[Federal Register Volume 64, Number 127 (Friday, July 2, 1999)]
[Rules and Regulations]
[Pages 36175-36181]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-16163]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8825]
RIN 1545-AU33


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

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final regulations relating to 
limitations on net operating loss carryovers and certain built-in 
losses following an ownership change of a corporation. The regulations 
implement the statutory authority under section 382(m) of the Internal 
Revenue Code to prescribe regulations concerning short taxable years 
and controlled groups of corporations. Additional rules are adopted 
relating principally to corporations that cease to exist following a 
merger (or similar transaction) or that have two or more ownership 
changes. These final regulations replace temporary regulations that 
provided guidance on these topics.

DATES: Effective Dates: These regulations are effective June 25, 1999.
    Applicability Dates: For dates of application and special 
transition 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 contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under 
control number 1545-1434. Responses to this collection of information 
are required to obtain a benefit relating to the value of a controlled 
group member.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number.
    The estimated annual burden per respondent is one quarter hour.
    Comments concerning the accuracy of this burden estimate and 
suggestions for

[[Page 36176]]

reducing this burden should be sent to the Internal Revenue Service, 
Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC 20224, 
and 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.
    Books and records relating to this collection of information must 
be retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background and Explanation of Provisions

    On February 4, 1991, the IRS and Treasury issued a notice of 
proposed rulemaking, CO-077-90 (56 FR 4183) (the 1991 controlled group 
proposed regulations), setting forth rules regarding the application of 
section 382 to controlled groups of corporations and to corporations 
that undergo a merger or similar transaction. The 1991 controlled group 
proposed regulations also related to the determination of the section 
382 limitation following an ownership change in the case of short 
taxable year, and to the valuation of the stock of a loss corporation 
for purposes of determining the amount of the section 382 limitation. 
On the same day, the IRS and Treasury also issued proposed regulations 
relating to the application of section 382 to affiliated groups of 
corporations filing consolidated returns (CO-132-87, 56 FR 4194), and 
to the use of built-in deductions and net operating losses and capital 
losses, including the carryover and carryback of separate return year 
(SRLY) losses, of members of consolidated groups (CO-078-90, 56 FR 
4228). 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 8679, 61 FR 33313) (the 1996 controlled group temporary 
regulations) relating to section 382. Except for the addition of a 
provision relating to the effects of successive ownership changes, 
these regulations were substantially identical to the 1991 controlled 
group 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) (the 1996 controlled 
group proposed regulations) and the 1991 controlled group proposed 
regulations were withdrawn. No written comments were received on the 
1996 controlled group proposed regulations and no public hearing was 
held. Also on June 27, 1996, the IRS and Treasury published temporary 
regulations relating to the application of section 382 to affiliated 
groups of corporations filing consolidated returns (TD 8678, 61 FR 
33335) and the SRLY limitation (TD 8677, 61 FR 33321). 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 corresponding proposed regulations published in 1991 
were withdrawn.
    The 1996 controlled group proposed regulations are adopted as 
revised by this Treasury decision and the corresponding temporary 
regulations are removed. The final regulations are substantially the 
same as the 1996 controlled group proposed regulations, with one 
significant change relating to built-in losses of a member of a 
controlled group of corporations. This change is discussed below.
    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 loss 
carryovers arising before the ownership change are subject to a 
limitation known as the section 382 limitation. The section 382 
limitation for a post-change taxable year of the loss corporation 
generally equals the fair market value of the stock of the corporation 
immediately before the ownership change multiplied by the long-term tax 
exempt rate (a rate of return published periodically in the Internal 
Revenue Bulletin).
    In addition to net operating loss carryovers, the recognized built-
in losses of corporations that have a net unrealized built-in loss on 
the ownership change date are also subject to the section 382 
limitation. In general, a corporation has a net unrealized built-in 
loss on its ownership change date if the adjusted basis of its assets 
exceeds their fair market value, and such excess is greater than the 
threshold amount under section 382(h)(3)(B). In general, recognized 
built-in losses are losses with respect to assets held on the change 
date that are recognized within the 5-year period beginning on the 
ownership change date. The recognized built-in loss on an asset, 
however, is limited to the lesser of the loss recognized on its 
disposition or the amount by which the adjusted basis of the asset 
exceeded its fair market value on the change date.
    Consistent with the proposed regulations, the final regulations 
require appropriate adjustments to the value of a loss corporation that 
is a member of a controlled group of corporations so that the same 
value is not included more than once in computing the section 382 
limitations for the loss corporations that are members of the 
controlled group. In general, adjustments are required only when 
corporations are members of the same controlled group both when a pre-
change loss arises and on the date of the ownership change. Thus, 
adjustments are required if a loss corporation is a component member of 
the same controlled group as another member (i) on December 31 of the 
taxable year in which a pre-change loss arises (or the change date, if 
earlier) and (ii) on the date that the loss corporation has an 
ownership change. If a loss corporation has pre-change losses that 
arise in different taxable years, the component members of the 
controlled group with respect to losses arising in each taxable year 
may differ. Therefore, as in the 1996 controlled group proposed 
regulations, the final regulations are applied by determining a 
controlled group with respect to each year's pre-change loss of the 
corporation (a controlled group loss).
    To avoid duplication of value in connection with a controlled group 
loss, the value of the stock of each corporation that is a component 
member of the controlled group with respect to a controlled group loss 
is reduced by the value of the stock of other component members that it 
directly owns immediately before the ownership change. A second 
adjustment (more fully explained in the preamble to the 1991 controlled 
group proposed regulations) permits a lower tier member to elect to 
restore some or all of the previously reduced value to a member that 
directly owns its stock.
    In identifying controlled group losses, the determination of the 
taxable year to which a net operating loss carryover is attributable 
usually presents no difficulty. The determination of the taxable year 
in which a net unrealized built-in loss accrues, however, is more 
problematic. To address some concerns in this area, the final 
regulations include an irrebutable presumption that certain built-in 
losses are attributable to the period before a particular taxable year. 
The presumption applies to a loss corporation that had an ownership 
change prior to the first day of the taxable year in question, and 
whose net unrealized built-in losses became subject to a section 382 
limitation as a result of that ownership change. Under

