[Federal Register Volume 67, Number 48 (Tuesday, March 12, 2002)]
[Rules and Regulations]
[Pages 11034-11040]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-5850]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8984]
RIN 1545-BA51


Loss Limitation Rules

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains regulations under sections 337(d) and 
1502. These regulations permit certain losses recognized on sales of 
subsidiary stock by members of a consolidated group. These regulations 
apply to corporations filing consolidated returns, both during and 
after the period of affiliation, and also affect purchasers of the 
stock of members of a consolidated group. The text of these temporary 
regulations also serves as the text of the proposed regulations set 
forth in the notice of proposed rulemaking on this subject in the 
Proposed Rules section in this issue of the Federal Register.

DATES: Effective Date: These regulations are effective March 7, 2002.
    Applicability Date: For dates of applicability, see Secs. 1.337(d)-
2T(g), 1.1502-20T(i) and 1.1502-32T(b)(4)(v).

FOR FURTHER INFORMATION CONTACT: Sean P. Duffley (202) 622-7530 or Lola 
L. Johnson (202) 622-7550 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    These regulations are being issued without prior notice and public 
procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553). 
For this reason, the collection of information contained in these 
regulations has been reviewed and, pending receipt and evaluation of 
public comments, approved by the Office of Management and Budget under 
control number 1545-1774. Responses to this collection of information 
are voluntary.
    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 assigned by the Office of Management and Budget.
    For further information concerning this collection of information, 
and where to submit comments on the collection of information and the 
accuracy of the estimated burden, and suggestions for reducing this 
burden,

[[Page 11035]]

please refer to the preamble to the cross-referencing notice of 
proposed rulemaking published in the Proposed Rules section of this 
issue of the Federal Register.
    Books or records relating to the collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    Section 337(d) of the Internal Revenue Code, enacted in 1986, 
directs the Secretary to prescribe regulations to ensure that the 
purposes of General Utilities repeal, which generally requires a 
corporation to recognize gain or loss on a disposition of any asset, 
may not be circumvented through the use of the consolidated return 
regulations. Pursuant to that directive, in 1990, the IRS and Treasury 
promulgated Sec. 1.337(d)-2. Section 1.337(d)-2 generally disallows any 
loss recognized by a member of a consolidated group on the disposition 
of subsidiary stock, except to the extent the consolidated group 
disposes of its entire equity interest in a subsidiary to persons not 
related to any member of the consolidated group within the meaning of 
section 267(b) or section 707(b)(1) (applying the language ``10 
percent'' instead of ``50 percent'') and can establish that such loss 
is not attributable to the recognition of built-in gain. Section 
1.337(d)-2, however, only applies with respect to dispositions and 
deconsolidations that occur on or after November 19, 1990, and that are 
not subject to Sec. 1.1502-20.
    Section 1.1502-20, which applies to all dispositions and 
deconsolidations of subsidiary stock that occur on or after February 1, 
1991, disallows certain losses recognized by a member of a consolidated 
group on the disposition of subsidiary stock. The rule disallows losses 
to the extent of the sum of ``extraordinary gain dispositions,'' 
``positive investment adjustments,'' and ``duplicated loss.'' The rule 
is designed not only to implement General Utilities repeal, but also to 
further single entity principles by preventing the allowance of stock 
losses that are reflected in a subsidiary's assets or loss carryovers.
    In Rite Aid Corp. v. United States, 255 F.3d 1357 (Fed. Cir. 2001), 
the United States Court of Appeals for the Federal Circuit held that 
the duplicated loss component of Sec. 1.1502-20 was an invalid exercise 
of regulatory authority. As stated in Notice 2002-11, 2002-7 I.R.B. 
526, the IRS has decided that the interests of sound tax administration 
will not be served by continuing to litigate the validity of the loss 
duplication factor of Sec. 1.1502-20. Moreover, because of the 
interrelationship in the operation of all of the loss disallowance 
factors, the IRS and Treasury have decided that new rules governing 
loss disallowance on sales of stock of a member of a consolidated group 
should be implemented.

