[Federal Register Volume 68, Number 88 (Wednesday, May 7, 2003)]
[Rules and Regulations]
[Pages 24351-24355]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-11209]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9057]
RIN 1545-BB39


Guidance Under Section 1502; Amendment of Waiver of Loss 
Carryovers From Separate Return Limitation Years

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: This document contains temporary regulations under section 
1502 that permit the amendment of certain elections to waive the loss 
carryovers of an acquired subsidiary. 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. These 
regulations apply to corporations filing consolidated returns. This 
document also provides notice of a public hearing on these temporary 
and proposed regulations.

DATES: Effective Date: These regulations are effective May 7, 2003.
    Applicability Date: For dates of applicability, see Sec.  1.1502-
20T(i)(3)(viii)(C), Sec.  1.1502-20T(i)(5)(ii), and Sec.  1.1502-
32T(b)(4)(vii)(F). The applicability of these sections expires on May 
8, 2006.

FOR FURTHER INFORMATION CONTACT: Alison G. Burns or Jeffrey B. Fienberg 
(202) 622-7930 (not a toll-free number).

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 required to obtain a benefit. This collection of 
information is revised by these regulations. These amended 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 
revised 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.
    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 of 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 a 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 and Explanation of Provisions

    In 1991, the IRS and Treasury Department promulgated Sec.  1.1502-
20 setting forth rules regarding the extent to which a loss recognized 
by a member

[[Page 24352]]

of a consolidated group on the disposition of stock of a subsidiary 
member of the same group was allowed and the extent to which the basis 
of subsidiary member stock was required to be reduced prior to its 
deconsolidation. Section 1.1502-20 provides that a loss recognized by a 
group member on the disposition of subsidiary member stock is allowable 
only to the extent it exceeds the sum of ``extraordinary gain 
dispositions,'' ``positive investment adjustments,'' and ``duplicated 
loss.'' In addition, it provides that the basis of subsidiary member 
stock that is deconsolidated is reduced to its value to the extent of 
the sum of the same amounts immediately prior to its deconsolidation. 
The duplicated loss amount equals the sum of the aggregated adjusted 
basis of the assets of the subsidiary (other than any stock and 
securities that the subsidiary owns in another member), the losses 
attributable to the subsidiary that are carried forward to the 
subsidiary's first taxable year following the disposition or 
deconsolidation, and any deferred deductions of the subsidiary, over 
the sum of the value of the subsidiary's stock and its liabilities.
    Section 1.1502-32(b)(4) provides that, if a subsidiary has a loss 
carryover from a separate return limitation year when it becomes a 
member of a consolidated group, the group may make an election to treat 
all or any portion of the loss carryover as expiring immediately before 
the subsidiary becomes a member of the consolidated group. This 
election allows an acquiring group to prevent the loss of stock basis 
that otherwise would result if the subsidiary's loss carryovers were to 
expire before the group could absorb them. See Sec.  1.1502-
32(b)(2)(iii). Section 1.1502-32(b)(4) further provides that, if the 
subsidiary was a member of another group immediately before it became a 
member of the consolidated group, the losses are treated as expiring 
immediately after the subsidiary ceases to be a member of the prior 
group. The election described in Sec.  1.1502-32(b)(4) may be made by 
identifying either the amount of each loss carryover deemed to expire 
or the amount of each loss carryover deemed not to expire.
    If stock of a subsidiary with loss carryovers is sold by one 
consolidated group to another and the acquiring group waives all or a 
portion of the subsidiary's loss carryovers pursuant to Sec.  1.1502-
32(b)(4), the selling group can exclude the waived loss carryovers from 
its computation of duplicated loss. In certain cases, the waiver could 
have the effect of increasing the amount of stock loss allowed on the 
disposition of subsidiary stock or reducing the basis reduction 
required on the deconsolidation of subsidiary stock. The IRS and 
Treasury understand that certain waivers of loss carryovers that were 
made pursuant to Sec.  1.1502-32(b)(4) were made so as to increase the 
amount of allowed loss on a disposition of subsidiary stock.
    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. In response to the Rite Aid decision, 
on March 7, 2002, the IRS and Treasury Department filed with the 
Federal Register temporary regulations under sections 337(d) and 1502 
governing the determination of a consolidated group's allowable stock 
loss and basis reduction required on a disposition or deconsolidation 
of subsidiary member stock. Under the temporary regulations, 
consolidated groups can compute the allowable loss or the basis 
reduction required on dispositions and deconsolidations of subsidiary 
stock before March 7, 2002, and certain dispositions and 
deconsolidations of subsidiary stock on or after March 7, 2002, by 
applying Sec.  1.1502-20 in its entirety, by applying the provisions of 
Sec.  1.1502-20 without regard to the duplicated loss factor of the 
loss disallowance formula, or by applying the provisions of Sec.  
1.337(d)-2T. See Sec.  1.1502-20T(i)(2).
    The IRS and Treasury Department believe that in certain cases in 
which a selling group elects to compute the allowable loss or the basis 
reduction required on a disposition or deconsolidation of subsidiary 
member stock by applying Sec.  1.1502-20 without regard to the 
duplicated loss factor of the loss disallowance formula, or by applying 
the provisions of Sec.  1.337(d)-2T, it is appropriate to permit an 
acquiring group to amend certain prior waivers of loss carryovers. The 
following paragraphs describe these cases and the amendments that this 
document makes to Sec. Sec.  1.1502-20T and 1.1502-32T to allow certain 
amendments to prior waivers of loss carryovers.

