Final_TD9048

Federal Register / Vol. 68, No. 50 / Friday, March 14, 2003 / Rules and Regulations
of the Federal Aviation Regulations (14 CFR
21.197 and 21.199) to operate the airplane to
a location where the requirements of this AD
can be accomplished.
Incorporation by Reference
(e) The actions shall be done in accordance
with Dornier Service Bulletin SB–328–31–
390, dated September 6, 2001; and Dornier
Service Bulletin SB–328J–31–118, dated
September 6, 2001; as applicable. This
incorporation by reference was approved by
the Director of the Federal Register in
accordance with 5 U.S.C. 552(a) and 1 CFR
part 51. Copies may be obtained from
Fairchild Dornier, Dornier Luftfahrt GmbH,
P.O. Box 1103, D–82230 Wessling, Germany.
Copies may be inspected at the FAA,
Transport Airplane Directorate, 1601 Lind
Avenue, SW., Renton, Washington; or at the
Office of the Federal Register, 800 North
Capitol Street, NW., suite 700, Washington,
DC.
Note 3: The subject of this AD is addressed
in German airworthiness directives 2002–238
and 2002–239, both dated August 22, 2002.
Effective Date
(f) This amendment becomes effective on
April 18, 2003.
Issued in Renton, Washington, on March 5,
2003.
Ali Bahrami,
Acting Manager, Transport Airplane
Directorate, Aircraft Certification Service.
[FR Doc. 03–5860 Filed 3–13–03; 8:45 am]
BILLING CODE 4910–13–P

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 9048]
RIN 1545–BB95

Guidance Under Section 1502;
Suspension of Losses on Certain
Stock Dispositions
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final and temporary
regulations.
SUMMARY: This document contains final
and temporary regulations under section
1502 that redetermine the basis of stock
of a subsidiary member of a
consolidated group immediately prior to
certain transfers of such stock and
certain deconsolidations of a subsidiary
member. In addition, this document
contains temporary regulations that
suspend certain losses recognized on
the disposition of stock of a subsidiary
member. The regulations apply to
corporations filing consolidated returns.
The text of the temporary regulations

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serves as the text of the proposed
regulations set forth in the Proposed
Rules section of this issue of the Federal
Register.
DATES: Effective date: These regulations
are effective March 14, 2003.
Applicability Date: For dates of
applicability, see §§ 1.1502–21T(h)(7),
1.1502–32T(h)(6), and 1.1502–35T(j).
FOR FURTHER INFORMATION CONTACT:
Aimee K. Meacham, (202) 622–7530
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
These regulations are being issued
without prior notice and public
procedure pursuant to the
Administrative Procedure Act (5 U.S.C.
553). For this reason, the collection of
information contained in these
temporary regulations has been
reviewed and, pending receipt and
evaluation of public comments,
approved by the Office of Management
and Budget (OMB) under 44 U.S.C. 3507
and assigned control number 1545–
1828. Responses to this collection of
information are voluntary.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information
displays a valid OMB control number.
For further information concerning
this collection of information, and
where to submit comments on the
collection of information and the
accuracy of the estimated burden, and
suggestions for reducing this burden,
please refer to the cross-referencing
notice of proposed rulemaking
published in the Proposed Rules section
of this issue of the Federal Register.
Books or records relating to a
collection of information must be
retained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information
are confidential, as required by 26
U.S.C. 6103.
Background and Explanation of
Provisions
On October 18, 2002, the IRS and
Treasury Department issued a notice of
proposed rulemaking (REG–131478–02,
2002–47 I.R.B. 892 [67 FR 65060]) that
included proposed regulations reflecting
the principle set forth in Notice 2002–
18 (2002–12 I.R.B. 644) that a
consolidated group should not be able
to obtain more than one tax benefit from
a single economic loss. The rules in the
proposed regulations were intended to
address at least two situations in which
a group may obtain more than one tax

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benefit from a single economic loss. In
one situation, a group first recognizes
and absorbs a subsidiary member’s
inside loss (e.g., a loss carryforward, a
deferred deduction, or a loss inherent in
an asset) and a member of the group
later recognizes a loss on the subsidiary
member’s stock that is duplicative of the
previously recognized and absorbed
inside loss. In the second situation, a
member of the group recognizes a loss
on a non-deconsolidating disposition of
the subsidiary member’s stock, the stock
loss duplicates an unrecognized or
unabsorbed loss of the subsidiary
member, and the group later recognizes
and absorbs the subsidiary’s inside loss.
The proposed regulations consist
primarily of two rules: a basis
redetermination rule and a loss
suspension rule. The proposed
regulations also include a basis
reduction rule that addresses certain
cases of loss duplication that are not
within the scope of the loss suspension
rule, such as losses arising from the
worthlessness of subsidiary member
stock.
No public hearing regarding the
proposed regulations was requested or
held. Comments, however, were
submitted.
The IRS and Treasury Department
have studied, and are continuing to
study, the comments received. The IRS
and Treasury Department believe that
the comments received, as well as the
issues more generally raised by Notice
2002–18 and the proposed regulations,
require significant further consideration.
Accordingly, the IRS and Treasury
Department will continue to study these
issues and, as more fully set forth
below, request comments on, and
suggestions for possible alternative
approaches to, the issues addressed in
the regulations. Nonetheless, the IRS
and Treasury Department believe that
immediately effective rules are
necessary to address the duplication of
loss within a consolidated group so as
to clearly reflect the income tax liability
of the group. Accordingly, the IRS and
Treasury Department are promulgating
the proposed regulations as temporary
regulations in this Treasury decision.
The temporary regulations are
substantially similar to the proposed
regulations, but reflect certain revisions
that were made based on comments
received. The following sections
describe these revisions.
A. Application of Basis Redetermination
Rule Upon Deconsolidation of a
Subsidiary Member
The proposed regulations require the
reallocation of the basis of subsidiary
member stock held by members of the

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group upon certain dispositions and
deconsolidations of subsidiary member
stock. The rule applies differently when
the subsidiary remains a member of the
group from when the subsidiary does
not remain a member of the group. The
IRS and Treasury Department received
several technical comments regarding
the basis redetermination rule
applicable when a subsidiary member
leaves the group. The temporary
regulations revise that rule in a manner
that addresses these comments and
clarifies its application.
In particular, under the temporary
regulations, subject to certain
exceptions, the rule applies upon a
deconsolidation of a subsidiary member
when any stock of the subsidiary
member owned by a member of the
group has a basis in excess of value. The
revised rule generally applies regardless
of whether the subsidiary member is
deconsolidated as a result of a transfer
of a gain share, a transfer of a loss share,
or a stock issuance because, in each
case, the effect is the same, i.e., each
share of subsidiary member stock
owned by group members is
deconsolidated. Further, in computing
the basis that is reallocated, the revised
rule takes into account all loss on
members’ shares of the subsidiary’s
stock and all prior negative basis
adjustments to members’ shares of the
subsidiary stock that are not loss shares.
The revised rule reflects that, unless all
deconsolidations and all deconsolidated
shares are treated similarly,
opportunities to duplicate losses will
continue to exist.
B. Application of Loss Suspension Rule
Under the loss suspension rule, if,
after application of the basis
redetermination rule, a member of a
consolidated group recognizes a loss on
the disposition of stock of a subsidiary
member of the same group, and the
subsidiary member is a member of the
same group immediately after the
disposition, then the selling member’s
stock loss is suspended to the extent of
the duplicated loss with respect to such
stock. Because a suspended stock loss
reflects the subsidiary member’s
unrecognized or unabsorbed deductions
and losses, under the proposed
regulations, the suspended loss is
reduced, with the result that it will not
later be allowed, as the subsidiary
member’s deductions and losses are
taken into account (i.e., absorbed) in
determining the group’s consolidated
taxable income (or loss). One comment
received regarding the proposed
regulations was that, in certain cases,
the loss suspension rule could disallow
a tax loss for an economic loss. This

