The look-back method; an enforcement mechanism with long arms.

The construction industry has been faced with numerous changes to the accounting methods available for long-term contracts since the enactment of the Tax Reform Act of 1986 (TRA). As a result of these changes, long-term contractors are generally required to use the percentage-of-completion method (PCM),(1) or a variation thereof, for recognizing taxable income from long-term contracts.

Although Congress determined that the PCM was the best method to report taxable income for long-term contracts, it also recognized the inherent drawbacks. Because of the many variables in a construction contract, it is impossible to pinpoint precisely the income from a particular contract in advance of the contract's completion. Because of the inability of any method of accounting to accurately report taxable income, Congress implemented the look-back method (LBM) in 1986.

According to the General Explanation of the Tax Reform Act of 1986,(2) the LBM was developed to enhance the PCM. The LBM is intended to prevent manipulation of the estimate of gross profit from contracts and to provide relief to taxpayers who inaccurately estimate profits under the PCM. The IRS acknowledges that the LBM was not "intended to raise revenue but to ensure accurate reporting by long-term contractors."(3) As this article will show, the LBM is a statutory "watchdog" over the construction industry that has caught many contractors in its far-reaching grasp.

The Look-Back Concept

Because the PCM requires contractors to use estimates of total contract price and total costs before contract completion, variances result in reporting contract income. These variances cause the resultant tax to be either higher or lower than the tax that would have occurred if all the facts had been known from the outset of the contract.

The look-back concept requires taxpayers to pay interest on the underreported taxable income from long-term contracts and, conversely, receive interest if taxable income is accelerated. At the completion of a contract the LBM is applied and the taxpayer recalculates each affected year's PCM income using actual, rather than estimated, contract price and costs. Hypothetical tax effects are calculated on the recalculated income and the corresponding look-back interest is computed.

* Scope of the LBM The LBM generally applies to all contracts that are required to be reported under the PCM for regular and/or alternative minimum tax (AMT) purposes.(4) All contracts entered into after Feb. 28, 1986 are subject to the LBM.(5) A de minimis exception allows certain long-term contracts to be exempted from the LBM for both regular and AMT purposes, if the contract --is completed within two years of commencement; and --has a gross contract price at completion that is the lesser of either a. $1 million; or b. 1% of the taxpayer's average annual gross receipts(6) for the three years preceding the year in which the contract is completed.(7)

The regulations clarify that the de minimis rule is mandatory and that all contracts meeting its definition must be excluded from the LBM.(8) Taxpayers may need to amend prior tax returns because the de minimis exception was enacted in the Technical and Miscellaneous Revenue Act of 1988 (TAMRA),(9) with a retroactive effective date. Taxpayers are permitted to amend prior look-back filings to reverse the effects of subjecting excepted contracts to the LBM.(10) However, the economic costs of recomputing, processing and paying additional professional fees must be weighed in light of these opportunities.

* The look-back computation The regulations break down the LBM into three steps, each with its own significant complications.

* Step One: Recalculate the PCM income using the actual (not estimated) contract price and costs. Income from the completed contract is redistributed among the prior contract year(s) and the hypothetical underreported or overreported amount of taxable income is determined.(11) * Step Two: Compare the hypothetical tax liability for each affected year, based on the income reallocated under Step One, with the actual tax liability previously reported.(12) * Step Three: Apply the quarterly overpayment interest rate to the hypothetical overpayment or underpayment of tax, as determined under Step Two.(13)

Step One: Income Recalculation

The recalculation of income under the LBM is performed in the year of completion of the long-term contract. The year a contract is completed is determined by the final completion and acceptance of the contract as outlined in Regs. Sec. 1.451-3(b)(2).(14) The LBM computation may also be required in years subsequent to the contract completion if there are postcompletion revenue and expenses.(15) If subsequent year LBM computations are required, all postcompletion adjustments must be discounted from the original amount taken into taxable income to the value at the time of the completion of the contract.(16) This discounting is required exclusively for purposes of the hypothetical LBM and, accordingly, does not affect how the items are recognized for other tax purposes. To avoid the complexities of discounting post-completion revenue and expenses, a taxpayer can elect, with respect to any contract, not to discount. This election is made on a contract-by-contract basis and must be made with the taxpayer's timely filed return, including extensions.(17)

