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Planning ideas under the new consolidated sec. 382 regulations.

Corporations filing a consolidated Federal income tax return may be affected by some temporary regulations published back in June 1996. The centerpiece of these regulations (Temp. Regs. Secs. 1.1502-90T through -99T) governs how Sec. 382 applies to consolidated groups, including such issues as (1) how to determine when a group undergoes an ownership change, as well as the amount of a consolidated Sec.382 limitation once a group does undergo an ownership change, (2) measuring a group's net unrealized built-in gain or loss at the time of the ownership change, (3) how to apply Sec. 382 when a stand-alone corporation or subgroup of corporations is acquired by a consolidated group and (4) how Sec. 382 applies when a member or subgroup is sold by a group already subject to a Sec. 382 limitation.

The new consolidated Sec.382 regulations complement another set of temporary regulations that revised the separate return limitation year SRLY) rules (chiefly, Temp. Regs. Secs. 1.1502-15T, -21T and -22T). There are some important similarities between the consolidated Sec.382 rules and the new SRLY rules (such as the test for built-in gains and losses, as well as the recognition period), but also some important differences (such as the composition of subgroups). Temp. Regs. Secs. 1.382-5T and -8T made certain conforming amendments to the separate return Sec. 382 regulations. All three sets of regulations are generally effective in tax years beginning on or after 1996, although each set has its own transition rules.

The Traps

When a group undergoes an ownership change, a consolidated Sec. 382 limitation arises, restricting the amount of post-change income that can be offset by pre-change net operating losses (NOLS) and built-in losses. The first trap arises when a member later leaves the group. Unless the selling group formally elects to apportion some of its consolidated Sec. 382 limit, the departing member will be completely unable to absorb its share of any pre-change losses subject to that limitation.

The second trap arises when a group acquires several corporations at the same time. If those target corporations bear a Sec. 1504(a) parent-subsidiary relationship, they could qualify as a subgroup. The acquisition typically triggers an ownership change for the subgroup (with the Sec. 382 limit on pre-acquisition losses determined according to the value of the subgroup parent's stock). As long as the subgroup remains intact, the acquiring group can absorb carryforwards up to the subgroup Sec. 382 limitation. (Of course, other rules may limit the allowable loss, such as SRLY, Sec. 384, etc.) If the subgroup relationship is broken, the acquiring group's parent must allocate some of the subgroup Sec. 382 limitation to the "departing" member, even if all the members remain part of the acquiring group.

It is safe to say that few observers would have predicted that an internal restructuring could reduce the Sec. 382 limit on a loss. This result is quite clear under the temporary regulations, however; see Temp. Regs. Sec. 1.1502-95T(d)(2), Example (3).

The Trick

Both of the previous examples involved the apportionment of a Sec. 382 limitation. Temp. Regs. Sec. 1. 1502-95T(e) sets forth the required contents of an apportionment election, who must sign, and how and when the election must be filed. Rather than simply apportioning a fixed-dollar amount, it may be possible in both of the apportionment situations described above to agree to a formula upfront, allowing subsequent events to determine how much of the Sec. 382 limit is actually applied each year thereafter.

The IRS has not yet indicated whether it approves of this approach. The preamble to the consolidated Sec. 382 temporary regulations is silent on this point. In a similar context, however, the Service has expressly prohibited groups from using formulas when waiving loss carryovers for purposes of the investment adjustment rules, while simultaneously soliciting comments on the use of formulas.


This discussion is intended only to spotlight some important ideas regarding the apportionment of a consolidated Sec. 382 limitation. Many other issues must be considered in planning for the acquisition or disposition of subsidiaries. For example, the selling group must consider the loss disallowance rules (including the advisability of making a reattribution election under Regs. Sec. 1.1502-20(g)), while the buying group must consider the application of the SR-LY and Sec. 382 rules, as well as the advisability of waiving any loss carryforwards under the investment adjustment rules (Regs. Sec. 1.1502-32(b)(4)).

These new consolidated Sec.382 and SRLY regulations provide numerous planning opportunities for almost every consolidated group. In particular, the possibility of formulary apportionment could substantially reduce tax liability by enhancing a group's ability to absorb Sec. 382-limited attributes.
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Article Details
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Author:Friedel, David
Publication:The Tax Adviser
Date:Apr 1, 1997
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