[Federal Register Volume 64, Number 154 (Wednesday, August 11, 1999)]
[Rules and Regulations]
[Pages 43613-43618]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-20242]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8833]
RIN 1545-AW08


Consolidated Returns--Consolidated Overall Foreign Losses and 
Separate Limitation Losses

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final consolidated return regulations 
relating to the treatment of overall foreign losses and separate 
limitation losses in the computation of the foreign tax credit 
limitation. The regulations replace existing guidance with respect to 
overall foreign losses and provide guidance with respect to separate 
limitation losses. These regulations affect consolidated groups that 
compute the foreign tax credit limitation or that dispose of property 
used in a foreign trade or business.

DATES: Effective Date: These regulations are effective August 11, 1999.
    Applicability Dates: For dates of applicability of these 
regulations, see Secs. 1.1502-9A(a)(1) and (b)(1) and 1.1502-9(e).

FOR FURTHER INFORMATION CONTACT: Trina Dang of the Office of Associate 
Chief Counsel (International), (202) 622-3850 (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 of 1995 (44 U.S.C. 3507) 
under the control number 1545-1634. Responses to this collection of 
information are mandatory.
    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.
    The estimated annual burden per respondent is 1.5 hours.
    Comments concerning the accuracy of this burden estimate and 
suggestions for 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 or records relating to a collection of information must be 
retained so 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

    On December 29, 1998, the IRS and Treasury published in the Federal 
Register (REG-106902-98, 63 FR 71589) a notice of proposed rulemaking 
modifying the rules relating to the

[[Page 43614]]