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result was not intended. Accordingly,
these temporary regulations include two
changes from the proposed regulations
that are intended to prevent this result.
First, the temporary regulations
provide that the amount by which a
suspended stock loss is reduced cannot
exceed the excess of the amount of the
subsidiary member’s items of loss and
deduction over the amount of such
items that are taken into account in
determining the basis adjustments made
to stock of the subsidiary member (or
any successor) owned by members of
the group under the investment
adjustment rules.
Second, they also include a provision
stating that the loss suspension rule is
not to be applied in a manner that
permanently disallows an otherwise
allowable deduction for an economic
loss. Whether the loss suspension rule
has resulted in such a disallowance is
determined on the earlier of the date of
the deconsolidation of the subsidiary (or
any successor) the stock of which gave
rise to the suspended stock loss and the
date on which the stock of such
subsidiary is determined to be
worthless. When it is determined that
the application of the loss suspension
rule has permanently disallowed a
deduction for an economic loss, the
taxpayer will be permitted to treat the
suspended stock loss as restored to the
extent of such disallowance. The
restoration of the suspended loss is
deemed to occur immediately prior to
the deconsolidation of the subsidiary or
the determination of worthlessness.
C. Basis Reduction Rule for Worthless
Stock and Stock of a Subsidiary With
No Separate Return Year
The proposed regulations include a
basis reduction rule intended to prevent
the duplication of unabsorbed losses
generated by a subsidiary member and
loss with respect to the stock of that
member if either (i) the stock of the
subsidiary member becomes worthless
or (ii) the stock of the subsidiary is
disposed of and, immediately after the
disposition, the subsidiary is no longer
a member of the group and does not
have a separate return year. Under this
rule, immediately before a
determination of worthlessness, or
immediately before a disposition of a
subsidiary that is not followed by a
separate return year, the basis of the
subsidiary’s stock is reduced by the
amount of any loss carryforwards that
would be treated as attributable to the
subsidiary under the principles of
§ 1.1502–21. This provision was
included because neither situation was
subject to the loss suspension rule and,
without such a rule, taxpayers might

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take the position that a group is entitled
to a subsidiary member’s loss
carryforwards even after the group has
enjoyed full basis recovery through a
worthless stock or other deduction.
Such a result, however, would be in
contravention of the principles of Notice
2002–18.
The proposed provision raised
questions about the operation of the
existing rules governing this situation.
Commentators contended that the basis
reduction rule could deny the group a
single tax loss for its economic loss. As
stated above, the proposed regulations,
including the basis reduction rule, were
not intended to disallow a tax loss for
an economic loss, but rather were
intended only to ensure that a group
obtains no more than a single tax loss
for an economic loss.
The temporary regulations address
this situation by providing that the
unabsorbed losses generated by the
subsidiary do not remain available to
the group. Specifically, the temporary
regulations provide that, if stock of a
subsidiary member is treated as
worthless under section 165 (taking into
account the provisions of § 1.1502–
80(c)), or if a member of a group
disposes of subsidiary member stock
and on the following day the subsidiary
is not a member of the group and does
not have a separate return year, then all
losses treated as attributable to the
subsidiary member under the principles
of § 1.1502–21, after computing the
taxable income of the group, the
subsidiary member, or a group of which
the subsidiary member was previously a
member for the taxable year that
includes the determination of
worthlessness or the disposition and
any prior taxable year, shall be treated
as expired, but not as absorbed by the
group, as of the beginning of the group’s
taxable year that follows the taxable
year that includes the determination of
worthlessness or the disposition. Under
this rule, the stock loss (or reduced
stock gain), unreduced by any loss
carryforwards attributable to the
subsidiary member, is allowed.
Moreover, because the losses are treated
as expired, there is no possibility of a
later, duplicative use of the loss
carryforwards. This approach is
consistent with the nature of a loss
realized upon such a determination or
disposition, i.e., a loss on an investment
in the subsidiary member.
Because the provisions of the
proposed regulations raised questions
about the operation of the existing rules,
the temporary regulations include a
special election for determinations of
worthlessness and dispositions that
occurred on or after March 7, 2002, and

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Federal Register / Vol. 68, No. 50 / Friday, March 14, 2003 / Rules and Regulations
before March 14, 2003. In such cases, as
an alternative to the treatment described
above, the common parent of the group
may make an irrevocable election to
reattribute to itself all or a portion of the
losses attributable to the subsidiary
member under the principles of
§ 1.1502–21. For purposes of applying
the investment adjustment rules to stock
of the subsidiary member owned by the
group, the reattributed losses are treated
as absorbed by the group immediately
prior to the allowance of any loss or
inclusion of any income or gain with
respect to the determination of
worthlessness or the disposition. The
common parent, however, is treated as
succeeding to the subsidiary’s losses in
a transaction described in section 381.
The IRS and Treasury Department
request comments regarding whether a
subsidiary member the stock of which is
determined to be worthless (under the
standards of § 1.1502–80(c)) should be
treated as a new corporation for
purposes of the Internal Revenue Code
as of the date of the determination of
worthlessness. In addition, the IRS and
Treasury Department request comments
regarding the desirability of further
clarification or changes regarding the
standards that govern determinations of
worthlessness and the deductibility of
losses (or the inclusion of excess loss
accounts) when stock of a subsidiary
member is determined to be worthless.
D. Deferral and Elimination of Gain
One comment noted that the basis
redetermination rule of the proposed
regulations could be used to shift the
location of gain and loss within a
consolidated group and even to
eliminate gain in a manner that is
unintended and contrary to the
purposes underlying section 337(d). The
following example illustrates this
concern.
P, the common parent of a
consolidated group, owns all of the
stock of S1 and S2. The S2 stock has a
basis of $400 and a value of $500. S1
owns 50% of the stock of the S3
common stock with a basis of $150 and
value equal to such amount. S2 owns
the remaining 50% of the S3 common
stock with a basis of $100 and a value
of $200 and one share of S3 preferred
stock with a basis of $10 and a value of
$9. P intends to sell all of its S2 stock
to an unrelated buyer that does not want
to acquire S3. P, therefore, engages in
the following steps to dispose of S2
without recognizing a substantial
portion of the built-in gain in S2. First,
P causes a recapitalization of S3 in
which S2’s S3 common stock is
exchanged for new S3 preferred shares.
P then sells all of its S2 stock. Although

