Regulations Under Section 1502 of the Internal Revenue Code
of 1986; Limitations on Net Operating Loss Carryforwards &
Certain Built-in Losses & Credits Following an Ownership Change
of a Consolidated Group

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Parts 1 and 602 [TD 8824] RIN 1545-
AU32

TITLE: Regulations Under Section 1502 of the Internal Revenue Code
of 1986; Limitations on Net Operating Loss Carryforwards and Certain
Built-in Losses and Credits Following an Ownership Change of a
Consolidated Group

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains final regulations regarding the
operation of sections 382 and 383 of the Internal Revenue Code of
1986 (relating to limitations on net operating loss carryforwards
and certain built-in losses and credits following an ownership
change) with respect to consolidated groups. The regulations include
rules for determining whether a loss group or a loss subgroup has an
ownership change, for computing a consolidated section 382
limitation or subgroup section 382 limitation, and for applying
sections 382 and 383 to corporations that join or leave a group. The
rules are necessary to provide guidance to such groups on the use of
certain of their tax attributes.

DATES: Effective Dates: These regulations are effective June 25,
1999.

Applicability Dates: For dates of application and special effective
date rules, see Effective Dates under SUPPLEMENTARY INFORMATION.

FOR FURTHER INFORMATION CONTACT: Lee A. Kelley at (202) 622-7550
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information in these final regulations has been
reviewed and, pending receipt and evaluation of public comments,
approved by the Office of Management and Budget (OMB) under 44
U.S.C. 3507 and assigned control number 1545-1218.

The collections of information in this regulation are in
§§1.1502-20(g)(4), 1.1502-95(e)(8), 1.1502-95(f), and 1.1502- 96(e).
This information is required to assure that a section 382 limitation
is properly determined and applied in cases of corporations that
become or cease to be members of a consolidated group. The
collection of information in §1.1502-98(e)(8) is mandatory. The
other collections of information are required to obtain a benefit.
The likely respondents are business or other for-profit
institutions.

Comments on the collection of information should be sent to the
Office of Management and Budget, Attn: Desk Officer for the
Department Of The Treasury, Office of Information and Regulatory
Affairs, Washington, DC 20503, with copies to the Internal Revenue
Service, Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington,
DC 20224. Comments on the collection of information should be
received by August 31, 1999. Comments are specifically requested
concerning:

Whether the collection[s] of information is necessary for the proper
performance of the functions of the Internal Revenue Service,
including whether the information will have practical utility;

The accuracy of the estimated burden associated with the collection
of information (see below); How the quality, utility, and clarity of
the information to be collected may be enhanced;

How the burden of complying with the collection[s] of information
may be minimized, including through the application of automated
collection techniques or other forms of information technology; and
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of service to provide information.

Estimated total annual reporting burden: 662 hoU.S. The estimated
annual burden per respondent varies from 15 to 25 minutes, depending
on individual circumstances, with an estimated average of 20
minutes.

Estimated number of respondents: 12,054

Estimated annual frequency of responses: On occasion 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.

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

On February 4, 1991, the IRS and Treasury issued three notices of
proposed rulemaking, C0-132-87 (56 FR 4194), CO-077-90 (56 FR 4183),
and CO-078-90 (56 FR 4228), setting forth rules regarding the
application of sections 382 and 383 by consolidated groups and by
controlled groups, and regarding the use of built-in deductions and
net operating losses and capital losses, including the carryover and
carryback of separate return limitation year (SRLY) losses of
members of consolidated groU.S. A public hearing regarding the three
sets of proposed regulations was held on April 8, 1991.

On June 27, 1996, the IRS and Treasury published temporary
regulations (TD 8678, 61 FR 33335) setting forth rules regarding the
application of section 382 to affiliated groups of corporations
filing consolidated returns. These regulations were substantially
identical to the proposed regulations. A notice of proposed
rulemaking cross-referencing the temporary regulations was published
in the Federal Register on the same day (CO-026-96, 61 FR 33391) and
the proposed regulations published in 1991 were withdrawn. The IRS
and Treasury also published temporary regulations regarding the SRLY
limitation (TD 8677, 61 FR 33321), and controlled group losses (TD
8679, 61 FR 33313). Notices of proposed rulemaking cross-referencing
these temporary regulations were published on the same day
(CO-025-96, 61 FR 33395 and CO-024- 96, 61 FR 33393) and the
proposed regulations published in 1991 were withdrawn.

This Treasury decision adopts the 1996 proposed regulations
regarding the application of section 382 to affiliated groups of
corporations filing consolidated returns.

The principal changes to those proposed regulations are described
below.

As companions to this Treasury decision, the IRS and Treasury also
are issuing final regulations relating to the application of
sections 382 and 383 by members of controlled groups, and relating
to the SRLY limitation. See TD 8823 and TD 8825 published elsewhere
in this issue of the Federal Register.

Explanation of Provisions

A. Overview

1. Sections 382 and 383

Under section 382, if an ownership change occurs with respect to a
loss corporation (as defined in section 382 and the regulations
thereunder), the amount of the loss corporation's taxable income for
a post-change year that may be offset by the net operating losses of
the loss corporation arising before the ownership change is limited
by an amount known as the section 382 limitation. The section 382
limitation for a taxable year of a loss corporation after an
ownership change generally is equal to the fair market value of the
corporation's stock immediately before the ownership change
multiplied by the long-term tax exempt rate (a rate of return
published periodically in the Internal Revenue Bulletin). See
generally sections 382(b), (e), and (f). This limitation for a
taxable year may be increased by certain items, such as an unused
limitation from a prior taxable year and certain built-in gains
recognized during the taxable year. See section 382(b)(2) and (h).

In general, an ownership change involves an increase of more than 50
percentage points in stock ownership by 5-percent shareholders
during the testing period (usually the 3-year period ending on the
date on which a loss corporation must make a determination whether
it has had an ownership change). In determining whether an ownership
change has occurred, all transactions occurring during the testing
period that affect the stock ownership of any 5-percent shareholder
whose percentage of stock ownership has increased as of the close of
the testing date are taken into account. The determination of the
percentage ownership interest of any shareholder is made on the
basis of the ratio of the fair market value of the loss corporation
stock owned by the shareholder to the total fair market value of the
loss corporation's outstanding stock. Ordinarily, all stock of the
loss corporation, except certain preferred stock described in
section 1504(a)(4), is taken into account. These rules are contained
in §§1.382-2 and 1.382-2T and relate to ownership changes of
corporations without regard to whether the corporations file a
separate return or join in filing a consolidated return.

2. General Description of Final Regulations

This document contains two sets of rules. The first set of rules,
set forth in §§1.1502-91 through 1.1502-93, provide the tax
treatment for net operating losses that arise in (and net unrealized
built-in losses with respect to) years that are not separate return
limitation years with respect to a consolidated group. (A separate
return limitation year, or SRLY, generally is a taxable year of a
subsidiary in which the subsidiary was not a member of the group).
In general, these rules adopt a single entity approach to determine
ownership changes and the section 382 limitations with respect to
such losses.

These final regulations also extend the single entity approach to
loss subgroups within consolidated groups. A loss subgroup generally
consists of two or more corporations that continue to be affiliated
with each other after leaving one group and joining another where at
least one of the corporations carries over losses from the first
group to the second group.

Thus, the single entity approach under the final regulations can
apply, for example, to a consolidated group's acquisition of another
consolidated group or of a chain of subsidiaries from another group.

The second set of rules, set forth in §§1.1502-94 and 1.1502-95,
applies to corporations that join or leave a consolidated group with
respect to certain attributes (e.g., attributes other than those
arising in a consolidated return year). In general, section 382 is
applied separately with respect to those attributes because the
attributes cannot be used by other members. Section 1.1502-96
contains miscellaneous rules.

In general, §1.1502-98 provides that the rules contained in
§§1.1502-91 through 1.1502-96 also apply for purposes of section
383, with adjustments to reflect that section 383 applies to credits
and net capital losses.

B. Amendments to the Proposed Regulations

1. Definition of a Loss Subgroup, §1.1502-91(d)

Under the proposed regulations, a loss subgroup is composed of
members of one group (the former group) that become members of
another consolidated group. In the case of a net operating loss
carryover, the members of a group compose a loss subgroup if (i)
they were affiliated with each other in another group, (ii) they
bear a relationship to each other described in section 1504(a)(1)
immediately after they become members of the group (the subgroup
parent requirement), and (iii) at least one of the members carries
over a net operating loss arising in a year that is not a SRLY (and
is not treated as a SRLY under proposed §1.1502-21(c)) with respect
to the former group. In the case of a net unrealized built-in loss
(NUBIL), the members of a group compose a loss subgroup if they (i)
have been continuously affiliated with each other for the 5
consecutive year period ending immediately before they become
members of the group (the five-year affiliation requirement), (ii)
meet the subgroup parent requirement, and (iii) have, in the
aggregate, a NUBIL. A member ceases to be included in a loss
subgroup when it files a separate return, or when a member breaks
the relationship described in section 1504(a)(1) to the loss
subgroup parent, regardless of whether that member leaves the
current group or remains in the consolidated group.

Retention of the subgroup parent requirement in general Commentators
suggested that the final regulations should eliminate the subgroup
parent requirement in order to provide a single subgroup definition
for the SRLY limitation and for the section 382 limitation. Other
commentators recommended eliminating the requirement following an
ownership change of the loss subgroup.

Like a loss group, a loss subgroup has an ownership change if the
loss subgroup parent has an ownership change (the parent change
method). The parent change method, adopted for its administrative
simplicity, looks only to ownership shifts of the parent corporation
in determining whether the consolidated group (or loss subgroup) has
an ownership change. Owner shifts of minority stock of subsidiary
members are not taken into account.

Application of the parent change method to loss subgroups eliminates
the administrative burdens associated with a rule that would mandate
separate tracking of the minority stock of each subgroup member for
determining whether an ownership change of the loss subgroup has
occurred.

The IRS and the Treasury have determined that, in circumstances
where owner shifts of a loss subgroup must continue to be tracked,
the parent change method should continue to apply for determining
whether a subgroup has an ownership change.

Accordingly, in general, these final regulations retain the subgroup
parent requirement. Also, these final regulations retain the general
rule that a member ceases to be a member of the loss subgroup on the
first day that it ceases to bear a relationship described in section
1504(a)(1) to the loss subgroup parent. The final regulations,
however, provide an election to treat the subgroup parent
requirement as satisfied, and provide certain exceptions for ceasing
to be a member of a loss subgroup when a member breaks the
relationship described in section 1504(a)(1) to the loss subgroup
parent, but remains within the current consolidated group.

Election to treat subgroup parent requirement as satisfied The
subgroup parent requirement may preclude subgroup treatment in
instances where single entity principles make such treatment
conceptually appropriate. For example, brother-sister corporations
with net operating loss carryovers that are not SRLY losses with
respect to the former group are not a loss subgroup even if the same
acquirer acquires both corporations at the same time. However,
single entity principles support treating the brother-sister
corporations as a subgroup because they were affiliated with each
other in the former group and remain affiliated in the current
group.

To extend single entity treatment in such cases would require a
mechanism other than the parent change method to track owner shifts
of the loss subgroup. Some commentators suggested permitting the
parent of the current group to designate the subgroup parent. Under
this approach, such designation would be respected unless the
designation is made with a principal purpose of avoiding an
ownership change.

The IRS and the Treasury believe that the ability to designate the
subgroup parent presents opportunities for avoiding or lessening the
impact of section 382. Also, a principal purpose standard is not an
effective mechanism for preventing inappropriate designations
because the only purpose of such designation is to apply the
ownership change rules of section 382.

The IRS and Treasury recognize, however, that it is appropriate to
extend subgroup treatment to the extent that single entity
principles support such treatment, and to the extent that subgroup
treatment does not compromise the determination whether a subgroup
has an ownership change. Also, the IRS and Treasury recognize that,
in certain circumstances, taxpayers may prefer more stringent
ownership change rules if they can obtain the benefit of subgroup
treatment. Finally, the IRS and Treasury recognize that the ability
of brother-sister corporations to constitute a section 382 subgroup
may be necessary in order for section 382 subgroups to conform with
SRLY subgroups, thus permitting application of the rule that
eliminates a separate SRLY limitation where the application of SRLY
and section 382 overlap. See §§1.1502-15(g), 1.1502-21(g) and
1.1502-22(g).

Accordingly, these final regulations provide that two or more
corporations that become members of a consolidated group at the same
time and that were affiliated with each other immediately before
becoming members of the group are deemed to meet the subgroup parent
requirement immediately after they become members of the group if
the common parent of the acquiring group makes an election under
§1.1502-91(d)(4) with respect to those members. An election includes
all corporations that become members of the current group at the
same time and that were affiliated with each other immediately
before they become members of the current group. The election
applies solely for purposes of satisfying the subgroup parent
requirement, and does not apply in determining whether members meet
the other requirements for inclusion in a loss subgroup. Although
the election applies solely for purposes of §§1.1502-91 through
1.1502-96 and §1.1502- 98, the election may affect whether a SRLY
limitation overlaps with application of section 382.

If the common parent makes an election under §1.1502- 91(d)(4), each
of the members with respect to which the election is made (and that
is included in the loss subgroup) is treated as the loss subgroup
parent for purposes of determining if the loss subgroup has an
ownership change on, or after, becoming members of the current
group. If, however, a member with respect to which the election is
made has an ownership change upon (or after) ceasing to be a member
of the current group, that ownership change does not cause an
ownership change of a loss subgroup comprised of one or more of its
members that remain members of the current group.

