The Section 382 - Steptoe & Johnson
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The Section 382 Consolidated Return Regulations
By
Mark J. Silverman
Steptoe & Johnson llp
Washington, D.C
Copyright © 2012, Mark J. Silverman, All Rights Reserved.
TABLE OF CONTENTS
Internal Revenue Service Circular 230 Disclosure: As provided for in IRS regulations, advice (if any) relating to federal taxes that is contained in this document (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.
I. OVERVIEW OF SECTION 382 6
A. Required Change in Ownership 6
B. Consequences of an Ownership Change 7
C. Losses Subject to Limitation 8
D. Example 9
E. Effective Dates 10
II. CONSOLIDATED RETURN ISSUES -- OVERVIEW 10
III. RULES PERTAINING TO LOSS GROUPS 16
A. Definition of Loss Group 17
B. Determining if a Loss Group Has an Ownership Change 18
C. Effect of an Ownership Change 33
IV. WHAT HAPPENS WHEN MULTIPLE CORPORATIONS JOIN A GROUP? -- THE LOSS SUBGROUP RULES 41
A. Definition of Loss Subgroup 41
B. Determining if a Loss Subgroup Has an Ownership Change 47
C. Effect of an Ownership Change 53
V. WHAT HAPPENS WHEN CORPORATIONS JOIN A GROUP AND SUBGROUPING DOES NOT APPLY? 56
A. Definition of New Loss Member 56
B. Determining if a New Loss Member Has an Ownership Change 57
C. Effect of an Ownership Change 58
D. Illustrations 58
VI. OWNERSHIP CHANGE OF SUBSIDIARY ON A SEPARATE ENTITY BASIS 60
A. Ownership Change Determination 60
B. Effect of the Ownership Change 63
C. Relationship to General Ownership Change Rules 63
VII. END OF SEPARATE TRACKING (THE "FOLD IN RULES") AND SUBSEQUENT OWNERSHIP CHANGES 64
A. End of Separate Tracking 64
B. Subsequent Ownership Changes 66
VIII. BUILT-IN GAINS AND LOSSES -- SPECIAL RULES 67
A. Determining if a Consolidated Group Has a Net Unrealized Built-in Gain or Loss 67
B. Intercompany Transactions 69
C. Exchanged Basis Property 69
D. Determination of Whether a Loss Subgroup Has a Net Unrealized Built-In Loss 70
E. Special Problems 70
IX. WHAT HAPPENS WHEN A CORPORATION LEAVES A GROUP OR SUBGROUP? 72
A. Leaving a Loss Group 72
B. Leaving or Ceasing to be a Member of a Loss Subgroup 82
C. Filing the Election to Apportion 84
D. Coordination with Loss Disallowance Rules 86
X. TITLE 11 OR SIMILAR CASES 88
XI. COORDINATION WITH SECTION 383 89
XII. CONTROLLED GROUP RULES 89
A. Background 89
B. Section 382 Limitation with Respect to Controlled Group Loss 90
C. Restoration of Value 93
D. Disposal and Reacquisition of Controlled Group Stock 96
E. Rules Preventing Double Reduction 96
F. Coordination with Consolidated Section 382 Regulations 97
XIII. REVISED SEPARATE RETURN LIMITATION YEAR RULES 97
A. Overview 97
B. Revision of SRLY Computation 98
C. SRLY Limitation Computed on Cumulative Basis 98
D. SRLY Subgroups 101
E. Built-In Gain and Loss 102
F. Overlap Rule 102
The Section 382
Consolidated Return Regulations
OVERVIEW OF SECTION 382
A key element in planning many transactions is the survival and subsequent use of net operating loss ("NOL") carryovers. The Tax Reform Act of 1986, P.L. 99-514, made sweeping changes in the rules governing the use and availability of NOL carryovers following certain changes in the stock ownership of a loss corporation. In particular, section 382 was substantially altered.
1 Required Change in Ownership
1 Section 382 ("section 382") applies only after a change, however effected, in ownership of more than 50 percent of the stock (by value) in a loss corporation over a prescribed period of time. See section 382(g).
1 Such a change is referred to as an "ownership change." The date on which an ownership change occurs is referred to as the "change date." See section 382(j).
2 An ownership change may occur either through an "owner shift involving a 5-percent shareholder," an "equity structure shift," or a combination of the two. See section 382(g).
3 In general, a "loss corporation" is a corporation entitled to use NOL carryovers, having an NOL in the year of the ownership change, or having a net unrealized built-in loss. See section 382(k)(1).
2 In general, the change in ownership of the loss corporation must occur within a three-year testing period ending on the day of any owner shift or equity structure shift. Section 382(i)(1).
3 Under the statute, the loss corporation must track the stock ownership of 5-percent shareholders.
1 To determine who the 5-percent shareholders are, the corporation must determine which ownership interests in the corporation constitute "stock." See section 382(k)(6); Treas. Reg. § 1.382-2(f)(18).
2 The corporation must then determine who owns the stock. For purposes of determining stock ownership, the constructive ownership rules of section 318 apply with certain modifications. See section 382(l)(3)(A); Treas. Reg. § 1.382-2(h).
3 Finally, once the constructive ownership rules have been applied, the corporation can determine its 5-percent shareholders based on the percentage of stock that they own.
1 A 5-percent shareholder is any person holding 5-percent or more (by value) of the loss corporation stock at any time during the testing period. See section 382(k)(6)(C) and (7); Treas. Reg. § 1.382-2(g).
2 Shareholders who own less than 5 percent are aggregated and treated as one 5-percent shareholder. See section 382(g)(4); Treas. Reg. § 1.382-2(j).
4 If the aggregate stock ownership of one or more of the 5-percent shareholders has increased by more than 50 percentage points during the testing period, then an ownership change has occurred. See section 382(g)(1); Treas. Reg. § 1.382-2(a)(1) and (c).
2 Consequences of an Ownership Change
1 If an ownership change occurs, section 382 places an annual limit on the amount of post-change taxable income which may be offset by the loss corporation's pre-change NOL carryovers.
1 This limitation -- known as the section 382 limitation -- is an amount equal to the product of a prescribed rate of return and the value of the loss corporation. Section 382(b)(1).
1 The prescribed rate of return is the long-term tax-exempt rate of return. Section 382(f).
2 The value of the loss corporation, in general, is measured by the value of the corporation's stock immediately before the ownership change. Section 382(e)(1).
2 If the loss corporation has a net unrealized built-in gain the annual limitation may be increased by recognized built-in gains of the loss corporation. Section 382(h)(1)(A).
3 If income is less than the section 382 limitation, the unused section 382 limitation amount may be carried forward to subsequent years. Section 382(b)(2).
2 If an ownership change occurs, the loss corporation must satisfy the continuity of business enterprise requirement applicable to reorganizations throughout the two-year period beginning on the change date. Otherwise, its loss carryovers, in effect, will be eliminated. Section 382(c)(1).
3 Losses Subject to Limitation
1 In general, losses incurred prior to the ownership change are subject to the section 382 limitations. That is, loss carried forward from previous years to the year of change, certain built-in losses and losses incurred during the year of change are subject to section 382. These losses are referred to as "pre-change losses." See sections 382(d)(1) and (h)(1)(B).
2 Losses generated in the year of change are allocated to the periods before and after the change. That portion allocated to the period after the ownership change is not subject to limitation; that portion allocated to the period prior to the ownership change is subject to the section 382 limitations, i.e., those losses may only offset income to the extent of the section 382 limitation. See section 382(d)(1)(B).
4 Example
1 Fact Pattern
On January 1, 1991, L corporation is wholly owned by individual A. A has held all of the L stock since L's formation in 1985. L has a $200 NOL carryover from a previous year. On December 31, 1994, A sells all of his stock to B for $500 (the fair market value of L). At that time, the long-term tax-exempt rate for section 382 purposes is 5 percent. During 1995, L generates $200 in taxable income.
2 Tax Consequences Under Section 382
1 The sale of all of the L stock by A to B is an ownership change which triggers section 382. The sale resulted in a more than 50 percentage point change in L stock ownership during the three-year testing period ending on December 31, 1994. Therefore, section 382 applies.
2 Under section 382, income generated after December 31, 1994 may be offset by L's NOL carryover only to the extent of $25 (the product of L's value ($500) and the rate prescribed under section 382 (5 percent)).
1 Thus, with respect to 1995, L may not fully offset its $200 taxable income with its $200 NOL carryover. Only $25 of its 1995 taxable income may be offset by the NOL carryover.
2 L has an NOL carryover to 1996 of $175 ($200 - $25).
3 If B caused L to sell all of its assets (assume at their book value) within two years of the change date, L's NOL carryover would be eliminated (because the continuity of business enterprise requirement would not be met).
5 Effective Dates
In general, the section 382 rules apply to ownership changes that occur on or after January 1, 1987. The earliest testing period begins on May 6, 1986.
CONSOLIDATED RETURN ISSUES -- OVERVIEW
1 Prior to January 1991, the application of section 382 to consolidated groups was uncertain. In enacting section 382, Congress merely indicated that the CRCO (consolidated return change of ownership) rules (Treas. Reg. §§ 1.1502-1(g) and -21(d)) and the separate return limitation year (“SRLY”) rules (Treas. Reg. §§ 1.1502-1(f) and -21(c)) would continue to apply. No other guidance was provided.
2 Application of section 382 in a consolidated return context turns upon one overall policy decision: whether section 382 should apply to an affiliated group filing consolidated returns on a "single entity" basis, whether it should apply on a "member-by-member" basis, or whether a combination of these two approaches is best.
1 This policy decision must be made at two levels. That is, first it must be decided whether the section 382(g) ownership change test should be applied on a single entity or a member-by-member basis. Second, it must be decided whether the operating provisions of section 382 (i.e., the annual limitation under section 382(a)) should be applied on a single entity or member-by-member basis.
2 Also, one approach may be applied with respect to consolidated net operating losses and a different approach may be applied with respect to losses incurred in separate return limitation years ("SRLY" losses).
3 On January 29, 1991, Treasury issued proposed regulations (the "former proposed regulations") regarding the application of section 382 to corporations filing consolidated returns. 56 Fed. Reg. 4194 (February 4, 1991).
1 These regulations generally adopted the single entity approach with respect to losses that are not SRLY losses.
1 The single entity approach applies to determine ownership changes and the section 382 limitation with respect to such losses.
1 This treatment reflects the general approach of the consolidated return regulations, which treats the members of a consolidated group as divisions of a single taxpayer with the common parent as the sole agent for each member of the group. See Preamble to the former proposed regulations.
2 This treatment also reflects the ability of consolidated group members to use each other's losses.
2 The single entity approach fosters the neutrality principle in that consolidated losses of one member could offset income of another member before an ownership change, and can do so after an ownership change as well, subject only to restrictions that would be imposed on a stand-alone corporation.
2 The regulations also generally adopted the single entity approach with respect to loss subgroups (as to losses that were not SRLY losses of the subgroup).
3 The former proposed regulations generally followed a separate entity approach, however, with respect to corporations that join or leave a consolidated group. According to the Preamble, section 382 applies separately with respect to such members because their losses cannot be used by other members.
4 At the same time, Treasury also issued proposed regulations that would have substantially amended the existing consolidated return regulations. 56 Fed. Reg. 4228 (February 4, 1991).
1 The regulations revised the SRLY rules to apply on a "subgroup" basis rather than on a "fragmentation" (i.e., on a member-by-member) basis.
1 Two or more corporations that are members of a consolidated group can offset one corporation's income against the other's losses, and vice versa.
2 It was thought to be more appropriate and consistent with the single entity approach that the SRLY rules be applied to those members forming or leaving a group on an aggregate or subgroup basis, rather than on a member-by-member basis.
2 The proposed SRLY regulations retained apportionment of consolidated net operating losses for members leaving the group. There had been prior speculation that the regulations would provide that consolidated net operating losses would stay with the common parent.
3 The CRCO rules were repealed, subject to transition rules. The continued application of the CRCO rules caused considerable confusion, since those rules generally paralleled the ownership change rules of section 382 before its amendment by the Tax Reform Act of 1986.
5 On August 8, 1991, the IRS issued Notice 91-27, 1991-2 C.B. 629, which proposed transitional relief relating to the built-in gain and loss rules, as well as clarifying the effective date for amendments to the SRLY rules.
6 New Temporary and Proposed Regulations
Substantial uncertainty arose as a result of the effective date of the former proposed regulations, which generally were proposed to be effective for consolidated return years ending on or after January 29, 1991. Because of the potentially retroactive application of the proposed regulations, taxpayers could not be sure which approach would govern their use of losses for years after January 29, 1991. To resolve this uncertainty, the proposed regulations were withdrawn on June 27, 1996 and replaced by temporary regulations (the "temporary regulations"). 61 Fed. Reg. 33,313 (June 27, 1996). The temporary regulations were issued primarily to address effective date concerns, are substantially identical to the former proposed regulations, and do not address comments received regarding the former proposed regulations. Instead, the temporary regulations were also issued as proposed regulations (the "new proposed regulations") and may be amended to reflect comments at a future date.
7 Effective Dates
The temporary regulations are generally effective for consolidated return years beginning on or after January 1, 1997. In contrast to the former proposed regulations, this effective date also applies to the amendments to the SRLY and built-in deduction rules. Under the former proposed regulations, the amendments to the SRLY and built-in deduction rules applied only to losses and deductions of corporations that became members after the effective date without regard to when such losses arose; losses and deductions of members acquired prior to that date remained subject to the old regime. In contrast, under the temporary regulations, the amendments to the SRLY and built-in deduction rules apply to losses and deductions carried to years after the effective date, regardless of when such losses or deductions arose.
8 Transitional Effective Dates
A consolidated group may elect to apply the temporary regulations to years ending on or after January 29, 1991 and before January 1, 1997 if three conditions are met: (1) the temporary regulations must be consistently applied on the group's return (original or amended) for each such year for which the statute of limitations does not preclude the filing of an amended return; (2) the temporary SRLY and built-in deduction rules must be applied only to losses of corporations becoming members and acquisitions occurring on or after January 29, 1991; and (3) adjustments must be made to the earliest subsequent open year to reflect any inconsistency in a closed year.
9 On June 25, 1999, Treasury issued new final regulations that modify the temporary regulations.
1 In T.D. 8823, 64 Fed. Reg. 36092 (Jul. 2, 1999), Treasury finalized the SRLY rules with one significant modification. The final regulations generally eliminate the SRLY limitation when its application overlaps with the section 382 limitation. See Part XIV.F.
2 In T.D. 8824, 64 Fed. Reg. 36116 (Jul. 2, 1999), Treasury finalized the rules provided in the temporary regulations on the operation of section 382 with respect to consolidated groups. New provisions in the final regulations include: (a) an election to treat the subgroup parent requirement as satisfied (See Part IV.A.3); (b) changes in the supplemental change method (See Part III.B.2); and (c) the apportionment of a group’s net unrealized built-in gain to a departing member (See Part X.A.4.e).
3 In T.D. 8825, 64 Fed. Reg. 36175 (Jul. 2, 1999), Treasury finalized the temporary regulations with respect to the application of section 382 to controlled groups, with some modifications, including the addition of a presumption that certain built-in losses are attributable to tax years before the tax year at issue. See Part XIII.B.
10 An Overview of the Final Regulations
1 The Consolidated Section 382 Regulations
1 Treas. Reg. § 1.1502-90 -- Table of Contents
2 Treas. Reg. § 1.1502-91 -- Contains the definitions of loss group and loss subgroup, pre-change consolidated and subgroup attributes; sets forth rules on the effect of section 382 and rules regarding built-in gains and losses.
