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 the remaining 20 percent
of the stock of T. L1 owns all the stock of L2. P1, which owns 60
percent of the stock of P, acquires, at the beginning of Year 2, the
T, L, and L1 stock owned by P, and T, L, L1, and L2 become members
of the P1 group. The P group has a consolidated net operating loss
arising in Year 1 that is carried over to Year 2. L, L1, and L2 are
each apportioned a portion of the Year 1 consolidated net operating
loss under �1.1502-21(b), which they carry over to the P1 group's
Year 2 and Year 3 consolidated return years. P1 makes the election
described in �1.1502-91(d)(4) to treat T, L, L1 and L2 as meeting
the section 1504(a)(1) requirement of �1.1502-91(d)(1)(ii). As a
result of the election, T, L, L1 and L2 compose a loss subgroup and
T, L, L1, and L2 are each treated as the loss subgroup parent for
purposes of this paragraph (b). Because of P1's indirect ownership
of T, L, L1, and L2 prior to P1's acquisition of the T, L, and L1
stock, P1's acquisition does not cause an ownership change of the
loss subgroup.

(ii) On February 2, Year 3, L1 sells all of the stock of L2 to B.
Although L2 is treated as a loss subgroup parent, the determination
whether the loss subgroup comprised of T, L, and L1 has an ownership
change under this paragraph (b) is made without regard to the sale
of L2 because L2's ownership change occurred upon ceasing to be a
member of the P1 group. See �1.1502-95(b) to determine the
application of section 382 to L2 when L2 ceases to be a member of
the P1 group and the T, L, L1 and L2 loss subgroup.

(iii) On March 26, Year 3, A sells her 20 percent minority stock
interest in T to C . C's purchase, together with the 32 percentage
point owner shift effected by P1's acquisition of the T stock at the
beginning of Year 2, causes an ownership change of T, and therefore
of the loss subgroup comprised of T, L, and L1.

(3) Special adjustments--(i) Common parent succeeded by a new common
parent. For purposes of determining if a loss group has an ownership
change, if the common parent of a loss group is succeeded or
acquired by a new common parent and the loss group remains in
existence, the new common parent is treated as a continuation of the
former common parent with appropriate adjustments to take into
account shifts in ownership of the former common parent during the
testing period (including shifts that occur incident to the common
parent's becoming the former common parent). A new common parent may
be a continuation of the former common parent even if, under
�1.1502-91(g)(2)(ii), the new common parent is not included in
determining whether the group has a net unrealized built-in loss.

(ii) Newly created loss subgroup parent. For purposes of determining
if a loss subgroup has an ownership change, if the member that is
the loss subgroup parent has not been the loss subgroup parent for
at least 3 years as of a testing date, appropriate adjustments must
be made to take into account owner shifts of members of the loss
subgroup so that the structure of the loss subgroup does not have
the effect of avoiding an ownership change under section 382. (See
paragraph (b)(3)(iii), Example 3 of this section.) (iii) Examples.
The following examples illustrate the principles of this paragraph
(b)(3):

Example 1. New common parent acquires old common parent.

(i) A, who owns all the L stock, sells 30 percent of the L stock to
B on August 26, Year 1. 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 3. On July 16, Year 2, A and B transfer their L stock
to a newly created holding company, HC, in exchange for 70 percent
and 30 percent, respectively, of the HC stock.

HC, L, and L1 thereafter file consolidated returns. Under the
principles of �1.1502-75(d), the L loss group is treated as
remaining in existence, with HC taking the place of L as the new
common parent of the loss group. The following is a graphic
illustration of these facts:

(ii) On November 11, Year 3, A sells 25 percent of the HC stock to
B. For purposes of determining if the L loss group has an ownership
change under paragraph (b)(1)(i) of this section on November 11,
Year 3, HC is treated as a continuation of L under paragraph (b)(4)
(i) of this section because it acquired L and became the common
parent without terminating the L loss group.

Accordingly, HC's testing period commences on January 1, Year 1, the
first day of the taxable year of the L loss group in which the
consolidated net operating loss that is carried over to Year 3 arose
(see �1.382-2T(d)(3)(i)). Immediately after the close of November
11, Year 3, B's percentage ownership interest in the common parent
of the loss group (HC) has increased by 55 percentage points over
its lowest percentage ownership during the testing period (zero
percent). Accordingly, HC and the L loss group have an ownership
change on that day.

Example 2. New common parent in case in which common parent ceases
to exist. (i) A, B, and C each own one-third of the L stock. L owns
all the L1 stock. The L group has a consolidated net operating loss
arising in Year 2 that is carried over to Year 3. On November 22,
Year 3, L is merged into P, a corporation owned by D, and L1
thereafter files consolidated returns with P.

A, B, and C, as a result of owning stock of L, own 90 percent of P's
stock after the merger. D owns the remaining 10 percent of P's
stock. The merger of L into P qualifies as a reverse acquisition of
the L group under �1.1502-75(d)(3)(i), and the L loss group is
treated as remaining in existence, with P taking the place of L as
the new common parent of the L group. The following is a graphic
illustration of these facts:

(ii) For purposes of determining if the L loss group has an
ownership change on November 22, Year 3, the day of the merger, P is
treated as a continuation of L so that the testing period for P
begins on January 1, Year 2, the first day of the taxable year of
the L loss group in which the consolidated net operating loss that
is carried over to Year 3 arose. Immediately after the close of
November 22, Year 3, D is the only 5-percent shareholder that has
increased his ownership interest in P during the testing period
(from zero to 10 percentage points).

(iii) The facts are the same as in paragraph (i) of this Example 2,
except that A has held 23 1/3 shares (23 1/3 percent) of L's stock
for five years, and A purchased an additional 10 shares of L stock
from E two years before the merger.

Immediately after the close of the day of the merger (a testing
date), A's ownership interest in P, the common parent of the L loss
group, has increased by 6 2/3 percentage points over A's lowest
percentage ownership during the testing period (23 1/3 percent to 30
percent).

(iv) The facts are the same as in (i) of this Example 2, except that
P has a net operating loss arising in Year 1 that is carried to the
first consolidated return year ending after the day of the merger.
Solely for purposes of determining whether the L loss group has an
ownership change under paragraph (b)(1)(i) of this section, the
testing period for P commences on January 1, Year 2. P does not
determine the earliest day for its testing period by reference to
its net operating loss carryover from Year 1, which ��1.1502-1(f)(3)
and 1.1502-75(d)(3)(i) treat as arising in a SRLY. See �1.1502-94 to
determine the application of section 382 with respect to P's net
operating loss carryover.

Example 3. Newly acquired loss subgroup parent. (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 over to Year 3.
On January 19, Year 2, L issues a 20 percent stock interest to B. On
February 5, Year 3, P contributes its L stock to a newly formed
subsidiary, HC, in exchange for all the HC stock, and distributes
the HC stock to its sole shareholder A. HC, L, and L1 thereafter
file consolidated returns. A portion of the P group's Year 1
consolidated net operating loss is apportioned to L and L1 under
�1.1502-21(b) and is carried over to the HC group's year ending
after February 5, Year 3. HC, L, and L1 compose a loss subgroup
within the meaning of �1.1502-91(d) with respect to the net
operating loss carryovers from Year 1. The following is a graphic
illustration of these facts:

(ii) February 5, Year 3, is a testing date for HC as the loss
subgroup parent with respect to the net operating loss carryovers of
L and L1 from Year 1. See paragraph (b)(1)(ii)(B) of this section.
For purposes of determining whether HC has an ownership change on
the testing date, appropriate adjustments must be made with respect
to the changes in the percentage ownership of the stock of HC
because HC was not the loss subgroup parent for at least 3 years
prior to the day on which it became a member of the HC loss subgroup
(a testing date). The appropriate adjustments include adjustments so
that HC succeeds to the owner shifts of other members of the former
group. Thus, HC succeeds to the owner shift of L that resulted from
the sale of the 20 percent interest to B in determining whether the
HC loss subgroup has an ownership change on February 5, Year 3, and
on any subsequent testing date that includes January 19, Year 2.

(4) End of separate tracking of certain losses. If �1.1502-96(a)
(relating to the end of separate tracking of attributes) applies to
a loss subgroup, then, while one or more members that were included
in the loss subgroup remain members of the consolidated group, there
is an ownership change with respect to their attributes described in
�1.1502-96(a)(2) only if the consolidated group is a loss group and
has an ownership change under paragraph (b)(1)(i) of this section
(or such a member has an ownership change under �1.1502-96(b)
(relating to ownership changes of subsidiaries)). If, however, the
loss subgroup has had an ownership change before �1.1502-96(a)
applies, see �1.1502-96(c) for the continuing application of the
subgroup's section 382 limitation with respect to its pre-change
subgroup attributes.

(c) Supplemental rules for determining ownership change--

(1) Scope. This paragraph (c) contains a supplemental rule for
determining whether there is an ownership change of a loss group (or
loss subgroup). It applies in addition to, and not instead of, the
rules of paragraph (b) of this section. Thus, for example, if the
common parent of the loss group has an ownership change under
paragraph (b) of this section, the loss group has an ownership
change even if, by applying this paragraph (c), the common parent
would not have an ownership change. This paragraph (c) does not
apply in determining an ownership change of a loss subgroup for
which an election under �1.1502-91(d)(4) is made.

(2) Cause for applying supplemental rule. This paragraph

(c) applies to a loss group (or loss subgroup) if--

(i) Any 5-percent shareholder of the common parent (or loss subgroup
parent) increases its percentage ownership interest in the stock of
both--

(A) A subsidiary of the loss group (or loss subgroup) other than by
a direct or indirect acquisition of stock of the common parent (or
loss subgroup parent); and

(B) The common parent (or loss subgroup parent);

(ii) Those increases occur within a 3 year period ending on any day
of a consolidated return year or, if shorter, the period beginning
on the first day following the most recent ownership change of the
loss group (or loss subgroup); and (iii) Either--

(A) 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 described in paragraph (c) (3)(i) of this section)
before the date that the group's income tax return is filed for the
taxable year that includes the date of that increase; or

(B) At any time during the period described in paragraph (c)(2)(ii)
of this section, the 5-percent shareholder of the common parent is
also a 5-percent shareholder of the subsidiary (determined without
regard to paragraph (c)(3)(i) of this section) 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 (determined as if the subsidiary was a loss corporation and
applying the principles of �1.382-2T(k), including the principles
relating to duty to inquire).

(3) Operating rules. Solely for purposes of this paragraph

(c)--

(i) 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 another person or
persons increases its percentage ownership interest in the stock of
a subsidiary 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);

(ii) The rules in section 382(l)(3) and ��1.382-2T(h) and 1.382-4(d)
(relating to constructive ownership) apply with respect to the stock
of the subsidiary by treating such stock as stock of a loss
corporation; and

(iii) In the case of a loss subgroup, a subsidiary includes any
member of the loss subgroup other than the loss subgroup parent. (A
loss subgroup parent is, however, a subsidiary of the loss group of
which it is a member.)

(4) Supplemental ownership change rules. The determination whether
the common parent (or loss subgroup parent) has an ownership change
is made by applying paragraph (b)(1) of this section as modified by
the following additional rules:

(i) Additional testing dates for the common parent (or loss subgroup
parent). A testing date for the common parent (or loss subgroup
parent) also includes--

(A) Each day on which there is an increase in the percentage
ownership of stock of a subsidiary as described in paragraph (c)(2)
of this section; and

(B) The first day of the first consolidated return year for which
the group is a loss group (or the members compose a loss subgroup).

(ii) Treatment of subsidiary stock as stock of the common parent (or
loss subgroup parent). The common parent (or loss subgroup parent)
is treated as though it had issued to the person acquiring (or
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). Similar
principles apply if the increase in percentage ownership interest is
effected by a redemption or similar transaction.

(iii) Different testing periods. Stock treated as issued under
paragraph (c)(4)(ii) of this section on a testing date is not
treated as so issued for purposes of applying the ownership change
rules of this paragraph (c) and paragraph (b) (1) of this section in
a testing period that does not include that testing date.