Sec. 460(b)(1) adds an additional measure of complexity to the PCM and LBM calculations. This section requires that all remaining gross income that has not been reported on each completed contract at the time of completion must be reported in the tax year following the year of completion. This complicates the analysis of the appropriate timing of contract revenue and costs for LBM purposes. The regulations further explain that future costs should not be considered in this computation.(18)

* 10% election Sec. 460(b)(5) permits long-term contractors to elect to defer income under the PCM until the first year in which 10% of the total estimated costs has been incurred. This 10% rule also applies to the LBM(19) and, therefore, will have an impact on the computations under Step One of the LBM if the estimate is inaccurate. Example 1: A contractor incurred $80 of costs in 1990 of total estimated contract costs of $900. Because $80 is less than 10% of the total estimated costs, no income needs to be recognized in 1990 under the PCM if the 10% election is made. The contract is completed in 1991 and the total contract costs are $700, rather than the estimated $900. When the LBM is applied to this contract, it is determined that in 1990 the contract was actually 11.4% complete ($80/$700) and that 11.4% of the revenue on the contract must be recognized under the hypothetical LBM, as well as the $80 of costs.(20)

Care must be taken when determining whether to make the 10% election, as it will add to the already burdensome financial and tax recordkeeping requirements. Also, the interest costs under the LBM may be substantial if estimates of completion are not accurate and if contract profits are significant. Therefore, all benefits and costs, including the LBM, must be considered before making the 10% election.

* Contingencies and change orders Because of the nature of the construction industry, a long-term contractor may not be fully aware of, or in control of, contingencies and change orders at the outset of a contract. Although this is the general nature of the industry, these items must be considered under the LBM.(21) Example 2: A contract is received for the rebuilding of a bridge for a municipality. The first phase of the job, which entails removing parts of the "old" bridge, is completed in year 1. Before beginning the rebuilding phase of the job, the contractor and the municipal authority realize that several modifications are necessary to ensure enough support for the "new" bridge. A change order is negotiated at a significantly more favorable gross profit percentage to the contractor. Unless the change order can be considered a separate contract under Regs. Sec. 1.451-3(e), the new total price and costs must be considered under the LBM.(22) Because the higher gross profit must be spread among all years of the contract, including all prior years, a hypothetical liability is likely to result and look-back interest will be due.

* Delayed reapplication method Regs. Sec. 1.460-6(e) provides for a simplification measure in the computation of the LBM. An election is available to minimize the number of times the LBM must be applied to a contract as a result of postcompletion adjustments to contract price and costs. Taxpayers can wait to reapply the LBM until the cumulative adjustments meet a certain threshold. The initial LBM computation, however, must still be applied in the year the contract is deemed completed.

The LBM computation is reapplied only when one of the following conditions is met.

1. The net undiscounted value of increases and decreases in the contract price occurring since the time of the last application of the LBM exceeds the lesser of --$1 million, or --10% of the total contract price as of that time; 2. the net undiscounted value of increases or decreases in contract costs occurring since the time of the last application of the LBM exceeds the lesser of --$1 million, or --10% of the total actual costs as of that time; 3. the taxpayer goes out of existence; 4. the taxpayer reasonably believes the contract is finally settled and closed; or 5. none of the above are met by the end of the fifth tax year that begins after the last previous application of the LBM.(23) Example 3: Contractor X completes a contract in 1989 and properly reports $600,000 as the actual contract price. In 1990, X receives an additional $40,000 as a result of settling a dispute and properly includes this $40,000 in gross income for 1990. X elects the delayed reapplication method and is not required to reapply the LBM in 1990; the additional $40,000 of gross income does not exceed $1,000,000 or 10% of the unadjusted contract price of $600,000, and five years have not passed since the last application of the LBM. In 1994, the LBM must be reapplied (assuming no other adjustments) because five years will have passed since the last reapplication. Alternatively, X could reapply the LBM in an interim year if it can be shown that the contract is finally settled and closed. This may afford X some latitude in timing the offset of look-back interest receivable and payable.(24)

