The loss disallowance rule - round three; is this the final chapter?

The IRS issued the final regulations covering the loss disallowance rule (LDR) on Sept. 13, 1991. Anyone familiar with the history of these regulations might wonder whether it was simply a coincidence or an event with greater significance that these highly criticized regulations were finalized on Friday the 13th. In previous articles, the authors have covered the details of the temporary regulations (1) and the proposed regulations, (2) and dealt with the background underlying such regulations and some of the rationale used by the IRS in issuing such controversial rules. Although some important changes were made, the final regulations continue the same basic disallowance approach adopted in Prop. Regs. Sec. 1.1502-20 (Nov. 19, 1990) and the provision of Temp. Regs. Sec. 1.1502-20T (Mar. 9, 1990). This article will analyze the final regulations and provide guidance for minimizing some of their negative effects.

The General Rule

In general, "[n]o deduction is allowed for any loss recognized by a member with respect to the disposition of stock of a subsidiary," (3) Regs. Sec. 1.1502-20 (a)(2) defines a disposition as "any event in which gain or loss is recognized, in whole or in part."

The final regulations modify the treatment of a loss on the disposition of subsidiary stock when such loss is not recognized immediately due to other provisions of the Code or regulations. In general, Regs. Sec. 1.1502-20 (a)(3) provides a coordination mechanism between the LDR and the other loss deferral and loss disallowance provisions, under which the LDR is applied after the other rules are applied. In other words, if the loss is deferred under any other provision, the LDR applies when the loss is taken into account. Likewise, if a loss is disallowed under another provision, the LDR is inapplicable. This ordering rule is subject to an exception for what the regulations call "overriding events." If an overriding event occurs before a deferred loss is taken into account, the LDR applies to the loss immediately before the event occurs even though the loss may not be taken into account until a later time. Regs. Sec. 1.1502-20(a)(3)(ii) indicates that overriding events occur when the subsidiary stock (1) ceases to be owned by a member of the consolidated group, (2) is canceled or redeemed (regardless of whether it is retired or held as Treasury stock) or (3) is disposed of within the meaning of Regs. Sec.. 1.1502-19(b)(2) (other than Regs. Sec. 1.1502-19(b)(2)(ii)).

Example 1: P is the common parent of a consolidated group, consisting of wholly owned subsidiary S, and T which is a recently purchased wholly owned subsidiary of S. S has a $200 basis in the T stock and T owns one asset (basis, $50; fair market value (FMV), $200). T sells the asset for $200, recognizing a gain of $150, which causes an upward basis adjustment from $200 to $350 in the T stock owned by S. S sells the T stock to P for $200 in a deferred intercompany transaction, recognizing a loss of $150 ($200 - $350), which is deferred under Sec. 267(f) and Regs. Sec. 1.1502-13(c). P subsequently sells the T stock for $200 to Z, which is a member of the same controlled group as P but is not a member of the P consolidated group. (4)

The application of the general rule to S's $150 loss is deferred because S's loss is deferred under Sec. 267(f) and Regs. Sec. 1.1502-13(c). Absent the overriding events exception, Temp. Regs. Sec. 1.267(f)-2T(d)(2) would provide that S's loss is not taken into account because Z is a member of the same controlled group as P and S. However, since T's stock is no longer owned by a member of the P consolidated group, an overriding event has occurred that causes S's deferred loss to be eliminated immediately before the sale and not to be taken into account under Sec. 267(f).

The final regulations continue to permit the netting of gains and losses on the disposition of stock in the same subsidiary. However, in a modification of the proposed regulations, Regs. Sec. 1.1502-s0(a)(4) adds the requirement that the stock must have the same material terms. Further, the final regulations allow the netting rule to apply whether or not all dispositions are to the same purchaser, provided such dispositions were part of the same plan or arrangement. The netting rule may also apply whether the amount of gain or loss is currently recognized or is a previously deferred amount that is currently taken into account.

