PORTFOLIO

Consolidated Returns — Limitations on Losses (Portfolio 757)

Tax Management Portfolio, Consolidated Returns — Limitations on Losses, No. 757-2nd, analyzes the problems relating to the limitations on losses imposed by the consolidated return regulations on an affiliated group of corporations filing a consolidated return. Consolidated tax liability is computed in four steps. First, the separate taxable income or loss of each member is determined in accordance with the eliminations and adjustments peculiar to consolidated returns (e.g., intercompany transactions, inventory, etc.). Next, items that were excluded from the computation of separate taxable income are computed on a consolidated basis. Then, consolidated taxable income is determined by adding the results obtained in the first two steps. Finally, the tax is determined on the amount of consolidated income, and reduced by consolidated tax credits.

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DESCRIPTION

Tax Management Portfolio, Consolidated Returns — Limitations on Losses, No. 757-2nd, analyzes the problems relating to the limitations on losses imposed by the consolidated return regulations on an affiliated group of corporations filing a consolidated return. Consolidated tax liability is computed in four steps. First, the separate taxable income or loss of each member is determined in accordance with the eliminations and adjustments peculiar to consolidated returns (e.g., intercompany transactions, inventory, etc.). Next, items that were excluded from the computation of separate taxable income are computed on a consolidated basis. Then, consolidated taxable income is determined by adding the results obtained in the first two steps. Finally, the tax is determined on the amount of consolidated income, and reduced by consolidated tax credits.
This Portfolio discusses and analyzes the limitations imposed by the consolidated return regulations on the use of losses, such as the separate return limitation year rules and §382.
For a discussion of eligibility to file consolidated returns and the scope of the consolidated return regulations, see 754 T.M., Consolidated Returns — Elections and Filing. For an analysis of the concepts involved in the ownership of subsidiary stock within an affiliated group filing consolidated returns, see 755 T.M., Consolidated Returns — Investment in Subsidiaries. For an analysis of (1) the computation of separate taxable income; (2) the computation of consolidated income items, such as capital gain or loss and §1231 gain or loss; and (3) the computation of consolidated tax credits, see 756 T.M., Computation of Consolidated Tax Liability.


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AUTHORS

GEORGE L. WHITE
George L. White, B.A., Holy Cross College (1958); M.B.A., University of Pennsylvania (1960); LL.B., Harvard University (1963); admitted to practice in Massachusetts; Certified Public Accountant, Massachusetts.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

II. Separate Return Limitation Year Rules

A. Overview

B. Separate Return Limitation Year

1. In General

2. Separate Return Year; Separate Return Limitation Year

a. In General

b. Predecessors and Successors

c. Exceptions to SRLY Status

(1) Separate Return Year of Common Parent

(2) Member of Group Each Day of Year

C. Net Operating Loss Carryovers and Carrybacks from SRLYs to Consolidated Return Years

1. Contribution of Loss Member to Consolidated Taxable Income

a. Background

b. In General

2. Built-in Losses Treated as Arising in SRLYs

3. Illustration of Operation of Net Operating Loss Carryover and Carryback Rules in SRLY Context

a. Net Operating Loss Carryovers

b. Net Operating Loss Carrybacks

D. Overlap Rule

1. Background

2. Overlap Situation

3. Operating Rules

4. Acquisition of Groups of Corporations

a. Overview

b. Definition of "Group"