[[Page 36177]]

the presumption, any built-in loss in such an asset is considered to be 
attributable to a period prior to the taxable year in question to the 
extent of the built-in loss in that asset on the previous change date.

Effective Dates

    Section 1.382-5 (relating to the section 382 limitation) generally 
applies to a loss corporation that has an ownership change to which 
section 382(a), as amended by the Tax Reform Act of 1986, applies. The 
rules in that section relating to successive ownership changes, 
however, apply to taxable years of a loss corporation beginning on or 
after January 1, 1997. Section 1.382-8 (relating to controlled groups 
of corporations) generally applies to a loss corporation that has an 
ownership change with respect to a controlled group loss on or after 
January 1, 1997. Transition rules are provided for members of 
controlled groups that have ownership changes before that date. The 
rules in Sec. 1.382-1(a)(iv) (relating to separate tracking of certain 
loss corporations) apply to testing dates on or after January 29, 1991. 
The rules in Sec. 1.382-2 (a) (4) and (a) (5) relating to successor or 
predecessor corporations in other than corporate reorganizations apply 
to testing dates on or after January 1, 1997.

Special Analysis

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in EO 12866. It has also been 
determined that section 553 of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations. 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 the collection of information in this regulation 
is a statement of election that it is estimated will take less than one 
hour to prepare. The statement will be filed by electing corporations 
that are members of a controlled group of corporations (determined by 
applying a 50% common control requirement) both (1) when a net 
operating loss carryover (or certain other tax attributes ) arises and 
(2) a member of the controlled group has an ownership change under 
section 382 of the Internal Revenue Code with respect to that net 
operating loss carryover (or other attribute). (An affiliated group of 
corporations that files a consolidated return is treated as a single 
corporation for this purpose, which reduces the number of potential 
filers.) Because the election is only filed with respect to an 
ownership change, it is unlikely that a corporation will file the 
election frequently. 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 submitted to the 
Small Business Administration for comment on its impact on small 
business.
    Drafting information. The principal author of these regulations is 
Lee A. Kelley of the Office of Assistant Chief Counsel (Corporate). 
Other personnel from the IRS and Treasury participated in their 
development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by 
removing entries for sections 1.382-5T and 1.382-8T and by adding 
entries in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.382-5 also issued under 26 U.S.C. 382(m). * * *
    Section 1.382-8 also issued under 26 U.S.C. 382(m). * * *

