Sec.  1.1502-96A(a
                                   )(2).               )(2).
1.1502-92T(b)(4), first sentence  Sec.  1.1502-96T(b  Sec.  1.1502-96A(b
                                   ).                  ).
1.1502-92T(b)(4), second          Sec.  1.1502-96T(a  Sec.  1.1502-96A(a
 sentence.                         ) applies, see      ) applies, see
                                   Sec.  1.1502-96T(   Sec.  1.1502-96A(
                                   c).                 c).
1.1502-92T(e)(1)(ii)............  Sec.  1.1502-96T(b  Sec.  1.1502-96A(b
                                   ).                  ).
1.1502-92T(e)(2), fifth sentence  Sec.  1.1502-96T(a  Sec.  1.1502-96A(a
                                   ).                  ).
1.1502-92T(e)(2), fifth sentence  Sec.  1.1502-91T(d  Sec.  1.1502-91A(d
                                   ).                  ).
1.1502-93T(a)(2)................  Sec.  1.1502-95T(c  Sec.  1.1502-95A(c
                                   ).                  ).
1.1502-93T(b)(2), last sentence.  Sec.  1.382-8T....  Sec.  1.382-8.
1.1502-93T(b)(2), fourth          Sec.  1.1502-91T(g  Sec.  1.1502-91A(g
 sentence.                         )(2).               )(2).
1.1502-94T(a)(1)(i).............  Sec.  1.1502-91T(d  Sec.  1.1502-91A(d
                                   )(1).               )(1).
1.1502-94T(a)(1)(ii)............  Sec.  1.1502-91T(d  Sec.  1.1502-91A(d
                                   )(2).               )(2).
1.1502-94T(a)(3)................  Sec.  1.1502-91T(d  Sec.  1.1502-91A(d
                                   ).                  ).
1.1502-94T(a)(3)................  Secs.  1.1502-92T   Secs.  1.1502-92A
                                   and 1.1502-93T.     and 1.1502-93A.
1.1502-94T(a)(4), first sentence  Sec.  1.1502-96T(a  Sec.  1.1502-96A(a
                                   ).                  ).
1.1502-94T(a)(4), first sentence  Sec.  1.1502-96T(a  Sec.  1.1502-96A(a
                                   )(2).               )(2).

[[Page 36126]]

 
1.1502-94T(a)(4), first sentence  Sec.  1.1502-92T(b  Sec.  1.1502-92A(b
                                   )(1)(i).            )(1)(i).
1.1502-94T(a)(4), first sentence  Sec.  1.1502-96T(b  Secs.  1.1502-96A(
                                   ).                  b).
1.1502-94T(a)(4), second          Sec.  1.1502-96T(a  Sec.  1.1502-96A(a
 sentence.                         ) applies, see      ) applies, see
                                   Sec.  1.1502-96T(   Sec.  1.1502-96A(
                                   c).                 c).
1.1502-94T(a)(5)................  Sec.  1.1502-96T(c  Sec.  1.1502-96A(c
                                   ).                  ).
1.1502-94T(b)(4) Example 1(b),    Sec.  1.1502-91T(d  Sec.  1.1502-91A(d
 first sentence.                   ).                  ).
1.1502-94T(b)(4) Example 2(b),..  Sec.  1.1502-91T(d  Sec.  1.1502-91A(d
                                   )(1).               )(1).
1.1502-94T(b)(4) Example 2(d),    Sec.  1.1502-96T(a  Sec.  1.1502-96A(a
 first sentence.                   ).                  ).
1.1502-94T(b)(4) Example 2(d),    Sec.  1.1502-91T(c  Sec.  1.1502-91A(c
 third sentence.                   ).                  ).
1.1502-94T(b)(4) Example 3(b),    Sec.  1.1502-91T(d  Sec.  1.1502-91A(d
 first sentence.                   )(1).               )(1).
1.1502-94T(b)(4) Example 3(c),    Secs.  1.1502-96T(  Secs.  1.1502-96A(
 second sentence.                  a) and 1.1502-      a) and 1.1502-
                                   91T(c)(2).          91A(c)(2).
1.1502-94T(c), first sentence...  Secs.  1.1502-91T(  Secs.  1.1502-91A(
                                   g) and (h).         g) and (h) and
                                                       1.1502-93A(c).
1.1502-94T(c), second sentence..  Sec.  1.1502-91T(g  Sec.  1.1502-91A(g
                                   )(3).               )(3).
1.1502-94T(d), fifth sentence...  Sec.  1.1502-96T(a  Sec.  1.1502-96A(a
                                   ).                  ).
1.1502-94T(d), sixth sentence...  Sec.  1.1502-92T(e  Sec.  1.1502-92A(e
                                   )(1).               )(1).
1.1502-95T(a)(3), paragraph       Secs.  1.1502-91T   Secs.  1.1502-91A
 heading.                          through 1.1502-     through 1.1502-
                                   93T.                93A.
1.1502-95T(a)(3)................  Secs.  1.1502-91T   Secs.  1.1502-91A
                                   through 1.1502-     through 1.1502-
                                   93T.                93A.
1.1502-95T(b)(1) introductory     Secs.  1.1502-91T   Secs.  1.1502-91A
 text, first sentence.             through 1.1502-     through 1.1502-
                                   93T.                93A.
1.1502-95T(b)(2) introductory     Sec.  1.1502-92T..  Sec.  1.1502-92A.
 text.
1.1502-95T(b)(4) Example(2)(a),   Sec.  1.1502-92T..  Sec.  1.1502-92A.
 second sentence.
1.1502-95T(c)(2) introductory     Sec.  1.1502-93T..  Sec.  1.1502-93A.
 text.
1.1502-95T(c)(7) Example(1)(a),   Sec.  1.1502-92T..  Sec.  1.1502-92A.
 third sentence.
1.1502-95T(d)(2) Example(1)(a),   Sec.  1.1502-92T..  Sec.  1.1502-92A.
 fifth sentence.
1.1502-95T(d)(2) Example(3)(a),   Sec.  1.1502-92T(b  Sec.  1.1502-92A(b
 fourth sentence.                  )(1)(ii).           )(1)(ii).
1.1502-95T(e)(1) introductory     Sec.  1.1502-95T..  Sec.  1.1502-95A.
 text.
1.1502-96T(a)(2) introductory     Sec.  1.1502-91T(c  Sec.  1.1502-91A(c
 text, first sentence.             )(1)(i).            )(1)(i).
1.1502-96T(a)(2)(ii)............  Sec.  1.1502-91T(c  Sec.  1.1502-91A(c
                                   ).                  ).
1.1502-96T(a)(3), second          Sec.  1.1502-91T(f  Sec.  1.1502-91A(f
 sentence.                         )(2).               )(2).
1.1502-96T(a)(5), first sentence  Secs.  1.1502-91T   Secs.  1.1502-91A
                                   through 1.1502-     through 1.1502-
                                   95T.                95A.
1.1502-96T(a)(5), first sentence  Sec.  1.1502-98T..  Sec.  1.1502-98A.
1.1502-96T(b)(1) introductory     Sec.  1.1502-92T..  Sec.  1.1502-92A.
 text, first sentence.
1.1502-96T(b)(1) introductory     Sec.  1.1502-91T(c  Sec.  1.1502-91A(c
 text, first sentence.             )(1).               )(1).
1.1502-96T(b)(1) introductory     Sec.  1.1502-91T(d  Sec.  1.1502-91A(d
 text, first sentence.             ).                  ).
1.1502-96T(b)(1) introductory     Sec.  1.1502-95T(b  Sec.  1.1502-95A(b
 text, second sentence.            ).                  ).
1.1502-96T(b)(3), paragraph       Secs.  1.1502-91T,  Secs.  1.1502-91A,
 heading.                          1.1502-92T, and     1.1502-92A, and
                                   1.1502-94T.         1.1502-94A.
1.1502-96T(b)(3), first sentence  Sec.  1.1502-92T..  Sec.  1.1502-92A.
1.1502-96T(b)(3), first sentence  Sec.  1.1502-92T..  Sec.  1.1502-92A.
1.1502-96T(b)(3), second          Sec.  1.1502-94T..  Sec.  1.1502-94A.
 sentence.
1.1502-96(c), last sentence.....  Sec.  1.382-5T(d).  Sec.  1.382-5(d).
1.1502-98T, first sentence......  Secs.  1.1502-91T   Secs.  1.1502-91A
                                   through 1.1502-     through 1.1502-
                                   96T.                96A.
1.1502-98T, second sentence.....  Secs.  1.1502-91T   Secs.  1.1502-91A
                                   through 1.1502-     through 1.1502-
                                   96T.                96A
1.1502-98T, third sentence......  Sec.  1.1502-92T..  Sec.  1.1502-92A.
1.1502-98T, third sentence......  Sec.  1.1502-93T..  Sec.  1.1502-93A
1.1502-99T(a), first sentence...  Sections 1.1502-    Sections 1.1502-
                                   91T through         91A through
                                   1.1502-96T and      1.1502-96A and
                                   1.1502-98T.         1.1502-98A.
1.1502-99T(a), second sentence..  Sections 1.1502-    Sections 1.1502-
                                   94T through         94A through
                                   1.1502-96T.         1.1502-96A.
1.1502-99T(b), first sentence...  Secs.  1.1502-91T   Secs.  1.1502-91A
                                   through 1.1502-     through 1.1502-
                                   96T and 1.1502-     96A and 1.1502-
                                   98T.                98A.
1.1502-99T(b), second sentence..  Sec.  1.1502-92T(b  Sec.  1.1502-92A(b
                                   )(1)(i).            )(1)(i).
1.1502-99T(b), third sentence...  Sec.  1.1502-92T(b  Sec.  1.1502-92A(b
                                   )(1).               )(1).
1.1502-99T(c)(1)(ii)............  Secs.  1.1502-91T   Secs.  1.1502-91A
                                   through 1.1502-     through 1.1502-
                                   96T and 1.1502-     96A and 1.1502-
                                   98T.                98A
1.1502-99T(c)(1)(iii), first      Secs.  1.1502-91T   Secs.  1.1502-91A
 sentence.                         through 1.1502-     through 1.1502-
                                   96T and 1.1502-     96A and 1.1502-
                                   98T.                98A.
1.1502-99T(c)(1)(iii), second     Sec.  1.1502-92T..  Sec.  1.1502-92A.
 sentence.
1.1502-99T(c)(2)(i), first        Secs.  1.1502-91T   Secs.  1.1502-91A
 sentence.                         through 1.1502-     1.1502-96A and
                                   96T and through     1.1502-98A.
                                   1.1502-98T.
1.1502-99T(c)(2)(i), first        Sec.  1.1502-95T(c  Sec.  1.1502-95A(c
 sentence.                         ).                  ).
1.1502-99T(c)(2)(i), fifth        Sec.  1.1502-91T(d  Sec.  1.1502-91A(d
 sentence.                         )(2)(i).            )(2)(i).
1.1502-99T(c)(2)(ii)............  Sec.  1.382-8T....  Sec.  1.382-8.
1.1502-99T(c)(2)(ii)............  Sec.  1.382-8T(h).  Sec.  1.382-8(h).
1.1502-99T(d)(1)................  Sec.  1.1502-92T..  Sec.  1.1502-92A.

[[Page 36127]]

 
1.1502-99T(d)(3)................  Secs.  1.1502-91T   Secs.  1.1502-91A
                                   through 1.1502-     through 1.1502-
                                   96T and 1.1502-     96A and 1.1502-
                                   98T.                98A.
------------------------------------------------------------------------

    Par. 3. Section 1.1502-20 is amended as follows:
    1. Adding a sentence to the end of paragraph (g)(1).
    2. Redesignating paragraph (g)(5) as paragraph (g)(4).
    3. Paragraph (g)(4)(i)(A) is amended by removing ``, and'' and 
adding ``;'' in its place.
    4. Paragraph (g)(4)(i)(B) is amended by removing the period at the 
end of the paragraph and adding ``; and'' in its place.
    5. Adding a new paragraph (g)(4)(i)(C) immediately after paragraph 
(g)(4)(i)(B) and before paragraph (g)(4)(i) concluding text.
    6. Redesignating paragraph (g)(4)(ii) as paragraph (g)(4)(iii).
    7. Adding a new paragraph (g)(4)(ii).
    The revisions and additions read as follows:


Sec. 1.1502-20  Disposition or deconsolidation of subsidiary stock.

* * * * *
    (g) * * *
    (1) * * * See Sec. 1.1502-96(d) for rules relating to section 382 
and the reattribution of losses under this paragraph (g).
* * * * *
    (4)
    (i) * * *
    (C) If the common parent is reattributing to itself all or any part 
of a section 382 limitation pursuant to Sec. 1.1502-96(d)(5), the 
information required by paragraph (g)(4)(ii) of this section.
* * * * *
    (ii) Reattribution of section 382 limitation. The information 
required by this paragraph (g)(4)(ii) is a separate list for each 
subsidiary (or a separate list for two or more subsidiaries that are 
members of a loss subgroup whose pre-change subgroup losses are being 
reattributed) with respect to which an apportionment of a separate 
section 382 limitation or subgroup section 382 limitation is being 
made, setting forth--
    (A) The name and E.I.N. of the subsidiary (or subsidiaries that 
were members of a loss subgroup);
    (B) A statement entitled ``THIS IS AN ELECTION UNDER Sec. 1.1502-
96(d)(5) TO APPORTION ALL OR PART OF [insert A SEPARATE or A SUBGROUP 
or BOTH A SEPARATE AND A SUBGROUP] SECTION 382 LIMITATION TO [insert 
name and E.I.N. of the common parent]'';
    (C) The date of the ownership change giving rise to the separate 
section 382 limitation or subgroup section 382 limitation that is being 
apportioned;
    (D) The amount of the separate (or subgroup) section 382 limitation 
for the taxable year in which the reattribution occurs (determined 
without reference to any apportionment under this section or 
Sec. 1.1502-95(c));
    (E) The amount of each net operating loss carryover or capital loss 
carryover, and the year in which it arose, of the subsidiary (or 
subsidiaries) that is subject to the separate section 382 limitation or 
subgroup section 382 limitation that is being apportioned to the common 
parent, and the amount of the value element and adjustment element of 
that limitation that is apportioned to the common parent.
* * * * *
    Par. 3a. Immediately following Sec. 1.1502-79A, an undesignated 
centerheading is added to read as follows:

Regulations Applying Section 382 With Respect to Testing Dates (and 
Corporations Joining or Leaving Consolidated Groups) Before June 
25, 1999

    Par. 4. Section Sec. 1.1502-90T is amended as follows:
    1. Redesignating Sec. 1.1502-90T as Sec. 1.1502-90A [newly 
redesignated Sec. 1.1502-90A will appear after the centerheading added 
in Par. 3a.]
    2. Revising the section heading and the introductory text of newly 
designated Sec. 1.1502-90A.
    3. Redesignating the entries for Sec. 1.1502-91T through 
Sec. 1.1502-99T as Sec. 1.1502-91A through Sec. 1.1502-99A and revising 
the section headings.
    4. Revising the entries for paragraph (a) of newly designated 
Sec. 1.1502-99A.
    The revisions read as follows:


Sec. 1.1502-90A  Table of contents.

    The following list contains the major headings in Secs. 1.1502-91A 
through 1.1502-99A:

Sec. 1.1502-91A Application of Section 382 With Respect to a 
Consolidated Group Generally Applicable for Testing Dates Before 
June 25, 1999.

* * * * *

Sec. 1.1502-92A  Ownership change of a loss group or a loss 
subgroup generally applicable for testing dates before June 25, 
1999.

* * * * *

Sec. 1.1502-93A  Consolidated section 382 limitation (or subgroup 
section 382 limitation) generally applicable for testing dates 
before June 25, 1999.

* * * * *

Sec. 1.1502-94A  Coordination with section 382 and the regulations 
thereunder when a corporation becomes a member of a consolidated 
group generally applicable for corporations becoming members of a 
group before June 25, 1999.

* * * * *

Sec. 1.1502-95A  Rules on ceasing to be a member of a consolidated 
group (or loss subgroup) generally applicable for corporations 
ceasing to be members before June 25, 1999.

* * * * *

Sec. 1.1502-96A  Miscellaneous rules generally applicable for 
testing dates before June 25, 1999.

* * * * *

Sec. 1.1502-97A  Special rules under section 382 for members under 
the jursidiction of a court in a title 11 or similar case. 
[Reserved].

Sec. 1.1502-98A  Coordination with section 383 generally applicable 
for testing dates (or members joining or leaving a group) before 
June 25, 1999.

* * * * *

Sec. 1.1502-99A  Effective dates.

    (a) Effective date.
    (1) In general.
    (2) Anti-duplication rules for recognized built-in gain.
* * * * *
    Par. 5. Section 1.1502-91T is amended as follows:
    1. Redesignating Sec. 1.1502-91T as Sec. 1.1502-91A.
    2. Revising the section heading of newly designated Sec. 1.1502-
91A.
    3. Amending paragraph (h)(2) by removing the words ``or an 
intercompany obligation'' and replacing them with ``(or an intercompany 
obligation disposed of before June 25, 1999''.
    The revision reads as follows:


Sec. 1.1502-91A  Application of section 382 with respect to a 
consolidated group generally applicable for testing dates before June 
25, 1999.

* * * * *
    Par. 6. Section 1.1502-92T is revised as Sec. 1.1502-92A, and the 
section heading is revised to read as follows:

[[Page 36128]]

Sec. 1.1502-92A  Ownership change of a loss group or a loss subgroup 
generally applicable for testing dates before June 25, 1999.

* * * * *
    Par 6a. Section 1.1502-93T is amended as follows:
    1. Redesignating Sec. 1.1502-93T as Sec. 1.1502-93A.
    2. Revising the section heading of newly redesignated Sec. 1.1502-
93A.
    3. Adding a sentence at the end of paragraph (c).
    The additions and revisions read as follows:


Sec. 1.1502-93A  Consolidated section 382 limitation (or subgroup 
section 382 limitation) generally applicable for testing dates before 
June 25, 1999.

* * * * *
    (c) * * * See Sec. 1.1502-99A(a)(2) for a special rule relating to 
the application of Sec. 1.502-93(c)(2) to consolidated return years for 
which the due date of the return is after June 25, 1999.
* * * * *
    Par. 7. Section 1.1502-94T is amended as follows:
    1. Redesignating Sec. 1.1502-94T as Sec. 1.1502-94A.
    2. Revising the section heading of newly redesignated Sec. 1.1502-
94A.
    3. Revising the last sentence of paragraph (b)(4), Example 3(b).
    The revision reads as follows:


Sec. 1.1502-94A  Coordination with section 382 and the regulations 
thereunder when a corporation becomes a member of a consolidated group) 
generally applicable for corporations becoming members of a group 
before June 25, 1999.

* * * * *
    (b) * * *
    (4) * * *
    Example 3. * * *
    (b) * * * See also Sec. 1.1502-21T in effect prior to June 25, 
1999, contained in 26 CFR Part 1, revised April 1, 1999, or 
Sec. 1.1502-21, as applicable.
* * * * *
    Par. 8. Redesignate Sec. 1.1502-95T as Sec. 1.1502-95A and revise 
the section heading to read as follows:


Sec. 1.1502-95A  Rules on ceasing to be a member of a consolidated 
group generally applicable for corporations ceasing to be members 
before June 25, 1999.

* * * * *
    Par. 9. Redesignate Sec. 1.1502-96T as Sec. 1.1502-96A and revise 
the section heading to read as follows:


Sec. 1.1502-96A.  Miscellaneous rules generally applicable for testing 
dates before June 25, 1999.

* * * * *
    Par. 10. Redesignate Sec. 1.1502-97T as Sec. 1.1502-97A and revise 
the section heading to read as follows:


Sec. 1.1502-97A  Special rules under section 382 for members under the 
jurisdiction of a court in a title 11 or similar case.

[Reserved].
* * * * *
    Par. 11. Redesignate Sec. 1.1502-98T as Sec. 1.1502-98A and revise 
the section heading to read as follows:


Sec. 1.1502-98A  Coordination with section 383 generally applicable for 
testing dates (or members joining or leaving a group) before June 25, 
1999.

* * * * *
    Par. 12. Section 1.1502-99T is amended as follows:
    1. Redesignating Sec. 1.1502-99T as Sec. 1.1502-99A.
    2. Revising the section heading.
    3. Revising paragraph (a).
    4. Amending paragraph (c)(2)(i) by removing the language 
``(relating to the apportionment'' in the first sentence and adding 
``and (b)(2)(ii)(relating to the apportionment''.
    The revisions read as follows:


Sec. 1.1502-99A  Effective dates.

    (a) Effective date--(1) In general. Except as provided in 
Sec. 1.1502-99(b), Secs. 1.1502-91A through 1.1502-96A and 1.1502-98A 
apply to any testing date on or after January 1, 1997, and before June 
25, 1999.
    Sections 1.1502-94A through 1.1502-96A also apply on any date on or 
after January 1, 1997, and before June 25, 1999, on which a corporation 
becomes a member of a group or on which a corporation ceases to be a 
member of a loss group (or a loss subgroup).
    (2) Anti-duplication rules for recognized built-in gain. Section 
1.1502-93(c)(2)(relating to recognized built-in gain of a loss group or 
loss subgroup) applies to taxable years for which the due date for 
income tax returns (without extensions) is after June 25, 1999,
* * * * *
    Par. 13. Sections 1.1502-90 through 1.1502-99 are added to read as 
follows:


Sec. 1.1502-90  Table of contents.