3 Treas. Reg. § 1.1502-92 -- Contains rules for determining whether an ownership change of a loss group or loss subgroup has occurred.
4 Treas. Reg. § 1.1502-93 -- Includes rules for the calculation of loss group and loss subgroup section 382 limitations.
5 Treas. Reg. § 1.1502-94 -- Sets forth rules that apply when corporations join a consolidated group.
6 Treas. Reg. § 1.1502-95 -- Contains rules that apply when a corporation ceases to be a member of a loss group or loss subgroup.
7 Treas. Reg. § 1.1502-96 -- Describes treatment under section 382 of certain SRLY losses treated as consolidated losses ("fold-in" rules), ownership change of subsidiary if certain persons hold options pursuant to a plan or arrangement, and continuing application of limitations following ownership changes.
8 Treas. Reg. § 1.1502-97 -- Deals with special rules in Title 11 cases and is Reserved.
9 Treas. Reg. § 1.1502-98 -- Describes coordination with section 383.
10 Treas. Reg. § 1.1502-99 -- Contains the effective date rules.
2 The New Consolidated Return Rules
The new regulations make significant changes to the existing consolidated return regulations. The major changes include the following.
1 Treas. Reg. § 1.1502-1 -- amending certain key definitions.
2 Treas. Reg. § 1.1502-15 -- amending the built-in loss rules.
3 Treas. Reg. § 1.1502-21 -- amending the SRLY rules with respect to net operating losses.
4 Treas. Reg. § 1.1502-22 -- amending the SRLY rules with respect to capital losses.
5 Treas. Reg. § 1.1502-23 -- amending the rules with respect to net section 1231 gains and losses.
3 Additional Regulations
Additional regulations were also released at the same time as the final regulations. These regulations made the following changes.
1 Treas. Reg. § 1.382-2 -- amends several key definitions in the temporary section 382 regulations, in particular the definition of "successor" and "predecessor" corporations.
2 Treas. Reg. § 1.382-5 -- provides rules for computing the section 382 limitation in the case of short years and successive ownership changes.
3 Treas. Reg. § 1.382-8 -- provides rules for determining the value of a loss corporation that is a member of a controlled group.
RULES PERTAINING TO LOSS GROUPS
The final regulations contain a series of rules that apply section 382 to a consolidated group (referred to as a "loss group"). The focus of the regulations in this regard generally is to apply the single entity concept with respect to consolidated attributes of the group, as opposed to attributes that arose in separate return years.
1 Definition of Loss Group
The first step is to determine whether a group is a loss group. Under Treas. Reg. § 1.1502-91(c)(1), a loss group is a consolidated group that meets one of three tests:
– the group is entitled to use a net operating loss carryover to the taxable year that did not arise (and is not treated as arising) in a SRLY;
– the group 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
– the group has a net unrealized built-in loss, determined by treating the date on which the determination is made as though it were a change date.
1 Example 1. Individual A owns all the stock of corporation L, which owns all the stock of L1. L and L1 file a consolidated return, and incur consolidated net operating losses. The L group is a loss group because it is entitled to use losses that are not SRLY losses.
2 Example 2. Corporation L owns 60 percent of the stock of corporation L1. Individual A owns the other 40 percent. Both L and L1 have net operating loss carryovers arising in 1994. On December 31, 1994, A sells her L1 stock to L. L and L1 file a consolidated return for 1995.
1 L and L1 compose a loss group. The L loss group is entitled to use L's carryover from 1994. L's loss from 1994 is not SRLY because of the so-called "lonely parent" rule. See Treas. Reg. § 1.1502-1(f)(2)(i).
2 Note that L1 has not undergone an ownership change for purposes of section 382 because there has only been a 40 percentage point increase in L's percentage interest in L1. However, as discussed below, L1's carryover from 1994 is a SRLY loss and is thus subject to the SRLY limitations. Treas. Reg. § 1.1502-91(c)(2).
3 Suppose that, in the example above, L had owned only 40 percent and A 60 percent of L1. L's purchase of all the L1 stock from A still creates a loss group. L1's carryover still would be subject to the SRLY limitation. In addition, L1 would undergo an ownership change.
1 As will be discussed below, L1's loss would be subject to a section 382 limitation based on L1's value before the ownership change.
2 If the L group were to subsequently undergo an ownership change, L1's loss carryover would be treated as a consolidated (non-SRLY) net operating loss subject to an additional section 382 limitation calculated for the entire group. Treas. Reg. § 1.1502-96(a) (discussed below in more detail at Part VII.).
2 Determining if a Loss Group Has an Ownership Change
The final regulations contain two methods for determining if a loss group has an ownership change: (1) the "parent change" method and (2) a variation of that approach, the "supplemental" method.
1 Parent Change Method
Under the regulations, the general rule is that a loss group has an ownership change if the loss group's common parent undergoes an ownership change -- as determined under section 382(g) and Temp. Treas. Reg. § 1.382-2T. Treas. Reg. § 1.1502-92(b)(1)(i). Under the parent change method, the determination of whether the loss group has an ownership change is not affected by transfers of ownership interests in a subsidiary.
1 The regulations provide that for purposes of determining whether the common parent has an ownership change:
1 Consolidated net operating losses, net operating loss carryovers and net unrealized built-in losses are treated as losses of the common parent; and
2 Only consolidated (non-SRLY, non-subgroup) attributes are taken into account in determining the earliest day that the testing period for the common parent can begin. Treas. Reg. § 1.1502-92(b)(1)(i).
2 In other words, the regulations focus on consolidated attributes, treating the common parent as if it incurred the consolidated losses and marking the beginning of the testing period -- for purposes of section 382(i)(3) (mandating a shorter testing period where losses arise in the normal three-year testing period) -- with respect to such losses. This reflects the single entity approach as it applies to consolidated attributes.
3 Example 3. Individual A owns the stock of corporation L. L owns 80 percent and individual B owns 20 percent of corporation L1. The L group has a consolidated net operating loss carryover from 1995 attributable to L1. On August 15, 1996, A sells 51 percent of the L stock to individual C.
1 Under the parent change method, section 382(g) is applied to L (the common parent) to determine whether it (and therefore the L loss group) has an ownership change with respect to L1's loss carryover from 1995.
1 Here, the L group has an ownership change as a result of the sale of the L stock to C. Thus, section 382 generally will apply to L and L1 as a group.
2 Section 382 applies to L1 even though more than 50 percent of the L1 stock ownership did not change (only 40.8 percent (51 percent x 80 percent) changed). See Treas. Reg. § 1.1502-92(b)(2) Ex. (1).
2 By contrast, if A sold only 49 percent of the L stock to C, and thereafter B sold his L1 stock to D, no ownership change would result under this method.
1 The parent change method looks solely at changes in ownership of the common parent. See Treas. Reg. § 1.1502-92(b)(2) Ex. (2).
2 B's sale would not be taken into account in determining if L (and thus the L loss group) has an ownership change under the parent change method. But see Treas. Reg. § 1.1502-92(c) discussed at Part III.B.2., below (supplemental ownership change method when both parent and subsidiary stock are acquired by a five-percent shareholder and certain other conditions are met).
2 Supplemental Method (The "Throw-Up" Rule)
The regulations contain a "supplemental" method for determining if a loss group has had an ownership change. The supplemental method imposes an ownership change on the entire group based on investment in the common parent and other group members. For reasons described below, this rule is also known as the "throw-up" rule.
1 When Does the Supplemental Method Apply?
1 In General
The supplemental method applies to a loss group if:
1 Any 5-percent shareholder of the common parent increases its percentage ownership in both the common parent and a subsidiary of the loss group (other than by direct or indirect acquisition of the common parent stock);
2 The increases occur within a 3 year period or, if shorter, the period beginning on the first day following the most recent ownership change of the loss group; and
3 Either (i) the common parent has actual knowledge of the increase in the 5-percent shareholder’s ownership interest in the subsidiary’s stock, or (ii) the 5-percent shareholder of the parent is also a 5-percent shareholder of the subsidiary whose percentage increase in the ownership of the subsidiary’s stock would be taken into account in determining if the subsidiary has an ownership change. Treas. Reg. § 1.1502-92(c)(2).
2 Special Anti-Abuse Rules
The regulations contain a number of special anti-abuse rules to be applied in determining if the supplemental method applies.
1 That is, in applying the general rule above, Treas. Reg. § 1.1502-92(c)(3)(i) provides that if any person acting pursuant to a plan or arrangement with a 5-percent shareholder of the common parent increases its ownership in the subsidiary and the 5-percent shareholder increases its percentage ownership interest in the common parent pursuant to the same plan or arrangement, then such increases in the stock of the subsidiary will be attributed to the 5-percent shareholder of the common parent.
3 Special Operating Rules
For purposes of determining if the supplemental method applies to a loss group, the constructive ownership rules of section 382(l)(3) and Treas. Reg. §§ 1.382-2(h) and 1.382-4(d) apply.
4 Relation to Parent Change Method
The supplemental method applies in addition to, not instead of, the parent change method. Treas. Reg. § 1.1502-92 (c)(1). Thus, section 382 will apply to a loss group if an ownership change occurs under either method.
5 Illustration of the Problem
L, L1 and L2 compose a loss group. All the L stock is owned by individual A. The L stock is worth $300 (including the value of L1 and L2), the L1 stock is worth $200 (including the value of L2), and the L2 stock is worth $100. On June 1, 1993, A sells 45 percent of the L stock to individual B for $135. On December 31, 1993, L1 issues 20 percent of its stock to B for $50 cash. After the stock issuance, the L stock is still worth $300, the L1 stock is worth $250, and the L2 stock is worth $100.
1 Neither purchase by B results in an ownership change of the loss group under the parent change method, because there has been no ownership change of the common parent, L. (Note, however, that if L1 and L2 were a loss subgroup, that subgroup would have undergone an ownership change as a result of the stock issuance to B, assuming the subgroup had not had an ownership change in connection with joining the L group.)
2 Arguably, an ownership change of the loss group has occurred, since B owns $185 in value of stock of a group with a total value of $350 ($185 equals (45% x $300) + (20% x $250)).
3 Treasury viewed this as a possibly abusive situation, which would not result in an ownership change under the parent change method.
2 How Does the Supplemental Method Operate?
Under the supplemental method, the parent change rules are used to determine if the common parent has an ownership change, with the following modifications.
1 The supplemental method tests whether the common parent has an ownership change by treating the common parent as though it had issued its own stock to the person acquiring the subsidiary stock. In other words, such subsidiary stock is "thrown up" to the parent and deemed issued by the parent.
1 The common parent is treated as issuing an amount of stock equal to the value of the subsidiary stock represented by the percentage increase in the acquiring person's ownership of the subsidiary (determined on a separate entity basis). Treas. Reg. § 1.1502-92(c)(4)(ii).
2 Although this language is not entirely clear, it apparently means that if a subsidiary is worth $100 and a person acquires 20 percent of the subsidiary stock, then the parent will be treated as issuing $20 worth of its own stock to the acquiring person (not stock representing 20 percent of the parent's value).
3 Note that the supplemental change method only requires the "throw up" of the subsidiary stock acquired by any person pursuant to a plan or arrangement with the 5-percent shareholder, not other minority shareholders.
4 In addition, only the increase in the acquiring person's interest during the testing period is apparently considered.
2 Similar principles apply if the increase in percentage ownership is effected by a redemption or similar transaction. Treas. Reg. § 1.1502-92 (c)(4)(ii).
3 Further, additional testing dates are created to include each day on which there is an increase in ownership of the stock of a subsidiary and the first day of the first consolidated return year for which the group is a loss group. Treas. Reg. § 1.1502-92(c)(4)(i).
4 For purposes of applying the ownership change rules, stock deemed issued under the supplemental method on a specific testing date is not treated as issued in a testing period that does not include such testing date. Treas. Reg. § 1.1502-92(c)(4)(iii).
5 These modifications to the parent change method do not apply if the deemed issuance of stock would not cause the loss group to have an ownership change before the day (if any) on which the subsidiary ceases to be a member of the loss group. Treas. Reg. § 1.1502-92(c)(4)(iv).
6 If any 5-percent shareholder of the common parent increases its percentage ownership in the subsidiary stock (other than by acquisition of common parent stock) before the 5-percent shareholder increases its percentage ownership interest in the stock of the common parent, then the deemed issuance of stock is treated as occurring on the date the 5-percent shareholder increases its percentage ownership in the common parent stock, in an amount equal to the value of the subsidiary stock on the date it was acquired. Treas. Reg. § 1.1502-92(c)(4)(v).
7 To prevent duplicative counting of stock, appropriate adjustments must be made if two or more 5-percent shareholders are treated as increasing their percentage ownership interests pursuant to the same plan or arrangement. Treas. Reg. § 1.1502-92(c)(4)(vi).
3 Illustrations
1 Example 4. A owns all the stock of L. L is a loss corporation. On July 16, 1995, L transfers $100 of assets to a newly created subsidiary, S, in exchange for S stock. L and S thereafter file consolidated returns. On November 23, 1995, B contributes cash to L in exchange for a 45 percent stock interest in L and contributes cash to S in exchange for a 20 percent stock interest in S. L and S are worth $200 and $100, respectively, prior to the contributions by B, and $364 and $125 thereafter.
1 B is a 5-percent shareholder who has increased his ownership interest in both L and S. The supplemental rules thus apply. See Treas. Reg. § 1.1502-92(c)(5) Ex. (1).
2 Accordingly, L is treated as if it had issued to B an additional $25 of its own stock. Therefore, L is considered to have $389 of stock outstanding ($200 initial value plus $164 contribution by B plus $25 of S stock "thrown up" to B).
3 No ownership change results under the supplemental method because B's interest has increased by only $189 ($164 + $25) of the total value in L of $389, or 48.6 percent.
4 Because B is a 5-percent of both L and S during the testing period and B’s increase in its percentage ownership in the S stock would be taken into account in determining if S had an ownership change, it is not relevant whether L has actual knowledge of B’s acquisition of the S stock. See Treas. Reg. §1.1502-92(c)(2).
6 Example 5. Assume in the above example, that B purchases a 20 percent interest in S from L for $20. L is treated as if it issued to B $20 of its own stock, and is considered to have $384 of stock outstanding ($200 initial value plus $164 contribution by B plus $20 of S stock "thrown up"). Under this scenario, no ownership change occurs, since B is deemed to own $184 ($164 + $20) or 47.9 percent of L's total $384 value.
7 Example 6. If B purchases 45 percent of the L stock from A for $90 (rather than making a capital contribution to L) and purchases 25 percent of the S stock from L for $25, an ownership change would result under the supplemental rules. B will be deemed to own $115 ($90 + $25) or 51 percent of L's total $225 value.
1 Importantly, in Example 6 above, while the loss group has undergone an ownership change, B has not acquired effective control of the common parent. B only owns 45 percent of the L stock.
2 It might have been more appropriate for the regulations to have applied the supplemental rules only in situations where the person obtains more than a 50 percent interest in the common parent (i.e., where B increases ownership in the common parent from 25 to 65 percent, or from 55 to 90 percent).
3 However, ownership changes under section 382 are based on movements in a corporation's "stock" interests, as measured by value. Section 382 is not concerned with shifts in control.
8 Example 7. Individual A owns the stock of L, which in turn owns the stock of L1. The L group is a loss group. As part of a plan, A sells 49 percent of the L stock to B on October 4, 1995, and, on November 6, 1995, L1 issues a 20 percent stock interest to the public. See Treas. Reg. § 1.1502-92(c)(5) Ex. (2).