Explanation of Provisions

    This Treasury decision adds Secs. 1.337(d)-2T, 1.1502-20T(i), and 
1.1502-32T(b)(4)(v), as described below.
    For dispositions and deconsolidations of subsidiary stock on or 
after March 7, 2002, unless the disposition or deconsolidation was 
effected pursuant to a binding written contract entered into before 
such date that was in continuous effect until the disposition or 
deconsolidation, this Treasury decision provides that Sec. 1.337(d)-2T, 
and not Sec. 1.1502-20, governs the amount of loss allowable on such 
sales, or the amount of basis reduction required on such 
deconsolidations, of subsidiary stock. In substantial part, 
Sec. 1.337(d)-2T restates the current Sec. 1.337(d)-2, with certain 
modifications. As described above, as currently in effect, 
Sec. 1.337(d)-2 permits recognition of loss only where a consolidated 
group disposes of its entire equity interest in a member of the group 
to persons not related to any member of the consolidated group within 
the meaning of section 267(b) or section 707(b)(1) (applying the 
language ``10 percent'' instead of ``50 percent''). Section 1.337(d)-2T 
eliminates those restrictions.
    For dispositions and deconsolidations of subsidiary stock before 
March 7, 2002, and dispositions and deconsolidations of subsidiary 
stock on or after March 7, 2002, that were effected pursuant to a 
binding written contract entered into before such date that was in 
continuous effect until the disposition or deconsolidation, this 
Treasury decision adds Sec. 1.1502-20T(i). Section 1.1502-20T(i) 
permits consolidated groups to calculate allowable loss on the sale of 
subsidiary stock by applying Sec. 1.1502-20 in its entirety or, in lieu 
thereof, by electing to apply one of two alternative regimes. In 
particular, the group may elect to apply the provisions of Sec. 1.1502-
20 without regard to the duplicated loss factor of the loss 
disallowance formula, i.e., calculating disallowed loss by taking into 
account only extraordinary gain dispositions and positive investment 
adjustment amounts. Alternatively, the group may elect to apply the 
provisions of Sec. 1.337(d)-2T. Such election may be made with the 
original return for the taxable year that includes the later of March 
7, 2002, and the date of the disposition or deconsolidation of the 
stock of the subsidiary. Alternatively, the election may be made with 
an amended return, provided that the amended return is filed before the 
date the original return for the taxable year that includes March 7, 
2002, is due.
    An election described in Sec. 1.1502-20(g) to reattribute losses 
will be respected only if the requirements of Sec. 1.1502-20(g), 
including the requirement that the election be filed with the group's 
income tax return for the year of the disposition, have been or are 
satisfied. The temporary regulations do not extend the time for filing 
an election under Sec. 1.1502-20(g). If a group made an election 
described in Sec. 1.1502-20(g) and elects to determine allowable loss 
by applying one of the alternative regimes pursuant to Sec. 1.1502-
20T(i), the amount of loss treated as reattributed may be reduced. If 
the group elects to determine allowable loss by applying the provisions 
of Sec. 1.1502-20 without regard to the duplicated loss factor of the 
loss disallowance formula, the amount of loss treated as reattributed 
is equal to the amount of loss originally reattributed, reduced to the 
extent that it exceeds the greater of (1) the loss disallowance amount 
determined by taking into account only extraordinary gain dispositions 
and positive investment adjustments (and not the duplicated loss factor 
of the loss disallowance formula) and (2) the amount of reattributed 
losses that the common parent of the selling group absorbed in closed 
years. If the group elects to determine allowable loss by applying 
Sec. 1.337(d)-2T, the amount of loss treated as reattributed is the 
greater of (1) zero and (2) the amount of reattributed losses that the 
common parent of the selling group absorbed in closed years. For this 
purpose, a taxable year is a closed year to the extent the assessment 
of a deficiency is prevented by any law or rule of law as of the date 
the election to apply one of the alternative regimes is filed and at 
all times thereafter.
    To the extent that an election under Sec. 1.1502-20T(i) results in 
a reduction in the amount of losses treated as reattributed, such 
excess losses will be treated as available for use by the subsidiary or 
any other group of which the subsidiary is a member, subject to any 
applicable limitations (e.g., section 382). In order to permit the 
subsidiary's use of such losses that are subject to an

[[Page 11036]]

existing section 382 limitation, Sec. 1.1502-20T(i) allows the common 
parent of the group that disposed of the stock to make certain 
adjustments to the amount of such a limitation apportioned under 
Sec. 1.1502-95 or Sec. 1.1502-96.
    Section 1.1502-20T(i) requires the common parent of the selling 
group to notify the subsidiary of the recomputed reattribution amount 
and any adjustment to the apportionment of a section 382 limitation 
made in connection with the election to apply one of the alternative 
regimes. In addition, if the acquirer was a member of a consolidated 
group at the time of the acquisition, the common parent of the selling 
group must provide such notification to the common parent of the 
acquirer at the time of the acquisition. The rules set forth in 
Sec. 1.1502-20T(i) also confirm that any losses treated as reattributed 
to the common parent of the selling group will not be available to 
offset income of the subsidiary or any other group of which such 
subsidiary is a member.
    The IRS and Treasury do not intend for a purchasing consolidated 
group to be unfairly disadvantaged in the event that the common parent 
of a selling member elects to apply one of the alternative regimes 
under Sec. 1.1502-20T(i) and, as a result, the amount of losses treated 
as reattributed to the common parent of the selling group is decreased 
and the amount of losses treated as available to the subsidiary is 
increased. Therefore, this Treasury decision adds Sec. 1.1502-
32T(b)(4)(v), which provides that, to the extent that the subsidiary's 
loss carryovers are increased by reason of an election to apply one of 
the alternative regimes and such loss carryovers expire, or would have 
been properly used to offset income, in a closed year, the purchasing 
group will be deemed to have made an election to treat all of such 
expired loss carryovers as expiring for all Federal income tax purposes 
immediately before the subsidiary became a member of the purchasing 
group. Accordingly, no basis reduction under Sec. 1.1502-32 will result 
from the expiration of, or failure to use, such losses.
    Section 1.1502-32T(b)(4)(v) further provides that, to the extent 
the subsidiary's loss carryovers are increased by reason of an election 
to apply one of the alternative regimes and such loss carryovers have 
not expired, and would not have been properly used to offset income, in 
a closed year, the purchasing group may make an election under 
Sec. 1.1502-32(b)(4) to treat all or a portion of such loss carryovers 
as expiring for all Federal income tax purposes immediately before the 
subsidiary became a member of the purchasing group. The election must 
be filed with the purchasing group's return for the taxable year in 
which the subsidiary receives the notification of the recomputed 
reattributed loss amount.
    For purposes of Sec. 1.1502-32T(b)(4)(v), a taxable year is a 
closed year to the extent the refund of an overpayment is prevented by 
any law or rule of law as of the date the group files its original 
return for the taxable year in which the subsidiary receives the 
notification of the recomputed reattributed loss amount and at all 
times thereafter.

