[Federal Register Volume 65, Number 102 (Thursday, May 25, 2000)]
[Rules and Regulations]
[Pages 33753-33760]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-11901]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8884]
RIN 1545-AV88


Consolidated Returns--Limitations on the Use of Certain Credits

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations regarding certain 
credits of corporations that become members of a consolidated group. 
The regulations provide rules for computing the limitation with respect 
to certain credits earned in a separate return limitation year (SRLY) 
and the carryover and carryback of those credits to consolidated and 
separate return years. The regulations also eliminate the application 
of the SRLY rules in certain circumstances in which the rules of 
section 383 also apply.

DATES: Effective Date: These regulations are effective May 25, 2000.
    Applicability Dates: For dates of applicability, see the ``Dates of 
Applicability'' portion of this preamble.

FOR FURTHER INFORMATION CONTACT: Marie C. Milnes-Vasquez, (202) 622-
7770 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

A. In General

    On January 12, 1998, the IRS and Treasury published in the Federal 
Register a Treasury decision (TD 8751, 63 FR 1740) containing temporary 
regulations concerning the use of certain tax attributes by a 
consolidated group. In part, these regulations provided rules governing 
the absorption of general business credits and minimum tax credits 
carried from separate return limitation years (SRLYs), and eliminated 
SRLY restrictions with respect to recapture of overall foreign losses 
(OFLs) and on the use of foreign tax credits of corporations joining a 
group. Further, this Treasury decision contained a final regulation 
eliminating the limitation on credit carryovers following a 
consolidated return change of ownership (CRCO).
    A notice of proposed rulemaking cross-referencing the temporary 
regulations was published in the Federal Register on the same day (63 
FR 1803). On March 16, 1998, the IRS and Treasury published temporary 
amendments to those consolidated return regulations (TD 8766, 63 FR 
12641) and the corresponding notice of proposed rulemaking (63 FR 
12717) modifying the general date of applicability contained in the 
January 12, 1998 temporary regulations. Per the amendment, the January 
12, 1998 temporary regulations, as amended, are generally applicable 
for consolidated return years for which the due date of the return is 
after March 13, 1998. The amendments provided further guidance with 
respect to consolidated return years beginning on or after January 1, 
1997, for which the income tax return is due on or before March 13, 
1998.
    On August 11, 1999, the IRS and Treasury issued final regulations 
relating to the recapture of OFLs (including elimination of any SRLY 
limitation on such recapture). (TD 8833, 64 FR 43613).
    This Treasury decision adopts without substantive change the 
portions of the temporary regulations that were issued in 1998, 
relating to general business credits and minimum tax credits, with the 
addition of the ``overlap rule'', discussed in Extension of 1999 
Principles of this preamble. This Treasury decision also makes final 
the rules eliminating SRLY restrictions on the use of foreign tax 
credits, and the rules repealing the consolidated return change of 
ownership provisions pertaining to those credits.

B. Extension of 1999 Principles

    On July 2, 1999, the IRS and Treasury published in the Federal 
Register a Treasury decision (TD 8823, 64 FR 36092) containing final 
regulations providing rules governing the absorption of certain tax 
attribute carryovers and carrybacks from separate return limitation 
years (SRLYs). These tax attributes included net operating losses and 
net capital losses. The rules also governed the absorption of 
recognized built-in losses. These regulations, in part, eliminated the 
application of the SRLY rules in certain circumstances in which the 
rules of section 382 also apply (overlap rule).
    The IRS and Treasury believe that it is appropriate to apply a 
single set of SRLY principles to all attributes that are subject to 
SRLY limitations. Unnecessary complexity would result from applying 
different principles to different attributes. Accordingly, this 
document extends the principles of the overlap rule of the 1999 final 
regulations to the general business credit and the minimum tax credit. 
These final regulations adopt the mechanism of subgrouping and the

[[Page 33754]]

overlap rule set forth in Sec. 1.1502-21 (including the requirements of 
coextensive subgroups and contemporaneity).

