Loss waiver is important for consolidated groups subject to the loss disallowance rule.

Whenever a consolidated group disposes of a subsidiary member at a loss, the loss is subject to the loss disallowance rule (Regs. Sec. 1.1502-20). In general, groups may recognize a loss on the sale of a subsidiary only to the extent such loss exceeds the sum of the extraordinary gain dispositions, positive investment adjustments and duplicated losses related to the departing subsidiary. Included in the definition of the term "duplicated losses" are loss carryforwards of a departing loss member. For example, a consolidated group that realized a $200 loss on the sale of a subsidiary member that left the group with a $90 net operating loss carryover may have $90 of its realized loss disallowed.

The drafters of the loss disallowance rules included limited relief in the form of a reattribution election (Regs. Sec. 1.1502-20(g)). This election allows groups to reattribute departing members' loss carryovers to the extent the loss on the disposition is disallowed. Because reattributed losses remain subject to all previously imposed loss limitations, some other form of relief would be helpful. This relief is based on an unrelated election available to the buying group. Under Regs. Sec. 1.1502-32(b)(4), a buying group may waive any or all loss carryovers of the purchased corporation. This waiver prevents the buying group from having to reduce its basis in the purchased corporation's stock by the amount of any pre-acquisition loss carryovers that expire in its hands. The Service has confirmed in a recent (yet to be released) letter ruling that loss carryforwards waived by a buyer under Regs. Sec. 1.1502-32(b)(4) are not duplicated losses subject to disallowance. Thus, certain selling groups may escape the grasp of the loss disallowance rule. This waiver may only be made by a buyer that is also a consolidated group.

This option allows certain selling groups to recognize an immediate capital loss on the sale of member stock rather than reattribute a loss that may be subject to severe restrictions (e.g., Sec. 382, passive activity, etc.). Buyers should be willing to waive loss carryovers that are either useless in their hands due to some limitation or are otherwise projected to expire unused. Because a proper waiver must be executed by the buyer to benefit the seller, a provision should be included in the sales contract requiring the buyer to deliver a properly executed waiver in a timely manner.

Reattribution of loss carryforwards is available to the selling group and may be the preferred method for realizing the benefit of those losses, especially if the losses apportioned to the departing member are not severely limited and the selling group cannot generate sufficient capital gains to offset the capital loss on the sale of the subsidiary.

The ideal situation for relying on the buyer's loss waiver involves:

* A consolidated group disposing of a loss member with loss carryforwards;

* The seller's loss disallowed under Regs. Sec. 1.1502-20 because of the loss carryforwards;

* The buyer is a consolidated group;

* The selling group has already generated (or anticipates generating) sufficient capital gains to take advantage of the capital loss; and

* Loss carryforwards would expire or be severely limited in the hands of the selling group if reattributed.

Any amount of loss carryforwards may be waived under Regs. Sec. 1.1502-32(b)(4), and the buyer has full discretion to determine which loss carryovers are waived if multiple years or multiple subsidiaries are involved.