[Federal Register Volume 67, Number 105 (Friday, May 31, 2002)]
[Rules and Regulations]
[Pages 37998-38000]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-13574]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8998]
RIN 1545-BA74


Loss Limitation Rules

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: This document contains amendments to temporary regulations 
issued under sections 337(d) and 1502. The amendments clarify certain 
aspects of the temporary regulations relating to the deductibility of 
losses recognized on dispositions of subsidiary stock by members of a 
consolidated group. The amendments in these temporary 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 May 31, 2002.
    Applicability Date: For dates of applicability see Sec. 1.337(d)-
2T(g) and 1.1502-20T(i).

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

    The collection of information contained in these regulations has 
been previously reviewed and approved by the Office of Management and 
Budget under control number 1545-1774. Responses to this collection of 
information are voluntary. No material changes to this collection of 
information are made by these regulations.
    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.
    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

    On March 12, 2002, the IRS and Treasury published in the Federal 
Register at 67 FR 11034 (2002-13 I.R.B. 668) temporary regulations 
under sections 337(d) and 1502 (the temporary regulations). The 
temporary regulations set forth rules that limit the deductibility of 
loss recognized by a consolidated group on the disposition of stock of 
a subsidiary member and that require certain basis reductions on the 
deconsolidation of stock of a subsidiary member. Section 1.1502-20T(i) 
of the temporary regulations provides that, in the case of a 
disposition or deconsolidation of a subsidiary before March 7, 2002, 
and for such transactions 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 allowable stock loss or basis reduction by 
applying Sec. 1.1502-20 in its entirety, Sec. 1.1502-20 without regard 
to the duplicated loss component of the loss disallowance rule, or 
Sec. 1.337(d)-2T. For dispositions and deconsolidations that occur on 
or after March 7, 2002, and that are not within the scope of the 
binding contract rule, Sec. 1.1502-20T(i) provides that allowable loss 
and basis reduction are determined under Sec. 1.337(d)-2T, not 
Sec. 1.1502-20.

Explanation of Provisions

    Since the publication of the temporary regulations, several 
questions have been raised concerning the interpretation and 
application of the temporary regulations. In response to these 
questions, the IRS and Treasury are promulgating the regulations in 
this Treasury decision as temporary regulations to clarify and amend 
the temporary regulations as described below in this preamble. The 
following paragraphs describe these amendments.

Netting Rule

    Commentators requested that Sec. 1.337(d)-2T be amended to provide 
a netting rule similar to that set forth in Sec. 1.1502-20(a)(4), 
pursuant to which gain and loss from certain dispositions of stock may 
be netted. This Treasury decision adds Sec. 1.337(d)-2T(a)(4) to 
provide such a rule and also adds Sec. 1.337(d)-2T(b)(4), which 
provides a similar netting rule for basis reductions on 
deconsolidations of subsidiary stock.

Time For Filing Election Described in Sec. 1.1502-20T(i)

    Section 1.1502-20T(i) currently provides that an election to 
determine allowable loss by applying Sec. 1.1502-20 (without regard to 
the duplicated loss component of the loss disallowance rule) or 
Sec. 1.337(d)-2T must be made by including a statement 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. Commentators noted that this provision 
may not permit the election to be made on an original return for the 
2001 taxable year where the disposition occurs during the 2001 taxable 
year. The IRS and Treasury believe that it is appropriate to permit the 
election to be made on such a return. Therefore, this Treasury decision 
amends Sec. 1.1502-20T(i) to provide that the statement may be filed 
with or as part of a timely filed (including any extensions) original 
return for any taxable year that includes any date on or before March 
7, 2002. In addition, if the date of the disposition or deconsolidation 
of the stock of the subsidiary is after March 7, 2002, the statement 
may be filed with or as part of a timely filed (including any 
extensions) original return for the taxable year that includes such 
date. This latter alternative effectively permits the statement to be 
filed with the original return that includes the date

[[Page 37999]]

of the disposition or deconsolidation if, as of March 7, 2002, the 
disposition or deconsolidation was subject to a binding written 
contract entered into before March 7, 2002, that was in continuous 
effect until the date of the disposition or deconsolidation.

