[Federal Register Volume 66, Number 3 (Thursday, January 4, 2001)]
[Rules and Regulations]
[Pages 713-715]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-196]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8919]
RIN 1545-AY57


Guidance on Filing an Application for a Tentative Carryback 
Adjustment in a Consolidated Return Context

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: This document contains temporary regulations relating to the 
filing of an application for a tentative carryback adjustment. These 
temporary regulations provide guidance to determine the time for filing 
such application by a consolidated group. This document also contains 
temporary regulations relating to the filing of an application for a 
tentative carryback adjustment by certain corporations for the separate 
return year created by their becoming a member of a consolidated group. 
These temporary regulations may affect all consolidated groups. The 
text of these temporary regulations also serves as the text of proposed 
regulations set forth in the notice of proposed rulemaking on this 
subject in the Proposed Rules section of this issue of the Federal 
Register.

DATES: Effective Date: January 4, 2001.
    Applicability Date: For dates of applicability, see Sec. 1.1502-78T 
(g)(2)(v) of these regulations.

FOR FURTHER INFORMATION CONTACT: Christopher M. Bass or Frances L. 
Kelly, (202) 622-7770 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains temporary amendments to the Income Tax 
Regulations (26 CFR Part 1) under section 1502 of the Internal Revenue 
Code of 1986 (Code). The amendments provide guidance as to the time for 
filing an application for a tentative carryback adjustment by a 
consolidated group. The amendments also extend the time for filing an 
application for a tentative carryback adjustment by certain 
corporations for the separate return year created by their becoming new 
members of a consolidated group.
    Section 6411(a) requires that an application for a tentative 
carryback adjustment be filed on or after the date of filing for the 
return for the taxable year of the loss (or unused business credit) 
from which the carryback results and within a period of twelve (12) 
months after the end of such taxable year. Section 6411(c) provides 
that if the corporation seeking a tentative carryback adjustment made 
or was required to make a consolidated return for the year in which the 
loss or credit arose or for the preceding taxable year affected by such 
loss or credit, the provisions of Section 6411(a) apply only to such 
extent and subject to such conditions, limitations and exceptions as 
the Secretary may by regulations prescribe. Section 1.6411-4 refers 
taxpayers to the consolidated return regulations, specifically 
Sec. 1.1502-78, for further rules applicable to consolidated groups 
filing for a tentative carryback adjustment.
    Section 1.1502-78(a) addresses the proper party to file an 
application for a tentative carryback adjustment. However, there is no 
provision addressing the time for filing such application. Section 
1.1502-78 does not currently alter the statutory rule as to ``when'' 
the end of a taxable year occurs for purposes of determining whether 
the twelve-month rule of section 6411 has been satisfied. Under 
Sec. 1.1502-76, the due date for the separate return of a new member is 
generally extended until the due date of the return of the consolidated 
group. In certain instances, however, such separate return cannot be 
filed before the expiration of the twelve-month period under section 
6411(a). Thus, a new member may be prevented from filing an application 
for a tentative carryback adjustment.
    Section 1.1502-76(b)(1)(i) provides that the consolidated return 
must include the common parent's items of income, gain, deduction, 
loss, and credit for the entire consolidated year, and each 
subsidiary's items for the portion of the year for which it is a 
member. Items of a corporation for the portion of the year not included 
in the consolidated return must be included in a separate return 
(including the consolidated return of another group). Thus, the items 
of a new member of a consolidated group are included in two returns: 
first, the consolidated return for the period of time it is a member of 
the group; and second, a separate return (including the consolidated 
return of another group) for the pre-affiliation period prior to 
becoming a member of the consolidated group. This pre-affiliation 
period is a separate return year as defined in Sec. 1.1502-1(e).
    The tax returns for the periods that end and begin upon a 
corporation becoming (or ceasing to be) a member of a consolidated 
group are separate taxable years for all Federal income tax purposes. 
Section 1.1502-76(b)(2)(i). Although these periods are separate taxable 
years, items of income, gain, deduction, loss, and credit (other than 
extraordinary items) may be ratably allocated between such years if: 
(1) The corporation is not required to change its annual accounting 
period or its method of accounting as a result of its change in status 
as a member; and (2) a timely ratable allocation election is made. 
Section 1.1502-76(b)(2)(ii)(A). If a ratable allocation cannot be made 
(or is not made), the corporation must close its books at the close of 
the day on which its status as a member changes and its items of 
income, gain, deduction, loss, and credit for the pre-affiliation 
period are included in its separate return. Section 1.1502-
76(b)(2)(ii).
    Section 1.1502-76(c) determines the time for filing the new 
member's separate return. The provisions of this section apply only to 
a corporation which, immediately prior to becoming a new member of a 
group, was the common parent of another consolidated group, or was not 
required to join in the filing of a consolidated return. Under 
Sec. 1.1502-76(c), the due date of the new member's separate return is 
dependent upon the filing of the consolidated group's tax return. If 
the consolidated return for the group has been filed by the due date 
for the new member's separate return, then the separate return must be 
filed no later than the due date of the consolidated group's return,