c. Elective Relief

E. Net Capital Losses

F. SRLY Subgroup Concept

1. In General

2. Identification of SRLY Subgroups

a. Carryover Subgroups

b. Carryback Subgroups

3. Departure from SRLY Subgroup

4. Members Included (or Excluded) with Principal Purpose of Avoiding SRLY Limitation

5. Anti-Duplication Rules

6. Coordination with Other Limitations

G. Predecessors and Successors

H. Effective Dates

III. Consolidated Return Change of Ownership Rules

IV. Section 382

A. Overview

1. Sections 382 and 383

2. Single-Entity Approach of the Consolidated Return Regulations

3. Application of § 382 in Consolidated Return Context

4. Separate Attribute Application of § 382 Limitation

B. Application of § 382 with Respect to a Consolidated Group

1. Determination and Effect of an Ownership Change

a. In General

b. Special Rule for Post-Change Year That Includes the Change Date

2. Loss Group

3. Loss Subgroup

a. Net Operating Loss Carryovers

b. Net Unrealized Built-In Loss

c. Loss Subgroup Parent

d. Election of Status as Loss Subgroup Parent

e. Principal Purpose of Avoiding a Limitation

f. Cessation as Member of Loss Subgroup

(1) In General

(2) Special Rules

4. Pre-Change Consolidated Attribute

5. Pre-Change Subgroup Attribute

6. Net Unrealized Built-In Gain and Loss

a. In General

b. Members Included in Net Unrealized Built-In Loss Determination

(1) Consolidated Group

(2) Loss Subgroup

c. Acquisition of Built-In Gain or Loss Assets

d. Indirect Ownership

7. Recognized Built-In Gain or Loss

a. Disposition of Stock or Debt of a Member

b. Intercompany Transactions

c. Exchanged Basis Property

C. Determination of Ownership Change

1. Loss Group

2. Loss Subgroup

3. Computational Rules

a. Loss Group

b. Loss Subgroup

4. Successor Parents

5. Newly Created Loss Subgroup Parent

6. Supplemental Method of Determining Ownership Change

7. Information Statements

D. Consolidated § 382 Limitation

1. In General

2. Value of Loss Group

3. Continuity of Business Requirement

E. Corporations Joining a Consolidated Group

F. Corporations Leaving a Consolidated Group

G. Separate Tracking of SRLY Attributes

H. Ownership Changes of Subsidiaries on Separate Corporation Basis

I. Application of § 383

J. Application of § 382 to "Controlled Groups"

1. Introduction

2. Circumstances and Amount of Adjustment Reducing Value

3. Restoration of Value

4. Other Value Reduction Rules

5. No Duplications of Adjustments

6. Coordination of Rules Relating to Controlled Groups and Consolidated Groups

V. Section 384

VI. SRLY Limitation on Built-In Losses

Introductory Material

A. Definition of "Built-In Loss"

1. Net Unrealized Built-In Loss

2. Recognized Built-In Loss

B. SRLY Limitation

C. Treatment of Built-In Losses for Non-SRLY Purposes

D. Built-In Loss SRLY Subgroups

1. General Rule

2. Members of Subgroups

VII. At-Risk Rules

A. In General

B. Amount at Risk

VIII. Disposition of Stock of a Subsidiary

A. Limitation on Use of Subsidiary's Losses to Offset Gain on Disposition of Subsidiary

B. Disallowance of Loss Recognized on Disposition of Stock or Deconsolidation of Subsidiary

1. Stage I: § 337(d); Notice 87-14

a. Use of Investment Adjustment Rules to Avoid Repeal of General Utilities Doctrine

b. Loss Duplication

2. Stage II: Initial Loss Disallowance and Deconsolidation Rules

a. Loss Disallowance Rule

(1) In General

(2) Netting of Gains and Losses

(3) Coordination with Loss Deferral and Loss Disallowance Rules

b. Deconsolidation Rule

(1) In General

(2) Loss Within Two Years After Basis Adjustment

(3) Netting of Gains and Losses

c. Exceptions to Loss Disallowance and Deconsolidation Rules

(1) Extraordinary Gain Dispositions

(2) Positive Investment Adjustments

(3) Duplicated Losses

(4) Netting of Basis Adjustments for Certain Periods

(5) Examples of Exceptions to Loss Disallowance and Deconsolidation Rules

d. Application of Loss Disallowance and Deconsolidation Rules to Successor

e. Anti-Avoidance Rules

(1) In General

(2) Anti-Stuffing Rule

(3) Tax Shelter Implications

f. Effect on Investment Adjustment System and Earnings and Profits Rules

g. Election to Retain Losses of Subsidiary

(1) In General

(2) Insolvency Limitation

(3) No Carryback of Reattributed Losses

(4) SRLY Taint Continued to Apply

(5) No § 382 Limitation

(6) Election Requirements

3. Stage III: Post-Rite Aid Loss Disallowance and Deconsolidation Rules

a. Loss Disallowance Rules

(1) Dispositions and Deconsolidations After March 6, 2002, and Before September 17, 2008