    The following list contains the major headings in Secs. 1.1502-91 
through 1.1502-99:

Sec. 1.1502-91  Application of section 382 with respect to a 
consolidated group.

    (a) Determination and effect of an ownership change.
    (1) In general.
    (2) Special rule for post-change year that includes the change 
date.
    (3) Cross-reference.
    (b) Definitions and nomenclature.
    (c) Loss group.
    (1) Defined.
    (2) Coordination with rule that ends separate tracking.
    (3) Example.
    (d) Loss subgroup.
    (1) Net operating loss carryovers.
    (2) Net unrealized built-in loss.
    (3) Loss subgroup parent.
    (4) Election to treat loss subgroup parent requirement as 
satisfied.
    (5) Principal purpose of avoiding a limitation.
    (6) Special rules.
    (7) Examples.
    (e) Pre-change consolidated attribute.
    (1) Defined.
    (2) Example.
    (f) Pre-change subgroup attribute.
    (1) Defined.
    (2) Example.
    (g) Net unrealized built-in gain and loss.
    (1) In general.
    (2) Members included.
    (i) Consolidated group with a net operating loss.
    (ii) Determination whether a consolidated group has a net 
unrealized built-in loss.
    (iii) Loss subgroup with net operating loss carryovers.
    (iv) Determination whether subgroup has a net unrealized built-
in loss.
    (v) Separate determination of section 382 limitation for 
recognized built-in losses and net operating losses.
    (3) Coordination with rule that ends separate tracking.
    (4) Acquisitions of built-in gain or loss assets.
    (5) Indirect ownership.
    (6) Common parent not common parent for five years.
    (h) Recognized built-in gain or loss.
    (1) In general. [Reserved]
    (2) Disposition of stock or an intercompany obligation of a 
member.
    (3) Intercompany transactions.
    (4) Exchanged basis property.
    (i) [Reserved]
    (j) Predecessor and successor corporations.

Sec. 1.1502-92  Ownership change of a loss group or a loss 
subgroup.

    (a) Scope.
    (b) Determination of an ownership change.
    (1) Parent change method.
    (i) Loss group.
    (ii) Loss subgroup.
    (iii) Special rule if election regarding section 1504(a)(1) 
relationship is made.
    (2) Examples.
    (3) Special adjustments.
    (i) Common parent succeeded by a new common parent.
    (ii) Newly created loss subgroup parent.
    (iii) Examples.
    (4) End of separate tracking of certain losses.
    (c) Supplemental rules for determining ownership change.
    (1) Scope.
    (2) Cause for applying supplemental rule.
    (3) Operating rules.
    (4) Supplemental ownership change rules.
    (i) Additional testing dates for the common parent (or loss 
subgroup parent).
    (ii) Treatment of subsidiary stock as stock of the common parent 
(or loss subgroup parent).
    (iii) Different testing periods.

[[Page 36129]]

    (iv) Disaffiliation of a subsidiary.
    (v) Subsidiary stock acquired first.
    (vi) Anti-duplication rule.
    (5) Examples.
    (d) Testing period following ownership change under this 
section.
    (e) Information statements.
    (1) Common parent of a loss group.
    (2) Abbreviated statement with respect to loss subgroups.

Sec. 1.1502-93  Consolidated section 382 limitation (or subgroup 
section 382 limitation).

    (a) Determination of the consolidated section 382 limitation (or 
subgroup section 382 limitation).
    (1) In general.
    (2) Coordination with apportionment rule.
    (b) Value of the loss group (or loss subgroup).
    (1) Stock value immediately before ownership change.
    (2) Adjustment to value.
    (i) In general.
    (ii) Anti-duplication.
    (3) Examples.
    (c) Recognized built-in gain of a loss group or loss subgroup.
    (1) In general.
    (2) Adjustments.
    (d) Continuity of business.
    (1) In general.
    (2) Example.
    (e) Limitations of losses under other rules.

Sec. 1.1502-94  Coordination with section 382 and the regulations 
thereunder when a corporation becomes a member of a consolidated 
group.

    (a) Scope.
    (1) In general.
    (2) Successor corporation as new loss member.
    (3) Coordination in the case of a loss subgroup.
    (4) End of separate tracking of certain losses.
    (5) Cross-reference.
    (b) Application of section 382 to a new loss member.
    (1) In general.
    (2) Adjustment to value.
    (3) Pre-change separate attribute defined.
    (4) Examples.
    (c) Built-in gains and losses.
    (d) Information statements.

Sec. 1.1502-95  Rules on ceasing to be a member of a consolidated 
group (or loss subgroup).

    (a) In general.
    (1) Consolidated group.
    (2) Election by common parent.
    (3) Coordination with Secs. 1.1502-91 through 1.1502-93.
    (b) Separate application of section 382 when a member leaves a 
consolidated group.
    (1) In general.
    (2) Effect of a prior ownership change of the group.
    (3) Application in the case of a loss subgroup.
    (4) Examples.
    (c) Apportionment of a consolidated section 382 limitation.
    (1) In general.
    (2) Amount which may be apportioned.
    (i) Consolidated section 382 limitation.
    (ii) Net unrealized built-in gain.
    (3) Effect of apportionment on the consolidated group.
    (i) Consolidated section 382 limitation.
    (ii) Net unrealized built-in gain.
    (4) Effect on corporations to which an apportionment is made.
    (i) Consolidated section 382 limitation.
    (ii) Net unrealized built-in gain.
    (5) Deemed apportionment when loss group terminates.
    (6) Appropriate adjustments when former member leaves during the 
year.
    (7) Examples.
    (d) Rules pertaining to ceasing to be a member of a loss 
subgroup.
    (1) In general.
    (2) Exceptions.
    (3) Examples.
    (e) Allocation of net unrealized built-in loss.
    (1) In general.
    (2) Amount of allocation.
    (i) In general.
    (ii) Transferred basis property and deferred gain or loss.
    (iii) Assets for which gain or loss has been recognized.
    (iv) Exchanged basis property.
    (v) Two or more members depart during the same year.
    (vi) Anti-abuse rule.
    (3) Effect of the allocation on the consolidated group.
    (4) Effect on corporations to which the allocation is made.
    (5) Subgroup principles.
    (6) Apportionment of consolidated section 382 limitation (or 
subgroup section 382 limitation).
    (i) In general.
    (ii) Special rule for former members that become members of the 
same consolidated group.
    (7) Examples.
    (8) Reporting requirement.
    (f) Filing the election to apportion the section 382 limitation 
and net unrealized built-in gain.
    (1) Form of the election to apportion.
    (2) Signing of the election.
    (3) Filing of the election.
    (4) Revocation of election.

Sec. 1.1502-96  Miscellaneous rules.

    (a) End of separate tracking of losses.
    (1) Application.
    (2) Effect of end of separate tracking.
    (i) Net operating loss carryovers.
    (ii) Net unrealized built-in losses.
    (iii) Common parent not common parent for five years.
    (3) Continuing effect of end of separate tracking.
    (i) In general.
    (ii) Example.
    (4) Special rule for testing period.
    (5) Limits on effects of end of separate tracking.
    (b) Ownership change of subsidiary.
    (1) Ownership change of a subsidiary because of options or plan 
or arrangement.
    (2) Effect of the ownership change.
    (i) In general.
    (ii) Pre-change losses.
    (3) Coordination with Secs. 1.1502-91, 1.1502-92, and 1.1502-94.
    (4) Example.
    (c) Continuing effect of an ownership change.
    (d) Losses reattributed under Sec. 1.1502-20(g).
    (1) In general.
    (2) Deemed section 381(a) transaction.
    (3) Rules relating to owner shifts.
    (i) In general.
    (ii) Examples.
    (4) Rules relating to the section 382 limitation.
    (i) Reattributed loss is a pre-change separate attribute of a 
new loss member.
    (ii) Reattributed loss is a pre-change subgroup attribute.
    (iii) Potential application of section 382(l)(1).
    (iv) Duplication or omission of value.
    (v) Special rule for continuity of business requirement.
    (5) Election to reattribute section 382 limitation.
    (i) Effect of election.
    (ii) Examples.
    (e) Time and manner of making election under Sec. 1.1502-
91(d)(4).
    (1) In general.
    (2) Election statement.

Sec. 1.1502-97  Special rules under section 382 for members under 
the jurisdiction of a court in a title 11 or similar case. 
[Reserved].

Sec. 1.1502-98  Coordination with section 383.

Sec. 1.1502-99  Effective dates.

    (a) Effective date.
    (b) Special rules.
    (1) Election to treat subgroup parent requirement as satisfied.
    (2) Principal purpose of avoiding a limitation.
    (3) Ceasing to be a member of a loss subgroup.
    (i) Ownership change of a loss subgroup.
    (ii) Expiration of 5-year period.
    (4) Reattribution of net operating loss carryovers under 
Sec. 1.1502-20(g).
    (5) Election to apportion net unrealized built-in gain.
    (c) Testing period may include a period beginning before June 
25, 1999.
    (1) In general.
    (2) Transition rule for net unrealized built-in losses.


Sec. 1.1502-91  Application of section 382 with respect to a 
consolidated group.

    (a) Determination and effect of an ownership change--(1) In 
general. This section and Secs. 1.1502-92 and 1.1502-93 set forth the 
rules for determining an ownership change under section 382 for members 
of consolidated groups and the section 382 limitations with respect to 
attributes described in paragraphs (e) and (f) of this section. These 
rules generally provide that an ownership change and the section 382 
limitation are determined with respect to these attributes for the 
group (or loss subgroup) on a single entity basis and

[[Page 36130]]

not for its members separately. Following an ownership change of a loss 
group (or a loss subgroup) under Sec. 1.1502-92, the amount of 
consolidated taxable income for any post-change year which may be 
offset by pre-change consolidated attributes (or pre-change subgroup 
attributes) shall not exceed the consolidated section 382 limitation 
(or subgroup section 382 limitation) for such year as determined under 
Sec. 1.1502-93.
    (2) Special rule for post-change year that includes the change 
date. If the post-change year includes the change date, section 
382(b)(3)(A) is applied so that the consolidated section 382 limitation 
(or subgroup section 382 limitation) does not apply to the portion of 
consolidated taxable income that is allocable to the period in the year 
on or before the change date. See generally Sec. 1.382-6 (relating to 
the allocation of income and loss). The allocation of consolidated 
taxable income for the post-change year that includes the change date 
must be made before taking into account any consolidated net operating 
loss deduction (as defined in Sec. 1.1502-21(a)).
    (3) Cross-reference. See Secs. 1.1502-94 and 1.1502-95 for rules 
that apply section 382 to a corporation that becomes or ceases to be a 
member of a group or loss subgroup.
    (b) Definitions and nomenclature. For purposes of this section and 
Secs. 1.1502-92 through 1.1502-99, unless otherwise stated:
    (1) The definitions and nomenclature contained in section 382 and 
the regulations thereunder (including the nomenclature and assumptions 
relating to the examples in Sec. 1.382-2T(b)) and this section and 
Secs. 1.1502-92 through 1.1502-99 apply.
    (2) In all examples, all groups file consolidated returns, all 
corporations file their income tax returns on a calendar year basis, 
the only 5-percent shareholder of a corporation is a public group, the 
facts set forth the only owner shifts during the testing period, no 
election is made under paragraph (d)(4) of this section, and each asset 
of a corporation has a value equal to its adjusted basis.
    (3) As the context requires, references to Secs. 1.1502-91 through 
1.1502-96 include references to corresponding provisions of 
Secs. 1.1502-91A through 1.1502-96A. For example, a reference to an 
ownership change under Sec. 1.1502-92 in Sec. 1.1502-95(b) can include 
a reference to an ownership change under Sec. 1.1502-92A.
    (c) Loss group--(1) Defined. A loss group is a consolidated group 
that--
    (i) Is entitled to use a net operating loss carryover to the 
taxable year that did not arise (and is not treated under Sec. 1.1502-
21(c) as arising) in a SRLY;
    (ii) Has a consolidated net operating loss for the taxable year in 
which a testing date of the common parent occurs (determined by 
treating the common parent as a loss corporation); or
    (iii) Has a net unrealized built-in loss (determined under 
paragraph (g) of this section by treating the date on which the 
determination is made as though it were a change date).
    (2) Coordination with rule that ends separate tracking. A 
consolidated group may be a loss group because a member's losses that 
arose in (or are treated as arising in) a SRLY are treated as described 
in paragraph (c)(1)(i) of this section. See Sec. 1.1502-96(a).
    (3) Example. The following example illustrates the principles of 
this paragraph (c):

    Example. Loss group. (i) L and L1 file separate returns and each 
has a net operating loss carryover arising in Year 1 that is carried 
over to Year 2. A owns 40 shares and L owns 60 shares of the 100 
outstanding shares of L1 stock. At the close of Year 1, L buys the 
40 shares of L1 stock from A. For Year 2, L and L1 file a 
consolidated return. The following is a graphic illustration of 
these facts:

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BILLING CODE 4830-01-C

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    (ii) L and L1 become a loss group at the beginning of Year 2 
because the group is entitled to use the Year 1 net operating loss 
carryover of L, the common parent, which did not arise (and is not 
treated under Sec. 1.1502-21(c) as arising) in a SRLY. See 
Sec. 1.1502-94 for rules relating to the application of section 382 
with respect to L1's net operating loss carryover from Year 1 which 
did arise in a SRLY.

    (d) Loss subgroup--(1) Net operating loss carryovers. Two or more 
corporations that become members of a consolidated group (the current 
group) compose a loss subgroup if--
    (i) They were affiliated with each other in another group (the 
former group), whether or not the group was a consolidated group;
    (ii) They bear the relationship described in section 1504(a)(1) to 
each other through a loss subgroup parent immediately after they become 
members of the current group (or are deemed to bear that relationship 
as a result of an election described in paragraph (d)(4) of this 
section); and
    (iii) At least one of the members carries over a net operating loss 
that did not arise (and is not treated under Sec. 1.1502-21(c) as 
arising) in a SRLY with respect to the former group.
    (2) Net unrealized built-in loss. Two or more corporations that 
become members of a consolidated group compose a loss subgroup if 
they--
    (i) Have been continuously affiliated with each other for the 5 
consecutive year period ending immediately before they become members 
of the group;
    (ii) Bear the relationship described in section 1504(a)(1) to each 
other through a loss subgroup parent immediately after they become 
members of the current group (or are deemed to bear that relationship 
as a result of an election described in paragraph (d)(4) of this 
section); and
    (iii) Have a net unrealized built-in loss (determined under 
paragraph (g) of this section on the day they become members of the 
group by treating that day as though it were a change date).
    (3) Loss subgroup parent. A loss subgroup parent is the corporation 
that bears the same relationship to the other members of the loss 
subgroup as a common parent bears to the members of a group.
    (4) Election to treat loss subgroup parent requirement as 
satisfied--(i) In general. Solely for purposes of paragraphs (d)(1)(i) 
and (2)(ii) of this section, two or more corporations that become 
members of a consolidated group at the same time and that were 
affiliated with each other immediately before becoming members of the 
group are deemed to bear a section 1504(a)(1) relationship to each 
other immediately after they become members of the group if the common 
parent of that group makes an election under this paragraph (d)(4) with 
respect to those members. See Sec. 1.1502-96(e) for the time and manner 
of making the election.
    (ii) Members included. An election under this paragraph (d)(4) 
includes all corporations that become members of the current group at 
the same time and that were affiliated with each other immediately 
before they become members of the current group.
    (iii) Each member included treated as loss subgroup parent. If the 
members to which this election applies are a loss subgroup described in 
paragraph (d)(1) or (2) of this section, then each member is treated as 
a loss subgroup parent. See Sec. 1.1502-92(b)(1)(iii) for special rules 
relating to an ownership change of a loss subgroup if the election 
under this paragraph (d)(4) is made.
    (5) Principal purpose of avoiding a limitation. The corporations 
described in paragraphs (d)(1) or (2) of this section do not compose a 
loss subgroup if any one of them is formed, acquired, or availed of 
with a principal purpose of avoiding the application of, or increasing 
any limitation under, section 382. Instead, Sec. 1.1502-94 applies with 
respect to the attributes of each such corporation. Any member excluded 
from a loss subgroup, if excluded with a principal purpose of so 
avoiding or increasing any section 382 limitation, is treated as 
included in the loss subgroup. This paragraph (d)(5) does not apply 
solely because, in connection with becoming members of the group, the 
members of a group (or loss subgroup) are rearranged (or, in the case 
of the preceding sentence, are not rearranged) to bear a relationship 
to the other members described in section 1504(a)(1).
    (6) Special rules. See Sec. 1.1502-95(d) for rules concerning when 
a corporation ceases to be a member of a loss subgroup, and for certain 
exceptions that may apply if a member does not continue to satisfy the 
loss subgroup parent requirement within the current group. See also 
Sec. 1.1502-96(a) for a special rule regarding the end of separate 
tracking of SRLY losses of a member that has an ownership change or 
that has been a member of a group for at least 5 consecutive years.
    (7) Examples. The following examples illustrate the principles of 
this paragraph (d):

    Example 1. Loss subgroup. (i) P owns all the L stock and L owns 
all the L1 stock. The P group has a consolidated net operating loss 
arising in Year 1 that is carried to Year 2. On May 2, Year 2, P 
sells all the stock of L to A, and L and L1 thereafter file 
consolidated returns. A portion of the Year 1 consolidated net 
operating loss is apportioned under Sec. 1.1502-21(b) to each of L 
and L1, which they carry over to Year 2. The following is a graphic 
illustration of these facts:

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    (ii) (a) L and L1 compose a loss subgroup within the meaning of 
paragraph (d)(1) of this section because--
    (A) They were affiliated with each other in the P group (the 
former group);
    (B) They bear a relationship described in section 1504(a)(1) to 
each other through a loss subgroup parent (L) immediately after they 
became members of the L group; and
    (C) At least one of the members (here, both L and L1) carries 
over a net operating loss to the L group (the current group) that 
did not arise in a SRLY with respect to the P group.
    (b) Under paragraph (d)(3) of this section, L is the loss 
subgroup parent of the L loss subgroup.
    Example 2. Loss subgroup--section 1504(a)(1) relationship. (i) P 
owns all the stock of L and L1. L owns all the stock of L2. L1 and 
L2 own 40 percent and 60 percent of the stock of L3, respectively. 
The P group has a consolidated net operating loss arising in Year 1 
that is carried over to Year 2. On May 22, Year 2, P sells all the 
stock of L and L1 to P1, the common parent of another consolidated 
group. The Year 1 consolidated net operating loss is apportioned 
under Sec. 1.1502-21(b), and each of L, L1, L2, and L3 carries over 
a portion of such loss to the first consolidated return year of the 
P1 group ending after the acquisition. The following is a graphic 
illustration of these facts:

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BILLING CODE 4830-01-C

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    (ii) L and L2 compose a loss subgroup within the meaning of 
paragraph (d)(1) of this section. Neither L1 nor L3 is included in a 
loss subgroup because neither bears a relationship described in section 
1504(a)(1) through a loss subgroup parent to any other member of the 
former group immediately after becoming members of the P1 group.
    Example 3. Loss subgroup--section 1504(a)(1) relationship. The 
facts are the same as in Example 2, except that the stock of L1 is 
transferred to L in connection with the sale of the L stock to P1. 
L, L1, L2, and L3 compose a loss subgroup within the meaning of 
paragraph (d)(1) of this section because--
    (i) They were affiliated with each other in the P group (the 
former group);
    (ii) They bear a relationship described in section 1504(a)(1) to 
each other through a loss subgroup parent (L) immediately after they 
become members of the P1 group; and
    (iii) At least one of the members (here, each of L, L1, L2, and 
L3) carries over a net operating loss to the P1 group (the current 
group).
    Example 4. Loss subgroup--elective section 1504(a)(1) 
relationship. The facts are the same as in Example 2, except that P1 
makes the election under paragraph (d)(4) of this section. The 
election includes L, L1, L2, and L3 (even though L and L2 would 
compose a loss subgroup without regard to the election) because they 
become members of the current group (the P1 group) at the same time 
and were affiliated with each other in the P group immediately 
before they became members of the P1 group. As a result of the 
election, L, L1, L2, and L3 are treated as satisfying the 
requirement that they bear the relationship described in section 
1504(a)(1) to each other through a loss subgroup parent immediately 
after they become members of the P1 group. L, L1, L2, and L3 compose 
a loss subgroup within the meaning of paragraph (d)(1) of this 
section.

    (e) Pre-change consolidated attribute--(1) Defined. A pre-change 
consolidated attribute of a loss group is--
    (i) Any loss described in paragraph (c)(1)(i) or (ii) of this 
section (relating to the definition of loss group) that is allocable to 
the period ending on or before the change date; and
    (ii) Any recognized built-in loss of the loss group.
    (2) Example. The following example illustrates the principle of 
this paragraph (e):

    Example. Pre-change consolidated attribute. (i) The L group has 
a consolidated net operating loss arising in Year 1 that is carried 
over to Year 2. The L loss group has an ownership change at the 
beginning of Year 2.
    (ii) The net operating loss carryover of the L loss group from 
Year 1 is a pre-change consolidated attribute because the L group 
was entitled to use the loss in Year 2 and therefore the loss was 
described in paragraph (c)(1)(i) of this section. Under paragraph 
(a)(2)(i) of this section, the amount of consolidated taxable income 
of the L group for Year 2 that may be offset by this loss carryover 
may not exceed the consolidated section 382 limitation of the L 
group for that year. See Sec. 1.1502-93 for rules relating to the 
computation of the consolidated section 382 limitation.