(iv) Disaffiliation of a subsidiary. If a deemed issuance of stock
under paragraph (c)(4)(ii) of this section would not cause the loss
group (or loss subgroup) to have an ownership change before the day
(if any) on which the subsidiary ceases to be a member of the loss
group (or subgroup), then paragraph (c)(4) of this section shall not
apply.

(v) Subsidiary stock acquired first. If an increase of subsidiary
stock described in paragraph (c)(2)(i)(A) of this section occurs
before the 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 that later date, but in an amount equal to the value
of the subsidiary stock on the date it was acquired.

(vi) Anti-duplication rule. If two or more 5-percent shareholders
are treated as increasing their percentage ownership interests
pursuant to the same plan or arrangement described in paragraph (c)
(3)(i) of this section, appropriate adjustments must be made so that
the amount of stock treated as issued is not taken into account more
than once.

(5) Examples. The following examples illustrate the principles of
this paragraph (c):

Example 1. Stock of the common parent under supplemental rules. (i)
A owns all the L stock. L is not a member of an affiliated group and
has a net operating loss carryover arising in Year 1 that is carried
over to Year 6. On September 20, Year 6, L transfers all of its
assets and liabilities to a newly created subsidiary, S, in exchange
for S stock. L and S thereafter file consolidated returns. On
November 23, Year 6, B contributes cash to L in exchange for a 45
percent ownership interest in L and contributes cash to S for a 20
percent ownership interest in S.

(ii) During the 3 year period ending on November 23, Year 6, B is a
5% shareholder of L and of S that increases its ownership interest
in L and S during that period. Under paragraph (c)(4)(ii) of this
section, the determination whether L (the common parent of a loss
group) has an ownership change on November 23, Year 6 (or, subject
to paragraph (c)(4)(iv) of this section, on any testing date in the
testing period which includes November 23, Year 6), is made by
applying paragraph (b)(1)(i) of this section and by treating the
value of B's 20 percent ownership interest in S as if it were L
stock issued to B.

Because B is a 5% shareholder of both L and S during the 3 year
period ending on November 23, Year 6, and B's increase in its
percentage ownership in the stock of S would be taken into account
in determining if S (if it were a loss corporation) had an ownership
change, it is not relevant whether L has actual knowledge of B's
acquisition of S stock.

Example 2. Plan or arrangement--public offering of subsidiary stock.
(i) A owns all the stock of L and L owns all the stock of L1. The L
group has a consolidated net operating loss arising in Year 1 that
resulted from the operations of L1 and that is carried over to Year
2. On October 7, Year 2, A sells 49 percent of the L stock to B. As
part of a plan that includes the sale of L stock, A causes a public
offering of L1 stock on November 6, Year 2. L has actual knowledge
of the plan.

The following is a graphic illustration of these facts:

(ii) A's sale of the L stock to B does not cause an ownership change
of the L loss group on October 7, Year 2, under the rules of
�1.382-2T and paragraph (b)(1)(i) of this section.

(iii) Because the issuance of L1 stock to the public occurs as part
of the same plan as B's acquisition of L stock, and L has knowledge
of the plan, paragraph (c)(4) of this section applies to determine
whether the L loss group has an ownership change on November 6, Year
2 (or, subject to paragraph (c)(4)(iv) of this section, on any
testing date for which the testing period includes November 6, Year
2).

(d) Testing period following ownership change under this section. If
a loss group (or a loss subgroup) has had an ownership change under
this section, the testing period for determining a subsequent
ownership change with respect to pre-change consolidated attributes
(or pre-change subgroup attributes) begins no earlier than the first
day following the loss group's (or loss subgroup's) most recent
change date.

(e) Information statements--(1) Common parent of a loss group. The
common parent of a loss group must file the information statement
required by �1.382-2T(a)(2)(ii) for a consolidated return year
because of any owner shift, equity structure shift, or other
transaction described in �1.382- 2T(a)(2)(i)--

(i) With respect to the common parent and with respect to any
subsidiary stock subject to paragraph (c) of this section; and

(ii) With respect to an ownership change described in �1.1502-96(b)
(relating to ownership changes of subsidiaries).

(2) Abbreviated statement with respect to loss subgroU.S. The common
parent of a consolidated group that has a loss subgroup during a
consolidated return year must file the information statement
required by �1.382-2T(a)(2)(ii) because of any owner shift, equity
structure shift, or other transaction described in �1.382-2T(a)(2)
(i) with respect to the loss subgroup parent and with respect to any
subsidiary stock subject to paragraph (c) of this section. Instead
of filing a separate statement for each loss subgroup parent, the
common parent (which is treated as a loss corporation) may file the
single statement described in paragraph (e)(1) of this section. In
addition to the information concerning stock ownership of the common
parent, the single statement must identify each loss subgroup parent
and state which loss subgroups, if any, have had ownership changes
during the consolidated return year. The loss subgroup parent is,
however, still required to maintain the records necessary to
determine if the loss subgroup has an ownership change. This
paragraph (e)(2) applies with respect to the attributes of a loss
subgroup until, under �1.1502-96(a), the attributes are no longer
treated as described in �1.1502-91(d) (relating to the definition of
loss subgroup). After that time, the information statement described
in paragraph (e)(1) of this section must be filed with respect to
those attributes.

�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.

Following an ownership change, the consolidated section 382
limitation (or subgroup section 382 limitation) for any post-change
year is an amount equal to the value of the loss group (or loss
subgroup), as defined in paragraph (b) of this section, multiplied
by the long-term tax-exempt rate that applies with respect to the
ownership change, and adjusted as required by section 382 and the
regulations thereunder. See, for example, section 382(b)(2)
(relating to the carryforward of unused section 382 limitation),
section 382(b)(3)(B) (relating to the section 382 limitation for the
post-change year that includes the change date), section 382(h)
(relating to recognized built-in gains and section 338 gains), and
section 382(m)(2) (relating to short taxable years). For special
rules relating to the recognized built-in gains of a loss group (or
loss subgroup), see paragraph (c)(2) of this section.

(2) Coordination with apportionment rule. For special rules relating
to apportionment of a consolidated section 382 limitation (or a
subgroup section 382 limitation) or net unrealized built-in gain
when one or more corporations cease to be members of a loss group
(or a loss subgroup) and to aggregation of amounts so apportioned,
see �1.1502-95(c).

(b) Value of the loss group (or loss subgroup)--(1) Stock value
immediately before ownership change. Subject to any adjustment under
paragraph (b)(2) of this section, the value of the loss group (or
loss subgroup) is the value, immediately before the ownership
change, of the stock of each member, other than stock that is owned
directly or indirectly by another member. For this purpose--

(i) Ownership is determined under �1.382-2T;

(ii) A member is considered to indirectly own stock of another
member through a nonmember only if the member has a 5- percent or
greater ownership interest in the nonmember; and

(iii) Stock includes stock described in section 1504(a)(4) and
�1.382-2T(f)(18)(ii) and (iii).

(2) Adjustment to value--(i) In general. The value of the loss group
(or loss subgroup), as determined under paragraph (b)(1) of this
section, is adjusted under any rule in section 382 or the
regulations thereunder requiring an adjustment to such value for
purposes of computing the amount of the section 382 limitation. See,
for example, section 382(e)(2) (redemptions and corporate
contractions), section 382(l)(1) (certain capital contributions) and
section 382(l)(4) (ownership of substantial nonbusiness assets). 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 paragraph
(d)(1)(ii) or (2)(ii) of this section), 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.

(ii) Anti-duplication. 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.

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

Example 1. Basic case. (i) L, L1, and L2 compose a loss group. L has
outstanding common stock, the value of which is $100. L1 has
outstanding common stock and preferred stock that is described in
section 1504(a)(4). L owns 90 percent of the L1 common stock, and A
owns the remaining 10 percent of the L1 common stock plus all the
preferred stock. The value of the L1 common stock is $40, and the
value of the L1 preferred stock is $30. L2 has outstanding common
stock, 50 percent of which is owned by L and 50 percent by L1. The L
group has an ownership change. The following is a graphic
illustration of these facts: (ii) Under paragraph (b)(1) of this
section, the L group does not include the value of the stock of any
member that is owned directly or indirectly by another member in
computing its consolidated section 382 limitation. Accordingly, the
value of the stock of the loss group is $134, the sum of the value
of--

(a) The common stock of L ($100);

(b) The 10 percent of the L1 common stock ($4) owned by A; and

(c) The L1 preferred stock ($30) owned by A.

Example 2--Indirect ownership. (i) L and L1 compose a consolidated
group. L's stock has a value of $100. L owns 80 shares (worth $80)
and corporation M owns 20 shares (worth $20) of the L1 stock. L also
owns 79 percent of the stock of corporation M. The L group has an
ownership change. The following is a graphic illustration of these
facts: (ii) Under paragraph (b)(1) of this section, because of L's
more than 5 percent ownership interest in M, a nonmember, L is
considered to indirectly own 15.8 shares of the L1 stock held by M
(79% x 20 shares). The value of the L loss group is $104.20, the sum
of the values of--

(a) The L stock ($100); and

(b) The L1 stock not owned directly or indirectly by L (21% x $20,
or $4.20).

(c) Recognized built-in gain of a loss group or loss subgroup--(1)
In general. If a loss group (or loss subgroup) has a net unrealized
built-in gain, 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).

(2) Adjustments. 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. For
example, a consolidated section 382 limitation that is increased by
recognized built-in gains is reduced to the extent that pre-change
net operating losses of a loss subgroup absorb additional
consolidated taxable income because the same recognized built-in
gains caused an increase in that loss subgroup's section 382
limitation. In addition, recognized built-in gain may not increase
the amount of consolidated taxable income that can be offset by
recognized built-in losses.

(d) Continuity of business--(1) In general. A loss group (or a loss
subgroup) is treated as a single entity for purposes of determining
whether it satisfies the continuity of business enterprise
requirement of section 382(c)(1).

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

Example. Continuity of business enterprise. L owns all the stock of
two subsidiaries, L1 and L2. The L group has an ownership change. It
has pre-change consolidated attributes attributable to L2. Each of
the members has historically conducted a separate line of business.
Each line of business is approximately equal in value. One year
after the ownership change, L discontinues its separate business and
the business of L2. The separate business of L1 is continued for the
remainder of the 2 year period following the ownership change. The
continuity of business enterprise requirement of section 382(c)(1)
is met even though the separate businesses of L and L2 are
discontinued.

(e) Limitations of losses under other rules. If a section 382
limitation for a post-change year exceeds the consolidated taxable
income that may be offset by pre-change attributes for any reason,
including the application of the limitation of �1.1502-21(c), the
amount of the excess is carried forward under section 382(b)(2)
(relating to the carryforward of unused section 382 limitation).

�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. This section applies section 382 and the
regulations thereunder to a corporation that is a new loss member of
a consolidated group. A corporation is a new loss member if it--

(i) Carries over a net operating loss that arose (or is treated
under �1.1502-21(c) as arising) in a SRLY with respect to the
current group, and that is not described in �1.1502-91(d)(1); or

(ii) Has a net unrealized built-in loss (determined under paragraph
(c) of this section immediately before it becomes a member of the
current group by treating that day as a change date) that is not
taken into account under �1.1502-91(d)(2) in determining whether two
or more corporations compose a loss subgroup.

(2) Successor corporation as new loss member. A new loss member also
includes any successor to a corporation that has a net operating
loss carryover arising in a SRLY and that is treated as remaining in
existence under �1.382-2(a)(1)(ii) following a transaction described
in section 381(a).

(3) Coordination in the case of a loss subgroup. For rules regarding
the determination of whether there is an ownership change of a loss
subgroup with respect to a net operating loss or a net unrealized
built-in loss described in �1.1502-91(d) (relating to the definition
of loss subgroup) and the computation of a subgroup section 382
limitation following such an ownership change, see ��1.1502-92 and
1.1502-93.