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the sale does not deconsolidate S3
(because all the S3 common stock is still
held by S1), it does deconsolidate the S3
preferred shares held by S2, including
the one share with a built-in loss.
Accordingly, under the proposed
regulations, the bases of all shares of S3
stock must be redetermined
immediately before P’s sale of S2. Under
the basis redetermination rule, the total
basis of S3 stock held by members of the
P group is allocated first to the S3
preferred shares, up to their value of
$209, and then to the remaining shares
of S3 common held by S1. S2’s
aggregate basis in the S3 preferred stock
is increased from $110 to $209. This
increase tiers up and increases P’s basis
in the S2 stock from $400 to $499.
Accordingly, P will recognize only $1 of
gain on the sale of its S2 stock.
Afterwards, P can cause S3 to redeem its
preferred stock for $209. S2 will
recognize no gain or loss from the
redemption. Although the unrecognized
gain is preserved in P’s basis in S1, and
S1’s basis in S3, the group can defer or
avoid recognizing that gain.
In this case, there is no significant
duplication of loss. Moreover, the steps
were structured with a view to avoiding
the recognition of gain on a disposition
of stock. The IRS and Treasury
Department do not intend that the basis
redetermination rule be applied to defer
or eliminate gain in such cases. The IRS
and Treasury Department considered
adopting a mechanical test to prevent
the application of the basis
redetermination rule in such cases.
They concluded that such a rule would
not provide the flexibility necessary to
obtain an appropriate balancing of the
concerns underlying this regulation and
those underlying section 337(d).
Therefore, these temporary regulations
include an anti-abuse rule that provides
that, if a transaction is structured with
a view to, and has the effect of, deferring
or avoiding the recognition of gain on a
disposition of stock by invoking
application of the basis redetermination
rule, and the stock loss attributable to
the transferred shares or the duplicated
loss of the subsidiary member that is
reflected in subsidiary member stock
owned by members of the group is not
significant, the basis redetermination
and loss suspension rules will not
apply.
E. Request for Comments
As described above, the IRS and
Treasury Department are continuing to
study the comments received regarding
the proposed regulations. In addition,
the IRS and Treasury Department are
considering alternative regimes that

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12289

would prevent the duplication of loss
within the group.
In particular, the IRS and Treasury
Department are studying a comment
that suggested applying the principles of
section 704(c) to allocate negative
investment adjustments arising from
loss items at the subsidiary member
level where there have been transfers of
loss property to the subsidiary member.
The comment asserts that this approach
would address the case where the
recognition and absorption of the inside
loss precedes the recognition of the
stock loss. The IRS and Treasury
Department are concerned that this
alternative approach addresses only
duplicative losses that arise as a result
of contributions of loss property, not
duplicative losses that arise as a result
of a loss incurred by a subsidiary
member. In addition, the IRS and
Treasury Department are concerned that
the application of the principles of
section 704(c) may be complex,
especially in cases where there have
been issuances of subsidiary member
stock at different times. The IRS and
Treasury Department request comments
regarding how the principles of section
704(c) should be applied in the
consolidated return context to prevent
the duplication of loss.
The IRS and Treasury Department are
also studying a suggestion that the type
of transaction in which the stock loss is
recognized prior to the absorption of the
inside loss be addressed by a rule that
allows the stock loss but limits the use
of the subsidiary member’s items of loss
and deduction if there have been
contributions of loss property with
respect to the subsidiary member and
there is any loss duplication at the
subsidiary member level at the time the
stock loss is recognized. That rule
would not permit the use of the
subsidiary’s items of loss and deduction
that are duplicative of the stock loss to
offset income of another member of the
group, but would permit such items to
offset income of the subsidiary.
This rule effectively would permit the
acceleration of stock loss. The IRS and
Treasury Department request comments
regarding whether permitting such
acceleration would clearly reflect the
income of the group.
In addition, because this rule would
permit the subsidiary’s losses to offset
its items of income and gain, it would
not prevent the duplication of losses
within the group to that extent. The IRS
and Treasury Department request
comments regarding whether this
duplication is appropriate given that the
benefits associated with the subsidiary
and its shareholder being members of
the group (e.g., positive basis

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adjustments to the shareholder
member’s stock of the subsidiary
member that reflect income of the
subsidiary member and the group’s
ability to use the loss recognized by
another member to offset income of the
subsidiary member of the group) have
been enjoyed by the group.
Finally, this rule would address only
cases of duplication where there have
been contributions of loss property. As
described above, the IRS and Treasury
Department are concerned that
contributions of loss property are not
the only types of transactions in which
a group can obtain more than one tax
benefit from a single economic loss.
The IRS and Treasury Department are
considering a variation of this suggested
rule to address the situation where the
stock loss is recognized prior to the
absorption of the inside loss. This
variation would allow the stock loss
when recognized, but would disallow
the inside losses of the subsidiary to the
extent that such losses reflect losses that
were duplicate losses at the time of the
recognition of the stock loss. Such
losses may be attributable to contributed
property or losses that arose in the
subsidiary member. The IRS and
Treasury Department request comments
regarding this variation.
Finally, the IRS and Treasury
Department continue to request
comments regarding any other
approaches that could be implemented
to address the duplication of loss within
a consolidated group.
Special Analyses
In Rite Aid Corp. v. United States, 255
F.3d 1357 (Fed. Cir. 2001), the United
States Court of Appeals for the Federal
Circuit held that the duplicated loss
component of § 1.1502–20 was an
invalid exercise of regulatory authority.
In response to the Rite Aid decision, the
IRS and Treasury Department issued

Notice 2002–11 (2002–7 I.R.B. 526),
stating that the interests of sound tax
administration would not be served by
the continued litigation of the validity
of the duplicated loss component of
§ 1.1502–20. Notice 2002–11 also
announced that because of the
interrelationship in the operation of all
of the loss disallowance factors, new
rules governing loss disallowance on
sales of subsidiary stock by members of
consolidated groups should be
implemented.
In Notice 2002–18 (2002–12 I.R.B.
644), the IRS and Treasury Department
stated that regulations would be
promulgated that would defer or
otherwise limit the utilization of a loss
on stock (or another asset that reflects
the basis of stock) in transactions that
facilitate the group’s utilization of a
single economic loss more than once.
Notice 2002–18 further stated that such
regulations would apply to dispositions
occurring on or after March 7, 2002.
These temporary regulations implement
Notice 2002–18 and are necessary to
provide taxpayers with immediate
guidance regarding stock basis and
allowable loss in connection with
transfers of subsidiary member stock.
Accordingly, good cause is found for
dispensing with a delayed effective date
pursuant to 5 U.S.C. 553(d)(3).
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required. It
is hereby certified that these regulations
do not have a significant impact on a
substantial number of small entities.
This certification is based on the fact
that these regulations will primarily
affect affiliated groups of corporations,
which tend to be larger businesses.
Moreover, the number of taxpayers
affected and the average burden are
minimal. Therefore, a Regulatory

Affected section

Remove

§ 1.267(f)–1(k) ......................

§ 1.597–4(g)(2)(v), second
sentence.

§§ 1.337(d)–1, §§ 1.337(d)–2, 1.1502–13(f)(6), and
1.1502–20.
Loss disallowance. For purposes of § 1.1502–20, FFA
and the amount described in § 1.597–4(g)(3) are
treated as an extraordinary gain disposition within the
meaning of § 1.1502–20(c)(2)(i) and a Taxable Transfer is treated as an applicable asset acquisition under
section 1060(c) within the meaning of § 1.1502–
20(c)(2)(i)(A)(4).
(See §§ 1.337(d)–1 and 1.1502–20 for potential limitations on the group’s worthless stock deduction).

§ 1.1502–11(b)(3)(ii) Example (c), third sentence.