C. Dates of Applicability

    The final regulations generally are applicable to consolidated 
return years for which the due date of the income tax return (without 
extensions) is after March 13, 1998. However, there are some special 
effective dates. The rules contained in these final regulations (except 
the overlap rule) may be applied optionally to years beginning on or 
after January 1, 1997. Application of the overlap principles of 
Sec. 1.1502-21(g) is generally effective for consolidated return years 
for which the return (without extensions) is due after May 25, 2000.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It is hereby 
certified that these regulations do not have a significant economic 
impact on a substantial number of small entities. This certification is 
based on the fact that these regulations principally affect persons 
filing consolidated federal income tax returns that have carryover or 
carryback of credits from separate return limitation years. Available 
data indicates that many consolidated return filers are large companies 
(not small businesses). In addition, the data indicates that an 
insubstantial number of consolidated return filers that are smaller 
companies have credit carryovers or carrybacks, and thus even fewer of 
these filers have credit carryovers or carrybacks that are subject to 
the separate return limitation year rules. Therefore, a Regulatory 
Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. 
chapter 6) is not required. Pursuant to section 7805(f) of the Internal 
Revenue Code, the notice of proposed rulemaking accompanying these 
regulations was sent to the Small Business Administration for comment 
on their impact on small businesses.

Drafting Information

    The principal author of these regulations is Marie C. Milnes-
Vasquez of the Office of Assistant Chief Counsel (Corporate). Other 
personnel from the IRS and Treasury participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by 
removing the entries for sections 1.1502-3T and 1.1502-55T and adding 
entries in numerical order to read in part as follows:

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

    Section 1.1502-3 also issued under 26 U.S.C. 1502.
    Section 1.1502-4 also issued under 26 U.S.C. 1502. * * *.
    Section 1.1502-55 also issued under 26 U.S.C. 1502. * * *


    Par. 2. Section 1.1502-3 is amended as follows:
    1. The section heading is revised.
    2. Paragraph (b)(3) is added.
    3. Paragraphs (c), (d), and (e)(3) are revised.
    The addition and revisions read as follows:


Sec. 1.1502-3  Consolidated tax credits.

* * * * *
    (b) * * *
    (3) Example. The provisions of paragraphs (a) and (b) of this 
section may be illustrated by the following example:

    Example. (i) Corporation P is incorporated on January 1, 1966. 
On that same day P incorporates corporation S, a wholly owned 
subsidiary. P and S file consolidated returns for calendar years 
1966 and 1967. P's and S's credit earned, the consolidated credit 
earned, and the consolidated limitation based on amount of tax for 
1966 and 1967 are as follows:

----------------------------------------------------------------------------------------------------------------
                                                                                                  Consolidated
                                                           Credit earned       Consolidated     limitation based
                                                                              credit earned     on amount of tax
----------------------------------------------------------------------------------------------------------------
1966:
  P....................................................            $60,000
  S....................................................             30,000            $90,000           $100,000
1967:
  P....................................................             40,000
  S....................................................             25,000             65,000             50,000
----------------------------------------------------------------------------------------------------------------

    (ii) P's and S's credit earned for 1966 are aggregated, and the 
group's consolidated credit earned, $90,000, is allowable in full to 
the group as a credit under section 38 for 1966 since such amount is 
less than the consolidated limitation based on amount of tax for 
1966, $100,000.
    (iii) Since the consolidated limitation based on amount of tax 
for 1967 is $50,000, only $50,000 of the $65,000 consolidated credit 
earned for such year is allowable to the group under section 38 as a 
credit for 1967. The consolidated unused credit for 1967 of $15,000 
($65,000 less $50,000) is a consolidated investment credit carryback 
and carryover to the years prescribed in section 46(b). In this case 
the consolidated unused credit is a consolidated investment credit 
carryback to 1966 (since P and S were not in existence in 1964 and 
1965) and a consolidated investment credit carryover to 1968 and 
subsequent years. The portion of the consolidated unused credit for 
1967 which is allowable as a credit for 1966 is $10,000. This amount 
shall be added to the amount allowable as a credit to the group for 
1966. The balance of the consolidated unused credit for 1967 to be 
carried to 1968 is $5,000. These amounts are computed as follows:

[[Page 33755]]



------------------------------------------------------------------------
 
------------------------------------------------------------------------
Consolidated carryback to 1966...  ...........  ...........      $15,000
  1966 consolidated limitation     ...........     $100,000  ...........
   based on tax..................
Less: Consolidated credit earned       $90,000
 for 1966........................
  Consolidated unused credits                0       90,000  ...........
   attributable to years
   preceding 1967................
                                  --------------------------------------
Limit on amount of 1967            ...........  ...........       10,000
 consolidated unused credit which
 may be added as a credit for
 1966............................
                                  --------------------------------------
Balance of 1967 consolidated       ...........  ...........        5,000
 unused credit to be carried to
 1968............................
------------------------------------------------------------------------