Special Analyses

    In light of the Federal Circuit's decision in Rite Aid Corp. v. 
United States, 255 F.3d 1357 (Fed. Cir. 2001), these temporary 
regulations are necessary in order to provide taxpayers with immediate 
guidance regarding allowable loss and basis reductions in connection 
with dispositions and deconsolidations of subsidiary stock and to carry 
out the principles of General Utilities repeal pending the issuance of 
further guidance. These temporary regulations permit taxpayers to 
determine the amount of allowable loss or basis reduction by applying 
Sec. 1.1502-20 in its entirety or, in lieu thereof, by electing to 
apply the provisions of either Sec. 1.337(d)-2T or 1.1502-20 without 
regard to Sec. 1.1502-20(c)(1)(iii). In addition, these temporary 
regulations provide taxpayers with guidance on the effect of elections 
previously made under Sec. 1.1502-20(g) to reattribute losses to the 
common parent of a selling group. Accordingly, good cause is found for 
dispensing with notice and public procedure pursuant to 5 U.S.C. 
553(b)(B) and with a delayed effective date pursuant to 5 U.S.C. 
553(d)(1) and (3).
    Because no notice of proposed rulemaking is required, the 
provisions of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) do 
not apply.

Drafting Information

    The principal authors of these regulations are Sean P. Duffley and 
Lola L. Johnson, Office of Associate Chief Counsel (Corporate). 
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.

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 adding 
entries in numerical order to read in part as follows:

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

    Section 1.337(d)-2T also issued under 26 U.S.C. 337(d). * * *
    Section 1.1502-20T(i) also issued under 26 U.S.C. 1502. * * *
    Section 1.1502-32T(b)(4)(v) also issued under 26 U.S.C. 1502. * 
* *

    Par. 2. Section 1.337(d)-2 is amended by adding paragraph (g)(4) to 
read as follows:


Sec. 1.337(d)-2  Loss limitation window period.

* * * * *
    (g) * * *
    (4) For dispositions and deconsolidations on and after March 7, 
2002, see Sec. 1.337(d)-2T.
    Par. 3. Section 1.337(d)-2T is added to read as follows:


Sec. 1.337(d)-2T  Loss limitation window period (temporary).

    (a) Loss disallowance--(1) General rule. No deduction is allowed 
for any loss recognized by a member of a consolidated group with 
respect to the disposition of stock of a subsidiary.
    (2) Definitions. For purposes of this section:
    (i) The definitions in Sec. 1.1502-1 apply.
    (ii) Disposition means any event in which gain or loss is 
recognized, in whole or in part.
    (3) Coordination with loss deferral and other disallowance rules. 
For purposes of this section, the rules of Sec. 1.1502-20(a)(3) apply, 
with appropriate adjustments to reflect differences between the 
approach of this section and that of Sec. 1.1502-20.
    (b) Basis reduction on deconsolidation--(1) General rule. If the 
basis of a member of a consolidated group in a share of stock of a 
subsidiary exceeds its value immediately before a deconsolidation of 
the share, the basis of the share is reduced at that time to an amount 
equal to its value. If both a disposition and a deconsolidation occur 
with respect to a share in the same transaction, paragraph (a) of this 
section applies and, to the extent necessary to effectuate the purposes 
of this section,