treatment of overall foreign loss (OFL) accounts, and providing new 
rules relating to the treatment of separate limitation loss (SLL) 
accounts. The regulations proposed to replace the notional account 
method for allocating a group's consolidated OFL (COFL) account to a 
departing member of a group with an asset-based method for allocating 
both OFLs and SLLs. The regulations also proposed to modify the section 
904(f)(3) and (5)(F) disposition rules in the case of intercompany 
transactions, and to provide computational rules and nomenclature for 
SLLs as well as OFLs.
    A public hearing was held on February 17, 1999, and two written 
comments were received. One commentator recommended the retention of 
the notional account method because the asset-based method can result 
in the allocation of a portion of the COFL account to a departing 
member that did not contribute to the COFL account, a result that the 
commentator views as arbitrary. To alleviate the tension between the 
interest allocation and COFL rules, the commentator suggested amending 
the interest allocation rules instead of the COFL rules.
    Treasury and the IRS recognize that, under the asset-based method, 
a portion of a COFL account can under certain circumstances be 
allocated to a member that did not directly contribute to the COFL 
account (because, for example, it was not a member of the group at the 
time the OFL arose). However, as noted in the preamble to regulations 
issued in January 1998 that eliminated the limitation on OFL recapture 
and foreign tax credit utilization with respect to separate return 
limitation years, any single member's economic ``contribution'' to a 
COFL account is difficult to measure since the expense allocation rules 
require interest and certain other expenses to be allocated to a 
member's income in separate limitation categories on the basis of the 
group's assets.
    An asset-based method is not arbitrary because it associates a COFL 
account with assets that will produce income subject to recapture, 
thereby ensuring the recapture of the COFL account. As explained in the 
preamble to the proposed regulations, Treasury and the IRS believe that 
the asset-based method for allocating a COFL account harmonizes the 
COFL rules with the interest allocation provisions. Those provisions, 
as required by statute, are designed to prevent corporations from 
borrowing in ways that inappropriately minimize the amount of interest 
expense allocated against foreign-source income (thereby inflating the 
amount of foreign-source income that can be sheltered from U.S. tax by 
foreign tax credits).
    The commentator also criticized the asset-based method for 
allocating COFL accounts as creating uncertainty and administrative 
burdens in determining the proper amount of a selling group's COFL 
account to be apportioned to a departing member at the time a member is 
acquired. Treasury and the IRS recognize that the asset-based method 
may result in greater uncertainty under certain circumstances. It is 
anticipated that a taxpayer acquiring a member of a consolidated group 
may address any uncertainties as to the proper allocation of a COFL 
account by entering into a tax indemnity or similar agreement. It is 
also noted that, even under the notional account method, a COFL account 
apportioned to a departing member cannot be determined with certainty 
at the time of the acquisition because the apportionment is made at the 
end of the taxable year during which the member departs the group. 
Treasury and the IRS recognize that the new rules may result in an 
increased burden for certain taxpayers, but have concluded that the 
possibility of an increased burden is not sufficient to warrant the 
retention of the notional account method in light of severe distortions 
created by the interaction of the notional account method and the 
interest expense allocation provisions.
    Another commentator requested a transition rule under which the 
notional account method would continue to apply to a group's existing 
COFL account that would not be a part of the group's account had the 
asset-based allocation method been in effect in prior years. The 
commentator argued that a transition rule is necessary because 
taxpayers can be adversely affected by the transition from the old 
rules to the new rules.
    The final regulations do not adopt this transition rule because of 
administrative and equity concerns. The rule would be difficult to 
administer because a taxpayer would be required to ascertain asset 
values of all members that departed the group (on the date that the 
member departed) going back a number of years in order to apply the 
asset-based allocation method. Additionally, keeping track of the 
grandfathered account on a prospective basis and distinguishing it from 
non-grandfathered accounts could add significant complexity.
    Furthermore, it is not clear whether the commentator's suggested 
transition rule generally produces equitable results. Under the 
suggested transition rule, no portion of the group's COFL account that 
would not be a part of the group's account had the new rules applied in 
earlier years would be allocated to a departing member that has foreign 
assets but that does not have a notional account. Treasury and the IRS 
are not convinced that it would be more equitable for the group to bear 
the burden of the COFL account under these circumstances.
    A question has been raised regarding whether the asset-based method 
for allocating COFL accounts to a departing member also applies to an 
affiliated group that does not file a consolidated return. Because the 
interest expense allocation rules apply to affiliated groups, these 
rules can result under certain circumstances in the creation of OFL 
accounts in members with no foreign assets. Section 904(i) is an anti-
abuse rule intended to prevent an affiliated group from circumventing 
the consolidated return rules to avoid the foreign tax credit 
limitation provisions. Under Sec. 1.904(i)-1, each member of an 
affiliated group determines its taxable income for each separate 
limitation income category under section 904(d) and then combines those 
amounts to determine one amount of income for the group in each income 
category. The consolidated return regulations that apply the principles 
of sections 904(f) and 907(c)(4) will then be applied to the combined 
amounts in each separate category as if all affiliates were members of 
a single consolidated group. By reason of the section 904(i) 
regulations, the asset-based method for allocating the appropriate 
portion of a group's COFL account to a departing member applies to an 
affiliated group of corporations that does not file returns on a 
consolidated basis.
    A question has also been raised as to whether the tax book value of 
assets is affected for purposes of COFL apportionment if a member's 
departure from a group causes the group to take into account in 
computing consolidated taxable income gain or loss on assets 
transferred in intercompany transactions. To prevent apportionment of a 
disproportionate amount of the COFL account to a departing member, 
Sec. 1.1502-9(c)(2)(ii) of the final regulations clarifies that the 
computation of the tax book value of assets for purposes of such 
apportionment shall be determined without regard to previously deferred 
gain or loss that is taken into account as a result of the member's 
departure from the group (because, for example, of the acceleration 
rule under Sec. 1.1502-13(d)).
    After full consideration of all questions and comments, the 
proposed

[[Page 43615]]

regulations published in the Federal Register on December 29, 1998 
(REG-106902-98, 63 FR 71589) are adopted by this Treasury decision 
without substantive amendment.

Special Analyses

    It has been determined that this regulation is not a significant 
regulatory action as defined in Executive Order 12866. Therefore, a 
regulatory impact analysis is not required. It is hereby certified that 
these regulations will not have a significant economic impact on a 
substantial number of small entities. This certification is based on 
the fact that these regulations principally affect corporations filing 
consolidated federal income tax returns that have overall foreign 
losses or separate limitation losses. Available data indicates that 
many consolidated return filers are large companies (not small 
businesses). In addition, the data indicates that an insubstantial 
number of consolidated return filers that are smaller companies have 
overall foreign losses or separate limitation losses. 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 this 
regulation was submitted to the Chief Counsel for Advocacy of the Small 
Business Administration for comment on its impact on small businesses.