Exceptions for ceasing to be a member of a loss subgroup when a
member breaks the section 1504(a)(1) relationship with the loss
subgroup parent, §1.1502-95(d)(1) In general, under §1.1502-95(d)(1)
(ii), these final regulations provide that a member ceases to be a
member of the loss subgroup on the first day that it ceases to bear
a relationship described in section 1504(a)(1) to the loss subgroup
parent. Continued affiliation through a loss subgroup parent is
central to the operation of the parent change method to loss
subgroU.S. Under certain circumstances, however, separate tracking
of the loss subgroup parent terminates, eliminating the need for
members to maintain a section 1504(a)(1) relationship through a loss
subgroup parent. Section 1.1502-96(a) provides, in part, that
ownership shifts of a loss subgroup cease to be separately tracked
if there is an ownership change of the loss subgroup within six
months before, on, or after becoming members of the group, or if a
period of five years elapses after becoming members of group during
which time the loss subgroup does not have an ownership change (a
fold-in event).

Also, an election under §1.1502-91(d)(4) obviates the need for a
section 1504(a)(1) relationship through a loss subgroup common
parent because each member is separately tracked as if it were the
loss subgroup parent.

In circumstances where the necessity of a section 1504(a)(1)
relationship through a loss subgroup parent is eliminated, the IRS
and the Treasury believe that a subgroup member should not cease to
be a member of the subgroup solely because it ceases to bear such a
relationship. Accordingly, these final regulations provide two
exceptions to the general rule of §1.1502-95(d)(1)(ii). The first
exception applies to the members of the loss subgroup if an election
under §1.1502- 91(d)(4) applies to them. The second exception
applies to loss subgroup members following a fold-in event.

Members excluded or included from a subgroup with a principal
purpose of avoiding a limitation, §1.1502-91(d)(5) Proposed
§1.1502-91(d)(5) provides that corporations do not compose a loss
subgroup if any one of them is formed, acquired, or availed of with
a principal purpose of avoiding the application of, or increasing
any limitation under, section 382.

This rule does not apply solely because, in connection with becoming
members of the group, the members of a group are rearranged to
satisfy the subgroup parent requirement. The final regulations
retain these provisions, and, in conformity with the anti-abuse rule
for SRLY subgroups, provide that any member excluded from a loss
subgroup, if excluded with a principal purpose of avoiding or
increasing a section 382 limitation, is treated as included in the
loss subgroup. This rule does not apply solely because a group does
not rearrange members of a group to satisfy the subgroup parent
requirement.

2. Definition of Loss Subgroup with a NUBIL, §1.1502-91(d)(2)

Commentators criticized the five-year affiliation requirement for
adding complexity to the regulations. For instance, the five-year
affiliation requirement can cause application of section 382 and
SRLY on a single entity basis with respect to members of a loss
subgroup with a net operating loss carryover that arose within the
former group (because an NOL loss subgroup does not require five
years of affiliation), but on a separate entity basis for those same
members with respect to built-in losses.

The IRS and Treasury have determined, however, that the five-year
affiliation requirement is a necessary feature of the NUBIL subgroup
rules. Just as the NOL subgroup rules apply only to loss carryovers
that arise in (or have folded into) the former group, so should the
NUBIL subgroup rules apply only to built-in losses that accrue
within (or have folded into) the former group.

Because an accurate method of determining economic accrual (e.g.,
tracing) would present significant problems for tax administration
and for compliance by taxpayers, the IRS and Treasury believe that
the five-year affiliation requirement is the best available proxy
for determining when built-in attributes arise.

Absent a five-year affiliation requirement, taxpayers could
effectively traffic in net unrealized built-in losses without being
subject to any limitation (other than one imposed under an
applicable "principal purpose" anti-abuse rule). A selling group
could acquire a new member with a NUBIG and sell both that recently-
acquired NUBIG member and the member containing the desired NUBIL to
the prospective buyer. To the extent that the NUBIG offset the NUBIL
and the corporations were structured to satisfy the requirements for
subgroup treatment, recognized built-in losses would escape any
limitation and could be freely absorbed by the acquiring group.

Furthermore, the absence of a five-year affiliation requirement
could be used to circumvent a SRLY limitation applicable to a NUBIL
if built-in losses are recognized. For instance, if a member comes
into a group with a NUBIL and without an ownership change,
recognition of that NUBIL would be subject to a SRLY limitation
during the following five years and the loss could not be freely
absorbed by the income of the other members of the group. However,
if all the members of the group were included in a NUBIL subgroup
upon being acquired by a second group two years into that five-year
period, that member's recognized built-in losses immediately
thereafter would be subject either to a SRLY or section 382
limitation computed with respect to all the members of the former
group (thus increasing the rate at which such losses can be
utilized) or, in the event that the acquired corporations have an
aggregate NUBIG, to no limitation whatsoever.

Some commentators contended that the five-year affiliation
requirement (and the time period required for a fold-in event under
§1.1502-96(a)) should be reduced to three years, based on the
duration of the testing period for an ownership change under section
382.

However, a five-year (rather than a three-year) affiliation
requirement is necessary to ensure that taxpayers cannot shorten the
five-year recognition period for the SRLY limitation, as described
above. Also, the IRS and Treasury believe that the five-year
recognition period for the SRLY limitation should be maintained
because it mirrors the statutorily-mandated five-year recognition
period of section 382(h)(7). In general, Treasury and the IRS
believe that it is important to conform the application of section
382 and the SRLY rules where possible, particularly in the light of
the rule eliminating application of SRLY where its application
overlaps with that of section 382.

Moreover, the five-year affiliation requirement is consistent with
Congress' indication in section 384(a) of the point at which it is
appropriate for built-in attributes of a member to be treated as
attributes of the group. Under certain circumstances, section 384(a)
prevents the recognized built-in gain of one corporation from
offsetting preacquisition losses of another corporation, if such
gain is recognized within a five-year period following the
acquisition date. Similarly, section 384(b) provides that section
384(a) does not apply to prevent the recognized built-in gain of one
corporation from offsetting the preacquisition losses of another
corporation if the gain corporation and the loss corporation were
members of the same controlled group (as defined in section 384(b)
(2)) for the five-year period ending on the acquisition date.

For these reasons, the final regulations do not reduce the duration
of the affiliation requirement from five years to three years.

Commentators requested clarification that an acquiring group takes
into account application of the fold-in rules of §1.1502-96(a) in
the former group in determining which members are included in a loss
subgroup. A new example under §1.1502- 96(a)(3), and a cross-
reference in a new §1.1502-91(g)(3) to the fold-in rules, clarifies
this treatment. Thus, a corporation whose NUBIL folded in to a
former group is deemed to have a five-year affiliation with the
common parent of that group (and is deemed to have affiliation
histories with other group members).

A special rule provides that the corporation is not deemed to have
been previously affiliated with another corporation that joined the
former group at the same time, but was not taken into account in
determining a NUBIL limitation, even if in fact the two corporations
were previously affiliated.

3. Members Included--Determination Whether a Consolidated Group

Has a NUBIL, §1.1502-91(g)(2)(ii) Proposed §1.1502-91(g)(2)(i)
provides, in part, that the members included in the determination
whether a consolidated group has a NUBIG or NUBIL are all members of
the group on the day the determination is made, other than a new
loss member with a NUBIL, and members included in a NUBIL subgroup.

The IRS and Treasury have determined that the reasons for applying a
five-year affiliation requirement to subgroups are equally relevant
to groups. Accordingly, these final regulations provide that the
members included in the determination whether a consolidated group
has a NUBIL are the common parent and all other members that have
been affiliated with the common parent for the five consecutive year
period ending on the day that the determination is made.

In certain cases, a member (or loss subgroup) can join a
consolidated group with a NUBIG, but have a NUBIL on the date the
consolidated group determines whether it has a NUBIL. The IRS and
Treasury have determined that, in such cases, it is appropriate for
the built-in attribute of the member to be included in the group's
determination because it is clear that such NUBIL arose when it was
a group member. Accordingly, the final regulations include in the
determination whether a group has a NUBIL any member that has a
NUBIL on the date the determination is made, and that is neither a
new loss member with a NUBIL nor a member of a NUBIL loss subgroup.
The final regulations also include members in the group's
determination whether the group has a NUBIL if such member(s) joined
the consolidated group with a NUBIL, and, in the aggregate, have a
NUBIG on the day that such determination is made.

4. Members Included--Determination Whether a Consolidated Group

(or Loss Subgroup) with a Net Operating Loss Has a NUBIG,
§1.1502-91(g)(2)(i) Proposed §1.1502-93(c) provides that if a loss
group (or loss subgroup) has a NUBIG, any recognized built-in gain
of the loss group (or loss subgroup) is taken into account under
section 382(h) in determining the consolidated section 382
limitation (or subgroup section 382 limitation)(emphasis added).

Commentators suggested that this provision, considered together with
the five-year affiliation requirement, makes it unclear whether an
NOL loss subgroup with members that do not satisfy the five-year
affiliation requirement can use a NUBIG, if recognized, to increase
the loss subgroup's section 382 limitation.

The IRS and Treasury have determined that the concerns forming the
basis of the five-year affiliation requirement for determining
whether a loss subgroup has a NUBIL do not extend to the
determination whether a net operating loss carryover group (or loss
subgroup) has a NUBIG. For example, unlike a NUBIL that can be
eliminated by a NUBIG without an immediate tax cost, recognized
built-in gains exact such a cost and, therefore, do not present the
same planning opportunities. Accordingly, these final regulations
provide that the members included in the determination whether an
NOL loss group (or loss subgroup) has a NUBIG are all members of the
group (or loss subgroup) on the day that the determination is made.

Section 1.1502-91(g)(2)(v) provides, in part, that in determining
whether an NOL loss group has a NUBIG which, if recognized,
increases the consolidated section 382 limitation, the group
includes all of its members on the day the determination is made.
However, for purposes of determining whether a group has a net
unrealized built-in loss, not all members of the consolidated group
may be included. Thus, a consolidated group may have recognized
built-in gains that increase the amount of consolidated taxable
income that may be offset by its pre-change net operating loss
carryovers that did not arise (and are not treated as arising) in a
SRLY, and also may have recognized built-in losses the absorption of
which is limited. Similar results may obtain for loss subgroups. In
such cases, §1.1502-93(c)(2) prohibits the use of recognized built-
in gains to increase the amount of consolidated taxable income that
can be offset by recognized built-in losses.

5. Recognized Built-in Gain or Loss on the Disposition of an
Intercompany Obligation of a Member, §1.1502-91(h)(2) Proposed
§1.1502-91(h)(2) provides that gain or loss recognized by a member
on the disposition of stock of another member or of an intercompany
obligation is treated as recognized built-in gain or loss under
section 382(h)(2)(unless disallowed under §1.1502-20 or otherwise),
even though gain or loss on such stock or obligation is not included
in the determination of the group's NUBIG or NUBIL immediately
before the ownership change.

The IRS and Treasury have determined that such treatment may lead to
inappropriate results. For instance, if a bad debt deduction is
treated as a recognized built-in loss, application of a section 382
limitation to that loss may prevent the proper offset of
cancellation of indebtedness income against the bad debt deduction.
Accordingly, §1.1502-91(h)(2) of the final regulations treats gain
or loss recognized on the disposition of an intercompany obligation
as recognized built-in gain or loss only to the extent that the
transaction gives rise to aggregate income or loss within the
consolidated group.

6. Ownership Change Determination--The Parent Change Method,
§1.1502-92

Proposed §1.1502-92 provides rules for determining an ownership
change of a loss group (or a loss subgroup). A loss group (or loss
subgroup) has an ownership change only if the common parent has an
ownership change under the parent change method. Out of concern that
taxpayers could exploit the parent change method's failure to
account for minority shifts of stock, the proposed regulations
adopted a supplemental change method that does take into account
minority shifts of stock under certain circumstances.

Under the proposed regulations, the supplemental method applies if a
person who is a 5-percent shareholder of the common parent
(including any person acting pursuant to a plan or arrangement with
such 5-percent shareholder) increases its percentage ownership both
in the common parent and in any subsidiary of the group within the
same testing period. In that event, the loss group (or loss
subgroup) must also determine whether it had an ownership change
under the rules for the parent change method by treating the common
parent as though it had issued to the person who acquires (or is
deemed to acquire) the subsidiary stock an amount of its own stock
(by value) that equals the value of the subsidiary stock represented
by the percentage increase in that person's ownership of the
subsidiary (determined on a separate entity basis).

Section 1.1502-92(c), Example 2 of the proposed regulations
illustrates application of the supplemental change method. In
Example 2, A owns all the stock of L, a loss group parent, and L
owns all of the stock of L1. As part of a plan, A sells 49 percent
of the L stock to B on October 7, Year 2, and L1 issues new stock
representing a 20 percent ownership interest in L1 to the public on
November 6, Year 2. The example concludes that "because the issuance
of L1 stock to the public occurs in connection with B's acquisition
of L stock pursuant to a plan," the supplemental change method
applies to the public offering of L1 stock.

Commentators suggest that the "plan or arrangement" language sweeps
too broadly, and that only plans to avoid section 382 should be
subject to this rule. Commentators also contend that Example 2 is
beyond the scope of the operative rule because the facts do not
demonstrate a plan or arrangement with a 5- percent shareholder.

The IRS and Treasury believe that it is appropriate to apply the
supplemental change method to certain acquisitions of a loss group
in which the plan is not between the 5-percent shareholder of the
loss group parent and another person to increase their interests in
the loss group. For example, if an individual buys 50 percent or
less of the stock of a loss group parent, and as part of the same
plan, causes a public offering out of a subsidiary, the supplemental
change method should apply to that offering. (Conversely, the
supplemental change method should not apply unless the 5-percent
shareholder's increase in the stock of parent or subsidiary is
related to the increase by another person because those increases
are pursuant to the same plan.)

Accordingly, these final regulations provide that a 5-percent
shareholder of the common parent (or loss subgroup parent) is
treated as increasing its ownership interest in the stock of a
subsidiary to the extent, if any, that the percentage ownership
interest of another person or persons in the stock of the subsidiary
is increased pursuant to a plan or arrangement under which the 5-
percent shareholder increases its percentage ownership interest in
the common parent (or loss subgroup parent).