    (f) Pre-change subgroup attribute--(1) Defined. A pre-change 
subgroup attribute of a loss subgroup is--
    (i) Any net operating loss carryover described in paragraph 
(d)(1)(iii) of this section (relating to the definition of loss 
subgroup); and
    (ii) Any recognized built-in loss of the loss subgroup.
    (2) Example. The following example illustrates the principle of 
this paragraph (f):

    Pre-change subgroup attribute. (i) P is the common parent of a 
consolidated group. P owns all the stock of L, and L owns all the 
stock of L1. L2 is not a member of an affiliated group, and has a 
net operating loss arising in Year 1 that is carried over to Year 2. 
On December 11, Year 2, L1 acquires all the stock of L2, causing an 
ownership change of L2. During Year 2, the P group has a 
consolidated net operating loss that is carried over to Year 3. On 
November 2, Year 3, M acquires all the L stock from P. M, L, L1, and 
L2 thereafter file consolidated returns. All of the P group Year 2 
consolidated net operating loss is apportioned under Sec. 1.1502-
21(b) to L and L2, which they carry over to the M group.
    (ii)(a) L, L1, and L2 compose a loss subgroup because--
    (1) They were affiliated with each other in the P group (the 
former group);
    (2) They bear a relationship described in section 1504(a)(1) to 
each other through a loss subgroup parent (L) immediately after they 
became members of the L group; and
    (3) At least one of the members (here, both L and L2) carries 
over a net operating loss to the M group (the current group) that is 
described in paragraph (d)(1)(iii) of this section.
    (b) For this purpose, L2's loss from Year 1 that was a SRLY loss 
with respect to the P group (the former group) is described in 
paragraph (d)(1)(iii) of this section because L2 had an ownership 
change on becoming a member of the P group (see Sec. 1.1502-96(a)) 
on December 11, Year 2. Starting on December 12, Year 2, the P group 
no longer separately tracked owner shifts of the stock of L1 with 
respect to the Year 1 loss. M's acquisition results in an ownership 
change of L, and therefore the L loss subgroup under Sec. 1.1502-
92(a)(2). See Sec. 1.1502-93 for rules governing the computation of 
the subgroup section 382 limitation.
    (iii) In the M group, L2's Year 1 loss continues to be subject 
to a section 382 limitation resulting from the ownership change that 
occurred on December 11, Year 2. See Sec. 1.1502-96(c).

    (g) Net unrealized built-in gain and loss--(1) In general. The 
determination whether a consolidated group (or loss subgroup) has a net 
unrealized built-in gain or loss under section 382(h)(3) is based on 
the aggregate amount of the separately computed net unrealized built-in 
gains or losses of each member that is included in the group (or loss 
subgroup) under paragraph (g)(2) of this section, including items of 
built-in income and deduction described in section 382(h)(6). Thus, for 
example, amounts deferred under section 267, or under Sec. 1.1502-13 
(other than amounts deferred with respect to the stock of a member (or 
an intercompany obligation) included in the group (or loss subgroup) 
under paragraph (g)(2) of this section) are built-in items. The 
threshold requirement under section 382(h)(3)(B) applies on an 
aggregate basis and not on a member-by-member basis. The separately 
computed amount of a member included in a group or loss subgroup does 
not include any unrealized built-in gain or loss on stock (including 
stock described in section 1504(a)(4) and Sec. 1.382-2T(f)(18)(ii) and 
(iii)) of another member included in the group or loss subgroup (or an 
intercompany obligation). However, a member of a group or loss subgroup 
includes in its separately computed amount the unrealized built-in gain 
or loss on stock (but not on an intercompany obligation) of another 
member not included in the group or loss subgroup. If a member is not 
included in the determination whether a group (or subgroup) has a net 
unrealized built-in loss under paragraph (g)(2)(ii) or (iv) of this 
section, that member is not included in the loss group or loss 
subgroup. See Sec. 1.1502-94(c) (relating to built-in gain or loss of a 
new loss member) and Sec. 1.1502-96(a) (relating to the end of separate 
tracking of certain losses).
    (2) Members included--(i) Consolidated group with a net operating 
loss. The members included in the determination whether a consolidated 
group described in paragraph (c)(1)(i) or (ii) of this section 
(relating to loss groups with net operating losses) has a net 
unrealized built-in gain are all members of the consolidated group on 
the day that the determination is made.
    (ii) Determination whether a consolidated group has a net 
unrealized built-in loss. The members included in the determination 
whether a consolidated group is a loss group described in paragraph 
(c)(1)(iii) of this section are--
    (A) The common parent and all other members that have been 
affiliated with the common parent for the 5 consecutive year period 
ending on the day that the determination is made;

[[Page 36137]]

    (B) Any other member that has a net unrealized built-in loss 
determined under paragraph (g)(1) of this section on the date that the 
determination is made, and that is neither a new loss member described 
in Sec. 1.1502-94(a)(1)(ii) nor a member of a loss subgroup described 
in paragraph (d)(2) of this section;
    (C) Any new loss member described in Sec. 1.1502-94(a)(1)(ii) that 
has a net unrealized built-in gain determined under paragraph (g)(1) of 
this section on the day that the determination is made; and
    (D) The members of a loss subgroup described in paragraph (d)(2) of 
this section if the members of the subgroup have, in the aggregate, a 
net unrealized built-in gain on the day that the determination is made.
    (iii) Loss subgroup with net operating loss carryovers. The members 
included in the determination whether a loss subgroup described in 
paragraph (d)(1) of this section (relating to loss subgroups with net 
operating loss carryovers) has a net unrealized built-in gain are all 
members of the loss subgroup on the day that the determination is made.
    (iv) Determination whether subgroup has a net unrealized built-in 
loss. The members included in the determination whether a subgroup has 
a net unrealized built-in loss are those members described in 
paragraphs (d)(2)(i) and (ii) of this section.
    (v) Separate determination of section 382 limitation for recognized 
built-in losses and net operating losses. In determining whether a loss 
group described in paragraph (c)(1)(i) or (ii) of this section 
(relating to loss groups that have net operating loss carryovers) has a 
net unrealized built-in gain which, if recognized, increases the 
consolidated section 382 limitation, the group includes, under 
paragraph (g)(2)(i) of this section, all of its members on the day the 
determination is made. Under paragraph (g)(2)(ii) of this section, 
however, for purposes of determining whether a group has a net 
unrealized built-in loss described in paragraph (c)(1)(iii) of this 
section, not all members of the consolidated group may be included. 
Thus, a consolidated group may have recognized built-in gains that 
increase the amount of consolidated taxable income that may be offset 
by its pre-change net operating loss carryovers that did not arise (and 
are not treated as arising) in a SRLY, and also may have recognized 
built-in losses the absorption of which is limited. Similar results may 
obtain for loss subgroups under paragraphs (g)(2)(iii) and (iv) of this 
section. See Sec. 1.1502-93(c)(2) for rules prohibiting the use of 
recognized built-in gains to increase the amount of consolidated 
taxable income that can be offset by recognized built-in losses.
    (3) Coordination with rule that ends separate tracking. See 
Sec. 1.1502-96(a) for special rules relating to members (or loss 
subgroups) that have an ownership change within six months before, on, 
or after becoming a member of the group.
    (4) Acquisitions of built-in gain or loss assets. A member of a 
consolidated group (or loss subgroup) may not, in determining its 
separately computed net unrealized built-in gain or loss, include any 
gain or loss with respect to assets acquired with a principal purpose 
to affect the amount of its net unrealized built-in gain or loss. A 
group (or loss subgroup) may not, in determining its net unrealized 
built-in gain or loss, include any gain or loss of a member acquired 
with a principal purpose to affect the amount of its net unrealized 
built-in gain or loss.
    (5) Indirect ownership. A member's separately computed net 
unrealized built-in gain or loss is adjusted to the extent necessary to 
prevent any duplication of unrealized gain or loss attributable to the 
member's indirect ownership interest in another member through a 
nonmember if the member has a 5-percent or greater ownership interest 
in the nonmember.
    (6) Common parent not common parent for five years. If the common 
parent has become the common parent of an existing group within the 
previous 5 year period in a transaction described in Sec. 1.1502-
75(d)(2)(ii) or (3), appropriate adjustments must be made in applying 
paragraph (g)(2)(ii)(A) of this section so that corporations that have 
not been members of the group for five years are not included. In such 
a case, references to the common parent in paragraph (g)(2)(ii)(A) of 
this section are to the former common parent. Thus, members of the 
group remaining in existence (including the new common parent) that 
have not been affiliated with the former common parent (or that have 
not been members of that group) for the five consecutive year period 
ending on the day that the determination is made are not included under 
paragraph (g)(2)(ii)(A) of this section. See, however, Sec. 1.1502-
96(a)(2) for special rules relating to members (or loss subgroups) that 
have an ownership change within six months before, on, or after the 
time that the member becomes a member of the group.
    (h) Recognized built-in gain or loss--(1) In general. [Reserved].
    (2) Disposition of stock or an intercompany obligation of a member. 
Gain or loss recognized by a member on the disposition of stock 
(including stock described in section 1504(a)(4) and Sec. 1.382-
2T(f)(18)(ii) and (iii)) of another member is treated as a recognized 
gain or loss for purposes of section 382(h)(2) (unless disallowed under 
Sec. 1.1502-20 or otherwise), even though gain or loss on such stock 
was not included in the determination of a net unrealized built-in gain 
or loss under paragraph (g)(1) of this section. Gain or loss recognized 
by a member with respect to an intercompany obligation is treated as 
recognized gain or loss only to the extent (if any) the transaction 
gives rise to aggregate income or loss within the consolidated group.
    (3) Intercompany transactions. Gain or loss that is deferred under 
provisions such as section 267 and Sec. 1.1502-13 is treated as 
recognized built-in gain or loss only to the extent taken into account 
by the group during the recognition period. See also Sec. 1.1502-
13(c)(7) Example 10.
    (4) Exchanged basis property. If the adjusted basis of any asset is 
determined, directly or indirectly, in whole or in part, by reference 
to the adjusted basis of another asset held by the member at the 
beginning of the recognition period, the asset is treated, with 
appropriate adjustments, as held by the member at the beginning of the 
recognition period.
    (i) [Reserved]
    (j) Predecessor and successor corporations. A reference in this 
section and Secs. 1.1502-92 through 1.1502-99 to a corporation, member, 
common parent, loss subgroup parent, or subsidiary includes, as the 
context may require, a reference to a predecessor or successor 
corporation as defined in Sec. 1.1502-1(f)(4). For example, the 
determination whether a successor satisfies the continuous affiliation 
requirement of paragraph (d)(2)(i) or (g)(2)(ii) of this section is 
made by reference to its predecessor.


Sec. 1.1502-92  Ownership change of a loss group or a loss subgroup.

    (a) Scope. This section provides rules for determining if there is 
an ownership change for purposes of section 382 with respect to a loss 
group or a loss subgroup. See Sec. 1.1502-94 for special rules for 
determining if there is an ownership change with respect to a new loss 
member and Sec. 1.1502-96(b) for special rules for determining if there 
is an ownership change of a subsidiary.
    (b) Determination of an ownership change--(1) Parent change 
method--(i) Loss group. A loss group has an ownership change if the 
loss group's common parent has an ownership change under section 382 
and the regulations thereunder. Solely for

[[Page 36138]]

purposes of determining whether the common parent has an ownership 
change--
    (A) The losses described in Sec. 1.1502-91(c) are treated as net 
operating losses (or a net unrealized built-in loss) of the common 
parent; and
    (B) The common parent determines the earliest day that its testing 
period can begin by reference to only the attributes that make the 
group a loss group under Sec. 1.1502-91(c).
    (ii) Loss subgroup. A loss subgroup has an ownership change if the 
loss subgroup parent has an ownership change under section 382 and the 
regulations thereunder. The principles of Sec. 1.1502-95(b) (relating 
to ceasing to be a member of a consolidated group) apply in determining 
whether the loss subgroup parent has an ownership change. Solely for 
purposes of determining whether the loss subgroup parent has an 
ownership change--
    (A) The losses described in Sec. 1.1502-91(d) are treated as net 
operating losses (or a net unrealized built-in loss) of the loss 
subgroup parent;
    (B) The day that the members of the loss subgroup become members of 
the group (or a loss subgroup) is treated as a testing date within the 
meaning of Sec. 1.382-2(a)(4); and
    (C) The loss subgroup parent determines the earliest day that its 
testing period can begin under Sec. 1.382-2T(d)(3) by reference to only 
the attributes that make the members a loss subgroup under Sec. 1.1502-
91(d).
    (iii) Special rule if election regarding section 1504(a)(1) 
relationship is made--(A) Ownership change of deemed loss subgroup 
parent is an ownership change of loss subgroup. If the common parent 
makes an election under Sec. 1.1502-91(d)(4), each of the members in 
the loss subgroup is treated as the loss subgroup parent for purposes 
of determining whether the loss subgroup has an ownership change under 
section 382 and the regulations thereunder on or after the day the 
members become members of the group.
    (B) Exception. Paragraph (b)(1)(iii)(A) of this section does not 
apply to cause an ownership change of a loss subgroup if a deemed loss 
subgroup parent has an ownership change upon (or after) ceasing to be a 
member of the current group.
    (2) Examples. The following examples illustrate the principles of 
this paragraph (b):

    Example 1. Loss group--ownership change of the common parent. 
(i) A owns all the L stock. L owns 80 percent and B owns 20 percent 
of the L1 stock. For Year 1, the L group has a consolidated net 
operating loss that resulted from the operations of L1 and that is 
carried over to Year 2. The value of the L stock is $1000. The total 
value of the L1 stock is $600 and the value of the L1 stock held by 
B is $120. The L group is a loss group under Sec. 1.1502-91(c)(1) 
because it is entitled to use its net operating loss carryover from 
Year 1. On August 15, Year 2, A sells 51 percent of the L stock to 
C. The following is a graphic illustration of these facts:

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    (ii) Under paragraph (b)(1)(i) of this section, section 382 and 
the regulations thereunder are applied to L to determine whether it 
(and therefore the L loss group) has an ownership change with 
respect to its net operating loss carryover from Year 1 attributable 
to L1 on August 15, Year 2. The sale of the L stock to C causes an 
ownership change of L under Sec. 1.382-2T and of the L loss group 
under paragraph (b)(1)(i) of this section. The amount of 
consolidated taxable income of the L loss group for any post-change 
taxable year that may be offset by its pre-change consolidated 
attributes (that is, the net operating loss carryover from Year 1 
attributable to L1) may not exceed the consolidated section 382 
limitation for the L loss group for the taxable year.
    Example 2. Loss group--owner shifts of subsidiaries disregarded. 
(i) The facts are the same as in Example 1, except that on August 
15, Year 2, A sells only 49 percent of the L stock to C and, on 
December 12, Year 3, in an unrelated transaction, B sells the 20 
percent of the L1 stock to D. A's sale of the L stock to C does not 
cause an ownership change of L under Sec. 1.382-2T nor of the L loss 
group under paragraph (b)(1)(i) of this section. The following is a 
graphic illustration of these facts:

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    (ii) B's subsequent sale of L1 stock is not taken into account for 
purposes of determining whether the L loss group has an ownership 
change under paragraph (b)(1)(i) of this section, and, accordingly, 
there is no ownership change of the L loss group. See paragraph (c) of 
this section, however, for a supplemental ownership change method that 
would apply to cause an ownership change if the purchases by C and D 
were pursuant to a plan or arrangement and certain other conditions are 
satisfied.
    Example 3. Loss subgroup--ownership change of loss subgroup parent 
controls. (i) P owns all the L stock. L owns 80 percent and A owns 20 
percent of the L1 stock. The P group has a consolidated net operating 
loss arising in Year 1 that is carried over to Year 2. On September 9, 
Year 2, P sells 51 percent of the L stock to B, and L1 is apportioned a 
portion of the Year 1 consolidated net operating loss under 
Sec. 1.1502-21(b), which it carries over to its next taxable year. L 
and L1 file a consolidated return for their first taxable year ending 
after the sale to B. The following is a graphic illustration of these 
facts:

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    (ii) Under Sec. 1.1502-91(d)(1), L and L1 compose a loss 
subgroup on September 9, Year 2, the day that they become members of 
the L group. Under paragraph (b)(1)(ii) of this section, section 382 
and the regulations thereunder are applied to L to determine whether 
it (and therefore the L loss subgroup) has an ownership change with 
respect to the portion of the Year 1 consolidated net operating loss 
that is apportioned to L1 on September 9, Year 2. L has an ownership 
change resulting from P's sale of 51 percent of the L stock to A. 
Therefore, the L loss subgroup has an ownership change with respect 
to that loss.
    Example 4. Loss group and loss subgroup--contemporaneous 
ownership changes. (i) A owns all the stock of corporation M, M owns 
35 percent and B owns 65 percent of the L stock, and L owns all the 
L1 stock. The L group has a consolidated net operating loss arising 
in Year 1 that is carried over to Year 2. On May 19, Year 2, B sells 
45 percent of the L stock to M for cash. M, L, and L1 thereafter 
file consolidated returns. L and L1 are each apportioned a portion 
of the Year 1 consolidated net operating loss, which they carry over 
to the M group's Year 2 and Year 3 consolidated return years. The M 
group has a consolidated net operating loss arising in Year 2 that 
is carried over to Year 3. On June 9, Year 3, A sells 70 percent of 
the M stock to C. The following is a graphic illustration of these 
facts:

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    (ii) Under Sec. 1.1502-91(d)(1), L and L1 compose a loss 
subgroup on May 19, Year 2, the day they become members of the M 
group. Under paragraph (b)(1)(ii) of this section, section 382 and 
the regulations thereunder are applied to L to determine whether L 
(and therefore the L loss subgroup) has an ownership change with 
respect to the loss carryovers from Year 1 on May 19, Year 2, a 
testing date because of B's sale of L stock to M. The sale of L 
stock to M results in only a 45 percentage point increase in A's 
ownership of L stock. Thus, there is no ownership change of L (or 
the L loss subgroup) with respect to those loss carryovers under 
paragraph (b)(1)(ii) of this section on that day.
    (iii) June 9, Year 3, is also a testing date with respect to the 
L loss subgroup because of A's sale of M stock to C. The sale 
results in a 56 percentage point increase in C's ownership of L 
stock, and L has an ownership change. Therefore, the L loss subgroup 
has an ownership change on that day with respect to the loss 
carryovers from Year 1.
    (iv) Paragraph (b)(1)(i) of this section requires that section 
382 and the regulations thereunder be applied to M to determine 
whether M (and therefore the M loss group) has an ownership change 
with respect to the net operating loss carryover from Year 2 on June 
9, Year 3, a testing date because of A's sale of M stock to C. The 
sale results in a 70 percentage point increase in C's ownership of M 
stock, and M has an ownership change. Therefore, the M loss group 
has an ownership change on that day with respect to that loss 
carryover.
    Example 5--Deemed subgroup parent. (i) P owns all the stock of L 
and L1 and 80 percent of the stock of T. A owns the remaining 20 
percent of the stock of T. L1 owns all the stock of L2. P1, which 
owns 60 percent of the stock of P, acquires, at the beginning of 
Year 2, the T, L, and L1 stock owned by P, and T, L, L1, and L2 
become members of the P1 group. The P group has a consolidated net 
operating loss arising in Year 1 that is carried over to Year 2. L, 
L1, and L2 are each apportioned a portion of the Year 1 consolidated 
net operating loss under Sec. 1.1502-21(b), which they carry over to 
the P1 group's Year 2 and Year 3 consolidated return years. P1 makes 
the election described in Sec. 1.1502-91(d)(4) to treat T, L, L1 and 
L2 as meeting the section 1504(a)(1) requirement of Sec. 1.1502-
91(d)(1)(ii). As a result of the election, T, L, L1 and L2 compose a 
loss subgroup and T, L, L1, and L2 are each treated as the loss 
subgroup parent for purposes of this paragraph (b). Because of P1's 
indirect ownership of T, L, L1, and L2 prior to P1's acquisition of 
the T, L, and L1 stock, P1's acquisition does not cause an ownership 
change of the loss subgroup.
    (ii) On February 2, Year 3, L1 sells all of the stock of L2 to 
B. Although L2 is treated as a loss subgroup parent, the 
determination whether the loss subgroup comprised of T, L, and L1 
has an ownership change under this paragraph (b) is made without 
regard to the sale of L2 because L2's ownership change occurred upon 
ceasing to be a member of the P1 group. See Sec. 1.1502-95(b) to 
determine the application of section 382 to L2 when L2 ceases to be 
a member of the P1 group and the T, L, L1 and L2 loss subgroup.
    (iii) On March 26, Year 3, A sells her 20 percent minority stock 
interest in T to C . C's purchase, together with the 32 percentage 
point owner shift effected by P1's acquisition of the T stock at the 
beginning of Year 2, causes an ownership change of T, and therefore 
of the loss subgroup comprised of T, L, and L1.