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1 The regulations indicate that because the acquisition of L stock by B and the issuance of L1 stock occurred pursuant to a plan and L has actual knowledge of the plan, the supplemental method will apply to determine whether the L group has had an ownership change.
2 The same 5-percent shareholder has not increased its percentage interest in both the parent and subsidiary, so that the supplemental rules would not apply but for the plan or arrangement exception.
3 However, this example seems ill-suited to illustrate the above stated rule.
1 The 5-percent shareholder is treated as increasing its percentage interest in the subsidiary only to the extent that there is a person acting pursuant to a plan or arrangement with the 5-percent shareholder that increases its ownership interest in the parent. Treas. Reg. § 1.1502-92(c)(3)(i).
2 The parties acting pursuant to the plan, L, L1 or A, have not increased their ownership interests. Further, it is difficult to conceive a plan or arrangement between the 5-percent shareholder and a large public group.
3 Change in Identity of the Common Parent
The regulations also provide rules concerning changes of identity of the common parent when the loss group continues in existence.
1 Treas. Reg. § 1.1502-92(b)(3) provides that for purposes of determining whether a loss group has an ownership change, if the common parent of a loss group is succeeded or acquired by a new common parent, then the new common parent is treated as a continuation of the former common parent. Appropriate adjustments must be made to take into account owner shifts in the former common parent during the testing period. Treas. Reg. § 1.1502-92(b)(3)(i).
2 Examples of such cases are where the new common parent acquires the old common parent in a reverse acquisition, and where the old common parent ceases to exist.
1 Example 8. L and L1 compose a loss group. All the L stock is owned by A. On August 26, 1992, A sells 30 percent of the L stock to B. On July 16, 1993, A and B transfer their L stock for a like percentage of stock in a newly created holding company, HC, and HC, L and L1 file consolidated returns. The formation of the holding company qualifies as a reverse acquisition under Treas. Reg. § 1.1502-75(d)(3)(i), and the loss group is treated as remaining in existence. HC is the new common parent of the loss group. On November 11, 1994, A sells 25 percent of the HC stock to B.
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1 HC is treated as a continuation of L because it succeeded the common parent and did not terminate the group. HC's testing period begins on January 1, 1992, the first day of the taxable year of the L loss group in which the consolidated NOL arose.
2 B's acquisition on November 11, 1994 results in an ownership change. See Treas. Reg. § 1.1502-92(b)(3)(iii) Ex. (1).
2 Example 9. L and L1 compose a loss group. A, B and C own equal shares of L's stock. On May 2, 1995, L is merged into P, a corporation owned by D. A, B and C each receive 30 percent of the P stock, and D retains 10 percent. L1 thereafter files consolidated returns with P. The merger of L into P qualifies as a reverse acquisition with the L group treated as remaining in existence, P taking the place of L as the new common parent.
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1 No ownership change of the loss group results since D is the only shareholder that has increased her ownership in the continuing loss group during the testing period, and the increase is only 10 percent. See Treas. Reg. § 1.1502-92(b)(3)(iii) Ex. (2).
2 Any NOL's belonging to P as it enters the group will be subject to the SRLY rules. In addition, P has undergone an ownership change with respect to such NOL's. See Treas. Reg. § 1.1502-92(b)(3)(iii) Ex. (2)(iv). See also Treas. Reg. § 1.1502-94, discussed at Part V., below.
4 Testing Period Following an Ownership Change
If a loss group has an ownership change, the testing period for determining a subsequent ownership change with respect to the pre-change consolidated attributes will begin no earlier than the first day following the loss group's most recent change date. Treas. Reg. § 1.1502-92(d).
5 Filing of Information Statement
The common parent of the loss group must file the information statement described in Treas. Reg. § 1.382-2(a)(2)(ii) for a consolidated return year because of any owner shift, equity structure shift, or other transaction that gives rise to a testing date (see Temp. Treas. Reg. § 1.382-2T(a)(2)(i)):
1 With respect to the common parent's stock and a subsidiary's stock (taken into account under the supplemental ownership change method); and
2 With respect to an ownership change described in Treas. Reg. § 1.1502-96(b) (relating to ownership changes of subsidiaries, see discussion at Part VI, below). Treas. Reg. § 1.1502-92(e)(1).
3 Effect of an Ownership Change
1 Limit on Consolidated Taxable Income
Following an ownership change of a loss group, the amount of consolidated taxable income for any post-change year that can be offset by "pre-change consolidated attributes" cannot exceed the "consolidated section 382 limitation" for such year. Treas. Reg. § 1.1502-91(a)(1).
1 Pre-Change Consolidated Attributes
1 For this purpose, a "pre-change consolidated attribute" of a loss group is:
1 Any current year loss or loss carryover not arising in a SRLY that is allocable to the period ending on or before the change date; or
2 Any recognized built-in loss of the loss group. Treas. Reg. § 1.1502-91(e)(1).
2 Example 10. The L group has a consolidated net operating loss arising in 1994 that is carried over to 1995. The L loss group has an ownership change at the beginning of 1995.
1 The net operating loss carryover of the L loss group from 1994 did not arise in a SRLY. Therefore, it is a pre-change consolidated attribute of the L group.
2 The amount of consolidated taxable income of the L group for 1995 that may be offset by this loss carryover may not exceed the consolidated section 382 limitation of the L group for that year computed as provided in Treas. Reg. § 1.1502-93. See Treas. Reg. § 1.1502-91(e)(2).
(3) NOTE: The Supreme Court recently affirmed that a loss group’s Consolidated Net Operating Loss (“CNOL”) must be calculated on a “single-entity” basis pursuant to Treas. Reg. § 1.1502-21(f). United Dominion Industries, Inc. v. United States, 121 S. Ct. 1934 (2001).
2 The Consolidated Section 382 Limitation
1 In General
1 The "consolidated section 382 limitation" for any post-change year is an amount equal to the "value of the loss group" multiplied by the long-term tax-exempt rate that applies with respect to the ownership change. Treas. Reg. § 1.1502-93(a)(1).
2 As with ownership changes outside of the consolidated return context, adjustments to the consolidated section 382 limitation may be required. For example, the following adjustments may be necessary:
--adjustments under section 382(b)(2) (unused section 382 limitation);
--section 382(b)(3)(B) (post-change year that includes change date);
--section 382(m)(2) (short taxable years); and,
--section 382(h) (recognized built-in gains and section 338 gains). Id.
3 The consolidated section 382 limitation also can be reduced to the extent apportioned to departing members of the group. See Part IX., below.
2 Value of Loss Group
In computing the consolidated section 382 limitation, the "value of the loss group" is the value of the stock of each member immediately before the ownership change, other than stock that is owned directly or indirectly by another member. Treas. Reg. § 1.1502-93(b)(1).
1 A member is considered to own indirectly stock of another member through a nonmember only if the member has a 5-percent or greater ownership interest in the nonmember. Treas. Reg. § 1.1502-93(b)(1)(ii).
2 Stock includes stock described in section 1504(a)(4) and Treas. Reg. § 1.382-2(f)(18)(ii) and (iii). Treas. Reg. § 1.1502-93(b)(1)(iii).
3 Adjustments to Value
The value of a loss group is adjusted by any rule in section 382 that would apply to stand-alone corporations.
1 For example, the value of the loss group is adjusted to take into account redemptions and corporate contractions (382(e)(2)), certain capital contributions (382(l)(1)), and ownership of substantial nonbusiness assets (382(l)(4)). Treas. Reg. § 1.1502-93(b)(2)(i).
1 The anti-stuffing rules of section 382(l)(1) would apply with respect to capital contributions made to any member of the loss group by a person or entity not included in the loss group. Id.
2 The rules of section 382(l)(4) would apply to the loss group in the aggregate. Id.
2 The value of the loss group is also adjusted to the extent necessary to prevent duplication of the value of stock of a member. For example, the principles of Treas. Reg. § 1.382-8 may apply in determining the value of a group of members that are not included in the determination of whether the group has a net unrealized built-in gain or loss under Treas. Reg. § 1.1502-91(b)(2)(ii).
3 Illustrations
1 Example 11. Individual A owns the stock of corporation L. L owns 80 percent and individual B owns 20 percent of corporation L1. The L group has a consolidated net operating loss carryover from 1994. The value of the L stock (which includes the value of L1 held by L) is $1,000. The total value of the L1 stock is $600, and the value of the L1 stock held by B is $120. On August 15, 1995, A sells 51 percent of the L stock to individual C. The long-term tax-exempt rate is 10 percent.
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1 The L group has an ownership change as a result of the sale of the L stock to C. See Treas. Reg. § 1.1502-92(b)(2) Ex. (1).
2 The section 382 limitation with respect to the 1994 consolidated NOL is $112. This equals the value of L stock ($1,000) plus the value of the L1 stock held by B ($120) multiplied by the long-term tax-exempt rate (10 percent).
2 Example 12. L, L1 and L2 compose a loss group. Individual B owns all the L stock. L1 has outstanding common stock and section 1504(a)(4) preferred stock. A owns 10 percent of the L1 common stock and all the L1 preferred. L2 is owned 50 percent by L1 and 50 percent by L. B sells all of the L stock to C. The value of the L stock is $100 (including L's interest in L1 and L2). The value of the L1 common stock is $40 and the L1 preferred stock is $30.
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1 The L group undergoes an ownership change as the result of B's sale of L stock to C.
2 In determining value, the L group cannot include the value of stock of any member that is owned directly or indirectly by another member.
1 Thus, the value of the L1 and L2 stock held by L is ignored.
2 The value of the L2 stock held by L1 is also ignored.
3 Accordingly, the value of the L group taken into account for purposes of the group section 382 limitation is $134. This is the value of the L stock ($100) plus the value of the L1 common stock owned by A (10 percent of $40) plus the value of the preferred stock owned by A ($30). See Treas. Reg. § 1.1502-93(b)(3) Ex. (1).
3 Example 13. L and L1 compose a consolidated group. The value of L's stock is $100. L owns 80 shares (80 percent) and corporation M owns 20 shares (20 percent) of the L1 stock. L owns 79 percent of the stock of corporation M. The 20 shares of L1 stock not owned directly by L have a fair market value of $20. Assume that the L group has an ownership change.
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1 Because L owns more than 5 percent of the ownership interests in M (a nonmember) L is considered to own indirectly 15.8 shares of the L1 stock held by M (79 percent x 20 shares). These shares cannot be included in the value of the L group.
2 Thus, in this case, the value of the L group for purposes of the section 382 limitation is $104.20.
3 This equals the value of the L stock ($100) plus the value of the L1 stock not owned directly or indirectly by L -- the stock owned by Public M (21 percent X $20, or $4.20). Treas. Reg. § 1.1502-93(b)(3) Ex. (2).
2 Recognized Built-in Gains
If a loss group has a net unrealized built-in gain, any recognized built-in gain of the loss group will increase the consolidated section 382 limitation. Treas. Reg. § 1.1502-93(c)(1).
3 Continuity of Business Enterprise
1 Under Treas. Reg. § 1.1502-93(d)(1), a loss group is treated as a single enterprise for purposes of determining whether it satisfies the continuity of business enterprise requirement in section 382(c)(1).
2 The regulations give an example of a loss group composed of three corporations, each operating an historic business. The three businesses have equal value.
1 In the example, two of the businesses are discontinued after the ownership change. One corporation continues its historic business for the two-year period following the change date.
2 The example concludes that the continuity of business enterprise requirement is met by the continued operation of the remaining business. See Treas. Reg. § 1.1502-93(d)(2). Cf. Treas. Reg. § 1.368-1(d)
WHAT HAPPENS WHEN MULTIPLE CORPORATIONS JOIN A GROUP? -- THE LOSS SUBGROUP RULES
The regulations also apply to loss subgroups. The loss subgroup rules were intended to parallel the rules applicable to loss groups, and are similar in many respects to the loss group rules.
1 Definition of Loss Subgroup
There are two definitions of a loss subgroup, one for net operating loss carryovers and one for net unrealized built-in losses. Treas. Reg. § 1.1502-91(d).
1 Subgroup for Loss Carryovers
1 Two or more corporations that become members of a consolidated group compose a loss subgroup if:
--they were affiliated with each other in another group (whether or not the group was a consolidated group);
--they bear a relationship to each other described in section 1504(a)(1) immediately after they become members of the group; and
--at least one of the members carries over a non-SRLY net operating loss with respect to the former group. Treas. Reg. § 1.1502-91(d)(1).
2 The necessity of the section 1504(a)(1) relationship has been questioned by many commentators. It is noteworthy that the new SRLY subgroup rules do not require a section 1504(a)(1) relationship. See Part XIV., below.
2 Subgroup for Net Unrealized Built-In Losses
A loss subgroup can be formed with respect to net unrealized built-in losses as well.
1 Two or more corporations that become members of a consolidated group compose a loss subgroup if they:
--have been continuously affiliated with each other for the five consecutive year period ending immediately before they become members of the group;
--bear a relationship to each other described in section 1504(a)(1) immediately after becoming members of the group; and
--have a net unrealized built-in loss on the day they become members of the group treating that day as a change date. Treas. Reg. § 1.1502-91(d)(2).
2 The determination of whether a corporation meets the five-year affiliation requirement described above is made with reference to any predecessor corporation. See Treas. Reg. § 1.1502-91(j).
1 A predecessor or successor is a transferor or distributor, or distributee or transferee, respectively, of assets to a member to which section 381 applies. Treas. Reg. §§ 1.382-2(a)(5), (6).
2 In addition, the regulations add a new definition of predecessor or successor to include, as the context may require, the transferor or transferee of assets if basis is determined, in whole or in part, by reference to the basis of the assets of the transferor or distributor, but only if the amount by which basis and value differ, in the aggregate, is material. Treas. Reg. §§ 1.382-2(a)(5), (6). This definition applies only with respect to testing dates on or after January 1, 1997.
1 This definition would encompass, among other transactions, section 351 transfers.
2 Under the former proposed regulations, this applied only in the case of built-in loss assets; if value exceeded basis the transferor was not a predecessor.
3 See PLR 9715035 (Jan. 14, 1997) for an example of the application of the predecessor/successor rule.
3 A corporation apparently can be a member of a subgroup with respect to loss carryovers, but not a member of a subgroup with respect to net unrealized built-in losses.
3 Election to treat loss subgroup parent requirement as satisfied
1 If two or more corporations become members of a consolidated group at the same time and were affiliated with each other immediately before becoming members of the group, and the common parent of the group makes an election with respect to those new members, then such corporations are deemed to bear a section 1504(a)(1) relationship to each other immediately after becoming members of the group. Treas. Reg. § 1.1502-91(d)(4)(i).
2 The common parent’s election includes all corporations that become members of the current group at the same time and that were affiliated with each other immediately before becoming members of the current group. Treas. Reg. § 1.1502-91(d)(4)(ii).
4 Anti-Abuse Rule
1 Importantly, corporations will not compose a loss subgroup if any one of them is formed, acquired or availed of with the principal purpose of avoiding the application of or increasing any limitation under section 382. Treas. Reg. § 1.1502-91(d)(5).
2 The purported members of such a loss subgroup will have section 382 apply separately to them under Treas. Reg. § 1.1502-94. Id. See discussion at Part V., below.
3 However, the prohibited purpose will not be found solely because, in connection with becoming members of the group, the members are rearranged to bear the required section 1504(a)(1) relationship. Id.