See also § 1.1502–20 for rules applicable to losses
from the sale of stock of subsidiaries.

§ 1.597–3(e) .........................

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Flexibility Analysis is not required.
Pursuant to section 7805(f) of the
Internal Revenue Code, these
regulations will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment
on their impact on small businesses.
Drafting Information
The principle author of these
regulations is Aimee K. Meacham of the
Office of Chief Counsel (Corporate).
However, other personnel from the IRS
and Treasury Department participated
in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping
requirements.
Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by adding entries
in numerical order to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1502–21T(b)(1) and (b)(3)(v) also
issued under 26 U.S.C. 1502. * * *
Section 1.1502–32T(a)(2), (b)(3)(iii)(C),
(b)(3)(iii)(D), and (b)(4)(vi) also issued under
26 U.S.C. 1502. * * *
Section 1.1502–35T also issued under 26
U.S.C. 1502. * * *

Par. 2. In the list below, for each
section indicated in the left column,
remove the wording indicated in the
middle column, and add the wording
indicated in the right column.
Add

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§§ 1.337(d)–2T, 1.1502–13(f)(6), and 1.1502–35T.
[Reserved].

(See §§ 1.337(d)–2T and 1.1502–35T(f) for rules applicable when a member of a consolidated group is entitled to a worthless stock deduction with respect to
stock of another member of the group.)
See also §§ 1.337(d)–2T and 1.1502–35T for rules relating to basis adjustments and allowance of stock
loss on dispositions of stock of a subsidiary member.

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12291

Affected section

Remove

Add

§ 1.1502–12(r) ......................

For rulings relating to loss disallowance or basis reduction on the disposition or deconsolidation of stock of
a subsidiary, see §§ 1.337(d)–1, 1.337(d)–2 and
1.1502–20.
See also § 1.1502–20(b) (additional stock basis reductions applicable to certain deconsolidations).
(e.g., under § 1.1502–20 or section 267) ........................

See §§ 1.337(d)–2T and 1.1502–35T(f) for rules relating
to basis adjustments and allowance of stock loss on
dispositions of stock of a subsidiary member.

§ 1.1502–13(f)(7), Example
1(e), sixth sentence.
§ 1.1502–15(b)(2)(iii), first
sentence.
§ 1.1502–21(b)(2)(i), third
sentence.
§ 1.1502–32(b)(3)(iii)(B),
third sentence.
§ 1.1502–32(b)(5)(ii), Example 2(b), last sentence.
§ 1.1502–32(e)(2), Example
4(a), fourth sentence.
§ 1.1502–80(c), last sentence.
§ 1.1502–91(h)(2), first sentence.

For rules permitting the reattribution of losses of a subsidiary to the common parent when loss is disallowed
on the disposition of subsidiary stock, see § 1.1502–
20(g).
§ 1.1502–20(b), or § 1.1502–20(g) ..................................
See also § 1.1502–20(b) (possible stock basis reduction
on the deconsolidation of S).
(Section § 1.1502–20(b) does not reduce P’s basis in
the S stock as a result of S’s deconsolidation).
See § 1.1502–11(c) and 1.1502–20 for additional rules
relating to stock loss.
(unless disallowed under § 1.1502–20 or otherwise) .....

Par. 3. Section 1.1502–21 is amended
by:
1. Revising paragraph (b)(1).
2. Adding paragraphs (b)(3)(v) and
(h)(7).
The revisions and addition read as
follows:
§ 1.1502–21

Net operating losses.

*

*
*
*
*
(b) * * *
(1) [Reserved]. For further guidance,
see § 1.1502–21T(b)(1).
*
*
*
*
*
(3) * * *
(v) [Reserved]. For further guidance,
see § 1.1502–21T(b)(3)(v).
*
*
*
*
*
(h) * * *
(7) [Reserved]. For further guidance,
see § 1.1502–21T(h)(7).
Par. 4. Section 1.1502–21T is revised
to read as follows:
§ 1.1502–21T
(temporary).

Net operating losses

(a) [Reserved]. For further guidance,
see § 1.1502–21(a).
(b) [Reserved]. For further guidance,
see § 1.1502–21(b).
(1) Carryovers and carrybacks
generally. The net operating loss
carryovers and carrybacks to a taxable
year are determined under the
principles of section 172 and this
section. Thus, losses permitted to be
absorbed in a consolidated return year
generally are absorbed in the order of
the taxable years in which they arose,
and losses carried from taxable years
ending on the same date, and which are
available to offset consolidated taxable
income for the year, generally are
absorbed on a pro rata basis. Additional
rules under the Internal Revenue Code

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(e.g., under §§ 1.337(d)–2T, 1.1502–35T, or section
267)

§ 1.1502–35T(b) or (f)(2)

See § 1.1502–11(c) and 1.1502–35T for additional rules
relating to stock loss.
(unless disallowed under § 1.337(d)–2T, 1.1502–35T, or
otherwise)

or regulations also apply. See, e.g.,
section 382(l)(2)(B) (if losses are carried
from the same taxable year, losses
subject to limitation under section 382
are absorbed before losses that are not
subject to limitation under section 382).
See Example 2 of paragraph (c)(1)(iii) of
this section for an illustration of pro rata
absorption of losses subject to a SRLY
limitation. See paragraph (b)(3)(v) of
this section regarding the treatment of
any loss that is treated as expired under
§ 1.1502–35T(f)(1).
(b)(2) through (b)(3)(iv) [Reserved].
For further guidance, see § 1.1502–
21(b)(2) through (b)(3)(iv).
(b)(3)(v) Losses treated as expired
under § 1.1502–35T(f)(1). No loss treated
as expired by § 1.1502–35T(f)(1) may be
carried over to any consolidated return
year of the group.
(c) through (h)(6) [Reserved]. For
further guidance, see § 1.1502–21(c)
through (h)(6).
(h)(7) Losses treated as expired under
§ 1.1502–35T(f)(1). Paragraph (b)(3)(v) of
this section is effective for losses treated
as expired under § 1.1502–35T(f)(1) on
and after March 7, 2002, and no later
than March 11. 2006.
Par. 5. Section 1.1502–32 is amended
by:
1. Revising paragraph (a)(2).
2. Adding paragraphs (b)(3)(iii)(C),
(b)(3)(iii)(D), (b)(4)(vi), and (h)(6).
The revision and additions read as
follows:
§ 1.1502–32

Investment adjustments.

*

*
*
*
*
(a)(2) [Reserved]. For further
guidance, see § 1.1502–32T(a)(2).

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(b)(3)(iii)(C) and (D) [Reserved]. For
further guidance, see § 1.1502–
32T(b)(3)(iii)(C) and (D).
*
*
*
*
*
(b)(4)(vi) [Reserved]. For further
guidance, see § 1.1502–32T(b)(4)(vi).
*
*
*
*
*
(h)(6) [Reserved]. For further
guidance, see § 1.1502–32T(h)(6).
Par. 6. Section 1.1502–32T is revised
to read as follows:
§ 1.1502–32T
(temporary).

