[Federal Register Volume 75, Number 120 (Wednesday, June 23, 2010)]
[Rules and Regulations]
[Pages 35643-35648]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-15087]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9490]
RIN 1545-BJ12


Extended Carryback of Losses to or from a Consolidated Group

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary regulations under 
section 1502 that affect corporations filing consolidated returns. 
These regulations contain rules regarding the implementation of section 
172(b)(1)(H) within a consolidated group. These regulations also permit 
certain acquiring consolidated groups to elect to waive all or a 
portion of the pre-acquisition carryback period pursuant to section 
172(b)(1)(H) for specific 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 regulations are effective on June 23, 
2010.
    Applicability Date: For date of applicability, see Sec.  1.1502-
21T(h)(9)(i). The applicability of these regulations will expire on 
June 21, 2013.

FOR FURTHER INFORMATION CONTACT: Grid Glyer, (202) 622-7930 (not a 
toll-free number).

SUPPLEMENTARY INFORMATON:

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 1545-2171. 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

    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 two 
taxable years preceding the taxable year of the loss. Section 172(b)(3) 
provides that any taxpayer entitled to a carryback period pursuant to 
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 pursuant to 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. A consolidated group is 
permitted to make this election for its entire consolidated net 
operating loss (CNOL) pursuant to the procedures provided in Sec.  
1.1502-21(b)(3)(i). In addition, Sec.  1.1502-21(b)(3)(ii)(B) permits 
an acquiring consolidated group to make a separate election to waive, 
for all taxable years of the acquiring group, and solely with respect 
to all consolidated net operating losses attributable to certain 
acquired members, the portion of the carryback period for which the 
acquired corporations were members of another group. This election is 
irrevocable and must be made by the due date (including extensions) of 
the acquiring group for the taxable year of the acquisition.
    Section 172(b)(1)(H) was amended by the Worker, Homeownership, and 
Business Assistance Act of 2009, which was signed by the President on 
November 6, 2009 (Pub. L. 111-92, 123 Stat. 2984) (the Act). As 
amended, section 172(b)(1)(H) allows taxpayers to elect to extend the 
standard two-year carryback period for an additional period of up to 
three years (Extended Carryback Period) for a net operating loss 
arising in a single taxable year ending after December 31, 2007, and 
beginning before January 1, 2010 (Applicable NOL). However, section 
172(b)(1)(H) does not apply to any taxpayer if that taxpayer, or any 
member of the taxpayer's affiliated group (within the meaning of the 
Act), is described in section 13(f) of the Act.
    As described in Revenue Procedure 2009-52, 2009-49 IRB 744, section 
13(e)(4) of the Act permits any taxpayer that previously elected 
pursuant to section 172(b)(3) to forgo the carryback period for a loss 
arising in a taxable year ending before the date of enactment of the 
Act (November 6, 2009) to revoke such election in order to take 
advantage of the Extended Carryback Period, provided that the taxpayer 
revokes the election before the due date (including extensions) for 
filing the return for the taxpayer's last taxable year beginning in 
2009. Revenue Procedure 2009-52 also permits a taxpayer that filed an 
application for a tentative carryback adjustment or an amended return 
using the two-year carryback period for an Applicable NOL to file 
certain forms to claim the Extended Carryback Period provided pursuant 
to section 172(b)(1)(H). Revenue Procedure 2009-52 further clarifies 
that a taxpayer includes an affiliated group filing a consolidated 
return, an Applicable NOL includes a CNOL, and the section

[[Page 35644]]

172(b)(1)(H) election is made by the common parent of the group.