[[Page 11037]]

this paragraph (b) applies following the application of paragraph (a) 
of this section.
    (2) Deconsolidation. Deconsolidation means any event that causes a 
share of stock of a subsidiary that remains outstanding to be no longer 
owned by a member of any consolidated group of which the subsidiary is 
also a member.
    (3) Value. Value means fair market value.
    (c) Allowable Loss--(1) Application. This paragraph (c) applies 
with respect to stock of a subsidiary only if a separate statement 
entitled ``Sec. 1.337(d)-2T(c) statement'' is included with the return 
in accordance with paragraph (c)(3) of this section.
    (2) General rule. Loss is not disallowed under paragraph (a)(1) of 
this section and basis is not reduced under paragraph (b)(1) of this 
section to the extent the taxpayer establishes that the loss or basis 
is not attributable to the recognition of built-in gain on the 
disposition of an asset (including stock and securities). Loss or basis 
may be attributable to the recognition of built-in gain on the 
disposition of an asset by a prior group. For purposes of this section, 
gain recognized on the disposition of an asset is built-in gain to the 
extent attributable, directly or indirectly, in whole or in part, to 
any excess of value over basis that is reflected, before the 
disposition of the asset, in the basis of the share, directly or 
indirectly, in whole or in part, after applying section 1503(e) and 
other applicable provisions of the Internal Revenue Code and 
regulations.
    (3) Contents of statement and time of filing. The statement 
required under paragraph (c)(1) of this section must be included with 
or as part of the taxpayer's return for the year of the disposition or 
deconsolidation and must contain:
    (i) The name and employer identification number (E.I.N.) of the 
subsidiary.
    (ii) The amount of the loss not disallowed under paragraph (a)(1) 
of this section by reason of this paragraph (c) and the amount of basis 
not reduced under paragraph (b)(1) of this section by reason of this 
paragraph (c).
    (4) Example. The principles of paragraphs (a), (b), and (c) of this 
section are illustrated by the examples in Secs. 1.337(d)-1(a)(5) and 
1.1502-20(a)(5) (other than Examples 3, 4, and 5) and (b), with 
appropriate adjustments to reflect differences between the approach of 
this section and that of Sec. 1.1502-20, and by the following example. 
For purposes of the examples in this section, unless otherwise stated, 
the group files consolidated returns on a calendar year basis, the 
facts set forth the only corporate activity, and all sales and 
purchases are with unrelated buyers or sellers. The basis of each asset 
is the same for determining earnings and profits adjustments and 
taxable income. Tax liability and its effect on basis, value, and 
earnings and profits are disregarded. Investment adjustment system 
means the rules of Sec. 1.1502-32.

    Example. Loss offsetting built-in gain in a prior group. (i) P 
buys all the stock of T for $50 in Year 1, and T becomes a member of 
the P group. T has 2 assets. Asset 1 has a basis of $50 and a value 
of $0, and asset 2 has a basis of $0 and a value of $50. T sells 
asset 2 during Year 3 for $50, and recognizes a $50 gain. Under the 
investment adjustment system, P's basis in the T stock increased to 
$100 as a result of the recognition of gain. In Year 5, all of the 
stock of P is acquired by the P1 group, and the former members of 
the P group become members of the P1 group. T then sells asset 1 for 
$0, and recognizes a $50 loss. Under the investment adjustment 
system, P's basis in the T stock decreases to $50 as a result of the 
loss. T's assets decline in value from $50 to $40. P then sells all 
the stock of T for $40 and recognizes a $10 loss.
    (ii) P's basis in the T stock reflects both T's unrecognized 
gain and unrecognized loss with respect to its assets. The gain T 
recognizes on the disposition of asset 2 is built-in gain with 
respect to both the P and the P1 groups for purposes of paragraph 
(c)(2) of this section. In addition, the loss T recognizes on the 
disposition of asset 2 is built-in loss with respect to the P and P1 
groups for purposes of paragraph (c)(2) of this section. T's 
recognition of the built-in loss while a member of the P1 group 
offsets the effect on T's stock basis of T's recognition of the 
built-in gain while a member of the P group. Thus, P's $10 loss on 
the sale of the T stock is not attributable to the recognition of 
built-in gain, and the loss is therefore not disallowed under 
paragraph (c)(2) of this section.
    (iii) The result would be the same if, instead of having a $50 
built-in loss in asset 2 when it becomes a member of the P group, T 
has a $50 net operating loss carryover and the carryover is used by 
the P group.

    (d) Successors. For purposes of this section, the rules and 
examples of Sec. 1.1502-20(d) apply, with appropriate adjustments to 
reflect differences between the approach of this section and that of 
Sec. 1.1502-20.
    (e) Anti-avoidance rules. For purposes of this section, the rules 
and examples of Sec. 1.1502-20(e) apply, with appropriate adjustments 
to reflect differences between the approach of this section and that of 
Sec. 1.1502-20.
    (f) Investment adjustments. For purposes of this section, the rules 
and examples of Sec. 1.1502-20(f) apply, with appropriate adjustments 
to reflect differences between the approach of this section and that of 
Sec. 1.1502-20.
    (g) Effective dates. This section applies with respect to 
dispositions and deconsolidations on or after March 7, 2002, unless the 
disposition or deconsolidation was effected pursuant to a binding 
written contract entered into before March 7, 2002, that was in 
continuous effect until the disposition or deconsolidation. In 
addition, this section applies to dispositions and deconsolidations for 
which an election is made under Sec. 1.1502-20T(i)(2) to determine 
allowable loss under this section. If loss is recognized because stock 
of a subsidiary became worthless, the disposition with respect to the 
stock is treated as occurring on the date the stock became worthless. 
For dispositions and deconsolidations prior to March 7, 2002, see 
Secs. 1.337(d)-1 and 1.337(d)-2 as contained in the 26 CFR part 1 
edition revised as of April 1, 2001.
    Par. 4. In Sec. 1.1502-20, paragraph (i) is added to read as 
follows:


Sec. 1.1502-20  Disposition or deconsolidation of subsidiary stock.