Drafting Information

    The principal author of this regulation is Trina Dang of the Office 
of Associate Chief Counsel (International), IRS. However, other 
personnel from the IRS and Treasury Department 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 the entry for Sec. 1.1502-9T and by adding entries in 
numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.1502-9 also issued under 26 U.S.C. 1502. * * *
    Section 1.1502-9A also issued under 26 U.S.C. 1502. * * *

    Par. 2. In Sec. 1.1502-3T, paragraph (c)(4), the first sentence is 
amended by removing the language ``1.1502-9T(b)(1)(v)'' and adding 
``1.1502-9A(b)(1)(v)'' in its place, and revising the last sentence to 
read as follows:


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

* * * * *
    (c) * * *
    (4) * * * However, a consolidated group making the election 
provided in Sec. 1.1502-9A(b)(1)(vi) (electing not to apply 
Sec. 1.1502-9A(b)(1)(v) to years beginning before January 1, 1998) may 
nevertheless choose to apply all such paragraphs other than 
Sec. 1.1502-9A(b)(1)(v) for all relevant years.
* * * * *
    Par. 3. Immediately following Sec. 1.1504-4 an undesignated center 
heading is added to read as follows:

Regulations Applicable for Tax Years for Which a Return Is Due on 
or Before August 11, 1999.

    Par. 4. Section 1.1502-9 is redesignated as Sec. 1.1502-9A and 
transferred under the new undesignated center heading set out in Par. 
3. above.
    Par. 5. Newly designated Sec. 1.1502-9A is amended by:
    1. Revising the section heading.
    2. Redesignating the paragraph heading and text of paragraph (a) as 
the paragraph heading and text of paragraph (a)(2).
    3. Adding a new paragraph heading for paragraph (a), and new 
paragraphs (a)(1), (b)(1)(v) and (b)(1)(vi).
    The revisions and additions read as follows:


Sec. 1.1502-9A  Application of overall foreign loss recapture rules to 
corporations filing consolidated returns due on or before August 11, 
1999.

    (a) Scope--(1) Effective date. This section applies only to 
consolidated return years for which the due date of the income tax 
return (without extensions) is on or before August 11, 1999.
    (2) In general. * * *
    (b) * * *
    (1) * * *
    (v) Special effective date for SRLY limitation. Except as provided 
in paragraph (b)(1)(vi) of this section, paragraphs (b)(1)(iii) and 
(iv) of this section apply only to consolidated return years for which 
the due date of the income tax return (without extensions) is on or 
before March 13, 1998. For consolidated return years for which the due 
date of the income tax return (without extensions) is after March 13, 
1998, the rules of paragraph (b)(1)(ii) of this section shall apply to 
overall foreign losses from separate return years that are separate 
return limitation years. For purposes of applying paragraph (b)(1)(ii) 
of this section in such years, the group treats a member with a balance 
in an overall foreign loss account from a separate return limitation 
year on the first day of the first consolidated return year for which 
the due date of the income tax return (without extensions) is after 
March 13, 1998, as a corporation joining the group on such first day. 
An overall foreign loss that is part of a net operating loss or net 
capital loss carryover from a separate return limitation year of a 
member that is absorbed in a consolidated return year for which the due 
date of the income tax return (without extensions) is after March 13, 
1998, shall be added to the appropriate consolidated overall foreign 
loss account in the year that it is absorbed. For consolidated return 
years for which the due date of the income tax return (without 
extensions) is after March 13, 1998, similar principles apply to 
overall foreign losses when there has been a consolidated return change 
of ownership (regardless of when the change of ownership occurred). See 
also Sec. 1.1502-3T(c)(4) for an optional effective date rule 
(generally making this paragraph (b)(1)(v) applicable to a consolidated 
return year beginning after December 31, 1996, if the due date of the 
income tax return (without extensions) for such year is on or before 
March 13, 1998).
    (vi) Election to defer application of special effective date. A 
consolidated group may elect not to apply paragraph (b)(1)(v) of this 
section to consolidated return years beginning before January 1, 1998. 
To make this election, a consolidated group must write ``Election 
Pursuant to Notice 98-40'' across the top of page 1 of an original or 
amended tax return for each consolidated return year subject to the 
election. For the first consolidated return year to which the overall 
foreign loss provisions of paragraph (b)(1)(v) of this section apply 
(i.e., the first year beginning on or after January 1, 1998), such 
consolidated group must write ``Notice 98-40 Election in Effect in 
Prior Years'' across the top of page 1 of the consolidated tax return 
for that year. For purposes of applying paragraph (b)(1)(ii) of this 
section with respect to such year, any member with a balance in an 
overall foreign loss account from a separate return limitation year on 
the first day of

[[Page 43616]]

such year shall be treated as joining the group on such first day.
* * * * *
    Par. 6. New Sec. 1.1502-9 is added to read as follows:


Sec. 1.1502-9  Consolidated overall foreign losses and separate 
limitation losses.