Explanation of Provisions

1. Extended Carryback Period Election and Computation of Limitation for 
Fifth Preceding Consolidated Return Year

a. Extended Carryback Period Election and Revocation of Prior Elections
    These temporary regulations provide that a consolidated group may 
elect to carry back a consolidated net operating loss arising in a 
consolidated return year ending after December 31, 2007, or beginning 
before January 1, 2010 (Applicable CNOL) to the Extended Carryback 
Period. In addition, these regulations provide that a group may revoke 
a prior election pursuant to Sec.  1.1502-21(b)(3)(i) in order to make 
an election pursuant to section 172(b)(1)(H). See section 4.01(3) and 
(4) of Rev. Proc. 2009-52 for the manner in which a group makes the 
election pursuant to section 172(b)(1)(H) and revokes a prior election 
pursuant to Sec.  1.1502-21(b)(3)(i).
    If a member (Electing Member) of a consolidated group elects an 
Extended Carryback Period pursuant to section 172(b)(1)(H) with regard 
to an Applicable NOL arising in a separate return year ending before 
the Electing Member's acquisition by a consolidated group, the election 
will not disqualify the acquiring group from making an otherwise 
available election pursuant to section 172(b)(1)(H) with regard to an 
Applicable CNOL for a consolidated return year.
b. Implementation of the Extended Carryback Period With Respect to a 
Consolidated Return Year
    As contemplated by section 172(b)(1)(H), the designated taxable 
year within the Extended Carryback Period may be the fifth taxable year 
preceding the year of the loss (Five-Year Carryback). A taxpayer may 
also choose the third or fourth preceding taxable year for the Extended 
Carryback Period. However, section 172(b)(1)(H)(iv) provides that the 
amount of an Applicable NOL that may be the subject of a Five-Year 
Carryback shall not exceed 50 percent of taxpayer's taxable income 
(computed without regard to the NOL deduction attributable to the loss 
year or any taxable year thereafter) for such fifth preceding taxable 
year.
    These temporary regulations provide that, if a group elects 
pursuant to section 172(b)(1)(H) to make a Five-Year Carryback into a 
consolidated return year of the same group, for purposes of computing 
the group's 50 percent limitation, taxpayer's taxable income means the 
consolidated taxable income (CTI) (computed without regard to any CNOL 
deduction attributable to the loss year or any equivalent taxable year 
as defined in Sec.  1.1502-21(b)(2)(iii), or any taxable year 
thereafter) of the group in its fifth consolidated return year 
preceding the year of the loss for which the group has elected the 
Five-Year Carryback.
    These temporary regulations also provide that a limitation applies 
to each year of a consolidated group that absorbs a Five-Year 
Carryback, even if the group itself has not made a section 172(b)(1)(H) 
election. For example, the annual limitation provided in these 
temporary regulations may limit the amount of loss absorbed by the 
group where such loss represents a Five-Year Carryback from separate 
return years of one or more former members. See also Sec.  1.1502-21(c) 
(SRLY limitation).

2. Elections To Waive the Entire Carryback Period or the Extended 
Carryback Period for Pre-Acquisition Consolidated Return Years of 
Acquired Members