* * * * *
    (i) [Reserved]. For further guidance, see Sec. 1.1502-20T(i).
    Par. 5. Section 1.1502-20T is added to read as follows:


Sec. 1.1502-20T  Disposition or deconsolidation of subsidiary stock 
(temporary).

    (a) through (h) [Reserved]. For further guidance, see Sec. 1.1502-
20(a) through (h).
    (i) Limitations on the applicability of Sec. 1.1502-20--(1) 
Dispositions and deconsolidations on or after March 7, 2002. Except to 
the extent specifically incorporated in Sec. 1.337(d)-2T, Sec. 1.1502-
20 does not apply to a disposition or deconsolidation of stock of a 
subsidiary on or after March 7, 2002, unless the disposition or 
deconsolidation was effected pursuant to a binding written contract 
entered into before March 7, 2002, that was in continuous effect until 
the disposition or deconsolidation.

    (2) Dispositions and deconsolidations prior to March 7, 2002.

    In the case of a disposition or deconsolidation of stock of a 
subsidiary by a member before March 7, 2002, or a disposition or 
deconsolidation on or after March 7, 2002, that was effected pursuant 
to a binding written contract entered into before March 7, 2002, that 
was in continuous effect until the disposition or deconsolidation, a 
consolidated group may determine the amount of the member's allowable 
loss or basis reduction by applying Sec. 1.1502-20 in its entirety, or, 
in lieu thereof, subject to the conditions set forth in this paragraph 
(i), by making an irrevocable

[[Page 11038]]