To alleviate concerns that the supplemental change method is overly
broad, the final regulations limit the scope of the supplemental
change method through application of the rules of §1.382-2T(k). The
final regulations provide that the supplemental change method will
apply if the common parent (or loss subgroup parent) has actual
knowledge of the increase in the 5-percent shareholder's ownership
interest in the stock of the subsidiary (or has actual knowledge of
the plan or arrangement) before the date that the group's income tax
return is filed for the taxable year that includes the date of that
increase or, if, at any time during the testing period, the 5-
percent shareholder of the common parent is also a 5-percent
shareholder of the subsidiary (determined without regard to a deemed
acquisition of subsidiary stock under the plan or arrangement rule)
whose percentage increase in the ownership of the stock of the
subsidiary would be taken into account in determining if the
subsidiary has an ownership change. For purposes of determining the
5-percent shareholders of the subsidiary, the principles of
§1.382-2T(k), including the duty to inquire, apply to the common
parent (or loss subgroup parent).

Several additional changes to the supplemental change method were
made in response to comments. Section 1.1502- 92(c)(4)(iii)
clarifies that stock treated as issued under the supplemental change
method is not treated as issued in testing periods that do not
include the testing date on which the parent stock is deemed to be
issued. Section 1.1502-92(c)(4)(ii) provides that stock is not
treated as issued if a deemed issuance of parent stock would not
cause the loss group (or loss subgroup) to have an ownership change
before the day on which the subsidiary leaves the loss group (or
loss subgroup).

To avoid retroactive changes in ownership, §1.1502- 92(c)(4)(v)
provides that if the supplemental change method applies to an
acquisition of subsidiary stock before the first date that the 5-
percent shareholder increases its percentage ownership interest in
the stock of the common parent (or loss subgroup parent), then the
deemed issuance of stock is treated as occurring on the first such
date. However, the value of the subsidiary stock is the value of
such stock on the date it was acquired. In addition, §1.1502-92(c)
(4)(vi) provides that if two or more 5-percent shareholders are
treated as increasing their percentage ownership interests pursuant
to a single plan or arrangement described above, appropriate
adjustments must be made so that the amount of stock treated as
issued is not taken into account more than one time.

Commentators also requested that the supplemental change method
apply only if the acquisitions of parent stock and subsidiary stock
are with a principal purpose of avoiding or lessening the impact of
section 382. The IRS and Treasury believe that if the same 5-percent
shareholder increases in the stock of both a subsidiary and the
common parent within the same testing period, the supplemental
change method should apply without further evidence of an avoidance
purpose. Similarly, a plan or arrangement under which a 5-percent
shareholder and another person both increase their interests in the
loss group is sufficient proof of an avoidance purpose that the
supplemental change method properly applies without further inquiry.

7. Consolidated Section 382 Limitation, §1.1502-93 Proposed
§1.1502-93 provides rules for computing the consolidated section 382
limitation following an ownership change of a loss group. The value
of the loss group is the value, immediately before the ownership
change, of the stock (including stock described in section 1504(a)
(4)) of each member of the loss group, other than stock that is
owned directly or indirectly by a member. Section 1.1502-93(b)(2)
provides that this value is adjusted under any rule in section 382
(such as section 382(l)(1), relating to certain capital
contributions) requiring an adjustment to value for purposes of
computing the section 382 limitation. The section 382 limitation, as
so determined, is further adjusted as required by section 382 and
the regulations thereunder (such as section 382(m)(2), relating to a
short taxable year). Similar rules apply in determining the section
382 limitation for a loss subgroup.

In response to comments, the final regulations make several
clarifications with respect to circumstances that require an
adjustment to the value of a loss group or loss subgroup.

Section 1.1502-93(b)(2)(i) provides that, for purposes of section
382(e)(2), redemptions and corporate contractions that do not effect
a transfer of value outside of the loss group (or loss subgroup) are
disregarded. For purposes of section 382(l)(1), capital
contributions between members of the loss group (or loss subgroup)
(or a contribution of stock to a member made solely to satisfy the
loss subgroup parent requirement of §§1.1502- 91(d)(1)(ii) or
1.1502-91(d)(2)(ii)), are not taken into account.

Also, the substantial nonbusiness asset test of section 382(l)(4) is
applied on a group (or subgroup) basis, and is not applied
separately to its members.

Section 1.1502-93(b)(2)(ii) provides rules that apply to prevent
duplication of value of the group (or loss subgroup) and to prevent
duplication of the section 382 limitation. This section provides
that appropriate adjustments must be made to the extent necessary to
prevent any duplication of the value of the stock of a member, even
though corporations that do not file consolidated returns may not be
required to make such an adjustment. In making these adjustments,
the group (or loss subgroup) may apply the principles of §1.382-8
(relating to controlled groups of corporations) in determining the
value of a loss group (or loss subgroup) even if that section would
not apply if separate returns were filed. Also, the principles of
§1.382-5(d)(relating to successive ownership changes and absorption
of a section 382 limitation) may apply to adjust the consolidated
section 382 limitation (or subgroup section 382 limitation) of a
loss group (or loss subgroup) to avoid a duplication of value if
there are simultaneous (rather than successive) ownership changes.

One commentator suggested that contributions of assets by the
selling group to a departing member or loss subgroup generally
should not be subject to section 382(l)(1). The IRS and Treasury
have determined that, unlike transfers of stock or assets that do
not effect a transfer of value into a loss subgroup, capital
contributions that constitute a transfer of value into a loss group
or to a departing member should continue to be subject to section
382(l)(1).

A new §1.1502-93(c)(2) provides that appropriate adjustments must be
made so that any recognized built-in gain of a member that increases
more than one section 382 limitation (whether consolidated,
subgroup, or separate) does not effect a duplication in the amount
of consolidated taxable income that can be offset by pre-change net
operating losses. In addition, recognized built-in gains may not
increase the amount of consolidated taxable income that can be
offset by recognized built-in losses.

8. Ceasing to Be a Member of a Consolidated Group (or Loss
Subgroup), §1.1502-95

Elective apportionment of NUBIG

In general, the common parent of a consolidated group may elect to
apportion all or part of each element (the value element and the
adjustment element) of a consolidated section 382 limitation to a
former member or loss subgroup. The proposed regulations do not
provide that the common parent may elect to apportion all or part of
a loss group's NUBIG.

Under section 382(h)(1)(A), if a consolidated group has a NUBIG
immediately before an ownership change, the section 382 limitation
for any recognition period taxable year is increased by the
recognized built-in gain for such taxable year. This increase cannot
exceed the NUBIG, reduced by recognized built-in gains for prior
years ending in the recognition period.

Commentators suggest that, like the value element and the adjustment
element of the consolidated section 382 limitation, the common
parent should be able to apportion any part or all of the group's
NUBIG to a departing member (or loss subgroup). The final
regulations adopt this recommendation.

In general, §1.1502-95(c)(2)(ii) provides that the amount of the
loss group's NUBIG that may be apportioned to one or more former
members that cease to be members during the same consolidated return
year cannot exceed the loss group's excess, immediately after the
close of that year, of net unrealized built-in gain over recognized
built-in gain, determined under section 382(h)(1)(A)(ii) (relating
to a limitation on recognized built-in gain). In general, NUBIG
apportioned to a former member reduces the amount of NUBIG that the
group can avail itself of in subsequent taxable years.

For purposes of determining the extent to which the former member's
section 382 limitation can be increased by recognized built-in
gains, the amount of NUBIG apportioned is treated as if it were an
amount determined under section 382(h) with respect to the former
member. The former member's five-year recognition period begins on
the group's (or loss subgroup's) change date.

Default apportionment of zero section 382 limitation and NUBIG when
a member ceases to be a member of a group (or loss subgroup),
§1.1502-95(c)(2)(ii)

Section 1.1502-95(c)(1) provides that the common parent may elect to
apportion all or any part of a consolidated section 382 limitation
to a former member (or a loss subgroup) when the member or loss
subgroup leaves the group. If the common parent does not make an
apportionment of the applicable section 382 limitation(s) or of a
NUBIG that the member recognizes during the recognition period, the
former member or loss subgroup has a consolidated section 382
limitation of zero with respect to pre-change attributes (the zero
default rule).

Commentators suggested that the zero default rule may be a trap for
the unwary. For instance, under the proposed regulations, a subgroup
member that ceases to bear a section 1504(a)(1) to the subgroup
parent is subject to the zero default rule, even if that member
remains within the current consolidated group.

The IRS and Treasury recognize that any default rule will benefit
some taxpayers while operating to the detriment of others. For
example, a default apportionment of a section 382 limitation or
NUBIG based on the departing member's contribution to the group's
net operating loss carryover could cause some apportioned limitation
to go unused if that member becomes subject to a new section 382
limitation upon departing the group.

By contrast, a rule providing that the default limitation is capped
by the amount of any subsequent section 382 limitation, would be
difficult to administer. Because the consequences of applying any
default rule depend on the particular facts of a transaction,
including the relative income generation of the departing and
remaining members, the IRS and Treasury believe that the simplicity
of the zero default rule makes the rule preferable to other
alternatives.

Also, the IRS and the Treasury believe that the new exceptions to
ceasing to be a member of a loss subgroup substantially reduce the
likelihood that the zero default rule will yield unexpected results.
For example, an acquisition of a loss subgroup typically will cause
an ownership change of the loss subgroup. Following that ownership
change, a member that remains within the current group now can break
the section 1504(a)(1) relationship to the loss subgroup parent
without ceasing to be a member of the loss subgroup. Accordingly,
these final regulations retain the zero default rule when a member
ceases to be a member of a group (or loss subgroup). The zero
default rule also applies to a NUBIG.

Mandatory apportionment of a group's NUBIL to a departing member,
§1.1502-95(e)

In general, a group has a NUBIL if the adjusted bases of the assets
of members included in such determination under §1.1502- 91(g)
exceed their fair market value immediately before the change date.
Similar rules apply to loss subgroups. Subject to the limitations of
section 382(h)(2)(B), NUBILs recognized within the five year period
beginning on the change date are subject to the consolidated section
382 limitation. The proposed regulations do not provide rules for
apportioning a group's NUBIL to a former member (or loss subgroup).
The IRS and Treasury believe that a mandatory apportionment of the
group's NUBIL is necessary to ensure that the group's NUBIL, if
recognized by the former member (or loss subgroup) during the
recognition period, remains subject to the consolidated section 382
limitation. One commentator suggests that a former member (or loss
group) should be apportioned a group's NUBIL only if and when a
former member that had a separately computed NUBIL that contributed
to the group's NUBIL departs the group, and the contributed built-in
loss has not fully been recognized. Adjustments would reflect
intragroup transfers of assets occurring between the change date and
the date that the former member departs.

The IRS and Treasury believe that the suggested approach
overemphasizes the location of assets with a NUBIG. For example, if
a former member has a NUBIG determined on a separate entity basis, a
recognized built-in loss of that member will not be limited, even if
the former member is the first corporation to dispose of a built-in
loss asset. The IRS and Treasury believe that subjecting the sale of
built-in loss assets to the consolidated section 382 limitation,
regardless of the location of built-in gain assets, more accurately
reflects the NUBIL as a group attribute. Similarly, consistent with
treatment of the NUBIL as a group attribute, the approach permits
built-in gain to be sheltered by built-in loss only after the excess
of built-in losses over built-in gains has been recognized.
Accordingly, these final regulations adopt a model that apportions
NUBIL based on the gross amount of built-in loss that the departing
member contributed to the determination of the group's NUBIL.

In general, §1.1502-95(f) provides that a departing member is
allocated a portion of the group's (or loss subgroup's) NUBIL if,
immediately after the close of the consolidated return year in which
the departing member ceases to be a member, the amount of the loss
group's (or loss subgroup's) excess of net unrealized built-in loss
over recognized built-in loss (the remaining NUBIL balance) is
greater than zero. In general, NUBIL apportioned to former members
in prior taxable years is treated as recognized built-in loss in
those years.

The amount of NUBIL allocated to a departing member is equal to the
remaining NUBIL balance multiplied by a fraction. The numerator of
the fraction is the amount of the built-in loss, taken into account
on the change date, in the assets held by the departing member
immediately after the member ceases to be a member of the loss group
(or loss subgroup). The denominator of the fraction is the sum of
the numerator, plus the amount of the built-in loss, taken into
account on the change date, in the assets held by the group
immediately after the close of the taxable year in which the
departing member ceases to be a member.

(Fluctuations in value of the assets between the change date and the
date that the member ceases to be a member of the group (or loss
subgroup), or the close of the taxable year in which the member
ceases to be a member of the loss group, are disregarded.) In
general, adjustments are made for gain or loss that has been
recognized during the recognition period, and for assets that are
transferred basis property. The amount of the NUBIL allocated to a
former member generally is treated as previously recognized built-in
loss for purposes of applying the limitation of section 382(h)(1)(B)
(ii) to a loss group's taxable years beginning after the year in
which the former member ceases to be a member.

For purposes of determining the amount of the former member's
recognized built-in losses in any taxable year beginning after the
former member ceases to be a member, the amount of the loss group's
(or loss subgroup's) net unrealized built-in loss that is
apportioned to the former member is treated as if it were an amount
of net unrealized built-in loss determined under section 382(h)(1)
(B)(i) with respect to such member, and that amount is not reduced
under section 382(h)(1)(B)(ii) by the loss group's (or loss
subgroup's) recognized built-in losses.

Subgroup principles apply to the allocation of a NUBIL. For example,
if two or more members leave a loss group, and are members of a
consolidated group, any allocation of the loss group's NUBIL is made
on a subgroup basis. In general, the common parent may apportion all
or any part of a consolidated section 382 limitation (or subgroup
section 382 limitation) under §1.1502-95(c) to a former member to
which the group's NUBIL is allocated (or to a loss subgroup that
includes that member).

9. Miscellaneous Rules, §1.1502-96

Fold-in rules do not apply to NUBIGs, §1.1502-96(a) Proposed
§1.1502-96(a)(2) provides in part that, following a fold-in event
described in §1.1502-96(a)(1), the member's separately computed
NUBIG or NUBIL is included in the determination whether the group
has a NUBIG or NUBIL.