    (3) Special adjustments--(i) Common parent succeeded by a new 
common parent. For purposes of determining if a loss group has an 
ownership change, if the common parent of a loss group is succeeded or 
acquired by a new common parent and the loss group remains in 
existence, the new common parent is treated as a continuation of the 
former common parent with appropriate adjustments to take into account 
shifts in ownership of the former common parent during the testing 
period (including shifts that occur incident to the common parent's 
becoming the former common parent). A new common parent may be a 
continuation of the former common parent even if, under Sec. 1.1502-
91(g)(2)(ii), the new common parent is not included in determining 
whether the group has a net unrealized built-in loss.
    (ii) Newly created loss subgroup parent. For purposes of 
determining if a loss subgroup has an ownership change, if the member 
that is the loss subgroup parent has not been the loss subgroup parent 
for at least 3 years as of a testing date, appropriate adjustments must 
be made to take into account owner shifts of members of the loss 
subgroup so that the structure of the loss subgroup does not have the 
effect of avoiding an ownership change under section 382. (See 
paragraph (b)(3)(iii), Example 3 of this section.)
    (iii) Examples. The following examples illustrate the principles of 
this paragraph (b)(3):

    Example 1. New common parent acquires old common parent.  (i) A, 
who owns all the L stock, sells 30 percent of the L stock to B on 
August 26, Year 1. L owns all the L1 stock. The L group has a 
consolidated net operating loss arising in Year 1 that is carried 
over to Year 3. On July 16, Year 2, A and B transfer their L stock 
to a newly created holding company, HC, in exchange for 70 percent 
and 30 percent, respectively, of the HC stock. HC, L, and L1 
thereafter file consolidated returns. Under the principles of 
Sec. 1.1502-75(d), the L loss group is treated as remaining in 
existence, with HC taking the place of L as the new common parent of 
the loss group. The following is a graphic illustration of these 
facts:

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    (ii) On November 11, Year 3, A sells 25 percent of the HC stock 
to B. For purposes of determining if the L loss group has an 
ownership change under paragraph (b)(1)(i) of this section on 
November 11, Year 3, HC is treated as a continuation of L under 
paragraph (b)(4)(i) of this section because it acquired L and became 
the common parent without terminating the L loss group. Accordingly, 
HC's testing period commences on January 1, Year 1, the first day of 
the taxable year of the L loss group in which the consolidated net 
operating loss that is carried over to Year 3 arose (see Sec. 1.382-
2T(d)(3)(i)). Immediately after the close of November 11, Year 3, 
B's percentage ownership interest in the common parent of the loss 
group (HC) has increased by 55 percentage points over its lowest 
percentage ownership during the testing period (zero percent). 
Accordingly, HC and the L loss group have an ownership change on 
that day.
    Example 2. New common parent in case in which common parent 
ceases to exist. (i) A, B, and C each own one-third of the L stock. 
L owns all the L1 stock. The L group has a consolidated net 
operating loss arising in Year 2 that is carried over to Year 3. On 
November 22, Year 3, L is merged into P, a corporation owned by D, 
and L1 thereafter files consolidated returns with P. A, B, and C, as 
a result of owning stock of L, own 90 percent of P's stock after the 
merger. D owns the remaining 10 percent of P's stock. The merger of 
L into P qualifies as a reverse acquisition of the L group under 
Sec. 1.1502-75(d)(3)(i), and the L loss group is treated as 
remaining in existence, with P taking the place of L as the new 
common parent of the L group. The following is a graphic 
illustration of these facts:

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    (ii) For purposes of determining if the L loss group has an 
ownership change on November 22, Year 3, the day of the merger, P is 
treated as a continuation of L so that the testing period for P 
begins on January 1, Year 2, the first day of the taxable year of 
the L loss group in which the consolidated net operating loss that 
is carried over to Year 3 arose. Immediately after the close of 
November 22, Year 3, D is the only 5-percent shareholder that has 
increased his ownership interest in P during the testing period 
(from zero to 10 percentage points).
    (iii) The facts are the same as in paragraph (i) of this Example 
2, except that A has held 23\1/3\ shares (23\1/3\ percent) of L's 
stock for five years, and A purchased an additional 10 shares of L 
stock from E two years before the merger. Immediately after the 
close of the day of the merger (a testing date), A's ownership 
interest in P, the common parent of the L loss group, has increased 
by 6\2/3\ percentage points over A's lowest percentage ownership 
during the testing period (23\1/3\ percent to 30 percent).
    (iv) The facts are the same as in (i) of this Example 2, except 
that P has a net operating loss arising in Year 1 that is carried to 
the first consolidated return year ending after the day of the 
merger. Solely for purposes of determining whether the L loss group 
has an ownership change under paragraph (b)(1)(i) of this section, 
the testing period for P commences on January 1, Year 2. P does not 
determine the earliest day for its testing period by reference to 
its net operating loss carryover from Year 1, which Secs. 1.1502-
1(f)(3) and 1.1502-75(d)(3)(i) treat as arising in a SRLY. See 
Sec. 1.1502-94 to determine the application of section 382 with 
respect to P's net operating loss carryover.
    Example 3. Newly acquired loss subgroup parent. (i) P owns all 
the L stock and L owns all the L1 stock. The P group has a 
consolidated net operating loss arising in Year 1 that is carried 
over to Year 3. On January 19, Year 2, L issues a 20 percent stock 
interest to B. On February 5, Year 3, P contributes its L stock to a 
newly formed subsidiary, HC, in exchange for all the HC stock, and 
distributes the HC stock to its sole shareholder A. HC, L, and L1 
thereafter file consolidated returns. A portion of the P group's 
Year 1 consolidated net operating loss is apportioned to L and L1 
under Sec. 1.1502-21(b) and is carried over to the HC group's year 
ending after February 5, Year 3. HC, L, and L1 compose a loss 
subgroup within the meaning of Sec. 1.1502-91(d) with respect to the 
net operating loss carryovers from Year 1. The following is a 
graphic illustration of these facts:

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    (ii) February 5, Year 3, is a testing date for HC as the loss 
subgroup parent with respect to the net operating loss carryovers of 
L and L1 from Year 1. See paragraph (b)(1)(ii)(B) of this section. 
For purposes of determining whether HC has an ownership change on 
the testing date, appropriate adjustments must be made with respect 
to the changes in the percentage ownership of the stock of HC 
because HC was not the loss subgroup parent for at least 3 years 
prior to the day on which it became a member of the HC loss subgroup 
(a testing date). The appropriate adjustments include adjustments so 
that HC succeeds to the owner shifts of other members of the former 
group. Thus, HC succeeds to the owner shift of L that resulted from 
the sale of the 20 percent interest to B in determining whether the 
HC loss subgroup has an ownership change on February 5, Year 3, and 
on any subsequent testing date that includes January 19, Year 2.

    (4) End of separate tracking of certain losses. If Sec. 1.1502-
96(a) (relating to the end of separate tracking of attributes) applies 
to a loss subgroup, then, while one or more members that were included 
in the loss subgroup remain members of the consolidated group, there is 
an ownership change with respect to their attributes described in 
Sec. 1.1502-96(a)(2) only if the consolidated group is a loss group and 
has an ownership change under paragraph (b)(1)(i) of this section (or 
such a member has an ownership change under Sec. 1.1502-96(b) (relating 
to ownership changes of subsidiaries)). If, however, the loss subgroup 
has had an ownership change before Sec. 1.1502-96(a) applies, see 
Sec. 1.1502-96(c) for the continuing application of the subgroup's 
section 382 limitation with respect to its pre-change subgroup 
attributes.
    (c) Supplemental rules for determining ownership change--
    (1) Scope. This paragraph (c) contains a supplemental rule for 
determining whether there is an ownership change of a loss group (or 
loss subgroup). It applies in addition to, and not instead of, the 
rules of paragraph (b) of this section. Thus, for example, if the 
common parent of the loss group has an ownership change under paragraph 
(b) of this section, the loss group has an ownership change even if, by 
applying this paragraph (c), the common parent would not have an 
ownership change. This paragraph (c) does not apply in determining an 
ownership change of a loss subgroup for which an election under 
Sec. 1.1502-91(d)(4) is made.
    (2) Cause for applying supplemental rule. This paragraph (c) 
applies to a loss group (or loss subgroup) if--
    (i) Any 5-percent shareholder of the common parent (or loss 
subgroup parent) increases its percentage ownership interest in the 
stock of both--
    (A) A subsidiary of the loss group (or loss subgroup) other than by 
a direct or indirect acquisition of stock of the common parent (or loss 
subgroup parent); and
    (B) The common parent (or loss subgroup parent);
    (ii) Those increases occur within a 3 year period ending on any day 
of a consolidated return year or, if shorter, the period beginning on 
the first day following the most recent ownership change of the loss 
group (or loss subgroup); and
    (iii) Either--
    (A) The common parent (or loss subgroup parent) has actual 
knowledge of the increase in the 5-percent shareholder's ownership 
interest in the stock of the subsidiary (or has actual knowledge of the 
plan or arrangement described in paragraph (c)(3)(i) of this section) 
before the date that the group's income tax return is filed for the 
taxable year that includes the date of that increase; or
    (B) At any time during the period described in paragraph (c)(2)(ii) 
of this section, the 5-percent shareholder of the common parent is also 
a 5-percent shareholder of the subsidiary (determined without regard to 
paragraph (c)(3)(i) of this section) whose percentage increase in the 
ownership of the stock of the subsidiary would be taken into account in 
determining if the subsidiary has an ownership change (determined as if 
the subsidiary was a loss corporation and applying the principles of 
Sec. 1.382-2T(k), including the principles relating to duty to 
inquire).
    (3) Operating rules. Solely for purposes of this paragraph (c)--
    (i) A 5-percent shareholder of the common parent (or loss subgroup 
parent) is treated as increasing its ownership interest in the stock of 
a subsidiary to the extent, if any, that another person or persons 
increases its percentage ownership interest in the stock of a 
subsidiary pursuant to a plan or arrangement under which the 5-percent 
shareholder increases its percentage ownership interest in the common 
parent (or loss subgroup parent);
    (ii) The rules in section 382(l)(3) and Secs. 1.382-2T(h) and 
1.382-4(d) (relating to constructive ownership) apply with respect to 
the stock of the subsidiary by treating such stock as stock of a loss 
corporation; and
    (iii) In the case of a loss subgroup, a subsidiary includes any 
member of the loss subgroup other than the loss subgroup parent. (A 
loss subgroup parent is, however, a subsidiary of the loss group of 
which it is a member.)
    (4) Supplemental ownership change rules. The determination whether 
the common parent (or loss subgroup parent) has an ownership change is 
made by applying paragraph (b)(1) of this section as modified by the 
following additional rules:
    (i) Additional testing dates for the common parent (or loss 
subgroup parent). A testing date for the common parent (or loss 
subgroup parent) also includes--
    (A) Each day on which there is an increase in the percentage 
ownership of stock of a subsidiary as described in paragraph (c)(2) of 
this section; and
    (B) The first day of the first consolidated return year for which 
the group is a loss group (or the members compose a loss subgroup).
    (ii) Treatment of subsidiary stock as stock of the common parent 
(or loss subgroup parent). The common parent (or loss subgroup parent) 
is treated as though it had issued to the person acquiring (or deemed 
to acquire) the subsidiary stock an amount of its own stock (by value) 
that equals the value of the subsidiary stock represented by the 
percentage increase in that person's ownership of the subsidiary 
(determined on a separate entity basis). Similar principles apply if 
the increase in percentage ownership interest is effected by a 
redemption or similar transaction.
    (iii) Different testing periods. Stock treated as issued under 
paragraph (c)(4)(ii) of this section on a testing date is not treated 
as so issued for purposes of applying the ownership change rules of 
this paragraph (c) and paragraph (b)(1) of this section in a testing 
period that does not include that testing date.
    (iv) Disaffiliation of a subsidiary. If a deemed issuance of stock 
under paragraph (c)(4)(ii) of this section would not cause the loss 
group (or loss subgroup) to have an ownership change before the day (if 
any) on which the subsidiary ceases to be a member of the loss group 
(or subgroup), then paragraph (c)(4) of this section shall not apply.
    (v) Subsidiary stock acquired first. If an increase of subsidiary 
stock described in paragraph (c)(2)(i)(A) of this section occurs before 
the date that the 5-percent shareholder increases its percentage 
ownership interest in the stock of the common parent (or loss subgroup 
parent), then the deemed issuance of stock is treated as occurring on 
that later date, but in an amount equal to the value of the subsidiary 
stock on the date it was acquired.
    (vi) Anti-duplication rule. If two or more 5-percent shareholders 
are treated as increasing their percentage ownership interests pursuant 
to the

[[Page 36151]]

same plan or arrangement described in paragraph (c)(3)(i) of this 
section, appropriate adjustments must be made so that the amount of 
stock treated as issued is not taken into account more than once.
    (5) Examples. The following examples illustrate the principles of 
this paragraph (c):

    Example 1. Stock of the common parent under supplemental rules. 
(i) A owns all the L stock. L is not a member of an affiliated group 
and has a net operating loss carryover arising in Year 1 that is 
carried over to Year 6. On September 20, Year 6, L transfers all of 
its assets and liabilities to a newly created subsidiary, S, in 
exchange for S stock. L and S thereafter file consolidated returns. 
On November 23, Year 6, B contributes cash to L in exchange for a 45 
percent ownership interest in L and contributes cash to S for a 20 
percent ownership interest in S.
    (ii) During the 3 year period ending on November 23, Year 6, B 
is a 5% shareholder of L and of S that increases its ownership 
interest in L and S during that period. Under paragraph (c)(4)(ii) 
of this section, the determination whether L (the common parent of a 
loss group) has an ownership change on November 23, Year 6 (or, 
subject to paragraph (c)(4)(iv) of this section, on any testing date 
in the testing period which includes November 23, Year 6), is made 
by applying paragraph (b)(1)(i) of this section and by treating the 
value of B's 20 percent ownership interest in S as if it were L 
stock issued to B. Because B is a 5% shareholder of both L and S 
during the 3 year period ending on November 23, Year 6, and B's 
increase in its percentage ownership in the stock of S would be 
taken into account in determining if S (if it were a loss 
corporation) had an ownership change, it is not relevant whether L 
has actual knowledge of B's acquisition of S stock.
    Example 2. Plan or arrangement--public offering of subsidiary 
stock. (i) A owns all the stock of L and L owns all the stock of L1. 
The L group has a consolidated net operating loss arising in Year 1 
that resulted from the operations of L1 and that is carried over to 
Year 2. On October 7, Year 2, A sells 49 percent of the L stock to 
B. As part of a plan that includes the sale of L stock, A causes a 
public offering of L1 stock on November 6, Year 2. L has actual 
knowledge of the plan. The following is a graphic illustration of 
these facts:

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    (ii) A's sale of the L stock to B does not cause an ownership 
change of the L loss group on October 7, Year 2, under the rules of 
Sec. 1.382-2T and paragraph (b)(1)(i) of this section.
    (iii) Because the issuance of L1 stock to the public occurs as 
part of the same plan as B's acquisition of L stock, and L has 
knowledge of the plan, paragraph (c)(4) of this section applies to 
determine whether the L loss group has an ownership change on 
November 6, Year 2 (or, subject to paragraph (c)(4)(iv) of this 
section, on any testing date for which the testing period includes 
November 6, Year 2).

    (d) Testing period following ownership change under this section. 
If a loss group (or a loss subgroup) has had an ownership change under 
this section, the testing period for determining a subsequent ownership 
change with respect to pre-change consolidated attributes (or pre-
change subgroup attributes) begins no earlier than the first day 
following the loss group's (or loss subgroup's) most recent change 
date.
    (e) Information statements--(1) Common parent of a loss group. The 
common parent of a loss group must file the information statement 
required by Sec. 1.382-2T(a)(2)(ii) for a consolidated return year 
because of any owner shift, equity structure shift, or other 
transaction described in Sec. 1.382-2T(a)(2)(i)--
    (i) With respect to the common parent and with respect to any 
subsidiary stock subject to paragraph (c) of this section; and
    (ii) With respect to an ownership change described in Sec. 1.1502-
96(b) (relating to ownership changes of subsidiaries).
    (2) Abbreviated statement with respect to loss subgroups. The 
common parent of a consolidated group that has a loss subgroup during a 
consolidated return year must file the information statement required 
by Sec. 1.382-2T(a)(2)(ii) because of any owner shift, equity structure 
shift, or other transaction described in Sec. 1.382-2T(a)(2)(i) with 
respect to the loss subgroup parent and with respect to any subsidiary 
stock subject to paragraph (c) of this section. Instead of filing a 
separate statement for each loss subgroup parent, the common parent 
(which is treated as a loss corporation) may file the single statement 
described in paragraph (e)(1) of this section. In addition to the 
information concerning stock ownership of the common parent, the single 
statement must identify each loss subgroup parent and state which loss 
subgroups, if any, have had ownership changes during the consolidated 
return year. The loss subgroup parent is, however, still required to 
maintain the records necessary to determine if the loss subgroup has an 
ownership change. This paragraph (e)(2) applies with respect to the 
attributes of a loss subgroup until, under Sec. 1.1502-96(a), the 
attributes are no longer treated as described in Sec. 1.1502-91(d) 
(relating to the definition of loss subgroup). After that time, the 
information statement described in paragraph (e)(1) of this section 
must be filed with respect to those attributes.


Sec. 1.1502-93  Consolidated section 382 limitation (or subgroup 
section 382 limitation).

    (a) Determination of the consolidated section 382 limitation (or 
subgroup section 382 limitation)--(1) In general. Following an 
ownership change, the consolidated section 382 limitation (or subgroup 
section 382 limitation) for any post-change year is an amount equal to 
the value of the loss group (or loss subgroup), as defined in paragraph 
(b) of this section, 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(h) (relating to recognized built-in gains and section 338 
gains), and section 382(m)(2) (relating to short taxable years). For 
special rules relating to the recognized built-in gains of a loss group 
(or loss subgroup), see paragraph (c)(2) of this section.
    (2) Coordination with apportionment rule. For special rules 
relating to apportionment of a consolidated section 382 limitation (or 
a subgroup section 382 limitation) or net unrealized built-in gain when 
one or more corporations cease to be members of a loss group (or a loss 
subgroup) and to aggregation of amounts so apportioned, see 
Sec. 1.1502-95(c).
    (b) Value of the loss group (or loss subgroup)--(1) Stock value 
immediately before ownership change. Subject to any adjustment under 
paragraph (b)(2) of this section, the value of the loss group (or loss 
subgroup) is the value, immediately before the ownership change, of the 
stock of each member, other than stock that is owned directly or 
indirectly by another member. For this purpose--
    (i) Ownership is determined under Sec. 1.382-2T;
    (ii) A member is considered to indirectly own stock of another 
member through a nonmember only if the member has a 5-percent or 
greater ownership interest in the nonmember; and
    (iii) Stock includes stock described in section 1504(a)(4) and 
Sec. 1.382-2T(f)(18)(ii) and (iii).
    (2) Adjustment to value--(i) In general. The value of the loss 
group (or loss subgroup), as determined under paragraph (b)(1) of this 
section, is adjusted under any rule in section 382 or the regulations 
thereunder requiring an adjustment to such value for purposes of 
computing the amount of the section 382 limitation. See, for example, 
section 382(e)(2) (redemptions and corporate contractions), section 
382(l)(1) (certain capital contributions) and section 382(l)(4) 
(ownership of substantial nonbusiness assets). For purposes of section 
382(e)(2), redemptions and corporate contractions that do not effect a 
transfer of value outside of the loss group (or loss subgroup) are 
disregarded. For purposes of section 382(l)(1), capital contributions 
between members of the loss group (or loss subgroup) (or a contribution 
of stock to a member made solely to satisfy the loss subgroup parent 
requirement of paragraph (d)(1)(ii) or (2)(ii) of this section), are 
not taken into account. Also, the substantial nonbusiness asset test of 
section 382(l)(4) is applied on a group (or subgroup) basis, and is not 
applied separately to its members.
    (ii) Anti-duplication. Appropriate adjustments must be made to the 
extent necessary to prevent any duplication of the value of the stock 
of a member, even though corporations that do not file consolidated 
returns may not be required to make such an adjustment. In making these 
adjustments, the group (or loss subgroup) may apply the principles of 
Sec. 1.382-8 (relating to controlled groups of corporations) in 
determining the value of a loss group (or loss subgroup) even if that 
section would not apply if separate returns were filed. Also, the 
principles of Sec. 1.382-5(d) (relating to successive ownership changes 
and absorption of a section 382 limitation) may apply to adjust the 
consolidated section 382 limitation (or subgroup section 382 
limitation) of a loss group (or loss subgroup) to avoid a duplication 
of value if there are simultaneous (rather than successive) ownership 
changes.
    (3) Examples. The following examples illustrate the principles of 
this paragraph (b):

    Example 1. Basic case. (i) L, L1, and L2 compose a loss group. L 
has outstanding common stock, the value of which is $100. L1 has 
outstanding common stock and

[[Page 36154]]

preferred stock that is described in section 1504(a)(4). L owns 90 
percent of the L1 common stock, and A owns the remaining 10 percent 
of the L1 common stock plus all the preferred stock. The value of 
the L1 common stock is $40, and the value of the L1 preferred stock 
is $30. L2 has outstanding common stock, 50 percent of which is 
owned by L and 50 percent by L1. The L group has an ownership 
change. The following is a graphic illustration of these facts:

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BILLING CODE 4830-01-C

    (ii) Under paragraph (b)(1) of this section, the L group does 
not include the value of the stock of any member that is owned 
directly or indirectly by another member in computing its 
consolidated section 382 limitation. Accordingly, the value of the 
stock of the loss group is $134, the sum of the value of--
    (a) The common stock of L ($100);
    (b) The 10 percent of the L1 common stock ($4) owned by A; and
    (c) The L1 preferred stock ($30) owned by A.
    Example 2--Indirect ownership. (i) L and L1 compose a 
consolidated group. L's stock has a value of $100. L owns 80 shares 
(worth $80) and corporation M owns 20 shares (worth $20) of the L1 
stock. L also owns 79 percent of the stock of corporation M. The L 
group has an ownership change. The following is a graphic 
illustration of these facts:

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BILLING CODE 4830-01-C
    (ii) Under paragraph (b)(1) of this section, because of L's more 
than 5 percent ownership interest in M, a nonmember, L is considered 
to indirectly own 15.8 shares of the L1 stock held by M (79%  x  20 
shares). The value of the L loss group is $104.20, the sum of the 
values of--
    (a) The L stock ($100); and
    (b) The L1 stock not owned directly or indirectly by L (21%  x  
$20, or $4.20).