A statement of intent to elect to delay the reapplication of the LBM must be included in a timely filed return for the first year the election is to be effective.(25) The election cannot be made on a contract-by-contract basis but applies to all long-term contracts requiring reapplication under the LBM in the election year and all future years. IRS consent is required to revoke this election.(26)

When deciding whether to elect reapplication, the taxpayer must consider the benefit of the reduced number of times the LBM must be applied to a particular contract versus the additional ministrative burden of maintaining contract information for up to five additional years.

Finally, an unanswered question is the effect that a delayed reapplication election will have on the three-year statute of limitation. Should a contract be "open" under the delayed reapplication method in the fourth year and the taxpayer is audited in that year, it is not clear whether the IRS can examine the contract itself. The contract was "completed" during a tax year that is not within the normal three-year statute of limitations; presumably, the Service has the authority to examine only the increases and decreases incurred during "open" years subject to the LBM.

* Simplification proposals Should the simplification bill currently being considered by Congress become law, the following additional elections would be available under Step One.

1. The most significant change is the addition of a new 10% de minimis rule. The bill provides that a taxpayer may elect not to apply the LBM if, for each prior contract year, the cumulative taxable income (or loss) from the contract using estimated contract price and costs is within 10% of the cumulative taxable income using the actual contract price and costs. Example 4: A two-year contract is estimated to produce income of $100 in year 1. On final completion of the contract in year 2, the actual income that should have been reported in year 1 is $105. Because the estimated income from this contract was within 10% of the actual income, this contract can be excluded from the LBM. 2. A taxpayer may elect not to reapply the LBM if amounts incurred in years after a contract is completed are de minimis. The de minimis amount is based on a 10% threshold similar to the first proposed change. Thus, additional computations are not required when costs (i.e., punch list items) or revenue changes by small amounts.

Both elections are one-time elections that require IRS approval before revocation. The obvious advantage is the reduction in required reapplications. The first change will merely reduce the impact of those contracts when the final results are close to the contractor's estimates.

Step Two: Compare Tax Liability

This step involves recomputing the taxpayer's hypothetical underpayment or overpayment of tax as a result of the hypothetically underreported or overreported taxable income computed under Step One. There are two methods to compute this hypothetical liability: the actual method or the simplified marginal impact method (SMIM).

The hypothetical underpayment or overpayment of tax is determined as of the latest of:

1. the original return date; 2. the date of a subsequent return amendment or adjustment; or 3. the last previous application of the LBM.(27)

In the case of #3, the cumulative effect of prior applications of the LBM is the liability to which the current hypothetical tax liability is compared.(28)

The regulations clarify that even if the taxpayer did not previously pay AMT but is now hypothetically required to pay AMT, this liability is considered under the actual method.(29)

* Actual method The actual method requires the taxpayer to determine what the hypothetical tax should be, based on the hypothetical increase or decrease in income determined under Step One of the LBM. Using this hypothetically increased or decreased net income, a revised tax liability is computed. This hypothetical tax liability takes into account all tax attributes of the taxpayer, such as tax credits, net operating loss carrybacks and carry-forwards, and AMT. Under certain circumstances this computation under Step Two becomes very complex.

The new hypothetical tax computed is compared to the actual tax liability reported for that particular year. The difference is the hypothetical increase or decrease under Step Two on which interest is computed under Step Three. Note that if a particular year is "looked back to" more than once, the new hypothetical tax is compared to the most recent redetermined tax liability.