    Given the enactment of section 172(b)(1)(H), and taxpayers' ability 
to revoke prior elections pursuant to section 172(b)(3) in order to 
take advantage of the Extended Carryback Period, the IRS and the 
Treasury Department believe that it is appropriate to afford 
consolidated groups an opportunity to waive the entire carryback period 
or the Extended Carryback Period with regard to the portion of the 
Applicable CNOL that is allocable to certain acquired members. The 
carryback period may be waived only to the extent of years preceding 
the acquisition during which the acquired members were included in 
another consolidated group. Further, this election is available only to 
groups that did not make an election described in Sec.  1.1502-
21(b)(3)(ii)(B) to waive all carrybacks with respect to the acquired 
members. In this regard, the regulations in this Treasury decision add 
Sec.  1.1502-21T(b)(3)(ii)(C), which sets forth two elections. These 
temporary regulations accordingly permit a consolidated group to make a 
carryback waiver that, as to an Applicable CNOL, is similar to the 
waiver described in Sec.  1.1502-21(b)(3)(ii)(B), even though the 
latter waiver election would otherwise be time-barred.
    Each of the two carryback waiver elections added by this temporary 
regulation applies only if (i) the acquiring consolidated group makes a 
section 172(b)(1)(H) election; and (ii) a portion of the Applicable 
CNOL is attributable to a member acquired from another group. Pursuant 
to the first election, an acquiring group may waive the part of the 
five-year carryback period during which the member was a member of 
another group. With regard to the apportioned loss, this election may 
result in a waiver of the entire five-year carryback period to the 
taxable years prior to the acquisition. However, the waiver is only 
available where none of such loss has 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 
part of the Extended Carryback Period during which the member was a 
member of another group. Thus, with regard to the apportioned loss, 
this second election permits a waiver of the third, fourth, and fifth 
carryback years only, to the extent that such years are prior to the 
acquisition. Moreover, this election is available even where such loss 
has been carried back to the first or second carryback years of the 
acquired member that are pre-acquisition years. However, this second 
election is available only where none of the loss has been carried back 
to a taxable year of a group of which the acquired member was 
previously a member which is prior to the second taxable year preceding 
the taxable year of the loss. Depending upon the facts of a particular 
group, it is possible that either of the two carryback waiver elections 
added by this Treasury decision could produce the same result.
    Unlike the election pursuant to Sec.  1.1502-21(b)(3)(ii)(B), the 
elections provided in these regulations apply only to a group's 
Applicable CNOL with regard to which the taxpayer makes an election 
pursuant to section 172(b)(1)(H) (that is, a single taxable year). An 
election that relates to an Applicable CNOL must be made by the due 
date (including extension of time) for filing the return for the 
taxpayer's last taxable year beginning in 2009.
    If the acquiring consolidated group files a valid election 
described in Sec.  1.1502-21(b)(3)(ii)(B) with respect to the 
acquisition of a member, no election pursuant to Sec.  1.1502-
21T(b)(3)(ii)(C) needs to be (nor should be) filed to ensure that an 
Applicable CNOL is not carried back to the relevant pre-acquisition 
years of the acquired member.

Special Analyses

    These regulations are necessary to provide taxpayers with immediate 
elective relief pursuant to section 172(b)(1)(H), which was amended as 
part of the Act. These regulations provide rules necessary to implement

[[Page 35645]]

section 172(b)(1)(H) within a consolidated group. These regulations 
further permit certain acquiring consolidated groups to elect to waive 
the standard carryback period or Extended Carryback Period with respect 
to certain acquired members. The regulations apply to NOLs arising in 
taxable years ending after December 31, 2007, and beginning before 
January 1, 2010. Based on these considerations, it has been determined 
that these regulations 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 U.S.C. 553(b)(3)(B) and a delayed effective date is not 
required pursuant to 5 U.S.C. 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. It has also been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations. For the 
applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6) 
refer to the Special Analyses section of the preamble to the cross-
reference notice of proposed rulemaking published in the Proposed Rules 
section in this issue of the Federal Register. Pursuant to section 
7805(f) of the Internal Revenue Code, these regulations have been 
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 Grid Glyer, Office of 
Associate Chief Counsel (Corporate). However, other personnel from the 
IRS and the 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

0
Accordingly, 26 CFR parts 1 and 602 are 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 1.1502-21 is amended by adding paragraphs (b)(3)(v) and 
(h)(9) to read as follows:


Sec.  1.1502-21  Net operating losses.

* * * * *
    (b) * * *
    (3) * * *
    (v) [Reserved]. For further guidance, see Sec.  1.1502-
21T(b)(3)(v).
* * * * *
    (h) * * *
    (9) [Reserved]. For further guidance, see Sec.  1.1502-21T(h)(9).