Example 2: P is the common parent of a consolidated group. P owns one-half of the stock of T with a basis of $200. The remaining T stock is owned by S, a wholly owned subsidiary of P, with a basis of $75. All of the T stock has the same terms. P and S sell all of the T stock to different purchasers for an aggregate price of $200 pursuant to the same plan. As a consequence of the sale, P recognizes a loss of $100 and S recognizes a gain of $25. Since the sale was part of the same plan or arrangement, even though to different purchasers, the amount of P's loss disallowed under the LDR is limited to $75 ($100 -$25). (5)

As noted above, the netting rule applies only to stock of the same subsidiary having the same material terms. Thus, loss from the sale of the common stock of a subsidiary may not be netted against gain from the sale of such subsidiary's preferred stock. In addition, loss from the sale of one subsidiary may not be netted against gain from the sale of another subsidiary. However, beyond these obvious situations, it is not clear what is meant by the requirement of the "same material terms." No definitive guidance is provided by the final regulations. The preamble to the regulations (6) indicates that the netting of "gains and losses on sales of different classes of a subsidiary's stock, of the same class of a subsidiary's stock taken into account at different times, or of stock of different subsidiaries, may be unrelated to each other, and netting of such gains and losses may permit circumvention of General Utilities repeal." Again, these situations are fairly obvious. Do the same material term exist when two different classes of common stock possess slightly different terms yet represent essentially the same investment with comparable values? As an example, consider two classes of common stock, A and B, where the only difference is the number of directors each class can elect. Is the material terms requirement aimed at this type of situation? Additional clarification certainly appears warranted.

The final regulations also amend the elective excess loss account (ELA) rules of Regs. Sec. 1.1502-19(a)(6) to conform such election to the availability of netting under the LDR and deconsolidation rules. In essence, the final regulations ensure that an unintended benefit cannot be achieved through an election to apply an ELA to reduce the basis of any other stock. Without this limitation, the ELA provisions would allow the netting of gain relating to the ELA on one share with the basis in another share, which could result in netting level involving common and preferred shares. In such cases, when the two shares do not have the same material terms, the ELA provisions would have allowed a result unavailable under the LDR and deconsolidation netting rules.

The Economic Loss Formula

Regs. Sec. 1.1502-20(c) caps the amount of loss disallowed (and basis reduction) resulting from a disposition or deconsolidation. Under the economic loss formula (ELF) the amount of loss disallowed or the amount of basis reduction with respect to a share of stock cannot exceed the share's sum of (1) extraordinary gain dispositions (EGADs), (2) positive investment adjustments (PINAs) and (3) duplicated loss.

* Extraordinary gain disposition

The first leg of the ELF is the share's allocable part of any member's earnings and profits (E&P), net of directly related expenses, from EGADs. Regs. Sec. 1.1502-20(c)(2)(i) defines an EGAD as an actual or deemed disposition of (1) a capital asset as defined in Sec. 1221, (2) property used in a trade or business as defined in Sec. 1231(b) (without regard to any holding period), (3) an asset described in Sec. 1221(1), (3), (4) or (5), if substantially all the assets in such category from the same trade or business are disposed of in one or a series of related transactions and (4) assets disposed of in an applicable asset acquisition under Sec. 1060(c).

Also included as EGADs are a change in method of accounting resulting in a positive Sec. 481 adjustment, income from discharge of indebtedness and any other item or event identified by the IRS in revenue rulings and revenue procedures.

To be included in the ELF, and EGAD must occur after Nov. 18, 1990 and must result in income or gain for purposes of computing E&P (determined net of directly related expenses). The preamble clarifies that an accounting method change that occurs after Nov. 18, 1990 is treated an and EGAD even if some or all of the adjustment resulting from the change is attributable to periods before Nov. 19, 1990. Federal income taxes are considered directly related expenses to the extent the group's income tax liability for the year of the EGAD is higher as a result of the EGAD. This is determined by computing the group's income tax liability (before foreign tax credit) with and without the EGAD.

* Positive investment adjustments

The second leg of the ELF is E&P that results in adjustments with respect to the share under Regs. Sec. 1.1502-32(b)(1)(i) and (c)(1), but only to the extent the E&P for a tax year exceeds the EGADs for the same year. (7) In other words, PINAs include the sum of all prior net positive adjustments (not including years with net negative adjustments) in excess of adjustments from EGADs. The E&P is treated as resulting in adjustments with respect to a share if it would have resulted in such adjustments but for distributions with respect to the share.

Thus, the netting of positive and negative adjustments occurring in the same year is permitted, but netting of such adjustments from different years is not. Regs. Sec. 1.1502-20(c)(2)(iii) provides that E&P is included in EGADs or PINAs only to the extent it is reflected in the basis of the share, directly or indirectly, immediately before the disposition or deconsolidation, after applying such provisions as Sec. 1503(e) and Regs. Sec. 1.1502-32(g). EGADs and PINAs are adjusted separately in the ELF to prevent losses attributable to EGADs from being netted against gain from EGADs.