    (c) Limitation on investment credit carryovers and carrybacks from 
separate return limitation years applicable for consolidated return 
years for which the due date of the return is on or before March 13, 
1998--(1) General rule. In the case of an unused credit of a member of 
the group arising in a separate return limitation year (as defined in 
Sec. 1.1502-1(f)) of such member (and in a separate return limitation 
year of any predecessor of such member), the amount which may be 
included under paragraph (b) of this section (computed without regard 
to the limitation contained in paragraph (e) of this section) shall not 
exceed the amount determined under paragraph (c)(2) of this section.
    (2) Computation of limitation. The amount referred to in paragraph 
(c)(1) of this section with respect to a member of the group is the 
excess, if any, of--
    (i) The limitation based on amount of tax of the group, minus such 
limitation recomputed by excluding the items of income, deduction, and 
foreign tax credit of such member; over
    (ii) The sum of the investment credit earned by such member for 
such consolidated return year, and the unused credits attributable to 
such member which may be carried to such consolidated return year 
arising in unused credit years ending prior to the particular separate 
return limitation year.
    (3) Special effective date. This paragraph (c) applies to 
consolidated return years for which the due date of the income tax 
return (without extensions) is on or before March 13, 1998. See 
paragraph (d) of this section for the rule that limits the group's use 
of a section 38 credit carryover or carryback from a SRLY for a 
consolidated return year for which the due date of the income tax 
return (without extensions) is after March 13, 1998. See also paragraph 
(d)(4) of this section for an optional effective date rule (generally 
making the rules of this paragraph (c) inapplicable 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).
    (4) Examples. The provisions of this paragraph (c) may be 
illustrated by the following examples:

    Example 1. (i) Assume the same facts as in the example contained 
in paragraph (b)(3) of this section, except that all the stock of 
corporation T, also a calendar year taxpayer, is acquired by P on 
January 1, 1968, and that P, S, and T file a consolidated return for 
1968. In 1966, T had an unused credit of $10,000 which has not been 
absorbed and is available as an investment credit carryover to 1968. 
Such carryover is from a separate return limitation year. P's and 
S's credit earned for 1968 is $10,000 each, and T's credit earned is 
$8,000; the consolidated credit earned is therefore $28,000. The 
group's consolidated limitation based on amount of tax for 1968 is 
$50,000. Such limitation recomputed by excluding the items of 
income, deduction, and foreign tax credit of T is $30,000. Thus, the 
amount determined under paragraph (c)(2)(i) of this section is 
$20,000 ($50,000 minus $30,000). Accordingly, the limitation on the 
carryover of T's unused credit is $12,000, the excess of $20,000 
over $8,000 (the sum of T's credit earned for the taxable year and 
any carryovers from prior unused credit years (none in this case)). 
Therefore T's $10,000 unused credit from 1966 may be carried over to 
the consolidated return year without limitation.
    (ii) The group's consolidated credit earned for 1968, $28,000, 
is allowable in full as a credit under section 38 since such amount 
is less than the consolidated limitation based on amount of tax, 
$50,000.
    (iii) The group's consolidated investment credit carryover to 
1968 is $15,000, consisting of the consolidated unused credits of 
the group ($5,000) plus T's separate return year unused credit 
($10,000). The entire $15,000 consolidated carryover shall be added 
to the amount allowable to the group as a credit under section 38 
for 1968, since such amount is less than $22,000 (the excess of the 
consolidated limitation based on tax, $50,000, over the sum of the 
consolidated credit earned for 1968, $28,000, and unused credits 
arising in prior unused credit years, zero).
    Example 2. Assume the same facts as in Example 1, except that 
the amount determined under paragraph (c)(2)(i) of this section is 
$12,000. Therefore, the limitation on the carryover of T's unused 
credit is $4,000. Accordingly, the consolidated investment credit 
carryover is only $9,000 since the amount of T's separate return 
year unused credit which may be added to the group's $ 5,000 
consolidated unused credit is $4,000. These amounts are computed as 
follows:

------------------------------------------------------------------------
 
------------------------------------------------------------------------
T's carryover to 1968............  ...........  ...........      $10,000
  Consolidated limitation based    ...........      $12,000  ...........
   on amount of tax minus
   recomputed limitation.........
Less: T's credit earned for 1968.       $8,000  ...........  ...........
  Unused credits attributable to             0       $8,000  ...........
   T arising in unused credit
   years preceding 1966..........
                                  --------------------------------------
 Limit on amount of 1966 unused    ...........  ...........        4,000
 credit of T which may be added
 to consolidated investment
 credit carryover................
                                  --------------------------------------
Balance of 1966 unused credit of   ...........  ...........        6,000
 T to be carried to 1969 (subject
 to the limitation contained in
 paragraph (c) of this section)..
------------------------------------------------------------------------

    (d) Limitation on tax credit carryovers and carrybacks from 
separate return limitation years applicable for consolidated return 
years for which the due date of the return is after March 13, 1998--(1) 
General rule. The aggregate of a member's unused section 38 credits 
arising in SRLYs that are included in the consolidated section 38 
credits for all consolidated return years of the group may not exceed--
    (i) The aggregate for all consolidated return years of the member's 
contributions to the consolidated section 38(c) limitation for each 
consolidated return year; reduced by
    (ii) The aggregate of the member's section 38 credits arising and 
absorbed in all consolidated return years (whether or not absorbed by 
the member).

[[Page 33756]]