(4) End of separate tracking of certain losses. If �1.1502-96(a)
(relating to the end of separate tracking of attributes) applies to
a new loss member, then, while that member remains a member of the
consolidated group, there is an ownership change with respect to its
attributes described in �1.1502- 96(a)(2) only if the consolidated
group is a loss group and has an ownership change under
�1.1502-92(b)(1)(i) (or that member has an ownership change under
�1.1502-96(b) (relating to ownership changes of subsidiaries)). If,
however, the new loss member has had an ownership change before
�1.1502-96(a) applies, see �1.1502-96(c) for the continuing
application of the section 382 limitation with respect to the
member's pre-change losses.

(5) Cross-reference. See section 382(a) and �1.1502-96(c) for the
continuing effect of an ownership change after a corporation becomes
or ceases to be a member.

(b) Application of section 382 to a new loss member--(1) In general.
Section 382 and the regulations thereunder apply to a new loss
member to determine, on a separate entity basis, whether and to what
extent a section 382 limitation applies to limit the amount of
consolidated taxable income that may be offset by the new loss
member's pre-change separate attributes. For example, if an
ownership change with respect to the new loss member occurs under
section 382 and the regulations thereunder, the amount of
consolidated taxable income for any post-change year that may be
offset by the new loss member's pre-change separate attributes shall
not exceed the section 382 limitation as determined separately under
section 382(b) with respect to that member for such year. If the
post-change year includes the change date, section 382(b)(3)(A) is
applied so that the section 382 limitation of the new loss member
does not apply to the portion of the taxable income for such year
that is allocable to the period in such year on or before the change
date. See generally �1.382-6 (relating to the allocation of income
and loss).

(2) Adjustment to value. 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.
For example, the principles of �1.1502-93(b)(2)(ii) (relating to
adjustments to value) apply in determining the value of a new loss
member.

(3) Pre-change separate attribute defined. A pre-change separate
attribute of a new loss member is--

(i) Any net operating loss carryover of the new loss member
described in paragraph (a)(1) of this section; and

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

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

Example 1. Basic case. (i) A and P each own 50 percent of the L
stock. On December 19, Year 6, P purchases 30 percent of the L stock
from A for cash. L has net operating losses arising in Year 1 and
Year 2 that it carries over to Year 6 and Year 7.

The following is a graphic illustration of these facts:

(ii) L is a new loss member because it has net operating loss
carryovers that arose in a SRLY with respect to the P group and L is
not a member of a loss subgroup under �1.1502-91(d).

Under section 382 and the regulations thereunder, L is a loss
corporation on December 19, Year 6, that day is a testing date for
L, and the testing period for L commences on December 20, Year 3.

(iii) P's purchase of L stock does not cause an ownership change of
L on December 19, Year 6, with respect to the net operating loss
carryovers from Year 1 and Year 2 under section 382 and �1.382-2T.
The use of the loss carryovers, however, is subject to limitation
under �1.1502-21(c).

Example 2. Multiple new loss members. (i) The facts are the same as
in Example 1, and, on December 31, Year 6, L purchases all the stock
of L1 from B for cash. L1 has a net operating loss of $40 arising in
Year 3 that it carries over to Year 7. The following is a graphic
illustration of these facts: (ii) L1 is a new loss member because it
has a net operating loss carryover from Year 3 that arose in a SRLY
with respect to the P group and L1 is not a member of a loss
subgroup under �1.1502-91(d)(1).

(iii) L's purchase of all the stock of L1 causes an ownership change
of L1 on December 31, Year 6, under section 382 and �1.382-2T.
Accordingly, a section 382 limitation based on the value of the L1
stock immediately before the ownership change limits the amount of
consolidated taxable income of the P group for any post-change year
that may be offset by L1's loss from Year 3.

(iv) L1's ownership change upon becoming a member of the P group is
an ownership change described in �1.1502-96(a). Thus, starting on
January 1, Year 7, the P group no longer separately tracks owner
shifts of the stock of L1 with respect to L1's loss from Year 3, and
the P group is a loss group because L1's Year 3 loss is treated as a
loss described in �1.1502-91(c).

Example 3. Ownership changes of new loss members. (i) The facts are
the same as in Example 2, and, on July 30, Year 7, C purchases all
the stock of P for cash.

(ii) L is a new loss member on July 30, Year 7, because its Year 1
and Year 2 losses arose in SRLYs with respect to the P group and it
is not a member of a loss subgroup under �1.1502- 91(d)(1). The
testing period for L commences on August 1, Year 4. C's purchase of
all the P stock causes an ownership change of L on July 30, Year 7,
under section 382 and �1.382-2T with respect to its Year 1 and Year
2 losses. Accordingly, a section 382 limitation based on the value
of the L stock immediately before the ownership change limits the
amount of consolidated taxable income of the P group for any post-
change year that may be offset by L's Year 1 and Year 2 losses. See
�1.1502-21(c) for rules relating to an additional limitation.

(iii) The P group is a loss group on July 30, Year 7, because it is
entitled to use L1's loss from Year 3, and such loss is no longer
treated as a loss of a new loss member starting the day after L1's
ownership change on December 31, Year 6. See ��1.1502-96(a) and
1.1502-91(c)(2). C's purchase of all the P stock causes an ownership
change of P, and therefore the P loss group, on July 30, Year 7,
with respect to L1's Year 3 loss.

Accordingly, a consolidated section 382 limitation based on the
value of the P stock immediately before the ownership change limits
the amount of consolidated taxable income of the P group for any
post-change year that may be offset by L1's Year 3 loss.

(c) Built-in gains and losses. As the context may require, the
principles of ��1.1502-91(g) and (h) and 1.1502-93(c) (relating to
built-in gains and losses) apply to a new loss member on a separate
entity basis. See �1.1502-91(g)(4). See �1.1502-13 (including
Example 10 of �1.1502-13(c)(7)) for rules relating to the treatment
of intercompany transactions.

(d) Information statements. The common parent of a consolidated
group that has a new loss member subject to paragraph (b)(1) of this
section during a consolidated return year must file the information
statement required by �1.382- 2T(a)(2)(ii) because of any owner
shift, equity structure shift, or other transaction described in
�1.382-2T(a)(2)(i). Instead of filing a separate statement for each
new loss member, the common parent may file a single statement
described in �1.382- 2T(a)(2)(ii) with respect to the stock
ownership of the common parent (which is treated as a loss
corporation). In addition to the information concerning stock
ownership of the common parent, the single statement must identify
each new loss member and state which new loss members, if any, have
had ownership changes during the consolidated return year. The new
loss member is, however, required to maintain the records necessary
to determine if it has an ownership change. This paragraph (d)
applies with respect to the attributes of a new loss member until an
event occurs which ends separate tracking under �1.1502-96(a). After
that time, the information statement described in �1.1502-92(e)(1)
must be filed with respect to these attributes.

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

(a) In general--(1) Consolidated group. This section provides rules
for applying section 382 on or after the day that a member ceases to
be a member of a consolidated group (or loss subgroup). The rules
concern how to determine whether an ownership change occurs with
respect to losses of the member, and how a consolidated section 382
limitation (or subgroup section 382 limitation) and a loss group's
(or loss subgroup's) net unrealized built-in gain or loss is
apportioned to the member.

As the context requires, a reference in this section to a loss
group, a member, or a corporation also includes a reference to a
loss subgroup, and a reference to a consolidated section 382
limitation also includes a reference to a subgroup section 382
limitation.

(2) Election by common parent. Only the common parent (not the loss
subgroup parent) may make the election under paragraph (c) of this
section to apportion a consolidated section 382 limitation (or
subgroup section 382 limitation) or a loss group's (or loss
subgroup's) net unrealized built-in gain.

(3) Coordination with ��1.1502-91 through 1.1502-93. For rules
regarding the determination of whether there is an ownership change
of a loss subgroup and the computation of a subgroup section 382
limitation following such an ownership change, see ��1.1502-91
through 1.1502-93.

(b) Separate application of section 382 when a member leaves a
consolidated group--(1) In general. Except as provided in
��1.1502-91 through 1.1502-93 (relating to rules applicable to loss
groups and loss subgroups), section 382 and the regulations
thereunder apply to a corporation on a separate entity basis after
it ceases to be a member of a consolidated group (or loss subgroup).
Solely for purposes of determining whether a corporation has an
ownership change--

(i) Any portion of a consolidated net operating loss that is
apportioned to the corporation under �1.1502-21(b) is treated as a
net operating loss of the corporation beginning on the first day of
the taxable year in which the loss arose;

(ii) The testing period may include the period during which (or
before which) the corporation was a member of the group (or loss
subgroup); and

(iii) Except to the extent provided in �1.1502-96(d) (relating to
reattributed losses), the day it ceases to be a member of a
consolidated group is treated as a testing date of the corporation
within the meaning of �1.382-2(a)(4).

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

If a loss group has had an ownership change under �1.1502-92 before
a corporation ceases to be a member of a consolidated group (the
former member)--

(i) Any pre-change consolidated attribute that is subject to a
consolidated section 382 limitation continues to be treated as a
pre-change loss with respect to the former member after it is
apportioned to the former member and, if any net unrealized built-in
loss is allocated to the former member under paragraph (e) of this
section, any recognized built-in loss of the former member is a pre-
change loss of the member;

(ii) The section 382 limitation with respect to such pre-change
attribute is zero unless the common parent, under paragraph (c) of
this section, apportions to the former member all or part of the
consolidated section 382 limitation applicable to such attribute.
The limitation applicable to a pre-change attribute other than a
recognized built-in loss may be increased to the extent that the
common parent has apportioned all or part of the loss group's net
unrealized built-in gain to the former member, and the former member
recognizes built-in gain during the recognition period;

(iii) The testing period for determining a subsequent ownership
change with respect to such pre-change attribute (or such net
unrealized built-in loss, if any) begins no earlier than the first
day following the loss group's most recent change date; and

(iv) As generally provided under section 382, an ownership change of
the former member that occurs on or after the day it ceases to be a
member of a loss group may result in an additional, lesser
limitation amount with respect to such losses.

(3) Application in the case of a loss subgroup. If two or more
former members are included in the same loss subgroup immediately
after they cease to be members of a consolidated group, the
principles of paragraphs (b), (c) and (e) of this section apply to
the loss subgroup. Therefore, for example, an apportionment by the
common parent under paragraph (c) of this section is made to the
loss subgroup rather than separately to its members. If the common
parent of the consolidated group apportions all or part of a
limitation (or net unrealized built-in gain) separately to one or
more former members that are included in a loss subgroup because the
common parent of the acquiring group makes an election under
�1.1502-91(d)(4) with respect to those members, the aggregate of
those separate amounts is treated as the amount apportioned to the
loss subgroup. Such separate apportionment may occur, for example,
because the election under �1.1502-91(d)(4) has not been filed at
the time that the election of apportionment is made under paragraph
(f) of this section.

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

Example 1. Treatment of departing member as a separate corporation
throughout the testing period. (i) A owns all the L stock. L owns
all the stock of L1 and L2. The L group has a consolidated net
operating loss arising in Year 1 that is carried over to Year 3. On
January 12, Year 2, A sells 30 percent of the L stock to B. On
February 7, Year 3, L sells 40 percent of the L2 stock to C, and L2
ceases to be a member of the group. A portion of the Year 1
consolidated net operating loss is apportioned to L2 under
�1.1502-21(b) and is carried to L2's first separate return year,
which ends December 31, Year 3. The following is a graphic
illustration of these facts: (ii) Under paragraph (b)(1) of this
section, L2 is a loss corporation on February 7, Year 3. Under
paragraph (b)(1)(iii) of this section, February 7, Year 3, is a
testing date. Under paragraph (b)(1)(ii) of this section, the
testing period for L2 with respect to this testing date commences on
January 1, Year 1, the first day of the taxable year in which the
portion of the consolidated net operating loss apportioned to L2
arose.

Therefore, in determining whether L2 has an ownership change on
February 7, Year 3, B's purchase of 30 percent of the L stock and
C's purchase of 40 percent of the L2 stock are each owner shifts.

L2 has an ownership change under section 382(g) and �1.382-2T
because B and C have increased their ownership interests in L2 by 18
and 40 percentage points, respectively, during the testing period.

Example 2. Effect of prior ownership change of loss group.