Example 3: P buys all of the stock of T for $200, and T becomes a member of the P consolidated group. T has indebtedness of $350 at the time of acquisition by P. Subsequently, T's assets decline in value and T's creditors agree to discharge $250 of T's indebtedness. The $250 discharge is not included in the P group's gross income due to Sec. 108(a). Further, no tax attributes are reduced under Sec. 108(b). Following the discharge, P disposes of the T stock for $50. The $250 discharge is included in T's E&P under Regs. Sec. 1.1502-32(b)(1)(i), which causes P's basis in the T stock to increase by a like amount to $450. In determining P's loss on the disposition of the T stock, Sec. 1503(e) excludes the $250 discharge of indebtedness from T's E&P. As a result, P's loss is $150 ($200 basis - $50 sales proceeds), instead of $400. Due to the Sec. 1503(e) adjustment, T's E&P from the $250 discharge of indebtedness is not reflected in the stock basis, directly or indirectly, immediately before the disposition. Therefore, T's E&P is zero, and P's $150 loss on the disposition is disallowed.

This example is based on Regs. Sec. 1.1502-20(c)(4), Example 7, which seems to fall short of a complete explanation of the interplay between a discharge of indebtedness and the LDR. For example, if T had a net operating loss (NOL) that was reduced under Sec. 108(b) due to the discharge of indebtedness, T's E&P would be increased to the extent of the attribute reduction under Sec. 1503(e). This scenario will result in a positive adjustment for the increase in E&P and a negative adjustment for the NOL reduction, which should arguably result in P's $150 loss being allowed.

* Transitional PINA

The preamble indicates that the Service rejected comments requesting that netting of PINAs be done on a prospective basis. Instead, Regs. Sec. 1.1502-20(c)(2)(v) adds a transitional netting rule, which is designed to alleviate some of the administrative problems involved when subsidiaries may have been owned by a prior group and the records of the adjustments may be difficult to obtain.

Under Regs. Sec. 1.1502-20(c)(2)(v), the PINA determined for tax ending on or before Sept. 13, 1991 (or such earlier years as determined below) is limited to the net increase, if any, in the basis of the share within a specified period. The beginning date of such period is (1) the date the share was first acquired by a member (whether or not a member at that time) or (2) the date the share was first acquired by a member of a prior consolidated group, if the share is transferred basis property (within the meaning of Sec. 7701(a)(43)) from a prior group. The ending date of the period is the earlier of (1) the end of any tax year ending after Dec. 31, 1986 and on or before Sept. 13, 1991 (whichever year-end produces the lowest net increase) or (2) the date of disposition or deconsolidation of the share. Thus, the transitional rule appears to permit complete netting for years ending before 1987, but limited netting for years ending after 1986 and before Sept. 14, 1991.

The transitional rule has been criticized as being deficient both as to its intent and its mechanical application. (8) The phrase lowest net increase should be clarified through examples. In addition, the Sept. 14, 1991 ending date could refer to the disposed of subsidiary's year ending before Sept. 14, 1991 or the parent's year ending before Sept. 14, 1991. It would seem that the ending date should refer to the subsidiary's year-end, but this interpretation needs clarification from the IRS.

Duplicated loss

The ELF attempts to disallow losses that could be duplicated at a later date. For example, a loss could be duplicated if a parent sells its subsidiary at a loss and (1) the subsidiary holds built-in loss assets that can be sold later at a loss or (2) the subsidiary is apportioned NOLs under Regs. Sec. 1.1502-79(a). Duplicated loss is determined immediately after a disposition or deconsolidation. The duplicated loss is the excess (if any) of the sum of (1) the aggregate adjusted basis of the assets of the subsidiary (other than any stock and securities that the subsidiary owns in another subsidiary), (2) any losses attributable to the subsidiary and carried to the subsidiary's first tax year following the disposition or deconsolidation and (3) any deferred deductions of the subsidiary, over the sum of (1) the value of the subsidiary's stock, (2) any liabilities of the subsidiary and (3) any other relevant items. (9)

Statement of loss allowed

The ELF cap applies only if a separate statement containing information set out in Regs. Sec. 1.1502-20(c)(3) is filed with the taxpayer's return for the year of disposition or deconsolidation. (10) In other words, no deduction or loss is allowed unless that statement is filed. Regs. Sec. 1.1502-20(h)(2)(ii) indicates that such statement as well as other statements required under the final regulations ordinarily cannot be made with an amended return.