Investment adjustments

(a) and (a)(1) [Reserved]. For further
guidance, see § 1.1502–32(a) and (a)(1).
(a)(2) Application of other rules of
law. The rules of this section are in
addition to other rules of law. See, e.g.,
section 358 (basis determinations for
distributees), section 1016 (adjustments
to basis), § 1.1502–11(b) (limitations on
the use of losses), § 1.1502–19
(treatment of excess loss accounts),
§ 1.1502–31 (basis after a group
structure change), and § 1.1502–35T
(additional rules relating to stock loss,
including losses attributable to
worthlessness and certain dispositions
not followed by a separate return year).
P’s basis in S’s stock must not be
adjusted under this section and other
rules of law in a manner that has the
effect of duplicating an adjustment. For
example, if pursuant to § 1.1502–
35T(c)(3) and paragraph (b)(3)(iii)(C) of
this section the basis in stock is reduced
to take into account a loss suspended
under § 1.1502–35T(c)(1), such basis
shall not be further reduced to take into
account such loss, or a portion of such
loss, if any, that is later allowed
pursuant to § 1.1502–35T(c)(5). See also
paragraph (h)(5) of this section for basis

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reductions applicable to certain former
subsidiaries.
(b) through (b)(3)(iii)(B) [Reserved].
For further guidance, see § 1.1502–32(b)
through (b)(3)(iii)(B).
(b)(3)(iii)(C) Loss suspended under
§ 1.1502–35T(c). Any loss suspended
pursuant to § 1.1502–35T(c) is treated as
a noncapital, nondeductible expense
incurred during the taxable year that
includes the date of the disposition to
which such section applies. See
§ 1.1502–35T(c)(3). Consequently, the
basis of a higher-tier member’s stock of
P is reduced by the suspended loss in
the year it is suspended.
(D) Loss disallowed under § 1.1502–
35T(g)(3)(iii). Any loss or deduction the
use of which is disallowed pursuant to
§ 1.1502–35T(g)(3)(iii) (other than a loss
or deduction described in § 1.1502–
35T(g)(3)(i)(B)(11)), and with respect to
which no waiver described in paragraph
(b)(4) of this section is filed, is treated
as a noncapital, nondeductible expense
incurred during the taxable year that
such loss would otherwise be absorbed.
See § 1.1502–35T(g)(3)(iv).
(b)(4) through (b)(4)(v) [Reserved]. For
further guidance, see § 1.1502–32(b)(4)
through (b)(4)(v).
(b)(4)(vi) Special rules in the case of
certain transactions subject to § 1.1502–
35T. If a member of a consolidated
group transfers stock of a subsidiary
member and such stock has a basis that
exceeds its value immediately before
such transfer or a subsidiary member is
deconsolidated and any stock of such
subsidiary member owned by members
of the group immediately before such
deconsolidation has a basis that exceeds
its value, all members of the group are
subject to the provisions of § 1.1502–
35T(b), which generally require a
redetermination of members’ basis in all
shares of subsidiary stock. In addition,
if stock of a subsidiary member is
treated as worthless under section 165
(taking into account the provisions of
§ 1.1502–80(c)), or if a member of a
group disposes of subsidiary member
stock and on the following day the
subsidiary is not a member of the group
and does not have a separate return
year, and the common parent makes an
election under § 1.1502–35T(f)(2) to
reattribute to itself the losses treated as
attributable to such subsidiary member,
§ 1.1502–35T(f)(2) requires a reduction
of members’ basis in shares of
subsidiary stock.
(c) through (h)(5)(ii) [Reserved]. For
further guidance, see § 1.1502–32(c)
through (h)(5)(ii).
(h)(6) Loss suspended under § 1.1502–
35T(c) or disallowed under § 1.1502–
35T(g)(3)(iii). Paragraphs (a)(2),
(b)(3)(iii)(C), (b)(3)(iii)(D) and (b)(4)(vi)

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of this section are effective on and after
March 7, 2002, and expire on March 11,
2006.
Par. 7. Section 1.1502–35T is added
to read as follows:
§ 1.1502–35T Transfers of subsidiary
member stock and deconsolidations of
subsidiary members (temporary).

(a) Purpose. The purpose of this
section is to prevent a group from
obtaining more than one tax benefit
from a single economic loss. The
provisions of this section shall be
construed in a manner consistent with
that purpose and in a manner that
reasonably carries out that purpose.
(b) Redetermination of basis on
certain nondeconsolidating transfers of
subsidiary member stock and on certain
deconsolidations of subsidiary
members—(1) Redetermination of basis
on certain nondeconsolidating transfers
of subsidiary member stock. Except as
provided in paragraph (b)(3)(i) of this
section, if, immediately after a transfer
of stock of a subsidiary member that has
a basis that exceeds its value, the
subsidiary member remains a member of
the group, then the basis in each share
of subsidiary member stock owned by
each member of the group shall be
redetermined in accordance with the
provisions of this paragraph (b)(1)
immediately before such transfer. All of
the members’ bases in the shares of
subsidiary member stock immediately
before such transfer shall be aggregated.
Such aggregated basis shall be allocated
first to the shares of the subsidiary
member’s preferred stock that are
owned by the members of the group
immediately before such transfer, in
proportion to, but not in excess of, the
value of those shares at such time. After
allocation of the aggregated basis to all
shares of the preferred stock of the
subsidiary member pursuant to the
preceding sentence, any remaining basis
shall be allocated among all common
shares of subsidiary member stock held
by members of the group immediately
before the transfer, in proportion to the
value of such shares at such time.
(2) Redetermination of basis on
certain deconsolidations of subsidiary
members.—(i) Allocation of reallocable
basis amount. Except as provided in
paragraph (b)(3)(ii) of this section, if,
immediately before a deconsolidation of
a subsidiary member, any share of stock
of such subsidiary owned by a member
of the group has a basis that exceeds its
value, then the basis in each share of the
subsidiary member’s stock owned by
each member of the group shall be
redetermined in accordance with the
provisions of this paragraph (b)(2)
immediately before such

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deconsolidation. The basis in each share
of the subsidiary member’s stock held
by members of the group immediately
before the deconsolidation that has a
basis in excess of value at such time
shall be reduced, but not below such
share’s value, in a manner that, to the
greatest extent possible, causes the ratio
of the basis to the value of each such
share to be the same; provided,
however, that the aggregate amount of
such reduction shall not exceed the
reallocable basis amount (as computed
pursuant to paragraph (b)(2)(ii) of this
section). Then, to the extent of the
reallocable basis amount, the basis of
each share of the preferred stock of the
subsidiary member that are held by
members of the group immediately
before the deconsolidation shall be
increased, but not above such share’s
value, in a manner that, to the greatest
extent possible, causes the ratio of the
basis to the value of each such share to
be the same. Then, to the extent that the
reallocable basis amount does not
increase the basis of shares of preferred
stock of the subsidiary member
pursuant to the third sentence of this
paragraph (b)(2)(i), such amount shall
increase the basis of all common shares
of the subsidiary member’s stock held
by members of the group immediately
before the deconsolidation in a manner
that, to the greatest extent possible,
causes the ratio of the basis to the value
of each such share to be the same.
(ii) Calculation of reallocable basis
amount. The reallocable basis amount
shall equal the lesser of—
(A) The aggregate of all amounts by
which, immediately before the
deconsolidation, the basis exceeds the
value of a share of subsidiary member
stock owned by any member of the
group at such time; and
(B) The total of the subsidiary
member’s (and any predecessor’s) items
of deduction and loss, and the
subsidiary member’s (and any
predecessor’s) allocable share of items
of deduction and loss of all lower-tier
subsidiary members, that were taken
into account in computing the
adjustment under § 1.1502–32 to the
bases of shares of stock of the subsidiary
member (and any predecessor) held by
members of the group immediately
before the deconsolidation, other than
shares that have bases in excess of value
immediately before the deconsolidation.
(3) Exceptions to application of
redetermination rules. (i) Paragraph
(b)(1) of this section shall not apply to
a transfer of subsidiary member stock
if—
(A) During the taxable year of such
transfer, in one or more fully taxable
transactions, the members of the group