    (2) Computational rules--(i) Member's contribution to the 
consolidated section 38(c) limitation. If the consolidated section 
38(c) limitation for a consolidated return year is determined by 
reference to the consolidated tentative minimum tax (see section 
38(c)(1)(A)), then a member's contribution to the consolidated section 
38(c) limitation for such year equals the member's share of the 
consolidated net income tax minus the member's share of the 
consolidated tentative minimum tax. If the consolidated section 38(c) 
limitation for a consolidated return year is determined by reference to 
the consolidated net regular tax liability (see section 38(c)(1)(B)), 
then a member's contribution to the consolidated section 38(c) 
limitation for such year equals the member's share of the consolidated 
net income tax minus 25 percent of the quantity which is equal to so 
much of the member's share of the consolidated net regular tax 
liability less its portion of the $25,000 amount specified in section 
38(c)(1)(B). The group computes the member's shares by applying to the 
respective consolidated amounts the principles of section 1552 and the 
percentage method under Sec. 1.1502-33(d)(3), assuming a 100% 
allocation of any decreased tax liability. The group must make proper 
adjustments so that taxes and credits not taken into account in 
computing the limitation under section 38(c) are not taken into account 
in computing the member's share of the consolidated net income tax, 
etc. (See, for example, the taxes described in section 26(b) that are 
disregarded in computing regular tax liability.) Also, the group may 
apportion all or a part of the $25,000 amount (or lesser amount if 
reduced by section 38(c)(3)) for any year to one or more members.
    (ii) Years included in computation. For purposes of computing the 
limitation under this paragraph (d), the consolidated return years of 
the group include only those years, including the year to which a 
credit is carried, that the member has been continuously included in 
the group's consolidated return, but exclude--
    (A) For carryovers, any years ending after the year to which the 
credit is carried; and
    (B) For carrybacks, any years ending after the year in which the 
credit arose.
    (iii) Subgroups and successors. The SRLY subgroup principles under 
Sec. 1.1502-21(c)(2) apply for purposes of this paragraph (d). The 
predecessor and successor principles under Sec. 1.1502-21(f) also apply 
for purposes of this paragraph (d).
    (iv) Overlap with section 383. The principles under Sec. 1.1502-
21(g) apply for purposes of this paragraph (d). For example, an overlap 
of paragraph (d) of this section and the application of section 383 
with respect to a credit carryover occurs if a corporation becomes a 
member of a consolidated group (the SRLY event) within six months of 
the change date of an ownership change giving rise to a section 383 
credit limitation with respect to that carryover (the section 383 
event), with the result that the limitation of this paragraph (d) does 
not apply. See Secs. 1.1502-21(g)(2)(ii)(A) and 1.383-1; see also 
Sec. 1.1502-21(g)(4) (subgroup rules).
    (3) Effective date--(i) In general. This paragraph (d) generally 
applies to consolidated return years for which the due date of the 
income tax return (without extensions) is after March 13, 1998.
    (A) Contribution years. Except as provided in paragraph (d)(4)(ii) 
of this section, a group does not take into account a consolidated 
taxable year for which the due date of the income tax return (without 
extensions) is on or before March 13, 1998, in determining a member's 
(or subgroup's) contributions to the consolidated section 38(c) 
limitation under this paragraph (d).
    (B) Special subgroup rule. In the event that the principles of 
Sec. 1.1502-21(g)(1) do not apply to a particular credit carryover in 
the current group, then solely for purposes of applying paragraph (d) 
of this section to determine the limitation with respect to that 
carryover and with respect to which the SRLY register (the aggregate of 
the member's or subgroup's contribution to consolidated section 38(c) 
limitation reduced by the aggregate of the member's or subgroup's 
section 38 credits arising and absorbed in all consolidated return 
years) began in a taxable year for which the due date of the return is 
on or before May 25, 2000, the principles of Sec. 1.1502-21(c)(2) shall 
be applied without regard to the phrase ``or for a carryover that was 
subject to the overlap rule described in paragraph (g) of this section 
or Sec. 1.1502-15(g) with respect to another group (the former 
group).''
    (ii) Overlap rule. Paragraph (d)(2)(iv) of this section (relating 
to overlap with section 383) applies to taxable years for which the due 
date (without extensions) of the consolidated return is after May 25, 
2000. For purposes of paragraph (d)(2)(iv) of this section, only an 
ownership change to which section 383, as amended by the Tax Reform Act 
of 1986 (100 Stat. 2085), applies and which results in a section 383 
credit limitation shall constitute a section 383 event.
    (4) Optional effective date of January 1, 1997. (i) For 
consolidated taxable years beginning on or after January 1, 1997, for 
which the due date of the income tax return (without extensions) is on 
or before March 13, 1998, in lieu of paragraphs (c) and (e)(3) of this 
section (relating to the general business credit), Sec. 1.1502-4(f)(3) 
and (g)(3) (relating to the foreign tax credit), the next to last 
sentence of Sec. 1.1502-9A(a)(2), Sec. 1.1502-9A(b)(1)(v) (relating to 
overall foreign losses), and Sec. 1.1502-55(h)(4)(iii) (relating to the 
alternative minimum tax credit), a consolidated group may apply the 
corresponding provisions as they appear in 1998-1 C.B. 655 through 661 
(see Sec. 601.601(d)(2) of this chapter) (treating references in such 
corresponding provisions to Secs. 1.1502-9(b)(1)(ii), (iii), and (iv) 
as references to Secs. 1.1502-9(b)(1)(ii), (iii), and (iv)). Also, in 
the case of a consolidated return change of ownership that occurs on or 
after January 1, 1997, in a taxable year for which the due date of the 
income tax return (without extensions) is on or before March 13, 1998, 
a consolidated group may choose not to apply paragraph (e) of this 
section and Sec. 1.1502-4(g) to taxable years ending after December 31, 
1996. A consolidated group making the choices described in the two 
preceding sentences generally must apply all such corresponding 
provisions (including not applying paragraph (e) of this section and 
Sec. 1.1502-4(g)) for all relevant years. 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 corresponding 
provisions referred to in this paragraph (d)(4)(i) other than the 
provision corresponding to Sec. 1.1502-9A(b)(1)(v) for all relevant 
years.
    (ii) If a consolidated group chooses to apply the corresponding 
provisions referred to in paragraph (d)(4)(i) of this section, the 
consolidated group shall not take into account a consolidated taxable 
year beginning before January 1, 1997, in determining a member's (or 
subgroup's) contributions to the consolidated section 38(c) limitation 
under this paragraph (d).
    (5) Example. The following example illustrates the provisions of 
this paragraph (d):

    Example. (i) Individual A owns all of the stock of P and T. P is 
the common parent of the P group. P acquires all the stock of T at 
the beginning of Year 2. T carries over an

[[Page 33757]]

unused section 38 general business credit from Year 1 of $100,000. 
The table in paragraph (i) of this Example shows the group's net 
consolidated income tax, consolidated tentative minimum tax, and 
consolidated net regular tax liabilities, and T's share of such 
taxes computed under the principles of section 1552 and the 
percentage method under Sec. 1.1502-33(d)(3), assuming a 100% 
allocation of any decreased tax liability, for Year 2. (The effects 
of the lower section 11 brackets are ignored, there are no other tax 
credits affecting a group amount or member's share, and $1,000s are 
omitted.)
BILLING CODE 4830-01-P
[GRAPHIC] [TIFF OMITTED] TR25MY00.002