    (c) Recognized built-in gain of a loss group or loss subgroup--(1) 
In general. If a loss group (or loss subgroup) has a net unrealized 
built-in gain, any recognized built-in gain of the loss group (or loss 
subgroup) is taken into account under section 382(h) in determining the 
consolidated section 382 limitation (or subgroup section 382 
limitation).
    (2) Adjustments. Appropriate adjustments must be made so that any 
recognized built-in gain of a member that increases more than one 
section 382 limitation (whether consolidated, subgroup, or separate) 
does not effect a duplication in the amount of consolidated taxable 
income that can be offset by pre-change net operating losses. For 
example, a consolidated section 382 limitation that is increased by 
recognized built-in gains is reduced to the extent that pre-change net 
operating losses of a loss subgroup absorb additional consolidated 
taxable income because the same recognized built-in gains caused an 
increase in that loss subgroup's section 382 limitation. In addition, 
recognized built-in gain may not increase the amount of consolidated 
taxable income that can be offset by recognized built-in losses.
    (d) Continuity of business--(1) In general. A loss group (or a loss 
subgroup) is treated as a single entity for purposes of determining 
whether it satisfies the continuity of business enterprise requirement 
of section 382(c)(1).
    (2) Example. The following example illustrates the principle of 
this paragraph (d):

    Example. Continuity of business enterprise. L owns all the stock 
of two subsidiaries, L1 and L2. The L group has an ownership change. 
It has pre-change consolidated attributes attributable to L2. Each 
of the members has historically conducted a separate line of 
business. Each line of business is approximately equal in value. One 
year after the ownership change, L discontinues its separate 
business and the business of L2. The separate business of L1 is 
continued for the remainder of the 2 year period following the 
ownership change. The continuity of business enterprise requirement 
of section 382(c)(1) is met even though the separate businesses of L 
and L2 are discontinued.

    (e) Limitations of losses under other rules. If a section 382 
limitation for a post-change year exceeds the consolidated taxable 
income that may be offset by pre-change attributes for any reason, 
including the application of the limitation of Sec. 1.1502-21(c), the 
amount of the excess is carried forward under section 382(b)(2) 
(relating to the carryforward of unused section 382 limitation).


Sec. 1.1502-94  Coordination with section 382 and the regulations 
thereunder when a corporation becomes a member of a consolidated group.

    (a) Scope--(1) In general. This section applies section 382 and the 
regulations thereunder to a corporation that is a new loss member of a 
consolidated group. A corporation is a new loss member if it--
    (i) Carries over a net operating loss that arose (or is treated 
under Sec. 1.1502-21(c) as arising) in a SRLY with respect to the 
current group, and that is not described in Sec. 1.1502-91(d)(1); or
    (ii) Has a net unrealized built-in loss (determined under paragraph 
(c) of this section immediately before it becomes a member of the 
current group by treating that day as a change date) that is not taken 
into account under Sec. 1.1502-91(d)(2) in determining whether two or 
more corporations compose a loss subgroup.
    (2) Successor corporation as new loss member. A new loss member 
also includes any successor to a corporation that has a net operating 
loss carryover arising in a SRLY and that is treated as remaining in 
existence under Sec. 1.382-2(a)(1)(ii) following a transaction 
described in section 381(a).
    (3) Coordination in the case of a loss subgroup. For rules 
regarding the determination of whether there is an ownership change of 
a loss subgroup with respect to a net operating loss or a net 
unrealized built-in loss described in Sec. 1.1502-91(d) (relating to 
the definition of loss subgroup) and the computation of a subgroup 
section 382 limitation following such an ownership change, see 
Secs. 1.1502-92 and 1.1502-93.
    (4) End of separate tracking of certain losses. If Sec. 1.1502-
96(a) (relating to the end of separate tracking of attributes) applies 
to a new loss member, then, while that member remains a member of

[[Page 36156]]

the consolidated group, there is an ownership change with respect to 
its attributes described in Sec. 1.1502-96(a)(2) only if the 
consolidated group is a loss group and has an ownership change under 
Sec. 1.1502-92(b)(1)(i) (or that member has an ownership change under 
Sec. 1.1502-96(b) (relating to ownership changes of subsidiaries)). If, 
however, the new loss member has had an ownership change before 
Sec. 1.1502-96(a) applies, see Sec. 1.1502-96(c) for the continuing 
application of the section 382 limitation with respect to the member's 
pre-change losses.
    (5) Cross-reference. See section 382(a) and Sec. 1.1502-96(c) for 
the continuing effect of an ownership change after a corporation 
becomes or ceases to be a member.
    (b) Application of section 382 to a new loss member--(1) In 
general. Section 382 and the regulations thereunder apply to a new loss 
member to determine, on a separate entity basis, whether and to what 
extent a section 382 limitation applies to limit the amount of 
consolidated taxable income that may be offset by the new loss member's 
pre-change separate attributes. For example, if an ownership change 
with respect to the new loss member occurs under section 382 and the 
regulations thereunder, the amount of consolidated taxable income for 
any post-change year that may be offset by the new loss member's pre-
change separate attributes shall not exceed the section 382 limitation 
as determined separately under section 382(b) with respect to that 
member for such year. If the post-change year includes the change date, 
section 382(b)(3)(A) is applied so that the section 382 limitation of 
the new loss member does not apply to the portion of the taxable income 
for such year that is allocable to the period in such year on or before 
the change date. See generally Sec. 1.382-6 (relating to the allocation 
of income and loss).
    (2) Adjustment to value. Appropriate adjustments must be made to 
the extent necessary to prevent any duplication of the value of the 
stock of a member, even though corporations that do not file 
consolidated returns may not be required to make such an adjustment. 
For example, the principles of Sec. 1.1502-93(b)(2)(ii) (relating to 
adjustments to value) apply in determining the value of a new loss 
member.
    (3) Pre-change separate attribute defined. A pre-change separate 
attribute of a new loss member is--
    (i) Any net operating loss carryover of the new loss member 
described in paragraph (a)(1) of this section; and
    (ii) Any recognized built-in loss of the new loss member.
    (4) Examples. The following examples illustrate the principles of 
this paragraph (b):

    Example 1. Basic case. (i) A and P each own 50 percent of the L 
stock. On December 19, Year 6, P purchases 30 percent of the L stock 
from A for cash. L has net operating losses arising in Year 1 and 
Year 2 that it carries over to Year 6 and Year 7. The following is a 
graphic illustration of these facts:

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    (ii) L is a new loss member because it has net operating loss 
carryovers that arose in a SRLY with respect to the P group and L is 
not a member of a loss subgroup under Sec. 1.1502-91(d). Under 
section 382 and the regulations thereunder, L is a loss corporation 
on December 19, Year 6, that day is a testing date for L, and the 
testing period for L commences on December 20, Year 3.
    (iii) P's purchase of L stock does not cause an ownership change 
of L on December 19, Year 6, with respect to the net operating loss 
carryovers from Year 1 and Year 2 under section 382 and Sec. 1.382-
2T. The use of the loss carryovers, however, is subject to 
limitation under Sec. 1.1502-21(c).
    Example 2. Multiple new loss members. (i) The facts are the same 
as in Example 1, and, on December 31, Year 6, L purchases all the 
stock of L1 from B for cash. L1 has a net operating loss of $40 
arising in Year 3 that it carries over to Year 7. The following is a 
graphic illustration of these facts:

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[[Page 36159]]

    (ii) L1 is a new loss member because it has a net operating loss 
carryover from Year 3 that arose in a SRLY with respect to the P 
group and L1 is not a member of a loss subgroup under Sec. 1.1502-
91(d)(1).
    (iii) L's purchase of all the stock of L1 causes an ownership 
change of L1 on December 31, Year 6, under section 382 and 
Sec. 1.382-2T. Accordingly, a section 382 limitation based on the 
value of the L1 stock immediately before the ownership change limits 
the amount of consolidated taxable income of the P group for any 
post-change year that may be offset by L1's loss from Year 3.
    (iv) L1's ownership change upon becoming a member of the P group 
is an ownership change described in Sec. 1.1502-96(a). Thus, 
starting on January 1, Year 7, the P group no longer separately 
tracks owner shifts of the stock of L1 with respect to L1's loss 
from Year 3, and the P group is a loss group because L1's Year 3 
loss is treated as a loss described in Sec. 1.1502-91(c).
    Example 3. Ownership changes of new loss members. (i) The facts 
are the same as in Example 2, and, on July 30, Year 7, C purchases 
all the stock of P for cash.
    (ii) L is a new loss member on July 30, Year 7, because its Year 
1 and Year 2 losses arose in SRLYs with respect to the P group and 
it is not a member of a loss subgroup under Sec. 1.1502-91(d)(1). 
The testing period for L commences on August 1, Year 4. C's purchase 
of all the P stock causes an ownership change of L on July 30, Year 
7, under section 382 and Sec. 1.382-2T with respect to its Year 1 
and Year 2 losses. Accordingly, a section 382 limitation based on 
the value of the L stock immediately before the ownership change 
limits the amount of consolidated taxable income of the P group for 
any post-change year that may be offset by L's Year 1 and Year 2 
losses. See Sec. 1.1502-21(c) for rules relating to an additional 
limitation.
    (iii) The P group is a loss group on July 30, Year 7, because it 
is entitled to use L1's loss from Year 3, and such loss is no longer 
treated as a loss of a new loss member starting the day after L1's 
ownership change on December 31, Year 6. See Secs. 1.1502-96(a) and 
1.1502-91(c)(2). C's purchase of all the P stock causes an ownership 
change of P, and therefore the P loss group, on July 30, Year 7, 
with respect to L1's Year 3 loss. Accordingly, a consolidated 
section 382 limitation based on the value of the P stock immediately 
before the ownership change limits the amount of consolidated 
taxable income of the P group for any post-change year that may be 
offset by L1's Year 3 loss.

    (c) Built-in gains and losses. As the context may require, the 
principles of Secs. 1.1502-91(g) and (h) and 1.1502-93(c) (relating to 
built-in gains and losses) apply to a new loss member on a separate 
entity basis. See Sec. 1.1502-91(g)(4). See Sec. 1.1502-13 (including 
Example 10 of Sec. 1.1502-13(c)(7)) for rules relating to the treatment 
of intercompany transactions.
    (d) Information statements. The common parent of a consolidated 
group that has a new loss member subject to paragraph (b)(1) of this 
section during a consolidated return year must file the information 
statement required by Sec. 1.382-2T(a)(2)(ii) because of any owner 
shift, equity structure shift, or other transaction described in 
Sec. 1.382-2T(a)(2)(i). Instead of filing a separate statement for each 
new loss member, the common parent may file a single statement 
described in Sec. 1.382-2T(a)(2)(ii) with respect to the stock 
ownership of the common parent (which is treated as a loss 
corporation). In addition to the information concerning stock ownership 
of the common parent, the single statement must identify each new loss 
member and state which new loss members, if any, have had ownership 
changes during the consolidated return year. The new loss member is, 
however, required to maintain the records necessary to determine if it 
has an ownership change. This paragraph (d) applies with respect to the 
attributes of a new loss member until an event occurs which ends 
separate tracking under Sec. 1.1502-96(a). After that time, the 
information statement described in Sec. 1.1502-92(e)(1) must be filed 
with respect to these attributes.


Sec. 1.1502-95  Rules on ceasing to be a member of a consolidated group 
(or loss subgroup).

    (a) In general--(1) Consolidated group. This section provides rules 
for applying section 382 on or after the day that a member ceases to be 
a member of a consolidated group (or loss subgroup). The rules concern 
how to determine whether an ownership change occurs with respect to 
losses of the member, and how a consolidated section 382 limitation (or 
subgroup section 382 limitation) and a loss group's (or loss 
subgroup's) net unrealized built-in gain or loss is apportioned to the 
member. As the context requires, a reference in this section to a loss 
group, a member, or a corporation also includes a reference to a loss 
subgroup, and a reference to a consolidated section 382 limitation also 
includes a reference to a subgroup section 382 limitation.
    (2) Election by common parent. Only the common parent (not the loss 
subgroup parent) may make the election under paragraph (c) of this 
section to apportion a consolidated section 382 limitation (or subgroup 
section 382 limitation) or a loss group's (or loss subgroup's) net 
unrealized built-in gain.
    (3) Coordination with Secs. 1.1502-91 through 1.1502-93. For rules 
regarding the determination of whether there is an ownership change of 
a loss subgroup and the computation of a subgroup section 382 
limitation following such an ownership change, see Secs. 1.1502-91 
through 1.1502-93.
    (b) Separate application of section 382 when a member leaves a 
consolidated group--(1) In general. Except as provided in Secs. 1.1502-
91 through 1.1502-93 (relating to rules applicable to loss groups and 
loss subgroups), section 382 and the regulations thereunder apply to a 
corporation on a separate entity basis after it ceases to be a member 
of a consolidated group (or loss subgroup). Solely for purposes of 
determining whether a corporation has an ownership change--
    (i) Any portion of a consolidated net operating loss that is 
apportioned to the corporation under Sec. 1.1502-21(b) is treated as a 
net operating loss of the corporation beginning on the first day of the 
taxable year in which the loss arose;
    (ii) The testing period may include the period during which (or 
before which) the corporation was a member of the group (or loss 
subgroup); and
    (iii) Except to the extent provided in Sec. 1.1502-96(d) (relating 
to reattributed losses), the day it ceases to be a member of a 
consolidated group is treated as a testing date of the corporation 
within the meaning of Sec. 1.382-2(a)(4).
    (2) Effect of a prior ownership change of the group. If a loss 
group has had an ownership change under Sec. 1.1502-92 before a 
corporation ceases to be a member of a consolidated group (the former 
member)--
    (i) Any pre-change consolidated attribute that is subject to a 
consolidated section 382 limitation continues to be treated as a pre-
change loss with respect to the former member after it is apportioned 
to the former member and, if any net unrealized built-in loss is 
allocated to the former member under paragraph (e) of this section, any 
recognized built-in loss of the former member is a pre-change loss of 
the member;
    (ii) The section 382 limitation with respect to such pre-change 
attribute is zero unless the common parent, under paragraph (c) of this 
section, apportions to the former member all or part of the 
consolidated section 382 limitation applicable to such attribute. The 
limitation applicable to a pre-change attribute other than a recognized 
built-in loss may be increased to the extent that the common parent has 
apportioned all or part of the loss group's net unrealized built-in 
gain to the former member, and the former member recognizes built-in 
gain during the recognition period;
    (iii) The testing period for determining a subsequent ownership

[[Page 36160]]

change with respect to such pre-change attribute (or such net 
unrealized built-in loss, if any) begins no earlier than the first day 
following the loss group's most recent change date; and
    (iv) As generally provided under section 382, an ownership change 
of the former member that occurs on or after the day it ceases to be a 
member of a loss group may result in an additional, lesser limitation 
amount with respect to such losses.
    (3) Application in the case of a loss subgroup. If two or more 
former members are included in the same loss subgroup immediately after 
they cease to be members of a consolidated group, the principles of 
paragraphs (b), (c) and (e) of this section apply to the loss subgroup. 
Therefore, for example, an apportionment by the common parent under 
paragraph (c) of this section is made to the loss subgroup rather than 
separately to its members. If the common parent of the consolidated 
group apportions all or part of a limitation (or net unrealized built-
in gain) separately to one or more former members that are included in 
a loss subgroup because the common parent of the acquiring group makes 
an election under Sec. 1.1502-91(d)(4) with respect to those members, 
the aggregate of those separate amounts is treated as the amount 
apportioned to the loss subgroup. Such separate apportionment may 
occur, for example, because the election under Sec. 1.1502-91(d)(4) has 
not been filed at the time that the election of apportionment is made 
under paragraph (f) of this section.
    (4) Examples. The following examples illustrate the principles of 
this paragraph (b):

    Example 1. Treatment of departing member as a separate 
corporation throughout the testing period. (i) A owns all the L 
stock. L owns all the stock of L1 and L2. The L group has a 
consolidated net operating loss arising in Year 1 that is carried 
over to Year 3. On January 12, Year 2, A sells 30 percent of the L 
stock to B. On February 7, Year 3, L sells 40 percent of the L2 
stock to C, and L2 ceases to be a member of the group. A portion of 
the Year 1 consolidated net operating loss is apportioned to L2 
under Sec. 1.1502-21(b) and is carried to L2's first separate return 
year, which ends December 31, Year 3. The following is a graphic 
illustration of these facts:

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    (ii) Under paragraph (b)(1) of this section, L2 is a loss 
corporation on February 7, Year 3. Under paragraph (b)(1)(iii) of 
this section, February 7, Year 3, is a testing date. Under paragraph 
(b)(1)(ii) of this section, the testing period for L2 with respect 
to this testing date commences on January 1, Year 1, the first day 
of the taxable year in which the portion of the consolidated net 
operating loss apportioned to L2 arose. Therefore, in determining 
whether L2 has an ownership change on February 7, Year 3, B's 
purchase of 30 percent of the L stock and C's purchase of 40 percent 
of the L2 stock are each owner shifts. L2 has an ownership change 
under section 382(g) and Sec. 1.382-2T because B and C have 
increased their ownership interests in L2 by 18 and 40 percentage 
points, respectively, during the testing period.
    Example 2. Effect of prior ownership change of loss group. (i) L 
owns all the L1 stock and L1 owns all the L2 stock. The L loss group 
had an ownership change under Sec. 1.1502-92 in Year 2 with respect 
to a consolidated net operating loss arising in Year 1 and carried 
over to Year 2 and Year 3. The consolidated section 382 limitation 
computed solely on the basis of the value of the stock of L is $100. 
On December 31, Year 2, L1 sells 25 percent of the stock of L2 to B. 
L2 is apportioned a portion of the Year 1 consolidated net operating 
loss which it carries over to its first separate return year ending 
after December 31, Year 2. L2's separate section 382 limitation with 
respect to this loss is zero unless L elects to apportion all or a 
part of the consolidated section 382 limitation to L2. (See 
paragraph (c) of this section for rules regarding the apportionment 
of a consolidated section 382 limitation.) L apportions $50 of the 
consolidated section 382 limitation to L2, and the remaining $50 of 
the consolidated section 382 limitation stays with the loss group 
composed of L and L1.
    (ii) On December 31, Year 3, L1 sells its remaining 75 percent 
stock interest in L2 to C, resulting in an ownership change of L2. 
L2's section 382 limitation computed on the change date with respect 
to the value of its stock is $30. Accordingly, L2's section 382 
limitation for post-change years ending after December 31, Year 3, 
with respect to its pre-change losses, including the consolidated 
net operating losses apportioned to it from the L group, is $30, 
adjusted for a short taxable year, carryforward of unused 
limitation, or any other adjustment required under section 382.