* Simplified marginal impact method The SMIM simplifies the tax computation for some taxpayers by eliminating the need to redetermine the tax liability on a hypothetical basis. The hypothetical underpayment or overpayment is determined by multiplying the hypothetical amount computed under Step One of the LBM by an assumed marginal rate.(30)

In certain situations the SMIM must be used by taxpayers and in other circumstances it can be elected. When the SMIM was originally enacted,(31) all widely held passthrough entities (S corporations, partnerships and trusts) that performed domestic contracts were required to use the SMIM.(32) This initial provision required that the SMIM be applied at the entity level.

The language found in the Code expressly disallows the use of the SMIM by a closely held passthrough entity.(33) A passthrough entity is closely held when, at any time during the tax year, 50% or more of the value of the beneficial interest in the entity is held (directly or indirectly) by five or fewer persons.(34) Because of concerns about the administrative burden under Step Two,(35) the regulations extended the use of the SMIM to entities performing contracts not covered by the statutory provisions. (Table I, page 741, summarizes the levels at which the SMIM must be determined.)

     Type of
     entity or                    Reporting level
     contract              Entity     Shareholder/partner
  Domestic contract   Required use           N/A
  in a widely held    of the SMIM
  passthrough entity
  Foreign contracts        N/A           Elected use
  in a widely held
  passthrough entity
  Closely held             N/A           Elected use
  passthrough entity
  C corporation            N/A           Elected use
  Sole proprietorship      N/A           Elected use

Tax rates under the SMIM: Under the SMIM, the applicable regular tax rate used is the highest rate in effect for the redetermination year under either Sec. 1 for individuals or Sec. 11 for corporations.(36) The AMT rate to be used is the rate in effect for the taxpayer under Sec. 55(b)(1). The highest rate is used even if the taxpayer's marginal rate for the year was less.

Overpayment ceiling under the SMIM: An area of the regulations that solicited many responses from the construction industry was the required overpayment ceiling.(37) Under the SMIM, a hypothetical overpayment is limited to the taxpayer's actual tax liability for the year.(38) See Example 5 on page 742.

  T, Inc., a C corporation, elects the SMIM in 1989 when it files its tax
  return. T's actual tax liability reported with its returns for 1987 and 1988
  is $1,500 and $500, respectively. The following results are computed
  under the LBM for 1987 and 1988.
                                     1987        1988
    Hypothetical taxable income
      under the LBM                 $(5,000)   $2,500
    Applicable tax rate              x   40%   x   34%
    Tentative hypothetical tax        2,000      (850)
    Ceiling (actual tax liability)    1,500       500
    Final over (under) payment
      (limited to lesser of over
      (under) payment or ceiling)   $ 1,500    $ (850)
  As a result of electing the SMIM and having the overpayment ceiling
  apply, T will not receive the full benefit of the excess overpayment when
  looking back to 1987. Although a $2,000 overpayment does result, the
  hypothetical overpayment is limited to the actual tax paid (after taking
  into account all carryovers and carrybacks for that year) of $1,500. Thus,
  T is eligible to receive interest only on the $1,500 hypothetical
  underpayment. Also, T is required to pay interest on the $850 hypothetical
  underpayment for 1988 because the overpayment ceiling does not apply
  when there is a hypothetical underpayment. If there is a redetermination
  under the LBM, the ceiling amount will be zero for 1987 and $1,350 ($850
  + $500) for 1988.
  (*)Adapted from the example in Regs. Sec. 1.460-6(d0(2)(iv).

Anti-abuse rule: The regulations provide an anti-abuse rule to ensure that taxpayers are not taking advantage of the SMIM effect. If the amount of income originally reported exceeds the amount reallocated (using actual contract receipts and costs) by the lesser of either $1 million or 20% of the amount reallocated, the IRS may require a recomputation based on the actual method under Step Two of the LBM rather than the SMIM.(39)

During the examination of Form 8697, Interest Computation Under the Look-back Method for Completed Long-term Contracts, the IRS will take into account whether the taxpayer overreported income for the purpose of receiving interest under the LBM at the applicable tax rate and whether the taxpayer underreported the income for the year in question with respect to other contracts. With the overpayment ceiling in effect, abuse should already be limited and one must question the necessity for these provisions.