5 Examples of Loss Subgroups
1 Example 1. P owns all the stock of L, which in turn owns all the stock of L1. The P group has a consolidated net operating loss that arose in 1994 and is carried to 1995. In 1995, P sells all the L stock to individual A, and L and L1 thereafter file consolidated returns. A portion of the 1994 consolidated NOL carryover is allocated to L and L1 under Treas. Reg. § 1.1502-21(b). L and L1 compose a loss subgroup with L as the loss subgroup parent. See Treas. Reg. § 1.1502-91(d)(7) Ex. (1).
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2 Example 2. P is the common parent of an affiliated group consisting of P, L, L1, L2 and L3, as indicated below. P sells all of its L and L1 stock to New P.
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1 Assuming the other prerequisites are met, only L and L2 compose a loss subgroup in this example. Neither L1 nor L3 bear a relationship described in section 1504(a)(1) with any of the other former members. See Treas. Reg. § 1.1502-91(d)(7) Ex. (2). (Note that New P can make an election to treat the 1504(a)(1) ownership requirement as satisfied. See Treas. Reg. § 1.1502-91(d)(7) Ex. (4).)
2 A different result obtains if, prior to the sale, P transfers the L1 stock to L. In that case, L, L1, L2 and L3 would compose a loss subgroup. Treas. Reg. § 1.1502-91(d)(7) Ex. (3). The regulations expressly sanction restructuring to meet the requisite relationship. See Treas. Reg. § 1.1502-91(d)(5).
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3 Example 3. P owns all the stock of L, which in turn owns all the stock of L1. The P group has a consolidated net operating loss carryover from 1991 that it carries to 1994. In 1992, L acquires the stock of S. In 1994, P sells the L stock to New P. A portion of the net operating loss carryover is allocated to L.
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L, L1 and S would compose a loss subgroup, even though none of the loss is apportioned to L1 or S, and even though S was not part of the group when the NOL was incurred.
2 Determining if a Loss Subgroup Has an Ownership Change
1 Parent Change Method
Under the regulations, the parent change method is applied at the loss subgroup level by reference to the loss subgroup parent.
1 More specifically, a loss subgroup has an ownership change if the "loss subgroup parent" has an ownership change. Treas. Reg. § 1.1502-92(b)(1)(ii). 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. Treas. Reg. § 1.1502-91(d)(3).
1 For purposes of determining if the loss subgroup parent has an ownership change, the subgroup's losses (or a net unrealized built-in loss) are treated as losses of the loss subgroup parent. Treas. Reg. § 1.1502-92(b)(1)(ii)(A).
2 The day that the members of the loss subgroup become members of the group (or of the loss subgroup) is treated as a testing date. Treas. Reg. § 1.1502-92(b)(1)(ii)(B).
3 Only those attributes that make the group a loss subgroup are taken into account for determining the earliest day that the testing period can begin. Treas. Reg. § 1.1502-92(b)(1)(ii)(C).
2 If the common parent elects to treat the loss subgroup parent requirement as satisfied under Treas. Reg. § 1.1502-91(d)(4) (see Part IV.A.3., above), then, to determine whether the loss subgroup has an ownership change on or after the members join the group, each member of the loss subgroup is treated as the loss subgroup parent. Treas. Reg. § 1.1502-92(b)(1)(iii)(A).
1 If a member that is treated as a loss subgroup parent under the above rule has an ownership change upon (or after) ceasing to be a member of the current group then the above stated rule is not applicable. Treas. Reg. § 1.1502-92(b)(1)(iii)(B).
3 Example 4. P is the common parent of a loss group. P owns the stock of L. L owns 80 percent and individual A owns 20 percent of L1. The P group has a consolidated NOL arising in 1994 that is carried over to 1995. On September 9, 1995, P sells 51 percent of the L stock to individual B, and L1 is apportioned a part of the consolidated NOL. L and L1 file a consolidated return for the their first taxable year after the sale to B.[pic]
1 L and L1 compose a loss subgroup on the day that they become members of the L group.
2 The section 382 rules are applied at the subgroup level to determine whether L (and thus the L loss subgroup) has an ownership change with respect to the NOL carryover from 1994.
3 As a result of P's sale of L stock to B, L (and therefore the L loss subgroup) has an ownership change with respect to the consolidated losses that arose in the P group. See Treas. Reg. § 1.1502-92(b)(2) Ex. (3).
2 Supplemental Method
The supplemental method for determining if an ownership change has occurred also applies to loss subgroups. The same principles outlined above in Part III.B.2. apply.
1 Thus, the supplemental method looks to whether a 5-percent shareholder of the loss subgroup parent increases its interest in both the loss subgroup parent and a subsidiary of the loss subgroup during the requisite testing period. See Treas. Reg. § 1.1502-92(c)(2).
2 For this purpose, a subsidiary of a loss subgroup includes any member other than the loss subgroup parent. Treas. Reg. § 1.1502-92(c)(3)(iii).
3 The loss subgroup parent is treated as issuing its own stock to the person increasing its interest in a subsidiary. Treas. Reg. § 1.1502-92(c)(4)(ii).
4 The special anti-abuse rules described in Part III.B.2.a.(2), above, apply with reference to the loss subgroup parent.
3 Contemporaneous Ownership Changes
1 A loss subgroup can undergo an ownership change simultaneously with the loss group of which it is part.
2 Example 5. L and L1 are a consolidated group. The L group has a consolidated NOL arising in 1993 that is carried to 1994. The L stock is owned 35 percent by corporation M and 65 percent by individual B. A owns all the M stock. On May 19, 1994, B sells 45 percent of the L stock to M. Thereafter, M, L and L1 file consolidated returns, and the M group incurs a consolidated net operating losses in 1994 that is carried to 1995. On June 9, 1995, A sells 70 percent of the M stock to C.
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1 L and L1 compose a loss subgroup on May 19, 1994, the day they join the M group.
1 Section 382(g) applies to L to determine if L (and thus the L loss subgroup) has an ownership change with respect to loss carryovers from 1993.
2 The sale of L stock to M does not result in an ownership change since there has only been a 45 percentage point change.
3 However, the former L group's consolidated losses will be subject to the SRLY rules.
2 A's sale of M stock to C on June 9, 1995 results in an ownership change of the L loss subgroup. A section 382 subgroup limitation based on the value of the L subgroup will apply with respect to the NOL carryover from 1993.
3 In addition, section 382(g) must be applied to determine whether M (and thus the M loss group) has an ownership change with respect the NOL carryover from 1994.
1 A's sale of stock to C also results in an ownership change of the M group. See Treas. Reg. § 1.1502-92(b)(2) Ex. (4).
2 A consolidated section 382 limitation based on the value of M, L and L1 will apply to the M group's consolidated losses.
4 Change in Identity of Loss Subgroup Parent
Special rules apply in the case of a newly-created loss subgroup parent.
1 Treas. Reg. § 1.1502-92(b)(3)(ii) states that 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 three years as of the testing date, appropriate adjustments must be made to take into account owner shifts of loss subgroup members.
2 Example 6. P, L and L1 compose a loss group with respect to a NOL carryover arising in 1993. On January 19, 1994, L issues a 20 percent stock interest to B. On February 5, 1995, P forms a new holding company, HC, contributes its L stock to the new subsidiary, and distributes the HC stock to its sole shareholder, A. P apportions a part of the 1993 NOL carryover to L and L1.
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1 HC, L and L1 compose a loss subgroup with respect to the 1993 NOL carryover apportioned to L and L1.
2 HC was not the loss subgroup parent for three years prior to the testing date on February 5, 1995. The regulations provide that adjustments must be made to the percentage ownership of HC to take into account owner shifts of other members of the former group.
3 Thus, the owner shift that resulted from the sale of the 20 percent interest to B "must be taken into account" in determining if the HC loss subgroup has an ownership change. Treas. Reg. § 1.1502-92(b)(3)(iii) Ex. (3).
4 The regulations do not specify how the adjustment is to be made. Perhaps L is treated as having a 20 percent shift in stock ownership.
5 Perhaps, the L stock owned by B is "thrown up" to HC. See Treas. Reg. § 1.1502-92(c) and discussion at Part III.B.2., above. In that case, if A sells more than 37.5 percent of the HC stock to B or another person (assuming constant values), an ownership change of the HC loss subgroup would result. The regulations should indicate whether the principles of the supplemental rules are intended to apply.
5 Filing of Information Statement
The common parent of a group that has a loss subgroup must file an information statement with respect to loss subgroups. Treas. Reg. § 1.1502-92(e)(2).
1 Instead of filing separate statements with respect to each loss subgroup parent, the common parent may file a single statement with respect to itself and any loss subgroups. Id.
2 The single statement must identify each loss subgroup parent and indicate which loss subgroups, if any, have undergone ownership changes during the consolidated return year. Id.
3 The loss subgroup parent is still required to maintain the records necessary to determine if the loss subgroup has had an ownership change. Id.
4 Once the subgroup attributes are treated as consolidated attributes under Treas. Reg. § 1.1502-96(a) (discussed at Part VII., below), only the common parent statement need be filed. Id.
3 Effect of an Ownership Change
The rules that apply to the consolidated section 382 limitation generally also apply to loss subgroups.
1 Limitation on Consolidated Taxable Income
Following an ownership change of a loss subgroup, the amount of consolidated taxable income for any post-change year that can be offset by "pre-change subgroup attributes" cannot exceed the "subgroup section 382 limitation" for such year. Treas. Reg. § 1.1502-91(a)(1).
1 Pre-Change Subgroup Attribute
1 For this purpose, Treas. Reg. § 1.1502-91(f)(1) defines a "pre-change subgroup attribute" of a loss subgroup generally as:
1 Any net operating loss carryover that did not arise in a SRLY (determined with reference to the former group); and
2 Any recognized built-in loss of a loss subgroup.
2 Example 7. L is not a member of an affiliated group. L has a net operating loss arising in 1994 that is carried to 1995. During 1995, L acquires all the stock of L1 which has a net operating loss carryover arising in 1994. L and L1 file a consolidated return for 1995. During 1995, the L group has a consolidated net operating loss that is carried to 1996. At the beginning of 1996, corporation M acquires all the stock of L, resulting in an ownership change of the L group. M, L, and L1 file a consolidated return for 1996.
1 Following M's acquisition of the L stock, L and L1 compose a loss subgroup.
2 L's loss carryover arising in 1994 and the 1995 consolidated net operating loss that is apportioned to L and L1 under Treas. Reg. § 1.1502-21(b) and carried to the M group's 1996 consolidated return year are pre-change subgroup attributes because they did not arise in a SRLY with respect to the L group (the former group).
3 The amount of consolidated taxable income of the M group for 1996 that may be offset by these losses may not exceed the subgroup section 382 limitation of the L loss subgroup for that year.
4 In contrast, L1's net operating loss carryover from 1994 is not a pre-change subgroup attribute because it arose in a taxable year that was a SRLY with respect to the L group. Section 382 applies separately to L1's net operating loss carryover from 1994. See Part V., below. Treas. Reg. § 1.1502-91(f)(2).
2 Subgroup Section 382 Limitation
1 The "subgroup section 382 limitation" is an amount equal to the "value of the loss subgroup" multiplied by the long-term tax-exempt rate that applies to the ownership change. Treas. Reg. § 1.1502-93(a).
2 The "value of the loss subgroup" is determined using the same principles that apply to determine the value of a loss group. See Part III.C.1.b., above.
2 Built-In Gains and Losses
If a loss subgroup has a net unrealized built-in gain, the recognized built-in gains of the loss subgroup will increase the subgroup section 382 limitation. Treas. Reg. § 1.1502-93(c).
3 Continuity of Business Enterprise
As with loss groups, the continuity of business enterprise test is applied to a loss subgroup on a single entity basis. Treas. Reg. § 1.1502-93(d).
WHAT HAPPENS WHEN CORPORATIONS JOIN A GROUP AND SUBGROUPING DOES NOT APPLY?
Special rules apply if a member joins a consolidated group, and the member is not included in a loss subgroup. Section 382 generally applies to such members (referred to as "new loss members") on a separate entity basis.
1 Definition of New Loss Member
1 In General
According to Treas. Reg. § 1.1502-94(a)(1), a corporation is a "new loss member" if it:
1 carries over a net operating loss that arose in a SRLY with respect to the current group and that is not part of a loss subgroup; or
2 has a net unrealized built-in loss (treating the day it becomes a member of the group as the change date) that is not taken into account in determining whether the corporation is part of a loss subgroup.
2 Illustrations
1 Example 1. L is a loss corporation. Individual A and corporation P each own 50 percent of L's stock. On December 19, 1993, P purchases 30 percent of the L stock from A. L is a new loss member with respect to the P group because it (1) has loss carryovers arising in a SRLY; and (2) is not part of a loss subgroup. See Treas. Reg. § 1.1502-94(b)(4) Ex. (1).
2 Example 2. L and L1 are loss corporations with no common ownership. On December 31, 1991, P purchases all the stock of L and L1 and contributes the L1 stock to L.
1 L and L1 are new loss members because they both have net operating losses arising in SRLYs. In addition, even though they bear the required relationship to be a subgroup, they were not affiliated with each other in another group so as to be a loss subgroup.
2 Suppose, in Example 2 above, that L and L1 had been affiliated with loss group P1, and P had purchased the L and L1 stock from P1. L had SRLY loss carryovers from being a member of the X group, and L1 had SRLY loss carryovers from being a member of the Y group. L and L1 would both be new loss members, unless a portion of P1's consolidated NOL is allocated to L and L1, in which case L and L1 would compose a loss subgroup.
3 Determining if a New Loss Member Has an Ownership Change
1 In General
Section 382 applies to a new loss member on a separate entity basis to determine whether the member has an ownership change and the corresponding section 382 limitation. Treas. Reg. § 1.1502-94(b)(1).
2 Filing of Information Statement
1 The common parent must file the information statement required by Treas. Reg. § 1.382-2(a)(2)(ii) with respect to owner shifts or equity structure shifts of the new loss member. Treas. Reg. § 1.1502-94(d).
2 Instead of filing a separate statement for each loss member, the common parent may file its statement and identify each new loss member and state which new loss members have undergone ownership changes during the year. Id.
4 Effect of an Ownership Change
1 Limitation on Consolidated Taxable Income
If an ownership change occurs with respect to a new loss member, the amount of consolidated taxable income for a post-change year that may be offset by the new loss member's "pre-change separate attributes" cannot exceed the member's separately computed section 382 limitation. Treas. Reg. § 1.1502-94(b)(1). (Note that the SRLY rules would also apply to the new loss member's losses).
1 Pre-Change Separate Attribute
A pre-change separate attribute is: (i) a loss carryover that arose in a SRLY and that is not an attribute of a loss subgroup, or (ii) any recognized built-in loss of a new loss member. Treas. Reg. § 1.1502-94(b)(3).
2 Section 382 Limitation
1 The section 382 limitation with respect to a new loss member generally is computed in the same fashion as a stand-alone corporation.
2 However, the value of the new loss member is adjusted to the extent necessary to prevent duplication in value of the stock of a member. Treas. Reg. § 1.382-8.
2 Built-In Gain or Loss
The built-in gain and loss rules of Treas. Reg. § 1.1502-91(g) and (h) and Treas. Reg. § 1.1502-93(c) apply to a new loss member on a separate entity basis, as the context may require. Treas. Reg. § 1.1502-94(c).
5 Illustrations
1 Example 3. L is a loss corporation. L is owned equally by individual A and corporation P. P buys 30 percent of the L stock from A. P and L thereafter file consolidated returns.
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1 L is a new loss member because it has loss carryovers that arose in a SRLY and L is not included in a loss subgroup.
2 L does not undergo an ownership change as a result of P's purchase of L stock. However, L's losses will be subject to the separate return year (SRLY) limitations. See Treas. Reg. § 1.1502-94(b)(4) Ex. (1).