(i) L owns all the L1 stock and L1 owns all the L2 stock. The L loss
group had an ownership change under �1.1502-92 in Year 2 with
respect to a consolidated net operating loss arising in Year 1 and
carried over to Year 2 and Year 3. The consolidated section 382
limitation computed solely on the basis of the value of the stock of
L is $100. On December 31, Year 2, L1 sells 25 percent of the stock
of L2 to B. L2 is apportioned a portion of the Year 1 consolidated
net operating loss which it carries over to its first separate
return year ending after December 31, Year 2. L2's separate section
382 limitation with respect to this loss is zero unless L elects to
apportion all or a part of the consolidated section 382 limitation
to L2. (See paragraph (c) of this section for rules regarding the
apportionment of a consolidated section 382 limitation.) L
apportions $50 of the consolidated section 382 limitation to L2, and
the remaining $50 of the consolidated section 382 limitation stays
with the loss group composed of L and L1.

(ii) On December 31, Year 3, L1 sells its remaining 75 percent stock
interest in L2 to C, resulting in an ownership change of L2. L2's
section 382 limitation computed on the change date with respect to
the value of its stock is $30. Accordingly, L2's section 382
limitation for post-change years ending after December 31, Year 3,
with respect to its pre-change losses, including the consolidated
net operating losses apportioned to it from the L group, is $30,
adjusted for a short taxable year, carryforward of unused
limitation, or any other adjustment required under section 382.

(c) Apportionment of a consolidated section 382 limitation --(1) In
general. The common parent may elect to apportion all or any part of
a consolidated section 382 limitation to a former member (or loss
subgroup). The common parent also may elect to apportion all or any
part of the loss group's net unrealized built-in gain to a former
member (or loss subgroup).

(2) Amount which may be apportioned--(i) Consolidated section 382
limitation. The common parent may apportion all or part of each
element of the consolidated section 382 limitation determined under
�1.1502-93. For this purpose, the consolidated section 382
limitation consists of two elements--

(A) The value element, which is the element of the limitation
determined under section 382(b)(1) (relating to value multiplied by
the long-term tax-exempt rate) without regard to such adjustments as
those described in section 382(b)(2) (relating to the carryforward
of unused section 382 limitation), section 382(b)(3)(B)(relating to
the section 382 limitation for the post-change year that includes
the change date), section 382(h)(relating to built-in gains and
section 338 gains), and section 382(m)(2)(relating to short taxable
years); and

(B) The adjustment element, which is so much (if any) of the
limitation for the taxable year during which the former member
ceases to be a member of the consolidated group that is attributable
to a carryover of unused limitation under section 382(b)(2) or to
recognized built-in gains under 382(h).

(ii) Net unrealized built-in gain. The aggregate amount of the loss
group's net unrealized built-in gain 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).
For this purpose, net unrealized built-in gain apportioned to former
members in prior consolidated return years is treated as recognized
built-in gain in those years.

(3) Effect of apportionment on the consolidated group--(i)
Consolidated section 382 limitation. The value element of the
consolidated section 382 limitation for any post-change year ending
after the day that a former member (or loss subgroup) ceases to be a
member(s) is reduced to the extent that it is apportioned under this
paragraph (c). The consolidated section 382 limitation for the post-
change year in which the former member (or loss subgroup) ceases to
be a member(s) is also reduced to the extent that the adjustment
element for that year is apportioned under this paragraph (c).

(ii) Net unrealized built-in gain. The amount of the loss group's
net unrealized built-in gain that is apportioned to the former
member (or loss subgroup) is treated as recognized built-in gain for
a prior taxable year ending in the recognition period for purposes
of applying the limitation of section 382(h)(1)(A)(ii) to the loss
group's recognition period taxable years beginning after the
consolidated return year in which the former member (or loss
subgroup) ceases to be a member.

(4) Effect on corporations to which an apportionment is made--(i)
Consolidated section 382 limitation. The amount of the value element
that is apportioned to a former member (or loss subgroup) is treated
as the amount determined under section 382(b)(1) for purposes of
determining the amount of that corporation's (or loss subgroup's)
section 382 limitation for any taxable year ending after the former
member (or loss subgroup) ceases to be a member(s). Appropriate
adjustments must be made to the limitation based on the value
element so apportioned for a short taxable year, carryforward of
unused limitation, or any other adjustment required under section
382. The adjustment element apportioned to a former member (or loss
subgroup) is treated as an adjustment under section 382(b)(2) or
section 382(h), as appropriate, for the first taxable year after the
member (or members) ceases to be a member (or members).

(ii) Net unrealized built-in gain. For purposes of determining the
amount by which the former member's (or loss subgroup's) section 382
limitation for any taxable year beginning after the former member
(or loss subgroup) ceases to be a member(s) is increased by its
recognized built-in gain--

(A) The amount of net unrealized built-in gain apportioned to a
former member (or loss subgroup) is treated as if it were an amount
of net unrealized built-in gain determined under section 382(h)(1)
(A)(i)(without regard to the threshold of section 382(h)(3)(B)) with
respect to such member or loss subgroup, and that amount is not
reduced under section 382(h)(1)(A)(ii) by the loss group's
recognized built-in gain;

(B) The former member's (or loss subgroup's) 5 year recognition
period begins on the loss group's change date;

(C) In applying section 382(h)(1)(A)(ii), the former member (or loss
subgroup) takes into account only its prior taxable years that begin
after it ceases to be a member of the loss group; and

(D) The former member's (or loss subgroup's) recognized built-in
gain on the disposition of an asset is determined under section
382(h)(2)(A), treating references to the change date in that section
as references to the loss group's change date.

(5) Deemed apportionment when loss group terminates. If a loss group
terminates, to the extent the consolidated section 382 limitation or
net unrealized built-in gain is not apportioned under paragraph (c)
(1) of this section, the consolidated section 382 limitation or net
unrealized built-in gain is deemed to be apportioned to the loss
subgroup that includes the common parent, or, if there is no loss
subgroup that includes the common parent immediately after the loss
group terminates, to the common parent. A loss group terminates on
the first day of the first taxable year that is a separate return
year with respect to each member of the former loss group.

(6) Appropriate adjustments when former member leaves during the
year. Appropriate adjustments are made to the consolidated section
382 limitation for the consolidated return year during which the
former member (or loss subgroup) ceases to be a member(s) to reflect
the inclusion of the former member in the loss group for a portion
of that year.

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

Example 1. Consequence of apportionment. (i) L owns all the L1 stock
and L1 owns all the L2 stock. The L group has a $200 consolidated
net operating loss arising in Year 1 that is carried over to Year 2.
At the close of December 31, Year 1, the group has an ownership
change under �1.1502-92. The ownership change results in a
consolidated section 382 limitation of $10 based on the value of the
stock of the group. On August 29, Year 2, L1 sells 30 percent of the
stock of L2 to A. L2 is apportioned $90 of the group's $200
consolidated net operating loss under �1.1502-21(b). L, the common
parent, elects to apportion $6 of the consolidated section 382
limitation to L2.

The following is a graphic illustration of these facts: (ii) For its
separate return years ending after December 31, Year 2, L2's section
382 limitation with respect to the $90 of the group's net operating
loss apportioned to it is $6, adjusted, as appropriate, for any
short taxable year, unused section 382 limitation, or other
adjustment. For its consolidated return year ending December 31,
Year 2 the L group's consolidated section 382 limitation with
respect to the remaining $110 of pre-change consolidated attribute
is $4 ($10 minus the $6 value element apportioned to L2), adjusted,
as appropriate, for any short taxable year, unused section 382
limitation, or other adjustment.

(iii) For the L group's consolidated return year ending December 31,
Year 2, the value element of its consolidated section 382 limitation
is increased by $4 (rounded to the nearest dollar), to account for
the period during which L2 was a member of the L group ($6, the
consolidated section 382 limitation apportioned to L2, times
241/365, the ratio of the number of days during Year 2 that L2 is a
member of the group to the number of days in the group's
consolidated return year). See paragraph (c)(6) of this section.
Therefore, the value element of the consolidated section 382
limitation for Year 2 of the L group is $8 (rounded to the nearest
dollar).

(iv) The section 382 limitation for L2's short taxable year ending
December 31, Year 2, is $2 (rounded to the nearest dollar), which is
the amount that bears the same relationship to $6, the value element
of the consolidated section 382 limitation apportioned to L2, as the
number of days during that short taxable year, 124 days, bears to
365. See �1.382-5(c).

Example 2. Consequence of no apportionment. The facts are the same
as in Example 1, except that L does not elect to apportion any
portion of the consolidated section 382 limitation to L2. For its
separate return years ending after August 29, Year 2, L2's section
382 limitation with respect to the $90 of the group's pre-change
consolidated attribute apportioned to L2 is zero under paragraph (b)
(2)(ii) of this section. Thus, the $90 consolidated net operating
loss apportioned to L2 cannot offset L2's taxable income in any of
its separate return years ending after August 29, Year 2. For its
consolidated return years ending after August 29, Year 2, the L
group's consolidated section 382 limitation with respect to the
remaining $110 of pre-change consolidated attribute is $10,
adjusted, as appropriate, for any short taxable year, unused section
382 limitation, or other adjustment.

Example 3. Apportionment of adjustment element. The facts are the
same as in Example 1, except that L2 ceases to be a member of the L
group on August 29, Year 3, and the L group has a $4 carryforward of
an unused consolidated section 382 limitation (under section 382(b)
(2)) to the Year 3 consolidated return year.

The carryover of unused limitation increases the consolidated
section 382 limitation for the Year 3 consolidated return year from
$10 to $14. L may elect to apportion all or any portion of the $10
value element and all or any portion of the $4 adjustment element to
L2.

(d) Rules pertaining to ceasing to be a member of a loss
subgroup--(1) In general. A corporation ceases to be a member of a
loss subgroup on the earlier of--

(i) The first day of the first taxable year for which it files a
separate return; or

(ii) The first day that it ceases to bear a relationship described
in section 1504(a)(1) to the loss subgroup parent (treating for this
purpose the loss subgroup parent as the common parent described in
section 1504(a)(1)(A)).

(2) Exceptions. Paragraph (d)(1)(ii) of this section does not apply
to a member of a loss subgroup while that member remains a member of
the current group--

(i) If an election under �1.1502-91(d)(4)(relating to treating the
subgroup parent requirement as satisfied) applies to the members of
the loss subgroup;

(ii) Starting on the day after the change date (but not earlier than
the date the loss subgroup becomes a member of the group), if there
is an ownership change of the loss subgroup within six months
before, on, or after becoming members of the group; or

(iii) Starting the day after the period of 5 consecutive years
following the day that the loss subgroup become members of the group
during which the loss subgroup has not had an ownership change.

(3) Examples. The principles of this paragraph (d) are illustrated
by the following examples:

Example 1. Basic case. (i) P owns all the L stock, L owns all the L1
stock and L1 owns all the L2 stock. The P group has a consolidated
net operating loss arising in Year 1 that is carried over to Year 2.
On December 11, Year 2, P sells all the stock of L to corporation M.
Each of L, L1, and L2 is apportioned a portion of the Year 1
consolidated net operating loss, and thereafter each joins with M in
filing consolidated returns.

Under �1.1502-92, the L loss subgroup has an ownership change on
December 11, Year 2. The L loss subgroup has a subgroup section 382
limitation of $100. The following is a graphic illustration of these
facts:

(ii) On May 22, Year 3, L1 sells 40 percent of the L2 stock to A. L2
carries over a portion of the P group's net operating loss from Year
1 to its separate return year ending December 31, Year 3. Under
paragraph (d)(1) of this section, L2 ceases to be a member of the L
loss subgroup on May 22, Year 3, which is both (1) the first day of
the first taxable year for which it files a separate return and (2)
the day it ceases to bear a relationship described in section
1504(a)(1) to the loss subgroup parent, L.

The net operating loss of L2 that is carried over from the P group
is treated as a pre-change loss of L2 for its separate return years
ending after May 22, Year 3. Under paragraphs (a)(2) and (b)(2) of
this section, the separate section 382 limitation with respect to
this loss is zero unless M elects to apportion all or a part of the
subgroup section 382 limitation of the L loss subgroup to L2.

