Section — Internal Revenue Bulletin 2004-40

26 CFR 1.1502–20T: Disposition or deconsolidation of subsidiary stock (temporary).

T.D. 9154

DEPARTMENT OF THE TREASURY Internal Revenue Service (IRS) 26 CFR Part 1

Extension of Time to Elect Method for Determining Allowable Loss

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

SUMMARY: This document contains temporary regulations under section 1502 of the Internal Revenue Code of 1986. The temporary regulations extend the time for consolidated groups to elect to apply a method for determining allowable loss on a disposition of subsidiary stock, and permit consolidated groups to revoke such elections. The temporary regulations affect corporations filing consolidated returns, both during and after the period of affiliation, and also affect purchasers of the stock of members of a consolidated group. The text of these temporary regulations serves as the text of the proposed regulations (REG–135898–04) set forth in the notice of proposed rulemaking on this subject in this issue of the Bulletin.

DATES: Effective Date: These regulations are effective August 26, 2004.

Applicability Date: For dates of applicability, see §1.1502–20T(i)(6)(v).

FOR FURTHER INFORMATION CONTACT: Theresa Abell (202) 622–7700 or Martin Huck (202) 622–7750 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in these regulations has been previously reviewed and approved by the Office of

Management and Budget under control number 1545–1774. Responses to this collection of information are required to obtain a benefit. This collection of information is revised by these regulations. These amended regulations are being issued without prior notice and public procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553). For this reason, the revised collection of information contained in these regulations has been reviewed and, pending receipt and evaluation of public comments, approved by the Office of Management and Budget under control number 1545–1774.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget.

For further information concerning this collection of information, and where to submit comments on the collection of information and the accuracy of the estimated burden, and suggestions for reducing this burden, please refer to the preamble of the cross-referencing notice of proposed rulemaking published in this issue of the Bulletin.

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 and Explanation of Provisions

On March 7, 2002, the IRS and Treasury Department issued regulations (the 2002 regulations) permitting consolidated groups to calculate allowable loss or the basis reduction required on certain dispositions and deconsolidations of subsidiary stock by applying §1.1502–20 in its entirety, §1.1502–20 without regard to the duplicated loss factor of the loss disallowance formula, or §1.337(d)–2T. If a consolidated group chose to apply either §1.1502–20 without regard to the duplicated loss factor of the loss disallowance formula, or §1.337(d)–2T, the 2002 regulations required the consolidated group to file an election under §1.1502–20T(i) to apply the chosen provision. The 2002 regulations also included several correlative

rules to address cases in which, as a result of the election, additional losses became available to the subsidiary the stock of which was disposed of.

Concurrently with the publication of these temporary regulations, the IRS and Treasury Department are publishing Notice 2004–58, 2004–39 I.R.B. 520 (September 27, 2004). That notice sets forth a method that the IRS will accept for determining whether subsidiary stock loss is disallowed and subsidiary stock basis is reduced under §1.337(d)–2T.

Given the availability of the method described in Notice 2004–58, the IRS and Treasury Department are publishing these temporary regulations to permit taxpayers to make, amend, or revoke elections under §1.1502–20T(i). These temporary regulations give taxpayers the ability to take the notice into account in choosing a method for determining allowable loss. In general these regulations allow taxpayers to elect into, or out of, the application of §1.1502–20 in its entirety, §1.1502–20 without regard to the duplicated loss factor of the loss disallowance formula, or §1.337(d)–2T. Under these regulations, a taxpayer that was permitted to make an election under §1.1502–20T(i), but did not previously make such an election, may make an election to apply either §1.1502–20 without regard to the duplicated loss factor, or §1.337(d)–2T. These regulations also permit a taxpayer that previously made an election to apply §1.1502–20 without regard to the duplicated loss factor to revoke the election and apply §1.1502–20 in its entirety, or to amend the election in order to apply §1.337(d)–2T. In addition, these regulations permit a taxpayer that previously made an election to apply §1.337(d)–2T to revoke the election and apply §1.1502–20 in its entirety or to amend the election in order to apply §1.1502–20 without regard to the duplicated loss factor. Finally, these regulations extend relief to acquiring groups by amending §1.1502–32T(b)(4)(b)(vii)(C) to change its date of applicability from May 7, 2003, to August 26, 2004.

If a group revokes an election to apply either §1.1502–20 without regard to the duplicated loss factor, or §1.337(d)–2T, and applies §1.1502–20 in its entirety, no election under §1.1502–20(g) will be

October 4, 2004 560 2004–40 I.R.B.

(i)(2)(i) or (ii) of this section is revoked or amended by including the statement required by paragraph (i)(6)(iii) of this section with or as part of any timely filed (including any extensions) original return for a taxable year that includes any date on or before August 26, 2004, or with or as part of an amended return filed before the date the original return for the taxable year that includes August 26, 2004, is due (including any extensions).

(iii) Required statement —(A) Revo- cation . To revoke an election to apply the provisions described in paragraph (i)(2)(i) or (ii) of this section, the consolidated group must file a statement entitled “Revocation of Election Under Section 1.1502–20T(i).” The statement must include the name and employer identification number (E.I.N.) of the subsidiary and of the member(s) that disposed of the subsidiary stock.