    (c) Apportionment of a consolidated section 382 limitation--(1) In 
general. The common parent may elect to apportion all or any part of a 
consolidated section 382 limitation to a former member (or loss 
subgroup). The common parent also may elect to apportion all or any 
part of the loss group's net unrealized built-in gain to a former 
member (or loss subgroup).
    (2) Amount which may be apportioned--(i) Consolidated section 382 
limitation. The common parent may apportion all or part of each element 
of the consolidated section 382 limitation determined under 
Sec. 1.1502-93. For this purpose, the consolidated section 382 
limitation consists of two elements--
    (A) The value element, which is the element of the limitation 
determined under section 382(b)(1) (relating to value multiplied by the 
long-term tax-exempt rate) without regard to such adjustments as those 
described in 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(h)(relating to built-in gains and section 338 gains), and 
section 382(m)(2)(relating to short taxable years); and
    (B) The adjustment element, which is so much (if any) of the 
limitation for the taxable year during which the former member ceases 
to be a member of the consolidated group that is attributable to a 
carryover of unused limitation under section 382(b)(2) or to recognized 
built-in gains under 382(h).
    (ii) Net unrealized built-in gain. The aggregate amount of the loss 
group's net unrealized built-in gain that may be apportioned to one or 
more former members that cease to be members during the same 
consolidated return year cannot exceed the loss group's excess, 
immediately after the close of that year, of net unrealized built-in 
gain over recognized built-in gain, determined under section 
382(h)(1)(A)(ii) (relating to a limitation on recognized built-in 
gain). For this purpose, net unrealized built-in gain apportioned to 
former members in prior consolidated return years is treated as 
recognized built-in gain in those years.
    (3) Effect of apportionment on the consolidated group--(i) 
Consolidated section 382 limitation. The value element of the 
consolidated section 382 limitation for any post-change year ending 
after the day that a former member (or loss subgroup) ceases to be a 
member(s) is reduced to the extent that it is apportioned under this 
paragraph (c). The consolidated section 382 limitation for the post-
change year in which the former member (or loss subgroup) ceases to be 
a member(s) is also reduced to the extent that the adjustment element 
for that year is apportioned under this paragraph (c).
    (ii) Net unrealized built-in gain. The amount of the loss group's 
net unrealized built-in gain that is apportioned to the former member 
(or loss subgroup) is treated as recognized built-in gain for a prior 
taxable year ending in the recognition period for purposes of applying 
the limitation of section 382(h)(1)(A)(ii) to the loss group's 
recognition period taxable years beginning after the consolidated 
return year in which the former member (or loss subgroup) ceases to be 
a member.
    (4) Effect on corporations to which an apportionment is made--(i) 
Consolidated section 382 limitation. The amount of the value element 
that is apportioned to a former member (or loss subgroup) is treated as 
the amount determined under section 382(b)(1) for purposes of 
determining the amount of that corporation's (or loss subgroup's) 
section 382 limitation for any taxable year ending after the former 
member (or loss subgroup) ceases to be a member(s). Appropriate 
adjustments must be made to the limitation based on the value element 
so apportioned for a short taxable year, carryforward of unused 
limitation, or any other adjustment required under section 382. The 
adjustment element apportioned to a former member (or loss subgroup) is 
treated as an adjustment under section 382(b)(2) or section 382(h), as 
appropriate, for the first taxable year after the member (or members) 
ceases to be a member (or members).
    (ii) Net unrealized built-in gain. For purposes of determining the 
amount by which the former member's (or loss subgroup's) section 382 
limitation for any taxable year beginning after the former member (or 
loss subgroup) ceases to be a member(s) is increased by its recognized 
built-in gain--
    (A) The amount of net unrealized built-in gain apportioned to a 
former member (or loss subgroup) is treated as if it were an amount of 
net unrealized built-in gain determined under section 
382(h)(1)(A)(i)(without regard to the threshold of section 
382(h)(3)(B)) with respect to such member or loss subgroup, and that 
amount is not reduced under section 382(h)(1)(A)(ii) by the loss 
group's recognized built-in gain;
    (B) The former member's (or loss subgroup's) 5 year recognition 
period begins on the loss group's change date;
    (C) In applying section 382(h)(1)(A)(ii), the former member (or 
loss subgroup) takes into account only its prior taxable years that 
begin after it ceases to be a member of the loss group; and
    (D) The former member's (or loss subgroup's) recognized built-in 
gain on the disposition of an asset is determined under section 
382(h)(2)(A), treating references to the change date in that section as 
references to the loss group's change date.
    (5) Deemed apportionment when loss group terminates. If a loss 
group terminates, to the extent the consolidated section 382 limitation 
or net unrealized built-in gain is not

[[Page 36163]]

apportioned under paragraph (c)(1) of this section, the consolidated 
section 382 limitation or net unrealized built-in gain is deemed to be 
apportioned to the loss subgroup that includes the common parent, or, 
if there is no loss subgroup that includes the common parent 
immediately after the loss group terminates, to the common parent. A 
loss group terminates on the first day of the first taxable year that 
is a separate return year with respect to each member of the former 
loss group.
    (6) Appropriate adjustments when former member leaves during the 
year. Appropriate adjustments are made to the consolidated section 382 
limitation for the consolidated return year during which the former 
member (or loss subgroup) ceases to be a member(s) to reflect the 
inclusion of the former member in the loss group for a portion of that 
year.
    (7) Examples. The following examples illustrate the principles of 
this paragraph (c):

    Example 1. Consequence of apportionment. (i) L owns all the L1 
stock and L1 owns all the L2 stock. The L group has a $200 
consolidated net operating loss arising in Year 1 that is carried 
over to Year 2. At the close of December 31, Year 1, the group has 
an ownership change under Sec. 1.1502-92. The ownership change 
results in a consolidated section 382 limitation of $10 based on the 
value of the stock of the group. On August 29, Year 2, L1 sells 30 
percent of the stock of L2 to A. L2 is apportioned $90 of the 
group's $200 consolidated net operating loss under Sec. 1.1502-
21(b). L, the common parent, elects to apportion $6 of the 
consolidated section 382 limitation to L2. The following is a 
graphic illustration of these facts:

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BILLING CODE 4830-01-C
    (ii) For its separate return years ending after December 31, 
Year 2, L2's section 382 limitation with respect to the $90 of the 
group's net operating loss apportioned to it is $6, adjusted, as 
appropriate, for any short taxable year, unused section 382 
limitation, or other adjustment. For its consolidated return year 
ending December 31, Year 2 the L group's consolidated section 382 
limitation with respect to the remaining $110 of pre-change 
consolidated attribute is $4 ($10 minus the $6 value element 
apportioned to L2), adjusted, as appropriate, for any short taxable 
year, unused section 382 limitation, or other adjustment.
    (iii) For the L group's consolidated return year ending December 
31, Year 2, the value element of its consolidated section 382 
limitation is increased by $4 (rounded to the nearest dollar), to 
account for the period during which L2 was a member of the L group 
($6, the consolidated section 382 limitation apportioned to L2, 
times 241/365, the ratio of the number of days during Year 2 that L2 
is a member of the group to the number of days in the group's 
consolidated return year). See paragraph (c)(6) of this section. 
Therefore, the value element of the consolidated section 382 
limitation for Year 2 of the L group is $8 (rounded to the nearest 
dollar).
    (iv) The section 382 limitation for L2's short taxable year 
ending December 31, Year 2, is $2 (rounded to the nearest dollar), 
which is the amount that bears the same relationship to $6, the 
value element of the consolidated section 382 limitation apportioned 
to L2, as the number of days during that short taxable year, 124 
days, bears to 365. See Sec. 1.382-5(c).
    Example 2. Consequence of no apportionment. The facts are the 
same as in Example 1, except that L does not elect to apportion any 
portion of the consolidated section 382 limitation to L2. For its 
separate return years ending after August 29, Year 2, L2's section 
382 limitation with respect to the $90 of the group's pre-change 
consolidated attribute apportioned to L2 is zero under paragraph 
(b)(2)(ii) of this section. Thus, the $90 consolidated net operating 
loss apportioned to L2 cannot offset L2's taxable income in any of 
its separate return years ending after August 29, Year 2. For its 
consolidated return years ending after August 29, Year 2, the L 
group's consolidated section 382 limitation with respect to the 
remaining $110 of pre-change consolidated attribute is $10, 
adjusted, as appropriate, for any short taxable year, unused section 
382 limitation, or other adjustment.
    Example 3. Apportionment of adjustment element. The facts are 
the same as in Example 1, except that L2 ceases to be a member of 
the L group on August 29, Year 3, and the L group has a $4 
carryforward of an unused consolidated section 382 limitation (under 
section 382(b)(2)) to the Year 3 consolidated return year. The 
carryover of unused limitation increases the consolidated section 
382 limitation for the Year 3 consolidated return year from $10 to 
$14. L may elect to apportion all or any portion of the $10 value 
element and all or any portion of the $4 adjustment element to L2.

    (d) Rules pertaining to ceasing to be a member of a loss subgroup--
(1) In general. A corporation ceases to be a member of a loss subgroup 
on the earlier of--

[[Page 36164]]

    (i) The first day of the first taxable year for which it files a 
separate return; or
    (ii) The first day that it ceases to bear a relationship described 
in section 1504(a)(1) to the loss subgroup parent (treating for this 
purpose the loss subgroup parent as the common parent described in 
section 1504(a)(1)(A)).
    (2) Exceptions. Paragraph (d)(1)(ii) of this section does not apply 
to a member of a loss subgroup while that member remains a member of 
the current group--
    (i) If an election under Sec. 1.1502-91(d)(4)(relating to treating 
the subgroup parent requirement as satisfied) applies to the members of 
the loss subgroup;
    (ii) Starting on the day after the change date (but not earlier 
than the date the loss subgroup becomes a member of the group), if 
there is an ownership change of the loss subgroup within six months 
before, on, or after becoming members of the group; or
    (iii) Starting the day after the period of 5 consecutive years 
following the day that the loss subgroup become members of the group 
during which the loss subgroup has not had an ownership change.
    (3) Examples. The principles of this paragraph (d) are illustrated 
by the following examples:

    Example 1. Basic case. (i) P owns all the L stock, L owns all 
the L1 stock and L1 owns all the L2 stock. The P group has a 
consolidated net operating loss arising in Year 1 that is carried 
over to Year 2. On December 11, Year 2, P sells all the stock of L 
to corporation M. Each of L, L1, and L2 is apportioned a portion of 
the Year 1 consolidated net operating loss, and thereafter each 
joins with M in filing consolidated returns. Under Sec. 1.1502-92, 
the L loss subgroup has an ownership change on December 11, Year 2. 
The L loss subgroup has a subgroup section 382 limitation of $100. 
The following is a graphic illustration of these facts:

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    (ii) On May 22, Year 3, L1 sells 40 percent of the L2 stock to 
A. L2 carries over a portion of the P group's net operating loss 
from Year 1 to its separate return year ending December 31, Year 3. 
Under paragraph (d)(1) of this section, L2 ceases to be a member of 
the L loss subgroup on May 22, Year 3, which is both (1) the first 
day of the first taxable year for which it files a separate return 
and (2) the day it ceases to bear a relationship described in 
section 1504(a)(1) to the loss subgroup parent, L. The net operating 
loss of L2 that is carried over from the P group is treated as a 
pre-change loss of L2 for its separate return years ending after May 
22, Year 3. Under paragraphs (a)(2) and (b)(2) of this section, the 
separate section 382 limitation with respect to this loss is zero 
unless M elects to apportion all or a part of the subgroup section 
382 limitation of the L loss subgroup to L2.
    Example 2. Formation of a new loss subgroup. The facts are the 
same as in Example 1, except that A purchases 40 percent of the L1 
stock from L rather than purchasing L2 stock from L1. L1 and L2 file 
a consolidated return for their first taxable year ending after May 
22, Year 3, and each of L1 and L2 carries over a part of the net 
operating loss of the P group that arose in Year 1. Under paragraph 
(d)(1) of this section, L1 and L2 cease to be members of the L loss 
subgroup on May 22, Year 3. The net operating losses carried over 
from the P group are treated as pre-change subgroup attributes of 
the loss subgroup composed of L1 and L2. The subgroup section 382 
limitation with respect to those losses is zero unless M elects to 
apportion all or part of the subgroup section 382 limitation of the 
L loss subgroup to the L1 loss subgroup. The following is a graphic 
illustration of these facts:

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    Example 3. Ownership change upon becoming members of the group. 
(i) A owns all the stock of P, and P owns all the stock of L1 and 
L2. The P group has a consolidated net operating loss arising in 
Year 1 that is carried over to Year 3 and Year 4. Corporation M 
acquires all the stock of P on November 11, Year 3, and P, L1, and 
L2 thereafter file consolidated returns with M. M's acquisition 
results in an ownership change of the P loss subgroup under 
Sec. 1.1502-92(b)(1)(ii).
    (ii) P distributes the L2 stock to M on October 7, Year 4, and 
L2 ceases to bear the relationship described in section 1504(a)(1) 
to P, the P loss subgroup parent. However, under paragraph (d)(2) of 
this section, L2 does not cease to be a member of the P loss 
subgroup because the P loss subgroup had an ownership change upon 
becoming members of the M group and L2 remains in the M group.
    Example 4. Ceasing to bear a section 1504 (a)(1) to the loss 
subgroup parent. (i) A owns all the stock of P, and P owns all the 
stock of L1 and L2. The P group has a consolidated net operating 
loss arising in Year 1 that is carried over to Year 7. At the close 
of Year 2, X acquires all of the stock of P, causing an ownership 
change of the loss subgroup composed of P, L1 and L2 under 
Sec. 1.1502-92(b)(1)(ii). In Year 4, M, which is owned by the same 
person that owns X, acquires all of the stock of P, and the M 
acquisition does not cause a second ownership change of the P loss 
subgroup.
    (ii) P distributes the L2 stock to M on February 3, Year 6 (less 
than 5 years after the P loss subgroup became members of the M 
group) and L2 ceases to bear the relationship described in section 
1504(a)(1) to P, the loss subgroup parent. Thus, the section 382 
limitation from the Year 2 ownership change that applies with 
respect to the pre-change attributes attributable to L2 is zero 
except to the extent M elects to apportion all or part of the P loss 
subgroup section 382 limitation to L2.
    Example 5. Relationship through a successor. The facts are the 
same as in Example 3, except that M's acquisition of the P stock 
does not result in an ownership change of the P loss subgroup, and, 
instead of P's distributing the stock of L2, L2 merges into L1 on 
October 7, Year 4. L1 (as successor to L2 in the merger within the 
meaning of Sec. 1.1502-1(f)(4)) continues to bear a relationship 
described in section 1504(a)(1) to P, the loss subgroup parent. 
Thus, L2 does not cease to be a member of the P loss subgroup as a 
result of the merger.
    Example 6. Reattribution of net operating loss carryover under 
Sec. 1.1502-20(g). The facts are the same as in Example 3, except 
that, instead of distributing the L2 stock to M, P sells that stock 
to B, and, under Sec. 1.1502-20(g), M reattributes $10 of L2's net 
operating loss carryover to itself. Under Sec. 1.1502-20(g), M 
succeeds to the reattributed loss as if the loss were succeeded to 
in a transaction described in section 381(a). M, as successor to L2, 
does not cease to be a member of the P loss subgroup.

    (e) Allocation of net unrealized built-in loss--(1) In general. 
This paragraph (e) provides rules for the allocation of a loss group's 
(or loss subgroup's) net unrealized built-in loss if a member ceases to 
be a member of a loss group (or loss subgroup). This paragraph (e) 
applies if--
    (i) A loss group (or loss subgroup) has a net unrealized built-in 
loss on a change date; and
    (ii) Immediately after the close of the consolidated return year in 
which the departing member ceases to be a member, the amount of the 
loss group's (or loss subgroup's) excess of net unrealized built-in 
loss over recognized built-in loss, determined under section 
382(h)(1)(B)(ii) (relating to a limitation on recognized built-in 
loss), is greater than zero. (The amount of such excess is referred to 
as the remaining NUBIL balance.) In applying section 382(h)(1)(B)(ii) 
for this purpose, net unrealized built-in loss allocated to departing 
members in prior consolidated return years is treated as recognized 
built-in loss in those years.
    (2) Amount of allocation--(i) In general. The amount of net 
unrealized built-in loss allocated to a departing member is equal to 
the remaining NUBIL balance, multiplied by a fraction. The numerator of 
the fraction is the amount of the built-in loss, taken into account on 
the change date under Sec. 1.1502-91(g), in the assets held by the 
departing member immediately after the member ceases to be a member of 
the loss group (or loss subgroup). The denominator of the fraction is 
the sum of the numerator, plus the amount of the built-in loss, taken 
into account under Sec. 1.1502-91(g) on the change date, in the assets 
held by the loss group (or loss subgroup) immediately after the close 
of the taxable year in which the departing member ceases to be a 
member. (Fluctuations in value of the assets between the change date 
and the date that the member ceases to be a member of the group (or 
loss subgroup), or the close of the taxable year in which the member 
ceases to be a member of the loss group, are disregarded.) Because the 
amount of built-in loss on the change date with respect to a departing 
member's assets is taken into account (rather than that member's 
separately computed net unrealized built-in loss on the change date), a 
departing member can be apportioned all or part of the loss group's net 
unrealized built-in loss, even if the departing member had a separately 
computed net unrealized built-in gain on the change date. Amounts taken 
into account under section 382(h)(6)(C) (relating to certain deduction 
items) are treated as if they were assets in determining the numerator 
and denominator of the fraction.
    (ii) Transferred basis property and deferred gain or loss. For 
purposes of paragraph (b)(2)(i) of this section, assets held by the 
departing member immediately after it ceases to be a member of the 
group (or by other members immediately after the close of the taxable 
year) include--
    (A) Assets held at that time that are transferred basis property 
that was held by any member of the group (or loss subgroup) on the 
change date; and
    (B) Assets held at that time by any member of the consolidated 
group with respect to which gain or loss of the group member or loss 
subgroup member at issue has been deferred in an intercompany 
transaction and has not been taken into account.
    (iii) Assets for which gain or loss has been recognized. For 
purposes of paragraph (b)(2)(i) of this section, assets held by the 
departing member immediately after it ceases to be a member of the 
group (or by other members immediately after the close of the taxable 
year) do not include assets with respect to which gain or loss has 
previously been recognized and taken into account during the 
recognition period (including gain or loss recognized in an 
intercompany transaction and taken into account immediately before the 
member leaves the group). Appropriate adjustments must be made if gain 
or loss on an asset has been only partially recognized and taken into 
account.
    (iv) Exchanged basis property. The rules of Sec. 1.1502-91(h) apply 
for purposes of this paragraph (e) (disregarding stock received from 
the departing member or another member that is a member immediately 
after the close of the taxable year).
    (v) Two or more members depart during the same year. If two or more 
members cease to be members during the same consolidated return year, 
appropriate adjustments must be made to the denominator of the fraction 
for each departing member by treating the other departing members as if 
they had not ceased to be members during that year and as if the assets 
held by those other departing members immediately after they cease to 
be members of the group (or loss subgroup) are assets held by the group 
immediately after the close of the taxable year.
    (vi) Anti-abuse rule. If assets are transferred between members or 
a member ceases to be a member with a principal purpose of causing or 
affecting the allocation of amounts under this paragraph (e), 
appropriate adjustments must be made to eliminate any benefit of such 
acquisition, disposition, or allocation.

[[Page 36169]]

    (3) Effect of allocation on the consolidated group. The amount of 
the net unrealized built-in loss that is allocated to the former member 
is treated as recognized built-in loss for a prior taxable year ending 
in the recognition period for purposes applying the limitation of 
section 382(h)(1)(B)(ii) to a loss group's (or loss subgroup's) 
recognition period taxable years beginning after the consolidated 
return year in which the former member ceases to be a member.
    (4) Effect on corporations to which the allocation is made. For 
purposes of determining the amount of the former member's recognized 
built-in losses in any taxable year beginning after the former member 
ceases to be a member--
    (i) The amount of the loss group's (or loss subgroup's) net 
unrealized built-in loss that is allocated to the former member is 
treated as if it were an amount of net unrealized built-in loss 
determined under section 382(h)(1)(B)(i)(without regard to the 
threshold of section 382(h)(3)(B)) with respect to such member or loss 
subgroup, and that amount is not reduced under section 382(h)(1)(B)(ii) 
by the loss group's (or loss subgroup's) recognized built-in losses;
    (ii) The former member's 5 year recognition period begins on the 
loss group's (or loss subgroup's) change date;
    (iii) In applying section 382(h)(1)(B)(ii), the former member takes 
into account only its prior taxable years that begin after it ceases to 
be a member of the loss group (or loss subgroup); and
    (iv) The former member's recognized built-in loss on the 
disposition of an asset is determined under section 382(h)(2)(B), 
treating references to the change date in that section as references to 
the loss group's (or loss subgroup's) change date.
    (5) Subgroup principles. If two or more former members are members 
of the same consolidated group (the second group) immediately after 
they cease to be members of the current group, the principles of 
paragraphs (e)(1), (2) and (4) of this section apply to those former 
members on an aggregate basis. Thus, for example, the amount of net 
unrealized built-in loss allocated to those members is based on the 
assets held by those members immediately after they cease to be members 
of the current group and the limitation of section 382(h)(1)(B)(ii) on 
recognized built-in losses is applied by taking into account the 
aggregate amount of net unrealized built-in loss allocated to the 
former members and the aggregate recognized losses of those members in 
taxable years beginning after they cease to be members of the current 
group. If one or more of such members cease to be members of the second 
group, the principles of this paragraph (e) are applied with respect to 
those members to allocate to them all or part of any remaining 
unrecognized amount of net unrealized built-in loss allocated to the 
members that became members of the second group.
    (6) Apportionment of consolidated section 382 limitation (or 
subgroup section 382 limitation)--(i) In general. For rules relating to 
the apportionment of a consolidated section 382 limitation (or subgroup 
section 382 limitation) to a former member, see paragraph (c) of this 
section.
    (ii) Special rule for former members that become members of the 
same consolidated group. If recognized built-in losses of one or more 
former members would be subject to a consolidated section 382 
limitation (or subgroup section 382 limitation) if recognized 
immediately before the member (or members) cease to be members of the 
group, an apportionment of that limitation may be made, under paragraph 
(c) of this section, to a loss subgroup that includes such member (or 
members), and the recognized built-in losses (if any) of that member 
(or members) will be subject to that apportioned limitation. If two or 
more of such former members are not included in a loss subgroup 
immediately after they cease to be members of the group (for example, 
because they do not have net operating loss carryovers or, in the 
aggregate, a net unrealized built-in loss), but are members of the same 
consolidated group, an apportionment of the consolidated section 382 
limitation (or subgroup section 382 limitation) may be made to them as 
if they were a loss subgroup.
    (7) Examples. The following examples illustrate the principles of 
this paragraph (e):

