Consolidated Returns--Limitation on Recapture of
Overall Foreign Loss Accounts

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [TD 8800] RIN 1545-AW51

TITLE: Consolidated returns--Limitation on recapture of overall
foreign loss accounts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains temporary amendments to the
consolidated return regulations. The temporary amendments modify the
date temporary regulations apply as published in the Federal
Register on January 12, 1998, and modified by amendments published
in the Federal Register on March 16, 1998, relating to a
consolidated group's recapture of an overall foreign loss account
arising in a separate return limitation year. The regulations affect
consolidated groups that claim foreign tax credits. The text of the
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 of this issue of the Federal
Register.

DATES: Effective dates: These amendments are effective December 29,
1998.

Applicability dates: For dates of applicability of these
regulations, see �1.1502-9T(b)(1)(v).

FOR FURTHER INFORMATION CONTACT: Trina Dang of the Office of
Associate Chief Counsel (International), (202) 622-3850 (not a toll-
free number).

SUPPLEMENTARY INFORMATION:

Background

As announced in Notice 98-40 (1998-35 I.R.B. 7), these temporary
regulations permit taxpayers to elect to delay the effective date of
�1.1502-9T, published in the Federal Register on January 12, 1998
(TD 8751, 63 FR 1740), and modified by amendments published in the
Federal Register on March 16, 1998 (TD 8766, 63 FR 12641).

On January 12, 1998, Treasury and the IRS published in the Federal
Register (TD 8751, 63 FR 1740) final, temporary and proposed
regulations (the January 1998 regulations) relating to limitations
on the use of certain tax credits and related attributes by
corporations filing consolidated income tax returns. In general, the
January 1998 regulations relate to the separate return limitation
year (SRLY) provisions for general business credits, alternative
minimum tax credits, foreign tax credits and overall foreign loss
accounts. The January 1998 regulations were generally applicable to
consolidated return years beginning on or after January 1, 1997.

On March 16, 1998, Treasury and the IRS published in the Federal
Register (TD 8766, 63 FR 12641) final, temporary, and proposed
regulations (the March 1998 regulations) modifying the effective
date of the January 1998 regulations. The March 1998 regulations
provide that the provisions of the January 1998 regulations will
apply for consolidated return years for which the due date (without
extensions) of the income tax return is after March 13, 1998. In
lieu of applying this effective date, however, the March 1998
regulations permit a consolidated group to choose to apply the
effective date provisions under the January 1998 regulations. The
March 1998 regulations provide that taxpayers making this choice
must apply all those effective date provisions for all relevant
years. Thus, under the March 1998 regulations, taxpayers are not
permitted to apply one provision of the January 1998 regulations
(e.g., the general business credit effective date) without applying
all the other provisions (e.g., the foreign tax credit effective
date).

On May 7, 1998, a public hearing was held regarding the proposed
January and March regulations. At the hearing and in written
submissions, commentators expressed concern regarding the effective
dates contained in the January 1998 and March 1998 regulations with
respect to the overall foreign loss account provisions of
�1.1502-9T. The commentators' principal concern was that these
effective dates resulted in adverse tax consequences not anticipated
by taxpayers with respect to business transactions that occurred
prior to the issuance of the January 1998 regulations. Treasury and
the IRS now believe that certain of these consequences are
inappropriate.

Accordingly, on August 14, 1998, Treasury and the Service issued
Notice 98-40 (1998-35 I.R.B. 7), announcing their intent to issue
regulations providing relief from the application of �1.1502-9T (the
overall foreign loss account provisions) for consolidated return
years beginning before January 1, 1998.

Explanation of Provisions

As announced in Notice 98-40, taxpayers are permitted to elect not
to apply �1.1502-9T(b)(1)(v) to consolidated return years beginning
before January 1, 1998. Section 1.1502-3T(c)(4) is amended to
clarify that a taxpayer that chooses under the March 1998
regulations to apply the effective date provisions under the January
1998 regulations may also make the election referred to in Notice
98-40.

To make the election, a taxpayer must write "Election Pursuant to
Notice 98-40" across the top of page 1 of an original or amended tax
return for each consolidated return year subject to the election.
For the first consolidated return year to which the overall foreign
loss provisions of �1.1502-9T apply (i.e., the first year beginning
on or after January 1, 1998), such taxpayer must write A Notice
98-40 Election in Effect in Prior Years @ across the top of page 1
of the consolidated tax return for that year. For purposes of
applying �1.1502-9T with respect to such year, any member with a
balance in an overall foreign loss account from a separate return
limitation year on the first day of such year shall be treated as
joining the group on such first day.

Special Analyses

It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It is hereby certified that
these regulations do not have a significant economic impact on a
substantial number of small entities. This certification is based on
the fact that these regulations principally affect corporations
filing consolidated federal income tax returns that have overall
foreign losses from separate return limitation years. Available data
indicates that many consolidated return filers are large companies
(not small businesses). In addition, the data indicates that an
insubstantial number of consolidated return filers that are smaller
companies have overall foreign losses. Presumably, even fewer of
these filers have overall foreign loss accounts that are subject to
the separate return limitation year rules. Therefore, a Regulatory
Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. It has also been determined that under
section 553(d) of the Administrative Procedure Act (5 U.S.C.

chapter 5) these regulations should be effective immediately because
they involve the applicability of regulations that modify the
limitations on the use of certain tax attributes for taxable years
for which a return is due after March 13, 1998. Pursuant to section
7805(f) of the Internal Revenue Code, the notice of proposed
rulemaking accompanying these regulations is being sent to the Small
Business Administration for comment on its impact on small
businesses.