(B) Amendment . To amend an election to apply the provisions described in paragraph (i)(2)(i) or (ii) of this section, the consolidated group must file a statement entitled “Amendment of Election Under Section 1.1502–20T(i).” The statement must include the following information—

( 1 ) The name and employer identification number (E.I.N.) of the subsidiary and of the member(s) that disposed of the subsidiary stock; and

( 2 ) The provision the taxpayer elects to apply to determine allowable loss or basis reduction (described in paragraph (i)(2)(i) or (ii) of this section).

(iv) Special rule . If a consolidated group revokes an election made under paragraph (i) of this section, an election described in §1.1502–20(g) to reattribute losses will not be respected, even if such election was filed with the group’s return for the year of the disposition.

(v) This paragraph (i)(6) is applicable on and after August 26, 2004.

- - - Par. 3. Section §1.1502–32T(b)(4)(vii) (C) is amended by removing the language “May 7, 2003” and adding the language “August 26, 2004” each time it appears.

Mark E. Matthews, Deputy Commissioner for Services and Enforcement .

Approved August 19, 2004.

available, even if the group had previously made an election under §1.1502–20(g) to reattribute losses of the subsidiary the stock of which was disposed of.

Pursuant to these regulations, an election under §1.1502–20T(i) must be made, amended, or revoked by including the statement required with a timely filed (including extensions) original return for a taxable year that includes any date on or before August 26, 2004, or with or as part of an amended return filed before the date the original return for the taxable year that includes August 26, 2004, is due (including any extensions). The new election or the revocation or amendment of a prior election, however, only will affect open years.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. These temporary regulations provide relief to consolidated groups by extending the time to elect a method for determining allowable loss. The extension of time allows taxpayers to take into account concurrent guidance in choosing a method for determining allowable loss. It is necessary to provide the extension of time immediately. Accordingly, good cause is found for dispensing with prior notice and comment pursuant to 5 U.S.C. 553(b) and for dispensing with a delayed effective date pursuant to 5 U.S.C. 553(d). For applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), see the notice of proposed rulemaking on this subject in this issue of the Bulletin. The IRS and Treasury Department request comments from small entities that believe they might be adversely affected by these regulations. Pursuant to section 7805(f) of the Internal Revenue Code, these temporary regulations will be submitted to the Chief Counsel for the Advocacy of the Small Business Administration for comment on their impact.

Drafting Information

The principal authors of these regulations are Theresa Abell and Martin Huck of the Office of Associate Chief Counsel (Corporate). However, other personnel

from the Treasury Department and the IRS participated in their development.

- - - -

Amendments to the Regulations

Accordingly, 26 CFR part 1 amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.1502–20T(i) is amended by:

Revising the first sentence of paragraph (i)(4).
Redesignating paragraph (i)(6) as (i)(7).
Adding new paragraph (i)(6). The revision and addition read as follows:

§1.1502–20T Disposition or deconsolidation of subsidiary stock (temporary).

- - - (i) - - (4) Time and manner of making the election . An election to determine allowable loss or basis reduction by applying the provisions described in paragraph (i)(2)(i) or (ii) of this section is made by including the statement required by this paragraph with or as part of any timely filed (including any extensions) original return for a taxable year that includes any date on or before August 26, 2004, or with or as part of an amended return filed before the date the original return for the taxable year that includes August 26, 2004, is due (including any extensions). - * *
- - - (6) Revocation or amendment of prior elections —(i) In general . Notwithstanding anything to the contrary in this paragraph (i), if a consolidated group made an election under paragraph (i) of this section to apply the provisions described in paragraph (i)(2)(i) or (ii) of this section, the consolidated group may revoke or amend that election as provided in this paragraph (i)(6).

(ii) Time and manner of revoking or amending an election . An election to apply the provisions described in paragraph

2004–40 I.R.B. 561 October 4, 2004

alternative regimes and such loss carryovers expire, or would have been properly used to offset income, in a closed year, the purchasing group will be deemed to have made an election to treat all of such expired loss carryovers as expiring for all Federal income tax purposes immediately before the subsidiary became a member of the purchasing group (the deemed waiver rule). Accordingly, no basis reduction under §1.1502–32 would result from the expiration of, or failure to use, such losses.

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

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. These temporary regulations are necessary to provide taxpayers with immediate guidance regarding the treatment of certain subsidiary losses. Accordingly, good cause is found for dispensing with notice and public procedure pursuant to 5 U.S.C. 553(b) and with a delayed effective date pursuant to 5 U.S.C. 553(d)(3). For applicability of the Regulatory Flexibility Act, please refer to the cross-reference notice of proposed rulemaking published elsewhere in this issue of the Bulletin. Pursuant to section 7805(f) of the Code, these temporary regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Gregory F. Jenner, Acting Assistant Secretary of the

Treasury (Tax Policy) .