Prior Waivers of Loss Carryovers Made To Increase Allowable Loss or 
Reduce Basis Reduction Required

    If a selling group elects to compute the allowable loss or the 
basis reduction required on a disposition or deconsolidation of 
subsidiary stock by applying the provisions of Sec.  1.1502-20 without 
regard to the duplicated loss factor of the loss disallowance formula, 
or by applying the provisions of Sec.  1.337(d)-2T, the acquiring 
group's prior waiver of loss carryovers of the subsidiary or lower-tier 
corporation of such subsidiary will have no effect on the selling 
group's allowable loss or the basis reduction required with respect to 
the disposed of or deconsolidated subsidiary stock. To the extent, 
therefore, that an acquiring group made an election to waive loss 
carryovers to increase the allowable loss or to reduce the basis 
reduction required with respect to the disposed of or deconsolidated 
subsidiary stock, the IRS and Treasury Department believe that the 
acquiring group should be permitted to amend such waivers to decrease, 
to a limited extent, the amounts of loss carryovers deemed to expire.
    Accordingly, the regulations contained in this document provide 
that, if the acquiring group made an election pursuant to Sec.  1.1502-
32(b)(4) to waive a subsidiary's loss carryovers, that election 
increased the amount of the allowable loss or reduced the basis 
reduction required with respect to the disposed of or deconsolidated 
subsidiary stock, and the selling group elects to compute the allowable 
loss or the basis reduction required with respect to the disposed of or 
deconsolidated subsidiary stock by applying the provisions of Sec.  
1.1502-20 without regard to the duplicated loss factor of the loss 
disallowance formula, or by applying the provisions of Sec.  1.337(d)-
2T, then the acquiring group may reduce the amount of any loss 
carryover deemed to expire (or increase the amount of any loss 
carryover deemed not to expire) as a result of the election made 
pursuant to Sec.  1.1502-32(b)(4). The aggregate amount of loss 
carryovers that may be treated as not expiring as a result of such an 
amendment of a waiver of a loss carryover of the subsidiary the stock 
of which is disposed of or deconsolidated and any lower-tier 
corporation of such subsidiary, however, may not exceed the duplicated 
loss with respect to the disposed of or deconsolidated subsidiary 
stock. This limitation is intended to ensure that all of the loss 
carryovers that do not expire as a result of the amendment did, in 
fact, increase the amount of the allowable loss or reduce the basis 
reduction required with respect to the disposed of or deconsolidated 
subsidiary stock. In addition, to enable the acquiring group's use of 
loss carryovers that are not deemed to expire as a result of such an 
amendment, these regulations permit a selling group to reapportion 
separate, subgroup, and consolidated section 382 limitations.