0
Par. 3. Section 1.1502-21T is revised 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 an applicable 
consolidated net operating loss--(1) Application. The acquiring group 
may make an election described in paragraph (b)(3)(ii)(C)(2) or 
(b)(3)(ii)(C)(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 June 23, 2010.
    (2) Partial waiver of entire pre-acquisition carryback period. If 
one or more members of a consolidated group become members of another 
consolidated group, then, with respect to the consolidated net 
operating loss arising in a taxable year ending after December 31, 
2007, and beginning before January 1, 2010 (Applicable CNOL) for which 
the group has made an election pursuant to section 172(b)(1)(H), the 
acquiring group may make an irrevocable election to relinquish, for the 
part of the Applicable CNOL attributable to such member, the portion of 
the carryback period during which the corporation was a member of 
another group. This election could thus operate to relinquish carryback 
for up to five taxable years, including the Extended Carryback Period 
(as defined in paragraph (b)(3)(v) of this section). However, any other 
corporation joining the acquiring group that was affiliated with the 
member immediately before it joined the acquiring group must also be 
included in the waiver, and the conditions of this paragraph 
(b)(3)(ii)(C)(2) must be satisfied. The acquiring group cannot make the 
election described in this paragraph (b)(3)(ii)(C)(2) with respect to 
any particular portion of an Applicable CNOL if any carryback is 
claimed, as provided in paragraph (b)(3)(ii)(C)(4) of this section, 
with respect to any such loss 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 
(b)(3)(ii)(C)(2) is filed. The election must be made in a separate 
statement entitled ``THIS IS AN ELECTION PURSUANT TO Sec.  1.1502-
21T(b)(3)(ii)(C)(2) TO WAIVE THE PRE-[insert the first day of the first 
taxable year for which the member (or members) was a member of the 
acquiring group] CARRYBACK PERIOD FOR THE CNOL ATTRIBUTABLE TO THE 
[insert taxable year of loss] TAXABLE YEAR 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 the Applicable CNOL for which 
the acquiring group has made an election pursuant to section 
172(b)(1)(H), the acquiring group may make an irrevocable election to 
relinquish, for the part of the Applicable CNOL attributable to such 
member, the portion of the Extended Carryback Period (as defined in 
paragraph (b)(3)(v) of this section) during which the corporation was a 
member of another group. This election could thus operate to relinquish 
carryback for up to three taxable years. However, any other corporation 
joining the acquiring group that was affiliated with the member 
immediately before it joined the acquiring group must also be included 
in the waiver, and the conditions of this paragraph (b)(3)(ii)(C)(3) 
must be satisfied. The acquiring group cannot make the election 
described in this paragraph (b)(3)(ii)(C)(3) with respect to any 
particular portion of an Applicable CNOL if a carryback to one or more 
taxable years that are prior to the taxable year that is two taxable 
years preceding the taxable year of the Applicable CNOL is claimed, as 
provided in paragraph (b)(3)(ii)(C)(4) of this section, with respect to 
any such loss 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

[[Page 35646]]

this paragraph (b)(3)(ii)(C)(3) is filed. The election must be made in 
a separate statement entitled ``THIS IS AN ELECTION PURSUANT TO Sec.  
1.1502-21T(b)(3)(ii)(C)(3) TO WAIVE THE PRE-[insert the 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 CNOL 
ATTRIBUTABLE TO THE [insert taxable year of losses] TAXABLE YEAR 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 (b)(3)(ii)(C)(3) of this section, a carryback is 
claimed with respect to a 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 NOL or 
CNOL in a taxable year prior to the taxable year of the loss, whether 
or not subsequently revoked in favor of a claim based on an Extended 
Carryback Period provided under section 172(b)(1)(H).
    (5) Time and manner for filing statement. A statement described in 
paragraph (b)(3)(ii)(C)(2) or (b)(3)(ii)(C)(3) of this section that 
relates to an Applicable CNOL shall be made by the due date (including 
extension of time) for filing the return for the taxpayer's last 
taxable year beginning in 2009.