In finalizing the regulations dealing with the ELF, the IRS rejected the numerous comments suggesting an exception for assets acquired by a consolidated group in a taxable transaction. It seems inappropriate for the EGAD and PINA components of the ELF to apply to a direct taxable asset acquisition or to a stock acquisition with a Sec. 338 election. In these instances, there is no opportunity to circumvent the General Utilities doctrine, since at the time of acquisition there is no built-in gain that could cause a tainted basis adjustment under the investment adjustment rules.

The preamble indicates that such an exception was denied because it would introduce the same administrative problems that arise with a tracing approach. Three examples are presented in the preamble in support of the administrative problems rationale, yet this rationale is not convincing and represents another example of the antitaxpayer flavor of the final regulations. The lack of this exception is a major shortcoming of the final regulations and will surely lead to the disallowance of true economic losses.

Deconsolidation Rule

In general, a deconsolidation of a share of stock of a subsidiary results in a basis reduction to FMV (assuming the basis of the share exceeds its FMV immediately before the deconsolidation) at that time. If both a disposition and a deconsolidation occur with respect to a share in the same transaction, the LDR applies first and then the deconsolidation rules apply, if necessary.

Regs. Sec. 1.1502-20(b)(2) defines a deconsolidation as "any event that causes a share of stock of a subsidiary that remains outstanding to be no longer owned by a member of any consolidated group of which the subsidiary is also a member." Therefore, any event that drops the group members' ownership below the 80% vote or value tests of Sec. 1504(a) results in a deconsolidation. In addition, the deconsolidation rule contains a netting rule similar to the rule discussed under the LDR and is subject to the ELF cap (i.e., the basis reduction cannot exceed the sum of the EGADs, PINAs and duplicated loss).

Statement required

If a share is disposed of at a loss within two years of the date of deconsolidation, the taxpayer must file a statement with its applicable return containing the information specified in Regs. Sec. 1.1502-20(b)(5) to claim a deduction or loss. This statement must be filed even if no basis reduction was required at the time of the deconsolidation.

Anti-avoidance Rules

Successors

Regs. Sec. 1.1502-20(d)(1) provides a general "effectuate the purpose of this section" rule that applies the LDR and deconsolidation rule to any property the basis of which is determined, directly or indirectly, in whole or in part, by reference to the basis of a subsidiary's stock.

For example, the successor rule may apply when a subsidiary leaves one consolidated group and joins another in a tax-free reorganization under Sec.368(a)(1)(B). Under Regs. Sec.1.1502-20(d), the transferor group must reduce to FMV the basis of the stock received in the reorganization (assuming the basis in the stock transferred exceeded its FMV). According to the preamble, "The successor rule applies to the stock received by the transferor group because the group otherwise would be able to convert its disallowed loss on the subsidiary stock to an allowed loss on the stock of a nonmember received in the transaction." This situation is clarified in the final regulations and corrects an inappropriate result contained in the earlier regulations.

Example 4: P is the common parent of a consolidated group that contains a recently purchased wholly owned subsidiary, T. P has a $200 basis in the T stock and T owns one asset (basis, $100; FMV, $200). T sells the asset for $200, recognizing a gain of $100, which causes an upward basis adjustment from $200 to $300 in P's basis in the T stock. Later, P transfers all of the T stock to an unrelated consolidated group in exchange for 15% of the stock of X, the common parent, in a reorganization under Sec. 368(a)(1)(B). The value of the X stock received by P is $75. (11)

Sec.358 provides that P has a basis of $300 in the X stock and Sec.362 provides that X has a $300 basis in the T stock. Since no gain or loss is recognized in the transaction, the LDR is inapplicable. Further, the transaction does not result in a deconsolidation of the T stock since T is a wholly owned member of another consolidated group.

The X stock owned by P is a successor interest to the T stock since P's basis in the X stock is determined by reference to P's basis in the T stock. The purpose of the successor rule requires that the reorganization be treated as a deconsolidation event with respect to P's interest in X. Since X is not a member of the P group, if the basis in the X stock was not reduced to FMV, the P group could recognize and deduct the loss attributable to the T stock. Therefore, P must reduce its basis in the X stock from $300 to $75, the FMV at the time of the exchange.

Since T is a member of the X group and, therefore, is subject to the LDR and related rules, no reduction in the T stock basis is necessary. Therefore, X's basis in the T stock remains at $300. This result is the correct result with respect to the T stock. However, under the earlier proposed LDR regulations, the result was a reduction in the basis of the T stock to FMV. The IRS listened to the commentators and corrected this result in the final regulations.