The IRS and Treasury believe that the "fold-in" of a member's NUBIG
can lead to inappropriate results. For example, a consolidated group
that acquires a corporation with a small net operating loss
carryover and a large NUBIG can immediately offset the group's NUBIL
with the NUBIG, if the member is acquired with an ownership change.
Accordingly, the fold-in rules of §1.1502- 96(a) do not apply to
include a member's separately computed NUBIG in determining whether
a group has a NUBIL. A member's NUBIG is only included in such
determination if the member is included under §1.1502-91(g)(2).

Net operating loss carryovers reattributed under §1.1502-20(g)
Section 1.1502-20 of the regulations disallows a deduction for
certain losses on the disposition of stock of a subsidiary.

In general, under §1.1502-20(g), the common parent can reattribute
to itself net operating loss carryovers or capital loss carryovers
attributable to the subsidiary in an amount not to exceed the
disallowed loss. Section 1.1502-20(g) further provides that the
common parent succeeds to the reattributed losses as if the losses
were succeeded to in a transaction described in section 381(a).
Also, any owner shift of the subsidiary (including any deemed owner
shift resulting from section 382(g)(4)(D) or 382(l)(3)) in
connection with the disposition is not taken into account under
section 382 with respect to the reattributed losses. (§1.1502-20(g)
(1)). The preamble to TD 8364 (56 FR 47379, September 19, 1991)
(which added §1.1502-20), states that clarification regarding the
application of section 382 to reattributed losses would be provided
in connection with finalizing §§1.1502-91 through 1.1502-99. The
preamble states that, for example, it is anticipated that proposed
§1.1502-95 would be modified to permit the common parent to elect to
retain all or part of a section 382 limitation that applies to
reattributed SRLY losses.

A new §1.1502-96(d) provides rules relating to reattributed losses.
This section generally provides that §§1.1502-91 through 1.1502-96
and §1.1502-98 apply to reattributed losses consistent with the
provision of §1.1502-20(g) that treats the common parent as
succeeding to the losses in a transaction to which section 381(a)
applies. For example, if the reattributed loss is a pre-change
attribute subject to a section 382 limitation, it remains subject to
that limitation following the reattribution. Section 1.1502-96(d)(4)
provides rules that allow the common parent to elect to apportion to
itself all or part of any separate section 382 limitation or
subgroup section 382 limitation to which the reattributed loss is
subject. The apportionment is made under the principles of the rules
of §1.1502-95(c), relating to the apportionment of a consolidated
section 382 limitation to a member that leaves the group. In certain
cases, the section 382 limitation applicable to the reattributed
loss is zero unless an apportionment of such limitation is made to
the common parent.

The election to apportion a section 382 limitation is made as part
of the election to reapportion the loss. See §1.1502- 20(g)(4), as
amended by this document.

As previously set forth in §1.1502-20(g), §1.1502-96(d) adopts the
general rule that any owner shift of the subsidiary (including any
deemed owner shift resulting from section 382(g)(4)(D) or 382(l)(3))
in connection with the disposition of the subsidiary's stock) is not
taken into account under section 382 with respect to the
reattributed losses. The final regulations, however, modify the
general rule to provide that any owner shift with respect to the
successor corporation that is treated as continuing in existence
under §1.382-2(a)(1)(ii) must be taken into account for such purpose
if such owner shift is effected by the reattribution and any owner
shift of the stock of the subsidiary not held directly or indirectly
by the common parent would have been taken into account if such
shift had occurred immediately before the reattribution. Such an
owner shift may occur if the subsidiary has minority shareholders
that, under §1.382-2(a)(1)(ii), are treated as decreasing their
ownership in the reattributed loss, while the shareholders of the
common parent increase their ownership interests in that loss.

The final regulations provide that, in general, the value of the
stock of the common parent is used to establish a section 382
limitation for the reattributed loss with respect to an ownership
change upon, or after, the reattribution. These rules coordinate the
determination of the value of that stock with the capital
contribution rules of section 382(l)(1), and also require
appropriate adjustments so that value is not improperly omitted or
duplicated as a result of the reattribution.

Effective Dates

Sections 1.1502-91 through 1.1502-96 and 1.1502-98

Except as set forth below, §§1.1502-91 through 1.1502-96 and
1.1502-98 apply to testing dates that occur on or after June 25,
1999. Sections 1.1502-94 through 1.1502-96 also apply on any date on
or after June 25, 1999 on which a corporation becomes a member of a
group or on which a corporation ceases to be a member of a loss
group (or a loss subgroup).

A transition rule for net unrealized built-in loss provides that a
consolidated group may apply §1.1502-91A(g) for the period ending on
the day before June 25, 1999 to determine the earliest date that its
testing period begins (treating the day before June 25, 1999 as the
end of a taxable year.) The election under §1.1502-91(d)(4) to treat
the subgroup parent requirement as satisfied is effective for
corporations that become members of a consolidated group in taxable
years for which the due date of the income tax return (without
extensions) is after June 25, 1999. Section 1.1502-95(d)(2)(ii)
(relating to exceptions to ceasing to be a member of loss subgroup)
applies to corporations that cease to bear a section 1504(a)(1)
relationship to a loss subgroup parent in taxable years for which
the due date of the income tax return (without extensions) is after
June 25, 1999.

The third sentence of §1.1502-91(d)(5)(relating to members excluded
from a loss subgroup) applies to corporations that become members of
a consolidated group on or after June 25, 1999.

In the case of corporations that cease to be members of a loss group
(or loss subgroup) before June 25, 1999, in a taxable year for which
the due date of the income tax return (without extensions) is after
June 25, 1999, §§1.1502-95(a), (b), (c) and (f) apply to those
corporations if the common parent makes the election described in
the second sentence of (c)(1) of that section in the time and manner
prescribed in paragraph (f) of that section.

Section 1.1502-96(d) applies to reattributions of net operating
losses or net capital losses in taxable years for which the due date
of the income tax return (without extensions) is after June 25,
1999; except that the election under §1.1502- 96(d)(5) (relating to
an election to reattribute section 382 limitation) can be made with
any election under §1.1502-20(g)(4) to reattribute to the common
parent a net operating loss or net capital loss that is timely filed
on or after June 25, 1999.

Sections 1.1502-91A through 1.1502-96A and 1.1502-98A apply to any
testing date on or after January 1, 1997, and before June 25, 1999.
Sections 1.1502-94A through 1.1502-96A also apply on any date on or
after January 1, 1997, and before June 25, 1999, on which a
corporation becomes a member of a group or on which a corporation
ceases to be a member of a loss group (or a loss subgroup). For
periods before January 1, 1997, the transition rules in
§1.1502-99A(c) continue to apply.

The transition rules in §1.1502-99A for periods ending before
January 1, 1997 also are clarified to provide that a member that
ceases to be a member of a group does not have a zero section 382
limitation with respect to pre-change net operating losses allocated
to that member.

Need For Immediate Guidance

Because the temporary regulations are not applicable for taxable
years ending after June 26, 1999, it is necessary to implement these
final regulations without delay to ensure continuity of treatment of
certain attributes and to ensure that there is no period within
which the treatment of such attributes is inconsistent with the
temporary regulations and these final regulations. See section
7805(e)(2). Accordingly, it is impracticable and contrary to the
public interest to issue this Treasury decision subject to the
effective date limitation of section 553(d) of title 5 of the United
States Code (if applicable).

SPECIAL ANALYSIS

It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. 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 net operating losses or other attributes that are subject to
section 382. 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 net operating losses or other
attributes subject to section 382. Moreover, many of these
corporations will not have ownership changes. Therefore, a
Regulatory Flexibility Analysis under the Regulatory Flexibility Act
(5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of
the Internal Revenue Code, the notice of proposed rulemaking
preceding these regulations was sent to the Small Business
Administration for comment on its impact on small business.

DRAFTING INFORMATION

The principal author of the final regulations is Lee A.

Kelley of the Office of Assistant Chief Counsel (Corporate), IRS.

Other personnel from the IRS and Treasury participated in their
development.

Adoption of Amendments to the Regulations Accordingly, 26 CFR parts
1 and 602 are amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by
removing the entries for sections 1.1502-91T, 1.1502-92T,
1.1502-93T, 1.1502-94T, 1.1502-95T, 1.1502-96T, 1.1502-98T, and
1.1502-99T, and adding entries in numerical order to read in part as
follows:

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

Section 1.1502-91 also issued under 26 U.S.C. 382(m) and 26 U.S.C.
1502.

Section 1.1502-92 also issued under 26 U.S.C. 382(m) and 26 U.S.C.
1502.

Section 1.1502-93 also issued under 26 U.S.C. 382(m) and 26 U.S.C.
1502.

Section 1.1502-94 also issued under 26 U.S.C. 382(m) and 26 U.S.C.
1502.

Section 1.1502-95 also issued under 26 U.S.C. 382(m) and 26 U.S.C.
1502.

Section 1.1502-96 also issued under 26 U.S.C. 382(m) and 26 U.S.C.
1502.

Section 1.1502-98 also issued under 26 U.S.C. 382(m) and 26 U.S.C.
1502.

Section 1.1502-99 also issued under 26 U.S.C. 382(m) and 26 U.S.C.
1502. * * *

Section 1.1502-91A also issued under 26 U.S.C. 382(m) and 26 U.S.C.
1502.

Section 1.1502-92A also issued under 26 U.S.C. 382(m) and 26 U.S.C.
1502.

Section 1.1502-93A also issued under 26 U.S.C. 382(m) and 26 U.S.C.
1502.

Section 1.1502-94A also issued under 26 U.S.C. 382(m) and 26 U.S.C.
1502.

Section 1.1502-95A also issued under 26 U.S.C. 382(m) and 26 U.S.C.
1502.

Section 1.1502-96A also issued under 26 U.S.C. 382(m) and 26 U.S.C.
1502.

Section 1.1502-98A also issued under 26 U.S.C. 382(m) and 26 U.S.C.
1502.

Section 1.1502-99A also issued under 26 U.S.C. 382(m) and 26 U.S.C.
1502. * * *

Par. 2. In the list below, for each section indicated in the left
column, remove the wording indicated in the middle column, and add
the wording indicated in the right column.

Affected Section Remove Add

1.1502-91T(a)(1), first sentence §§ 1.1502-92T and 1.1502-93T §§
1.1502-92A and 1.1502-93A

1.1502-91T(a)(1), third sentence § 1.1502-92T § 1.1502-92A

1.1502-91T(a)(1), third sentence § 1.1502-93T § 1.1502-93A

1.1502-91T(a)(3) §§ 1.1502-94T and 1.1502-95T §§ 1.1502-94A and
1.1502-95A

1.1502-91T(b) introductory text §§ 1.1502-92T through 1.1502-99T §§
1.1502-92A through 1.1502-99A

1.1502-91T(b)(1) §§ 1.1502-92T through 1.1502-99T §§ 1.1502-92A
through 1.1502-99A

1.1502-91T(c)(2), second sentence § 1.1502-96T(a) § 1.1502-96A(a)

1.1502-91T(c)(3), Example(b), § 1.1502-94T § 1.1502-94A second
sentence

1.1502-91T(d)(4), second sentence § 1.1502-94T § 1.1502-94A

1.1502-91T(d)(5), first sentence § 1.1502-95T(d) § 1.1502-95A(d)

1.1502-91T(d)(5), second sentence § 1.1502-96T(a) § 1.1502-96A(a)

1.1502-91T(e)(2), Example(b), § 1.1502-93T § 1.1502-93A third
sentence

1.1502-91T(f)(2), Example(b)(2), § 1.1502-96T(a) § 1.1502-96A(a)
first sentence

1.1502-91T(f)(2), Example(b)(2), § 1.1502-92T(a)(2) § 1.1502-92A(a)
(2) third sentence

1.1502-91T(f)(2), Example(b)(2), § 1.1502-93T § 1.1502-93A fourth
sentence

1.1502-91T(f)(2), Example(c), § 1.1502-96T(c) § 1.1502-96A(c) second
sentence

1.1502-91T(g)(1), last sentence §1.1502-94T(c) § 1.1502-94A(c)

1.1502-91T(g)(1), last sentence § 1.1502-96T(a) § 1.1502-96A(a)

1.1502-91T(g)(2)(i)(A) § 1.1502-94T(a)(1)(ii) § 1.1502-94A(a)(1)(ii)

1.1502-91T(g)(2)(i)(B) § 1.1502-91T(d)(2) § 1.1502-91A(d)(2)

1.1502-91T(j), first sentence §§ 1.1502-92T through 1.1502-99T §§
1.1502-92A through 1.1502-99A

1.1502-92T(a), second sentence § 1.1502-94T § 1.1502-94A

1.1502-92T(a), second sentence §1.1502-96T(b) § 1.1502-96A(b)

1.1502-92T(b)(1)(i)(A) § 1.1502-91T(c) § 1.1502-91A(c)

1.1502-92T(b)(1)(i)(B) § 1.1502-91T(c) § 1.1502-91A(c)

1.1502-92T(b)(1)(ii), § 1.1502-95T(b) § 1.1502-95A(b) second
sentence

1.1502-92T(b)(1)(ii)(A) § 1.1502-91T(d) § 1.1502-91A(d)

1.1502-92T(b)(1)(ii)(C) § 1.1502-91T(d) § 1.1502-91A(d)

1.1502-92T(b)(2) Example 1(a), § 1.1502-91T(c)(1) § 1.1502-91A(c)(1)
sixth sentence

1.1502-92T(b)(2) Example 3(b), § 1.1502-91T(d)(1) § 1.1502-91A(d)(1)
first sentence

1.1502-92T(b)(2) Example 4(b), § 1.1502-91T(d)(1) § 1.1502-91A(d)(1)
first sentence

1.1502-92T(b)(3)(iii) Example 2(d), § 1.1502-94T § 1.1502-94A fourth
sentence

1.1502-92T(b)(3)(iii) Example 3(a), § 1.1502-91T(d) § 1.1502-91A(d)
seventh sentence