    (6) Example.  (i) Waiver in case of pre-consolidation separate 
return years. T was a separate corporation that was not part of a 
consolidated group, until December 31, 2004, when it was acquired by 
the X Group. On December 31, 2007, the X Group sold all of the stock 
of T to the P Group. P did not make the election described in Sec.  
1.1502-21(b)(3)(ii)(B) to relinquish, with respect to all CNOLs 
attributable to T, the portion of the carryback period for which T 
was a member of the X Group. In 2008, the P Group sustained a $1,000 
CNOL, $600 of which was attributable to T under Sec.  1.1502-
21(b)(2)(iv)(A). P elected a Five-Year Carryback (as defined in 
paragraph (b)(3)(v) of this section) pursuant to section 
172(b)(1)(H) with regard to the P Group's 2008 CNOL, and the P Group 
elected, pursuant to paragraph (b)(3)(ii)(C)(2) of this section, to 
waive the portion of the carryback period during which T was 
included in any other consolidated group. T's fifth and fourth 
taxable years preceding the year of the loss were its 2003 and 2004 
separate return years. Due to the P Group's election pursuant to 
paragraph (b)(3)(ii)(C)(2) of this section, T's allocable portion of 
the P Group's 2008 CNOL will not be carried back to the years for 
which it was a member of the X Group. However, T's allocable portion 
of the P Group's 2008 CNOL will be carried back to T's non-
consolidated taxable years (2003 and 2004), subject to the 
limitation provided in section 172(b)(1)(H)(iv).
    (ii) Split-waiver election made. The facts are the same as in 
paragraph (i) except that the group made the election described in 
Sec.  1.1502-21(b)(3)(ii)(B) with regard to its acquisition of T in 
2007. Due to the P Group's election pursuant to Sec.  1.1502-
21(b)(3)(ii)(B), T's allocable portion of the P Group's 2008 CNOL 
will not be carried back to the years for which T was a member of 
the X Group. However, T's allocable portion of the P Group's 2008 
CNOL will be carried back to T's non-consolidated taxable years 
(2003 and 2004), subject to the limitation provided in section 
172(b)(1)(H)(iv).