(Filed by the Office of the Federal Register on August 25, 2004, 8:45 a.m., and published in the issue of the Federal Register for August 26, 2004, 69 F.R. 52419)

26 CFR 1.1502–32T: Investment adjustments (tempo- rary).

T.D. 9155

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Guidance Under Section 1502; Treatment of Loss Carryovers From Separate Return Limitation Years

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

SUMMARY: This document contains temporary regulations under section 1502 that provide guidance regarding the treatment of certain losses available to acquired subsidiaries as a result of an election made under the section 1502 regulations. The text of these temporary regulations also serves as the text of the proposed regulations (REG–129274–04) set forth in the notice of proposed rulemaking on this subject in this issue of the Bulletin. These regulations apply to corporations filing consolidated returns.

DATES: Effective Date: These regulations are effective August 18, 2004.

Applicability Date: For dates of applicability, see §1.1502–32T(b)(4)(v)(C).

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

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

Under §1.1502–32(b)(4), if a subsidiary of a consolidated group has a loss

carryover from a separate return limitation year when it becomes a member of the group, the group may make an irrevocable election to treat all or any portion of the loss carryover as expiring for all Federal income tax purposes immediately before the subsidiary becomes a member of the group. If the subsidiary was a member of another group immediately before it became a member of the group, the expiration is also treated as occurring immediately after it ceases to be a member of the prior group. Waiving losses of an acquired subsidiary is desirable in cases in which it is anticipated that the losses of the subsidiary may expire unused in that it prevents a negative basis adjustment in the stock of the subsidiary.

In March of 2002, in response to the decision of the United States Court of Appeals for the Federal Circuit in Rite Aid Corp. v. United States, 255 F.3d 1357 (Fed. Cir. 2001), the Treasury Department and the IRS issued guidance regarding the treatment of certain losses realized on dispositions and deconsolidations of stock of a member of a consolidated group. Those rules permitted groups to calculate allowable loss on the sale of subsidiary stock by applying §1.1502–20 in its entirety, §1.1502–20 without regard to the duplicated loss factor of the loss disallowance formula, or §1.337(d)–2T. If a group that made an election described in §1.1502–20(g) to reattribute to the common parent losses of the subsidiary elected to determine allowable loss by applying either §1.1502–20 without regard to the duplicated loss factor of the loss disallowance formula, or §1.337(d)–2T, the amount of loss treated as reattributed could be reduced. As a result, losses that were previously treated as reattributed would be treated as available for use by the subsidiary or any other group of which the subsidiary is a member, subject to any applicable limitations ( e.g., section 382). To prevent a purchasing consolidated group from being unfairly disadvantaged in the event that the amount of losses treated as reattributed to the common parent of the selling group were decreased and the amount of losses treated as available to the subsidiary were increased (excess losses), §1.1502–32T(b)(4)(v) was added to provide that, to the extent that the subsidiary’s loss carryovers are increased by reason of an election to apply one of the

October 4, 2004 562 2004–40 I.R.B.

of such loss carryovers of S by taking a position on an original or amended tax return for each relevant taxable year that is consistent with having made such choice.

- (C) Effective date . Paragraph (b)(4)(v)(A) of this section is applicable on and after August 18, 2004. Groups, however, may apply paragraph (b)(4)(v)(A) of this section before August 18, 2004, and on and after March 7, 2002. Otherwise, see paragraph (b)(4)(v)(A) of §1.1502–32. Paragraph (b)(4)(v)(B) of this section is applicable on and after March 7, 2002.

Mark E. Matthews, Deputy Commissioner for Services and Enforcement .

Approved July 29, 2004.

Gregory F. Jenner, Acting Assistant Secretary of the Treasury .

(Filed by the Office of the Federal Register on August 17, 2004, 8:45 a.m., and published in the issue of the Federal Register for August 18, 2004, 69 F.R. 51175)

Drafting Information

The principal author of these regulations is Sean McKeever, Office of Associate Chief Counsel (Corporate). However, other personnel from the IRS and Treasury Department participated in their development.

- - - -

Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1 — INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.1502–32T is amended by revising paragraph (b)(4)(v)(A) and (C).

§1.1502–32T Investment adjustments (temporary).

(b) - * (4) - * (v) Special rule for loss carry- overs of a subsidiary acquired in a transaction for which an election un- der §1.1502–20T(i)(2) is made —(A) Expired losses . Notwithstanding §1.1502–32(b)(4)(iv), unless a group otherwise chooses, to the extent that S’s loss carryovers are increased by reason of an election under §1.1502–20T(i)(2) and such loss carryovers expire or would have been properly used to offset income in a taxable year for which the refund of an overpayment is prevented by any law or rule of law as of the date the group files its original return for the taxable year in which S receives the notification described in §1.1502–20T(i)(3)(iv) and at all times thereafter, the group will be deemed to have made an election under §1.1502–32(b)(4) to treat all of such loss carryovers as expiring for all Federal income tax purposes immediately before S became a member of the consolidated group. A group may choose not to apply the rule of the previous sentence to all

2004–40 I.R.B. 563 October 4, 2004