1.1502-92T(b)(4), first sentence § 1.1502-96T(a) § 1.1502-96A(a)

1.1502-92T(b)(4), first sentence § 1.1502-96T(a)(2) § 1.1502-96A(a)
(2)

1.1502-92T(b)(4), first sentence § 1.1502-96T(b) § 1.1502-96A(b)

1.1502-92T(b)(4), second sentence § 1.1502-96T(a) applies,
§1.1502-96A(a) see § 1.1502-96T(c) applies, see § 1.1502-96A(c)

1.1502-92T(e)(1)(ii) § 1.1502-96T(b) § 1.1502-96A(b)

1.1502-92T(e)(2), fifth sentence § 1.1502-96T(a) § 1.1502-96A(a)

1.1502-92T(e)(2), fifth sentence § 1.1502-91T(d) § 1.1502-91A(d)

1.1502-93T(a)(2) § 1.1502-95T(c) § 1.1502-95A(c)

1.1502-93T(b)(2), last sentence § 1.382-8T § 1.382-8

1.1502-93T(b)(2), fourth sentence § 1.1502-91T(g)(2) § 1.1502-91A(g)
(2)

1.1502-94T(a)(1)(i) § 1.1502-91T(d)(1) § 1.1502-91A(d)(1)

1.1502-94T(a)(1)(ii) § 1.1502-91T(d)(2) § 1.1502-91A(d)(2)

1.1502-94T(a)(3) § 1.1502-91T(d) § 1.1502-91A(d)

1.1502-94T(a)(3) §§ 1.1502-92T and §§ 1.1502-92A and 1.1502-93T
1.1502- 93A

1.1502-94T(a)(4), first sentence § 1.1502-96T(a) § 1.1502-96A(a)

1.1502-94T(a)(4), first sentence §, 1.1502-96T(a)(2) §1.1502-96A(a)
(2)

1.1502-94T(a)(4), first sentence §1.1502-92T(b)(1)(i) §1.1502-92A(b)
(1)(i)

1.1502-94T(a)(4), first sentence §1.1502-96T(b) §§1.1502-96A(b)

1.1502-94T(a)(4), second sentence § 1.1502-96T(a) applies, §
1.1502-96A(a) see § 1.1502-96T(c) applies, see § 1.1502-96A(c)

1.1502-94T(a)(5) § 1.1502-96T(c) § 1.1502-96A(c)

1.1502-94T(b)(4) Example 1(b), § 1.1502-91T(d) § 1.1502-91A(d) first
sentence

1.1502-94T(b)(4) Example 2(b), § 1.1502-91T(d)(1) § 1.1502-91A(d)(1)

1.1502-94T(b)(4) Example 2(d), § 1.1502-96T(a) § 1.1502-96A(a) first
sentence

1.1502-94T(b)(4) Example 2(d), § 1.1502-91T(c) § 1.1502-91A(c) third
sentence

1.1502-94T(b)(4) Example 3(b), § 1.1502-91T(d)(1) § 1.1502-91A(d)(1)
first sentence

1.1502-94T(b)(4) Example 3(c), §§ 1.1502-96T(a) and §§ 1.1502-
96A(a) and second sentence 1.1502-91T(c)(2) 1.1502-91A(c)(2)
1.1502-94T(c), first sentence §§ 1.1502-91T(g) and (h) §§
1.1502-91A(g) and (h) and 1.1502-93A(c)

1.1502-94T(c), second sentence § 1.1502-91T(g)(3) § 1.1502-91A(g)(3)

1.1502-94T(d), fifth sentence § 1.1502-96T(a) § 1.1502-96A(a)

1.1502-94T(d),sixth sentence § 1.1502-92T(e)(1) § 1.1502-92A(e)(1)

1.1502-95T(a)(3), paragraph §§ 1.1502-91T §§ 1.1502-91A heading
through 1.1502-93T through 1.1502-93A

1.1502-95T(a)(3) §§ 1.1502-91T §§ 1.1502-91A through 1.1502-93T
through 1.1502-93A

1.1502-95T(b)(1) introductory §§ 1.1502-91T §§ 1.1502-91A text,
first sentence through 1.1502-93T through 1.1502-93A

1.1502-95T(b)(2) introductory § 1.1502-92T § 1.1502-92A text

1.1502-95T(b)(4) Example(2)(a), § 1.1502-92T § 1.1502-92A second
sentence

1.1502-95T(c)(2) introductory § 1.1502-93T § 1.1502-93A text

1.1502-95T(c)(7) Example(1)(a), § 1.1502-92T § 1.1502-92A third
sentence

1.1502-95T(d)(2) Example(1)(a), § 1.1502-92T § 1.1502-92A fifth
sentence

1.1502-95T(d)(2) Example(3)(a), § 1.1502-92T(b)(1)(ii) § 1.1502-
fourth sentence 92A(b)(1)(ii)

1.1502-95T(e)(1) introductory text § 1.1502-95T § 1.1502-95A

1.1502-96T(a)(2) introductory text, § 1.1502-91T(c)(1)(i) §
1.1502-91A(c)(1)(i) first sentence

1.1502-96T(a)(2)(ii) § 1.1502-91T(c) § 1.1502-91A(c)

1.1502-96T(a)(3), second sentence § 1.1502-91T(f)(2) § 1.1502-91A(f)
(2)

1.1502-96T(a)(5), first sentence §§ 1.1502-91T §§ 1.1502-91A through
1.1502-95T through 1.1502-95A

1.1502-96T(a)(5) introductory text, § 1.1502-98T § 1.1502-98A first
sentence

1.1502-96T(b)(1) introductory text, § 1.1502-92T § 1.1502-92A first
sentence

1.1502-96T(b)(1) introductory text, § 1.1502-91T(c)(1) §
1.1502-91A(c)(1) first sentence

1.1502-96T(b)(1) introductory text, § 1.1502-91T(d) § 1.1502-91A(d)
first sentence

1.1502-96T(b)(1) introductory text, § 1.1502-95T(b) § 1.1502-95A(b)
second sentence

1.1502-96T(b)(3), paragraph §§ 1.1502-91T, 1.1502-92T, §§1.1502-91A,
heading and 1.1502-94T 1.1502-92A, and 1.1502-94A

1.1502-96T(b)(3), first sentence § 1.1502-92T § 1.1502-92A

1.1502-96T(b)(3), first sentence § 1.1502-92T § 1.1502-92A

1.1502-96T(b)(3), second sentence § 1.1502-94T § 1.1502-94A

1.1502-96(c), last sentence § 1.382-5T(d) § 1.382-5(d)

1.1502-98T, first sentence §§ 1.1502-91T through §§ 1.1502-91A
1.1502-96T through 1.1502-96A

1.1502-98T, second sentence §§ 1.1502-91T through §§ 1.1502-91A
1.1502-96T through 1.1502-96A

1.1502-98T, third sentence § 1.1502-92T § 1.1502-92A

1.1502-98T, third sentence § 1.1502-93T § 1.1502-93A

1.1502-99T(a), first sentence Sections 1.1502-91T Sections
1.1502-91A through 1.1502-96T through 1.1502-96A and 1.1502-98T and
1.1502-98A

1.1502-99T(a), second sentence Sections 1.1502-94T Sections
1.1502-94A through 1.1502-96T through 1.1502-96A

1.1502-99T(b), first sentence §§ 1.1502-91T through §§ 1.1502-91A

1.1502-96T and through 1.1502-96A

1.1502-98T and 1.1502-98A

1.1502-99T(b), second sentence § 1.1502-92T(b)(1)(i) § 1.1502-92A(b)
(1)(i)

1.1502-99T(b), third sentence § 1.1502-92T(b)(1) § 1.1502-92A(b)(1)

1.1502-99T(c)(1)(ii) §§ 1.1502-91T through §§ 1.1502-91A

1.1502-96T and through 1.1502-98T 1.1502-96A and 1.1502-98A

1.1502-99T(c)(1)(iii), first sentence §§ 1.1502-91T through §§
1.1502-91A

1.1502-96T and 1.1502-98T through 1.1502-96A and 1.1502-98A

1.1502-99T(c)(1)(iii), second § 1.1502-92T § 1.1502-92A sentence

1.1502-99T(c)(2)(i), first sentence §§ 1.1502-91T through §§
1.1502-91A 1.1502-96T and through 1.1502-98T 1.1502-96A and
1.1502-98A

1.1502-99T(c)(2)(i), first sentence § 1.1502-95T(c) § 1.1502-95A(c)
1.1502-99T(c)(2)(i), fifth sentence § 1.1502-91T(d)(2)(i) § 1.1502-
91A(d)(2)(i)

1.1502-99T(c)(2)(ii) § 1.382-8T § 1.382-8

1.1502-99T(c)(2)(ii) § 1.382-8T(h) § 1.382-8(h)

1.1502-99T(d)(1) § 1.1502-92T § 1.1502-92A

1.1502-99T(d)(3) §§ 1.1502-91T through §§ 1.1502-91A

1.1502-96T and through

1.1502-98T 1.1502-96A and 1.1502-98A

Par. 3. Section 1.1502-20 is amended as follows:

1. Adding a sentence to the end of paragraph (g)(1).

2. Redesignating paragraph (g)(5) as paragraph (g)(4).

3. Paragraph (g)(4)(i)(A) is amended by removing A , and @ and
adding A ; @ in its place.

4. Paragraph (g)(4)(i)(B) is amended by removing the period at the
end of the paragraph and adding A ; and @ in its place.

5. Adding a new paragraph (g)(4)(i)(C) immediately after paragraph
(g)(4)(i)(B) and before paragraph (g)(4)(i) concluding text.

6. Redesignating paragraph (g)(4)(ii) as paragraph (g)(4)(iii).

7. Adding a new paragraph (g)(4)(ii).

The revisions and additions read as follows:

§1.1502-20 Disposition or deconsolidation of subsidiary stock.

* * * * *

(g) * * *

(1) * * * See §1.1502-96(d) for rules relating to section 382 and
the reattribution of losses under this paragraph (g).

* * * * *

(4)

(i) * * *

(C) If the common parent is reattributing to itself all or any part
of a section 382 limitation pursuant to §1.1502-96(d)(5), the
information required by paragraph (g)(4)(ii) of this section.

* * * * *

(ii) Reattribution of section 382 limitation. The information
required by this paragraph (g)(4)(ii) is a separate list for each
subsidiary (or a separate list for two or more subsidiaries that are
members of a loss subgroup whose pre-change subgroup losses are
being reattributed) with respect to which an apportionment of a
separate section 382 limitation or subgroup section 382 limitation
is being made, setting forth--

(A) The name and E.I.N. of the subsidiary (or subsidiaries that were
members of a loss subgroup);

(B) A statement entitled A THIS IS AN ELECTION UNDER §1.1502-96(d)
(5) TO APPORTION ALL OR PART OF [insert A SEPARATE or A SUBGROUP or
BOTH A SEPARATE AND A SUBGROUP] SECTION 382 LIMITATION TO [insert
name and E.I.N. of the common parent] @ ;

(C) The date of the ownership change giving rise to the separate
section 382 limitation or subgroup section 382 limitation that is
being apportioned;

(D) The amount of the separate (or subgroup) section 382 limitation
for the taxable year in which the reattribution occurs (determined
without reference to any apportionment under this section or
§1.1502-95(c));

(E) The amount of each net operating loss carryover or capital loss
carryover, and the year in which it arose, of the subsidiary (or
subsidiaries) that is subject to the separate section 382 limitation
or subgroup section 382 limitation that is being apportioned to the
common parent, and the amount of the value element and adjustment
element of that limitation that is apportioned to the common parent.

* * * * *

Par. 3a. Immediately following §1.1502-79A, an undesignated
centerheading is added to read as follows:

REGULATIONS APPLYING SECTION 382 WITH RESPECT TO TESTING DATES (AND
CORPORATIONS JOINING OR LEAVING CONSOLIDATED GROUPS) BEFORE June 25,
1999.

Par. 4. Section §1.1502-90T is amended as follows:

1. Redesignating §1.1502-90T as §1.1502-90A [newly redesignated
§1.1502-90A will appear after the centerheading added in Par. 3a.]

2. Revising the section heading and the introductory text of newly
designated §1.1502-90A.

3. Redesignating the entries for §1.1502-91T through §1.1502-99T as
§1.1502-91A through §1.1502-99A and revising the section headings.

4. Revising the entries for paragraph (a) of newly designated
§1.1502-99A.

The revisions read as follows:

§1.1502-90A Table of contents.

The following list contains the major headings in §§1.1502- 91A
through 1.1502-99A:

§1.1502-91A Application of section 382 with respect to a
consolidated group generally applicable for testing dates before
June 25, 1999.

* * * * *

§1.1502-92A Ownership change of a loss group or a loss subgroup
generally applicable for testing dates before June 25, 1999.

* * * * *

§1.1502-93A Consolidated section 382 limitation (or subgroup section
382 limitation) generally applicable for testing dates before June
25, 1999.

* * * * *

§1.1502-94A Coordination with section 382 and the regulations
thereunder when a corporation becomes a member of a consolidated
group generally applicable for corporations becoming members of a
group before June 25, 1999.

* * * * *

§1.1502-95A Rules on ceasing to be a member of a consolidated group
(or loss subgroup) generally applicable for corporations ceasing to
be members before June 25, 1999.

* * * * *

§1.1502-96A Miscellaneous rules generally applicable for testing
dates before June 25, 1999.

* * * * *

§1.1502-97A Special rules under section 382 for members under the
jursidiction of a court in a title 11 or similar case.

[Reserved].

§1.1502-98A Coordination with section 383 generally applicable for
testing dates (or members joining or leaving a group) before June
25, 1999.

§1.1502-99A Effective dates.

(a) Effective date.

(1) In general.

(2) Anti-duplication rules for recognized built-in gain.

* * * * *

Par. 5. Section 1.1502-91T is amended as follows:

1. Redesignating §1.1502-91T as §1.1502-91A.

2. Revising the section heading of newly designated §1.1502-91A.

3. Amending paragraph (h)(2) by removing the words A or an
intercompany obligation @ and replacing them with A (or an
intercompany obligation disposed of before June 25, 1999) @ .