election to apply the provisions of either--
    (i) Section 1.1502-20, except that in applying Sec. 1.1502-
20(c)(1), the amount of loss disallowed under Sec. 1.1502-20(a)(1) and 
the amount of basis reduction under Sec. 1.1502-20(b)(1) with respect 
to a share of stock will not exceed the sum of the amounts described in 
Sec. 1.1502-20(c)(1)(i) and (ii); or
    (ii) Section 1.337(d)-2T.
    (3) Operating rules--(i) Reattribution of losses in the case of an 
election to determine allowable loss by applying the provisions 
described in paragraph (i)(2)(i) of this section. If a consolidated 
group elects to determine allowable loss by applying the provisions 
described in paragraph (i)(2)(i) of this section, an election described 
in Sec. 1.1502-20(g) to reattribute losses will be respected only if 
the requirements of Sec. 1.1502-20(g), including the requirement that 
the election be filed with the group's income tax return for the year 
of the disposition, have been or are satisfied. For example, if a 
consolidated group did not file a valid election described in 
Sec. 1.1502-20(g) with its return for the year of the disposition, this 
section does not authorize the group that disposed of the stock to make 
such an election with its return for the year in which it elects to 
determine its allowable stock loss under the provisions described in 
paragraph (i)(2)(i) of this section. If a consolidated group that made 
a valid election described in Sec. 1.1502-20(g) with respect to the 
disposition of stock elects to determine allowable loss by applying the 
provisions described in paragraph (i)(2)(i) of this section, the 
election described in Sec. 1.1502-20(g) may not be revoked, and the 
amount of loss treated as reattributed as of the time of the 
disposition pursuant to the election described in Sec. 1.1502-20(g) is 
the amount of loss originally reattributed, reduced to the extent that 
it exceeds the greater of--
    (A) The amount of stock loss disallowed after applying the 
provisions described in paragraph (i)(2)(i) of this section; and
    (B) The amount of reattributed losses that the group that disposed 
of the stock absorbed in years for which the assessment of a deficiency 
is prevented by any law or rule of law as of the date the election to 
apply the provisions described in paragraph (i)(2)(i) of this section 
is filed and at all times thereafter.
    (ii) Reattribution of losses in the case of an election to 
determine allowable loss by applying the provisions described in 
paragraph (i)(2)(ii) of this section. If a consolidated group elects to 
determine allowable loss by applying the provisions described in 
paragraph (i)(2)(ii) of this section, the consolidated group may not 
make an election described in Sec. 1.1502-20(g) to reattribute any 
losses. If the consolidated group made an election described in 
Sec. 1.1502-20(g) with respect to the disposition of subsidiary stock, 
the amount of loss treated as reattributed pursuant to such election 
will be the greater of--
    (A) Zero; and
    (B) The amount of reattributed losses that the group that disposed 
of the stock absorbed in years for which the assessment of a deficiency 
is prevented by any law or rule of law as of the date the election to 
apply the provisions described in paragraph (i)(2)(ii) of this section 
is filed and at all times thereafter.
    (iii) Apportionment of section 382 limitation in the case of a 
reduction of reattributed losses--(A) Losses subject to a separate 
section 382 limitation. If, as a result of the application of paragraph 
(i)(3)(i) or (ii) and paragraph (i)(3)(vii) of this section, pre-change 
separate attributes that were subject to a separate section 382 
limitation are treated as losses of a subsidiary and the common parent 
previously elected to apportion all or a part of such limitation to 
itself under Sec. 1.1502-96(d), the common parent may reduce the amount 
of such limitation apportioned to itself.
    (B) Losses subject to a subgroup section 382 limitation. If, as a 
result of the application of paragraph (i)(3)(i) or (ii) and paragraph 
(i)(3)(vii) of this section, pre-change subgroup attributes that were 
subject to a subgroup section 382 limitation are treated as losses of a 
subsidiary and the common parent previously elected to apportion all or 
a part of such limitation to itself under Sec. 1.1502-96(d), the common 
parent may reduce the amount of such limitation apportioned to itself. 
In addition, if such subsidiary has ceased to be a member of the loss 
subgroup to which the pre-change subgroup attributes relate, the common 
parent may increase the total amount of such limitation apportioned to 
such subsidiary (or loss subgroup that includes such subsidiary) under 
Sec. 1.1502-95(c) by an amount not in excess of the amount by which 
such limitation that is apportioned to the common parent is reduced 
pursuant to the previous sentence.
    (C) Losses subject to a consolidated section 382 limitation. If, as 
a result of the application of paragraph (i)(3)(i) or (ii) and 
paragraph (i)(3)(vii) of this section, pre-change consolidated 
attributes (or pre-change subgroup attributes) that were subject to a 
consolidated section 382 limitation (or subgroup section 382 limitation 
where the common parent was a member of the loss subgroup) are treated 
as losses of a subsidiary, and the subsidiary has ceased to be a member 
of the loss group (or loss subgroup), the common parent may increase 
the amount of such limitation that is apportioned to such subsidiary 
(or loss subgroup that includes such subsidiary) under Sec. 1.1502-
95(c). The amount of each element of such limitation that can be 
apportioned to a subsidiary (or loss subgroup that includes such 
subsidiary) pursuant to this paragraph (i)(3)(iii)(C), however, cannot 
exceed the product of (x) the element and (y) a fraction the numerator 
of which is the amount of pre-change consolidated attributes (or 
subgroup attributes) subject to that limitation that are treated as 
losses of the subsidiary (or loss subgroup) as a result of the 
application of paragraph (i)(3)(i) or (ii) and paragraph (i)(3)(vii) of 
this section and the denominator of which is the total amount of pre-
change attributes subject to that limitation determined as of the close 
of the taxable year in which the subsidiary ceases to be a member of 
the group (or loss subgroup).
    (D) Operating rules--(i) Limitations on apportionment. In making 
any adjustment to an apportionment of a subgroup section 382 limitation 
or a consolidated section 382 limitation pursuant to paragraph 
(i)(3)(iii)(B) or (C) of this section, the common parent must take into 
account the extent, if any, to which such limitation has previously 
been apportioned to another subsidiary or loss subgroup prior to the 
date the election to apply the provisions described in paragraph 
(i)(2)(i) or (ii) of this section is filed.
    (ii) Manner and effect of adjustment to previous apportionment of 
limitation to common parent. Any reduction in a previous apportionment 
of a separate section 382 limitation or a subgroup section 382 
limitation to the common parent made pursuant to paragraph 
(i)(3)(iii)(A) or (B) of this section is treated as effective when the 
previous apportionment was effective. Any such adjustment must be made 
in a manner consistent with the principles of Sec. 1.1502-95(c). For 
example, to the extent the apportionment of a separate section 382 
limitation or a subgroup section 382 limitation to a common parent is 
reduced pursuant to paragraph (i)(3)(iii)(A) or (B) of this section, 
the amount of such limitation available to the subsidiary or loss 
subgroup, as applicable, is increased.
    (iii) Manner and effect of adjustment to apportionment of 
limitation to

[[Page 11039]]