2 Example 4. L is a loss corporation. Individual A owns 80 percent and corporation P owns 20 percent of L. P purchases all the L stock owned by A. L undergoes an ownership change as a result of P's purchase.
1 L will be subject to both a separately computed section 382 limitation and the SRLY rules. See Treas. Reg. § 1.1502-94(b)(4) Ex. (3).
2 If the P group subsequently undergoes an ownership change, L's loss carryovers will be treated as consolidated NOL carryovers for purposes of the P group's limitation. See Treas. Reg. § 1.1502-96(a), discussed at Part VII., below.
OWNERSHIP CHANGE OF SUBSIDIARY ON A SEPARATE ENTITY BASIS
1 Ownership Change Determination
1 In General
1 The regulations also provide rules whereby a member will undergo an ownership change on a separate entity basis, notwithstanding that it is still a member of a consolidated group.
2 As discussed below, this rule applies where more than 20 percent of a subsidiary's stock is subject to an option, or where there is a certain plan or arrangement in effect to acquire subsidiary stock.
3 If Treas. Reg. § 1.1502-96(b) applies, the ownership change is determined on a separate entity basis by treating the subsidiary as not being a member of the consolidated group. Treas. Reg. § 1.1502-96(b)(1).
2 Options to Acquire Subsidiary Stock
In the first scenario, an ownership change will apply separately with respect to a subsidiary upon the deemed exercise of an option or options 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. Treas. Reg. § 1.1502-96(b)(1)(i).
1 As a general matter, an option to acquire subsidiary stock would be irrelevant under the parent change method, which looks only to the parent's stock.
1 However, the power to acquire more than 20 percent of the subsidiary's stock necessarily carries with it the power to cause deconsolidation.
2 Because section 382 applies on a separate entity basis to a member leaving a group (see discussion at Part IX., below), Treasury apparently felt it was appropriate to test on a separate entity basis once a person had an option the exercise of which would cause deconsolidation.
2 Generally, the option to acquire subsidiary stock must be held by a single person. Options held by different persons are aggregated only if there is a plan or arrangement.
3 Under the former proposed regulations, the option rule did not apply to a bilateral contract to purchase stock of a subsidiary if the stock was actually acquired pursuant to the contract within one year of the deemed exercise. See former Prop. Treas. Reg. § 1.1502-96(b)(2). This rule is now contained in Treas. Reg. § 1.382-4(d)(7), which supersedes the option arbitration rules of Temp. Treas. Reg. § 1.382-2T(h)(4) for testing dates on or after November 5, 1992.
4 Example 1. L owns the stock of L1, which owns the stock of L2. L, L1 and L2 compose a loss group. On August 26, 1994, corporation M enters into a contract to purchase all the L1 stock from L. The sale closes on November 22, 1995. L1 and L2 are treated as separate corporations and each undergoes an ownership change on August 26, 1994. The one-year rule does not apply because the sale was not completed within one year of the deemed exercise of the option. See former Prop. Treas. Reg. § 1.1502-96(b)(3) Ex. (1); Treas. Reg. 1.382-4(d)(7)(i).
3 Plan or Arrangement to Avoid an Ownership Change
1 In the second scenario, an ownership change will occur separately as to a subsidiary where there is a more than 50 percentage point increase by one or more 5-percent shareholders in a subsidiary during the testing period through acquisitions (or deemed acquisitions) of stock in the subsidiary or higher-tier members, if such shareholders are acting pursuant to a plan or arrangement to avoid an ownership change of the subsidiary. Treas. Reg. § 1.1502-96(b)(1)(ii).
2 Example 2. L owns all the stock of L1, which owns the stock of L2, which owns the stock of L3, which owns the stock of L4. L1, L2, and L3 own no assets other than the stock of their respective subsidiaries. Pursuant to a plan to avoid the section 382 limitations, individuals A, B, C and D acquire 20 percent of the stock of L1, L2, L3 and L4 respectively. L4 has an ownership change as a result of the acquisitions. See Treas. Reg. § 1.1502-96(b)(4).
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1 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.
2 This percentage ownership interest in L4 causes a separate ownership change of L4.
2 Effect of the Ownership Change
1 In General
1 If a subsidiary has a separate ownership change, the amount of taxable income for any post-change year that may be offset by the pre-change losses of the subsidiary cannot exceed the section 382 limitation for the subsidiary. Treas. Reg. § 1.1502-96(b)(2)(i).
2 For purposes of this limitation, the value of the subsidiary is determined solely by reference to the value of the subsidiary's stock. Id.
2 Pre-Change Losses
The pre-change losses of a subsidiary are:
1 Its allocable part of any consolidated net operating loss which is attributable to it under Treas. Reg. § 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;
2 Its net operating loss carryovers that arose (or are treated as having arisen) in a SRLY; and
3 Its recognized built-in loss with respect to its separately computed net unrealized built-in loss, if any, determined on the change date. Treas. Reg. § 1.1502-96(b)(2)(ii).
3 Relationship to General Ownership Change Rules
If an increase in percentage interest causes an ownership change with respect to a particular attribute under both the general rule (Treas. Reg. § 1.1502-92) and under the special rules described above (Treas. Reg. § 1.1502-96(b)), then the general rules will control. Treas. Reg. § 1.1502-96(b)(3).
END OF SEPARATE TRACKING (THE "FOLD IN RULES") AND SUBSEQUENT OWNERSHIP CHANGES
1 End of Separate Tracking
The regulations contain special rules (referred to as the "fold-in" rules) to terminate separate tracking of the SRLY attributes of a member or loss subgroup.
1 When Does Separate Tracking Cease
In general, the separate tracking of SRLY losses of a member or loss subgroup (or net unrealized built-in loss) will cease upon the occurrence of one of the following two events:
1 An ownership change of the member or loss subgroup within six months before, on, or after, becoming a member of the consolidated group. (Treas. Reg. § 1.1502-96(a)(1)(i)); or
2 A period of five consecutive years following the day that the member or loss subgroup becomes a member of the consolidated group, during which time the member or loss subgroup has not had an ownership change. Treas. Reg. § 1.1502-96(a)(1)(ii).
2 Impact of the Fold-In Rules
1 If separate tracking of attributes ceases (due to an ownership change or expiration of the five-year period), then as of such time:
1 An NOL carryover of the member or loss subgroup that arose in a SRLY is treated as if it were a consolidated NOL, Treas. Reg. § 1.1502-96(a)(2)(i); and
2 The separately computed net unrealized built-in loss of the member or subgroup is taken into account in determining the loss group's net unrealized built-in loss, Treas. Reg. § 1.1502-96(a)(2)(ii).
2 For transactions to which Treas. Reg. § 1.1502-96(a) applies, to determine the beginning of the loss group's testing period, the member's or loss subgroup's NOL carryovers (or net unrealized built-in loss) are considered to arise:
1 In a taxable year that begins on the later of the day after the change date or the day the member or loss subgroup joins the group, if there has been an ownership change of the member within six months before, on, or after joining the group; or
2 In a taxable year that begins three years before the end of the five consecutive year period, in a case where the five-year rule applies. Treas. Reg. § 1.1502-96(a)(4).
3 Treas. Reg. § 1.1502-96(a)(2) further states that the fold-in rule applies for purposes of determining whether there is an ownership change with respect to the "folded in" attributes. Thus, as stated in the regulations, on any day after the change date or the end of the five-year period:
1 The group is not required to track separately the stock of the new loss member or subgroup parent to determine if there is an ownership change with respect to the NOL carryover and/or the net unrealized built-in loss. Treas. Reg. § 1.1502-96(a)(2)(i)(A) and (ii) (A).
2 In determining whether the group is a loss group, the member’s NOL carryover and/or net unrealized built-in loss is taken into account. Treas. Reg. §1.1502-96(a)(2)(i)(B) and (ii)(B).
3 There is an ownership change with respect to the non-consolidated attributes only if the group has an ownership change and, if the attribute is a net unrealized built-in loss, the group is a loss group. Treas. Reg. § 1.1502-96(a)(2)(i)(C) and (ii)(C).
4 If the group has an ownership change, the NOL carryover and/or net unrealized built-in loss and assets are pre-change consolidated attributes subject to the loss group's consolidated section 382 limitation. Treas. Reg. § 1.1502-96(a)(2)(i)(D) and (ii)(D).
4 The rules in Treas. Reg. § 1.1502-96(a) apply only for purposes of the consolidated section 382 regulations (Treas. Reg. §§ 1.1502-91 -- 1.1502-95 and Treas. Reg. § 1.1502-98). Treas. Reg. § 1.1502-96(a)(5). Therefore, attributes that are treated as consolidated attributes under Treas. Reg. § 1.1502-96(a) will still be subject to the SRLY rules.
2 Subsequent Ownership Changes
1 Treas. Reg. § 1.1502-96(c) provides that a loss corporation or loss subgroup subject to a section 382 limitation remains subject to that limitation whether or not it joins or ceases to be a member of a consolidated group.
1 An ownership change that occurs after an earlier ownership change may result in an additional, lesser (but never in a greater) section 382 limitation with respect to the previously limited losses. Treas. Reg. § 1.382-5(d).
2 This provision may suggest that the initially computed section 382 limitation continues to apply with respect to the non-consolidated attributes, notwithstanding the rules in Treas. Reg. § 1.1502-96(a). Indeed, Treas. Reg. § 1.1502-96(c) provides that a loss corporation (or loss subgroup) that is subject to a section 382 limitation 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.
BUILT-IN GAINS AND LOSSES -- SPECIAL RULES
1 Determining if a Consolidated Group Has a Net Unrealized Built-in Gain or Loss
1 In General
1 Under Treas. Reg. § 1.1502-91(g)(1), the determination whether a consolidated group has a net unrealized built-in gain or loss is determined on an aggregate basis.
2 Each includible member of the group separately computes its built-in gain or loss, and these amounts are netted together to arrive at the group's net unrealized built-in gain or loss.
3 The 15 percent/$10 million threshold of section 382(h)(3)(B) is also computed on an aggregate basis. Treas. Reg. § 1.1502-91(g)(1).
2 Members Included
1 In determining whether a consolidated group has a net unrealized built-in gain, all members of the group on the day the determination is made are included. Treas. Reg. § 1.1502-91(g)(2)(i).
2 The members included in determining whether the consolidated group has a net unrealized built-in loss are:
1 The common parent and all other members affiliated with the common parent for the five-year period ending on the day the determination is made;
2 Any other member that has a net unrealized built-in loss and that is neither a new loss member nor a member of a loss subgroup;
3 Any new loss member that has a net unrealized built-in gain; and
4 The members of a loss subgroup if the members of the subgroup have, in the aggregate, a net unrealized built-in gain on the day that the determination is made. Treas. Reg. § 1.1502-91(g)(2)(ii).
3 If, within the previous five years, the common parent became the common parent of an existing group in a transaction described in Treas. Reg. § 1.1502-75(d)(2)(ii) or (3) (transfer of assets to subsidiary or reverse acquisitions), appropriate adjustments must be made in applying the five year period to prevent corporations that have not been members of the group for five years from being included. Treas. Reg. § 1.1502-91(g)(6).
4 For purposes of the net unrealized built-in gain determination, the group includes all members on the day the determination is made. On the other hand, for purposes of the net built-in loss, not all members of the group may be included. Thus, a consolidated group may have recognized built-in gains that increase its SRLY limitation and also may have recognized built-in losses the absorption of which is limited. Treas. Reg. § 1.1502-91(g)(2)(v).
3 Anti-Stuffing Rule
1 A member may not take into account assets acquired with a principal purpose to affect the amount of its net unrealized built-in gain or loss. Treas. Reg. § 1.1502-91(g)(4).
2 Similarly, a group may not take account built-in gain or loss with respect to a member acquired with a principal purpose to affect the amount of its net unrealized built-in gain or loss. Id.
4 Stock or Debt of Members
1 Net unrealized built-in gain or loss with respect to stock or debt of group members is not taken into account in computing net unrealized built-in gain or loss. Treas. Reg. § 1.1502-91(g)(1).
2 However, gain or loss on disposition of stock or debt of a member is taken into account, unless disallowed, in determining recognized built-in gain or loss under section 382(h)(2). Treas. Reg. § 1.1502-91(h)(2).
5 Duplication of Value
A member's separately computed net unrealized built-in gain or loss is adjusted to prevent duplication attributable to the member's indirect ownership interest in another member through a non-member, if the member has a five percent or greater interest in the nonmember. Treas. Reg. § 1.1502-91(g)(3).
2 Intercompany Transactions
Gain or loss that is deferred is treated as recognized built-in gain or loss only to the extent restored during the recognition period. Treas. Reg. § 1.1502-91(h)(3).
3 Exchanged Basis Property
An asset will be treated as held from the beginning of the recognition period if its adjusted basis is determined, indirectly or directly, in whole or in part, with reference to the basis of another asset that was held from the beginning of the recognition period. Treas. Reg. § 1.1502-91(h)(4).
4 Determination of Whether a Loss Subgroup Has a Net Unrealized Built-In Loss
1 The principles that apply in determining if a consolidated group has a net unrealized built-in gain or loss also apply to loss subgroups.
2 In determining whether a loss subgroup has a net unrealized built-in gain, all members of the loss subgroup on the day the determination is made are included. Treas. Reg. § 1.1502-91(g)(2)(iii).
3 The members included in determining whether a loss subgroup has a net unrealized built-in loss are those members that have been continuously affiliated with each other for the five consecutive year period ending immediately before they become members of the group and bear a relationship to each other described in section 1504(a)(1) immediately after they join the group. Treas. Reg. § 1.1502-91(g)(2)(iv).
4 On October 24, 2011, the IRS issued proposed regulations that would revise Treas. Reg. § 1.1502-91(g) by adding a rule that would apply when any member of the consolidated group directly or indirectly takes any amount of gain or loss into account with respect to a share of stock of an included subsidiary, whether or not this amount is absorbed. When the rule applies, the loss group would be required to redetermine NUBIG or NUBIL to include any unduplicated built-in gain or loss with respect to the share. The proposed regulations would apply to amounts taken into account with respect to a share of stock of an included subsidiary on or after the date final regulations are published, but only for ownership changes occurring on or after October 24, 2011.
5 Special Problems
A number of problems arose in applying the consolidated section 382 built-in gain or loss rules under the former proposed regulations, one of which is illustrated in the following example.
Example. X corporation is owned by individual A. X owns corporation Y, the assets of which have a $100 built-in gain, and corporation Z, the assets of which have a $50 built-in loss. X, Y and Z have been continuously affiliated for 5 years. X forms holding company H, and contributes the Y and Z stock to H. X sells the H stock to corporation P.
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1 H, Y and Z have the requisite section 1504(a)(1) relationship for subgrouping. However, H has not been continuously affiliated for 5 years with the prior group.
2 Under the former proposed regulations, H could not be considered the successor of X to tack the affiliation period (unless the basis of the Y and Z stock exceeded the value by a material amount). Prior Temp. Treas. Reg. § 1.382-2T(f)(4).
3 Therefore, the built-in gain and loss would be computed on a separate entity basis, and Y's built-in gain would not be able to offset Z's built-in loss, even though the corporations have been affiliated for the requisite period.
4 One solution to this problem was for H to contribute the Y stock to Z, or vice versa. Then, Y and Z will have a subgroup relationship, and the built-in gain and loss should offset each other. The former proposed regulations sanctioned this restructuring. Treas. Reg. § 1.1502-91A(d)(5).