The revision reads as follows:

§1.1502-91A Application of section 382 with respect to a
consolidated group generally applicable for testing dates before
June 25, 1999.

* * * * *

Par. 6. Section 1.1502-92T is revised as §1.1502-92A, and the
section heading is amended to read as follows:

§1.1502-92A Ownership change of a loss group or a loss subgroup
generally applicable for testing dates before June 25, 1999.

* * * * *

Par 6a. Section 1.1502-93T is amended as follows:

1. Redesignating §1.1502-93T as §1.1502-93A.

2. Revising the section heading of newly redesignated §1.1502-93A.

3. Adding a sentence at the end of paragraph (c).

The additions and revisions read as follows: §1.1502-93A
Consolidated section 382 limitation (or subgroup section 382
limitation)generally applicable for testing dates before June 25,
1999.

* * * * *

(c)* * * See §1.1502-99A(a)(2) for a special rule relating to the
application of §1.502-93(c)(2) to consolidated return years for
which the due date of the return is after June 25, 1999.

* * * * *

Par. 7. Section 1.1502-94T is amended as follows:

1. Redesignating §1.1502-94T as §1.1502-94A.

2. Revising the section heading of newly redesignated §1.1502-94A.

3. Revising the last sentence of paragraph (b)(4), Example 3(b).

The revision reads as follows:

§1.1502-94A Coordination with section 382 and the regulations
thereunder when a corporation becomes a member of a consolidated
group) generally applicable for corporations becoming members of a
group before June 25, 1999.

* * * * *

(b) * * *

(4) * * *

Example 3. * * *

(b) * * * See also §1.1502-21T in effect prior to June 25, 1999,
contained in 26 CFR Part 1, revised April 1, 1999, or §1.1502-21, as
applicable.

* * * * *

Par. 8. Redesignate §1.1502-95T as §1.1502-95A and revise the
section heading to read as follows:

§1.1502-95A Rules on ceasing to be a member of a consolidated group
generally applicable for corporations ceasing to be members before
June 25, 1999.

* * * * *

Par. 9. Redesignate §1.1502-96T as §1.1502-96A and revise the
section heading to read as follows:

§1.1502-96A. Miscellaneous rules generally applicable for testing
dates before June 25, 1999.

* * * * *

Par. 10. Redesignate §1.1502-97T as §1.1502-97A and revise the
section heading to read as follows:

§1.1502-97A Special rules under section 382 for members under the
jurisdiction of a court in a title 11 or similar case.

[Reserved].

* * * * * Par. 11. Redesignate §1.1502-98T as §1.1502-98A and revise
the section heading to read as follows:

§1.1502-98A Coordination with section 383 generally applicable for
testing dates (or members joining or leaving a group) before June
25, 1999.

* * * * *

Par. 12. Section 1.1502-99T is amended as follows:

1. Redesignating §1.1502-99T as §1.1502-99A.

2. Revising the section heading.

3. Revising paragraph (a).

4. Amending paragraph (c)(2)(i) by removing the language A (relating
to the apportionment @ in the first sentence and adding A and (b)(2)
(ii)(relating to the apportionment @ .

The revisions read as follows:

§1.1502-99A Effective dates.

(a) Effective date--(1) In general. Except as provided in
§1.1502-99(b), §§1.1502-91A through 1.1502-96A and 1.1502-98A apply
to any testing date on or after January 1, 1997, and before June 25,
1999. Sections 1.1502-94A through 1.1502-96A also apply on any date
on or after January 1, 1997, and before June 25, 1999, on which a
corporation becomes a member of a group or on which a corporation
ceases to be a member of a loss group (or a loss subgroup).

(2) Anti-duplication rules for recognized built-in gain.

Section 1.1502-93(c)(2)(relating to recognized built-in gain of a
loss group or loss subgroup) applies to taxable years for which the
due date for income tax returns (without extensions) is after June
25, 1999.

* * * * *

Par. 13. Sections 1.1502-90 through 1.1502-99 are added to read as
follows: §1.1502-90 Table of contents.

The following list contains the major headings in §§1.1502- 91
through 1.1502-99:

§1.1502-91 Application of section 382 with respect to a consolidated
group.

(a) Determination and effect of an ownership change.

(1) In general.

(2) Special rule for post-change year that includes the change date.

(3) Cross-reference.

(b) Definitions and nomenclature.

(c) Loss group.

(1) Defined.

(2) Coordination with rule that ends separate tracking.

(3) Example.

(d) Loss subgroup.

(1) Net operating loss carryovers.

(2) Net unrealized built-in loss.

(3) Loss subgroup parent.

(4) Election to treat loss subgroup parent requirement as satisfied.

(5) Principal purpose of avoiding a limitation.

(6) Special rules.

(7) Examples.

(e) Pre-change consolidated attribute.

(1) Defined.

(2) Example.

(f) Pre-change subgroup attribute.

(1) Defined.

(2) Example.

(g) Net unrealized built-in gain and loss.

(1) In general.

(2) Members included.

(i) Consolidated group with a net operating loss.

(ii) Determination whether a consolidated group has a net unrealized
built-in loss.

(iii) Loss subgroup with net operating loss carryovers.

(iv) Determination whether subgroup has a net unrealized built-in
loss.

(v) Separate determination of section 382 limitation for recognized
built-in losses and net operating losses.

(3) Coordination with rule that ends separate tracking.

(4) Acquisitions of built-in gain or loss assets.

(5) Indirect ownership.

(6) Common parent not common parent for five years.

(h) Recognized built-in gain or loss.

(1) In general. [Reserved]

(2) Disposition of stock or an intercompany obligation of a member.

(3) Intercompany transactions.

(4) Exchanged basis property.

(i) [Reserved]

(j) Predecessor and successor corporations.

§1.1502-92 Ownership change of a loss group or a loss subgroup.

(a) Scope.

(b) Determination of an ownership change.

(1) Parent change method.

(i) Loss group.

(ii) Loss subgroup.

(iii) Special rule if election regarding section 1504(a)(1)
relationship is made.

(2) Examples.

(3) Special adjustments.

(i) Common parent succeeded by a new common parent.

(ii) Newly created loss subgroup parent.

(iii) Examples.

(4) End of separate tracking of certain losses.

(c) Supplemental rules for determining ownership change.

(1) Scope.

(2) Cause for applying supplemental rule.

(3) Operating rules.

(4) Supplemental ownership change rules.

(i) Additional testing dates for the common parent (or loss subgroup
parent).

(ii) Treatment of subsidiary stock as stock of the common parent (or
loss subgroup parent).

(iii) Different testing periods.

(iv) Disaffiliation of a subsidiary.

(v) Subsidiary stock acquired first.

(vi) Anti-duplication rule.

(5) Examples.

(d) Testing period following ownership change under this section.

(e) Information statements.

(1) Common parent of a loss group.

(2) Abbreviated statement with respect to loss subgroU.S. §1.1502-93
Consolidated section 382 limitation (or subgroup section 382
limitation).

(a) Determination of the consolidated section 382 limitation (or
subgroup section 382 limitation).

(1) In general.

(2) Coordination with apportionment rule.

(b) Value of the loss group (or loss subgroup).

(1) Stock value immediately before ownership change.

(2) Adjustment to value.

(i) In general.

(ii) Anti-duplication.

(3) Examples.

(c) Recognized built-in gain of a loss group or loss subgroup.

(1) In general.

(2) Adjustments.

(d) Continuity of business.

(1) In general.

(2) Example.

(e) Limitations of losses under other rules.

§1.1502-94 Coordination with section 382 and the regulations
thereunder when a corporation becomes a member of a consolidated
group.

(a) Scope.

(1) In general.

(2) Successor corporation as new loss member.

(3) Coordination in the case of a loss subgroup.

(4) End of separate tracking of certain losses.

(5) Cross-reference.

(b) Application of section 382 to a new loss member.

(1) In general.

(2) Adjustment to value.

(3) Pre-change separate attribute defined.

(4) Examples.

(c) Built-in gains and losses.

(d) Information statements.

§1.1502-95 Rules on ceasing to be a member of a consolidated group
(or loss subgroup).

(a) In general.

(1) Consolidated group.

(2) Election by common parent.

(3) Coordination with §§1.1502-91 through 1.1502-93.

(b) Separate application of section 382 when a member leaves a
consolidated group.

(1) In general.

(2) Effect of a prior ownership change of the group.

(3) Application in the case of a loss subgroup.

(4) Examples.

(c) Apportionment of a consolidated section 382 limitation.

(1) In general.

(2) Amount which may be apportioned.

(i) Consolidated section 382 limitation.

(ii) Net unrealized built-in gain.

(3) Effect of apportionment on the consolidated group.

(i) Consolidated section 382 limitation.

(ii) Net unrealized built-in gain.

(4) Effect on corporations to which an apportionment is made.

(i) Consolidated section 382 limitation.

(ii) Net unrealized built-in gain.

(5) Deemed apportionment when loss group terminates.

(6) Appropriate adjustments when former member leaves during the
year.

(7) Examples.

(d) Rules pertaining to ceasing to be a member of a loss subgroup.

(1) In general.

(2) Exceptions.

(3) Examples.

(e) Allocation of net unrealized built-in loss.

(1) In general.

(2) Amount of allocation.

(i) In general.

(ii) Transferred basis property and deferred gain or loss.

(iii) Assets for which gain or loss has been recognized.

(iv) Exchanged basis property.

(v) Two or more members depart during the same year.

(vi) Anti-abuse rule.

(3) Effect of the allocation on the consolidated group.

(4) Effect on corporations to which the allocation is made.

(5) Subgroup principles.

(6) Apportionment of consolidated section 382 limitation (or
subgroup section 382 limitation).

(i) In general.

(ii) Special rule for former members that become members of the same
consolidated group.

(7) Examples.

(8) Reporting requirement.

(f) Filing the election to apportion the section 382 limitation and
net unrealized built-in gain.

(1) Form of the election to apportion.

(2) Signing of the election.

(3) Filing of the election.

(4) Revocation of election.

§1.1502-96 Miscellaneous rules.

(a) End of separate tracking of losses.

(1) Application.

(2) Effect of end of separate tracking.

(i) Net operating loss carryovers.

(ii) Net unrealized built-in losses.

(iii) Common parent not common parent for five years.

(3) Continuing effect of end of separate tracking.

(i) In general.

(ii) Example.

(4) Special rule for testing period.

(5) Limits on effects of end of separate tracking.

(b) Ownership change of subsidiary.

(1) Ownership change of a subsidiary because of options or plan or
arrangement.

(2) Effect of the ownership change.

(i) In general.

(ii) Pre-change losses.

(3) Coordination with §§1.1502-91, 1.1502-92, and 1.1502-94.

(4) Example.

(c) Continuing effect of an ownership change.

(d) Losses reattributed under §1.1502-20(g).

(1) In general.

(2) Deemed section 381(a) transaction.

(3) Rules relating to owner shifts.

(i) In general.

(ii) Examples.

(4) Rules relating to the section 382 limitation.

(i) Reattributed loss is a pre-change separate attribute of a new
loss member.

(ii) Reattributed loss is a pre-change subgroup attribute.

(iii) Potential application of section 382(l)(1).

(iv) Duplication or omission of value.

(v) Special rule for continuity of business requirement.

(5) Election to reattribute section 382 limitation.

(i) Effect of election.

(ii) Examples.

(e) Time and manner of making election under §1.1502-91(d)(4).

(1) In general.

(2) Election statement.

§1.1502-97 Special rules under section 382 for members under the
jurisdiction of a court in a title 11 or similar case.[Reserved].

§1.1502-98 Coordination with section 383.

§1.1502-99 Effective dates.

(a) Effective date.

(b) Special rules.

(1) Election to treat subgroup parent requirement as satisfied.

(2) Principal purpose of avoiding a limitation.

(3) Ceasing to be a member of a loss subgroup.

(i) Ownership change of a loss subgroup.

(ii) Expiration of 5-year period.

(4) Reattribution of net operating loss carryovers under
§1.1502-20(g).

(5) Election to apportion net unrealized built-in gain.

(c) Testing period may include a period beginning before June 25,
1999.

(1) In general.

(2) Transition rule for net unrealized built-in losses.

§1.1502-91 Application of section 382 with respect to a consolidated
group.

(a) Determination and effect of an ownership change

B-(1)

In general. This section and §§1.1502-92 and 1.1502-93 set forth the
rules for determining an ownership change under section 382 for
members of consolidated groups and the section 382 limitations with
respect to attributes described in paragraphs (e) and (f) of this
section. These rules generally provide that an ownership change and
the section 382 limitation are determined with respect to these
attributes for the group (or loss subgroup) on a single entity basis
and not for its members separately.

Following an ownership change of a loss group (or a loss subgroup)
under §1.1502-92, the amount of consolidated taxable income for any
post-change year which may be offset by pre-change consolidated
attributes (or pre-change subgroup attributes) shall not exceed the
consolidated section 382 limitation (or subgroup section 382
limitation) for such year as determined under §1.1502-93.

(2) Special rule for post-change year that includes the change date.
If the post-change year includes the change date, section 382(b)(3)
(A) is applied so that the consolidated section 382 limitation (or
subgroup section 382 limitation) does not apply to the portion of
consolidated taxable income that is allocable to the period in the
year on or before the change date.

See generally §1.382-6 (relating to the allocation of income and
loss). The allocation of consolidated taxable income for the post-
change year that includes the change date must be made before taking
into account any consolidated net operating loss deduction (as
defined in §1.1502-21(a)).

(3) Cross-reference. See §§1.1502-94 and 1.1502-95 for rules that
apply section 382 to a corporation that becomes or ceases to be a
member of a group or loss subgroup.

(b) Definitions and nomenclature. For purposes of this section and
§§1.1502-92 through 1.1502-99, unless otherwise stated:

(1) The definitions and nomenclature contained in section 382 and
the regulations thereunder (including the nomenclature and
assumptions relating to the examples in §1.382-2T(b)) and this
section and §§1.1502-92 through 1.1502-99 apply.