departing subsidiary or loss subgroup. Any increase in an amount of a 
subgroup section 382 limitation or a consolidated section 382 
limitation apportioned to a departing subsidiary (or loss subgroup that 
includes such subsidiary) made pursuant to paragraph (i)(3)(iii)(B) or 
(C) of this section is treated as effective for taxable years ending 
after the date the subsidiary ceases to be a member of the group or 
loss subgroup. Any such adjustment may be made regardless of whether 
the common parent previously elected to apportion all or a part of such 
limitation to such subsidiary (or loss subgroup that includes such 
subsidiary) under Sec. 1.1502-95(c) or 1.1502-95A(c), but must be made 
in a manner consistent with the principles of Sec. 1.1502-95(c). For 
example, to the extent the apportionment of an element of a subgroup 
section 382 limitation or a consolidated section 382 limitation to a 
departing subsidiary is increased pursuant to paragraph (i)(3)(iii)(B) 
or (C) of this section, the amount of such element of such limitation 
that is available to the loss subgroup or loss group is reduced 
consistent with Sec. 1.1502-95(c)(3).
    (iv) Prohibition against other adjustments. This paragraph 
(i)(3)(iii) does not authorize the common parent to adjust the 
apportionment of any separate section 382 limitation, subgroup section 
382 limitation, or consolidated section 382 limitation that it 
previously apportioned to a subsidiary, to a loss subgroup, or to 
itself under Sec. 1.1502-95(c), 1.1502-95A(c), or 1.1502-96(d), other 
than as provided in paragraphs (i)(3)(iii)(A), (B), and (C) of this 
section.
    (E) Time and manner of making apportionment adjustment. An 
adjustment to the apportionment of any separate section 382 limitation, 
subgroup section 382 limitation, or consolidated section 382 limitation 
pursuant to paragraph (i)(3)(iii)(A), (B), or (C) of this section must 
be made as part of the group's election to apply the provisions of 
paragraph (i)(2)(i) or (ii) of this section, as described in paragraph 
(i)(4) of this section.
    (iv) Notification of reduction of reattributed losses and 
adjustment of apportionment of section 382 limitation. If the 
application of paragraph (i)(3)(i) or (ii) of this section results in a 
reduction of the losses treated as reattributed pursuant to an election 
described in Sec. 1.1502-20(g), then, prior to the date that the group 
files its income tax return for the taxable year that includes March 7, 
2002, the common parent must send the notification required by this 
paragraph to the subsidiary, at the subsidiary's last known address. In 
addition, if the acquirer of the subsidiary stock was a member of a 
consolidated group at the time of the disposition, the common parent 
must send a copy of such notification to the person that was the common 
parent of the acquirer's group at the time of the acquisition, at its 
last known address. The notification is to be in the form of a 
statement entitled ``Recomputation of Losses Reattributed Pursuant to 
the Election Described in Sec. 1.1502-20(g),'' that is signed by the 
common parent and that includes the following information--
    (A) The name and employer identification number (E.I.N.) of the 
subsidiary;
    (B) The original and the recomputed amount of losses treated as 
reattributed pursuant to the election described in Sec. 1.1502-20(g); 
and
    (C) If the apportionment of a separate section 382 limitation, a 
subgroup section 382 limitation, or a consolidated section 382 
limitation is adjusted pursuant to paragraph (i)(3)(iii)(A), (B), or 
(C) of this section, the original and the adjusted apportionment of 
such limitation.
    (v) Items taken into account in closed years. An election under 
paragraph (i)(2) of this section affects a taxpayer's items of income, 
gain, deduction, or loss only to the extent that the election gives 
rise, directly or indirectly, to items or amounts that would properly 
be taken into account in a year for which an assessment of deficiency 
or a refund of overpayment, as the case may be, is not prevented by any 
law or rule of law.
    (vi) Conforming amendments for items previously taken into account 
in open years. To the extent that, on any Federal income tax return, 
the common parent absorbed losses that were reattributed pursuant to an 
election described in Sec. 1.1502-20(g) and the amount of losses so 
absorbed is in excess of the amount of losses that are treated as 
reattributed after application of paragraph (i)(3)(i) or (ii) of this 
section, or that may be taken into account after any adjustment to an 
apportionment of a separate section 382 limitation, a subgroup section 
382 limitation, or a consolidated section 382 limitation pursuant to 
paragraph (i)(3)(iii) of this section, such returns must be amended to 
the greatest extent possible to reflect the reduction in the amount of 
losses treated as reattributed and any adjustment to the apportionment 
of such limitation.
    (vii) Availability of losses to subsidiary. To the extent that any 
losses of a subsidiary are reattributed to the common parent pursuant 
to an election described in Sec. 1.1502-20(g), such reattribution is 
binding on the subsidiary and any group of which the subsidiary is or 
becomes a member. Therefore, if the subsidiary ceases to be a member of 
the group, any reattributed losses are not thereafter available to the 
subsidiary and may not be utilized by the subsidiary or any other group 
of which such subsidiary is or becomes a member. To the extent that the 
application of paragraph (i)(3)(i) or (ii) of this section results in a 
reduction in the amount of losses treated as reattributed to the common 
parent pursuant to an election described in Sec. 1.1502-20(g), however, 
losses in the amount of such reduction are available to the subsidiary 
and may be utilized by the subsidiary or any group of which such 
subsidiary is a member, subject to applicable limitations (e.g., 
section 382).
    (4) Time and manner of making the election. An election to 
determine allowable loss or basis reduction by applying the provisions 
described in paragraph (i)(2)(i) or (ii) of this section is made by 
including the statement required by this paragraph with or as part of 
the original return for the taxable year that includes the later of 
March 7, 2002, and the date of the disposition or deconsolidation of 
the stock of the subsidiary, or with or as part of an amended return 
filed before the date the original return for the taxable year that 
includes March 7, 2002, is due. The statement shall be entitled 
``Allowed Loss under Section [Specify Section under Which Allowed Loss 
Is Determined] Pursuant to Section 1.1502-20T(i)'' and must include the 
following information--
    (i) The name and employer identification number (E.I.N.) of the 
subsidiary and of the member(s) that disposed of the subsidiary stock;
    (ii) In the case of an election to determine allowable loss or 
basis reduction by applying the provisions described in paragraph 
(i)(2)(i) of this section, a statement that the taxpayer elects to 
determine allowable loss or basis reduction by applying such 
provisions;
    (iii) In the case of an election to determine allowable loss or 
basis reduction by applying the provisions described in paragraph 
(i)(2)(ii) of this section, a statement that the taxpayer elects to 
determine allowable loss or basis reduction by applying such 
provisions;
    (iv) If an election described in Sec. 1.1502-20(g) was made with 
respect to the disposition of the stock of the subsidiary, the amount 
of losses originally treated as reattributed pursuant to such election 
and the

