[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
[[Page 36179]]
[GRAPHIC] [TIFF OMITTED] TR02JY99.019
[[Page 36180]]
* * * * *
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