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5 Under the final regulations, however, the successor definition has been revised to include any transferee corporation the basis of whose assets is determined in whole or part by the basis of the transferor corporation if the basis differs materially from value in the aggregate. See Treas. Reg. § 1.382-2(a)(5) for the definition of successor corporation. Thus, for testing dates on or after January 1, 1997, the problem has been resolved.
WHAT HAPPENS WHEN A CORPORATION LEAVES A GROUP OR SUBGROUP?
1 Leaving a Loss Group
1 Application of Section 382 to Member Leaving Group
1 Section 382 applies on a separate entity basis to a corporation that ceases to be a member of a consolidated group. Treas. Reg. § 1.1502-95(b)(1).
2 However, if two or more corporations form a loss subgroup immediately after departing the group, section 382 generally will apply on a subgroup basis to the departing members. Treas. Reg. § 1.1502-95(b)(3).
2 Operating Rules
Treas. Reg. § 1.1502-95(b)(1) provides that for purposes of determining whether a corporation leaving a group has an ownership change:
1 Any portion of the consolidated NOL apportioned to a departing member is treated as an NOL arising on the first day of the taxable year in which the loss arose;
2 The testing period may include the period during or before which the corporation was a member of a group or loss subgroup; and
3 The day the corporation ceases to be a member of the consolidated group is treated as a testing date.
3 Illustration
1 Example 1. Individual A owns the stock of L. L owns the stock of L1 and L2. L, L1 and L2 compose a loss group. In 1994, A sells 30 percent of the L stock to B. In 1995, L sells 40 percent of the L2 stock to C. L allocates a portion of the consolidated NOL carryover to L2 under Treas. Reg. § 1.1502-21(b).
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2 The date L2 leaves the group is a testing date. The first day of the taxable year in which the consolidated NOL carryover arose begins the testing period.
3 L2 has an ownership change as a result of L's sale of L2 stock to C. B has increased her ownership in L2 by 18 percentage points (30% X 60%) and C has increased his percentage ownership in L2 by 40 percentage points. See Treas. Reg. § 1.1502-95(b)(4) Ex. (1).
4 Apportionment of Section 382 Limitation
1 In General
1 The common parent of the consolidated group apportions to a departing member or subgroup the consolidated net operating loss attributable to the departing member. Treas. Reg. § 1.1502-21(b).
2 The common parent may elect to apportion part or all of a consolidated section 382 limitation to a member or subgroup leaving a consolidated group. Treas. Reg. § 1.1502-95(c)(1).
3 Absent apportionment of section 382 limitation to the departing member or subgroup, the limitation attributable to that member or subgroup will be zero. See Treas. Reg. § 1.1502-95(b)(2)(ii).
4 It has been suggested that the rule apportioning a zero section 382 limitation to a departing member (absent an allocation by the common parent) is a trap for the unwary.
5 The regulations should, in default of allocation by the common parent, allocate section 382 limitation on some pro rata basis.
2 Apportionment of the Section 382 Limitation
The regulations divide the section 382 limitation into a "value element" and an "adjustment element." The common parent may apportion to the former member all or any part of each element. Treas. Reg. § 1.1502-95(c)(2)(i).
3 Value Element
1 The value element is the value of the corporation multiplied by the long-term tax-exempt rate. Treas. Reg. § 1.1502-95(c)(1)(i)(A).
2 The value element is computed without regard to adjustments under:
1 section 382(b)(2) (carryforward of unused section 382 limitation);
2 section 382(b)(3)(B) (carryforward for post-change year that includes the change date);
3 section 382(h) (built-in gains and section 338 gains); and
4 section 382(m)(2) (short taxable years).
4 Adjustment Element
The adjustment element consists 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 section 382 limitation (section 382(b)(2) or recognized built-in gains (section 382(h)). Treas. Reg. § 1.1502-95(c)(1)(i)(B).
5 Net Unrealized Built-in Gain
The total amount of the loss group’s net unrealized built-in gain that may be apportioned to departing members is limited to the loss group’s excess of net unrealized built-in gain over recognized built-in gain, immediately after the close of the year that the departing members cease to be members. Treas. Reg. § 1.1502-95(c)(2)(ii).
1 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 the prior years. Id.
7 Effect on Group
1 The value element and the adjustment element apportioned to a departing member or subgroup reduces the consolidated 382 limitation for the remaining members of the group. Treas. Reg. § 1.1502-95(c)(3)(i).
2 In applying the limitation to the group in taxable years after the departing member leaves the group, the net built-in gain apportioned to a departing member is treated as recognized built-in gain in a taxable year ending in the recognition period. Treas. Reg. § 1.1502-95(c)(3)(ii).
3 Adjustments must also be made to the consolidated section 382 limitation in the year the member(s) leaves the group to reflect the inclusion of the member in the group for a portion of that year. Treas. Reg. § 1.1502-95(c)(6).
8 Loss Group Terminates
1 If the loss group terminates and the consolidated section 382 limitation is not otherwise apportioned, the limitation is deemed to be apportioned to the loss subgroup that includes the common parent. Treas. Reg. § 1.1502-95(c)(5).
2 If there is no loss subgroup that includes the common parent, the limitation is apportioned to the common parent. Id.
9 Illustrations
1 Example 2. L owns the stock of L1, which in turn owns the stock of L2. In 1993, the L group had an ownership change with respect to a consolidated NOL carryover, and the consolidated section 382 limitation is $100 with respect to that carryover. On December 31, 1994, L1 sells 25 percent of the L2 stock to B. L2 has no SRLY loss carryovers, nor does it have any net unrealized built-in gain or loss.
1 Part of the consolidated NOL is allocated to L2 under Treas. Reg. § 1.1502-21(b).
2 L may elect to apportion part of the consolidated section 382 limitation to L2. If L fails to apportion part of the 382 limitation, the consolidated NOL will be worthless to L2, since its 382 limitation will be zero. See Treas. Reg. § 1.1502-95(b)(4) Ex. (2).
2 Example 3. The L group is a loss group. L owns the stock of L1, which owns the stock of L2. The L group has a $200 consolidated NOL carryover. The L group has an ownership change on December 31, 1993. The consolidated section 382 limitation is $10. On August 29, 1995, L1 sells 30 percent of the L2 stock to individual A. L2 is apportioned $90 of the group's $200 NOL and L elects to apportion to L2 $6 of the $10 consolidated section 382 limitation. The L group also has unused consolidated section 382 limitation of $4 from 1992.
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1 L2 has a section 382 limitation of $6. However, for L2's short taxable year ending December 31, 1993, the limitation is only $2 (124/365 x $6).
2 With respect to the L group, it has a section 382 limitation of $4. However, for the L group's consolidated return year ending December 31, 1993, the section 382 limitation is $8, to take into account the part of the year that L2 was a member of the group (241/365 X $6). See Treas. Reg. § 1.1502-95(c)(7) Ex. (1).
3 L may also allocate any or all of the $4 unused section 382 limitation to L2. See Treas. Reg. § 1.1502-95(c)(7) Ex. (3).
4 If L does not apportion any of the consolidated section 382 limitation to L2, L2's limitation with respect to the $90 NOL will be zero. See Treas. Reg. § 1.1502-95(c)(7) Ex. (2).
10 Allocation of Net Unrealized Built-in Loss
1 The regulations also provide rules for allocating a loss group’s (or loss subgroup’s) net unrealized built-in loss when a member leaves the group (or subgroup). Treas. Reg. § 1.1502-95(e).
2 A loss group’s (or loss subgroup’s) net unrealized built-in loss must be allocated if (a) the loss group (or loss subgroup) has a net unrealized built-it loss on a change date and (b) the excess of the loss group’s (or loss subgroup’s) net unrealized built-in loss over its recognized built-in loss is greater than zero, determined immediately after the close of the consolidated year in which the departing member leaves the group. Treas. Reg. § 1.1502-95(e)(1).
1 Any net unrealized built-in loss previously allocated to departing members is treated as recognized built-in loss in the year(s) in which it was allocated. Id.
3 Amount of allocation. Treas. Reg. § 1.1502-95(e)(2).
1 The amount of net unrealized built-in loss allocated to a departing member is equal to the loss group’s (or loss subgroup’s) net unrealized built-in loss over its recognized built-in loss, multiplied by a fraction.
2 The numerator of the fraction is the departing member’s built-in loss, on the change date, in its assets held immediately after the member leaves the group. The denominator of the fraction is the sum of the numerator plus the loss group’s built-in loss, on the change date, in its assets held immediately after the close of the taxable year in which the member leaves the group.
4 Transferred basis property
For purposes of calculating the numerator and/or denominator of the above fraction, assets held by the departing member immediately after leaving the group (or by other members immediately after the close of the taxable year) include:
1 Transferred basis property that was held by any member of the group on the change date and that is held by the departing member immediately after leaving the group (or by other members immediately after the close of the taxable year), and
2 Assets held at that time by any member of the consolidated group with respect to which gain or loss has been deferred in an intercompany transaction and has not been taken into account. Treas. Reg. § 1.1502-95(e)(2)(ii).
5 For purposes of calculating the numerator and/or denominator of the fraction, assets held by the departing member immediately after leaving 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. Treas. Reg. § 1.1502-95(e)(2)(iii).
6 If more than one member departs the group in the same taxable year, appropriate adjustments must be made to the denominator of the fraction for each member. With respect to each departing member, such adjustments are made by treating the other departing members as if they had not left the group during that year and as if the assets held by the other departing members are assets held by the group immediately after the close of the taxable year. Treas. Reg. § 1.1502-95(e)(2)(v).
5 Previous Ownership Change
If the loss group has undergone an ownership change prior to the time the member or subgroup leaves the group, Treas. Reg. § 1.1502-95(b)(2) provides that:
1 Any consolidated attribute that is subject to a section 382 limitation continues to be treated as a pre-change loss;
2 The former member's section 382 limitation with respect to the attribute is zero unless the common parent apportions all or part of the consolidated section 382 limitation to the departing member;
3 The testing period with respect to a consolidated attribute begins no earlier than the day following the loss group's most recent change date;
4 An ownership change occurring on or after the day the former member departs the group may result in an additional, lesser section 382 limitation.
5 Example 4. Assume the facts are the same as in Example 2. L apportions to L2 $50 of the consolidated section 382 limitation. L1 sells its remaining 75 percent interest in L2 to C. L2 undergoes an ownership change as a result of the sale to C, and L2's section 382 limitation with respect to this second ownership change is $30. See Treas. Reg. § 1.1502-95(b)(4) Ex. (2).
1 In this case, $20 of the section 382 limitation apportioned to L2 is wasted because L2 will be subject to the lesser of the two limitations.
2 The election to apportion the 382 limitation cannot be revoked without IRS consent, thus, L cannot merely amend its return to reattribute $20 of the section 382 limitation back to the L group.
2 Leaving or Ceasing to be a Member of a Loss Subgroup
1 The regulations provide a general rule with respect to leaving a loss subgroup, along with several examples. Treas. Reg. § 1.1502-95(d).
2 A corporation ceases to be a member of a loss subgroup on the earlier of:
1 The first day of the first taxable year in which it files a separate return; or
2 The first day that it ceases to bear a section 1504(a)(1) relationship to the loss subgroup parent. Treas. Reg. § 1.1502-95(d)(1).
3 However, the above-stated general rule does not apply to a member of a loss subgroup while that member remains a member of such loss subgroup:
1 If an election to treat the subgroup parent requirement as satisfied applies to the members of the loss subgroup;
2 If there is an ownership change of the loss subgroup within six months before, on, or after becoming members of the group, starting on the day after the change date but not earlier than the date the loss subgroup becomes a member of the group; or
3 Starting the day after the five year period (which began the day that the loss subgroup became members of the group) during which the loss subgroup has not had an ownership change. Treas. Reg. § 1.1502-95(d)(2).
4 Example 5. P, L, L1 and L2 compose a loss group. In 1995, P sells all of the L stock to corporation M. This causes an ownership change with respect to the L loss subgroup. The subgroup has a $100 subgroup section 382 limitation. In 1996, L1 sells 40 percent of the L2 stock to individual A. L2 is apportioned a part of the P group's consolidated NOL. The section 382 limitation with respect to L2's carryover loss is zero unless M apportions to L2 part of the $100 L subgroup limitation. See Treas. Reg. § 1.1502-95(d)(3) Ex. (1).
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5 Example 6. Assume the same facts as in Example 5, except that L sells 40 percent of the L1 stock to A. L1 and L2 are apportioned a part of the P group NOL carryover. L1 and L2 have left the L loss subgroup, and compose a new subgroup. M must still apportion part of the L subgroup section 382 limitation to the L1 subgroup or the NOL will be useless. See Treas. Reg. § 1.1502-95(d)(3) Ex. (2).
6 Example 7. P, L1 and L2 compose a loss group. All the P stock is owned by individual A. In 1994, corporation M acquires the P stock from A. In 1995, P distributes the L2 stock to M.
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1 P, L1 and L2 compose a loss subgroup with respect to the losses incurred prior to the acquisition by M.
2 L2 leaves the loss subgroup as a result of the distribution by P. See Treas. Reg. § 1.1502-95(d)(3) Ex. (3).
3 L2 does not cease to be a member of the P loss subgroup because the P loss subgroup had an ownership change upon becoming a member of the M group and L2 remains in the M group.
3 Filing the Election to Apportion
1 The common parent of the group filing a consolidated return must file an election to apportion part of the consolidated section 382 limitation to a member leaving the group with its income tax return for the year in which the former member or new loss subgroup ceases to be a member. Treas. Reg. § 1.1502-95(f)(1).
2 The election must contain a reference that it is an election to apportion a section 382 limitation to a specific member and also contain:
1 The date of the ownership change that resulted in the limitation;
2 The amount of the departing member’s pre-change net operating loss carryovers and taxable years in which they arose that will be subject to the limitation that is being apportioned to that member;
3 The amount of any net unrealized built-in loss allocated to the departing member which, if recognized, can be a pre-change attribute subject to the limitation that is being apportioned;
4 The amount of the consolidated section 382 limitation for the taxable year during which the former member ceases to be a member of the consolidated group;
5 The amount of the loss group’s net unrealized built-in gain that may be apportioned to members that ceased to be members during the consolidated return year;
6 The amount of the value element and adjustment element that is apportioned to the former member;
7 The amount of the loss group’s net unrealized built-in gain that is apportioned to the former member;
8 The amount of any adjustment element apportioned to the former member that is attributable to recognized built-in gains; and
9 The name and employer identification number of the common parent. Id.
3 The election must be signed by both the parent and the subsidiary. Treas. Reg. § 1.1502-95(f)(2).
4 An election to apportion a section 382 limitation is revocable only with the consent of the Commissioner. Treas. Reg. § 1.1502-95(f)(4).
5 Importantly, only the common parent (not the loss subgroup parent) can make the election to apportion either a consolidated section 382 limitation or a subgroup section 382 limitation, or a loss group’s or loss subgroup’s net unrealized built-in gain. Treas. Reg. § 1.1502-95(a)(2).
4 Coordination with Former Loss Disallowance Rules
1 History of Former Loss Disallowance Rules and Unified Loss Rule
1 In March 1990, Treasury issued controversial temporary regulations that disallowed all losses on the sale of a subsidiary's stock. See former Temp. Treas. Reg. § 1.1502-20T. In November 1990, the temporary regulations were revoked, and replaced with slightly more lenient proposed rules, which were subsequently finalized in September 1991. See Treas. Reg. § 1.1502-20. These rules allowed certain losses on the sale of a subsidiary’s stock. As described below, these regulations were removed by the IRS, effective for dispositions of stock occurring on or after March 7, 2002.