BILLING CODE 4830-01-C
    (ii) T's Year 1 is a SRLY with respect to the P group. See 
Sec. 1.1502-1(f)(2)(ii). T did not undergo an ownership change 
giving rise to a section 383 credit limitation within 6 months of 
joining the P group. Thus, T's $100,000 general business credit 
arising in Year 1 is subject to a SRLY limitation in the P group. 
The amount of T's unused section 38 credits from Year 1 that are 
included in the consolidated section 38 credits for Year 2 may not 
exceed T's contribution to the consolidated section 38(c) 
limitation. For Year 2, the group determines the consolidated 
section 38(c) limitation by reference to consolidated tentative 
minimum tax for Year 2. Therefore, T's contribution to the 
consolidated section 38(c) limitation for Year 2 equals its share of 
consolidated net income tax minus its share of consolidated 
tentative minimum tax. T's contribution is $280,000 minus $160,000, 
or $120,000. However, because the group has a consolidated section 
38 limitation of zero, it may not include any of T's unused section 
38 credits in the consolidated section 38 credits for Year 2.
    (iii) The following table shows similar information for the 
group for Year 3:
BILLING CODE 4830-01-P

[[Page 33758]]

[GRAPHIC] [TIFF OMITTED] TR25MY00.003

BILLING CODE 4830-01-C
    (iv) The amount of T's unused section 38 credits from Year 1 
that are included in the consolidated section 38 credits for Year 3 
may not exceed T's aggregate contribution to the consolidated 
section 38(c) limitation for Years 2 and 3. For Year 3, the group 
determines the consolidated section 38(c) limitation by reference to 
the consolidated tentative minimum tax for Year 3. Therefore, T's 
contribution to the consolidated section 38(c) limitation for Year 3 
equals its share of consolidated net income tax minus its share of 
consolidated tentative minimum tax. Applying the principles of 
section 1552 and Sec. 1.1502-33(d) (taking into account, for 
example, that T's positive earnings and profits adjustment under 
Sec. 1.1502-33(d) reflects its losses actually absorbed by the 
group), T's contribution is $(105,000) minus $(40,000), or 
$(65,000). T's aggregate contributions to the consolidated section 
38(c) limitation for Years 2 and 3 is $120,000 + $(65,000), or 
$55,000. The group may include $55,000 of T's Year 1 unused section 
38 credits in its consolidated section 38 tax credit in Year 3.

    (e) * * *
    (3) Special effective date. This paragraph (e) applies only to a 
consolidated return change of ownership that occurred during a 
consolidated return year for which the due date of the income tax 
return (without extensions) is on or before March 13, 1998. See 
paragraph (d)(4) of this section for an optional effective date rule 
(generally making the rules of this paragraph (e) also inapplicable if 
the consolidated return change of ownership occurred on or after 
January 1, 1997, and during a consolidated return year for which the 
due date of the income tax return (without extensions) is on or before 
March 13, 1998).
* * * * *


Sec. 1.1502-3T  [Removed]

    Par. 3. Section 1.1502-3T is removed.

    Par. 4. Section 1.1502-4 is amended by revising paragraphs (f)(3) 
and (g)(3) to read as follows:


Sec. 1.1502-4  Consolidated foreign tax credit.

* * * * *
    (f)* * *
    (3) Limitation on unused foreign tax credit carryover or carryback 
from separate return limitation years. Paragraphs (f)(1) and (2) of 
this section do not apply for consolidated return years for which the 
due date of the income tax return (without extensions) is after March 
13, 1998. For consolidated return years for which the due date of the 
income tax return (without extensions) is after March 13, 1998, a group 
shall include an unused foreign tax of a member arising in a SRLY 
without regard to the contribution of the member to consolidated tax 
liability for the consolidated return year. See also Sec. 1.1502-
3(d)(4) for an optional

[[Page 33759]]

effective date rule (generally making the rules of paragraphs (f)(1) 
and (2) of this section also inapplicable to a consolidated return year 
beginning on or after January 1, 1997, if the due date of the income 
tax return (without extensions) for such year is on or before March 13, 
1998).
    (g)* * *
    (3) Special effective date for CRCO limitation. Paragraphs (g)(1) 
and (2) of this section apply only to a consolidated return change of 
ownership that occurred during a consolidated return year for which the 
due date of the income tax return (without extensions) is on or before 
March 13, 1998. See also Sec. 1.1502-3(d)(4) for an optional effective 
date rule (generally making the rules of paragraph (g)(1) and (2) of 
this section also inapplicable if the consolidated return change of 
ownership occurred on or after January 1, 1997, and during a 
consolidated return year for which the due date of the income tax 
return (without extensions) is on or before March 13, 1998).
* * * * *


Sec. 1.1502-4T  [Removed]

    Par. 5. Section 1.1502-4T is removed.