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Federal Register / Vol. 68, No. 50 / Friday, March 14, 2003 / Rules and Regulations
dispose of all of the shares of the
subsidiary member stock that they own
immediately before the transfer, other
than the shares the transfer of which
would otherwise trigger the application
of paragraph (b)(1) of this section, to a
person or persons that are not members
of the group;
(B) During the taxable year of such
transfer, the members of the group are
allowed a worthless stock loss under
section 165(g) (taking into account the
provisions of § 1.1502–80(c)) with
respect to all of the shares of subsidiary
member stock that they own
immediately before the transfer, other
than the shares the transfer of which
would otherwise trigger the application
of paragraph (b)(1) of this section; or
(C) Such transfer is to a member of the
group and section 332 (provided the
stock is transferred to an 80-percent
distributee), section 351, or section 361
applies to such transfer.
(ii) Paragraph (b)(2) of this section
shall not apply to a deconsolidation of
a subsidiary member if—
(A) During the taxable year of such
deconsolidation, in one or more fully
taxable transactions, the members of the
group dispose of all of the shares of the
subsidiary member stock that they own
immediately before the deconsolidation
to a person or persons that are not
members of the group;
(B) Such deconsolidation results from
a fully taxable disposition, to a person
or persons that are not members of the
group, of some of the shares of the
subsidiary member, and, during the
taxable year of such deconsolidation,
the members of the group are allowed a
worthless stock loss under section
165(g) with respect to all of the shares
of subsidiary member stock that they
own immediately after the
deconsolidation; or
(C) The deconsolidation of the
subsidiary member results from the
deconsolidation of a higher-tier
subsidiary member and, immediately
after the deconsolidation of the
subsidiary member, none of the stock of
the subsidiary member is owned by a
group member.
(4) Special rule for lower-tier
subsidiaries. If, immediately after a
transfer of subsidiary member stock or
a deconsolidation of a subsidiary
member, a lower-tier subsidiary member
some of the stock of which is owned by
the subsidiary member is a member of
the group, then, for purposes of
applying paragraph (b) of this section,
the subsidiary member shall be treated
as having transferred its stock of the
lower-tier subsidiary member. This
principle shall apply to stock of

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subsidiary members that are owned by
such lower-tier subsidiary member.
(5) Stock basis adjustments for highertier stock. The basis adjustments
required under this paragraph (b) result
in basis adjustments to higher-tier
member stock. The adjustments are
applied in the order of the tiers, from
the lowest to highest. For example, if a
common parent owns stock of a
subsidiary member that owns stock of a
lower-tier subsidiary member and the
subsidiary member recognizes a loss on
the disposition of a portion of its shares
of the lower-tier subsidiary member
stock, the common parent must adjust
its basis in its subsidiary member stock
under the principles of § 1.1502–32 to
reflect the adjustments that the
subsidiary member must make to its
basis in its stock of the lower-tier
subsidiary member.
(6) Ordering rules. (i) The rules of this
paragraph (b) apply after the rules of
§ 1.1502–32 are applied.
(ii) The rules of this paragraph (b)
apply before the rules of § 1.337(d)–2T
and paragraph (c) of this section are
applied.
(iii) Paragraph (b) of this section (and
any resulting basis adjustments to
higher-tier member stock made pursuant
to paragraph (b)(5) of this section)
applies to redetermine the basis of stock
of a lower-tier subsidiary member before
paragraph (b) of this section applies to
a higher-tier member of such lower-tier
subsidiary member.
(c) Loss suspension—(1) General rule.
Any loss recognized by a member of a
consolidated group with respect to the
disposition of a share of subsidiary
member stock shall be suspended to the
extent of the duplicated loss with
respect to such share of stock if,
immediately after the disposition, the
subsidiary is a member of the
consolidated group of which it was a
member immediately prior to the
disposition (or any successor group).
(2) Special rule for lower-tier
subsidiaries. This paragraph (c)(2)
applies if neither paragraph (c)(1) nor (f)
of this section applies to a member’s
disposition of a share of stock of a
subsidiary member (the departing
member), a loss is recognized on the
disposition of such share, and the
departing member owns stock of one or
more other subsidiary members (a
remaining member) that is a member of
such group immediately after the
disposition. In that case, such loss shall
be suspended to the extent the
duplicated loss with respect to the
departing member stock disposed of is
attributable to the remaining member or
members.

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12293

(3) Treatment of suspended loss. For
purposes of the rules of § 1.1502–32,
any loss suspended pursuant to
paragraph (c)(1) or (c)(2) of this section
is treated as a noncapital, nondeductible
expense of the member that disposes of
subsidiary member stock, incurred
during the taxable year that includes the
date of the disposition of stock to which
paragraph (c)(1) or (c)(2) of this section
applies. See § 1.1502–32T(b)(3)(iii)(C).
Consequently, the basis of a higher-tier
member’s stock of the member that
disposes of subsidiary member stock is
reduced by the suspended loss in the
year it is suspended.
(4) Reduction of suspended loss—(i)
General rule. The amount of any loss
suspended pursuant to paragraphs (c)(1)
and (c)(2) of this section shall be
reduced, but not below zero, by the
subsidiary member’s (and any
successor’s) items of deduction and loss,
and the subsidiary member’s (and any
successor’s) allocable share of items of
deduction and loss of all lower-tier
subsidiary members, that are allocable
to the period beginning on the date of
the disposition that gave rise to the
suspended loss and ending on the day
before the first date on which the
subsidiary member (or any successor) is
not a member of the group of which it
was a member immediately prior to the
disposition (or any successor group),
and that are taken into account in
determining consolidated taxable
income (or loss) of such group for any
taxable year that includes any date on
or after the date of the disposition and
before the first date on which the
subsidiary member (or any successor) is
not a member of such group; provided,
however, that such reduction shall not
exceed the excess of the amount of such
items over the amount of such items
that are taken into account in
determining the basis adjustments made
under § 1.1502–32 to stock of the
subsidiary member (or any successor)
owned by members of the group. The
preceding sentence shall not apply to
items of deduction and loss to the extent
that the group can establish that all or
a portion of such items was not reflected
in the computation of the duplicated
loss with respect to the subsidiary
member on the date of the disposition
of stock that gave rise to the suspended
loss.
(ii) Operating rules—(A) Year in
which deduction or loss is taken into
account. For purposes of paragraph
(c)(4)(i) of this section, a subsidiary
member’s (or any successor’s)
deductions and losses are treated as
taken into account when and to the
extent they are absorbed by the
subsidiary member (or any successor) or