(2) Dispositions and Deconsolidations Before March 7, 2002

b. Duplicated Loss Rules

(1) Basis Redetermination Rule

(2) Loss Suspension Rule

(3) Basis Reduction Rule

(4) Anti-Avoidance Rules

4. Stage IV: Unified Loss Rule

a. In General

b. Basis Redetermination Sub-Rule

c. Basis Reduction Sub-Rule

d. Attribute Reduction Sub-Rule

e. Modifications to Unified Loss Rule

(1) Adjustments for Certain Prior Transactions

(2) Subsidiary Stock Transferred in Intercompany Transactions

(3) Complete Liquidations of Subsidiary

(4) Elections

(5) Anti-Abuse Provision

IX. Passive Loss Rules

A. In General

B. Transactions Between Group Members

C. Disallowed Passive Losses and Credits

X. Section 267

XI. Dual Consolidated Loss Limitation

A. Background

B. Dual Consolidated Loss Limitation: In General

C. Dual Resident Corporation

D. Domestic Use of Dual Consolidated Losses

1. General Rule

2. Separate Unit Combination Rule

3. Exceptions to Domestic Use Limitation Rule

a. Bilateral Elective Agreement

b. No Possibility of Foreign Use

c. Domestic Use Election

(1) In General

(2) Effect of Domestic Use Limitation

(3) Triggering Events

(4) Exceptions to Triggering Events

4. Recapture of Dual Consolidated Losses

a. In General

b. Amount of Recapture

c. Treatment of Recapture Income

d. Failure to Comply with Recapture Rules

E. Foreign Use of Dual Consolidated Losses

1. General Rule

2. Indirect Foreign Use

3. Exceptions to Foreign Use

4. Ordering Rules

5. "Mirror Legislation" of Foreign Country

F. Accounting for Dual Consolidated Losses

1. Calculation of Amount of Dual Consolidated Loss

2. Basis Adjustments

G. Reasonable Cause Standard

XII. Limitation on Use of Group Losses to Offset Income of a Subsidiary Paying Preferred Dividends

XIII. Reverse Acquisitions

A. In General

B. Determination of Stock Ownership Percentage

1. Creeping Reverse Acquisitions

2. Multiple Acquired Corporations

3. Substance-over-Form Principle

4. Cross Ownership of Stock

C. Consolidation into Newly Formed Common Parent

D. Merger of Subsidiary into Common Parent

E. Impact of a Reverse Acquisition

1. Separate Return Limitation Year Rules

2. Net Operating Loss of New Group

XIV. Carrybacks and Carryovers to Separate Return Years

A. In General

B. Net Operating Loss

C. Net Capital Loss

XV. Disposition of Stock of Parent by Member of Group

A. Background

B. Disallowance of Recognized Losses

C. Disallowance of Losses When P Stock Becomes Owned by Nonmember

D. Waiver of Built-in Loss on P Stock

E. Losses from Options, Warrants, and Similar Positions

F. Exception for Dealers in P Stock


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 List of Preambles to Regulations

Worksheet 2 Notice 2004-58, 2004-39 I.R.B. 520 (9/15/2004) (Guidance on Subsidiary Stock Loss Under Regs. § 1.337(d)-2T)

Worksheet 3 Election to Reattribute Subsidiary's Losses to Common Parent (Regs. § 1.1502-20(g)(4))

Worksheet 4 Election to Take Previously Owned Stock into Account for Purposes of Reverse Acquisition Rules (Regs. § 1.1502-75(d)(3)(iii))

Worksheet 5 Statement of Disposition of Stock Within Two Years of Deconsolidation (Regs. § 1.1502-20(b)(5))

Bibliography

OFFICIAL

Statutes:

Regulations:

Treasury Rulings:

Cases:

UNOFFICIAL

Periodicals:

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