(2) In all examples, all groups file consolidated returns, all
corporations file their income tax returns on a calendar year basis,
the only 5-percent shareholder of a corporation is a public group,
the facts set forth the only owner shifts during the testing period,
no election is made under paragraph (d)(4) of this section, and each
asset of a corporation has a value equal to its adjusted basis.

(3) As the context requires, references to §§1.1502-91 through
1.1502-96 include references to corresponding provisions of
§§1.1502-91A through 1.1502-96A. For example, a reference to an
ownership change under §1.1502-92 in §1.1502-95(b) can include a
reference to an ownership change under §1.1502-92A.

(c) Loss group--(1) Defined. A loss group is a consolidated group
that--

(i) Is entitled to use a net operating loss carryover to the taxable
year that did not arise (and is not treated under §1.1502-21(c) as
arising) in a SRLY;

(ii) Has a consolidated net operating loss for the taxable year in
which a testing date of the common parent occurs (determined by
treating the common parent as a loss corporation); or

(iii) Has a net unrealized built-in loss (determined under paragraph
(g) of this section by treating the date on which the determination
is made as though it were a change date).

(2) Coordination with rule that ends separate tracking. A
consolidated group may be a loss group because a member's losses
that arose in (or are treated as arising in) a SRLY are treated as
described in paragraph (c)(1)(i) of this section. See §1.1502-96(a).

(3) Example. The following example illustrates the principles of
this paragraph (c):

Example. Loss group. (i) L and L1 file separate returns and each has
a net operating loss carryover arising in Year 1 that is carried
over to Year 2. A owns 40 shares and L owns 60 shares of the 100
outstanding shares of L1 stock. At the close of Year 1, L buys the
40 shares of L1 stock from A. For Year 2, L and L1 file a
consolidated return. The following is a graphic illustration of
these facts:

(ii) L and L1 become a loss group at the beginning of Year 2 because
the group is entitled to use the Year 1 net operating loss carryover
of L, the common parent, which did not arise (and is not treated
under §1.1502-21(c) as arising) in a SRLY. See §1.1502-94 for rules
relating to the application of section 382 with respect to L1's net
operating loss carryover from Year 1 which did arise in a SRLY.

(d) Loss subgroup--(1) Net operating loss carryovers. Two or more
corporations that become members of a consolidated group (the
current group) compose a loss subgroup if--

(i) They were affiliated with each other in another group (the
former group), whether or not the group was a consolidated group;

(ii) They bear the relationship described in section 1504(a)(1) to
each other through a loss subgroup parent immediately after they
become members of the current group (or are deemed to bear that
relationship as a result of an election described in paragraph (d)
(4) of this section); and

(iii) At least one of the members carries over a net operating loss
that did not arise (and is not treated under §1.1502-21(c) as
arising) in a SRLY with respect to the former group.

(2) Net unrealized built-in loss. Two or more corporations that
become members of a consolidated group compose a loss subgroup if
they--

(i) Have been continuously affiliated with each other for the 5
consecutive year period ending immediately before they become
members of the group;

(ii) Bear the relationship described in section 1504(a)(1) to each
other through a loss subgroup parent immediately after they become
members of the current group (or are deemed to bear that
relationship as a result of an election described in paragraph (d)
(4) of this section); and

(iii) Have a net unrealized built-in loss (determined under
paragraph (g) of this section on the day they become members of the
group by treating that day as though it were a change date).

(3) Loss subgroup parent. A loss subgroup parent is the corporation
that bears the same relationship to the other members of the loss
subgroup as a common parent bears to the members of a group.

(4) Election to treat loss subgroup parent requirement as
satisfied--(i) In general. Solely for purposes of paragraphs (d)(1)
(i) and (2)(ii) of this section, two or more corporations that
become members of a consolidated group at the same time and that
were affiliated with each other immediately before becoming members
of the group are deemed to bear a section 1504(a)(1) relationship to
each other immediately after they become members of the group if the
common parent of that group makes an election under this paragraph
(d)(4) with respect to those members. See §1.1502-96(e) for the time
and manner of making the election.

(ii) Members included. An election under this paragraph (d)(4)
includes all corporations that become members of the current group
at the same time and that were affiliated with each other
immediately before they become members of the current group.

(iii) Each member included treated as loss subgroup parent.

If the members to which this election applies are a loss subgroup
described in paragraph (d)(1) or (2) of this section, then each
member is treated as a loss subgroup parent. See §1.1502-92(b)(1)
(iii) for special rules relating to an ownership change of a loss
subgroup if the election under this paragraph (d)(4) is made.

(5) Principal purpose of avoiding a limitation. The corporations
described in paragraphs (d)(1) or (2) of this section do not compose
a loss subgroup if any one of them is formed, acquired, or availed
of with a principal purpose of avoiding the application of, or
increasing any limitation under, section 382. Instead, §1.1502-94
applies with respect to the attributes of each such corporation. Any
member excluded from a loss subgroup, if excluded with a principal
purpose of so avoiding or increasing any section 382 limitation, is
treated as included in the loss subgroup. This paragraph (d)(5) does
not apply solely because, in connection with becoming members of the
group, the members of a group (or loss subgroup) are rearranged (or,
in the case of the preceding sentence, are not rearranged) to bear a
relationship to the other members described in section 1504(a)(1).

(6) Special rules. See §1.1502-95(d) for rules concerning when a
corporation ceases to be a member of a loss subgroup, and for
certain exceptions that may apply if a member does not continue to
satisfy the loss subgroup parent requirement within the current
group. See also §1.1502-96(a) for a special rule regarding the end
of separate tracking of SRLY losses of a member that has an
ownership change or that has been a member of a group for at least 5
consecutive years.

(7) Examples. The following examples illustrate the principles of
this paragraph (d):

Example 1. Loss subgroup. (i) P owns all the L stock and L owns all
the L1 stock. The P group has a consolidated net operating loss
arising in Year 1 that is carried to Year 2. On May 2, Year 2, P
sells all the stock of L to A, and L and L1 thereafter file
consolidated returns. A portion of the Year 1 consolidated net
operating loss is apportioned under §1.1502- 21(b) to each of L and
L1, which they carry over to Year 2. The following is a graphic
illustration of these facts: (ii) (a) L and L1 compose a loss
subgroup within the meaning of paragraph (d)(1) of this section
because--

(A) They were affiliated with each other in the P group (the former
group);

(B) They bear a relationship described in section 1504(a)(1) to each
other through a loss subgroup parent (L) immediately after they
became members of the L group; and

(C) At least one of the members (here, both L and L1) carries over a
net operating loss to the L group (the current group) that did not
arise in a SRLY with respect to the P group.

(b) Under paragraph (d)(3) of this section, L is the loss subgroup
parent of the L loss subgroup.

Example 2. Loss subgroup--section 1504(a)(1) relationship.

(i) P owns all the stock of L and L1. L owns all the stock of L2. L1
and L2 own 40 percent and 60 percent of the stock of L3,
respectively. The P group has a consolidated net operating loss
arising in Year 1 that is carried over to Year 2. On May 22, Year 2,
P sells all the stock of L and L1 to P1, the common parent of
another consolidated group. The Year 1 consolidated net operating
loss is apportioned under §1.1502-21(b), and each of L, L1, L2, and
L3 carries over a portion of such loss to the first consolidated
return year of the P1 group ending after the acquisition. The
following is a graphic illustration of these facts:

(ii) L and L2 compose a loss subgroup within the meaning of
paragraph (d)(1) of this section. Neither L1 nor L3 is included in a
loss subgroup because neither bears a relationship described in
section 1504(a)(1) through a loss subgroup parent to any other
member of the former group immediately after becoming members of the
P1 group.

Example 3. Loss subgroup--section 1504(a)(1) relationship.

The facts are the same as in Example 2, except that the stock of L1
is transferred to L in connection with the sale of the L stock to
P1. L, L1, L2, and L3 compose a loss subgroup within the meaning of
paragraph (d)(1) of this section because--

(i) They were affiliated with each other in the P group (the former
group);

(ii) They bear a relationship described in section 1504(a)(1) to
each other through a loss subgroup parent (L) immediately after they
become members of the P1 group; and

(iii) At least one of the members (here, each of L, L1, L2, and L3)
carries over a net operating loss to the P1 group (the current
group).

Example 4. Loss subgroup--elective section 1504(a)(1) relationship.
The facts are the same as in Example 2, except that P1 makes the
election under paragraph (d)(4) of this section. The election
includes L, L1, L2, and L3 (even though L and L2 would compose a
loss subgroup without regard to the election) because they become
members of the current group (the P1 group) at the same time and
were affiliated with each other in the P group immediately before
they became members of the P1 group. As a result of the election, L,
L1, L2, and L3 are treated as satisfying the requirement that they
bear the relationship described in section 1504(a)(1) to each other
through a loss subgroup parent immediately after they become members
of the P1 group. L, L1, L2, and L3 compose a loss subgroup within
the meaning of paragraph (d)(1) of this section.

(e) Pre-change consolidated attribute--(1) Defined. A pre-change
consolidated attribute of a loss group is--

(i) Any loss described in paragraph (c)(1)(i) or (ii) of this
section (relating to the definition of loss group) that is allocable
to the period ending on or before the change date; and

(ii) Any recognized built-in loss of the loss group.

(2) Example. The following example illustrates the principle of this
paragraph (e):

Example. Pre-change consolidated attribute. (i) The L group has a
consolidated net operating loss arising in Year 1 that is carried
over to Year 2. The L loss group has an ownership change at the
beginning of Year 2.

(ii) The net operating loss carryover of the L loss group from Year
1 is a pre-change consolidated attribute because the L group was
entitled to use the loss in Year 2 and therefore the loss was
described in paragraph (c)(1)(i) of this section. Under paragraph
(a)(2)(i) of this section, the amount of consolidated taxable income
of the L group for Year 2 that may be offset by this loss carryover
may not exceed the consolidated section 382 limitation of the L
group for that year. See §1.1502-93 for rules relating to the
computation of the consolidated section 382 limitation.

(f) Pre-change subgroup attribute--(1) Defined. A pre-change
subgroup attribute of a loss subgroup is--

(i) Any net operating loss carryover described in paragraph (d)(1)
(iii) of this section (relating to the definition of loss subgroup);
and

(ii) Any recognized built-in loss of the loss subgroup.

(2) Example. The following example illustrates the principle of this
paragraph (f):

Pre-change subgroup attribute. (i) P is the common parent of a
consolidated group. P owns all the stock of L, and L owns all the
stock of L1. L2 is not a member of an affiliated group, and has a
net operating loss arising in Year 1 that is carried over to Year 2.
On December 11, Year 2, L1 acquires all the stock of L2, causing an
ownership change of L2. During Year 2, the P group has a
consolidated net operating loss that is carried over to Year 3. On
November 2, Year 3, M acquires all the L stock from P. M, L, L1, and
L2 thereafter file consolidated returns. All of the P group Year 2
consolidated net operating loss is apportioned under §1.1502-21(b)
to L and L2, which they carry over to the M group.

(ii)(a) L, L1, and L2 compose a loss subgroup because-- (1) They
were affiliated with each other in the P group (the former group);

(2) They bear a relationship described in section 1504(a)(1) to each
other through a loss subgroup parent (L) immediately after they
became members of the L group; and

(3) At least one of the members (here, both L and L2) carries over a
net operating loss to the M group (the current group) that is
described in paragraph (d)(1)(iii) of this section.

(b) For this purpose, L2's loss from Year 1 that was a SRLY loss
with respect to the P group (the former group) is described in
paragraph (d)(1)(iii) of this section because L2 had an ownership
change on becoming a member of the P group (see §1.1502-96(a)) on
December 11, Year 2. Starting on December 12, Year 2, the P group no
longer separately tracked owner shifts of the stock of L1 with
respect to the Year 1 loss. M's acquisition results in an ownership
change of L, and therefore the L loss subgroup under §1.1502-92(a)
(2). See §1.1502-93 for rules governing the computation of the
subgroup section 382 limitation.

(iii) In the M group, L2's Year 1 loss continues to be subject to a
section 382 limitation resulting from the ownership change that
occurred on December 11, Year 2. See §1.1502-96(c).

(g) Net unrealized built-in gain and loss--(1) In general.

The determination whether a consolidated group (or loss subgroup)
has a net unrealized built-in gain or loss under section 382(h)(3)
is based on the aggregate amount of the separately computed net
unrealized built-in gains or losses of each member that is included
in the group (or loss subgroup) under paragraph (g)(2) of this
section, including items of built-in income and deduction described
in section 382(h)(6). Thus, for example, amounts deferred under
section 267, or under §1.1502-13 (other than amounts deferred with
respect to the stock of a member (or an intercompany obligation)
included in the group (or loss subgroup) under paragraph (g)(2) of
this section) are built-in items. The threshold requirement under
section 382(h)(3)(B) applies on an aggregate basis and not on a
member-by-member basis. The separately computed amount of a member
included in a group or loss subgroup does not include any unrealized
built-in gain or loss on stock (including stock described in section
1504(a)(4) and §1.382-2T(f)(18)(ii) and (iii)) of another member
included in the group or loss subgroup (or an intercompany
obligation). However, a member of a group or loss subgroup includes
in its separately computed amount the unrealized built-in gain or
loss on stock (but not on an intercompany obligation) of another
member not included in the group or loss subgroup. If a member is
not included in the determination whether a group (or subgroup) has
a net unrealized built-in loss under paragraph (g)(2)(ii) or (iv) of
this section, that member is not included in the loss group or loss
subgroup. See §1.1502-94(c) (relating to built-in gain or loss of a
new loss member) and §1.1502-96(a) (relating to the end of separate
tracking of certain losses).

(2) Members included--(i) Consolidated group with a net operating
loss. The members included in the determination whether a
consolidated group described in paragraph (c)(1)(i) or (ii) of this
section (relating to loss groups with net operating losses) has a
net unrealized built-in gain are all members of the consolidated
group on the day that the determination is made.

