[Federal Register Volume 67, Number 105 (Friday, May 31, 2002)]
[Rules and Regulations]
[Pages 38000-38003]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-13576]


-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8997]
RIN 1545-BA76


Carryback of Consolidated Net Operating Losses to Separate Return 
Years

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains regulations under section 1502 that 
affect corporations filing consolidated returns. These regulations 
permit certain acquiring consolidated groups to elect to waive all or a 
portion of the pre-acquisition portion of the 5-year carryback period 
under section 172(b)(1)(H) for certain losses attributable to certain 
acquired members. 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 temporary regulations are effective May 
31, 2002.

[[Page 38001]]

    Applicability Date: These regulations apply to consolidated net 
operating losses arising in taxable years ending during 2001 and 2002.

FOR FURTHER INFORMATION CONTACT: Marie Milnes-Vasquez of the Office of 
Associate Chief Counsel (Corporate), (202) 622-7770 (not a toll-free 
number).

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 1545-1790. Responses to this collection of information 
are required to obtain a benefit.
    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, 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

    On July 2, 1999, the IRS and Treasury published in the Federal 
Register (64 FR 36092 (1999-2 C.B. 34)) final regulations regarding 
certain deductions and losses of members that join a consolidated 
group. These regulations added Sec. 1.1502-21(b)(3)(ii)(B), which 
permits an acquiring consolidated group to elect to waive, with respect 
to all consolidated net operating losses attributable to certain 
acquired members, the portion of the carryback period for which the 
corporation was a member of another group.
    Section 172(b)(1) provides, in part, that a net operating loss for 
any taxable year must generally be carried back to each of the 2 
taxable years preceding the taxable year of the loss. Section 172(b)(3) 
provides that any taxpayer entitled to a carryback period under section 
172(b)(1) may elect to relinquish the carryback period with respect to 
a loss for any taxable year. An election to relinquish the carryback 
period under section 172(b)(3) must be made by the due date (including 
extensions) of the taxpayer's return for the taxable year of the loss 
and in the manner prescribed by the Secretary. Normally, this election 
is irrevocable.
    Section 172(b)(1)(H), which was enacted as part of the Job Creation 
and Worker Assistance Act of 2002 (the Act), extended the 2-year 
carryback period to 5 years for losses arising in taxable years ending 
during 2001 and 2002 (hereafter, 2001 and 2002). Section 172(j), which 
was also enacted as part of the Act, allows a taxpayer entitled to the 
5-year carryback period under section 172(b)(1)(H) to elect to 
relinquish that carryback period with respect to a loss for any taxable 
year. A taxpayer making this election generally must apply the 2-year 
carryback period set forth in section 172(b)(1), unless the taxpayer 
also elects to relinquish that carryback period under section 
172(b)(3).
    As described in Revenue Procedure 2002-40 (2002-23 I.R.B.), in 
order to give effect to the intent of Congress to allow taxpayers a 5-
year carryback period to the maximum extent possible, the Service is 
permitting any taxpayer that previously elected under section 172(b)(3) 
to forgo the carryback period for losses arising in 2001 or 2002 to 
revoke such election in order to take advantage of the 5-year carryback 
period, provided the taxpayer revokes the election no later than 
October 31, 2002. Revenue Procedure 2002-40 also permits a taxpayer 
that filed an application for a tentative carryback adjustment or an 
amended return using the 2-year carryback period for a net operating 
loss arising in 2001 or 2002 to file certain forms to claim the 5-year 
carryback period provided under section 172(b)(1)(H).
    Given the enactment of section 172(b)(1)(H) and taxpayers' ability 
to revoke prior elections under section 172(b)(3) and to make certain 
other filings in order to take advantage of the 5-year carryback 
period, the IRS and Treasury believe that it is appropriate to afford 
certain acquiring consolidated groups that did not make an election 
described in Sec. 1.1502-21(b)(3)(ii)(B) with respect to certain 
acquired members an opportunity to waive the portion of the entire 
carryback period or the portion of the extended carryback period for 
2001 and 2002 losses attributable to the acquired members, for pre-
acquisition years. In this regard, the regulations in this Treasury 
decision add Sec. 1.1502-21T(b)(3)(ii)(C), which sets forth two 
elections.
    Pursuant to the first election, an acquiring group may waive the 
portion of the 5-year carryback period for 2001 and 2002 losses 
attributable to a member acquired from another group after June 25, 
1999, for which the member was a member of another group. While this 
election effectively permits a waiver of the entire 5-year carryback 
period to the extent that it is prior to the acquisition with respect 
to a consolidated net operating loss arising in a particular taxable 
year, it is only available where none of such losses have previously 
been carried back to a taxable year of a group of which the acquired 
member was previously a member.
    Pursuant to the second election, an acquiring group may waive the 
portion of the pre-acquisition carryback period for 2001 and 2002 
losses attributable to a member acquired from another group to the 
extent that the Act increased the carryback period for such losses. 
This second election effectively permits a waiver of the third, fourth, 
and fifth carryback years to the extent that such years are prior to 
the acquisition and is available even where 2001 or 2002 losses have 
been carried back to the first or second carryback years of the 
acquired member that are pre-acquisition years. This second election, 
however, is only available with respect to consolidated net operating 
losses arising in a particular taxable year where none of such losses 
have been carried back to a taxable year of a group of which the 
acquired member was previously a member that is prior to the second 
taxable year preceding the taxable year of the loss.
    Unlike the election under Sec. 1.1502-21(b)(3)(ii)(B), the 
elections provided in these regulations apply only to losses for 2001 
and 2002. In addition, the elections are made on a year-by-basis. That 
is, one election may be made for 2001 losses while another election, or 
no election, may be made for 2002 losses. An election that relates to 
consolidated net operating losses attributable to a taxable year ending 
during 2001 must be filed with the acquiring consolidated group's 
timely filed (including extensions) original or amended return for the 
taxable year ending during 2001, provided that such original or amended 
return is filed on or before October 31, 2002. An election that relates 
to consolidated net operating losses attributable to a taxable year 
ending during 2002 must be filed