    Example 1. Basic allocation case. (i) P owns all of the stock of 
L1 and L2. On September 4, Year 1, A purchases all of the P stock, 
causing an ownership change of the P group. On that date P has two 
assets (other than the L1 and L2 stock), asset 1 with an adjusted 
basis of $40 and a fair market value of $15 and asset 2 with an 
adjusted basis of $50 and a fair market value of $100. L1 has two 
assets, asset 3 , with a fair market value of $50 and an adjusted 
basis of $100, and asset 4, with an adjusted basis of $125 and a 
fair market value of $75. L2 has two assets, asset 5, with a fair 
market value of $150 and an adjusted basis of $100, and asset 6, 
with an adjusted basis of $90 and a fair market value of $40. Thus, 
the P loss group has a net unrealized built-in loss of $75.
    (ii) On March 19, Year 3, P sells all of the L2 stock to M. At 
that time, asset 5, which has appreciated in value, has a fair 
market value of $250 and an adjusted basis of $100. Asset 6, which 
has declined in value, has an adjusted basis of $90 and a fair 
market value of $10.
    (iii) On April 8, Year 3, P sells asset 1, and has a recognized 
built-in loss of $25 that is subject to the P group's section 382 
limitation. On November 11, Year 4, L2 sells asset 6 for its then 
fair market value, $10, recognizing a loss of $80. On June 3, Year 
5, L1 sells asset 4, recognizing a loss of $50.
    (iv) Immediately after the close of Year 3, the P loss group's 
remaining NUBIL balance is $50 ($75 net unrealized built-in loss 
reduced by the $25 recognized built-in loss of P). The portion of 
the remaining NUBIL balance that is allocated to L2 is $17 (rounded 
to the nearest dollar). Seventeen dollars is the product obtained by 
multiplying $50 (the remaining NUBIL balance) by $50/$150. The 
numerator of the fraction ($50) is the amount of built-in loss in 
asset 6, taken into account on the change date under Sec. 1.1502-
91(g). The denominator ($150) is the sum of the numerator ($50) and 
the amount of built-in loss in assets 3 and 4, taken into account on 
the change date under Sec. 1.1502-91(g) ($100). The built-in loss in 
asset 1 is not included in the denominator of the fraction because 
it is not held by the P group immediately after the close of Year 3.
    (v) Seventeen dollars of L2's $80 loss on the sale of asset 6 is 
a recognized built-in loss and subject to a section 382 limitation 
of zero, unless P apportions some or all of the P group's 
consolidated section 382 limitation to L2 (adjusted for a short 
taxable year, carryover of unused limitation, or any other 
adjustment required under section 382).
    (vi) Thirty-three dollars of L1's $50 loss on the sale of asset 
4 is subject to the P group's consolidated section 382 limitation, 
reduced by the amount of such limitation apportioned to L2, and 
adjusted for any short taxable year, a carryforward of unused 
limitation, or other adjustment. (In applying section 
382(h)(1)(B)(ii) with respect to Year 5, the P group's net 
unrealized built-in loss is reduced by P's $25 recognized built-in 
loss in Year 3 and the $17 of net unrealized built-in loss allocated 
to L2, thus limiting the P group's recognized built-in loss in Year 
5 to $33.)
    Example 2. Two members depart in the same year. The facts are 
the same as in Example 1, except that P sells all of the stock of L1 
to C on November 1, Year 3. The amount of net unrealized built-in 
loss apportioned to L2 (rounded to the nearest dollar) is $17 ($50 
remaining NUBIL balance  x  $50/$150). The amount of net unrealized 
built-in loss apportioned to L1 (rounded to the nearest dollar) is 
$33 ($50 remaining NUBIL balance  x  $100/$150).

    (8) Reporting requirement. If a net unrealized built-in loss is 
allocated under this paragraph (e), the common parent must file a 
statement with its income tax return for the taxable year in which the 
former member(s) (or a new loss subgroup that includes that member) 
ceases to be a member. The statement must provide the name and employer 
identification number (E.I.N.)

[[Page 36170]]

of the departing member, the amount of remaining NUBIL balance for the 
taxable year in which the member departs, and the amount of the net 
unrealized built-in loss allocated to the departing member. The common 
parent must also deliver a copy of the statement to the former member 
on or before the day the group files its income tax return for the 
consolidated return year that the former member ceases to be a member. 
A copy of the statement must be attached to the first income tax return 
of the former member (or the first return in which the former member 
joins) that is filed after the close of the consolidated return year of 
the group of which the former member (or a new loss subgroup that 
includes that member) cease to be a member. This paragraph (e)(8) does 
not apply if the required information (other than the amount of 
remaining NUBIL balance) is included in a statement of election under 
paragraph (f) of this section (relating to apportioning a section 382 
limitation).
    (f) Filing the election to apportion the section 382 limitation and 
net unrealized built-in gain--(1) Form of the election to apportion. An 
election under paragraph (c) of this section must be made by the common 
parent. The election must be made in the form of the following 
statement: ``THIS IS AN ELECTION UNDER Sec. 1.1502-95 OF THE INCOME TAX 
REGULATIONS TO APPORTION ALL OR PART OF THE [insert THE CONSOLIDATED 
SECTION 382 LIMITATION, THE SUBGROUP SECTION 382 LIMITATION, THE LOSS 
GROUP'S NET UNREALIZED BUILT-IN GAIN, THE LOSS SUBGROUP'S NET 
UNREALIZED BUILT-IN GAIN, as appropriate] TO [insert name and E.I.N. of 
the corporation (or the corporations that compose a new loss subgroup) 
to which allocation is made]''. The declaration must also include the 
following information, as appropriate--
    (i) The date of the ownership change that resulted in the 
consolidated section 382 limitation (or subgroup section 382 
limitation) or the loss group's (or loss subgroup's) net unrealized 
built-in gain;
    (ii) The amount of the departing member's (or loss subgroup's) pre-
change net operating loss carryovers and the taxable years in which 
they arose that will be subject to the limitation that is being 
apportioned to that member (or loss subgroup);
    (iii) The amount of any net unrealized built-in loss allocated to 
the departing member (or loss subgroup) under paragraph (e) of this 
section, which, if recognized, can be a pre-change attribute subject to 
the limitation that is being apportioned;
    (iv) If a consolidated section 382 limitation (or subgroup section 
382 limitation) is being apportioned, the amount of the consolidated 
section 382 limitation (or subgroup section 382 limitation) for the 
taxable year during which the former member (or new loss subgroup) 
ceases to be a member of the consolidated group (determined without 
regard to any apportionment under this section);
    (v) If any net unrealized built-in gain is being apportioned, the 
amount of the loss group's (or loss subgroup's) net unrealized built-in 
gain (as determined under paragraph (c) (2)(ii) of this section) that 
may be apportioned to members that ceased to be members during the 
consolidated return year;
    (vi) The amount of the value element and adjustment element of the 
consolidated section 382 limitation (or subgroup section 382 
limitation) that is apportioned to the former member (or new loss 
subgroup) pursuant to paragraph (c) of this section;
    (vii) The amount of the loss group's (or loss subgroup's) net 
unrealized built-in gain that is apportioned to the former member (or 
new loss subgroup) pursuant to paragraph (c) of this section;
    (viii) If the former member is allocated any net unrealized built-
in loss under paragraph (e) of this section, the amount of any 
adjustment element apportioned to the former member that is 
attributable to recognized built-in gains (determined in a manner that 
will enable both the group and the former member to apply the 
principles of Sec. 1.1502-93(c));
    (ix) The name and E.I.N. of the common parent making the 
apportionment.
    (2) Signing of the election. The election statement must be signed 
by both the common parent and the former member (or, in the case of a 
loss subgroup, the common parent and the loss subgroup parent) by 
persons authorized to sign their respective income tax returns. If the 
allocation is made to a loss subgroup for which an election under 
Sec. 1.1502-91(d)(4) is made, and not separately to its members, the 
election statement under this paragraph (e) must be signed by the 
common parent and any member of the new loss subgroup by persons 
authorized to sign their respective income tax returns.
    (3) Filing of the election. The election statement must be filed by 
the common parent of the group that is apportioning the consolidated 
section 382 limitation (or the subgroup section 382 limitation) or the 
loss group's net unrealized built-in gain (or loss subgroup's net 
unrealized built-in gain) with its income tax return for the taxable 
year in which the former member (or new loss subgroup) ceases to be a 
member. The common parent must also deliver a copy of the statement to 
the former member (or the members of the new loss subgroup) on or 
before the day the group files its income tax return for the 
consolidated return year that the former member (or new loss subgroup) 
ceases to be a member. A copy of the statement must be attached to the 
first return of the former member (or the first return in which the 
members of a new loss subgroup join) that is filed after the close of 
the consolidated return year of the group of which the former member 
(or the members of a new loss subgroup) ceases to be a member.
    (4) Revocation of election. An election statement made under 
paragraph (c) of this section is revocable only with the consent of the 
Commissioner.


Sec. 1.1502-96  Miscellaneous rules.

    (a) End of separate tracking of losses--(1) Application. This 
paragraph (a) applies to a member (or a loss subgroup) with a net 
operating loss carryover that arose (or is treated under Sec. 1.1502-
21(c) as arising) in a SRLY, or a member (or loss subgroup) with a net 
unrealized built-in loss determined at the time that the member (or 
loss subgroup) becomes a member of the consolidated group if there is--
    (i) An ownership change of the member (or loss subgroup) within six 
months before, on, or after becoming a member of the group; or
    (ii) A period of 5 consecutive years following the day that the 
member (or loss subgroup) becomes a member of a group during which the 
member (or loss subgroup) has not had an ownership change.
    (2) Effect of end of separate tracking--(i) Net operating loss 
carryovers. If this paragraph (a) applies with respect to a member (or 
loss subgroup) with a net operating loss carryover, then, starting on 
the day after the earlier of the change date (but not earlier than the 
day the member (or loss subgroup) becomes a member of the consolidated 
group) or the last day of the 5 consecutive year period described in 
paragraph (a)(1)(ii) of this section, such loss carryover is treated as 
described in Sec. 1.1502-91(c)(1)(i). The preceding sentence also 
applies for purposes of determining whether there is an ownership 
change with respect to such loss carryover following such change date 
or 5 consecutive year period. Thus, for example, starting the day after 
the change date (but not earlier than the day the member (or loss 
subgroup) becomes a member of the consolidated group) or

[[Page 36171]]

the end of the 5 consecutive year period--
    (A) The consolidated group which includes the new loss member or 
loss subgroup is no longer required to separately track owner shifts of 
the stock of the new loss member or subgroup parent to determine if an 
ownership change occurs with respect to the loss carryover of the new 
loss member or members included in the loss subgroup;
    (B) The group is a loss group because the member's loss carryover 
is treated as a loss described in Sec. 1.1502-91(c)(1)(i);
    (C) There is an ownership change with respect to such loss 
carryover only if the group has an ownership change; and
    (D) If the group has an ownership change, such loss carryover is a 
pre-change consolidated attribute subject to the loss group's 
consolidated section 382 limitation.
    (ii) Net unrealized built-in losses. If this paragraph (a) applies 
with respect to a new loss member described in Sec. 1.1502-94(a)(1)(ii) 
(or a loss subgroup described in Sec. 1.1502-91(d)(2)) then, starting 
on the day after the earlier of the change date (but not earlier than 
the day the member (or loss subgroup) becomes a member of the group) or 
the last day of the 5 consecutive year period described in paragraph 
(a)(1)(ii) of this section, the member (or members of the loss 
subgroup) are treated, for purposes of applying Sec. 1.1502-
91(g)(2)(ii), as if they have been affiliated with the common parent 
for 5 consecutive years. Starting on that day, the member's (or the 
members of the loss subgroup's) separately computed net unrealized 
built-in loss is included in the determination whether the group has a 
net unrealized built-in loss, and there is an ownership change with 
respect to the member's separately computed net unrealized built-in 
loss only if the group (including the member) has a net unrealized 
built-in loss and has an ownership change. Thus, for example, starting 
the day after the change date (but not earlier than the day the member 
(or loss subgroup) becomes a member of the consolidated group), or the 
end of the 5 consecutive period
    (A) The consolidated group which includes the new loss member or 
loss subgroup is no longer required to separately track owner shifts of 
the stock of the new loss member or subgroup parent to determine if an 
ownership change occurs with respect to the net unrealized built-in 
loss of the new loss member or members of the loss subgroup;
    (B) The group includes the member's (or the loss subgroup members') 
separately computed net unrealized built-in loss in determining whether 
it is a loss group under Sec. 1.1502-91(c)(1)(iii);
    (C) There is an ownership change with respect to such net 
unrealized built-in loss only if the group is a loss group and has an 
ownership change; and
    (D) If the group has an ownership change, the member's separately 
computed net unrealized built-in loss and its assets are taken into 
account in determining the group's pre-change consolidated attributes 
described in Sec. 1.1502-91(e)(1) (relating to recognized built-in 
losses) that are subject to the group's consolidated section 382 
limitation.
    (iii) Common parent not common parent for five years. If the common 
parent has become the common parent of an existing group within the 
previous 5-year period in a transaction described in Sec. 1.1502-
75(d)(2)(ii) or (3), appropriate adjustments must be made in applying 
paragraphs (a)(2)(ii) and (3) of this section. In such a case, as the 
context requires, references to the common parent are to the former 
common parent.
    (3) Continuing effect of end of separate tracking--(i) In general. 
As the context may require, a current group determines which of its 
members are included in a loss subgroup on any testing date by taking 
into account the application of this section in the former group. See 
the example in Sec. 1.1502-91(f)(2). For this purpose, corporations 
that are treated under paragraph (a)(2)(ii) of this section as having 
been affiliated with the common parent of the former group for 5 
consecutive years are also treated as having been affiliated with any 
other members that have been (or are treated as having been) affiliated 
with the common parent. The corporations are treated as having been 
affiliated with such other members for the same period of time that 
those members have been (or are treated as having been) affiliated with 
the common parent. If two or more corporations become members of the 
group at the same time, but paragraph (a)(1) of this section does not 
apply to every such corporation, then immediately after the 
corporations become members of the group, the corporations to which 
paragraph (a)(1) of this section applied are treated as not having been 
previously affiliated, for purposes of applying this paragraph (a)(3), 
with the corporations to which paragraph (a)(2)(ii) of this section did 
not apply.
    (ii) Example. The following example illustrates the principles of 
this paragraph (a)(3):

    Example. (i) L has owned all the stock of L1 for three years. At 
the close of December 31, Year 1, the M group purchases all the L 
stock, and L and L1 become members of the M group. Other than the 
stock of L1, L has one asset (the L loss asset) with a net 
unrealized built-in loss of $200 on this date. L1 has one asset with 
a net unrealized built-in gain of $50 (the L1 gain asset). L and L1 
do not compose a loss subgroup because they do not meet the five 
year affiliation requirement of Sec. 1.1502-91(d)(2)(i). L is a new 
loss member, and M's purchase of L causes an ownership change of L. 
At the close of December 31, Year 4, at a time when L1 has been 
affiliated with the M group for three years and has been affiliated 
with L for six years, the S group purchases all the M stock. On this 
date, the L loss asset has a net unrealized built-in loss of $300, 
the L1 gain asset has a net unrealized built-in gain of $80, and M, 
the common parent of the M group, has one asset with a net 
unrealized built-in gain of $200.
    (ii) Paragraph (a)(1) of this section applies to L because L is 
a new loss member described in Sec. 1.1502-94(a)(1)(ii) that has an 
ownership change upon becoming a member of the M group on December 
31, Year 1. Accordingly, L is treated as having been affiliated with 
M for 5 consecutive years, and the L loss asset with a net 
unrealized built-in loss of $300 is included in the determination 
whether the M group has a net unrealized built-in loss.
    (iii) The S group determines which of its members are included 
in a loss subgroup by taking into account application of paragraph 
(a) of this section in the M group. For this purpose, application of 
paragraph (a) of this section causes L to be treated as having been 
affiliated with M (or as having been a member of the M group) for 5 
consecutive years as of January 1, Year 2. Therefore, the S group 
includes L in the determination whether the M subgroup acquired by S 
on December 31, Year 4, has a net unrealized built-in loss.
    (iv) Because paragraph (a)(1) of this section applied to L when 
L became a member of the M group, but did not apply to L1, L is 
treated as not having been affiliated with L1 before L and L1 joined 
the M group. Also, L1 is not included in the determination whether 
the M subgroup has a net unrealized built-in loss because L1 has not 
been continuously affiliated with members of the M group for the 
five consecutive year period ending immediately before they become 
members of the S group. See Sec. 1.1502-91(g)(2).

    (4) Special rule for testing period. For purposes of determining 
the beginning of the testing period for a loss group, the member's (or 
loss subgroup's) net operating loss carryovers (or net unrealized 
built-in loss) described in paragraph (a)(2) of this section are 
considered to arise--
    (i) In a case described in paragraph (a)(1)(i) of this section, in 
a taxable year that begins not earlier than the later of the day 
following the change date or the day that the member becomes a member 
of the group; and

[[Page 36172]]

    (ii) In a case described in paragraph (a)(1)(ii) of this section, 
in a taxable year that begins 3 years before the end of the 5 
consecutive year period.
    (5) Limits on effects of end of separate tracking. The rule 
contained in this paragraph (a) applies solely for purposes of 
Secs. 1.1502-91 through 1.1502-95 and this section (other than 
paragraph (b)(2)(ii)(B) of this section (relating to the definition of 
pre-change attributes of a subsidiary)) and Sec. 1.1502-98, and not for 
purposes of other provisions of the consolidated return regulations. 
However, the rule contained in this paragraph (a) does apply in 
Secs. 1.1502-15(g), 1.1502-21(g) and 1.1502-22(g) for purposes of 
determining the composition of loss subgroups defined in Sec. 1.1502-
91(d). See also paragraph (c) of this section for the continuing effect 
of an ownership change with respect to pre-change attributes.
    (b) Ownership change of subsidiary--(1) Ownership change of a 
subsidiary because of options or plan or arrangement. Notwithstanding 
Sec. 1.1502-92, a subsidiary may have an ownership change for purposes 
of section 382 with respect to its attributes which a group or loss 
subgroup includes in making a determination under Sec. 1.1502-91(c)(1) 
(relating to the definition of loss group) or Sec. 1.1502-91(d) 
(relating to the definition of loss subgroup). The subsidiary has such 
an ownership change if it has an ownership change under the principles 
of Sec. 1.1502-95(b) and section 382 and the regulations thereunder 
(determined on a separate entity basis by treating the subsidiary as 
not being a member of a consolidated group) in the event of--
    (i) The deemed exercise under Sec. 1.382-4(d) of an option or 
options (other than an option with respect to stock of the common 
parent) held by a person (or persons acting pursuant to a plan or 
arrangement) to acquire more than 20 percent of the stock of the 
subsidiary; or
    (ii) An increase by 1 or more 5-percent shareholders, acting 
pursuant to a plan or arrangement to avoid an ownership change of a 
subsidiary, in their percentage ownership interest in the subsidiary by 
more than 50 percentage points during the testing period of the 
subsidiary through the acquisition (or deemed acquisition pursuant to 
Sec. 1.382-4(d)) of ownership interests in the subsidiary and in 
higher-tier members with respect to the subsidiary.
    (2) Effect of the ownership change--(i) In general. If a subsidiary 
has an ownership change under paragraph (b)(1) of this section, the 
amount of consolidated taxable income for any post-change year that may 
be offset by the pre-change losses of the subsidiary shall not exceed 
the section 382 limitation for the subsidiary. For purposes of this 
limitation, the value of the subsidiary is determined solely by 
reference to the value of the subsidiary's stock.
    (ii) Pre-change losses. The pre-change losses of a subsidiary are--
    (A) Its allocable part of any consolidated net operating loss which 
is attributable to it under Sec. 1.1502-21(b) (determined on the last 
day of the consolidated return year that includes the change date) that 
is not carried back and absorbed in a taxable year prior to the year 
including the change date;
    (B) Its net operating loss carryovers that arose (or are treated 
under Sec. 1.1502-21(c) as having arisen) in a SRLY; and
    (C) Its recognized built-in loss with respect to its separately 
computed net unrealized built-in loss, if any, determined on the change 
date.
    (3) Coordination with Secs. 1.1502-91, 1.1502-92, and 1.1502-94. If 
an increase in percentage ownership interest causes an ownership change 
with respect to an attribute under this paragraph (b) and under 
Sec. 1.1502-92 on the same day, the ownership change is considered to 
occur only under Sec. 1.1502-92 and not under this paragraph (b). See 
Sec. 1.1502-94 for anti-duplication rules relating to value.
    (4) Example. The following example illustrates paragraph (b)(1)(ii) 
of this section:

    Example. Plan to avoid an ownership change of a subsidiary. (i) 
L owns all the stock of L1, L1 owns all the stock of L2, L2 owns all 
the stock of L3, and L3 owns all the stock of L4. The L group has a 
consolidated net operating loss arising in Year 1 that is carried 
over to Year 2. L has assets other than its L1 stock with a value of 
$900. L1, L2, and L3 own no assets other than their L2, L3, and L4 
stock. L4 has assets with a value of $100. During Year 2, A, B, C, 
and D, acting pursuant to a plan to avoid an ownership change of L4, 
acquire the following ownership interests in the members of the L 
loss group: (A) on September 11, Year 2, A acquires 20 percent of 
the L1 stock from L and B acquires 20 percent of the L2 stock from 
L1; and (B) on September 20, Year 2, C acquires 20 percent of the 
stock of L3 from L2 and D acquires 20 percent of the stock of L4 
from L3.
    (ii) The acquisitions by A, B, C, and D pursuant to the plan 
have increased their respective percentage ownership interests in L4 
by approximately 10, 13, 16, and 20 percentage points, for a total 
of approximately 59 percentage points during the testing period. 
This more than 50 percentage point increase in the percentage 
ownership interest in L4 causes an ownership change of L4 under 
paragraph (b)(2) of this section.