Mechanics of electing the SMIM: The SMIM election is made by stating such on a timely filed return, including extensions, for the first tax year the election is to apply.(40) The election is binding on all future years and require IRS consent to revoke it. The election for a consolidated group to use the SMIM is made by the common parent of the group and is binding on all affected members of the group.(41)

Effective date of the SMIM: The SMIM must be applied by widely held passthrough entities that have domestic contracts in tax years for which the due date of the return, determined with regard to extensions, is after Nov. 9, 1988.(42)

Although the SMIM appears to be a simplifying measure in the complicated world of look-back, it may not always be the appropriate choice for all contractors. (See Table II, on page 744, for a summary of the elections available to contractors.)

Step Three: Interest Application

Step Three applies the required rates of interest to the underpaid or overpaid tax liability (computed in Step Two) and computes the look-back interest payable or receivable.

The interest rate used in this computation is the overpayment rate of Sec. 6621.(43) This rate is used for both overpayment and underpayment purposes. Because the rate under Sec. 6621 is adjusted quarterly, this interest determination may be complicated. Under proposed legislation, a single annual rate would be required.

Generally, interest is charged or credited beginning at the due date, not including extensions, for the redetermination year for which the hypothetical amount has been determined under Step Two.(44) Interest ends on the earlier of either

--the due date, not including extensions, of the return for the filing year; or --the date both the return for the filing year is filed and the tax for that year has been paid in full.

Extended time frames and complications develop if there are changes in the amount of a loss or credit carryback or carryover, or if there have been changes in the amount of tax liability that generated a subsequent refund.(45)

If a taxpayer has received an extension of time to file its income tax return for the filing year, look-back interest is computed only until the initial due date of the return, without regard to any extension. However, additional interest on the interest will be required to be computed to the date that the return is finally filed, if the amount cannot be offset by a refund of regular tax.(46) See Example 6 on page 745.

Example 6: Calculating Interest on Hypothetical Underpayment

F Company files its return on a calendar-year basis. It is determined

under Step Two of the LBM in 1988 that F has a hypothetical

underreported tax liability for 1987 (the redetermination year). The due date for

filing F's federal income tax return for 1988 is Mar. 15, 1989. F obtains

an extension of time and files the return on the extended due date of

Sept. 15, 1989. Under the LBM, F must pay interest on the amount of

the hypothetical underpayment computed from the due date determined

without regard to extensions for its return for 1987 (Mar. 15, 1988) until

the due date of its return for 1988 (Mar. 15, 1989). F is also required to

pay additional interest from March 15 to September 15 on the amount,

if any, of interest outstanding as of March 15 with respect to the

hypothetical underpayment.

The actual interest on this hypothetical interest is calculated as

follows, with an assumed hypothetical liability of $25,000.

      Period         Rate     Factor(*)    Interest
    3/16/88 - 3/31/88     10%    0.004392565    $ 109.81
    4/1/88 - 6/30/88       9     0.022689079      569.72
    7/1/88 - 9/30/88       9     0.022941248      589.12
    10/1/88 - 12/31/88    10     0.025522183      670.43
    1/1/89 - 3/15/89      10     0.020477973      551.66
    Total interest under the LBM                2,490.74

Potential additional interest

to filing date of 9/15/89

      (computations not shown)                  1,554.49
    Total interest liability                   $4,045.23

(*)Derived from Rev. Proc. 83-7, 1983-1 CB 583, as a result of quarterly changes

in the Sec. 6621 rate. Note that under the proposed simplification bill only one

annual interest rate would be required.