Drafting Information

The principal author of these regulations is Trina Dang of the
Office of Associate Chief Counsel (International). However, other
personnel from the IRS and Treasury participated in their
development.

List of Subjects in 26 CFR Part 1

Income taxes, 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 continues to read in
part as follows:

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

Par. 2. Section 1.1502-3T is amended by removing the last sentence
of paragraph (c)(4) and adding two sentences in its place to read as
follows:

�1.1502-3T Consolidated investment credit (temporary).

* * * * *

(c) * * *

(4) * * * A consolidated group making this choice generally must
apply all such paragraphs for all relevant years. However, a
consolidated group making the election provided in �1.1502- 9T(b)(1)
(vi) (electing not to apply �1.1502-9T(b)(1)(v) to years beginning
before January 1, 1998) may nevertheless choose to apply all such
paragraphs other than �1.1502-9T(b)(1)(v) for all relevant years.

* * * * *

Par. 3. In �1.1502-9, paragraph (a) is amended by revising the last
two sentences to read as follows:

�1.1502-9 Application of overall foreign loss recapture rules to
corporations filing consolidated returns.

(a) * * * See �1.1502-9T(b)(1)(v) for the rule that ends the
separate return limitation year limitation for consolidated return
years for which the due date of the income tax return (without
extensions) is after March 13, 1998, and �1.1502- 9T(b)(1)(vi) for
an election to continue the separate return limitation year
limitation for consolidated return years beginning before January 1,
1998. See also �1.1502-3T(c)(4) for an optional effective date rule
(generally making the rules of paragraphs (b)(1)(iii) and (iv) of
this section inapplicable for a consolidated return year beginning
after December 31, 1996, if the due date of the income tax return
(without extensions) for such year is on or before March 13, 1998).

* * * * *

Par. 4. Section 1.1502-9T is amended by revising paragraph (b)(1)(v)
and adding paragraph (b)(1)(vi) to read as follows:

�1.1502-9T Application of overall foreign loss recapture rules to
corporations filing consolidated returns (temporary).

* * * * *

(b)(1)(v) Special effective date for SRLY limitation.

Except as provided in paragraph (b)(1)(vi) of this section,
�1.1502-9(b)(1)(iii) and (iv) apply only to consolidated return
years for which the due date of the income tax return (without
extensions) is on or before March 13, 1998. For consolidated return
years for which the due date of the income tax return (without
extensions) is after March 13, 1998, the rules of �1.1502-9(b)(1)
(ii) shall apply to overall foreign losses from separate return
years that are separate return limitation years.

For purposes of applying �1.1502-9(b)(1)(ii) in such years, the
group treats a member with a balance in an overall foreign loss
account from a separate return limitation year on the first day of
the first consolidated return year for which the due date of the
income tax return (without extensions) is after March 13, 1998, as a
corporation joining the group on such first day. An overall foreign
loss that is part of a net operating loss or net capital loss
carryover from a separate return limitation year of a member that is
absorbed in a consolidated return year for which the due date of the
income tax return (without extensions) is after March 13, 1998,
shall be added to the appropriate.9 consolidated overall foreign
loss account in the year that it is absorbed. For consolidated
return years for which the due date of the income tax return
(without extensions) is after March 13, 1998, similar principles
apply to overall foreign losses when there has been a consolidated
return change of ownership (regardless of when the change of
ownership occurred). See also �1.1502-3T(c)(4) for an optional
effective date rule (generally making this paragraph (b)(1)(v)
applicable to a consolidated return year beginning after December
31, 1996, if the due date of the income tax return (without
extensions) for such year is on or before March 13, 1998).

(vi) Election to defer application of special effective date. A
consolidated group may elect not to apply paragraph (b)(1)(v) of
this section to consolidated return years beginning before January
1, 1998. To make this election, a consolidated group must write
"Election Pursuant to Notice 98-40" across the top of page 1 of an
original or amended tax return for each consolidated return year
subject to the election. For the first consolidated return year to
which the overall foreign loss provisions of paragraph (b)(1)(v) of
this section apply (i.e., the first year beginning on or after
January 1, 1998), such consolidated group must write A Notice 98-40
Election in Effect in Prior Years @ across the top of page 1 of the
consolidated tax return for that year. For purposes of applying
�1.1502- 9(b)(1)(ii) with respect to such year, any member with a
balance in an overall foreign loss account from a separate return
limitation year on the first day of such year shall be treated as
joining the group on such first day.

* * * * *

Robert E. Wenzel
Deputy Commissioner of Internal Revenue
Approved:
Donald C. Lubick
Assistant Secretary of the Treasury

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