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any other member. To the extent that
the subsidiary member’s (or any
successor’s) deduction or loss is
absorbed in the year it arises or is
carried forward and absorbed in a
subsequent year (e.g., under section 172,
465, or 1212), the deduction is treated
as taken into account in the year in
which it is absorbed. To the extent that
a subsidiary member’s (or any
successor’s) deduction or loss is carried
back and absorbed in a prior year
(whether consolidated or separate), the
deduction or loss is treated as taken into
account in the year in which it arises
and not in the year in which it is
absorbed.
(B) Determination of items that are
allocable to the post-disposition, predeconsolidation period. For purposes of
paragraph (c)(4)(i) of this section, the
determination of whether a subsidiary
member’s (or any successor’s) items of
deduction and loss and allocable share
of items of deduction and loss of all
lower-tier subsidiary members are
allocable to the period beginning on the
date of the disposition of subsidiary
stock that gave rise to the suspended
loss and ending on the day before the
first date on which the subsidiary
member (or any successor) is not a
member of the consolidated group of
which it was a member immediately
prior to the disposition (or any
successor group) is determined pursuant
to the rules of § 1.1502–76(b)(2), without
regard to § 1.1502–76(b)(2)(ii)(D), as if
the subsidiary member ceased to be a
member of the group at the end of the
day before the disposition and filed
separate returns for the period
beginning on the date of the disposition
and ending on the day before the first
date on which it is not a member of
such group.
(5) Allowable loss—(i) General rule.
To the extent not reduced under
paragraph (c)(4) of this section, any loss
suspended pursuant to paragraph (c)(1)
or (c)(2) of this section shall be allowed,
to the extent otherwise allowable under
applicable provisions of the Internal
Revenue Code and regulations
thereunder, on a return filed by the
group of which the subsidiary was a
member on the date of the disposition
of subsidiary stock that gave rise to the
suspended loss (or any successor group)
for the taxable year that includes the
day before the first date on which the
subsidiary (or any successor) is not a
member of such group or the date the
group is allowed a worthless stock loss
under section 165(g) (taking into
account the provisions of § 1.1502–
80(c)) with respect to all of the
subsidiary member stock owned by
members.

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(ii) No tiering up of certain
adjustments. No adjustments shall be
made to a member’s basis of stock of a
subsidiary member (or any successor)
for a suspended loss that is taken into
account under paragraph (c)(5)(i) of this
section. See § 1.1502–32T(a)(2).
(iii) Statement of allowed loss.
Paragraph (c)(5)(i) of this section applies
only if the separate statement required
under this paragraph (c)(5)(iii) is filed
with, or as part of, the taxpayer’s return
for the year in which the loss is
allowable. The statement must be
entitled ‘‘ALLOWED LOSS UNDER
§ 1.1502–35T(c)(5)’’ and must contain
the name and employer identification
number of the subsidiary the stock of
which gave rise to the loss.
(6) Special rule for dispositions of
certain carryover basis assets. If—
(i) A member of a group recognizes a
loss on the disposition of an asset other
than stock of a subsidiary member;
(ii) Such member’s basis in the asset
disposed of was determined, directly or
indirectly, in whole or in part, by
reference to the basis of stock of a
subsidiary member and, at the time of
the determination of the member’s basis
in the asset disposed of, there was a
duplicated loss with respect to such
stock of the subsidiary member; and
(iii) Immediately after the disposition,
the subsidiary member is a member of
such group, then such loss shall be
suspended pursuant to the principles of
paragraphs (c)(1) and (c)(2) of this
section to the extent of the duplicated
loss with respect to such stock at the
time of the determination of basis of the
asset disposed of. Principles similar to
those set forth in paragraphs (c)(3),
(c)(4), and (c)(5) of this section shall
apply to a loss suspended pursuant to
this paragraph (c)(6).
(7) Coordination with loss deferral,
loss disallowance, and other rules—(i)
In general. Loss recognized on the
disposition of subsidiary member stock
or another asset is subject to
redetermination, deferral, or
disallowance under other applicable
provisions of the Internal Revenue Code
and regulations thereunder, including
sections 267(f) and 482. Paragraphs
(c)(1), (c)(2), and (c)(6) of this section do
not apply to a loss that is disallowed
under any other provision. If loss is
deferred under any other provision,
paragraphs (c)(1), (c)(2), and (c)(6) of
this section apply when the loss would
otherwise be taken into account under
such other provision. However, if an
overriding event described in paragraph
(c)(7)(ii) of this section occurs before the
deferred loss is taken into account,
paragraphs (c)(1), (c)(2), and (c)(6) of
this section apply to the loss

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immediately before the event occurs,
even though the loss may not be taken
into account until a later time.
(ii) Overriding events. For purposes of
paragraph (c)(7)(i) of this section, the
following are overriding events—
(A) The stock ceases to be owned by
a member of the consolidated group;
(B) The stock is canceled or redeemed
(regardless of whether it is retired or
held as treasury stock); or
(C) The stock is treated as disposed of
under § 1.1502–19(c)(1)(ii)(B) or
(c)(1)(iii).
(8) Application. This paragraph (c)
shall not be applied in a manner that
permanently disallows a deduction for
an economic loss, provided that such
deduction is otherwise allowable. If the
application of any provision of this
paragraph (c) results in such a
disallowance, proper adjustment may be
made to prevent such a disallowance.
Whether a provision of this paragraph
(c) has resulted in such a disallowance
is determined on the date on which the
subsidiary (or any successor) the
disposition of the stock of which gave
rise to a suspended stock loss is not a
member of the group or the date the
group is allowed a worthless stock loss
under section 165(g) (taking into
account the provisions of § 1.1502–
80(c)) with respect to all of such
subsidiary member stock owned by
members. Proper adjustment in such
cases shall be made by restoring the
suspended stock loss immediately
before the subsidiary ceases to be a
member of the group or the group is
allowed a worthless stock loss under
section 165(g) (taking into account the
provisions of § 1.1502–80(c)) with
respect to all of such subsidiary member
stock owned by members, to the extent
that its reduction pursuant to paragraph
(c)(4) of this section had the result of
permanently disallowing a deduction
for an economic loss.
(9) Ordering rule. The rules of this
paragraph (c) apply after the rules of
paragraph (b) of this section and
§ 1.337(d)–2T are applied.
(d) Definitions—(1) Disposition.
Disposition means any event in which
gain or loss is recognized, in whole or
in part.
(2) Deconsolidation. Deconsolidation
means any event that causes a
subsidiary member to no longer be a
member of the consolidated group.
(3) Value. Value means fair market
value.
(4) Duplicated loss—(i) In general.
Duplicated loss is determined
immediately after a disposition and
equals the excess, if any, of—
(A) The sum of—