Filing Requirements

Form 8697 is used to report the computations under the LBM.(47) This form appears innocuous, but the schedules required to detail the amounts entered onto the form provide the real workload. This form must be filed for each year in which a long-term contract that was entered into after Feb. 28, 1986 is completed.(48)

Form 8697 must be filed with the taxpayer's income tax return if look-back interest is payable to the IRS. Conversely, if a refund is due to the taxpayer, Form 8697 is filed separately from the tax return and the taxpayer must await the refund.(49) It is not clear how to file Form 8697 if no interest is determined to be payable or receivable. Presumably, because no interest is due, the form can be filed separately.

Interest Characterization

In order to spur compliance with the look-back filing requirements, Sec. 460(b)(1) was changed to require that interest paid under the LBM be treated as an increase in tax for purposes of subtitle F of the Code (except for estimated tax purposes). Because of this treatment, look-back interest is also characterized by the taxpayer as interest expense arising from an underpayment of income tax.(50) Accordingly, the look-back interest paid is treated differently by corporations and individuals.

Look-back interest will be treated as nondeductible personal interest by individuals in accordance with Temp. Regs. Sec. 1.163-9T(b)(2). Likewise, interest determined under the SMIM at the entity level is required to be allocated by passthrough entities. The interest expense will have to be distributed via Schedules K-1 for appropriate treatment by shareholders and partners.

Mid-Contract Changes in Taxpayer

The proposed regulations provided that a mid-contract change in the taxpayer performing the contract was to be considered as a continuation of the contract by the successor who is generally responsible for filing (and paying) interest under the LBM.(51) Because of numerous comments received by the IRS on this point, this section was reserved in the final regulations for further analysis.

The proposed approach posed numerous logistical concerns, especially for taxpayers who have sold their contracts to unrelated parties. When this regulation is finalized, it will likely reverse the approach to simplify this area, if not for all changes in taxpayers, at least for sales to unrelated parties.

Small Contractors

A small contractor is defined under Sec. 460(e)(1)(B) as one that typically averages less than $10 million in gross receipts for the three tax years preceding the year in which a contract is entered. Because these taxpayers are not required to use the PCM for regular tax purposes, they are typically faced with the LBM only as a result of the AMT, which requires the use of the PCM.

The small contractor thus faces the burden of maintaining hypothetical records under the LBM for AMT purposes. Although it may not be in an AMT situation in a particular year, the small contractor must perform computations under the LBM to determine if AMT now applies on the hypothetical basis. Additionally, the taxpayer must carry forward the results of the LBM to future years in order to comply with the requirement that taxpayers determine the cumulative effect on the hypothetical profit of a job for the year of completion. The result is an increased recordkeeping burden on the small contractor even though there may be no effect. It must be recognized that an increase in AMT on a hypothetical basis will also increase the hypothetical AMT credit available for carryover. The result could easily entail the same amount of look-back interest being returned in a future year as is paid as a result of an increased hypothetical AMT.(52) The benefit of the increased AMT credit carryover would be forgone should the SMIM be elected. In its place the small contractor is faced with the overpayment ceiling that limits potential refunds. Additionally, the small contractor would be faced with limited refunds yet unlimited potential look-back interest under the SMIM, even if the contractor is not in an AMT position.

The IRS has acknowledged during informal conversations that it would not be beneficial for the small contractor to elect the SMIM in light of these two facts. However, the determination to elect the SMIM must still be weighed in light of its simplifying benefits versus the forgone benefits.