Example 2. Formation of a new loss subgroup. The facts are the same
as in Example 1, except that A purchases 40 percent of the L1 stock
from L rather than purchasing L2 stock from L1. L1 and L2 file a
consolidated return for their first taxable year ending after May
22, Year 3, and each of L1 and L2 carries over a part of the net
operating loss of the P group that arose in Year 1. Under paragraph
(d)(1) of this section, L1 and L2 cease to be members of the L loss
subgroup on May 22, Year 3. The net operating losses carried over
from the P group are treated as pre-change subgroup attributes of
the loss subgroup composed of L1 and L2. The subgroup section 382
limitation with respect to those losses is zero unless M elects to
apportion all or part of the subgroup section 382 limitation of the
L loss subgroup to the L1 loss subgroup. The following is a graphic
illustration of these facts:

Example 3. Ownership change upon becoming members of the group. (i)
A owns all the stock of P, and P owns all the stock of L1 and L2.
The P group has a consolidated net operating loss arising in Year 1
that is carried over to Year 3 and Year 4.

Corporation M acquires all the stock of P on November 11, Year 3,
and P, L1, and L2 thereafter file consolidated returns with M.

M's acquisition results in an ownership change of the P loss
subgroup under �1.1502-92(b)(1)(ii).

(ii) P distributes the L2 stock to M on October 7, Year 4, and L2
ceases to bear the relationship described in section 1504(a)(1) to
P, the P loss subgroup parent. However, under paragraph (d)(2) of
this section, L2 does not cease to be a member of the P loss
subgroup because the P loss subgroup had an ownership change upon
becoming members of the M group and L2 remains in the M group.

Example 4. Ceasing to bear a section 1504 (a)(1) to the loss
subgroup parent. (i) A owns all the stock of P, and P owns all the
stock of L1 and L2. The P group has a consolidated net operating
loss arising in Year 1 that is carried over to Year 7.

At the close of Year 2, X acquires all of the stock of P, causing an
ownership change of the loss subgroup composed of P, L1 and L2 under
�1.1502-92(b)(1)(ii). In Year 4, M, which is owned by the same
person that owns X, acquires all of the stock of P, and the M
acquisition does not cause a second ownership change of the P loss
subgroup.

(ii) P distributes the L2 stock to M on February 3, Year 6 (less
than 5 years after the P loss subgroup became members of the M
group) and L2 ceases to bear the relationship described in section
1504(a)(1) to P, the loss subgroup parent. Thus, the section 382
limitation from the Year 2 ownership change that applies with
respect to the pre-change attributes attributable to L2 is zero
except to the extent M elects to apportion all or part of the P loss
subgroup section 382 limitation to L2.

Example 5. Relationship through a successor. The facts are the same
as in Example 3, except that M's acquisition of the P stock does not
result in an ownership change of the P loss subgroup, and, instead
of P's distributing the stock of L2, L2 merges into L1 on October 7,
Year 4. L1 (as successor to L2 in the merger within the meaning of
�1.1502-1(f)(4)) continues to bear a relationship described in
section 1504(a)(1) to P, the loss subgroup parent. Thus, L2 does not
cease to be a member of the P loss subgroup as a result of the
merger.

Example 6. Reattribution of net operating loss carryover under
�1.1502-20(g). The facts are the same as in Example 3, except that,
instead of distributing the L2 stock to M, P sells that stock to B,
and, under �1.1502-20(g), M reattributes $10 of L2's net operating
loss carryover to itself. Under �1.1502-20(g), M succeeds to the
reattributed loss as if the loss were succeeded to in a transaction
described in section 381(a).

M, as successor to L2, does not cease to be a member of the P loss
subgroup.

(e) Allocation of net unrealized built-in loss--(1) In general. This
paragraph (e) provides rules for the allocation of a loss group's
(or loss subgroup's) net unrealized built-in loss if a member ceases
to be a member of a loss group (or loss subgroup). This paragraph
(e) applies if--

(i) A loss group (or loss subgroup) has a net unrealized built-in
loss on a change date; and

(ii) 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, determined under section 382(h)
(1)(B)(ii) (relating to a limitation on recognized built-in loss),
is greater than zero.

(The amount of such excess is referred to as the remaining NUBIL
balance.) In applying section 382(h)(1)(B)(ii) for this purpose, net
unrealized built-in loss allocated to departing members in prior
consolidated return years is treated as recognized built-in loss in
those years.

(2) Amount of allocation--(i) In general. The amount of net
unrealized built-in loss 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 under �1.1502-91(g), 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 under �1.1502- 91(g)
on the change date, in the assets held by the loss group (or loss
subgroup) 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.) Because
the amount of built-in loss on the change date with respect to a
departing member's assets is taken into account (rather than that
member's separately computed net unrealized built-in loss on the
change date), a departing member can be apportioned all or part of
the loss group's net unrealized built-in loss, even if the departing
member had a separately computed net unrealized built-in gain on the
change date.

Amounts taken into account under section 382(h)(6)(C) (relating to
certain deduction items) are treated as if they were assets in
determining the numerator and denominator of the fraction.

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

For purposes of paragraph (b)(2)(i) of this section, assets held by
the departing member immediately after it ceases to be a member of
the group (or by other members immediately after the close of the
taxable year) include--

(A) Assets held at that time that are transferred basis property
that was held by any member of the group (or loss subgroup) on the
change date; and

(B) Assets held at that time by any member of the consolidated group
with respect to which gain or loss of the group member or loss
subgroup member at issue has been deferred in an intercompany
transaction and has not been taken into account.

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

For purposes of paragraph (b)(2)(i) of this section, assets held by
the departing member immediately after it ceases to be a member of
the group (or by other members immediately after the close of the
taxable year) do not include assets with respect to which gain or
loss has previously been recognized and taken into account during
the recognition period (including gain or loss recognized in an
intercompany transaction and taken into account immediately before
the member leaves the group). Appropriate adjustments must be made
if gain or loss on an asset has been only partially recognized and
taken into account.

(iv) Exchanged basis property. The rules of �1.1502-91(h) apply for
purposes of this paragraph (e) (disregarding stock received from the
departing member or another member that is a member immediately
after the close of the taxable year).

(v) Two or more members depart during the same year. If two or more
members cease to be members during the same consolidated return
year, appropriate adjustments must be made to the denominator of the
fraction for each departing member by treating the other departing
members as if they had not ceased to be members during that year and
as if the assets held by those other departing members immediately
after they cease to be members of the group (or loss subgroup) are
assets held by the group immediately after the close of the taxable
year.

(vi) Anti-abuse rule. If assets are transferred between members or a
member ceases to be a member with a principal purpose of causing or
affecting the allocation of amounts under this paragraph (e),
appropriate adjustments must be made to eliminate any benefit of
such acquisition, disposition, or allocation.

(3) Effect of allocation on the consolidated group. The amount of
the net unrealized built-in loss that is allocated to the former
member is treated as recognized built-in loss for a prior taxable
year ending in the recognition period for purposes applying the
limitation of section 382(h)(1)(B)(ii) to a loss group's (or loss
subgroup's) recognition period taxable years beginning after the
consolidated return year in which the former member ceases to be a
member.

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

(i) The amount of the loss group's (or loss subgroup's) net
unrealized built-in loss that is allocated 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)(without regard to the
threshold of section 382(h)(3)(B)) with respect to such member or
loss subgroup, 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;

(ii) The former member's 5 year recognition period begins on the
loss group's (or loss subgroup's) change date;

(iii) In applying section 382(h)(1)(B)(ii), the former member takes
into account only its prior taxable years that begin after it ceases
to be a member of the loss group (or loss subgroup); and

(iv) The former member's recognized built-in loss on the disposition
of an asset is determined under section 382(h)(2)(B), treating
references to the change date in that section as references to the
loss group's (or loss subgroup's) change date.

(5) Subgroup principles. If two or more former members are members
of the same consolidated group (the second group) immediately after
they cease to be members of the current group, the principles of
paragraphs (e)(1), (2) and (4) of this section apply to those former
members on an aggregate basis. Thus, for example, the amount of net
unrealized built-in loss allocated to those members is based on the
assets held by those members immediately after they cease to be
members of the current group and the limitation of section 382(h)(1)
(B)(ii) on recognized built-in losses is applied by taking into
account the aggregate amount of net unrealized built-in loss
allocated to the former members and the aggregate recognized losses
of those members in taxable years beginning after they cease to be
members of the current group. If one or more of such members cease
to be members of the second group, the principles of this paragraph
(e) are applied with respect to those members to allocate to them
all or part of any remaining unrecognized amount of net unrealized
built-in loss allocated to the members that became members of the
second group.

(6) Apportionment of consolidated section 382 limitation (or
subgroup section 382 limitation)--(i) In general. For rules relating
to the apportionment of a consolidated section 382 limitation (or
subgroup section 382 limitation) to a former member, see paragraph
(c) of this section.

(ii) Special rule for former members that become members of the same
consolidated group. If recognized built-in losses of one or more
former members would be subject to a consolidated section 382
limitation (or subgroup section 382 limitation) if recognized
immediately before the member (or members) cease to be members of
the group, an apportionment of that limitation may be made, under
paragraph (c) of this section, to a loss subgroup that includes such
member (or members), and the recognized built-in losses (if any) of
that member (or members) will be subject to that apportioned
limitation. If two or more of such former members are not included
in a loss subgroup immediately after they cease to be members of the
group (for example, because they do not have net operating loss
carryovers or, in the aggregate, a net unrealized built-in loss),
but are members of the same consolidated group, an apportionment of
the consolidated section 382 limitation (or subgroup section 382
limitation) may be made to them as if they were a loss subgroup.

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

Example 1. Basic allocation case. (i) P owns all of the stock of L1
and L2. On September 4, Year 1, A purchases all of the P stock,
causing an ownership change of the P group.

On that date P has two assets (other than the L1 and L2 stock),
asset 1 with an adjusted basis of $40 and a fair market value of $15
and asset 2 with an adjusted basis of $50 and a fair market value of
$100. L1 has two assets, asset 3 , with a fair market value of $50
and an adjusted basis of $100, and asset 4, with an adjusted basis
of $125 and a fair market value of $75. L2 has two assets, asset 5,
with a fair market value of $150 and an adjusted basis of $100, and
asset 6, with an adjusted basis of $90 and a fair market value of
$40. Thus, the P loss group has a net unrealized built-in loss of
$75.

(ii) On March 19, Year 3, P sells all of the L2 stock to M.

At that time, asset 5, which has appreciated in value, has a fair
market value of $250 and an adjusted basis of $100. Asset 6, which
has declined in value, has an adjusted basis of $90 and a fair
market value of $10..-164- (iii) On April 8, Year 3, P sells asset
1, and has a recognized built-in loss of $25 that is subject to the
P group's section 382 limitation. On November 11, Year 4, L2 sells
asset 6 for its then fair market value, $10, recognizing a loss of
$80.

On June 3, Year 5, L1 sells asset 4, recognizing a loss of $50.

(iv) Immediately after the close of Year 3, the P loss group's
remaining NUBIL balance is $50 ($75 net unrealized built-in loss
reduced by the $25 recognized built-in loss of P).

The portion of the remaining NUBIL balance that is allocated to L2
is $17 (rounded to the nearest dollar). Seventeen dollars is the
product obtained by multiplying $50 (the remaining NUBIL balance) by
$50/$150. The numerator of the fraction ($50) is the amount of
built-in loss in asset 6, taken into account on the change date
under �1.1502-91(g). The denominator ($150) is the sum of the
numerator ($50) and the amount of built-in loss in assets 3 and 4,
taken into account on the change date under �1.1502-91(g) ($100).
The built-in loss in asset 1 is not included in the denominator of
the fraction because it is not held by the P group immediately after
the close of Year 3.

(v) Seventeen dollars of L2's $80 loss on the sale of asset 6 is a
recognized built-in loss and subject to a section 382 limitation of
zero, unless P apportions some or all of the P group's consolidated
section 382 limitation to L2 (adjusted for a short taxable year,
carryover of unused limitation, or any other adjustment required
under section 382).