[[Page 38002]]

with the acquiring consolidated group's timely filed (including 
extensions) original or amended return for the taxable year ending 
during 2001 or 2002, provided that such original or amended return is 
filed on or before September 15, 2003.
    If the acquiring consolidated group files or filed a valid election 
described in Sec. 1.1502-21(b)(3)(ii)(B) with respect to the 
acquisition of a member, no election under Sec. 1.1502-21T(b)(3)(ii)(C) 
needs to be (or should be) filed to ensure that 2001 or 2002 losses are 
not carried back to pre-acquisition years of the acquired member.

Special Analyses

    These temporary regulations are necessary to provide taxpayers with 
immediate elective relief from section 172(b)(1)(H), which was enacted 
as the part of the Job Creation and Worker Assistance Act of 2002. 
These regulations permit certain acquiring consolidated groups to elect 
to waive the 5-year carryback period with respect to certain acquired 
members. The regulations apply to losses arising in taxable years 
ending in 2001 and 2002. 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. Because of the need for immediate guidance, notice and 
public procedure are impracticable and contrary to the public interest 
pursuant to 5 USC 553(b)(B) and delayed effective date is not required 
pursuant to 5 USC 553(d)(1) and (3).
    Further, 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. Pursuant to section 
7805(f) of the Internal Revenue 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 author of these temporary regulations is Marie 
Milnes-Vasquez. However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR 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 1.1502-21T also issued under 26 U.S.C. 1502. * * *

    Par. 2. Section 1.1502-21 is amended by adding paragraph 
(b)(3)(ii)(C) to read as follows:


Sec. 1.1502-21  Net operating losses.

* * * * *
    (b) * * *
    (3) * * *
    (ii) * * *
    (C) [Reserved]. For further guidance, see Sec. 1.1502-
21T(b)(3)(ii)(C).
* * * * *

    Par. 3. Section 1.1502-21T is added to read as follows:


Sec. 1.1502-21T  Net operating losses (temporary).