2 On March 12, 2002, the IRS promulgated new temporary and proposed loss disallowance regulations under sections 337(d) and 1502, adding Temp. Treas. Reg. §§ 1.337(d)-2T, 1.1502-20T(i), and 1.1502-32T(b)(4)(v). See 67 Fed. Reg. 11,034 (Mar. 12, 2002). The IRS subsequently amended these temporary and proposed regulations. See 67 Fed. Reg. 37,998 (May 31, 2002); 69 Fed. Reg. 51,175 (Aug. 18, 2004); and 69 Fed. Reg. 51,419 (Aug. 26, 2004). On March 3, 2005, the IRS promulgated final loss disallowance regulations that adopted the temporary regulations (as amended) without substantive change. See 70 Fed. Reg. 10,319 (Mar. 3, 2005).
3 On January 23, 2007, the Service published proposed consolidated return loss disallowance rules that would both implement the repeal of the General Utilities doctrine and address the duplication of losses by members of a consolidated group. These “Unified Loss Rules” were finalized in Treas. Reg. § 1.1502-36 on September 17, 2008. The final regulations remove Treas. Reg. § 1.1502-20 and provide that Treas. Reg. §§ 1.337(d)-1, 1.337(d)-2, and 1.1502-35 do not apply to transactions subject to the Unified Loss Rules. T.D. 9424, 73 Fed. Reg. 53,933, 53,944 (Sept. 17, 2008); Treas. Reg. §§ 1.337(d)-1(a)(1), 1.337(d)-2(a)(1), 1.1502-35(a)(2)(iii), 1.1502-36.
4 The Treas. Reg. § 1.1502-36 Unified Loss Rules apply to transfers of shares of subsidiary stock on or after September 17, 2008, unless the transfer was made pursuant to a binding agreement that was in effect prior to September 17, 2008 and at all times thereafter.
2 Application of Former Loss Disallowance Rules in Treas. Reg. § 1.1502-20
1 General Rule. Losses were disallowed, except losses allowed to the extent that they exceeded (i) extraordinary gain dispositions, (ii) positive investment adjustments, and (iii) duplicated losses. Treas. Reg. § 1.1502-20(c)(1).
2 If a loss was disallowed, the common parent was entitled to some relief under Treas. Reg. § 1.1502-20(g).
3 Pursuant to Treas. Reg. § 1.1502-20(g), the common parent was able to elect, generally, to retain any or all of the subsidiary's losses (including SRLY losses), up to the amount of the disallowed loss, and was able to specify the particular year and the character of the loss subject to attribution. The parent was also able to reattribute to itself losses of a lower tier subsidiary.
4 A reattributed loss was not subject to a section 382 limitation (unless it was previously subject to limitation), even though the subsidiary had undergone an ownership change in connection with the transaction. Treas. Reg. § 1.1502-20(g)(1). Reattributed SRLY losses retained their character as SRLY losses. Treas. Reg. § 1.1502-20(g)(3) Ex. (3)(iv).
5 As described above, the consolidated 382 rules permit apportionment of the section 382 limitation. Treas. Reg. § 1.1502-95(c). As a result, the common parent could allocate a section 382 limitation commensurate with the apportioned loss, if any, that accompanied the subsidiary.
3 Application of Subsequent Loss Disallowance Rules in Treas. Reg. § 1.337(d)-2.
1 Contrary to Treas. Reg. § 1.1502-20(g),under Treas. Reg. § 1.337(d)-2 the common parent may not elect to retain losses attributable to a subsidiary, even if the losses are disallowed Treas. As a result, for years to which Treas. Reg. § 1.337(d)-2 applies, the common parent will not need to adjust the apportionment of the section 382 limitation between the common parent and the subsidiary to provide for the reattribution of losses to the common parent.
4 Application of Current Unified Loss Rule
1 Treasury and the IRS have recently finalized the Unified Loss Rule regulations that replace both Treas. Reg. § 1.337(d)-2 and Treas. Reg. § 1.1502-20. T.D. 9424, 73 Fed. Reg. 53,933, 53,944 (Sept. 17, 2008). The final Unified Loss Rule regulations do not allow the common parent to elect to retain losses attributable to a subsidiary in the event the proposed regulations disallow losses on the disposition of the subsidiary stock. Treas. Reg. § 1.1502-36.
TITLE 11 OR SIMILAR CASES
1 Treas. Reg. § 1.1502-97 has been reserved for the application of section 382 to consolidated groups in Title 11 or similar cases.
2 Even though the consolidated 382 regulations generally adopt a single entity approach, Treasury officials have indicated, and the Preamble to the proposed regulations imply, that the Title 11 consolidated 382 regulations may take a separate entity approach.
COORDINATION WITH SECTION 383
1 Treas. Reg. § 1.1502-98 provides that the rules of sections 1.1502-91 through 1.1502-96 also apply for purposes of section 383, with appropriate adjustments to take into account that section 383 applies to net capital losses and credits.
2 For example, if a loss group has an ownership change and has a carryover of unused business credits, the amount of tax liability that can be offset by the credits cannot exceed the consolidated section 383 credit limitation, determined by applying the principles of Treas. Reg. § 1.383-1 and Treas. Reg. § 1.1502-93.
CONTROLLED GROUP RULES
1 Background
1 An ownership change with respect to a non-consolidated controlled group is determined on a separate entity basis. In addition, a section 382 limitation is separately determined for each member of the controlled group.
2 However, section 382(m)(5), added by the Technical and Miscellaneous Revenue Act of 1988, gives the Commissioner authority to promulgate regulations providing appropriate adjustments to value, built-in gain or loss and other items so that such items are not omitted or taken into account more than once.
3 The regulatory authority applies in the case of any group of corporations described in section 1563(a) (a "controlled group of corporations"), substituting 50 percent for 80 percent control. See section 382(m)(5); Treas. Reg. § 1.382-8(e)(2).
1 Simultaneous with the temporary consolidated section 382 regulations, Treasury issued Treas. Reg. § 1.382-8T (now Treas. Reg. § 1.382-8), concerning adjustments to value of controlled groups of corporations.
2 In general, the regulations reduce the value of any loss corporation that is a member of a controlled group by the value of the stock of each component member owned by the loss corporation immediately after the ownership change. Treas. Reg. § 1.382-8(a).
2 Section 382 Limitation with Respect to Controlled Group Loss
1 For purposes of computing the section 382 limitation with respect to a "controlled group loss," the value of the stock of the member before the ownership change is reduced by the value of the stock of any other directly owned component member. Treas. Reg. § 1.382-8(c)(1).
2 A "controlled group loss" is a pre-change loss or net unrealized built-in loss attributable to a taxable year of the corporation during which the corporation is a component member of a controlled group for that year. Treas. Reg. § 1.382-8(b)(1).
1 To address the issue of when a net unrealized built-in loss accrues, the final regulations provide for an irrebutable presumption that certain built-in losses are attributable to a period ending before the taxable year in question. Treas. Reg. § 1.382-8(b)(2).
2 In determining whether a net unrealized built-in loss is attributable to a particular taxable year (the “determination year”), the final regulations deem the built-in loss in a “prior change date asset" to be attributable to a period ending before the determination year. Id.
3 A "prior change date asset" is any of the loss corporation’s assets held at all times during the period which begins on the change date of its most recent ownership change after 1986 and ends on the first day of the determination year. Id.
4 The built-in loss in a prior change date asset is the adjusted basis of the asset on the prior change date less the fair market value of the asset on such date. Id.
3 The controlled group with respect to each controlled group loss is composed of the loss corporation and each other corporation that is a component member both:
1 With respect to the taxable year to which the controlled group loss is attributable; and
2 On the date the loss corporation has an ownership change. Treas. Reg. § 1.382-8(b)(1).
4 Example 1. L, L1 and L2 are loss corporations that do not file a consolidated return. Individual A owns all the stock of L. L owns the stock of L1, which in turn owns the stock of L2. The value of L is $250 (including the value of L1 and L2), the value of L1 is $100, and the value of L2 is $75. Individual A sells all her L stock to individual B. As a result, L, L1 and L2 undergo an ownership change. The long-term tax-exempt rate is 10 percent. Absent the duplication in value rules, L would have a $25 section 382 limitation, L1 would have a $10 limitation, and L2 would have a $7.50 limitation.
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1 If L, L1 and L2 were a consolidated group, the section 382 limitation for any group losses would be limited to $250.
2 It is clear that the group as a whole is worth only $250, not $425. Stock ownership in other members of the group increases the aggregate limitation by $175.
3 Congress and Treasury apparently felt that permitting this duplication in value was inappropriate.
4 Example 2. Assume the same facts as in the above fact pattern--L's value is $250, L1's value is $100, and L2's value is $75, and that each member's loss is a controlled group loss (discussed below).
5 For purposes of each member's section 382 limitation, L's value would be $150, L1's value would be $25, and L2's value would be $75.
5 Example 3. L is a loss corporation by reason of a NOL carryover arising in 1992 that is carried to 1994. L1 has a NOL arising in 1991 that is carried to 1994. L is owned by Public L, and L1 is owned 30 percent by L and 70 percent by Public L1. In 1993, L acquires 30 percent of the stock of L1. Also in 1993, L purchases all the stock of S. On November 1, 1994, corporation P acquired all the L stock, resulting in an ownership change of L and L1. See Treas. Reg. § 1.382-8(g) Ex. (1).
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1 L was not part of a controlled group at the time its 1992 NOL carryover arose, even though it was part of a controlled group at the time of the ownership change. Thus, the value of L for purposes of its section 382 limitation does not need to be reduced by the value of the L1 stock.
2 L1's loss carryover from 1991 is a controlled group loss with respect to T because L1 and T were a controlled group (1) at the time the NOL arose, and (2) at the time of L1's ownership change.
3 Thus, L1's section 382 limitation must be reduced by the value of the T stock. L1 need not however, reduce its value by the value of the S stock, because S was not part of the group at the time NOL arose.
3 Restoration of Value
1 The regulations permit a member (the “electing member") to restore the value of its stock to another member that owns its stock. The member may elect to restore value to another member in an amount not exceeding the lesser of:
1 The value of the electing member's stock before the ownership change directly owned by the other component member immediately after the ownership change, plus any value restored to the electing member by another member; or
2 The value of the electing member's stock immediately before the ownership change directly owned by the other component member immediately after the ownership change, without regard to any restoration of value. Treas. Reg. § 1.382-8(c)(2).
3 Any value restored to another member reduces the value of the electing member. Treas. Reg. § 1.382-8(c)(3).
4 The regulations also provide for additional adjustments to be made to prevent duplication of value, including adjustments to take into account indirect ownership in another component member and cross ownership. Treas. Reg. § 1.382-8(c)(4).
2 Example 4. Assume the same facts as in Example 1 above--L has $250 value, L1 has $100 value and L2 has $75 value. The value restoration election permits the following alternative values, among others, for purposes of the section 382 limitation. Of course, the number of possibilities is limitless.
| |L |$250 |150 |175 |150 | |
| |L1 |0 |100 |0 |50 | |
| |L2 |0 |0 |75 |50 | |
3 Example 5. Individual A owns all the stock of L, which owns 80 percent of P, which in turn owns 75 percent of L1. Individual B owns the other 20 percent of P, and individual C owns the other 25 percent of L1. L and L1 each have a NOL carryover from 1992 that is carried to 1993. On December 1, 1993, A sells all the L stock to D, resulting in an ownership change of L and L1. Immediately before the ownership change, the value of L is $200 (including the value of P and L1), the value of P (including the value of L1) is $100, and the value of L1 is $40.
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1 The 1992 NOL carryovers of L and L1 are both controlled group carryovers.
2 The value of L1 for purposes of its section 382 limitation is $40 if it does not elect to restore any value to P.
3 The value of P is reduced by $30 (75% x $40 L1 value) to $70. P may elect to restore this value to L, a wise choice since P is not subject to any limitation and cannot otherwise use the value.
4 The value of L is reduced by $80 (80% x $100 P value) and increased by the $70 P elected to restore to it. Thus, L's value is $190 for purposes of its section 382 limitation. See Treas. Reg. § 1.382-8(g) Ex. (2).
5 If L1 elects to restore $20 of value to P:
1 L1's value will be reduced to $20;
2 P's value will be $90 ($70 plus $20 restored by L1); and
3 P may restore up to $80 of value to L, this being the lesser of (a) the value of its stock after the initial adjustment ($70) plus any value restored to it ($20), or (2) the value of the P stock without regard to any adjustments ($80). See Treas. Reg. § 1.382-8(g) Ex. (3).
4 Disposal and Reacquisition of Controlled Group Stock
A loss corporation that has an ownership change is required to make an adjustment to value (notwithstanding the controlled group and controlled group loss requirements) if stock of another corporation is disposed of before the ownership change and:
1 Both corporations were component members of a controlled group with respect to a taxable year to which a controlled group loss of the loss corporation is attributable and at any time during the two year period prior to the ownership change; and
2 Both corporations are component members of a controlled group at any time during the two-year period following the ownership change. Treas. Reg. § 1.382-8(c)(5).
5 Rules Preventing Double Reduction
1 The regulations provide that section 382 and the controlled group rules should not be applied to duplicate a reduction in value of the loss corporation. The regulations use an example of a contribution to capital of stock of a component member. The value of such stock is not taken into account under section 382(l)(1).
2 The controlled group rules do not then apply to further reduce the 382 limitation by the value of the stock contributed. Treas. Reg. § 1.382-8(d).
6 Coordination with Consolidated Section 382 Regulations
1 Generally, the consolidated section 382 regulations apply rather than the controlled group rules to controlled group members that are also members of a consolidated group. Treas. Reg. § 1.382-8(f). This makes sense in that the consolidated section 382 limitation is based on the value of the entire loss group and avoids duplication.
2 The controlled group rules may apply, however, if a member of a consolidated group, loss group, or loss subgroup is also a member of a controlled group with respect to a controlled group loss. Treas. Reg. § 1.382-8(f).
3 For purposes of applying the controlled group rules, a consolidated group, loss group, or loss subgroup is treated as a single corporation. Id.
4 Example 6. P owns all the stock of L, and P and L file a consolidated return. L owns 79 percent of L1. The P group has a consolidated NOL arising in 1992 that is carried to 1994. L1 also has an NOL arising in 1992 that is carried to 1994. On January 1, 1994, the P group and L1 both undergo an ownership change. The consolidated NOL is a controlled group loss with respect to the P group and L1. In computing the consolidated section 382 limitation, the P group's value is reduced by the value of its L1 stock. L1 may, however, elect to restore value to the P group. See Treas. Reg. § 1.382-8(g) Ex. (4).
REVISED SEPARATE RETURN LIMITATION YEAR RULES
1 Overview
1 On June 25, 1999, Treasury issued final regulations eliminating the application of the SRLY rules where such rules overlap with the application of section 382. T.D. 8823, 1999-29 I.R.B. 34.
2 Prior to the issuance of the final regulations, Treasury issued extensive temporary amendments to the SRLY rules. T.D. 8679, 1996-2 C.B. 25. These rules were issued concurrent with the temporary consolidated section 382 regulations. The revisions added by the temporary amendments to the SRLY rules, generally adopted in the final regulations, fall into four basic categories:
1 The SRLY limitation is computed based on the member's items entering into consolidated taxable income;
2 The SRLY limitation uses a cumulative, rather than an annual basis;
3 The SRLY limitation is applied on a subgroup basis rather than on an entity basis; and
4 The built-in gain and loss rules were revised to conform with the section 382 built-in gain and loss rules.
2 Revision of SRLY Computation
1 Under the old rules, the amount of the SRLY limitation equaled the difference between (1) the group's consolidated taxable income (excluding the NOL deduction) and (2) the group's consolidated taxable income excluding items of gain and loss of the subsidiary. Prior Treas. Reg. § 1.1502-21(c).