Antistuffing rule

Regs. Sec. 1.1502-20(e)(1) contains a general antiavoidance rule aimed at situations in which a taxpayer acts with a view to avoid the effect of the LDR or deconsolidation rule. A more specific antiavoidance rule is contained in Regs. Sec. 1.1502-20(e)(2) (the antistuffing rule). The antistuffing rule is invoked if (1) a post-Mar. 8, 1990 transfer of any asset is followed within two years by a disposition or deconsolidation of stock and (2) the transfer is with a view to avoiding the LDR or deconsolidation rule, or the recognition of the unrealized gain following the transfer. If the antistuffing rule applies, the basis of the stock is reduced immediately before the disposition or deconsolidation to cause the disallowance of loss, the reduction of basis or the recognition of gain, otherwise avoided by reason of the transfer.

Antibreakup rule

The March 1990 preamble to the temporary regulations announced that the IRS was considering adopting some form of an antibreakup rule to prevent the sheltering of postacquisition gain when a target corporation is disposed of within two years after its stock is acquired by a group. (12) The final regulations do not include an antibreakup rule. Further, the IRS, does not plan to adopt such a rule in the absence of evidence of significant abuse. Importantly, the Service will not consider the preamble statement in the March 1990 temporary regulations as notice for any future antibreakup rule.

Investment Adjustments and E&P

Any deduction that is disallowed, or any amount by which basis is reduced, under Regs. Sec. 1.1502-20 is treated as a loss arising and absorbed by the member in the tax year in which the disallowance or basis reduction occurs for purposes of determining investment adjustments and E&P. (13) The deconsolidation of a share is treated as a disposition of the share for timing of the appropriate investment adjustments and E&P.

Reattribution

If a member disposes of a subsidiary's stock and the member's loss would be disallowed under the LDR, Regs. Sec. 1.1502-20(g) allows the common parent to irrevocably elect to reattribute to itself any portion of the NOL and net capital loss carryovers attributable to the subsidiary (and any lower tier subsidiary) without regard to the order in which they were incurred. (14) The amount that may be reattributed cannot exceed the amount disallowed under Regs. Sec. 1.1502-20(a) after taking into account the ELF.

The amount of loss disallowed and losses that may be reattributed are determined immediately after the disposition, but the reattribution is deemed to be made immediately before the disposition.

Reattribution limitations

The IRS felt that taxpayers could circumvent the General Utilities repeal if losses borne by creditors of a subsidiary (rather than by the group) could be reattributed to the common parent. (15) To prevent the reattribution of losses that are borne by creditors, Regs. Sec. 1.1502-20(g)(2) limits the losses that may be reattributed from an insolvent subsidiary. If such subsidiary, or any higher tier subsidiary, is insolvent within the meaning of Sec. 108(d)(3) at the time of disposition, "losses of the subsidiary may be reattributed only to the extent they exceed the sum of the separate insolvencies of any subsidiaries (taking into account only the subsidiary and its higher tier subsidiaries) that are insolvent." Solely for determining investment adjustments and E&P losses that are reattributed are treated as absorbed by the subsidiary (or lower tier subsidiary) immediately before the disposition. (16)

Since Regs. Sec. 1.1502-20(g)(1) provides that the common parent succeeds to the reattributed losses as if the transaction was described in Sec. 381(a), no carryback is allowed to prior tax years of the parent under Sec. 381(b)(3). In addition, any SRLY taint is retained as such in the hands of the common parent. (17)

Election format

The election must be made in a separate statement containing the information set out in Regs. Sec. 1.1502-20(g)(5). The statement must be signed by the common parent, and by each subsidiary with respect to which loss is reattributed that does not remain a member of the common parent's group immediately following the disposition. (18)

Effective Date

The new rules generally apply with respect to dispositions and deconsolidations on or after Feb. 1, 1991. (19) Regs. Sec. 1.1502-20(h)(2) allows the group to make an irrevocable election to apply the final regulations to all its members with respect to all dispositions and deconsolidations on or after Nov. 19, 1990. The election is made by including the information required by Regs. Sec. 1.1502-20(h)(2)(ii) in a separate statement, signed by the common parent, and filed with the group's income tax return for the tax year of the first disposition or deconsolidation to which the election applies. If the due date of the applicable return (including extensions) was before Apr. 16, 1991, the statement may be filed with an amended return for the year of the disposition or deconsolidation. (20)

Planning

There are certain planning opportunities that should be considered in dealing with the final regulations.