[[Page 714]]

including extensions. If the consolidated return for the group has not 
been filed by the due date for the new member's separate return, then 
the separate return must be filed on or before such due date. In each 
case, the due date for the new member's separate return is determined 
with regard to extensions of time for filing but without regard to the 
member's new affiliated status. The close of the new member's separate 
return year is treated as the close of its normal taxable year. 
Therefore, Sec. 1.1502-76(c) effectively extends the period of time in 
which a new member is required to file its separate return because 
otherwise, the taxable year would end on the date it becomes a member. 
Section 1.1502-76(b)(2).
    While Sec. 1.1502-76(c) extends the due date for filing the new 
member's separate return, there is no similar provision that extends 
the due date for filing an application for a tentative carryback 
adjustment for the separate return year. Neither section 6411(a) nor 
Sec. 1.1502-78 interprets the close of the new member's separate return 
year as the close of its normal taxable year. Therefore, an application 
for a tentative carryback adjustment must be filed: (1) on or after the 
extended date for filing the return for the taxable year; and (2) 
within a period of twelve months after the close of such taxable year. 
Since the separate return year is treated as a separate taxable year 
for all Federal income tax purposes under Sec. 1.1502-76(b)(2)(i), a 
new member that chooses to file an application for a tentative 
carryback adjustment under section 6411 must do so within twelve (12) 
months after the close of its separate return year (not its normal 
taxable year).
    The practical effect of extending the due date for filing the new 
member's separate return under Sec. 1.1502-76(c) without extending the 
time period for filing an application for a tentative carryback 
adjustment is that a corporation that becomes a member of a 
consolidated group early in its taxable year may effectively be 
precluded from filing the application. This results because the twelve-
month period for filing the refund application may expire prior to the 
due date (extended or unextended) for the filing of the new member's 
separate return.
    The problem is illustrated by the following example:

    On April 30, 2000, 100% of the stock of Corporation X, a stand-
alone corporation, is acquired by Group Y. Both Corporation X and 
Group Y file their returns on a calendar year basis. Under 
Sec. 1.1502-76(c), Corporation X's separate return for the period, 
January 1-April 30, 2000 (the April 2000 Year), is due on or before 
September 15, 2001 (with extensions). However, its application for a 
tentative carryback adjustment for the April 2000 Year is due no 
later than April 30, 2001, twelve months after the end of the April 
2000 Year.

    As a practical matter, the separate return of some new members 
cannot be filed before the group's consolidated return is filed. As 
previously noted, Sec. 1.1502-76(b)(2) provides, under certain 
circumstances, that the new member's items of income, gain, deduction, 
loss, and credit may be ratably allocated between the pre-affiliation 
and the post-affiliation periods. The new member may not know whether 
the common parent will elect to ratably allocate its items. Such 
allocation would alter the income or loss of the new member for its 
separate return year. The new member also may not know the proper 
amount of income and loss to report and thus cannot file its separate 
return or its application for a tentative carryback adjustment until 
the group's consolidated return has been filed. Furthermore, Rev. Rul. 
75-327 (1975-2 C.B. 481) holds that, because the IRS must rely on the 
information provided by the taxpayer in its application for a tentative 
carryback adjustment and much of that information (such as NOLs) is 
based on the return for the loss year, section 6411(a) requires that 
the return for the loss year be filed before the application for a 
tentative refund can be filed.
    This problem is not generally faced by corporations that become 
members of a consolidated group in the latter part of their taxable 
year. For example, if Corporation X had been acquired on October 15, 
2000, rather than April 15, 2000, its application for a tentative 
carryback adjustment would be due on or before October 15, 2001, a 
month after its separate return is due (with extensions).

Explanation of Provisions

    The consolidated return regulations do not address the time for 
filing an application for a tentative carryback adjustment. Rather, the 
consolidated return regulations rely upon the general provisions of 
section 6411 for guidance. The amendments to Sec. 1.1502-78 provide a 
general rule for all consolidated taxpayers stating that the provisions 
of section 6411(a) shall apply to determine the time for filing an 
application for a tentative carryback adjustment by a consolidated 
group.
    In addition, the amendments provide a special rule designed to 
remedy the problem faced by some corporations that become new members 
of a consolidated group. For such members, the amendments extend the 
period of time for filing an application for a tentative carryback 
adjustment resulting from losses or credits arising in the new member's 
last separate return year. For these purposes, the amendments treat the 
separate return year as ending on the same date as the end of the 
current taxable year of the consolidated group.
    The special rule of these temporary regulations will apply only to 
a corporation that, immediately prior to becoming a new member of a 
group, was the common parent of another consolidated group, or was not 
required to join in the filing of a consolidated return. The situation 
not covered involves the acquisition of a member of another 
consolidated group. In this case, the corporation's items of income, 
gain, deduction, loss and credit for the period prior to becoming a 
member of the new consolidated group will be included in the 
consolidated return of its former group. The due date for the former 
group's consolidated return is not affected by the acquisition and the 
due date for its application for a tentative carryback adjustment 
relates back to the end of the former group's taxable year.
    The approach taken attempts to provide consistency between 
Sec. 1.1502-76(c) and Sec. 1.1502-78. In addition, this approach 
provides certainty to taxpayers and allows for simplicity of 
administration by the IRS.