    (a) In general. This section provides rules for applying section 
904(f) (including its definitions and nomenclature) to a group and its 
members. Generally, section 904(f) concerns rules relating to overall 
foreign losses (OFLs) and separate limitation losses (SLLs) and the 
consequences of such losses. As provided in section 904(f)(5), losses 
are computed separately in each category of income described in section 
904(d)(1) (basket). Paragraph (b) of this section defines terms and 
provides computational and accounting rules, including rules regarding 
recapture. Paragraph (c) of this section provides rules that apply to 
OFLs and SLLs when a member becomes or ceases to be a member of a 
group. Paragraph (d) of this section provides a predecessor and 
successor rule. Paragraph (e) of this section provides effective dates.
    (b) Consolidated application of section 904(f). A group applies 
section 904(f) for a consolidated return year in accordance with that 
section, subject to the following rules:
    (1) Computation of CSLI or CSLL and consolidated U.S. source income 
or loss. The group computes its consolidated separate limitation income 
(CSLI) or consolidated separate limitation loss (CSLL) for each basket 
under the principles of Sec. 1.1502-11 by aggregating each member's 
foreign-source taxable income or loss in such basket computed under the 
principles of Sec. 1.1502-12, and taking into account the foreign 
portion of the consolidated items described in Sec. 1.1502-11(a)(2) 
through (8) for such basket. The group computes its consolidated U.S.-
source taxable income or loss under similar principles.
    (2) Netting CSLLs, CSLIs, and consolidated U.S. source taxable 
income or loss. The group applies section 904(f)(5) to determine the 
extent to which a CSLL for a basket reduces CSLI for another basket or 
consolidated U.S.-source taxable income.
    (3) CSLL and COFL accounts. To the extent provided in section 
904(f), the amount by which a CSLL for a basket (the loss basket) 
reduces CSLI for another basket (the income basket) shall result in the 
creation of (or addition to) a CSLL account for the loss basket with 
respect to the income basket. Likewise, the amount by which a CSLL for 
a loss basket reduces consolidated U.S.-source income will create (or 
add to) a consolidated overall foreign loss account (a COFL account).
    (4) Recapture of COFL and CSLL accounts. In the case of a COFL 
account for a loss basket, section 904(f)(1) and (3) recharacterizes 
some or all of the foreign-source income in the loss basket as U.S.-
source income. In the case of a CSLL account for a loss basket with 
respect to an income basket, section 904(f)(5)(C) and (F) 
recharacterizes some or all of the foreign-source income in the loss 
basket as foreign-source income in the income basket. The COFL account 
or CSLL account is reduced to the extent amounts are recharacterized 
with respect to such account.
    (5) Intercompany transactions--(i) Nonapplication of section 904(f) 
disposition rules. Neither section 904(f)(3) (in the case of a COFL 
account) nor (5)(F) (in the case of a CSLL account) applies at the time 
of a disposition that is an intercompany transaction to which 
Sec. 1.1502-13 applies. Instead, section 904(f)(3) and (5)(F) applies 
only at such time and only to the extent that the group is required 
under Sec. 1.1502-13 (without regard to section 904(f)(3) and (5)(F)) 
to take into account any intercompany items resulting from the 
disposition, based on the COFL or CSLL account existing at the end of 
the consolidated return year during which the group takes the 
intercompany items into account.
    (ii) Example. Paragraph (b)(5)(i) of this section is illustrated by 
the following examples. The identity of the parties and the basic 
assumptions set forth in Sec. 1.1502-13(c)(7)(i) apply to the examples. 
Except as otherwise stated, assume further that the consolidated group 
recognizes no foreign-source income other than as a result of the 
transactions described. The examples are as follows:

    Example 1. (i) On June 10, Year 1, S transfers nondepreciable 
property with a basis of $100 and a fair market value of $250 to B 
in a transaction to which section 351 applies. The property was 
predominantly used without the United States in a trade or business, 
within the meaning of section 904(f)(3). B continues to use the 
property without the United States. The group has a COFL account in 
the relevant loss basket of $120 as of December 31, Year 1.
    (ii) Because the contribution from S to B is an intercompany 
transaction, section 904(f)(3) does not apply to result in any gain 
recognition in Year 1. See paragraph (b)(5)(i) of this section.
    (iii) On January 10, Year 4, B ceases to be a member of the 
group. Because S did not recognize gain in Year 1 under section 351, 
no gain is taken into account in Year 4 under Sec. 1.1502-13(d). 
Thus, no portion of the group's COFL account is recaptured in Year 
4. For rules requiring apportionment of a portion of the COFL 
account to B, see paragraph (c)(2) of this section.
    Example 2. (i) The facts are the same as in paragraph (i) of 
Example 1. On January 10, Year 4, B sells the property to X for 
$300. As of December 31, Year 4, the group's COFL account is $40. 
(The COFL account was reduced between Year 1 and Year 4 due to 
unrelated foreign-source income taken into account by the group.)
    (ii) B takes into account gain of $200 in Year 4. The $40 COFL 
account in Year 4 recharacterizes $40 of the gain as U.S. source. 
See section 904(f)(3).
    Example 3. (i) On June 10, Year 1, S sells nondepreciable 
property with a basis of $100 and a fair market value of $250 to B 
for $250 cash. The property was predominantly used without the 
United States in a trade or business, within the meaning of section 
904(f)(3). The group has a COFL account in the relevant loss basket 
of $120 as of December 31, Year 1. B predominately uses the property 
in a trade or business without the United States.
    (ii) Because the sale is an intercompany transaction, section 
904(f)(3) does not require the group to take into account any gain 
in Year 1. Thus, under paragraph (b)(5)(i) of this section, the COFL 
account is not reduced in Year 1.
    (iii) On January 10, Year 4, B sells the property to X for $300. 
As of December 31, Year 4, the group's COFL account is $60. (The 
COFL account was reduced between Year 1 and Year 4 due to unrelated 
foreign-source income taken into account by the group.)
    (iv) In Year 4, S's $150 intercompany gain and B's $50 
corresponding gain are taken into account to produce the same effect 
on consolidated taxable income as if S and B were divisions of a 
single corporation. See Sec. 1.1502-13(c). All of B's $50 
corresponding gain is recharacterized under section 904(f)(3). If S 
and B were divisions of a single corporation and the intercompany 
sale were a transfer between the divisions, B would succeed to S's 
$100 basis in the property and would have $200 of gain ($60 of which 
would be recharacterized under section 904(f)(3)), instead of a $50 
gain. Consequently, S's $150 intercompany gain and B's $50 
corresponding gain are taken into account, and $10 of S's gain is 
recharacterized under section 904(f)(3) as U.S. source to reflect 
the $10 difference between B's $50 recharacterized gain and the $60 
recomputed gain that would have been recharacterized.

    (c) Becoming or ceasing to be a member of a group--(1) Adding 
separate accounts on becoming a member. At the time that a corporation 
becomes a member of a group (a new member), the group adds to the 
balance of its COFL or CSLL account the balance of the new member's 
corresponding OFL account or SLL account. A new member's OFL account 
corresponds to a COFL account if the account is for the same loss 
basket. A new member's SLL account corresponds to a CSLL account if the 
account is for the same loss basket

[[Page 43617]]