Conclusion

The look-back method is clearly a far-reaching "watchdog" on the construction industry. Open for consideration is whether or not the LBM meets its goals and whether the excessive administrative burden placed on all long-term contractors is needed when these objectives could possibly be met in other ways. [Tabular Data 2 Omitted]

(1)Sec. 460(a). See Sec. 460(e) for a general exception to the use of the PCM. (2)Staff of the Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986 (1987), at 527. (3)Phinet Daily Update, 8/24/90 Reporting on IRS Hearing held on the Proposed Look-Back Regulations. (4)Regs. Sec. 1.460-6(b)(1). Also note that portions of contracts under the percentage-of-completion capitalized cost method (PCCCM) using the PCM are subject to the LBM. (5)Regs. Sec. 1.460-6(b)(5). (6)Presumably the guidance for the definition of gross receipts for the Sec. 460(e) exception found in Notice 89-15, 1989-1 CB 634, applies here also. (7)Sec. 460(b)(3)(B). (8)Regs. Sec. 1.460-6(b)(3). (9)TAMRA Section 1008(c)(2)(A). (10)See the preamble to the final regulations in TD 8315 (10/12/90). (11)Regs. Sec. 1.460-6(c)(2). (12)Regs. Sec. 1.460-6(c)(3). (13)Regs. Sec. 1.460-6(c)(4). (14)Regs. Sec. 1.460-6(c)(1)(ii)(B). (15)Regs. Sec. 1.460-6(c)(1)(ii)(A). (16)Regs. Sec. 1.460-6(c)(1)(ii)(C)(1). (17)Regs. Sec. 1.460-6(c)(1)(ii)(C)(2). (18)Regs. Sec. 1.460-6(c)(1)(ii)(D). (19)Sec. 460(b)(5)(D)(ii). (20)Adapted from the example in Regs. Sec. 1.460-6(c)(2)(v)(B). (21)Regs. Sec. 1.460-6(c)(2)(vi)(B) and (C). (22)Regs. Sec. 1.460-6(c)(2)(vi)(C). (23)Regs. Sec. 1.460-6(e)(1). (24)Adapted from the examples in Regs. Sec. 1.460-6(e)(3). (25)Regs. Sec. 1.460-6(e)(2). (26)If a member leaves an electing consolidated group, the election still applies. If an electing corporation enters a group when no election is made, the election is effectively revoked for contracts adjusted after joining (Regs. Sec. 1.460-6(e)(2)). (27)Regs. Sec. 1.460-6(c)(3)(iii). (28)Regs. Sec. 1.460-6(c)(3)(iv). (29)Regs. Sec. 1.460-6(c)(3)(vi). (30)Regs. Sec. 1.460-6(d)(1). (31)Added by TAMRA Section 5041(d). (32)Sec. 460(b)(4)(A). (33)Sec. 460(b)(4)(B). (34)Regs. Sec. 1.460-6(d)(4)(i)(B). The attribution rules of Sec. 1563(e) apply. (35)See the preamble to the final regulations. Practitioners must be cautious not to rely solely on the language in Sec. 460. (36)Regs. Sec. 1.460-6(d)(2)(ii). (37)See the preamble to the final regulations for the IRS response to these comments. (38)Regs. Sec. 1.460-6(d)(2)(iii). (39)Regs. Sec. 1.460-6(d)(3). (40)Regs. Sec. 1.460-6(d)(4)(ii)(B). (41)See Regs. Sec. 1.460-6(d)(4)(ii)(C) for the effects on joining and existing members of a consolidated group. (42)Regs. Sec. 1.460-6(d)(4)(i)(F). (43)Sec. 460(b)(2)(C). (44)Regs. Sec. 1.460-6(c)(4)(i). (45)See Regs. Sec. 1.460-6(c)(4)(ii) and (iii), as well as Examples (8) through (11) of Regs. Sec. 1.460-6(h)(9). (46)Regs. Sec. 1.460-6(c)(4)(iv). (47)Regs. Sec. 1.460-6(f)(1). (48)Instructions to Form 8697 (revised Jan. 1991). (49)See Ann. 90-55, IRB 1990-16, 21. (50)Regs. Sec. 1.460-6(f)(2)(ii). (51)Regs. Sec. 1.460-6(g) [reserved]. See the preamble to the final regulations. (52)See Regs. Sec. 1.460-6(h)(8), Example (7).