[[Page 24353]]

Inadvertent Waivers of Loss Carryovers

    A selling group's election to compute the allowable loss or the 
basis reduction required on a disposition or deconsolidation of 
subsidiary stock by applying the provisions of Sec.  1.1502-20 without 
regard to the duplicated loss factor of the loss disallowance formula, 
or by applying the provisions of Sec.  1.337(d)-2T, may result in a 
reduction of the amount of losses treated as reattributed to the 
selling group pursuant to an election described in Sec.  1.1502-20(g). 
To the extent that losses treated as reattributed to the selling group 
are reduced, the losses of a subsidiary are increased. In this case, if 
the acquiring group made an election to waive certain loss carryovers 
of the subsidiary by identifying those losses that were deemed not to 
expire, it may have inadvertently waived those losses that are treated 
as losses of the subsidiary as a result of the election by the selling 
group. The IRS and Treasury Department believe that such acquiring 
groups should be permitted to make certain amendments of such waivers.
    Accordingly, these regulations permit acquiring groups to amend an 
election made pursuant to Sec.  1.1502-32(b)(4) where the group of 
which the subsidiary was a member immediately before the acquisition 
(the prior group) elected to determine the amount of the allowable loss 
or the basis reduction required with respect to the stock of the 
subsidiary or a higher-tier corporation of the subsidiary by applying 
Sec.  1.1502-20 without regard to the duplicated loss factor of the 
loss disallowance formula, or by applying the provisions of Sec.  
1.337(d)-2T, the subsidiary's loss carryovers are increased by such 
election by the prior group, and the acquiring group made an election 
pursuant to Sec.  1.1502-32(b)(4) by identifying those losses that 
would be deemed not to expire. In this case, pursuant to these 
regulations, the acquiring group may amend its election made pursuant 
to Sec.  1.1502-32(b)(4) to provide that all or a portion of the loss 
carryovers of the subsidiary that are treated as loss carryovers of the 
subsidiary as a result of the prior group's election are deemed not to 
expire.
    The regulations contained in this document only permit acquiring 
groups to reduce the amount of loss carryovers deemed to expire, or 
increase the amount of loss carryovers deemed not to expire, as a 
result of an election under Sec.  1.1502-32(b)(4). The regulations, 
however, do not permit acquiring groups to increase the amount of loss 
carryovers deemed to expire, or reduce the amount of loss carryovers 
deemed not to expire, as a result of such an election. The regulations, 
therefore, permit increases, but not decreases, of the amount of loss 
carryovers available to acquiring groups.

Limited Extension of Time To Apply Alternative Regime

    In addition to the provisions described above, the regulations 
include a limited extension of time for selling groups to make an 
election to compute the allowable loss or the basis reduction required 
on a disposition or deconsolidation of subsidiary stock by applying the 
provisions of Sec.  1.1502-20 without regard to the duplicated loss 
factor of the loss disallowance formula, or by applying the provisions 
of Sec.  1.337(d)-2T, if the acquiring group is otherwise eligible to 
amend an election under Sec.  1.1502-32(b)(4) pursuant to these 
regulations, but the time period during which the selling group could 
make its election has or has almost expired.

Additional Adjustments

    In promulgating Sec.  1.1502-20T and related provisions, the IRS 
and Treasury have attempted to ameliorate where possible the situation 
of groups that relied on the provisions of Sec.  1.1502-20 in prior 
periods. The IRS and Treasury recognize that the loss disallowance rule 
in Sec.  1.1502-20 affected the manner in which some transactions were 
structured. For example, some groups caused subsidiaries to sell their 
assets rather than engage in stock sales subject to loss disallowance 
under Sec.  1.1502-20. Alternatively, groups may have engaged in deemed 
asset sales under Sec.  338(h)(10). The IRS and Treasury believe that 
transactions cast in the form of actual or deemed asset sales should 
not be undone, notwithstanding the possible role of Sec.  1.1502-20 in 
their planning. However, as was the case with the relief provided 
earlier in Sec.  1.1502-20T and its related amendments, the IRS and 
Treasury have concluded that relief is appropriate and administrable in 
the situation that is the subject of these temporary regulations.