2 Under the final regulations, the SRLY limitation equals consolidated taxable income determined by taking into account only the member's items of income, gain, loss and deduction. Treas. Reg. § 1.1502-21(c)(1). This is a more direct, simpler method of computing the limitation, which, as intended, limits the SRLY carryover to the member's income.
3 SRLY Limitation Computed on Cumulative Basis
1 Under the old rules, a SRLY loss could not be used in a year in which the group had income, but the member did not, notwithstanding that in a prior year the member had income that was offset by the group's losses.
2 The final regulations compute the SRLY limitation on a cumulative basis, based on the member's cumulative contribution to the group's consolidated taxable income for all years during which it was a member. Treas. Reg. § 1.1502-21(c)(1)(i).
3 Example 1. P, the parent of an affiliated group filing a consolidated return, owns stock in two unaffiliated corporations, S and T. P acquires the remaining stock of corporations S and T in a transaction that does not result in an ownership change of S or T. S carries over a SRLY NOL of $100, and T carries over a SRLY NOL of $40. The contribution to the P group's consolidated taxable income for the three years after the acquisition is as follows:
Year 1 Year 2 Year 3
P ($100) $70 $60
S ($100 NOL) $85 ($30) ($15)
T ($40 NOL) ($25) $10 $20
CTI ($40) $50 $65
1 With respect to S, in Year 1 it contributes $85 to CTI. Because the group has a consolidated loss, none of the SRLY NOL would be absorbed. After Year 2, S's cumulative contribution to CTI would be $55 ($85 + ($30)). Because CTI in Year 2 is $50, the use of S's SRLY NOL would be limited to $50. After Year 3, S's cumulative contribution to CTI is $40 ($85 + ($30) + ($15)). However, the $50 of SRLY NOL absorbed in Year 2 must also be taken into account, reducing S's cumulative contribution to CTI to ($10), so that none of S's SRLY NOL can be used in Year 3. Even though the group has absorbed more of S's SRLY NOL after Year 3 ($50) than S's cumulative contribution to CTI ($40), there is no requirement that the $10 excess be recaptured.
2 With respect to T, in Year 1 its contribution to CTI is negative, and CTI itself is also negative, so that none of T's SRLY NOL would be absorbed. In Year 2, T makes a positive contribution to CTI; however, its cumulative contribution is still negative (($25) + $10 = ($15)). In Year 3, T would be able to absorb $5 of its SRLY NOL (($25) + $10 + $20).
3 Below is a comparison of the results under old SRLY and new SRLY. Note that S fares better under the new rules, while the new rules work to T's detriment.
| |Year 1 |Year 2 |Year 3 |
| | | | |
|S (Old SRLY) |$0 |$0 |$0 |
| (New SRLY) |$0 |$50 |$0 |
| | | | |
|T (Old SRLY) |$0 |$10 |$20 |
| (New SRLY) |$0 |$0 |$5 |
4 Several commentators developed the following framework for applying the new rules.
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4 SRLY Subgroups
1 The final regulations compute the SRLY limitation on a subgroup, rather than an individual entity basis, where applicable. See Treas. Reg. § 1.1502-21(c)(2). This is appropriate and highly desirable in that had the subgroup members remained in the group, each member's income and loss could offset the income and loss of the other members.
2 A SRLY subgroup is not the same as a loss subgroup under the section 382 consolidated return regulations. In particular, only affiliation in a prior group when the loss is incurred is required (and continuous affiliation thereafter). No section 1504(a)(1) relationship among the subgroup members need be established.
3 Example 2. Assume the same facts as in Example 1, except that S and T have been historically affiliated with each other. Thus S and T's contribution to consolidated taxable income would be computed on a subgroup basis.
| |Year 1 |Year 2 |Year 3 |
| | | | |
|P($100) |$70 |$60 | |
|S ($100 NOL) |$85 |($30) |($15) |
|T ($40 NOL) |($25) |$10 |$20 |
| CTI |($40) |$50 |$65 |
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5 Built-In Gain and Loss
1 The built-in gain and loss rules of Prior Treas. Reg. § 1.1502-15 are revised to reflect the rules in section 382(h). For example, built-in loss is defined with reference to section 382(h)(3) (net unrealized built-in loss), including the 15 percent/$10 million threshold. Treas. Reg. § 1.1502-15(b)(1).
2 A corporation having a net unrealized built-in loss when it joins the group will be subject to the SRLY rules for its recognized built-in gains and losses, notwithstanding that it has not undergone an ownership change under section 382. Treas. Reg. § 1.1502-21(b)(2)(i).
3 The built-in gain and loss rules also apply on a subgroup basis. Treas. Reg. § 1.1502-15(c)(1). However, to be included in a built-in gain or loss subgroup requires affiliation for 60 consecutive months prior to joining the group. Treas. Reg. § 1.1502-15(c)(2).
6 Overlap Rule
1 The SRLY limitation is not applicable to an NOL carryover if there is an overlap with the section 382 limitation. Treas. Reg. § 1.1502-21(g)(1).
2 With respect to an NOL carryover, an overlap of the section 382 limitation and the SRLY limitation occurs if a corporation becomes a member of a consolidated group (the “SRLY event”) within six months of the change date of an ownership change (the “section 382 event”) which results in a section 382 limitation. Treas. Reg. § 1.1502-21(g)(2)(ii)(A).
1 The Overlap Rule also includes NOLs that arise during the six month period after a section 382 event and before a SRLY event. Treas. Reg. § 1.1502-21(g)(2)(ii)(B).
2 Example 3. Individual A owns 100% of the stock of corporation P which owns 100% of the stock of corporation S. P and S file a consolidated return. B, an individual unrelated to A, owns all the stock of T. T has a net operating loss of $100 in 2000. On January 1, 2001, S acquires all the stock of T from B.
1 The acquisition of the T stock by S results in T becoming a member of the P group (the SRLY event). Also, because there was an ownership change of more than 50 percentage points of the T stock (the section 382 event), the section 382 limitation applies.
2 The SRLY event and the change date of the section 382 event occur on the same date, January 1, 2001. Thus, there is an overlap of the SRLY limitation and the section 382 limitation.
3 Thus, under the Overlap Rule, in 2001, the SRLY limitation does not apply to the $100 NOL carryover. See Treas. Reg. § 1.1502-21(g)(5) Ex. 1.
3 Operating Rules
1 If the SRLY event occurs on the same date as the section 382 event or within six months after the section 382 event, then the Overlap Rule applies beginning with the tax year that includes the SRLY event. Treas. Reg. § 1.1502-21(g)(3)(i).
1 Example 4. Individual A owns all the stock of corporation P which owns all the stock of corporation S. Individual B, unrelated to A, owns all the stock of T which incurs a $100 net operating loss in 2000. On February 28, 2001, S acquires 55% of the T stock, and on June 30, 2001, S acquires an additional 35% of the T stock.
1 The February 28, 2001 acquisition results in an ownership change (the section 382 event) of T. The June 30, 2001 acquisition results in T becoming a member of the P group (the SRLY event).
2 Because the SRLY event occurs within six months of the section 382 event, there is an overlap of the SRLY limitation and the section 382 limitation. Thus, the SRLY limitation does not apply to the net operating loss in 2001. See Treas. Reg. § 1.1502-21(g)(5) Ex. 2.
2 Example 5. The facts are the same as in Example 2, except S acquires the T stock on September 30, 2001, as opposed to June 30, 2001.
1 The February 28, 2001 acquisition results in an ownership change (the section 382 event) of T.
2 The September 30, 2001 acquisition results in T becoming a member of the P group (the SRLY event).
3 Because the SRLY event occurs more than six months after the change date of the section 382 event, there is no overlap and the Overlap Rule does not apply. See Treas. Reg. § 1.1502-21(g)(5) Ex. 3.
2 If the section 382 event occurs within six months after the SRLY event, the Overlap Rule applies with the first tax year beginning after the section 382 event. Treas. Reg. § 1.1502-21(g)(3)(ii).
1 Example 6. P owns all of S and, since 1994, S has owned 40% of T. In 2000, T incurs a net operating loss of $500 that is carried forward. On March 31, 2001, S acquires an additional 40% of T’s stock. On August 31, 2001, S acquires the remaining 20% of T stock.
1 The acquisition on March 31, 2001 is a SRLY event because it results in T becoming a member of the P group.
2 The August 31, 2001 acquisition is a section 382 event because it results in an ownership change of T.
3 Because the section 382 event occurs within six months after the SRLY event, the Overlap Rule applies.
4 Thus, the SRLY limitation will apply in 2001. In 2002 (the year after the section 382 event), the unabsorbed portion of the NOL from 2000 will not be subject to a SRLY limitation. See Treas. Reg. § 1.1502-21(g)(5) Ex. 4.
4 Subgroup Rules
1 With respect to an NOL carryover for which there is a SRLY subgroup and a section 382 loss subgroup (see Part IV.A.1., above), the Overlap Rule applies to the SRLY subgroup, not to its separate members. Treas. Reg. § 1.1502-21(g)(4).
2 The Overlap Rule applies to an NOL carryover only if:
1 All members of the SRLY subgroup with respect to a particular carryover are also included within a section 382 loss subgroup with respect to such carryover; and
2 All members of the section 382 loss subgroup with respect to a particular carryover are also members of the SRLY subgroup with respect to such carryover. Treas. Reg. § 1.1502-21(g)(4)(i).
1 In other words, the Overlap Rule applies if the SRLY subgroup members and the loss subgroup members are coextensive.
2 With respect to NOL carryovers that arise during the period between the date of a section 382 event and the date of a later SRLY event under Treas. Reg. § 1.1502-21(g)(2)(ii)(B), the Overlap Rule only applies if all members of the SRLY subgroup for that NOL carryover are also members of a SRLY subgroup to which the general Overlap Rule of Treas. Reg. § 1.1502-21(g)(2)(ii)(A) applies. Treas. Reg. § 1.1502-21(g)(4)(ii).
3 In order to provide a way to conform SRLY subgroups and section 382 subgroups, the regulations provide an election that allows corporations to expand a newly formed section 382 loss subgroup. See Treas. Reg. § 1.1502-91(d)(4).
1 Under these regulations, if the common parent of a section 382 loss subgroup elects, two or more corporations that become members of the group at the same time and that were affiliated with each other immediately before becoming members of the group may be treated as meeting the subgroup parent requirement (and thus may be treated as members of the loss subgroup) (see Part IV.A.3., above).
2 Thus, the regulations permit brother-sister corporations to be members of the section 382 loss subgroup if necessary to match the SRLY subgroup membership and fall under the Overlap Rule.
3 The election must be made by the common parent of the loss subgroup and filed with its income tax return for the year in which the members with respect to whom the election is made become members of the group. Treas. Reg. § 1.1502-96(e). The election is irrevocable. Id.
3 Example 7. Individual A owns all the stock of S which owns all the stock of T. In 2000, the S group has a $200 NOL, of which $100 is attributable to S and $100 is attributable to T. Individual B, unrelated to A, owns all the stock of P. On January 1, 2001, P acquires all the stock of S from A.
1 P’s acquisition of the S stock results in S and T becoming members of the P group (the SRLY event). With respect to the NOL carryover, S and T are a SRLY subgroup.
2 P’s acquisition of the S stock results in an ownership change of S, the parent of the loss subgroup, which gives rise to a section 382 limitation (the section 382 event).
3 Because the SRLY event occurs on the same date as the change date of the section 382 event, overlap occurs. Because the SRLY subgroup and loss subgroup are coextensive, the Overlap Rule applies and the SRLY limitation is inapplicable to the $200 NOL carryover. See Treas. Reg. § 1.1502-21(g)(5) Ex. 5.
4 Example 8. Individual B owns all the stock of P which owns all the stock of S and T. In 2000, the P group has a $200 NOL, of which $100 is attributable to S and $100 is attributable to T. Individual A, unrelated to B, owns all the stock of corporation X. On January 1, 2002, X acquires all the stock of S and T from P. X does not make an election to treat the loss subgroup parent requirement as having been satisfied (Treas. Reg. § 1.1502-91(d)(4)).
1 X’s acquisition of S and T results in S and T becoming members of the X group (the SRLY event). With respect to the $200 NOL, S and T are a SRLY subgroup.
2 Because S and T do not have a section 1504(a)(1) relationship, they do not compose a loss subgroup. X’s acquisition of S and T results in separate ownership changes of S and T (the section 382 events).
3 The SRLY event and the change dates of the section 382 events occur on the same date, thus there is overlap. However, because the SRLY subgroup (S and T) is not coextensive with the loss subgroup with respect to the NOL carryover, the Overlap Rule does not apply. See Treas. Reg. § 1.1502-21(g)(5) Ex. 6.
5 Example 9. Individual A owns all the stock of T and S. In 1992, T incurs a $100 NOL that is carried forward. Individual B, unrelated to A, owns all the stock of P. In 1993, S acquires all the stock of T and the S group incurs a $200 NOL that is carried forward. In 1999, P acquires all the stock of S and T from A.
1 S’s 1993 acquisition of the T stock results in T becoming a member of the S group (the SRLY event). But the acquisition did not result in an ownership change. Thus, the Overlap Rule does not apply and T’s 1992 NOL is subject to the SRLY rules.
2 P’s 1999 acquisition of S results in S and T becoming members of the P group (the SRLY event). With respect to the 1992 NOL, S and T do not compose a SRLY subgroup. However, S and T do compose a loss subgroup. P’s acquisition of S results in an ownership change (the section 382 event) with respect to the 1992 carryover.
3 The SRLY event and the change date of the section 382 event occur on the same date. Thus there is overlap. But, because the SRLY subgroup and the loss subgroup are not coextensive, the Overlap Rule is not applicable to the 1992 NOL.
4 With respect to the 1993 NOL, S and T compose a SRLY subgroup and a loss subgroup. Thus, the Overlap Rule applies and the 1993 NOL is not subject to the SRLY limitation. See Treas. Reg. § 1.1502-21(g)(5) Ex. 7.
6 Example 10. Individual A owns all the stock of R and M. Individual B owns all the stock of D. In 1995, D incurs a $100 NOL that is carried forward. In 1997, R acquires all of the stock of D from B. In 1999, M acquires all of the stock of R.
1 R’s 1997 acquisition of D results in D becoming a member of the R group (the SRLY event) and also results in an ownership change (the section 382 event). Thus, because the SRLY event occurs on the same date as the change date of the section 382 event, there is an overlap. The Overlap Rule applies and D’s NOL is not subject to the SRLY limitation.
2 M’s 1999 acquisition of R results in R and D becoming members of the M group (the SRLY event). However there is no ownership change under section 382 and, thus, no section 382 event.
3 Thus, there is no overlap, and D’s NOL is subject to the SRLY limitation in the M group. See Treas. Reg. § 1.1502-21(g)(5) Ex. 8.
-----------------------
L
A
L stock
B
($200)
loss
L
L1
L
L1
A
40%
60%
A
49%
20%
80%
C
B
80%
$120 FMV
$480 FMV
]
B
A
$1000 FMV
L L
51%
L L
20%
L1
L1
A
A
B
55%
45%
L
L
FMV $300
80%
20%
L1
L1
FMV $200
L2
L2
FMV $100
L
S
S
L
A
$25 FMV
$100 FMV
B
80%
$200 FMV
A
$200 FMV
$164 FMV
A
55%
20%
$100 FMV
L
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