Consolidated charitable deductions.

When a profitable consolidated group acquires a consolidated group with loss carryovers (or a loss corporation), the use of the acquired loss group's tax attributes may be limited by Secs. 382-384 and by the separate return limitation year (SRLY) rules contained in the consolidated return regulations. Sec. 382 limits carryover use to offset taxable income generated after an ownership change. Since 1997, the SRLY regulations have limited the absorption of carryovers with the sub-grouping and the cumulative-register approaches. Final SRLY regulations, generally effective June 25, 1999, provide rules for computing the limit on losses, as well as the carryover or carryback of losses to consolidated and SRLYs. The final regulations also eliminate the application of the SRLY roles when such rules overlap with the Sec. 382 limitations.

However, SRLY and Sec. 382 limitations applicable to acquired net operating losses (NOLs) do not seem to apply to charitable deductions. Sec. 382(h)(6)(B) provides that any amount allowable as a deduction during the recognition period (determined without regard to any carryover), but which is attributable to periods before the change date, shall be treated as a recognized built-in loss for the tax year for which it is allowed as a deduction.

Regs. Sec. 1.1502-12(1) provides that, for consolidated returns, the deduction for charitable contributions is one of the items not taken into account in computing a member's separate taxable income. Rather, the deduction for charitable contributions is determined on a consolidated basis (Regs. Sec. 1.1502-11 (a) (5)). The consolidated charitable contribution carryover to a tax year consists of the sum of (1) any prior-year charitable contributions of the group in excess of the amount deductible in the prior tax year, (2) any charitable contributions of a member of the group arising in a separate year in excess of the amount deductible in the prior year that can be carried over to the tax year under Sec. 170(b)(2), and (3) charitable contributions by group members for the current year (Regs. Sec. 1.1502-24(b)).

Under Regs. Sec. 1.1502-24(c), the group's adjusted consolidated taxable income for this purpose is the group's consolidated taxable income computed without regard to:

1. The consolidated charitable deduction;

2. The consolidated dividends-received deduction;

3. The 100% dividends-received deduction (which is available in limited circumstances);

4. The consolidated Sec. 247 deduction;

5. The consolidated NOL carryback to the tax year; and

6. The consolidated capital loss carryback to the tax year.

Regs. Sec. 1.1502-24(c) provides that, because deductible contributions include contributions made in the tax year and excess contribution carryovers from consolidated return years or SRLYs, excess contributions (including contributions made in a SRLY) may be applied against the consolidated taxable income, despite the fact that the contributing member had little or no taxable income in the tax year. Sec. 381(c)(19) provides that unexpired excess charitable contributions of a predecessor corporation in a Sec. 381 transaction may be deducted by the successor corporation, commencing with its first tax year beginning after the date of transfer. Consequently, there exists an opportunity for profitable taxpayers that have erroneously applied the SRLY and Sec. 382 rules to limit the use of acquired excess charitable contributions to file amended tax returns to increase the claimed deduction, subject to the Sec. 170(b) (2) 10% of taxable income limitation.

FROM BRYAN P. COLLINS, J.D., LL.M., CPA, ARTHUR ANDERSEN LLP, WASHINGTON, DC, AND MATTHEW R. SHAFER, MS, CPA, AT&T CORP., MORRISTOWN, NJ, (NOT ASSOCIATED WITH ARTHUR ANDERSEN LLP)