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 to provide taxpayers with immediate guidance 
regarding the amendment of certain elections to waive the loss 
carryovers of an acquired subsidiary. Without such immediate guidance, 
taxpayers may not be able to avail themselves of the relief provided 
for in these regulations. 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). For applicability of the Regulatory Flexibility Act, 
please refer to the cross-reference notice of proposed rulemaking 
published elsewhere in this issue of the Federal Register. Pursuant to 
Sec.  7805(f) of the Internal Revenue Code, these temporary regulations 
will be submitted to the Chief Counsel of Advocacy of the Small 
Business Administration for comment on their impact.

Drafting Information

    The principal author of these regulations is Jeffrey B. Fienberg, 
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

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.1502-20T also issued under 26 U.S.C. 1502. * * *
    Section 1.1502-32T also issued under 26 U.S.C. 1502. * * *


0
Par. 2. In Sec.  1.1502-20T paragraph (i)(5) is redesignated as 
paragraph (i)(6).

0
Par. 3. Section 1.1502-20T is amended by adding paragraphs (i)(3)(viii) 
and (i)(5) to read as follows:


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

* * * * *
    (i) * * *
    (3) * * *
    (viii) Apportionment of section 382 limitation in the case of an 
amendment of an election made pursuant to Sec.  1.1502-32(b)(4). (A) In 
general. If, in connection with a disposition or deconsolidation of 
subsidiary stock, the subsidiary the stock of which was disposed of or 
deconsolidated became a member of another consolidated group (the 
acquiring group), and, pursuant to Sec.  1.1502-32T(b)(4)(vii), the 
acquiring group amends an election made pursuant to Sec.  1.1502-
32(b)(4) to treat all or a portion of the loss carryovers of

[[Page 24354]]

such subsidiary (or a lower-tier corporation of such subsidiary) as 
expiring for all Federal income tax purposes, then the common parent 
may reapportion a separate, subgroup, or consolidated section 382 
limitation with respect to such subsidiary or lower-tier corporation in 
a manner consistent with the principles of paragraph (i)(3)(iii)(A) 
through (D) of this section. Any reapportionment of a section 382 
limitation made pursuant to the previous sentence shall have the 
effects described in paragraph (i)(3)(iii)(D)(ii) and (iii) of this 
section. For purposes of this section, a lower-tier corporation is a 
corporation that was a member of the group of which the subsidiary was 
a member immediately before becoming a member of the acquiring group 
and that became a member of the acquiring group as a result of the 
subsidiary becoming a member of the acquiring group.
    (B) Time and manner of adjustment of apportionment of section 382 
limitation. The common parent must include a statement entitled 
Adjustment of Apportionment of Section 382 Limitation in Connection 
with Amendment of Election under Sec.  1.1502-32(b)(4) with or as part 
of any timely filed (including any extensions) original return for a 
taxable year that includes any date on or before May 7, 2003 or with or 
as part of an amended return filed before the date the original return 
for the taxable year that includes May 7, 2003 is due (with regard to 
extensions). The statement must set forth the name and employer 
identification number (E.I.N.) of the subsidiary and both the original 
and the adjusted apportionment of a separate section 382 limitation, a 
subgroup section 382 limitation, and a consolidated section 382 
limitation, as applicable. The requirements of this paragraph 
(i)(3)(viii)(B) will be treated as satisfied if the information 
required by this paragraph (i)(3)(viii)(B) is included in the statement 
required by paragraph (i)(4) of this section rather than in a separate 
statement.
    (C) Effective date. This paragraph (i)(3)(viii) is applicable on 
and after May 7, 2003.
* * * * *
    (5) Special time for filing election in the case of a waiver under 
Sec.  1.1502-32(b)(4). (i) In general. Notwithstanding the provisions 
of paragraph (i)(4) of this section, the election to determine 
allowable loss or basis reduction provided in this paragraph (i) may be 
made by including the statement required by paragraph (i)(4) of this 
section with or as part of an original or amended return that is filed 
on or before June 15, 2003, if--
    (A) The group that includes the acquirer of the subsidiary stock 
made an election pursuant to Sec.  1.1502-32(b)(4) to treat all or a 
portion of the loss carryovers of the subsidiary (or a lower-tier 
corporation of such subsidiary) as expiring for all Federal income tax 
purposes;
    (B) The timely filing of an election to determine allowable loss or 
basis reduction by applying the provisions described in paragraph 
(i)(2)(i) or (ii) of this section would permit the acquiring group to 
amend its election under Sec.  1.1502-32(b)(4) pursuant to Sec.  
1.1502-32T(b)(4)(vii);
    (C) June 6, 2003 is after the date the original return of the 
consolidated group for the taxable year that includes March 7, 2002, is 
due (including extensions); and
    (D) The statement required by paragraph (i)(4) of this section 
specifies that the filing of the election is permitted under this 
paragraph (i)(5).
    (ii) Effective date. This paragraph (i)(5) is applicable on and 
after May 7, 2003.
* * * * *