    (b)(3)(iii) and (b)(3)(iv) [Reserved]. For further guidance, see 
Sec.  1.1502-21(b)(3)(iii) and (b)(3)(iv).
    (v) Extended Carryback Period under section 172(b)(1)(H). Section 
172(b)(1)(H) allows a taxpayer to elect to carry back a single net 
operating loss arising in a taxable year ending after December 31, 
2007, and beginning before January 1, 2010 (Applicable NOL) to its 
third, fourth, or fifth taxable year preceding the taxable year of the 
loss (Extended Carryback Period). As contemplated by section 
172(b)(1)(H), the designated taxable year within the Extended Carryback 
Period may be the fifth taxable year preceding the year of the loss 
(Five-Year Carryback), and section 172(b)(1)(H)(iv) limits the amount 
of the Applicable NOL that may be carried back to 50 percent of the 
taxpayer's taxable income (computed without regard to any NOL deduction 
attributable to the loss year or any taxable year thereafter) for such 
fifth preceding taxable year. This paragraph (b)(3)(v) provides rules 
for computing the 50 percent limitation under section 172(b)(1)(H)(iv) 
where a Five-Year Carryback is made to a consolidated return year from 
any consolidated return year or separate return year.
    (A) Election--(1) In general. Except as otherwise provided in this 
section, a consolidated group may elect an Extended Carryback Period 
pursuant to section 172(b)(1)(H) with regard to a consolidated net 
operating loss arising in a taxable year ending after December 31, 2007 
and beginning before January 1, 2010 (Applicable CNOL). However, no 
election may be made under this paragraph for a taxpayer described in 
section 13(f) of the Worker, Homeownership, and Business Assistance Act 
of 2009, Public Law 111-92, 123 Stat. 2984 (November 6, 2009). The 
election pursuant to section 172(b)(1)(H) applies to the entire 
Applicable CNOL, except as otherwise provided in paragraph 
(b)(3)(ii)(C) of this section or in this paragraph (b)(3)(v). See also 
paragraph (c) of this section (SRLY limitation).
    (2) Revoking a previous carryback waiver. A consolidated group may 
revoke a prior election pursuant to Sec.  1.1502-21(b)(3)(i) to 
relinquish the entire carryback period with respect to an Applicable 
CNOL, but only if the group makes the election pursuant to section 
172(b)(1)(H) with regard to such Applicable CNOL.
    (3) Pre-acquisition electing member. If a member (Electing Member) 
of a consolidated group makes an Extended Carryback Period election 
pursuant to section 172(b)(1)(H) with regard to a loss from a separate 
return year ending before the Electing Member's inclusion in a 
consolidated group, the election will not disqualify the acquiring 
group from making an otherwise available election pursuant to section 
172(b)(1)(H) with regard to an Applicable CNOL incurred in a 
consolidated return year that includes the Electing Member.
    (B) Taxpayer's taxable income. For purposes of computing the 
limitation under section 172(b)(1)(H)(iv) on a Five-Year Carryback to 
any consolidated return year from any consolidated return year or 
separate return year, taxpayer's taxable income as used in section 
172(b)(1)(H)(iv)(I) means consolidated taxable income (CTI) (computed 
without regard to any CNOL deduction attributable to Five-Year 
Carrybacks to such year or any NOL from any member's equivalent taxable 
year as defined in Sec.  1.1502-21(b)(2)(iii), or any taxable year 
thereafter) in the consolidated return year that is the fifth taxable 
year preceding the year of the loss.
    (C) Limitation on Five-Year Carrybacks to a consolidated group.--
(1) Annual Limitation. The aggregate amount of Five-Year Carrybacks to 
any consolidated return year may not exceed 50 percent of the CTI for 
that year (computed without regard to any CNOL deduction attributable 
to Five-Year Carrybacks to such year or any NOL from any member's 
equivalent taxable year as defined in Sec.  1.1502-21(b)(2)(iii), or 
attributable to any taxable year thereafter) (Annual Limitation).
    (2) Pro rata absorption of limited and non-limited losses. All 
Five-Year Carrybacks and other net operating losses from years ending 
on the same date that are available to offset CTI in the same year are 
absorbed on a pro rata basis. See Sec.  1.1502-21(b)(1).
    (D) Election by small business. This paragraph (b)(3)(v) does not 
apply to any loss of an eligible small business as defined in section 
172(b)(1)(H)(v)(II) with respect to any election made pursuant to 
section 172(b)(1)(H) as in

[[Page 35647]]

effect on the day before the date of the enactment of the Worker, 
Homeownership, and Business Assistance Act of 2009. x
    (E) Examples. The rules of this paragraph (b)(3)(v) are illustrated 
by the following examples. For purposes of the examples, all affiliated 
groups file consolidated returns, all corporations are includible 
corporations that have calendar taxable years, the facts set forth the 
only relevant corporate activity, and all transactions are with 
unrelated parties.