    Par. 2. Section 382-1 is amended by:
    1. Revising the entry for Sec. 1.382-2, paragraph (a)(1)(iv).
    2. Adding an entry for Sec. 1.382-2, paragraph (a)(1)(v).
    3. Adding entries for Sec. 1.382-2, paragraphs (a)(5) and (a)(6).
    4. Removing the entries for Sec. 1.382-2T, paragraphs (f)(1)(i), 
(f)(1)(ii), and (f)(1)(iii).
    5. The entry for Sec. 1.382-4 is amended as follows:
    a. The entry for paragraph (b) is revised.
    b. Entries for paragraphs (b)(1) and (b)(2) are added.
    6. Removing the entry for Sec. 1.382-5.
    7. Redesignating the entry for Sec. 1.382-5T as Sec. 1.382-5 and 
revising the section heading.
    8. Removing the entry for Sec. 1.382-8.
    9. Redesignating the entry for Sec. 1.382-8T as Sec. 1.382-8, 
revising the section heading, and adding entries for paragraphs (b) (1) 
and (b) (2).
    The revision and additions read as follows:


Sec. 1.382-1  Table of contents.

* * * * *

Sec. 1.382-2  General rules for ownership change.

    (a) * * *
    (1) * * *
    (iv) End of separate accounting for losses and credits of 
distributor or transferor corporation.
    (v) Application to other successor corporations.
* * * * *
    (5) Successor corporation.
    (6) Predecessor corporation.
* * * * *

Sec. 1.382-4  Constructive ownership of stock.

* * * * *
    (b) Attribution from corporations, partnerships, estates and 
trusts.
    (1) [Reserved].
    (2) Limitation.
* * * * *

Sec. 1.382-5  Section 382 limitation.

* * * * *

Sec. 1.382-8  Controlled groups.

* * * * *
    (b) * * *
    (1) In general.
    (2) Presumption regarding net unrealized built-in loss.
* * * * *


Sec. 1.1382-2  [Amended]

    Par. 2a. Section 1.382-2 is amended by removing paragraph 
(a)(1)(iv).
    Par. 3. Section 1.382-2T is amended as follows:
    1. In paragraph (e)(2)(iv) Example (2)(ii), remove the reference 
``paragraph (f)(1)(ii)'' and add ``Sec. 1.382-2(a)(1)(iv)'' in its 
place.
    2. Paragraph (f)(1)(ii) is redesignated as paragraph (a)(1)(iv) of 
Sec. 1.382-2.
    3. Paragraph (f)(1) is revised.
    4. Paragraphs (f)(4) and (f)(5) are redesignated as paragraphs 
(a)(5) and (a)(6) of Sec. 1.382-2, respectively.
    5. New paragraphs (f)(4) and (f)(5) are added.
    6. In paragraph (h)(2)(i)(A), remove the language ``and solely for 
purposes of determining whether a loss corporation has an ownership 
change''.
    The revision and additions read as follows:


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

* * * * *
    (f) Definitions. * * *
    (1) Loss corporation. See section 382 and Sec. 1.382-2(a)(1) for 
the definition of a loss corporation.
* * * * *

[[Page 36178]]