* Asset sales and Sec. 338(h)(10) elections

the final regulations do not prevent members from recognizing losses on the sale of assets other than the stock of a member. In addition, a stock sale followed by a joint Sec. 338(h)(10) election should be reviewed.

* Stuff and wait

The final regulations allow the group to shelter unrealized postacquisition appreciation by the loss inherent in the stock of a subsidiary. If the consolidated group is willing to wait two years after the transfer of an appreciated asset to a subsidiary (to avoid the antistuffing rule), it could shelter the built-in gain when the stock of the subsidiary is sold.

In addition, a parent consolidation with a built-in loss in a subsidiary's stock might consider having the subsidiary incur debt to acquire depreciable assets. The parent's high basis in its subsidiary's stock could possibly be reduced by the future depreciation deductions. (21)

* Acquisitions outside the group

The group might consider acquisition of future subsidiaries so that they are not included in the group (i.e., fail the 80% vote or value test of Sec. 1504(a)). A subsequent disposition of such stock at a loss would not be subject to the LDR.

* Debt vs. stock

Since the final regulations do not apply to the disposition of a subsidiary's debt, consolidated groups should consider capitalizing new subsidiaries with debt as well as stock. Converting stock into debt in existing subsidiaries should also be reviewed. The debt versus equity rules must be reviewed to make sure that the debt will be respected as debt and not treated as equity.

* Minimizing the ELF cap

The ELF sets the maximum amount of loss that would be disallowed. Therefore, the group should attempt to minimize the ELF by manipulating the three legs of the formula. For example, losses from EGADs cannot reduce gains from EGADs. However, such losses can be netted against other PINAs. Losses from EGADs should be timed (if possible) to occur when the group has other PINAs.

In addition, since negative adjustments in one year may not be netted against positive adjustments from another, a group should attempt to match positive and negative adjustments to the extent possible.

The duplicated loss portion of the ELF cannot be minimized through the use of the reattribution of losses to the common parent under Regs. Sec. 1.1502-20(g). If the duplicated loss rests in an asset of the subsidiary, consideration should be given to selling the asset before disposition of the stock.

Conclusion

The final LDR regulations respond to some of the taxpayer concerns voiced in comment letters and testimony. However, the move by the IRS to "rough justice" regulations meant its turning a deaf ear to most comments and suggestions, resulting in an end product that, in many instances, will disallow true economic losses. Only time will tell whether such results will withstand the inevitable court challenge.

(1) See Mason and Choate, "The Loss Disallowance Rule," 21 The Tax Adviser 469 (Aug. 1990).

(2) See Mason and Choate, "The Loss Disallowance Rule--Round Two," 22 The Tax Adviser 207 (Apr. 1991).

(3) Regs. Sec. 1.1502-20(a)(1).

(4) Adapted from Regs. Sec. 1.1502-20(a)(5), Example 6.

(5) Adapted from Regs. Sec. 1.1502-20(a)(5), Example 5.

(6) TD 8364 (9/13/91).

(7) Regs. Sec. 1.1502-20(c)(2)(ii).

(8) See Letter to Treasury, by Gilbert Bloom, reprinted in Tax Analysts Daily Tax Highlights and Documents, (10/31/91), at 1000.

(9) Regs. Sec. 1.150-20(c)(2)(vi).

(10) Regs. Sec. 1.1502-20(c)(3).

(11) Adapted from Regs. Sec. 1.1502-20(d)(2), Example 1.

(12) TD 8294 (3/9/90).

(13) Regs. Sec. 1.1502-20(f).

(14) The election also includes separate return limitation year (SLRY) losses and allows the common parent to specify the year and the character of the loss that is subject to reattribution. See Regs. Sec. 1.1502-20(g)(4), Example 3, and (g)(5).

(15) Preamble, TD 8364.

(16) Regs. Sec. 1.1502-20(g)(3).

(17) Regs. Sec. 1.1502-20(g)(4), Example 3. See also the preamble.

(18) Regs. Sec. 1.1502-20(g)(5)(i). Since the parent may not control the subsidiary after a disposition, the subsidiary's obligation to comply should be covered in the acquisition documents.

(19) Regs. SEc. 1.1502-20(h)(i).

(20) Regs. Sec. 1.1502-20(h)(2)(ii).

(21) The rules of SEc. 1503(e) must be factored into the viability of this planning idea.