    Example 1. Computation and Absorption of Five-Year Carrybacks.  
(i) Facts. P is the common parent of the P Group. On June 30, 2006, 
P acquired all of the stock of T from X, the common parent of the X 
Group. The X Group has been in existence since 1996. P did not make 
the election described in Sec.  1.1502-21(b)(3)(ii)(B) to 
relinquish, with respect to all CNOLs attributable to T, the portion 
of the carryback period for which T was a member of the X Group. In 
2008, the P Group sustained a $1,000 CNOL, $600 of which was 
attributable to T under Sec.  1.1502-21(b)(2)(iv)(A). P elected a 
Five-Year Carryback pursuant to section 172(b)(1)(H) with regard to 
the P Group's 2008 CNOL. P did not make an election pursuant to 
paragraph (b)(3)(ii)(C) of this section to waive any portion of the 
period during which T was included in the X Group. T's fifth taxable 
year preceding the year of the loss was the X Group's 2004 
consolidated return year. For 2004, T's separate return limitation 
year (SRLY) limitation for losses carried into the X Group was $400. 
The X Group's CTI for 2004 is $200. The X Group did not make a Five-
Year Carryback election for a CNOL from its 2008 or 2009 taxable 
year. There are no other NOL carrybacks into the X Group's 2003 or 
2004 consolidated taxable year.
    (ii) Five-Year Carryback from separate return year. Pursuant to 
paragraph (b)(3)(v)(C)(1) of this section, the amount of T's 
apportioned loss that is eligible for Five-Year Carryback is limited 
to 50 percent of the X Group's CTI for 2004, or $100 ($200 x 50 
percent). Therefore, $100 of T's apportioned loss will be carried 
into the X Group's 2004 consolidated return year. In addition, T's 
2008 loss is subject to the SRLY limitation of $400 with respect to 
the X Group. Thus, the amount of T's portion of the P Group's 2008 
CNOL that may offset the X Group's 2004 CTI is $100 (the lesser of 
$400 (T's SRLY limitation) or $100 (the amount of T's Five-Year 
Carryback)).
    (iii) Pro rata absorption of limited and non-limited losses 
within a single consolidated return year. The facts are the same as 
in paragraph (i), except that the X Group sustained a $750 CNOL in 
2008, which X elected to carry back four years to its 2004 
consolidated return year (no Five-Year Carryback). Further, the X 
Group had CTI of $500 in 2004. Therefore, the X Group and the P 
Group both carry back CNOLs from years ending December 31, 2008, 
although only the P Group's CNOL (including the portion allocable to 
T) constitutes a Five-Year Carryback. The Annual Limitation on Five-
Year Carrybacks will be $250 [$500 x 50 percent]. The $750 CNOL 
carryback within the X Group is subject to no limitation. Under 
Sec.  1.1502-21(b)(1), because the 2008 CNOL of the X Group and the 
2008 SRLY loss of T are losses from years ending on the same date 
and are available to offset CTI in the same year, the two losses 
offset the X Group's $500 CTI on a pro rata basis. Accordingly, $375 
of the X's Group's 2008 CNOL [$500 x $750/($750 + $250)] and $125 of 
T's portion of the P Group's 2008 CNOL [$500 x $250/($750 + $250)] 
offset the X Group's 2004 CTI.
    Example 2. Multiple carryback years. (i) Facts. On January 1, 
2004, Individual A formed X, which formed corporations S and T, and 
X elected to file a consolidated Federal income tax return. For its 
2004 consolidated taxable year, the X Group's CTI was $1,100. For 
its 2005 consolidated taxable year, the X Group's CTI was $1,000. On 
June 30, 2007, the X Group sold all of the S stock to the Y Group 
and sold all of the T stock to the Z Group. The X Group terminated 
in 2007. Neither Y nor Z made the election described in Sec.  
1.1502-21(b)(3)(ii)(B) to relinquish, with respect to all CNOLs 
attributable to S and T, respectively, the portion of the carryback 
period for which S and T were members of the X Group. In 2008, the Y 
Group sustained an $800 CNOL, $400 of which was attributable to S 
under Sec.  1.1502-21(b)(2)(iv)(A). Y elected a Five-Year Carryback 
with regard to the Y Group's 2008 CNOL pursuant to section 
172(b)(1)(H). Y did not make an election pursuant to paragraph 
(b)(3)(ii)(C) of this section to waive any portion of the period 
during which S was included in the X Group. In 2009, the Z Group 