    (4) Successor corporation. See Sec. 1.382-2(a)(5) for the 
definition of successor corporation.
    (5) Predecessor corporation. See Sec. 1.382-2(a)(6) for the 
definitions of predecessor corporation.
* * * * *
    Par. 4. Section 1.382-2 is amended as follows:
    1. In the first sentence of paragraph (a)(1)(iii), remove the 
reference ``Sec. 1.382-2T(f)(1)(ii)'' and add ``paragraph (a)(1)(iv) of 
this section'' in its place.
    2. In the first sentence of newly designated paragraph (a)(1)(iv), 
remove the reference ``Sec. 1.382-2(a)(1)(iii)'' and add `` paragraph 
(a)(1)(iii) of this section'' in its place.
    3. In the first sentence of newly designated paragraph (a)(1)(iv), 
remove the reference ``Sec. 1.382-2(a)(1)(ii)'' and add ``paragraph 
(a)(1)(ii) of this section'' in its place.
    4. In the last sentence of newly designated paragraph (a)(1)(iv), 
remove the reference ``paragraph (f)(1)(ii)'' and add ``paragraph 
(a)(1)(iv)'' in its place.
    5. Paragraph (a)(1)(v) is added.
    6. In the first sentence of paragraph (a)(3)(i), remove the 
reference ``paragraph (f)(18)'' and add ``paragraph (a)(3)(i) and 
Sec. 1.382-2T(f)(18)(ii) and (iii)'' in its place.
    7. In the last sentence of newly designated paragraph (a)(5), 
remove the reference ``paragraph (f)(4)'' and add ``paragraph (a)(5)'' 
in its place.
    8. In the last sentence of newly designated paragraph (a)(6), 
remove the reference ``paragraph (f)(5)'' and add ``paragraph (a)(6)'' 
in its place.
    The addition reads as follows:


Sec. 1.382-2  General rules for ownership change.

    (a) * * *
    (1) * * *
    (v) Application to other successor corporations. This paragraph 
(a)(1) also applies, as the context may require, to successor 
corporations other than successors in section 381(a) transactions. For 
example, if a corporation receives assets from the loss corporation 
that have basis in excess of value, the recipient corporation's basis 
for the assets is determined, directly or indirectly, in whole or in 
part, by reference to the loss corporation's basis, and the amount by 
which basis exceeds value is material, the recipient corporation is a 
successor corporation subject to this paragraph (a)(1). This paragraph 
(a)(1)(v) applies to any testing date occurring on or after January 1, 
1997.
* * * * *
    Par. 5. Section 1.382-4 is amended by revising paragraph (b) to 
read as follows:


Sec. 1.382-4  Constructive ownership of stock.

* * * * *
    (b) Attribution from corporations, partnerships, estates and 
trusts. (1) [Reserved].
    (2) Limitation. Section 1.382-2T(h)(2)(i)(A) applies solely for 
purposes of determining whether a loss corporation has an ownership 
change.
* * * * *


Sec. 1.382-5  [Removed]

    Par. 6. Section 1.382-5 is removed.
    Par. 7. Section 1.382-5T is redesignated as Sec. 1.382-5 and 
amended as follows:
    1. The section heading is revised.
    2. In paragraph (e), the reference ``Sec. 1.382-8T'' is removed and 
``Sec. 1.382-8'' is added in its place.
    The revision reads as follows:


Sec. 1.382-5  Section 382 limitation.

* * * * *


Sec. 1.382-8  [Removed]

    Par. 8. Section 1.382-8 is removed.
    Par. 9. Section 1.382-8T is redesignated as Sec. 1.382-8 and 
amended as follows:
    1. The section heading is revised.
    2. Redesignate paragraphs (b) introductory text, (b)(1) and (b)(2) 
as paragraphs (b)(1) introductory text, (b)(1)(i) and (b)(1)(ii), 
respectively.
    3. A paragraph heading for newly designated paragraph (b)(1) is 
added.
    4. Paragraph (b)(2) is added.
    5. The first three sentences of paragraph (f) are revised.
    6. The graphics of paragraph (g) Example 1(a) are revised.
    7. The graphics of paragraph (g) Example 2(a) are revised.
    8. Paragraph (g) Example 4 is amended as follows:
    a. In the last sentence of paragraph (a), remove the reference 
``Sec. 1.1502-92T(b)(1)(i)'' and add ``Sec. 1.1502-92(b)(1(i)'' in its 
place.
    b. In paragraph (b)(2), remove the reference ``Sec. 1.1502-91T(c)'' 
and add ``Sec. 1.1502-91(c)'' in its place.
    c. In paragraph (c), remove the reference ``Sec. 1.1502-93T'' and 
add ``Sec. 1.1502-93'' in its place.
    9. In the fifth sentence of paragraph (h)(1), remove the reference 
``Sec. 1.382-8T'' and add ``Sec. 1.382-8'' in its place.
    10. Paragraph (i) is added.
    The additions and revisions read as follows:


Sec. 1.382-8  Controlled groups.

* * * * *
    (b) Controlled group loss and controlled group with respect to a 
controlled group loss--(1) In general. * * *
    (2) Presumption regarding net unrealized built-in loss. For 
purposes of determining whether a net unrealized built-in loss of a 
loss corporation is attributable to a taxable year (the determination 
year) with respect to which the corporation is a component member of a 
controlled group, the built-in loss in a prior change date asset is 
deemed to be attributable to a period ending before the determination 
year. A prior change date asset is any asset held by the loss 
corporation at all times during the period beginning on the change date 
of its most recent ownership change after 1986 (the first change date), 
and ending on the first day of the determination year. The built-in 
loss in a prior change date asset is the amount by which the adjusted 
basis of the asset on the first change date exceeds the fair market 
value of the asset on that date. The principles of this paragraph 
(b)(2) also apply to items described in section 382(h)(6)(B).
* * * * *
    (f) Coordination between consolidated groups and controlled groups. 
Some or all of the component members of a controlled group may also be 
members of a consolidated group, and a controlled group loss may be 
subject to a consolidated section 382 limitation or subgroup section 
382 limitation determined under Sec. 1.1502-93. Except as otherwise 
provided in this paragraph (f) and Secs. 1.1502-91 through 1.1502-99, 
Sec. 1.1502-93 applies instead of this section when both sections, by 
their terms, are otherwise applicable. This section is applicable and 
may require an adjustment to value if a member of a consolidated group, 
a loss group, or loss subgroup (as those terms are defined in 
Secs. 1.1502-1(h) and 1.1502-91) is also a component member of a 
controlled group with respect to a controlled group loss. * * *
    (g) * * *

    Example 1. * * * (a) * * *

BILLING CODE 4830-01-U

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[GRAPHIC] [TIFF OMITTED] TR02JY99.019




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* * * * *
    Example 2.  * * * (a) * * *
    [GRAPHIC] [TIFF OMITTED] TR02JY99.020
    

BILLING CODE 4830-01-C

[[Page 36181]]

* * * * *
    (i) References to former temporary regulations. As the context 
requires, a reference in this section to Sec. 1.382-8 includes a 
reference to Sec. 1.382-8T in effect prior to June 25, 1999, as 
contained in 26 CFR part 1 revised as of April 1, 1999, a reference to 
Secs. 1.1502-91, 1.1502-92, 1.1502-93, and Secs. 1.1502-91 through 
1.1502-99 includes a reference to Secs. 1.1502-91A, 1.1502-92A, 1.1502-
93A and Secs. 1.1502-91A through 1.1502-99A.
* * * * *

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

    Par. 10. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.

    Par. 11. In Sec. 602.101, paragraph (b) is amended in the table by 
removing the entry for 1.382-8T and adding an entry in numerical order 
to read as follows:


Sec. 602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where identified and described       control No.
------------------------------------------------------------------------
 
                  *        *        *        *        *
1.382-8.................................................       1545-1434
 
                  *        *        *        *        *
------------------------------------------------------------------------

John M. Dalrymple,
Acting Deputy Commissioner of Internal Revenue.
    Approved: June 18, 1999.
Donald C. Lubick,
Assistant Secretary of the Treasury.
[FR Doc. 99-16163 Filed 6-25-99; 1:27 pm]
BILLING CODE 4830-01-U