(vi) Thirty-three dollars of L1's $50 loss on the sale of asset 4 is
subject to the P group's consolidated section 382 limitation,
reduced by the amount of such limitation apportioned to L2, and
adjusted for any short taxable year, a carryforward of unused
limitation, or other adjustment. (In applying section 382(h)(1)(B)
(ii) with respect to Year 5, the P group's net unrealized built-in
loss is reduced by P's $25 recognized built-in loss in Year 3 and
the $17 of net unrealized built-in loss allocated to L2, thus
limiting the P group's recognized built-in loss in Year 5 to $33.)
Example 2. Two members depart in the same year. The facts are the
same as in Example 1, except that P sells all of the stock of L1 to
C on November 1, Year 3. The amount of net unrealized built-in loss
apportioned to L2 (rounded to the nearest dollar) is $17 ($50
remaining NUBIL balance x $50/$150).

The amount of net unrealized built-in loss apportioned to L1
(rounded to the nearest dollar) is $33 ($50 remaining NUBIL balance
x $100/$150).

(8) Reporting requirement. If a net unrealized built-in loss is
allocated under this paragraph (e), the common parent must file a
statement with its income tax return for the taxable year in which
the former member(s) (or a new loss subgroup that includes that
member) ceases to be a member. The statement must provide the name
and employer identification number (E.I.N.) of the departing member,
the amount of remaining NUBIL balance for the taxable year in which
the member departs, and the amount of the net unrealized built-in
loss allocated to the departing member. The common parent must also
deliver a copy of the statement to the former member on or before
the day the group files its income tax return for the consolidated
return year that the former member ceases to be a member. A copy of
the statement must be attached to the first income tax return of the
former member (or the first return in which the former member joins)
that is filed after the close of the consolidated return year of the
group of which the former member (or a new loss subgroup that
includes that member) cease to be a member. This paragraph (e)(8)
does not apply if the required information (other than the amount of
remaining NUBIL balance) is included in a statement of election
under paragraph (f) of this section (relating to apportioning a
section 382 limitation).

(f) Filing the election to apportion the section 382 limitation and
net unrealized built-in gain--(1) Form of the election to apportion.
An election under paragraph (c) of this section must be made by the
common parent. The election must be made in the form of the
following statement: "THIS IS AN ELECTION UNDER �1.1502-95 OF THE
INCOME TAX REGULATIONS TO APPORTION ALL OR PART OF THE [insert THE
CONSOLIDATED SECTION 382 LIMITATION, THE SUBGROUP SECTION 382
LIMITATION, THE LOSS GROUP'S NET UNREALIZED BUILT-IN GAIN, THE LOSS
SUBGROUP'S NET UNREALIZED BUILT-IN GAIN, as appropriate] TO [insert
name and E.I.N. of the corporation (or the corporations that compose
a new loss subgroup) to which allocation is made] @ . The
declaration must also include the following information, as
appropriate--

(i) The date of the ownership change that resulted in the
consolidated section 382 limitation (or subgroup section 382
limitation) or the loss group's (or loss subgroup's) net unrealized
built-in gain;

(ii) The amount of the departing member's (or loss subgroup's) pre-
change net operating loss carryovers and the taxable years in which
they arose that will be subject to the limitation that is being
apportioned to that member (or loss subgroup);

(iii) The amount of any net unrealized built-in loss allocated to
the departing member (or loss subgroup) under paragraph (e) of this
section, which, if recognized, can be a pre-change attribute subject
to the limitation that is being apportioned;

(iv) If a consolidated section 382 limitation (or subgroup section
382 limitation) is being apportioned, the amount of the consolidated
section 382 limitation (or subgroup section 382 limitation) for the
taxable year during which the former member (or new loss subgroup)
ceases to be a member of the consolidated group (determined without
regard to any apportionment under this section);

(v) If any net unrealized built-in gain is being apportioned, the
amount of the loss group's (or loss subgroup's) net unrealized
built-in gain (as determined under paragraph (c) (2)(ii) of this
section) that may be apportioned to members that ceased to be
members during the consolidated return year; (vi) The amount of the
value element and adjustment element of the consolidated section 382
limitation (or subgroup section 382 limitation) that is apportioned
to the former member (or new loss subgroup) pursuant to paragraph
(c) of this section; (vii) The amount of the loss group's (or loss
subgroup's) net unrealized built-in gain that is apportioned to the
former member (or new loss subgroup) pursuant to paragraph (c) of
this section;

(viii) If the former member is allocated any net unrealized built-in
loss under paragraph (e) of this section, the amount of any
adjustment element apportioned to the former member that is
attributable to recognized built-in gains (determined in a manner
that will enable both the group and the former member to apply the
principles of �1.1502-93(c));

(ix) The name and E.I.N. of the common parent making the
apportionment.

(2) Signing of the election. The election statement must be signed
by both the common parent and the former member (or, in the case of
a loss subgroup, the common parent and the loss subgroup parent) by
persons authorized to sign their respective income tax returns. If
the allocation is made to a loss subgroup for which an election
under �1.1502-91(d)(4) is made, and not separately to its members,
the election statement under this paragraph (e) must be signed by
the common parent and any member of the new loss subgroup by persons
authorized to sign their respective income tax returns.

(3) Filing of the election. The election statement must be filed by
the common parent of the group that is apportioning the consolidated
section 382 limitation (or the subgroup section 382 limitation) or
the loss group's net unrealized built-in gain (or loss subgroup's
net unrealized built-in gain) with its income tax return for the
taxable year in which the former member (or new loss subgroup)
ceases to be a member. The common parent must also deliver a copy of
the statement to the former member (or the members of the new loss
subgroup) on or before the day the group files its income tax return
for the consolidated return year that the former member (or new loss
subgroup) ceases to be a member.

A copy of the statement must be attached to the first return of the
former member (or the first return in which the members of a new
loss subgroup join) that is filed after the close of the.-169-
consolidated return year of the group of which the former member (or
the members of a new loss subgroup) ceases to be a member.

(4) Revocation of election. An election statement made under
paragraph (c) of this section is revocable only with the consent of
the Commissioner.

�1.1502-96 Miscellaneous rules.

(a) End of separate tracking of losses--(1) Application.

This paragraph (a) applies to a member (or a loss subgroup) with a
net operating loss carryover that arose (or is treated under
�1.1502-21(c) as arising) in a SRLY, or a member (or loss subgroup)
with a net unrealized built-in loss determined at the time that the
member (or loss subgroup) becomes a member of the consolidated group
if there is--

(i) An ownership change of the member (or loss subgroup) within six
months before, on, or after becoming a member of the group; or

(ii) A period of 5 consecutive years following the day that the
member (or loss subgroup) becomes a member of a group during which
the member (or loss subgroup) has not had an ownership change.

(2) Effect of end of separate tracking--(i) Net operating loss
carryovers. If this paragraph (a) applies with respect to a member
(or loss subgroup) with a net operating loss carryover, then,
starting on the day after the earlier of the change date (but not
earlier than the day the member (or loss subgroup) becomes a member
of the consolidated group) or the last day of the 5 consecutive year
period described in paragraph (a)(1)(ii) of this section, such loss
carryover is treated as described in �1.1502-91(c)(1)(i). The
preceding sentence also applies for purposes of determining whether
there is an ownership change with respect to such loss carryover
following such change date or 5 consecutive year period. Thus, for
example, starting the day after the change date (but not earlier
than the day the member (or loss subgroup) becomes a member of the
consolidated group) or the end of the 5 consecutive year period--

(A) The consolidated group which includes the new loss member or
loss subgroup is no longer required to separately track owner shifts
of the stock of the new loss member or subgroup parent to determine
if an ownership change occurs with respect to the loss carryover of
the new loss member or members included in the loss subgroup;

(B) The group is a loss group because the member's loss carryover is
treated as a loss described in �1.1502-91(c)(1)(i);

(C) There is an ownership change with respect to such loss carryover
only if the group has an ownership change; and

(D) If the group has an ownership change, such loss carryover is a
pre-change consolidated attribute subject to the loss group's
consolidated section 382 limitation.

(ii) Net unrealized built-in losses. If this paragraph (a) applies
with respect to a new loss member described in �1.1502-94 (a)(1)(ii)
(or a loss subgroup described in �1.1502-91(d)(2)) then, starting on
the day after the earlier of the change date (but not earlier than
the day the member (or loss subgroup) becomes a member of the group)
or the last day of the 5 consecutive year period described in
paragraph (a)(1)(ii) of this section, the member (or members of the
loss subgroup) are treated, for purposes of applying �1.1502-91(g)
(2)(ii), as if they have been affiliated with the common parent for
5 consecutive years. Starting on that day, the member's (or the
members of the loss subgroup's) separately computed net unrealized
built-in loss is included in the determination whether the group has
a net unrealized built-in loss, and there is an ownership change
with respect to the member's separately computed net unrealized
built-in loss only if the group (including the member) has a net
unrealized built-in loss and has an ownership change. Thus, for
example, starting the day after the change date (but not earlier
than the day the member (or loss subgroup) becomes a member of the
consolidated group), or the end of the 5 consecutive period B

(A) The consolidated group which includes the new loss member or
loss subgroup is no longer required to separately track owner shifts
of the stock of the new loss member or subgroup parent to determine
if an ownership change occurs with respect to the net unrealized
built-in loss of the new loss member or members of the loss
subgroup;

(B) The group includes the member's (or the loss subgroup members')
separately computed net unrealized built-in loss in determining
whether it is a loss group under �1.1502- 91(c)(1)(iii);

(C) There is an ownership change with respect to such net unrealized
built-in loss only if the group is a loss group and has an ownership
change; and

(D) If the group has an ownership change, the member's separately
computed net unrealized built-in loss and its assets are taken into
account in determining the group's pre-change consolidated
attributes described in �1.1502-91(e)(1) (relating to recognized
built-in losses) that are subject to the group's consolidated
section 382 limitation.

(iii) 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
paragraphs (a)(2)(ii) and (3) of this section. In such a case, as
the context requires, references to the common parent are to the
former common parent.

(3) Continuing effect of end of separate tracking--(i) In general.
As the context may require, a current group determines which of its
members are included in a loss subgroup on any testing date by
taking into account the application of this section in the former
group. See the example in �1.1502-.-173- 91(f)(2). For this purpose,
corporations that are treated under paragraph (a)(2)(ii) of this
section as having been affiliated with the common parent of the
former group for 5 consecutive years are also treated as having been
affiliated with any other members that have been (or are treated as
having been) affiliated with the common parent. The corporations are
treated as having been affiliated with such other members for the
same period of time that those members have been (or are treated as
having been) affiliated with the common parent. If two or more
corporations become members of the group at the same time, but
paragraph (a)(1) of this section does not apply to every such
corporation, then immediately after the corporations become members
of the group, the corporations to which paragraph (a)(1) of this
section applied are treated as not having been previously
affiliated, for purposes of applying this paragraph (a)(3), with the
corporations to which paragraph (a)(2)(ii) of this section did not
apply.

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

Example. (i) L has owned all the stock of L1 for three years. At the
close of December 31, Year 1, the M group purchases all the L stock,
and L and L1 become members of the M group. Other than the stock of
L1, L has one asset (the L loss asset) with a net unrealized built-
in loss of $200 on this date.

L1 has one asset with a net unrealized built-in gain of $50 (the L1
gain asset). L and L1 do not compose a loss subgroup because they do
not meet the five year affiliation requirement of �1.1502-91(d)(2)
(i). L is a new loss member, and M's purchase of L causes an
ownership change of L. At the close of December 31, Year 4, at a
time when L1 has been affiliated with the M group for three years
and has been affiliated with L for six years, the S group purchases
all the M stock. On this date, the L loss asset has a net unrealized
built-in loss of $300, the L1 gain asset has a net unrealized built-
in gain of $80, and M, the common parent of the M group, has one
asset with a net unrealized built-in gain of $200.