and with respect to the same income basket. If the group does not have 
a COFL or CSLL account corresponding to the new member's account, it 
creates a COFL or CSLL account with a balance equal to the balance of 
the member's account.
    (2) Apportionment of consolidated account to departing member--(i) 
In general. A group apportions to a member that ceases to be a member 
(a departing member) a portion of each COFL and CSLL account as of the 
end of the year during which the member ceases to be a member and after 
the group makes the additions or reductions to such account required 
under paragraphs (b)(3), (b)(4) and (c)(1) of this section (other than 
an addition under paragraph (c)(1) of this section attributable to a 
member becoming a member after the departing member ceases to be a 
member). The group computes such portion under paragraph (c)(2)(ii) of 
this section, as limited by paragraph (c)(2)(iii) of this section. The 
departing member carries such portion to its first separate return year 
after it ceases to be a member. Also, the group reduces each account by 
such portion and carries such reduced amount to its first consolidated 
return year beginning after the year in which the member ceases to be a 
member. If two or more members cease to be members in the same year, 
the group computes the portion allocable to each such member (and 
reduces its accounts by such portion) in the order that the members 
cease to be members.
    (ii) Departing member's portion of group's account. A departing 
member's portion of a group's COFL or CSLL account for a loss basket is 
computed based upon the member's share of the group's assets that 
generate income subject to recapture at the time that the member ceases 
to be a member. Under the characterization principles of Secs. 1.861-
9T(g)(3) and 1.861-12T, the group identifies the assets of the 
departing member and the remaining members that generate foreign-source 
income (foreign assets) in each basket. The assets are characterized 
based upon the income that the assets are reasonably expected to 
generate after the member ceases to be a member. The member's portion 
of a group's COFL or CSLL account for a loss basket is the group's COFL 
or CSLL account, respectively, multiplied by a fraction, the numerator 
of which is the value of the member's foreign assets for the loss 
basket and the denominator of which is the value of the foreign assets 
of the group (including the departing member) for the loss basket. The 
value of the foreign assets is determined under the asset valuation 
rules of Sec. 1.861-9T(g)(1) and (2) using either tax book value or 
fair market value under the method chosen by the group for purposes of 
interest apportionment as provided in Sec. 1.861-9T(g)(1)(ii). For 
purposes of this paragraph (c)(2)(ii), Sec. 1.861-9T(g)(2)(iv) (assets 
in intercompany transactions) shall apply, but Sec. 1.861-9T(g)(2)(iii) 
(adjustments for directly allocated interest) shall not apply. If the 
group uses the tax book value method, the member's portions of COFL and 
CSLL accounts are limited by paragraph (c)(2)(iii) of this section. In 
addition, for purposes of this paragraph (c)(2)(ii), the tax book value 
of assets transferred in intercompany transactions shall be determined 
without regard to previously deferred gain or loss that is taken into 
account by the group as a result of the transaction in which the member 
ceases to be a member. The assets should be valued at the time the 
member ceases to be a member, but values on other dates may be used 
unless this creates substantial distortions. For example, if a member 
ceases to be a member in the middle of the group's consolidated return 
year, an average of the values of assets at the beginning and end of 
the year (as provided in Sec. 1.861-9T(g)(2)) may be used or, if a 
member ceases to be a member in the early part of the group's 
consolidated return year, values at the beginning of the year may be 
used, unless this creates substantial distortions.
    (iii) Limitation on member's portion for groups using tax book 
value method. If a group uses the tax book value method of valuing 
assets for purposes of paragraph (c)(2)(ii) of this section and the 
aggregate of a member's portions of COFL and CSLL accounts for a loss 
basket (with respect to one or more income baskets) determined under 
paragraph (c)(2)(ii) of this section exceeds 150 percent of the actual 
fair market value of the member's foreign assets in the loss basket, 
the member's portion of the COFL or CSLL accounts for the loss basket 
shall be reduced (proportionately, in the case of multiple accounts) by 
such excess. This rule does not apply if the departing member and all 
other members that cease to be members as part of the same transaction 
own all (or substantially all) the foreign assets in the loss basket.
    (iv) Determination of values of foreign assets binding on departing 
member. The group's determination of the value of the member's and the 
group's foreign assets for a loss basket is binding on the member, 
unless the Commissioner concludes that the determination is not 
appropriate. The common parent of the group must attach a statement to 
the return for the taxable year that the departing member ceases to be 
a member of the group that sets forth the name and taxpayer 
identification number of the departing member, the amount of each COFL 
or CSLL for each loss basket that is apportioned to the departing 
member under this paragraph (c)(2), the method used to determine the 
value of the member's and the group's foreign assets in each such loss 
basket, and the value of the member's and the group's foreign assets in 
each such loss basket. The common parent must also furnish a copy of 
the statement to the departing member.
    (v) Anti-abuse rule. If a corporation becomes a member and ceases 
to be a member, and a principal purpose of the corporation becoming and 
ceasing to be a member is to transfer the corporation's OFL account or 
SLL account to the group or to transfer the group's COFL or CSLL 
account to the corporation, appropriate adjustments will be made to 
eliminate the benefit of such a transfer of accounts. Similarly, if any 
member acquires assets or disposes of assets (including a transfer of 
assets between members of the group and the departing member) with a 
principal purpose of affecting the apportionment of accounts under 
paragraph (c)(2)(i) of this section, appropriate adjustments will be 
made to eliminate the benefit of such acquisition or disposition.
    (vi) Examples. The following examples illustrate this paragraph 
(c):