[[Page 11040]]

amount of losses treated as reattributed pursuant to paragraph 
(i)(3)(i) or (ii) of this section;
    (v) If an apportionment of a separate section 382 limitation, a 
subgroup section 382 limitation, or a consolidated section 382 
limitation is adjusted pursuant to paragraph (i)(3)(iii)(A), (B), or 
(C) of this section, the original and redetermined apportionment of 
such limitation; and
    (vi) If the application of paragraph (i)(3)(i) or (ii) of this 
section results in a reduction of the amount of losses treated as 
reattributed pursuant to an election described in Sec. 1.1502-20(g), a 
statement that the notification described in paragraph (i)(3)(iv) of 
this section was sent to the subsidiary and, if the acquirer was a 
member of a consolidated group at the time of the stock sale, to the 
person that was the common parent of such group at such time, as 
required by paragraph (i)(3)(iv) of this section.
    (5) Cross references. See Sec. 1.1502-32(b)(4)(v) for a special 
rule for filing a waiver of loss carryovers.
    Par. 6. Section 1.1502-32 is amended by adding paragraph (b)(4)(v) 
to read as follows:


Sec. 1.1502-32  Investment adjustments.

* * * * *
    (b) * * *
    (4) * * *
    (v) [Reserved]. For further guidance, see Sec. 1.1502-32T(b)(4)(v).
    Par. 7. Section 1.1502-32T is added to read as follows:


Sec. 1.1502-32T  Investment adjustments (temporary).

    (a) through (b)(4)(iv) [Reserved]. For further guidance, see 
Sec. 1.1502-32(a) through (b)(4)(iv).
    (v) Special rule for loss carryovers of a subsidiary acquired in a 
transaction for which an election under Sec. 1.1502-20T(i)(2) is made--
(A) Expired losses. Notwithstanding Sec. 1.1502-32(b)(4)(iv), to the 
extent that S's loss carryovers are increased by reason of an election 
under Sec. 1.1502-20T(i)(2) and such loss carryovers expire or would 
have been properly used to offset income in a taxable year for which 
the refund of an overpayment is prevented by any law or rule of law as 
of the date the group files its original return for the taxable year in 
which S receives the notification described in Sec. 1.1502-
20T(i)(3)(iv) and at all times thereafter, the group will be deemed to 
have made an election under Sec. 1.1502-32(b)(4) to treat all of such 
expired loss carryovers as expiring for all Federal income tax purposes 
immediately before S became a member of the consolidated group.
    (B) Available losses. Notwithstanding Sec. 1.1502-32(b)(4)(iv), to 
the extent that S's loss carryovers are increased by reason of an 
election under Sec. 1.1502-20T(i)(2) and such loss carryovers have not 
expired and would not have been properly used to offset income in a 
taxable year for which the refund of an overpayment is prevented by any 
law or rule of law as of the date the group files its original return 
for the taxable year in which S receives the notification described in 
Sec. 1.1502-20T(i)(3)(iv) and at all times thereafter, the group may 
make an election under Sec. 1.1502-32(b)(4) to treat all or a portion 
of such loss carryovers as expiring for all Federal income tax purposes 
immediately before S became a member of the consolidated group. Such 
election must be filed with the group's original return for the taxable 
year in which S receives the notification described in Sec. 1.1502-
20T(i)(3)(iv).
    (C) Effective date. This paragraph (b)(4)(v) is applicable on and 
after March 7, 2002.
    (c) through (h)(5)(ii) [Reserved]. For further guidance, see 
Sec. 1.1502-32(c) through (h)(5)(ii).

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 by adding entries 
to the table in numerical order to read in part as follows:


Sec. 602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                             Current OMB
     CFR part or section where identified and described      control No.
------------------------------------------------------------------------
 
                  *        *        *        *        *
1.337(d)-2T................................................    1545-1774
 
                  *        *        *        *        *
1.1502-20T.................................................    1545-1774
 
                  *        *        *        *        *
1.1502-32T.................................................    1545-1774
 
                  *        *        *        *        *
------------------------------------------------------------------------


Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
    Approved: February 27, 2002.
Mark Weinberger,
Assistant Secretary of the Treasury.
[FR Doc. 02-5850 Filed 3-7-02; 3:17 pm]
BILLING CODE 4830-01-P