(ii) Paragraph (a)(1) of this section applies to L because L is a
new loss member described in �1.1502-94(a)(1)(ii) that has an
ownership change upon becoming a member of the M group on December
31, Year 1. Accordingly, L is treated as having been affiliated with
M for 5 consecutive years, and the L loss asset with a net
unrealized built-in loss of $300 is included in the determination
whether the M group has a net unrealized built-in loss.

(iii) The S group determines which of its members are included in a
loss subgroup by taking into account application of paragraph (a) of
this section in the M group. For this purpose, application of
paragraph (a) of this section causes L to be treated as having been
affiliated with M (or as having been a member of the M group) for 5
consecutive years as of January 1, Year 2. Therefore, the S group
includes L in the determination whether the M subgroup acquired by S
on December 31, Year 4, has a net unrealized built-in loss.

(iv) Because paragraph (a)(1) of this section applied to L when L
became a member of the M group, but did not apply to L1, L is
treated as not having been affiliated with L1 before L and L1 joined
the M group. Also, L1 is not included in the determination whether
the M subgroup has a net unrealized built-in loss because L1 has not
been continuously affiliated with members of the M group for the
five consecutive year period ending immediately before they become
members of the S group.

See �1.1502-91(g)(2).

(4) Special rule for testing period. For purposes of determining the
beginning of the testing period for a loss group, the member's (or
loss subgroup's) net operating loss carryovers (or net unrealized
built-in loss) described in paragraph (a)(2) of this section are
considered to arise--

(i) In a case described in paragraph (a)(1)(i) of this section, in a
taxable year that begins not earlier than the later of the day
following the change date or the day that the member becomes a
member of the group; and

(ii) In a case described in paragraph (a)(1)(ii) of this section, in
a taxable year that begins 3 years before the end of the 5
consecutive year period.

(5) Limits on effects of end of separate tracking. The rule
contained in this paragraph (a) applies solely for purposes of
��1.1502-91 through 1.1502-95 and this section (other than paragraph
(b)(2)(ii)(B) of this section (relating to the definition of pre-
change attributes of a subsidiary)) and �1.1502-98, and not for
purposes of other provisions of the consolidated return regulations.
However, the rule contained in this paragraph (a) does apply in
��1.1502-15(g), 1.1502-21(g) and 1.1502-22(g) for purposes of
determining the composition of loss subgroups defined in
�1.1502-91(d). See also paragraph (c) of this section for the
continuing effect of an ownership change with respect to pre-change
attributes.

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

Notwithstanding �1.1502-92, a subsidiary may have an ownership
change for purposes of section 382 with respect to its attributes
which a group or loss subgroup includes in making a determination
under �1.1502-91(c)(1) (relating to the definition of loss group) or
�1.1502-91(d) (relating to the definition of loss subgroup).

The subsidiary has such an ownership change if it has an ownership
change under the principles of �1.1502-95(b) and section 382 and the
regulations thereunder (determined on a separate entity basis by
treating the subsidiary as not being a member of a consolidated
group) in the event of--

(i) The deemed exercise under �1.382-4(d) of an option or options
(other than an option with respect to stock of the common parent)
held by a person (or persons acting pursuant to a plan or
arrangement) to acquire more than 20 percent of the stock of the
subsidiary; or

(ii) An increase by 1 or more 5-percent shareholders, acting
pursuant to a plan or arrangement to avoid an ownership change of a
subsidiary, in their percentage ownership interest in the subsidiary
by more than 50 percentage points during the testing period of the
subsidiary through the acquisition (or deemed acquisition pursuant
to �1.382-4(d)) of ownership interests in the subsidiary and in
higher-tier members with respect to the subsidiary.

(2) Effect of the ownership change--(i) In general. If a subsidiary
has an ownership change under paragraph (b)(1) of this section, the
amount of consolidated taxable income for any post-change year that
may be offset by the pre-change losses of the subsidiary shall not
exceed the section 382 limitation for the subsidiary. For purposes
of this limitation, the value of the subsidiary is determined solely
by reference to the value of the subsidiary's stock.

(ii) Pre-change losses. The pre-change losses of a subsidiary are--

(A) Its allocable part of any consolidated net operating loss which
is attributable to it under �1.1502-21(b) (determined on the last
day of the consolidated return year that includes the change date)
that is not carried back and absorbed in a taxable year prior to the
year including the change date;

(B) Its net operating loss carryovers that arose (or are treated
under �1.1502-21(c) as having arisen) in a SRLY; and

(C) Its recognized built-in loss with respect to its separately
computed net unrealized built-in loss, if any, determined on the
change date.

(3) Coordination with ��1.1502-91, 1.1502-92, and 1.1502- 94. If an
increase in percentage ownership interest causes an ownership change
with respect to an attribute under this paragraph (b) and under
�1.1502-92 on the same day, the ownership change is considered to
occur only under �1.1502-92 and not under this paragraph (b). See
�1.1502-94 for anti-duplication rules relating to value.

(4) Example. The following example illustrates paragraph (b)(1)(ii)
of this section:

Example. Plan to avoid an ownership change of a subsidiary.

(i) L owns all the stock of L1, L1 owns all the stock of L2, L2 owns
all the stock of L3, and L3 owns all the stock of L4. The L group
has a consolidated net operating loss arising in Year 1 that is
carried over to Year 2. L has assets other than its L1 stock with a
value of $900. L1, L2, and L3 own no assets other than their L2, L3,
and L4 stock. L4 has assets with a value of $100. During Year 2, A,
B, C, and D, acting pursuant to a plan to avoid an ownership change
of L4, acquire the following ownership interests in the members of
the L loss group: (A) on September 11, Year 2, A acquires 20 percent
of the L1 stock from L and B acquires 20 percent of the L2 stock
from L1; and (B) on September 20, Year 2, C acquires 20 percent of
the stock of L3 from L2 and D acquires 20 percent of the stock of L4
from L3.

(ii) The acquisitions by A, B, C, and D pursuant to the plan have
increased their respective percentage ownership interests in L4 by
approximately 10, 13, 16, and 20 percentage points, for a total of
approximately 59 percentage points during the testing period. This
more than 50 percentage point increase in the percentage ownership
interest in L4 causes an ownership change of L4 under paragraph (b)
(2) of this section.

(c) Continuing effect of an ownership change. A loss corporation (or
loss subgroup) that is subject to a limitation under section 382
with respect to its pre-change losses continues to be subject to the
limitation regardless of whether it becomes a member or ceases to be
a member of a consolidated group. See �1.382-5(d) (relating to
successive ownership changes and absorption of a section 382
limitation).

(d) Losses reattributed under �1.1502-20(g)--(1) In general. This
paragraph (d) contains rules relating to net operating carryovers
that are reattributed to the common parent under �1.1502-20(g).
References in this paragraph (d) to a subsidiary are references to
the subsidiary (or lower tier subsidiary) whose net operating loss
carryover is reattributed to the common parent.

(2) Deemed section 381(a) transaction. Under �1.1502-20 (g)(1), the
common parent succeeds to the reattributed losses as if the losses
were succeeded to in a transaction described in section 381(a). In
general, ��1.1502-91 through 1.1502-95, this section, and �1.1502-98
are applied to the reattributed net operating loss carryovers in
accordance with that characterization. See generally, �1.382-2(a)(1)
(ii)(relating to distributor or transferor loss corporations in
transactions under section 381), �1.1502-(1)(f)(4)(relating to the
definition of predecessor and successor) and �1.1502-91(j)(relating
to predecessor and successor corporations). For example, if the
reattributed net operating loss carryover is a pre-change attribute
subject to a section 382 limitation, it remains subject to that
limitation following the reattribution. In certain cases, the
limitation applicable to the reattributed loss is zero unless the
common parent apportions all or part of the limitation to itself.
(See paragraph (d)(4) of this section.) (3) Rules relating to owner
shifts--(i) In general. 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 stock of the
subsidiary is not taken into account in determining whether there is
an ownership change with respect to the reattributed net operating
loss carryover.

However, 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 an 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. See paragraph (d)(3)(ii)
Example 2 of this section.

(ii) Examples. The following examples illustrate the principles of
this paragraph (d)(3):

Example 1. No owner shift for reattributed loss. (i) P, the common
parent of a consolidated group, owns 60% of the stock of L, and B
owns the remaining 40%. L has a net operating loss carryover of $100
from year 1 that it carries over to Years 2, 3, and 4. At the
beginning of Year 2, P purchases 40% of the L stock from B, which
does not cause an ownership change of L. On December 31, Year 3, P
sells all of the L stock to M. Pursuant to �1.1502-20(g), P
reattributes $10 of L's $100 net operating loss carryover to itself,
and L carries $90 of its net operating loss carryover to its Year 4.

(ii) The sale of the L stock to M does not cause an owner shift that
is taken into account in determining if there is an ownership change
with respect to the $10 reattributed loss.

Following the reattribution, �1.1502-94(b) continues to apply to
determine if there is an ownership change with respect to the $10
reattributed loss, until, under paragraph (a) of this section, the
loss is treated as described in �1.1502-91(c)(1)(i). In applying
�1.1502-94(b), the 40 percentage point increase by the P
shareholders prior to the reattribution is taken into account.

The sale of the L stock to M does cause an ownership change of L
with respect to the $90 of its net operating loss that it carries
over to Year 4.

Example 2. Owner shift for reattributed loss. The facts are the same
as in Example 1, except that P only purchases 20% of the L stock
from B and sells 80% of the L stock to M. L is a new loss member,
and, under �1.1502-94(b)(1), an owner shift of the stock of L not
held directly or indirectly by the common parent (the 20% of L stock
still held by B) would have been taken into account if such shift
had occurred immediately before the reattribution. Following the
reattribution, �1.1502-94(b) continues to apply to determine if
there is an ownership change with respect to the $10 reattributed
loss, until, under paragraph (a) of this section, the loss is
treated as described in �1.1502-91(c)(1)(i). With respect to the $10
reattributed loss, the P shareholders have increased their
percentage ownership interest by 40 percentage points. The P
shareholders have increased their ownership interests by 20
percentage points as a result of P's purchase of stock from B, and,
under �1.382-2(a)(1)(ii), are treated as increasing their interests
by an additional 20 percentage points as a result of the
reattribution. (The acquisition of the L stock by M does not,
however, effect an owner shift for the $10 of reattributed loss.)
The sale of the L stock to M causes an ownership change of L with
respect to the $90 of net operating loss that L carries over to Year
4.

(4) Rules relating to the section 382 limitation--(i) Reattributed
loss is a pre-change separate attribute of a new loss member. If the
reattributed net operating loss carryover is a pre-change separate
attribute of a new loss member that is subject to a separate section
382 limitation prior to the disposition of subsidiary stock, the
common parent's limitation with respect to that loss is zero, except
to the extent that the common parent apportions to itself, under
paragraph (d)(5) of this section, all or part of such limitation. A
separate section 382 limitation is the limitation described in
�1.1502-94(b) that applies to a pre-change separate attribute.

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

If the reattributed net operating loss carryover is a pre-change
subgroup attribute subject to a subgroup section 382 limitation
prior to the disposition of subsidiary stock, and, immediately after
the reattribution, the common parent is not a member of the loss
subgroup, the section 382 limitation with respect to that net
operating loss carryover is zero, except to the extent that the
common parent apportions to itself, under paragraph (d)(5) of this
section, all or part of the subgroup section 382 limitation.

See, however, �1.1502-95(d)(3) Example 6, for an illustration of a
case where the common parent, as successor to the subsidiary, is a
member of the loss subgroup immediately after the reattribution.