    Par. 6. Section 1.1502-21 is amended by revising paragraph 
(c)(2)(ix) to read as follows:


Sec. 1.1502-21  Net operating losses.

* * * * *
    (c) * * *
    (2) * * *
    (ix) Application to other than loss carryovers. Paragraph (g) of 
this section and the phrase ``or for a carryover that was subject to 
the overlap rule described in paragraph (g) of this section or 
Sec. 1.1502-15(g) with respect to another group (the former group)'' in 
this paragraph (c)(2) apply only to carryovers of net operating losses, 
net capital losses, and for taxable years for which the due date 
(without extensions) of the consolidated return is after May 25, 2000, 
to carryovers of credits described in section 383(a)(2). Accordingly, 
as the context may require, if another regulation references this 
section and such other regulation does not concern a carryover of net 
operating losses, net capital losses, or for taxable years for which 
the due date (without extensions) of the consolidated return is after 
May 25, 2000, carryovers of credits described in section 383(a)(2), 
then such reference does not include a reference to such paragraph or 
phrase.
* * * * *

    Par. 7. Section 1.1502-55 is added to read as follows:


Sec. 1.1502-55  Computation of alternative minimum tax of consolidated 
groups.

    (a) through (h)(3) [Reserved].
    (h)(4) Separate return year minimum tax credit.
    (i) and (ii) [Reserved].
    (iii)(A) Limitation on portion of separate return year minimum tax 
credit arising in separate return limitation years. The aggregate of a 
member's minimum tax credits arising in SRLYs that are included in the 
consolidated minimum tax credits for all consolidated return years of 
the group may not exceed--
    (1) The aggregate for all consolidated return years of the member's 
contributions to the consolidated section 53(c) limitation for each 
consolidated return year; reduced by
    (2) The aggregate of the member's minimum tax credits arising and 
absorbed in all consolidated return years (whether or not absorbed by 
the member).
    (B) Computational rules--(1) Member's contribution to the 
consolidated section 53(c) limitation. Except as provided in the 
special rule of paragraph (h)(4)(iii)(B)(2) of this section, a member's 
contribution to the consolidated section 53(c) limitation for a 
consolidated return year equals the member's share of the consolidated 
net regular tax liability minus its share of consolidated tentative 
minimum tax. The group computes the member's shares by applying to the 
respective consolidated amounts the principles of section 1552 and the 
percentage method under Sec. 1.1502-33(d)(3), assuming a 100% 
allocation of any decreased tax liability. The group makes proper 
adjustments so that taxes and credits not taken into account in 
computing the limitation under section 53(c) are not taken into account 
in computing the member's share of the consolidated net regular tax, 
etc. (See, for example, the taxes described in section 26(b) that are 
disregarded in computing regular tax liability.)
    (2) Adjustment for year in which alternative minimum tax is paid. 
For a consolidated return year for which consolidated tentative minimum 
tax is greater than consolidated regular tax liability, the group 
reduces the member's share of the consolidated tentative minimum tax by 
the member's share of the consolidated alternative minimum tax for the 
year. The group determines the member's share of consolidated 
alternative minimum tax for a year using the same method it uses to 
determine the member's share of the consolidated minimum tax credits 
for the year.
    (3) Years included in computation. For purposes of computing the 
limitation under this paragraph (h)(4)(iii), the consolidated return 
years of the group include only those years, including the year to 
which a credit is carried, that the member has been continuously 
included in the group's consolidated return, but exclude any years 
after the year to which the credit is carried.
    (4) Subgroup principles. The SRLY subgroup principles under 
Sec. 1.1502-21(c)(2) apply for purposes of this paragraph (h)(4)(iii). 
The predecessor and successor principles under Sec. 1.1502-21(f) also 
apply for purposes of this paragraph (h)(4)(iii).
    (5) Overlap with section 383. The principles under Sec. 1.1502-
21(g) apply for purposes of this paragraph (h)(4)(iii). For example, an 
overlap of this paragraph (h)(4)(iii) and the application of section 
383 with respect to a credit carryover occurs if a corporation becomes 
a member of a consolidated group (the SRLY event) within six months of 
the change date of an ownership change giving rise to a section 383 
credit limitation with respect to that carryover (the section 383 
event), with the result that the limitation of this paragraph 
(h)(4)(iii) does not apply. See Secs. 1.1502-21(g)(2)(ii)(A) and 1.383-
1; see also Sec. 1.1502-21(g)(4) (subgroup rules).
    (C) Effective date--(1) In general. This paragraph (h)(4)(iii) 
generally applies to consolidated return years for which the due date 
of the income tax return (without extensions) is after March 13, 1998. 
See Sec. 1.1502-3(d)(4) for an optional effective date rule (generally 
making this paragraph (h)(4)(iii) also applicable to a consolidated 
return year beginning on or after January 1, 1997, if the due date of 
the income tax return (without extensions) was on or before March 13, 
1998).
    (i) Contribution years. In general, a group does not take into 
account a consolidated taxable year for which the due date of the 
income tax return (without extensions) is on or before March 13, 1998, 
in determining a member's (or subgroup's) contributions to the 
consolidated section 53(c) limitation under this paragraph (h)(4)(iii). 
However, if a consolidated group chooses to apply the optional 
effective date rule, the consolidated group shall not take into account 
a consolidated taxable year beginning before January 1, 1997 in 
determining a member's (or subgroup's) contributions to the 
consolidated section 53(c) limitation under this paragraph (h)(4)(iii).

