Alert for consolidated return filers.

A recent Federal Circuit decision (Rite Aid Corp., 7/6/01) may have significant long-term implications for consolidated return filers. One aspect, however, requires immediate attention.

In reversing the Court of Federal Claims (46 Fed. Cl. 500 (2000)), the Federal Circuit held that the consolidated return loss disallowance rule under Regs. Sec. 1.1502-20 was invalid as it applied to Rite Aid. The IRS issued Regs. Sec. 1.1502-20 in 1991 to disallow a taxpayer's loss on the sale of subsidiary stock.

Under Regs. Sec. 1.1502-20, a loss on the sale of the stock of a consolidated subsidiary is disallowed to the extent of the following three factors: (1) extraordinary gain dispositions; (2) positive investment adjustments; and (3) duplicated losses. In Rite Aid, the Federal Circuit's focus was solely on duplicated losses. However, the breadth of the Federal Circuit's opinion is unclear.

Based on this decision, consolidated return taxpayers that had subsidiary stock losses disallowed on their calendar 1997 returns should consider filing amended returns or protective refund claims. Sept. 17, 2001 is the deadline for filing such claims (assuming the 1997 returns were fully extended). Claims for pre-1997 open tax years should also be considered. For original returns, a taxpayer claiming a loss contrary to Regs. Sec. 1.1502-20 should consider disclosing the position taken on Form 8275-R, Regulation Disclosure Statement, as well as attaching the statement required by Regs. Sec. 1.1502-20(c)(3).

Note: Readers should be mindful of the possibility of legislation in this area. Sen. Grassley (R-Iowa), ranking member on the Senate Finance Committee (SFC), has indicated that SFC staff are studying a legislative reversal of Rite Aid.

FROM THE AICPA TAX DIVISION'S CONSOLIDATED TAX ISSUES TASK FORCE

Editor:
Frank J. O'Connell, Jr., CPA, J.D.
Crowe Chizek
Oak Brook, IL