(iii) Potential application of section 382(l)(1). In general, the
value of the stock of the common parent is used to determine the
section 382 limitation for an ownership change with respect to the
reattributed net operating loss carryover that occurs at the time
of, or after, the reattribution. For example, if the net operating
loss carryover is a pre-change consolidated attribute, the value of
the stock of the common parent is used to determine the section 382
limitation, and no adjustment to that value is required because of
the deemed section 381(a) transaction. However, if the net operating
loss carryover is a pre-change separate attribute of a new loss
member (or is a pre-change attribute of a loss subgroup member and
the common parent was not the loss subgroup parent immediately
before the reattribution), the deemed section 381(a) transaction is
considered to constitute a capital contribution with respect to the
new loss member (or loss subgroup member) for purposes of section
382(l)(1). Accordingly, if that section applies because the deemed
capital contribution is (or is considered under section 382(l)(1)(B)
to be) part of a plan described in section 382(l)(1)(A), the value
of the stock of the common parent after the deemed section 381(a)
transaction must be adjusted to reflect the capital contribution.
Ordinarily, this will require the value of the stock of the common
parent to be reduced to an amount that represents the value of the
stock of the subsidiary (or loss subgroup of which the subsidiary
was a member) when the reattribution occurred.

(iv) Duplication or omission of value. In determining any section
382 limitation with respect to the reattributed net operating loss
carryover and with respect to other pre-change losses, appropriate
adjustments must be made so that value is not improperly omitted or
duplicated as a result of the reattribution. For example, if the
subsidiary has an ownership change upon its departure, and the
common parent (as successor) has an ownership change with respect to
the reattributed pre-change separate attribute upon its
reattribution under paragraph (d)(3)(i) of this section, proper
adjustments must be made so that the value of the subsidiary is not
taken into account more than once in determinining the section 382
limitation for the reattributed loss and the loss that is not
reattributed.

(v) Special rule for continuity of business requirement. If the
reattributed net operating loss carryover is a pre-change attribute
of new loss member and the reattribution occurs within the two year
period beginning on the change date, then, starting immediately
after the reattribution, the continuity of business requirement of
section 382(c)(1) is applied with respect to the business enterprise
of the common parent. Similar principles apply if the reattributed
net operating loss carryover is a pre-change subgroup attribute and,
on the day after the reattribution, the common parent is not a
member of the loss subgroup.

(5) Election to reattribute section 382 limitation--(i) Effect of
election. The common parent may elect to apportion to itself all or
part of any separate section 382 limitation or subgroup section 382
limitation to which the net operating loss carryover is subject
immediately before the reattribution.

However, no net unrealized built-in gain of the member (or loss
subgroup) whose net operating loss carryover is reattributed can be
apportioned to the common parent. The principles of �1.1502-95(c)
apply to the apportionment, treating, as the context requires,
references to the former member as references to the common parent,
and references to the consolidated section 382 limitation as
references to the separate section 382 limitation (or subgroup
section 382 limitation) that is being apportioned. Thus, for
example, the common parent can reattribute to itself all or part of
the value element or adjustment element of the limitation, and any
part of such element that is apportioned requires a corresponding
reduction in such element of the separate section 382 limitation of
the subsidiary whose net operating loss carryover is reattributed
(or in the subgroup section 382 limitation if the reattributed loss
is a pre-change subgroup attribute). Appropriate adjustments must be
made to the separate section 382 limitation (or subgroup section 382
limitation) for the consolidated return year in which the
reattribution is made to reflect that the reattributed net operating
loss carryover is an attribute acquired by the common parent during
the year in a transaction to which section 381(a) applies. The
election is made by the common parent as part of the election to
reattribute the net operating loss carryover. See �1.1502-20(g)(4)
for the time and manner of making the election.

(ii) Examples. The following examples illustrate the principles of
this paragraph (d)(5):

Example 1. Consequence of apportionment. (i) P, the common parent of
a consolidated group, purchases all of the stock of L on December
31, Year 1. L carries over a net operating loss arising in Year 1 to
each of the next 5 taxable years. The purchase of the L stock causes
an ownership change of L, and results in a separate section 382
limitation of $10 for L's net operating loss carryover based on the
value of the L stock. On July 2, Year 3, P sells 30 percent of the L
stock to A. Under �1.1502-20(g), P elects to apportion to itself
$110 of L's $200 net operating loss carryover. P also elects to
apportion to itself $6 of the $10 value element of the separate
section 382 limitation.

(ii) For the consolidated return years ending after December 31,
Year 3, P's separate section 382 limitation with respect to the
reattributed net operating loss carryover is $6, adjusted as
appropriate for any short taxable year, unused section 382
limitation, or other adjustment. For the P group's consolidated
return year ending December 31, Year 3, the separate section 382
limitation for L's net operating loss carryover is $8, the sum of $5
and $3. Five dollars of the limitation is the amount that bears the
same relationship to $10 as the number of days in the period ending
with the deemed section 381(a) transaction, 183 days, bears to 365.
Three dollars of the limitation is the amount that bears the same
relationship to $6 as the number of days in the period between July
3 and December 31, 182, bears to 365.

(iii) For L's taxable years ending after December 31, Year 3, L's
separate section 382 limitation for its $90 of net operating loss
carryover that was not reattributed to P is $4, adjusted as
appropriate for any short taxable year, unused section 382
limitation, or other adjustment. For L's short taxable year ending
December 31, Year 3, the section 382 limitation for its $90 of net
operating loss carryover is $2, the amount that bears the same
relationship to $4 (the portion of the value element that was not
apportioned to P), as the number of days during the short taxable
year, 182 days, bears to 365. See �1.382-5(c).

Example 2. No apportionment required for consolidated pre-change
attribute. (i) P, the common parent of a consolidated group, forms
L. For Year 1, L has an operating loss of $70 that is not absorbed
and is included in the group's consolidated net operating loss that
is carried over to subsequent years. On January 1 of Year 3, A buys
all of the P stock and the P group has an ownership change. The
consolidated section 382 limitation based on the value of the P
stock is $10.

(ii) On April 13 of Year 4, P sells all of the stock of L to B and,
under �1.1502-20(g), elects to reattribute to itself $45 of L's net
operating loss carryover. Following the reattribution, the $45
portion of the Year 1 net operating loss carryover retains its
character as a pre-change consolidated attribute, and remains
subject to so much of the $10 consolidated section 382 limitation as
P does not elect to apportion to L under �1.1502-95(c).

(e) Time and manner of making election under �1.1502-91(d)(4)--(1)
In general. This paragraph (e) prescribes the time and manner of
making the election under �1.1502-91(d)(4), relating to treating two
or more corporations as treating the section 1504(a)(1) requirement
of �1.1502-91(d) (1)(ii) and (d) (2)(ii) as satisfied.

(2) Election statement. An election under �1.1502-91(d)(4) must be
made by the common parent. The election must be made in the form of
the following statement: "THIS IS AN ELECTION UNDER �1.1502-91(d)(4)
TO TREAT THE FOLLOWING CORPORATIONS AS MEETING THE REQUIREMENTS OF
�1.1502-91(d)(1)(ii) AND (d)(2)(ii) IMMEDIATELY AFTER THEY BECAME
MEMBERS OF THE GROUP." [List separately the name of each
corporation, its E.I.N., and the date that it became a member of the
group]. If separate elections are being made for corporations that
became members at different times or that were acquired from
different affiliated groups, provide a separate statement and list
for each election.

(3) The election statement must be filed by the common parent with
its income tax return for the consolidated return year in which the
members with respect to which the election is made become members of
the group. Such election must be filed on or before the due date for
such income tax return, including extensions.

(4) An election made under this paragraph (e) is irrevocable.

�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.

The rules contained in ��1.1502-91 through 1.1502-96 also apply for
purposes of section 383, with appropriate adjustments to reflect
that section 383 applies to credits and net capital losses.
Similarly, in the case of net capital losses, general business
credits, and excess foreign taxes that are pre-change attributes,
�1.383-1 applies the principles of ��1.1502-91 through 1.1502-96.
For example, if a loss group has an ownership change under
�1.1502-92 and has a carryover of unused general business credits
from a pre-change consolidated return year to a post-change
consolidated return year, the amount of the group's regular tax
liability for the post-change year that can be offset by the
carryover cannot exceed the consolidated section 383 credit
limitation for that post-change year, determined by applying the
principles of ��1.383-1(c)(6) and 1.1502-93 (relating to the
computation of the consolidated section 382 limitation).

�1.1502-99 Effective dates.

(a) In general. Except as provided in paragraphs (b) and (c) of this
section, ��1.1502-91 through 1.1502-96 and �1.1502-98 apply to any
testing date on or after June 25, 1999. Sections 1.1502-94 through
1.1502-96 also apply to a corporation that becomes a member of a
group or ceases to be a member of a group (or loss subgroup) on any
date on or after June 25, 1999.

(b)Special rules

B-(1) Election to treat subgroup parent

requirement as satisfied. Section 1.1502-91(d)(4), �1.1502- 91(d)
(7), Example 4, �1.1502-92(b)(1)(iii), �1.1502-92(b)(2), Example 5,
the last two sentences of �1.1502-95(b)(3), �1.1502- 95(d)(2)(i),
and �1.1502-96(e)(all of which relate to the election under
�1.1502-91(d)(4) to treat the loss subgroup parent requirement as
satisfied) apply to 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.

(2) Principal purpose of avoiding a limitation. 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.

(3) Ceasing to be a member of a loss subgroup--(i) Ownership change
of a loss subgroup. Section 1.1502-95(d)(2)(ii) and �1.1502-95(d)
(3), Example 3 apply to corporations that cease to bear a
relationship described in section 1504(a)(1) 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.

(ii) Expiration of 5-year period. Section 1.1502-95(d)(2) (iii)
applies with respect to the day after the last day of any 5
consecutive year period described in that section that ends in a
taxable year for which the due date of the income tax return
(without extensions) is after June 25, 1999.

(4) Reattribution of net operating loss carryovers under
�1.1502-20(g). Section 1.1502-96(d) applies to reattributions of net
operating loss carryovers (or capital loss carryovers) 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.

(5) Election to apportion net unrealized built-in gain. 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 paragraph (c)(1) of �1.1502- 95 in the time and manner
prescribed in paragraph (f) of �1.1502- 95.

(c) Testing period may include a period beginning before June 25,
1999--(1) In general. A testing period for purposes of ��1.1502-91
through 1.1502-96 and 1.1502-98 may include a period beginning
before June 25, 1999. Thus, for example, in applying �1.1502-92(b)
(1)(i)(relating to the determination of an ownership change of a
loss group), the determination of the lowest percentage of ownership
interest of any 5-percent shareholder of the common parent during a
testing period ending on a testing date occurring on or after June
25, 1999 takes into account the period beginning before June 25,
1999, except to the extent that the period is more than 3 years
before the testing date or is otherwise before the beginning of the
testing period. See �1.1502-92(b)(1).

(2) Transition rule for net unrealized built-in loss. A loss group
(or loss subgroup) that has a net unrealized built-in loss on a
testing date on or after June 25, 1999 may apply �1.1502-91A(g)(and
�1.1502-96A(a) as it relates to �1.1502- 91A(g)) for the period
ending on the day before June 25, 1999 to determine under
�1.382-2T(d)(ii)(A) the earliest date that its testing period begins
(treating the day before June 25, 1999 as the end of a taxable
year.) Thus, for example, if a consolidated group with no net
operating losses has a net unrealized built-in loss determined under
�1.1502-91(g) on a testing date after June 25, 1999, but, under
�1.1502-91A(g), does not have a net unrealized built-in loss for the
period ending on the day before June 25, 1999, the group's testing
period begins no earlier than June 25, 1999..PART 602--OMB CONTROL
NUMBERS UNDER THE Paperwork Reduction Act

Par. 14. The authority citation for part 602 continues to read as
follows:

Authority: 26 U.S.C. 7805.

Par. 15. In �602.101, paragraph (b) is amended by removing the entry
for �1.1502-95T, revising the entry for �1.1502-20, and adding
entries in numerical order to the table to read as follows:

�602.101 OMB Control numbers.

* * * * *

(b) * * *

CFR part or section where Current OMB identified and described
control No.

* * * * *

1.1502-20.............................................1545-1160

1545-1218

* * * * *

1.1502-95.............................................1545-1218

1.1502-96.............................................1545-1218

1.1502-95A............................................1545-1218

* * * * *

John M. Dalrymple
Acting Deputy Commissioner of Internal Revenue
Approved: June 18, 1999
Donald C. Lubick
Assistant Secretary of the Treasury

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