[[Page 33760]]

    (ii) Special subgroup rule. In the event that the principles of 
Sec. 1.1502-21(g)(1) do not apply to a particular credit carryover in 
the current group, then solely for purposes of applying this paragraph 
(h)(4)(iii) to determine the limitation with respect to that carryover 
and with respect to which the SRLY register (the aggregate of the 
member's or subgroup's contribution to consolidated section 53(c) 
limitation reduced by the aggregate of the member's or subgroup's 
minimum tax credits arising and absorbed in all consolidated return 
years) began in a taxable year for which the due date of the return is 
on or before May 25, 2000, the principles of Sec. 1.1502-21(c)(2) shall 
be applied without regard to the phrase ``or for a carryover that was 
subject to the overlap rule described in paragraph (g) of this section 
or Sec. 1.1502-15(g) with respect to another group (the former 
group).''
    (2) Overlap rule. Paragraph (h)(4)(iii)(B)(5) of this section 
(relating to overlap with section 383) applies to taxable years for 
which the due date (without extensions) of the consolidated return is 
after May 25, 2000. For purposes of paragraph (h)(4)(iii)(B)(5) of this 
section, only an ownership change to which section 383, as amended by 
the Tax Reform Act of 1986 (100 Stat. 2095), applies and which results 
in a section 383 credit limitation shall constitute a section 383 
event. The optional effective date rule of Sec. 1.1502-3(d)(4) 
(generally making this paragraph (h)(4)(iii) also applicable to a 
consolidated return year beginning on or after January 1, 1997, if the 
due date of the income tax return (without extensions) was on or before 
March 13, 1998) does not apply with respect to paragraph 
(h)(4)(iii)(B)(5) of this section (relating to the overlap rule).


Sec. 1.1502-55T  [Removed]

    Par. 8. Section 1.1502-55T is removed.

    Par. 9. Section 1.1502-98 is amended by adding a sentence 
immediately following the first sentence to read as follows:


Sec. 1.1502-98  Coordination with section 383.

    * * * For example, subgroups with respect to the carryover of 
general business credits, minimum tax credits, unused foreign tax, and 
net capital loss are determined by applying the principles of 
Sec. 1.1502-91(d)(1). * * *


Sec. 1.1502-9A  [Amended]

    Par. 10. Section 1.1502-9A is amended as follows:

    1. In paragraph (a)(2), the last sentence is amended by removing 
the language ``1.1502-3T(c)(4)'' and adding ``1.1502-3(d)(4)'' in its 
place.
    2. In paragraph (b)(1)(v), the last sentence is amended by removing 
the language ``1.1502-3T(c)(4)'' and adding ``1.1502-3(d)(4)'' in its 
place.

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
    Approved: May 8, 2000.
Jonathan Talisman,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 00-11901 Filed 5-24-00; 8:45 am]
BILLING CODE 4830-01-P