    Example 1. (i) On November 6, Year 1, S, a member of the P 
group, a consolidated group with a calendar consolidated return 
year, ceases to be a member of the group. On December 31, Year 1, 
the P group has a $40 COFL account for the general limitation 
basket, a $20 CSLL account for the general limitation basket (i.e., 
the loss basket) with respect to the passive basket (i.e., the 
income basket), and a $10 CSLL account for the shipping income 
basket (i.e., the loss basket) with respect to the passive basket 
(i.e., the income basket). No member of the group has foreign-source 
income or loss in Year 1. The group apportions its interest expense 
according to the tax book value method.
    (ii) On November 6, Year 1, the group identifies S's assets and 
its own assets (including S's assets) expected to produce foreign 
general limitation income. Use of end-of-the-year values will not 
create substantial distortions in determining the relative values of 
S's and the group's relevant assets on November 6, Year 1. The group 
determines that S's relevant assets have a tax book value of $2,000 
and a fair market value of $2,200. Also, the group's relevant assets 
(including S's assets) have a tax book value of $8,000. On November 
6, Year 1, S has no assets expected to produce foreign shipping 
income.
    (iii) Under paragraph (c)(2)(ii) of this section, S takes a $10 
COFL account for the general limitation basket ($40  x  $2000/$8000)

[[Page 43618]]

and a $5 CSLL account for the general limitation basket with respect 
to the passive basket ($20  x  $2000/$8000). S does not take any 
portion of the shipping income basket CSLL account. The limitation 
described in paragraph (c)(2)(iii) of this section does not apply 
because the aggregate of the COFL and CSLL accounts for the general 
limitation basket that are apportioned to S ($15) is less than 150 
percent of the actual fair market value of S's general limitation 
foreign assets ($2,200  x  150%).
    Example 2. (i) Assume the same facts as in Example 1, except 
that the fair market value of S's general limitation foreign assets 
is $4 as of November 6, Year 1.
    (ii) Under paragraph (c)(2)(iii) of this section, S's COFL and 
CSLL accounts for the general limitation basket must be reduced by 
$9, which is the excess of $15 (the aggregate amount of the accounts 
apportioned under paragraph (c)(2)(ii) of this section) over $6 (150 
percent of the $4 actual fair market value of S's general limitation 
foreign assets). S thus takes a $4 COFL account for the general 
limitation basket ($10-($9  x  $10/$15)) and a $2 CSLL account for 
the general limitation basket with respect to the passive basket 
($5-($9  x  $5/$15)).

    (d) Predecessor and successor. A reference to a member includes, as 
the context may require, a reference to a predecessor or successor of 
the member. See Sec. 1.1502-1(f).
    (e) Effective dates. This section applies to consolidated return 
years for which the due date of the income tax return (without 
extensions) is after August 11, 1999. However, paragraph (b)(5) of this 
section (intercompany transactions) is not applicable for intercompany 
transactions that occur before January 28, 1999. A group applies the 
principles of Sec. 1.1502-9A(e) to a disposition which is an 
intercompany transaction to which Sec. 1.1502-13 applies and that 
occurs before January 28, 1999. Also, paragraph (c)(2) of this section 
(apportionment of consolidated account to departing member) is not 
applicable for members ceasing to be members of a group before January 
28, 1999. A group applies the principles of Sec. 1.1502-9A (rather than 
paragraph (c)(2) of this section) to determine the amount of a 
consolidated account that is apportioned to a member that ceases to be 
a member of the group before January 28, 1999 (and reduces its 
consolidated account by such apportioned amount) before applying 
paragraph (c)(2) of this section to members that cease to be members on 
or after January 28, 1999.


Sec. 1.1502-9T  [Removed]

    Par. 7. Section 1.1502-9T is removed.

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

    Par. 8. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.

    Par 9. In Sec. 602.101, paragraph (b) is amended in the table by 
removing the current entry for 1.1502-9 and adding new entries for 
1.1502-9 and 1.1502-9A to read as follows:


Sec. 602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                             Current OMB
     CFR part or section where identified and described      control No.
------------------------------------------------------------------------
 
                 *        *        *        *          *
1.1502-9...................................................    1545-1634
 
                 *        *        *        *          *
1.1502-9A..................................................    1545-0121
 
                 *        *        *        *          *
------------------------------------------------------------------------

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.

    Approved: July 16, 1999.
Donald C. Lubick,
Assistant Secretary of the Treasury.
[FR Doc. 99-20242 Filed 8-10-99; 8:45 am]
BILLING CODE 4830-01-P