    (a) through (b)(3)(ii)(B) [Reserved]. For further guidance, see 
Sec. 1.1502-21(a) through (b)(3)(ii)(B).
    (C) Partial waiver of carryback period for 2001 and 2002 losses--
(1) Application. The acquiring group may make the elections described 
in paragraphs (b)(3)(ii)(C)(2) and (3) of this section with respect to 
an acquired member or members only if it did not file a valid election 
described in Sec. 1.1502-21(b)(3)(ii)(B) with respect to such acquired 
member or members on or before May 31, 2002.
    (2) Partial waiver of entire pre-acquisition carryback period. If 
one or more members of a consolidated group become members of another 
consolidated group after June 25, 1999, then, with respect to all 
consolidated net operating losses attributable to the member for the 
taxable year ending during either 2001 or 2002, or both, the acquiring 
group may make an irrevocable election to relinquish the portion of the 
carryback period for such losses for which the corporation was a member 
of another group, provided that any other corporation joining the 
acquiring group that was affiliated with the member immediately before 
it joined the acquiring group is also included in the waiver and that 
the conditions of this paragraph are satisfied. The acquiring group 
cannot make the election described in this paragraph with respect to 
any consolidated net operating losses arising in a particular taxable 
year if any carryback is claimed, as provided in paragraph 
(b)(3)(ii)(C)(4) of this section, with respect to any such losses on a 
return or other filing by a group of which the acquired member was 
previously a member and such claim is filed on or before the date the 
election described in this paragraph is filed. The election must be 
made in a separate statement entitled ``THIS IS AN ELECTION UNDER 
SECTION 1.1502-21T(b)(3)(ii)(C)(2) TO WAIVE THE PRE-[insert first day 
of the first taxable year for which the member (or members) was a 
member of the acquiring group] CARRYBACK PERIOD FOR THE CNOLS 
ATTRIBUTABLE TO THE [insert taxable year of losses] TAXABLE YEAR(S) OF 
[insert names and employer identification numbers of members].'' Such 
statement must be filed as provided in paragraph (b)(3)(ii)(C)(5) of 
this section.
    (3) Partial waiver of pre-acquisition extended carryback period. If 
one or more members of a consolidated group become members of another 
consolidated group, then, with respect to all consolidated net 
operating losses attributable to the member for the taxable year ending 
during either 2001 or 2002, or both, the acquiring group may make an 
irrevocable election to relinquish the portion of the carryback period 
for such losses for which the corporation was a member of another group 
to the extent that such carryback period includes one or more taxable 
years that are prior to the taxable year that is 2 taxable years 
preceding the taxable year of the loss, provided that any other 
corporation joining the acquiring group that was affiliated with the 
member immediately before it joined the acquiring group is also 
included in the waiver and that the conditions of this paragraph are 
satisfied. The acquiring group cannot make the election described in 
this paragraph with respect to any consolidated net operating losses 
arising in a particular taxable year if a carryback to one or more 
taxable years that are prior to the taxable year that is 2 taxable 
years preceding the taxable year of the loss is claimed, as provided in 
paragraph (b)(3)(ii)(C)(4) of this section, with respect to any such 
losses on a return or other filing by a group of which the acquired 
member was previously a member and such claim is filed on or before the 
date the election described in this paragraph is filed. The election 
must be made in a separate statement entitled ``THIS IS AN ELECTION 
UNDER SECTION 1.1502-

[[Page 38003]]

21T(b)(3)(ii)(C)(3) TO WAIVE THE PRE-[insert first day of the first 
taxable year for which the member (or members) was a member of the 
acquiring group] EXTENDED CARRYBACK PERIOD FOR THE CNOLS ATTRIBUTABLE 
TO THE [insert taxable year of losses] TAXABLE YEAR(S) OF [insert names 
and employer identification numbers of members].'' Such statement must 
be filed as provided in paragraph (b)(3)(ii)(C)(5) of this section.
    (4) Claim for a carryback. For purposes of paragraphs 
(b)(3)(ii)(C)(2) and (3) of this section, a carryback is claimed with 
respect to a consolidated net operating loss if there is a claim for 
refund, an amended return, an application for a tentative carryback 
adjustment, or any other filing that claims the benefit of the net 
operating loss in a taxable year prior to the taxable year of the loss, 
whether or not subsequently revoked in favor of a claim based on a 5-
year carryback period.
    (5) Time and manner for filing statement. A statement described in 
paragraph (b)(3)(ii)(C)(2) or (3) of this section that relates to 
consolidated net operating losses attributable to a taxable year ending 
during 2001 must be filed with the acquiring consolidated group's 
timely filed (including extensions) original or amended return for the 
taxable year ending during 2001, provided that such original or amended 
return is filed on or before October 31, 2002. A statement described in 
paragraph (b)(3)(ii)(C)(2) or (3) of this section that relates to 
consolidated net operating losses attributable to a taxable year ending 
during 2002 must be filed with the acquiring consolidated group's 
timely filed (including extensions) original or amended return for the 
taxable year ending during 2001 or 2002, provided that such original or 
amended return is filed on or before September 15, 2003.
    (iii) through (h) [Reserved]. For further guidance, see 
Sec. 1.1502-21(b)(3)(iii) through (h).

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

    Par. 4. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.


    Par. 5. In Sec. 602.101, paragraph (b) is amended by adding an 
entry to the table in numerical order to read as follows:


Sec. 602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where identified and described       control No.
------------------------------------------------------------------------
 
                  *        *        *        *        *
1.1502-21T..............................................       1545-1790
 
                  *        *        *        *        *
------------------------------------------------------------------------


David A. Mader,
Acting Deputy Commissioner of Internal Revenue.
    Approved: May 20, 2002.
Pamela F. Olson,
Acting Assistant Secretary of the Treasury.
[FR Doc. 02-13576 Filed 5-30-02; 8:45 am]
BILLING CODE 4830-01-P