0
Par. 4. Section 1.1502-32T is amended by adding paragraph (b)(4)(vii) 
to read as follows:


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

* * * * *
    (b) * * *
    (4) * * *
    (vii) Special rules for amending waiver of loss carryovers from 
separate return limitation year--(A) Waivers that increased allowable 
loss or reduced basis reduction required. If, in connection with the 
acquisition of S, the group made an election pursuant to Sec.  1.1502-
32(b)(4) to treat all or any portion of S's loss carryovers as 
expiring, and the prior group elected to determine the amount of the 
allowable loss or the basis reduction required with respect to the 
stock of S or a higher-tier corporation of S by applying the provisions 
described in Sec.  1.1502-20T(i)(2)(i) or (ii), then the group may 
reduce the amount of any loss carryover deemed to expire (or increase 
the amount of any loss carryover deemed not to expire) as a result of 
the election made pursuant to Sec.  1.1502-32(b)(4). The aggregate 
amount of loss carryovers that may be treated as not expiring as a 
result of amendments made pursuant to this paragraph (b)(4)(vii)(A) 
with respect to S and any higher- and lower-tier corporation of S may 
not exceed the amount described in Sec.  1.1502-20(c)(1)(iii) with 
respect to the acquired stock (computed without regard to the effect of 
the group's election or elections pursuant to Sec.  1.1502-32(b)(4), 
but with regard to the effect of the prior group's election pursuant to 
Sec.  1.1502-20(g), if any, prior to the application of Sec.  1.1502-
20T(i)(3)). For purposes of determining the aggregate amount of loss 
carryovers that may be treated as not expiring as a result of 
amendments made pursuant to this paragraph (b)(4)(vii)(A) with respect 
to S and any higher- and lower-tier corporation of S, the group may 
rely on a written notification provided by the prior group. Nothing in 
this paragraph shall be construed as permitting a group to increase the 
amount of any loss carryover deemed to expire (or reduce the amount of 
any loss carryover deemed not to expire) as a result of the election 
made pursuant to Sec.  1.1502-32(b)(4).
    (B) Inadvertent waivers of loss carryovers previously subject to an 
election described in Sec.  1.1502-20(g). If, in connection with the 
acquisition of S, the group made an election pursuant to Sec.  1.1502-
32(b)(4) to waive loss carryovers of S by identifying the amount of 
each loss carryover deemed not to expire, the prior group elected to 
determine the amount of the allowable loss or the basis reduction 
required with respect to the stock of S or a higher-tier corporation of 
S by applying the provisions described in Sec.  1.1502-20T(i)(2)(i) or 
(ii), and the amount of S's loss carryovers treated as reattributed to 
the prior group pursuant to the election described in Sec.  1.1502-
20(g) is reduced pursuant to Sec.  1.1502-20T(i)(3), then the group may 
amend its election made pursuant to Sec.  1.1502-32(b)(4) to provide 
that all or a portion of the loss carryovers of S that are treated as 
loss carryovers of S as a result of the prior group's election to apply 
the provisions described in Sec.  1.1502-20T(i)(2)(i) or (ii) are 
deemed not to expire. This paragraph (b)(4)(vii)(B), however, does not 
permit a group to reduce the amount of any loss carryover deemed not to 
expire as a result of the election made pursuant to Sec.  1.1502-
32(b)(4).
    (C) Time and manner of amending an election under Sec.  1.1502-
32(b)(4). The amendment of an election made pursuant to Sec.  1.1502-
32(b)(4) must be made in a statement entitled Amendment of Election to 
Treat Loss Carryover as Expiring Under Sec.  1.1502-32(b)(4) Pursuant 
to Sec.  1.1502-32T(b)(4)(vii). The statement must be filed with or as 
part of any timely filed (including extensions) original return for the 
taxable year that includes May 7, 2003 or with or as part of an amended 
return filed before the date the original return for the taxable year 
that includes May 7, 2003 is due (with regard to extensions). A 
separate statement shall