    (c) Continuing effect of an ownership change. A loss corporation 
(or loss subgroup) that is subject to a limitation under section 382 
with respect to its pre-change losses continues to be subject to the 
limitation regardless of whether it becomes a member or ceases to be a 
member of a consolidated group. See Sec. 1.382-5(d) (relating to 
successive ownership changes and absorption of a section 382 
limitation).
    (d) Losses reattributed under Sec. 1.1502-20(g)--(1) In general. 
This paragraph (d) contains rules relating to net operating carryovers 
that are reattributed to the common parent under Sec. 1.1502-20(g). 
References in this paragraph (d) to a subsidiary are references to the 
subsidiary (or lower tier subsidiary) whose net operating loss 
carryover is reattributed to the common parent.
    (2) Deemed section 381(a) transaction. Under Sec. 1.1502-20 (g)(1), 
the common parent succeeds to the reattributed losses as if the losses 
were succeeded to in a transaction described in section 381(a). In 
general, Secs. 1.1502-91 through 1.1502-95, this section, and 
Sec. 1.1502-98 are applied to the reattributed net operating loss 
carryovers in accordance with that characterization. See generally, 
Sec. 1.382-2(a)(1)(ii) (relating to distributor or transferor loss 
corporations in transactions under section 381), Sec. 1.1502-(1)(f)(4) 
(relating to the definition of predecessor and successor) and 
Sec. 1.1502-91(j) (relating to predecessor and successor corporations). 
For example, if the reattributed net operating loss carryover is a pre-
change attribute subject to a section 382 limitation, it remains 
subject to that limitation following the reattribution. In certain 
cases, the limitation applicable to the reattributed loss is zero 
unless the common parent apportions all or part of the limitation to 
itself. (See paragraph (d)(4) of this section.)
    (3) Rules relating to owner shifts--(i) In general. Any owner shift 
of the subsidiary (including any deemed owner shift resulting from 
section 382(g)(4)(D) or 382(l)(3)) in connection with the disposition 
of the stock of the subsidiary is not taken into account in determining 
whether there is an ownership change with respect to the reattributed 
net operating loss carryover. However, any owner shift with respect to 
the successor corporation that is treated as continuing in existence 
under Sec. 1.382-2(a)(1)(ii) must be taken into account for such 
purpose if such owner shift is effected by the reattribution and an 
owner shift of the stock of the subsidiary not held directly or 
indirectly by the common parent would

[[Page 36173]]

have been taken into account if such shift had occurred immediately 
before the reattribution. See paragraph (d)(3)(ii) Example 2 of this 
section.
    (ii) Examples. The following examples illustrate the principles of 
this paragraph (d)(3):

    Example 1. No owner shift for reattributed loss. (i) P, the 
common parent of a consolidated group, owns 60% of the stock of L, 
and B owns the remaining 40%. L has a net operating loss carryover 
of $100 from year 1 that it carries over to Years 2, 3, and 4. At 
the beginning of Year 2, P purchases 40% of the L stock from B, 
which does not cause an ownership change of L. On December 31, Year 
3, P sells all of the L stock to M. Pursuant to Sec. 1.1502-20(g), P 
reattributes $10 of L's $100 net operating loss carryover to itself, 
and L carries $90 of its net operating loss carryover to its Year 4.
    (ii) The sale of the L stock to M does not cause an owner shift 
that is taken into account in determining if there is an ownership 
change with respect to the $10 reattributed loss. Following the 
reattribution, Sec. 1.1502-94(b) continues to apply to determine if 
there is an ownership change with respect to the $10 reattributed 
loss, until, under paragraph (a) of this section, the loss is 
treated as described in Sec. 1.1502-91(c)(1)(i). In applying 
Sec. 1.1502-94(b), the 40 percentage point increase by the P 
shareholders prior to the reattribution is taken into account. The 
sale of the L stock to M does cause an ownership change of L with 
respect to the $90 of its net operating loss that it carries over to 
Year 4.
    Example 2. Owner shift for reattributed loss. The facts are the 
same as in Example 1, except that P only purchases 20% of the L 
stock from B and sells 80% of the L stock to M. L is a new loss 
member, and, under Sec. 1.1502-94(b)(1), an owner shift of the stock 
of L not held directly or indirectly by the common parent (the 20% 
of L stock still held by B) would have been taken into account if 
such shift had occurred immediately before the reattribution. 
Following the reattribution, Sec. 1.1502-94(b) continues to apply to 
determine if there is an ownership change with respect to the $10 
reattributed loss, until, under paragraph (a) of this section, the 
loss is treated as described in Sec. 1.1502-91(c)(1)(i). With 
respect to the $10 reattributed loss, the P shareholders have 
increased their percentage ownership interest by 40 percentage 
points. The P shareholders have increased their ownership interests 
by 20 percentage points as a result of P's purchase of stock from B, 
and, under Sec. 1.382-2(a)(1)(ii), are treated as increasing their 
interests by an additional 20 percentage points as a result of the 
reattribution. (The acquisition of the L stock by M does not, 
however, effect an owner shift for the $10 of reattributed loss.) 
The sale of the L stock to M causes an ownership change of L with 
respect to the $90 of net operating loss that L carries over to Year 
4.

    (4) Rules relating to the section 382 limitation--(i) Reattributed 
loss is a pre-change separate attribute of a new loss member. If the 
reattributed net operating loss carryover is a pre-change separate 
attribute of a new loss member that is subject to a separate section 
382 limitation prior to the disposition of subsidiary stock, the common 
parent's limitation with respect to that loss is zero, except to the 
extent that the common parent apportions to itself, under paragraph 
(d)(5) of this section, all or part of such limitation. A separate 
section 382 limitation is the limitation described in Sec. 1.1502-94(b) 
that applies to a pre-change separate attribute.
    (ii) Reattributed loss is a pre-change subgroup attribute. If the 
reattributed net operating loss carryover is a pre-change subgroup 
attribute subject to a subgroup section 382 limitation prior to the 
disposition of subsidiary stock, and, immediately after the 
reattribution, the common parent is not a member of the loss subgroup, 
the section 382 limitation with respect to that net operating loss 
carryover is zero, except to the extent that the common parent 
apportions to itself, under paragraph (d)(5) of this section, all or 
part of the subgroup section 382 limitation. See, however, Sec. 1.1502-
95(d)(3) Example 6, for an illustration of a case where the common 
parent, as successor to the subsidiary, is a member of the loss 
subgroup immediately after the reattribution.
    (iii) Potential application of section 382(l)(1). In general, the 
value of the stock of the common parent is used to determine the 
section 382 limitation for an ownership change with respect to the 
reattributed net operating loss carryover that occurs at the time of, 
or after, the reattribution. For example, if the net operating loss 
carryover is a pre-change consolidated attribute, the value of the 
stock of the common parent is used to determine the section 382 
limitation, and no adjustment to that value is required because of the 
deemed section 381(a) transaction. However, if the net operating loss 
carryover is a pre-change separate attribute of a new loss member (or 
is a pre-change attribute of a loss subgroup member and the common 
parent was not the loss subgroup parent immediately before the 
reattribution), the deemed section 381(a) transaction is considered to 
constitute a capital contribution with respect to the new loss member 
(or loss subgroup member) for purposes of section 382(l)(1). 
Accordingly, if that section applies because the deemed capital 
contribution is (or is considered under section 382(l)(1)(B) to be) 
part of a plan described in section 382(l)(1)(A), the value of the 
stock of the common parent after the deemed section 381(a) transaction 
must be adjusted to reflect the capital contribution. Ordinarily, this 
will require the value of the stock of the common parent to be reduced 
to an amount that represents the value of the stock of the subsidiary 
(or loss subgroup of which the subsidiary was a member) when the 
reattribution occurred.
    (iv) Duplication or omission of value. In determining any section 
382 limitation with respect to the reattributed net operating loss 
carryover and with respect to other pre-change losses, appropriate 
adjustments must be made so that value is not improperly omitted or 
duplicated as a result of the reattribution. For example, if the 
subsidiary has an ownership change upon its departure, and the common 
parent (as successor) has an ownership change with respect to the 
reattributed pre-change separate attribute upon its reattribution under 
paragraph (d)(3)(i) of this section, proper adjustments must be made so 
that the value of the subsidiary is not taken into account more than 
once in determinining the section 382 limitation for the reattributed 
loss and the loss that is not reattributed.
    (v) Special rule for continuity of business requirement. If the 
reattributed net operating loss carryover is a pre-change attribute of 
new loss member and the reattribution occurs within the two year period 
beginning on the change date, then, starting immediately after the 
reattribution, the continuity of business requirement of section 
382(c)(1) is applied with respect to the business enterprise of the 
common parent. Similar principles apply if the reattributed net 
operating loss carryover is a pre-change subgroup attribute and, on the 
day after the reattribution, the common parent is not a member of the 
loss subgroup.
    (5) Election to reattribute section 382 limitation--(i) Effect of 
election. The common parent may elect to apportion to itself all or 
part of any separate section 382 limitation or subgroup section 382 
limitation to which the net operating loss carryover is subject 
immediately before the reattribution. However, no net unrealized built-
in gain of the member (or loss subgroup) whose net operating loss 
carryover is reattributed can be apportioned to the common parent. The 
principles of Sec. 1.1502-95(c) apply to the apportionment, treating, 
as the context requires, references to the former member as references 
to the common parent, and references to the consolidated section 382 
limitation as references to the separate section 382 limitation (or 
subgroup section 382 limitation) that is being apportioned. Thus, for 
example, the common parent can reattribute to itself all or part of the 
value element or adjustment element of the limitation, and any part of 
such

[[Page 36174]]

element that is apportioned requires a corresponding reduction in such 
element of the separate section 382 limitation of the subsidiary whose 
net operating loss carryover is reattributed (or in the subgroup 
section 382 limitation if the reattributed loss is a pre-change 
subgroup attribute). Appropriate adjustments must be made to the 
separate section 382 limitation (or subgroup section 382 limitation) 
for the consolidated return year in which the reattribution is made to 
reflect that the reattributed net operating loss carryover is an 
attribute acquired by the common parent during the year in a 
transaction to which section 381(a) applies. The election is made by 
the common parent as part of the election to reattribute the net 
operating loss carryover. See Sec. 1.1502-20(g)(4) for the time and 
manner of making the election.
    (ii) Examples. The following examples illustrate the principles of 
this paragraph (d)(5):

    Example 1. Consequence of apportionment. (i) P, the common 
parent of a consolidated group, purchases all of the stock of L on 
December 31, Year 1. L carries over a net operating loss arising in 
Year 1 to each of the next 5 taxable years. The purchase of the L 
stock causes an ownership change of L, and results in a separate 
section 382 limitation of $10 for L's net operating loss carryover 
based on the value of the L stock. On July 2, Year 3, P sells 30 
percent of the L stock to A. Under Sec. 1.1502-20(g), P elects to 
apportion to itself $110 of L's $200 net operating loss carryover. P 
also elects to apportion to itself $6 of the $10 value element of 
the separate section 382 limitation.
    (ii) For the consolidated return years ending after December 31, 
Year 3, P's separate section 382 limitation with respect to the 
reattributed net operating loss carryover is $6, adjusted as 
appropriate for any short taxable year, unused section 382 
limitation, or other adjustment. For the P group's consolidated 
return year ending December 31, Year 3, the separate section 382 
limitation for L's net operating loss carryover is $8, the sum of $5 
and $3. Five dollars of the limitation is the amount that bears the 
same relationship to $10 as the number of days in the period ending 
with the deemed section 381(a) transaction, 183 days, bears to 365. 
Three dollars of the limitation is the amount that bears the same 
relationship to $6 as the number of days in the period between July 
3 and December 31, 182, bears to 365.
    (iii) For L's taxable years ending after December 31, Year 3, 
L's separate section 382 limitation for its $90 of net operating 
loss carryover that was not reattributed to P is $4, adjusted as 
appropriate for any short taxable year, unused section 382 
limitation, or other adjustment. For L's short taxable year ending 
December 31, Year 3, the section 382 limitation for its $90 of net 
operating loss carryover is $2, the amount that bears the same 
relationship to $4 (the portion of the value element that was not 
apportioned to P), as the number of days during the short taxable 
year, 182 days, bears to 365. See Sec. 1.382-5(c).
    Example 2. No apportionment required for consolidated pre-change 
attribute. (i) P, the common parent of a consolidated group, forms 
L. For Year 1, L has an operating loss of $70 that is not absorbed 
and is included in the group's consolidated net operating loss that 
is carried over to subsequent years. On January 1 of Year 3, A buys 
all of the P stock and the P group has an ownership change. The 
consolidated section 382 limitation based on the value of the P 
stock is $10.
    (ii) On April 13 of Year 4, P sells all of the stock of L to B 
and, under Sec. 1.1502-20(g), elects to reattribute to itself $45 of 
L's net operating loss carryover. Following the reattribution, the 
$45 portion of the Year 1 net operating loss carryover retains its 
character as a pre-change consolidated attribute, and remains 
subject to so much of the $10 consolidated section 382 limitation as 
P does not elect to apportion to L under Sec. 1.1502-95(c).

    (e) Time and manner of making election under Sec. 1.1502-91(d)(4)--
(1) In general. This paragraph (e) prescribes the time and manner of 
making the election under Sec. 1.1502-91(d)(4), relating to treating 
two or more corporations as treating the section 1504(a)(1) requirement 
of Sec. 1.1502-91(d)(1)(ii) and (d)(2)(ii) as satisfied.
    (2) Election statement. An election under Sec. 1.1502-91(d)(4) must 
be made by the common parent. The election must be made in the form of 
the following statement: ``THIS IS AN ELECTION UNDER Sec. 1.1502-
91(d)(4) TO TREAT THE FOLLOWING CORPORATIONS AS MEETING THE 
REQUIREMENTS OF Sec. 1.1502-91 (d)(1)(ii) AND (d)(2)(ii) IMMEDIATELY 
AFTER THEY BECAME MEMBERS OF THE GROUP.'' [List separately the name of 
each corporation, its E.I.N., and the date that it became a member of 
the group]. If separate elections are being made for corporations that 
became members at different times or that were acquired from different 
affiliated groups, provide a separate statement and list for each 
election.
    (3) The election statement must be filed by the common parent with 
its income tax return for the consolidated return year in which the 
members with respect to which the election is made become members of 
the group. Such election must be filed on or before the due date for 
such income tax return, including extensions.
    (4) An election made under this paragraph (e) is irrevocable.


Sec. 1.1502-97  Special rules under section 382 for members under the 
jurisdiction of a court in a title 11 or similar case.

[Reserved]


Sec. 1.1502-98  Coordination with section 383.

    The rules contained in Secs. 1.1502-91 through 1.1502-96 also apply 
for purposes of section 383, with appropriate adjustments to reflect 
that section 383 applies to credits and net capital losses. Similarly, 
in the case of net capital losses, general business credits, and excess 
foreign taxes that are pre-change attributes, Sec. 1.383-1 applies the 
principles of Secs. 1.1502-91 through 1.1502-96. For example, if a loss 
group has an ownership change under Sec. 1.1502-92 and has a carryover 
of unused general business credits from a pre-change consolidated 
return year to a post-change consolidated return year, the amount of 
the group's regular tax liability for the post-change year that can be 
offset by the carryover cannot exceed the consolidated section 383 
credit limitation for that post-change year, determined by applying the 
principles of Secs. 1.383-1(c)(6) and 1.1502-93 (relating to the 
computation of the consolidated section 382 limitation).


Sec. 1.1502-99  Effective dates.

    (a) In general. Except as provided in paragraphs (b) and (c) of 
this section, Secs. 1.1502-91 through 1.1502-96 and Sec. 1.1502-98 
apply to any testing date on or after June 25, 1999. Sections 1.1502-94 
through 1.1502-96 also apply to a corporation that becomes a member of 
a group or ceases to be a member of a group (or loss subgroup) on any 
date on or after June 25, 1999.
    (b) Special rules--(1) Election to treat subgroup parent 
requirement as satisfied. Section 1.1502-91(d)(4), Sec. 1.1502-
91(d)(7), Example 4, Sec. 1.1502-92(b)(1)(iii), Sec. 1.1502-92(b)(2), 
Example 5, the last two sentences of Sec. 1.1502-95(b)(3), Sec. 1.1502-
95(d)(2)(i), and Sec. 1.1502-96(e)(all of which relate to the election 
under Sec. 1.1502-91(d)(4) to treat the loss subgroup parent 
requirement as satisfied) apply to corporations that become members of 
a consolidated group in taxable years for which the due date of the 
income tax return (without extensions) is after June 25, 1999.
    (2) Principal purpose of avoiding a limitation. The third sentence 
of Sec. 1.1502-91(d)(5) (relating to members excluded from a loss 
subgroup) applies to corporations that become members of a consolidated 
group on or after June 25, 1999.
    (3) Ceasing to be a member of a loss subgroup--(i) Ownership change 
of a loss subgroup. Section 1.1502-95(d)(2)(ii) and Sec. 1.1502-
95(d)(3), Example 3 apply to corporations that cease to bear a 
relationship described in section 1504(a)(1) to a loss subgroup parent 
in taxable years for which the

[[Page 36175]]

due date of the income tax return (without extensions) is after June 
25, 1999.
    (ii) Expiration of 5-year period. Section 1.1502-95(d)(2)(iii) 
applies with respect to the day after the last day of any 5 consecutive 
year period described in that section that ends in a taxable year for 
which the due date of the income tax return (without extensions) is 
after June 25, 1999.
    (4) Reattribution of net operating loss carryovers under 
Sec. 1.1502-20(g). Section 1.1502-96(d) applies to reattributions of 
net operating loss carryovers (or capital loss carryovers) in taxable 
years for which the due date of the income tax return (without 
extensions) is after June 25, 1999; except that the election under 
Sec. 1.1502-96(d)(5) (relating to an election to reattribute section 
382 limitation) can be made with any election under Sec. 1.1502-
20(g)(4) to reattribute to the common parent a net operating loss or 
net capital loss that is timely filed on or after June 25, 1999.
    (5) Election to apportion net unrealized built-in gain. In the case 
of corporations that cease to be members of a loss group (or loss 
subgroup) before June 25, 1999 in a taxable year for which the due date 
of the income tax return (without extensions) is after June 25, 1999, 
Sec. 1.1502-95(a), (b), (c), and (f) apply to those corporations if the 
common parent makes the election described in the second sentence of 
paragraph (c)(1) of Sec. 1.1502-95 in the time and manner prescribed in 
paragraph (f) of Sec. 1.1502-95.
    (c) Testing period may include a period beginning before June 25, 
1999--
    (1) In general. A testing period for purposes of Secs. 1.1502-91 
through 1.1502-96 and 1.1502-98 may include a period beginning before 
June 25, 1999. Thus, for example, in applying Sec. 1.1502-
92(b)(1)(i)(relating to the determination of an ownership change of a 
loss group), the determination of the lowest percentage of ownership 
interest of any 5-percent shareholder of the common parent during a 
testing period ending on a testing date occurring on or after June 25, 
1999 takes into account the period beginning before June 25, 1999, 
except to the extent that the period is more than 3 years before the 
testing date or is otherwise before the beginning of the testing 
period. See Sec. 1.1502-92(b)(1).
    (2) Transition rule for net unrealized built-in loss. A loss group 
(or loss subgroup) that has a net unrealized built-in loss on a testing 
date on or after June 25, 1999 may apply Sec. 1.1502-91A(g) (and 
Sec. 1.1502-96A(a) as it relates to Sec. 1.1502-91A(g)) for the period 
ending on the day before June 25, 1999 to determine under Sec. 1.382-
2T(d)(ii)(A) the earliest date that its testing period begins (treating 
the day before June 25, 1999 as the end of a taxable year.) Thus, for 
example, if a consolidated group with no net operating losses has a net 
unrealized built-in loss determined under Sec. 1.1502-91(g) on a 
testing date after June 25, 1999, but, under Sec. 1.1502-91A(g), does 
not have a net unrealized built-in loss for the period ending on the 
day before June 25, 1999, the group's testing period begins no earlier 
than June 25, 1999.

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

    Par. 14. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.

    Par. 15. In Sec. 602.101, paragraph (b) is amended by removing the 
entry for Sec. 1.1502-95T, revising the entry for Sec. 1.1502-20, and 
adding entries in numerical order to the table to read as follows:


Sec. 602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                             Current OMB
     CFR part or section where identified and described      control No.
------------------------------------------------------------------------
 
                  *        *        *        *        *
1.1502-20..................................................    1545-1160
                                                               1545-1218
 
                  *        *        *        *        *
1.1502-95..................................................    1545-1218
1.1502-96..................................................    1545-1218
1.1502-95A.................................................    1545-1218
 
                  *        *        *        *        *
------------------------------------------------------------------------

John M. Dalrymple,
Acting Deputy Commissioner of Internal Revenue.

    Approved: June 18, 1999.
Donald C. Lubick,
Assistant Secretary of the Treasury.
[FR Doc. 99-16162 Filed 6-25-99; 1:27 pm]
BILLING CODE 4830-01-U