[Federal Register Volume 69, Number 159 (Wednesday, August 18, 2004)]
[Rules and Regulations]
[Pages 51175-51176]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-18789]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9155]
RIN 1545-BD58


Guidance Under Section 1502; Treatment 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 provide guidance regarding the treatment of certain losses 
available to acquired subsidiaries as a result of an election made 
under the section 1502 regulations. 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.

DATES: Effective Date: These regulations are effective August 18, 2004.
    Applicability Date: For dates of applicability see Sec.  1.1502-
32T(b)(4)(v)(C).

FOR FURTHER INFORMATION CONTACT: Sean McKeever at (202) 622-7750 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

    Under Sec.  1.1502-32(b)(4), if a subsidiary of a consolidated 
group has a loss carryover from a separate return limitation year when 
it becomes a member of the group, the group may make an irrevocable 
election to treat all or any portion of the loss carryover as expiring 
for all Federal income tax purposes immediately before the subsidiary 
becomes a member of the group. If the subsidiary was a member of 
another group immediately before it became a member of the group, the 
expiration is also treated as occurring immediately after it ceases to 
be a member of the prior group. Waiving losses of an acquired 
subsidiary is desirable in cases in which it is anticipated that the 
losses of the subsidiary may expire unused in that it prevents a 
negative basis adjustment in the stock of the subsidiary.
    In March of 2002, in response to the decision of the United States 
Court of Appeals for the Federal Circuit in Rite Aid Corp. v. United 
States, 255 F.3d 1357 (Fed. Cir. 2001), the Treasury Department and the 
IRS issued guidance regarding the treatment of certain losses realized 
on dispositions and deconsolidations of stock of a member of a 
consolidated group. Those rules permitted groups to calculate allowable 
loss on the sale of subsidiary stock by applying Sec.  1.1502-20 in its 
entirety, Sec.  1.1502-20 without regard to the duplicated loss factor 
of the loss disallowance formula, or Sec.  1.337(d)-2T. If a group that 
made an election described in Sec.  1.1502-20(g) to reattribute to the 
common parent losses of the subsidiary elected to determine allowable 
loss by applying either Sec.  1.1502-20 without regard to the 
duplicated loss factor of the loss disallowance formula, or Sec.  
1.337(d)-2T, the amount of loss treated as reattributed could be 
reduced. As a result, losses that were previously treated as 
reattributed would 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). To prevent a purchasing 
consolidated group from being unfairly disadvantaged in the event that 
the amount of losses treated as reattributed to the common parent of 
the selling group were decreased and the amount of losses treated as 
available to the subsidiary were increased (excess losses), Sec.  
1.1502-32T(b)(4)(v) was added to provide 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 (the deemed waiver rule). Accordingly, no basis 
reduction under Sec.  1.1502-32 would result from the expiration of, or 
failure to use, such losses.
    The Treasury Department and the IRS have become aware that the 
deemed waiver rule may deny the use of excess losses in cases in which 
such denial was

[[Page 51176]]

not intended, particularly in cases in which the excess losses would 
have been properly used to offset income in a closed year and the use 
of such losses in the closed year would make losses that were used in 
the closed year available to offset income in an open year. 
Accordingly, one commentator has asked that relief from the deemed 
waiver rule be afforded in these cases. These temporary regulations 
provide that relief by making the application of the deemed waiver rule 
optional. This relief is applicable on and after August 18, 2004. In 
addition, groups may apply this relief before August 18, 2004, and on 
and after March 7, 2002.

Special Analyses

    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. These temporary 
regulations are necessary to provide taxpayers with immediate guidance 
regarding the treatment of certain subsidiary losses. Accordingly, good 
cause is found for dispensing with notice and public procedure pursuant 
to 5 U.S.C. 553(b) and with a delayed effective date pursuant to 5 
U.S.C. 553(d)(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 
section 7805(f) of the Code, these temporary 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 regulations is Sean McKeever, 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 * * *


0
Par. 2. Section 1.1502-32T is amended by revising paragraph 
(b)(4)(v)(A) and (C).


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

* * * * *
    (b) * * *
    (4) * * *
    (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), 
unless a group otherwise chooses, 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 loss 
carryovers as expiring for all Federal income tax purposes immediately 
before S became a member of the consolidated group. A group may choose 
not to apply the rule of the previous sentence to all of such loss 
carryovers of S by taking a position on an original or amended tax 
return for each relevant taxable year that is consistent with having 
made such choice.
* * * * *
    (C) Effective date. Paragraph (b)(4)(v)(A) of this section is 
applicable on and after August 18, 2004. Groups, however, may apply 
paragraph (b)(4)(v)(A) of this section before August 18, 2004, and on 
and after March 7, 2002. Otherwise, see paragraph (b)(4)(v)(A) of Sec.  
1.1502-32. Paragraph (b)(4)(v)(B) of this section is applicable on and 
after March 7, 2002.
* * * * *

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
    Approved: July 29, 2004.
Gregory F. Jenner,
Acting Assistant Secretary of the Treasury.
[FR Doc. 04-18789 Filed 8-17-04; 8:45 am]
BILLING CODE 4830-01-P