Requirements for Perfecting Election Described in Sec. 1.1502-20T(i)

    Commentators questioned whether an election to determine allowable 
loss by applying Sec. 1.1502-20 (without regard to the duplicated loss 
component of the loss disallowance rule) or Sec. 1.337(d)-2T was valid 
only if a statement of allowed loss described in Sec. 1.337(d)-2T(c) or 
1.1502-20(c), as appropriate, was or is filed with respect to the 
disposition or deconsolidation of subsidiary stock. The amendments to 
the temporary regulations in this Treasury decision clarify that no 
statement other than the one described in Sec. 1.1502-20T(i)(4) is 
necessary to perfect an election to compute allowable loss or basis 
reduction by applying the provisions described in Sec. 1.1502-
20T(i)(2)(i) or (ii). Therefore, an election pursuant to Sec. 1.1502-
20T(i) may be made regardless of whether a statement of allowed loss 
described in Sec. 1.337(d)-2T(c) or 1.1502-20(c) was or is filed with 
respect to the disposition or deconsolidation.
    In addition, taxpayers determining allowable loss under 
Sec. 1.1502-20 in its entirety will generally be treated as having 
satisfied the requirement to file a statement of allowed loss otherwise 
imposed by Sec. 1.1502-20(c) even if no such statement is filed. 
Nothing in the temporary regulations or these amendments to the 
temporary regulations, however, affects the filing requirements 
regarding the election provided in Sec. 1.1502-20(g).

Effect of Election

    Finally, a number of questions have been raised regarding the 
extent to which the election described in Sec. 1.1502-20T(i) affects a 
taxpayer's items of income, gain, deduction, or loss other than the 
loss allowed on a disposition of subsidiary stock. In response to these 
questions, the temporary regulations are amended to explain that if, 
pursuant to an election under Sec. 1.1502-20T(i), the loss allowed with 
respect to a disposition of subsidiary stock is increased, but the year 
of the disposition (or the year to which such loss would have been 
carried back or carried forward) is closed, to the extent that the 
absorption of such excess loss in such year would have affected the tax 
treatment of another item (e.g., another loss that was absorbed in such 
year) that has an effect in an open year, the election will affect the 
treatment of such other item.
    In addition, the regulations provide a special rule for situations 
in which a subsidiary of the group (the disposing member) recognized a 
loss on the disposition of stock of a lower-tier subsidiary member of 
the group, the loss was disallowed under Sec. 1.1502-20, and, as a 
result, a group member's basis in the stock of the disposing member was 
reduced pursuant to Sec. 1.1502-32 (because the disallowed loss was 
treated as a noncapital, nondeductible expense). In such cases, to the 
extent that all or some portion of the disallowed loss is allowed as a 
result of an election under Sec. 1.1502-20T(i), but such loss would 
have been properly absorbed or expired in a closed year, the basis in 
the stock of the disposing member may be increased. This adjustment is 
to be made for purposes of determining the group's or the shareholder-
member's Federal income tax liability for all open years.

Special Analyses

    In light of the Federal Circuit's decision in Rite Aid Corp. v. 
United States, 255 F.3d 1357 (Fed. Cir. 2001), the temporary 
regulations were necessary 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 amendments to the temporary regulations clarify 
those rules and simplify their application in order to ease taxpayer 
compliance. 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). 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.

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 in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--[AMENDED]

    Paragraph 1. The authority citation for part 1 is amended by 
removing the entry for ``Section 1.1502-20T(i)'' and adding an entry in 
numerical order to read in part as follows:

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

    Section 1.1502-20T also issued under the authority of 26 U.S.C. 
337(d) and 1502.* * *

    Par. 2. In Sec. 1.337(d)-2T, paragraphs (a)(4) and (b)(4) are added 
to read as follows:


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

    (a) * * *
    (4) Netting. Paragraph (a)(1) of this section does not apply to 
loss with respect to the disposition of stock of a subsidiary, to the 
extent that, as a consequence of the same plan or arrangement, gain is 
taken into account by members with respect to stock of the same 
subsidiary having the same material terms. If the gain to which this 
paragraph applies is less than the amount of the loss with respect to 
the disposition of the subsidiary's stock, the gain is applied to 
offset loss with respect to each share disposed of as a consequence of 
the same plan or arrangement in proportion to the amount of the loss 
deduction that would have been disallowed under paragraph (a)(1) of 
this section with respect to such share before the application of this 
paragraph (a)(4). If the same item of gain could be taken into account 
more than once in limiting the application of paragraphs (a)(1) and 
(b)(1) of this section, the item is taken into account only once.
    (b) * * *
    (4) Netting. Paragraph (b)(1) of this section does not apply to 
reduce the basis of stock of a subsidiary, to the extent that, as a 
consequence of the same plan or arrangement, gain is taken into account 
by members with respect to stock of the same subsidiary having the same 
material terms. If the gain to which this paragraph applies is less 
than the amount of basis reduction with respect to shares of the 
subsidiary's stock, the gain is applied to offset basis reduction with 
respect to each share deconsolidated as a consequence of the same plan 
or arrangement in proportion to the amount of the reduction that would 
have been required under paragraph (b)(1) of this section with

[[Page 38000]]

respect to such share before the application of this paragraph (b)(4).
* * * * *
    Par. 3. Section 1.1502-20T is amended by revising paragraphs 
(i)(3)(v) and (i)(4) to read as follows:


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

* * * * *
    (i) * * *
    (3) * * *
    (v) Items taken into account in open years--(A) General rule. 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. Under this paragraph, if the 
election increases the loss allowed with respect to a disposition of 
subsidiary stock, but the year of the disposition (or the year to which 
such loss would have been carried back or carried forward) is a year 
for which a refund of overpayment is prevented by law, to the extent 
that the absorption of such excess loss in such year would have 
affected the tax treatment of another item (e.g., another loss that was 
absorbed in such year) that has an effect in a year for which a refund 
of overpayment is not prevented by any law or rule of law, the election 
will affect the treatment of such other item. Therefore, if the 
absorption of the excess loss in the year of the disposition (which is 
a year for which a refund of overpayment is prevented by law) would 
have prevented the absorption of another loss (the second loss) in such 
year and such loss would have been carried to and used in a year for 
which a refund of overpayment is not prevented by any law or rule of 
law (the other year), the election makes the second loss available for 
use in the other year.
    (B) Special rule. If a member's basis in stock of a subsidiary was 
reduced pursuant to Sec. 1.1502-32 because a loss with respect to stock 
of a lower-tier subsidiary was treated as disallowed under Sec. 1.1502-
20, then, to the extent such disallowed loss is allowed as a result of 
an election under paragraph (i) of the section but would have been 
properly absorbed or expired in a year for which a refund of 
overpayment is prevented by law or rule of law, the member's basis in 
the subsidiary stock may be increased for purposes of determining the 
group's or the shareholder-member's Federal income tax liability in all 
years for which a refund of overpayment is not prevented by law or rule 
of law.
* * * * *
    (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 
any timely filed (including any extensions) original return for a 
taxable year that includes any date on or before March 7, 2002, or, if 
the date of the disposition or deconsolidation of the stock of the 
subsidiary is after March 7, 2002, then such date, 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 (including any 
extensions). Filing a statement in accordance with the provisions of 
this paragraph satisfies the requirement to file a ``statement of 
allowed loss'' otherwise imposed under Sec. 1.1502-20(c)(3) or 
Sec. 1.337(d)-2T(c)(3). The statement required by this paragraph 
satisfies the requirement that a statement be filed in order to claim 
allowable loss or basis reduction by applying the provisions described 
in paragraph (i)(2)(i) or (ii). The statement filed under this 
paragraph 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 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.
* * * * *

    Approved: May 20, 2002.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
    Approved: May 20, 2002.
Pamela F. Olson,
Acting Assistant Secretary of the Treasury.
[FR Doc. 02-13574 Filed 5-30-02; 8:45 am]
BILLING CODE 4830-01-P