(ii) Determination whether a consolidated group has a net unrealized
built-in loss. The members included in the determination whether a
consolidated group is a loss group described in paragraph (c)(1)
(iii) of this section are--

(A) The common parent and all other members that have been
affiliated with the common parent for the 5 consecutive year period
ending on the day that the determination is made;

(B) Any other member that has a net unrealized built-in loss
determined under paragraph (g)(1) of this section on the date that
the determination is made, and that is neither a new loss member
described in §1.1502-94(a)(1)(ii) nor a member of a loss subgroup
described in paragraph (d)(2) of this section;

(C) Any new loss member described in §1.1502-94(a)(1)(ii) that has a
net unrealized built-in gain determined under paragraph (g)(1) of
this section on the day that the determination is made; and

(D) The members of a loss subgroup described in paragraph (d)(2) of
this section if the members of the subgroup have, in the aggregate,
a net unrealized built-in gain on the day that the determination is
made.

(iii) Loss subgroup with net operating loss carryovers.

The members included in the determination whether a loss subgroup
described in paragraph (d)(1) of this section (relating to loss
subgroups with net operating loss carryovers) has a net unrealized
built-in gain are all members of the loss subgroup on the day that
the determination is made.

(iv) Determination whether subgroup has a net unrealized built-in
loss. The members included in the determination whether a subgroup
has a net unrealized built-in loss are those members described in
paragraphs (d)(2)(i) and (ii) of this section.

(v) Separate determination of section 382 limitation for recognized
built-in losses and net operating losses. In determining whether a
loss group described in paragraph (c)(1)(i) or (ii) of this section
(relating to loss groups that have net operating loss carryovers)
has a net unrealized built-in gain which, if recognized, increases
the consolidated section 382 limitation, the group includes, under
paragraph (g)(2)(i) of this section, all of its members on the day
the determination is made.

Under paragraph (g)(2)(ii) of this section, however, for purposes of
determining whether a group has a net unrealized built-in loss
described in paragraph (c)(1)(iii) of this section, not all members
of the consolidated group may be included. Thus, a consolidated
group may have recognized built-in gains that increase the amount of
consolidated taxable income that may be offset by its pre-change net
operating loss carryovers that did not arise (and are not treated as
arising) in a SRLY, and also may have recognized built-in losses the
absorption of which is limited. Similar results may obtain for loss
subgroups under paragraphs (g)(2)(iii) and (iv) of this section. See
§1.1502-93(c)(2) for rules prohibiting the use of recognized built-
in gains to increase the amount of consolidated taxable income that
can be offset by recognized built-in losses.

(3) Coordination with rule that ends separate tracking. See
§1.1502-96(a) for special rules relating to members (or loss
subgroups) that have an ownership change within six months before,
on, or after becoming a member of the group.

(4) Acquisitions of built-in gain or loss assets. A member of a
consolidated group (or loss subgroup) may not, in determining its
separately computed net unrealized built-in gain or loss, include
any gain or loss with respect to assets acquired with a principal
purpose to affect the amount of its net unrealized built-in gain or
loss. A group (or loss subgroup) may not, in determining its net
unrealized built-in gain or loss, include any gain or loss of a
member acquired with a principal purpose to affect the amount of its
net unrealized built-in gain or loss.

(5) Indirect ownership. A member's separately computed net
unrealized built-in gain or loss is adjusted to the extent necessary
to prevent any duplication of unrealized gain or loss attributable
to the member's indirect ownership interest in another member
through a nonmember if the member has a 5-percent or greater
ownership interest in the nonmember.

(6) Common parent not common parent for five years. If the common
parent has become the common parent of an existing group within the
previous 5 year period in a transaction described in §1.1502-75(d)
(2)(ii) or (3), appropriate adjustments must be made in applying
paragraph (g)(2)(ii)(A) of this section so that corporations that
have not been members of the group for five years are not included.
In such a case, references to the common parent in paragraph (g)(2)
(ii)(A) of this section are to the former common parent. Thus,
members of the group remaining in existence (including the new
common parent) that have not been affiliated with the former common
parent (or that have not been members of that group) for the five
consecutive year period ending on the day that the determination is
made are not included under paragraph (g)(2)(ii)(A) of this section.
See, however, §1.1502-96(a)(2) for special rules relating to members
(or loss subgroups) that have an ownership change within six months
before, on, or after the time that the member becomes a member of
the group.

(h) Recognized built-in gain or loss--(1) In general.

[Reserved].

(2) Disposition of stock or an intercompany obligation of a member.
Gain or loss recognized by a member on the disposition of stock
(including stock described in section 1504(a)(4) and §1.382-2T(f)
(18)(ii) and (iii)) of another member is treated as a recognized
gain or loss for purposes of section 382(h)(2) (unless disallowed
under §1.1502-20 or otherwise), even though gain or loss on such
stock was not included in the determination of a net unrealized
built-in gain or loss under paragraph (g)(1) of this section. Gain
or loss recognized by a member with respect to an intercompany
obligation is treated as recognized gain or loss only to the extent
(if any) the transaction gives rise to aggregate income or loss
within the consolidated group.

(3) Intercompany transactions. Gain or loss that is deferred under
provisions such as section 267 and §1.1502-13 is treated as
recognized built-in gain or loss only to the extent taken into
account by the group during the recognition period.

See also §1.1502-13(c)(7) Example 10.

(4) Exchanged basis property. If the adjusted basis of any asset is
determined, directly or indirectly, in whole or in part, by
reference to the adjusted basis of another asset held by the member
at the beginning of the recognition period, the asset is treated,
with appropriate adjustments, as held by the member at the beginning
of the recognition period.

(i) [Reserved]

(j) Predecessor and successor corporations. A reference in this
section and §§1.1502-92 through 1.1502-99 to a corporation, member,
common parent, loss subgroup parent, or subsidiary includes, as the
context may require, a reference to a predecessor or successor
corporation as defined in §1.1502- 1(f)(4). For example, the
determination whether a successor satisfies the continuous
affiliation requirement of paragraph (d)(2)(i) or (g)(2)(ii) of this
section is made by reference to its predecessor.

§1.1502-92 Ownership change of a loss group or a loss subgroup.

(a) Scope. This section provides rules for determining if there is
an ownership change for purposes of section 382 with respect to a
loss group or a loss subgroup. See §1.1502-94 for special rules for
determining if there is an ownership change with respect to a new
loss member and §1.1502-96(b) for special rules for determining if
there is an ownership change of a subsidiary.

(b) Determination of an ownership change--(1) Parent change
method--(i) Loss group. A loss group has an ownership change if the
loss group's common parent has an ownership change under section 382
and the regulations thereunder. Solely for purposes of determining
whether the common parent has an ownership change--

(A) The losses described in §1.1502-91(c) are treated as net
operating losses (or a net unrealized built-in loss) of the common
parent; and

(B) The common parent determines the earliest day that its testing
period can begin by reference to only the attributes that make the
group a loss group under §1.1502-91(c).

(ii) Loss subgroup. A loss subgroup has an ownership change if the
loss subgroup parent has an ownership change under section 382 and
the regulations thereunder. The principles of §1.1502-95(b)
(relating to ceasing to be a member of a consolidated group) apply
in determining whether the loss subgroup parent has an ownership
change. Solely for purposes of determining whether the loss subgroup
parent has an ownership change--

(A) The losses described in §1.1502-91(d) are treated as net
operating losses (or a net unrealized built-in loss) of the loss
subgroup parent;

(B) The day that the members of the loss subgroup become members of
the group (or a loss subgroup) is treated as a testing date within
the meaning of §1.382-2(a)(4); and

(C) The loss subgroup parent determines the earliest day that its
testing period can begin under §1.382-2T(d)(3) by reference to only
the attributes that make the members a loss subgroup under
§1.1502-91(d).

(iii) Special rule if election regarding section 1504(a)(1)
relationship is made--(A) Ownership change of deemed loss subgroup
parent is an ownership change of loss subgroup. If the common parent
makes an election under §1.1502-91(d)(4), each of the members in the
loss subgroup is treated as the loss subgroup parent for purposes of
determining whether the loss subgroup has an ownership change under
section 382 and the regulations thereunder on or after the day the
members become members of the group.

(B) Exception. Paragraph (b)(1)(iii)(A) of this section does not
apply to cause an ownership change of a loss subgroup if a deemed
loss subgroup parent has an ownership change upon (or after) ceasing
to be a member of the current group.

(2) Examples. The following examples illustrate the principles of
this paragraph (b):

Example 1. Loss group--ownership change of the common parent. (i) A
owns all the L stock. L owns 80 percent and B owns 20 percent of the
L1 stock. For Year 1, the L group has a consolidated net operating
loss that resulted from the operations of L1 and that is carried
over to Year 2. The value of the L stock is $1000. The total value
of the L1 stock is $600 and the value of the L1 stock held by B is
$120. The L group is a loss group under §1.1502-91(c)(1) because it
is entitled to use its net operating loss carryover from Year 1. On
August 15, Year 2, A sells 51 percent of the L stock to C. The
following is a graphic illustration of these facts:

(ii) Under paragraph (b)(1)(i) of this section, section 382 and the
regulations thereunder are applied to L to determine whether it (and
therefore the L loss group) has an ownership change with respect to
its net operating loss carryover from Year 1 attributable to L1 on
August 15, Year 2. The sale of the L stock to C causes an ownership
change of L under §1.382-2T and of the L loss group under paragraph
(b)(1)(i) of this section. The amount of consolidated taxable income
of the L loss group for any post-change taxable year that may be
offset by its pre-change consolidated attributes (that is, the net
operating loss carryover from Year 1 attributable to L1) may not
exceed the consolidated section 382 limitation for the L loss group
for the taxable year.

Example 2. Loss group--owner shifts of subsidiaries disregarded. (i)
The facts are the same as in Example 1, except that on August 15,
Year 2, A sells only 49 percent of the L stock to C and, on December
12, Year 3, in an unrelated transaction, B sells the 20 percent of
the L1 stock to D. A's sale of the L stock to C does not cause an
ownership change of L under §1.382- 2T nor of the L loss group under
paragraph (b)(1)(i) of this section. The following is a graphic
illustration of these facts:

(ii) B's subsequent sale of L1 stock is not taken into account for
purposes of determining whether the L loss group has an ownership
change under paragraph (b)(1)(i) of this section, and, accordingly,
there is no ownership change of the L loss group. See paragraph (c)
of this section, however, for a supplemental ownership change method
that would apply to cause an ownership change if the purchases by C
and D were pursuant to a plan or arrangement and certain other
conditions are satisfied.

Example 3. Loss subgroup--ownership change of loss subgroup parent
controls. (i) P owns all the L stock. L owns 80 percent and A owns
20 percent of the L1 stock. The P group has a consolidated net
operating loss arising in Year 1 that is carried over to Year 2. On
September 9, Year 2, P sells 51 percent of the L stock to B, and L1
is apportioned a portion of the Year 1 consolidated net operating
loss under §1.1502-21(b), which it carries over to its next taxable
year. L and L1 file a consolidated return for their first taxable
year ending after the sale to B. The following is a graphic
illustration of these facts:

(ii) Under §1.1502-91(d)(1), L and L1 compose a loss subgroup on
September 9, Year 2, the day that they become members of the L
group. Under paragraph (b)(1)(ii) of this section, section 382 and
the regulations thereunder are applied to L to determine whether it
(and therefore the L loss subgroup) has an ownership change with
respect to the portion of the Year 1 consolidated net operating loss
that is apportioned to L1 on September 9, Year 2. L has an ownership
change resulting from P's sale of 51 percent of the L stock to A.
Therefore, the L loss subgroup has an ownership change with respect
to that loss.

Example 4. Loss group and loss subgroup--contemporaneous ownership
changes. (i) A owns all the stock of corporation M, M owns 35
percent and B owns 65 percent of the L stock, and L owns all the L1
stock. The L group has a consolidated net operating loss arising in
Year 1 that is carried over to Year 2. On May 19, Year 2, B sells 45
percent of the L stock to M for cash. M, L, and L1 thereafter file
consolidated returns. L and L1 are each apportioned a portion of the
Year 1 consolidated net operating loss, which they carry over to the
M group's Year 2 and Year 3 consolidated return years. The M group
has a consolidated net operating loss arising in Year 2 that is
carried over to Year 3. On June 9, Year 3, A sells 70 percent of the
M stock to C.

The following is a graphic illustration of these facts: (ii) Under
§1.1502-91(d)(1), L and L1 compose a loss subgroup on May 19, Year
2, the day they become members of the M group. Under paragraph (b)
(1)(ii) of this section, section 382 and the regulations thereunder
are applied to L to determine whether L (and therefore the L loss
subgroup) has an ownership change with respect to the loss
carryovers from Year 1 on May 19, Year 2, a testing date because of
B's sale of L stock to M. The sale of L stock to M results in only a
45 percentage point increase in A's ownership of L stock. Thus,
there is no ownership change of L (or the L loss subgroup) with
respect to those loss carryovers under paragraph (b)(1)(ii) of this
section on that day.

(iii) June 9, Year 3, is also a testing date with respect to the L
loss subgroup because of A's sale of M stock to C. The sale results
in a 56 percentage point increase in C's ownership of L stock, and L
has an ownership change. Therefore, the L loss subgroup has an
ownership change on that day with respect to the loss carryovers
from Year 1.

(iv) Paragraph (b)(1)(i) of this section requires that section 382
and the regulations thereunder be applied to M to determine whether
M (and therefore the M loss group) has an ownership change with
respect to the net operating loss carryover from Year 2 on June 9,
Year 3, a testing date because of A's sale of M stock to C. The sale
results in a 70 percentage point increase in C's ownership of M
stock, and M has an ownership change. Therefore, the M loss group
has an ownership change on that day with respect to that loss
carryover.

Example 5--Deemed subgroup parent. (i) P owns all the stock of L and
L1 and 80 percent of the stock of T. A owns