sustained a $1,000 CNOL, $600 of which was attributable to T under 
Sec.  1.1502-21(b)(2)(iv)(A). Z elected a Five-Year Carryback with 
regard to the Z Group's 2009 CNOL pursuant to section 172(b)(1)(H). 
Z did not make an election pursuant to paragraph (b)(3)(ii)(C) of 
this section to waive any portion of the Extended Carryback Period 
during which T was included in the X Group.
    (ii) Analysis. The $400 of Y Group's 2008 CNOL that is 
apportioned to S is carried back as a separate return year Five-Year 
Carryback to the X Group's 2004 consolidated return year. The $600 
of Z Group's 2009 CNOL that is apportioned to T is also a separate 
return year Five-Year Carryback to the X Group's 2005 consolidated 
return year. The Annual Limitation on Five-Year Carryback to the X 
Group's 2004 consolidated return year computed under paragraph 
(b)(3)(v)(C)(1) of this section equals $550 ($1,100 of CTI x 50 
percent). Because S is making the sole Five-Year Carryback to the X 
Group's 2004 consolidated return year, S will make a Five-Year 
Carryback of the full $550. Similarly, the Annual Limitation for 
Five-Year Carryback to the X Group's 2005 consolidated return year 
computed under paragraph (b)(3)(v)(C)(1) of this section equals $500 
($1,000 of CTI x 50 percent). Because T is making the sole Five-Year 
Carryback to the X Group's 2005 consolidated return year, T will 
make a Five-Year Carryback of the full $500. The SRLY limitations 
for S and T, respectively, may limit the absorption of the Five-Year 
Carrybacks within the X Group.
    Example 3. Pre-acquisition election by T. P is the common parent 
of the P Group. On December 31, 2008, P acquired all of the stock of 
T from X, the common parent of the X Group. T had been a member of 
the X Group since 1999. P did not make the election described in 
Sec.  1.1502-21(b)(3)(ii)(B) to relinquish, with respect to all 
CNOLs attributable to T, the portion of the carryback period for 
which T was a member of the X Group. Pursuant to section 
172(b)(1)(H), the X Group elected to make a Five-Year Carryback of 
its 2008 CNOL back to 2003. A portion of this CNOL is attributable 
to T pursuant to Sec.  1.1502-21(b)(2)(iv)(A). In 2009, the P Group 
incurred a CNOL of $1,000, $600 of which is attributable to T 
pursuant to Sec.  1.1502-21(b)(2)(iv)(A). Pursuant to section 
172(b)(1)(H), the P Group elected a Five-Year Carryback with regard 
to its 2009 CNOL. P did not make the election pursuant to paragraph 
(b)(3)(ii)(C) of this section to waive any portion of the period 
during which T was included in the X Group. The Five-Year Carryback 
election by the X Group with respect to its 2008 CNOL (which 
includes the portion of the CNOL attributable to T) does not 
disqualify the P Group from electing a Five-Year Carryback with 
regard to its 2009 CNOL. Therefore, the P Group may carry back its 
CNOL, including the portion attributable to T, in accordance with 
Sec.  1.1502-21 and the rules of this section.

    (c) through (h)(8) [Reserved]. For further guidance, see Sec.  
1.1502-21(c) through (h)(8).
    (9) Section 172(b)(1)(H)--(i) Applicability date. This section 
applies to any consolidated Federal income tax return due (without 
extensions) after June 23, 2010, if such return was not filed on or 
before such date. However, a consolidated group may apply this section 
to any consolidated Federal income tax return that is not described in 
the preceding sentence.
    (ii) Expiration date. The applicability of this section will expire 
on June 21, 2013.

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

0
Par. 4. The authority citation for part 602 continues to read as 
follows:

    Authority:  26 U.S.C. 7805.


0
Par. 5. In Sec.  602.101, paragraph (b) the entry for Sec.  1.1502-21T 
is revised 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..............................................       1545-2171
 

[[Page 35648]]

 
                                * * * * *
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Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
    Approved: June 16, 2010.
Michael F. Mundaca,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2010-15087 Filed 6-22-10; 8:45 am]
BILLING CODE 4830-01-P