Special Analyses

    It has been determined that this notice of temporary rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. Because no 
preceding notice of proposed rulemaking is required for this temporary 
regulation, the provisions of the Regulatory Flexibility Act do not 
apply.
    This Treasury decision ensures that all new members of consolidated 
groups have the opportunity to file an application for a tentative 
carryback adjustment, a benefit currently unavailable to some new 
members. Issuing this regulation in proposed form would continue the 
difficulty of filing an application for a tentative carryback 
adjustment for affected new members. Based on these considerations, it 
is determined that this temporary regulation will provide taxpayers 
with the necessary guidance and authority to ensure equitable 
administration of the tax laws. Therefore, it would be contrary to the 
public interest to issue this Treasury decision with prior notice under 
section 553(b) or subject to the effective date limitation of section

[[Page 715]]

553(d) of title 5 of the United States Code.
    Pursuant to section 7805(f) of the Code, these regulations will be 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact on small business.

Drafting Information

    The principal authors of these temporary regulations are 
Christopher M. Bass and Frances L. Kelly, Office of the Associate Chief 
Counsel (Corporate). However, other personnel from the IRS and Treasury 
Department 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 adding 
an entry in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.1502-78T also issued under 26 U.S.C. 1502 and 6411(c). 
* * *

    Par. 2. Section 1.1502-78T is added to read as follows:


Sec. 1.1502-78T  Rules for filing applications for tentative carryback 
adjustments.

    (a) through (f) [Reserved]. For further guidance, see Sec. 1.1502-
78(a) through (f).
    (g) Time for filing application--(1) General rule. The provisions 
of section 6411(a) apply to the filing of an application for a 
tentative carryback adjustment by a consolidated group.
    (2) Special rule for new members--(i) New member. A new member is a 
corporation that, in the preceding taxable year, did not qualify as a 
member, as defined in Sec. 1.1502-1(b), of the consolidated group that 
it now joins.
    (ii) End of taxable year. Solely for the purpose of complying with 
the twelve-month requirement for making an application for a tentative 
carryback adjustment under section 6411(a), the separate return year of 
a qualified new member shall be treated as ending on the same date as 
the end of the current taxable year of the consolidated group that the 
qualified new member joins.
    (iii) Qualified new member. A new member of a consolidated group 
qualifies for purposes of the provisions of this paragraph (g)(2), if 
immediately prior to becoming a new member, either--
    (A) It was the common parent of a consolidated group; or
    (B) It was not required to join in the filing of a consolidated 
return.
    (iv) Examples. The provisions of this paragraph (g)(2) may be 
illustrated by the following examples:

    Example 1. Individual A owns 100 percent of the stock of X, a 
corporation filing returns on a calendar year basis. On January 31 
of year 1, X becomes a member of the Y consolidated group, which 
also files returns on a calendar year basis. X is a qualified new 
member as defined in paragraph (g)(2)(iii)(B) of this section 
because, immediately prior to becoming a new member of the Y 
consolidated group, X was not required to join in the filing of a 
consolidated return. As a result of its becoming a new member of 
Group Y, X's separate return for the short taxable year (January 1 
of year 1 through January 31 of year 1) is due September 15 of year 
2 (with extensions). Section 1.1502-76(c). Group Y's consolidated 
return is also due September 15 of year 2 (with extensions). Section 
1.1502-76(c). Solely for the purpose of complying with the twelve-
month requirement for making an application for a tentative 
carryback adjustment under Section 6411(a), X's taxable year for the 
separate return year is treated as ending on December 31 of year 1. 
X's application for a tentative carryback adjustment is therefore 
due on or before December 31 of year 2.

    Example 2.  Assume the same facts as in Example 1 except that 
immediately prior to becoming a new member of Group Y, X was a 
member of the Z consolidated group. Because X was required to join 
in the filing of the consolidated return for Group Z, X is not a 
qualified new member as defined in paragraph (g)(2)(iii) of this 
section. X's items for the one-month period will be included in the 
consolidated return for Group Z. Group Z's application for a 
tentative carryback adjustment, if any, continues to be due within 
12 months of the end of its taxable year, which is not affected by 
X's change in status as a new member of Group Y.


(v) Effective date.
    The provisions of this paragraph (g)(2) apply for applications by 
new members of consolidated groups for tentative carryback adjustments 
resulting from net operating losses, net capital losses, or unused 
business credits arising in separate return years of new members that 
begin on or after January 1, 2001.

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
    Approved: December 13, 2000.
Jonathan Talisman,
Acting Assistant Secretary of the Treasury.
[FR Doc. 01-196 Filed 1-3-01; 8:45 am]
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