[[Page 24355]]

be filed for each election made pursuant to Sec.  1.1502-32(b)(4) that 
is being amended pursuant to this paragraph (b)(4)(vii). For purposes 
of making this statement, the group may rely on the statements set 
forth in a written notification provided by the prior group. The 
statement filed under this paragraph must include the following--
    (1) The name and employer identification number (E.I.N.) of S;
    (2) In the case of an amendment made pursuant to paragraph 
(b)(4)(vii)(A), a statement that the group has received a written 
notification from the prior group confirming that the group's prior 
election or elections pursuant to Sec.  1.1502-32(b)(4) had the effect 
of either increasing the prior group's allowable loss on the 
disposition of subsidiary stock or reducing the prior group's amount of 
basis reduction required;
    (3) The amount of each loss carryover of S deemed to expire (or the 
amount of loss carryover deemed not to expire) as set forth in the 
election made pursuant to Sec.  1.1502-32(b)(4);
    (4) The amended amount of each loss carryover of S deemed to expire 
(or the amended amount of loss carryover deemed not to expire); and
    (5) In the case of an amendment made pursuant to paragraph 
(b)(4)(vii)(A) of this section, a statement that the aggregate amount 
of loss carryovers of S and any higher- and lower-tier corporation of S 
that will be treated as not expiring as a result of amendments made 
pursuant to paragraph (b)(4)(vii)(A) of this section will not exceed 
the amount described in Sec.  1.1502-20(c)(1)(iii) with respect to the 
acquired stock (computed without regard to the effect of the group's 
election or elections pursuant to Sec.  1.1502-32(b)(4), but with 
regard to the effect of the prior group's election pursuant to Sec.  
1.1502-20(g), if any, prior to the application of Sec.  1.1502-
20T(i)(3)).
    (D) Items taken into account in open years. An amendment to an 
election made pursuant to Sec.  1.1502-32(b)(4) affects the group's 
items of income, gain, deduction or loss only to the extent that the 
amendment 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 for overpayment, as the case may be, is not 
prevented by any law or rule of law. Under this paragraph, if the year 
to which a loss previously deemed to expire as a result of an election 
made pursuant to Sec.  1.1502-32(b)(4) is deemed not to expire as a 
result of an election made pursuant to this paragraph would have been 
carried back or carried forward is a year for which a refund of 
overpayment is prevented by law, then to the extent that the absorption 
of such 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 amendment to the election made 
pursuant to Sec.  1.1502-32(b)(4) will affect the treatment of such 
other item. Therefore, if the absorption of such loss (the first loss) 
in 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 second 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 amendment of the election makes the second 
loss available for use in the other year.
    (E) Higher- and lower-tier corporations of S. A higher-tier 
corporation of S is a corporation that was a member of the prior group 
and, as a result of such higher-tier corporation becoming a member of 
the group, S became a member of the group. A lower-tier corporation of 
S is a corporation that was a member of the prior group and became a 
member of the group as a result of S becoming a member of the group.
    (F) Effective date. This paragraph (b)(4)(vii) is applicable on and 
after May 7, 2003.
* * * * *

David A. Mader,
Assistant Deputy Commissioner of Internal Revenue.
    Approved: April 25, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury.
[FR Doc. 03-11209 Filed 5-6-03; 8:45 am]
BILLING CODE 4830-01-P