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(1) The aggregate adjusted basis of the
subsidiary member’s assets other than
any stock that subsidiary member owns
in another subsidiary member; and
(2) Any losses attributable to the
subsidiary member and carried to the
subsidiary member’s first taxable year
following the disposition; and
(3) Any deductions of the subsidiary
member that have been recognized but
are deferred under a provision of the
Internal Revenue Code (such as
deductions deferred under section 469);
over
(B) The sum of—
(1) The value of the subsidiary
member’s stock; and
(2) Any liabilities of the subsidiary
member that have been taken account
for tax purposes.
(ii) Special rules. (A) The amounts
determined under paragraph (d)(4)(i)
(other than amounts described in
paragraph (d)(4)(i)(B)(1)) of this section
with respect to a subsidiary member
include its allocable share of
corresponding amounts with respect to
all lower-tier subsidiary members. If 80
percent or more in value of the stock of
a subsidiary member is acquired by
purchase in a single transaction (or in a
series of related transactions during any
12-month period), the value of the
subsidiary member’s stock may not
exceed the purchase price of the stock
divided by the percentage of the stock
(by value) so purchased. For this
purpose, stock is acquired by purchase
if the transferee is not related to the
transferor within the meaning of
sections 267(b) and 707(b)(1), using the
language ‘‘’10 percent’’’ instead of ‘‘’50
percent’’’ each place that it appears, and
the transferee’s basis in the stock is
determined wholly by reference to the
consideration paid for such stock.
(B) The amounts determined under
paragraph (d)(4)(i) of this section are not
applied more than once to suspend a
loss under this section.
(5) Predecessor and Successor. A
predecessor is a transferor of assets to a
transferee (the successor) in a
transaction—
(i) To which section 381(a) applies;
(ii) In which substantially all of the
assets of the transferor are transferred to
members in a complete liquidation;
(iii) In which the successor’s basis in
assets is determined (directly or
indirectly, in whole or in part) by
reference to the transferor’s basis in
such assets, but the transferee is a
successor only with respect to the assets
the basis of which is so determined; or
(iv) Which is an intercompany
transaction, but only with respect to
assets that are being accounted for by

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the transferor in a prior intercompany
transaction.
(6) Successor group. A surviving
group is treated as a successor group of
a consolidated group (the terminating
group) that ceases to exist as a result
of—
(i) The acquisition by a member of
another consolidated group of either the
assets of the common parent of the
terminating group in a reorganization
described in section 381(a)(2), or the
stock of the common parent of the
terminating group; or
(ii) The application of the principles
of § 1.1502–75(d)(2) or (3).
(7) Preferred stock, common stock.
Preferred stock and common stock shall
have the meanings set forth in § 1.1502–
32(d)(2) and (3), respectively.
(8) Higher-tier. A subsidiary member
is higher-tier with respect to a member
if or to the extent investment basis
adjustments under § 1.1502–32 with
respect to the stock of the latter member
would affect investment basis
adjustments with respect to the stock of
the former member.
(9) Lower-tier. A subsidiary member is
lower-tier with respect to a member if or
to the extent investment basis
adjustments under § 1.1502–32 with
respect to the stock of the former
member would affect investment basis
adjustments with respect to the stock of
the latter member.
(e) Examples. For purposes of the
examples in this section, all groups file
consolidated returns on a calendar-year
basis, the facts set forth the only
corporate activity, all transactions are
between unrelated persons unless
otherwise specified, and tax liabilities
are disregarded. The principles of
paragraphs (a) through (d) of this section
are illustrated by the following
examples:
Example 1. Nondeconsolidating sale of
preferred stock of lower-tier subsidiary
member. (i) Facts. P owns 100 percent of the
common stock of each of S1 and S2. S1 and
S2 each have only one class of stock
outstanding. P’s basis in the stock of S1 is
$100 and the value of such stock is $130. P’s
basis in the stock of S2 is $120 and the value
of such stock is $90. P, S1, and S2 are all
members of the P group. S1 and S2 form S3.
In Year 1, in transfers to which section 351
applies, S1 contributes $100 to S3 in
exchange for all of the common stock of S3
and S2 contributes an asset with a basis of
$50 and a value of $20 to S3 in exchange for
all of the preferred stock of S3. S3 becomes
a member of the P group. In Year 3, in a
transaction that is not part of the plan that
includes the contributions to S3, S2 sells the
preferred stock of S3 for $20. Immediately
after the sale, S3 is a member of the P group.
(ii) Application of basis redetermination
rule. Because S2’s basis in the preferred stock
of S3 exceeds its value immediately prior to

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the sale and S3 is a member of the P group
immediately after the sale, all of the P group
members’ bases in the stock of S3 is
redetermined pursuant to paragraph (b)(1) of
this section. Of the group members’ total
basis of $150 in the S3 stock, $20 is allocated
to the preferred stock, the fair market value
of the preferred stock on the date of the sale,
and $130 is allocated to the common stock.
S2’s sale of the preferred stock results in the
recognition of $0 of gain/loss. Pursuant to
paragraph (b)(5) of this section, the
redetermination of S1’s and S2’s bases in the
stock of S3 results in adjustments to P’s basis
in the stock of S1 and S2. In particular, P’s
basis in the stock of S1 is increased by $30
to $130 and its basis in the stock of S2 is
decreased by $30 to $90.
Example 2. Deconsolidating sale of
common stock. (i) Facts. In Year 1, in a
transfer to which section 351 applies, P
contributes Asset A with a basis of $900 and
a value of $200 to S in exchange for one share
of S common stock (CS1). In Years 2 and 3,
in successive but unrelated transfers to
which section 351 applies, P transfers $200
to S in exchange for one share of S common
stock (CS2), Asset B with a basis of $300 and
a value of $200 in exchange for one share of
S common stock (CS3), and Asset C with a
basis of $1000 and a value of $200 in
exchange for one share of S common stock
(CS4). In Year 4, S sells Asset A for $200,
recognizing $700 of loss that is used to offset
income of P recognized during Year 4. As a
result of the sale of Asset A, the basis of each
of P’s four shares of S common stock is
reduced by $175. Therefore, the basis of CS1
is $725. The basis of CS2 is $25. The basis
of CS3 is $125, and the basis of CS4 is $825.
In Year 5 in a transaction that is not part of
a plan that includes the Year 1 contribution,
P sells CS4 for $200. Immediately after the
sale of CS4, S is not a member of the P group.
(ii) Application of basis redetermination
rule. Because P’s basis in each of CS1 and
CS4 exceeds its value immediately prior to
the deconsolidation of S, P’s basis in its
shares of S common stock is redetermined
pursuant to paragraph (b)(2) of this section.
Pursuant to paragraph (b)(2)(ii) of this
section, the reallocable basis amount is $350
(the lesser of $1150, the gross loss inherent
in the stock of S owned by P immediately
before the sale, and $350, the aggregate
amount of S’s items of deduction and loss
that were previously taken into account in
the computation of the adjustment to the
basis of the stock of S that P did not hold at
a loss immediately before the
deconsolidation). Pursuant to paragraph
(b)(2)(i) of this section, first, P’s basis in CS1
is reduced from $725 to $600 and P’s basis
in CS4 is reduced from $825 to $600. Then,
the reallocable basis amount increases P’s
basis in CS2 from $25 to $250 and P’s basis
in CS3 from $125 to $250. P recognizes $400
of loss on the sale of CS4. The loss
suspension rule does not apply because S is
no longer a member of the P group. Thus, the
loss is allowable at that time.
Example 3. Nondeconsolidating sale of
common stock. (i) Facts. In Year 1, P forms
S with a contribution of $80 in exchange for
80 shares of the common stock of S, which
at that time represents all of the outstanding

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stock of S. S becomes a member of the P
group. In Year 2, P contributes Asset A with
a basis of $50 and a value of $20 in exchange
for 20 shares of the common stock of S in a
transfer to which section 351 applies. In Year
3, in a transaction that is not part of the plan
that includes the Year 2 contribution, P sells
the 20 shares of the common stock of S that
it acquired in Year 2 for $20. Immediately
after the Year 3 stock sale, S is a member of
the P group. At the time of the Year 3 stock
sale, S has $80 and Asset A. In Year 4, S sells
Asset A , the basis and value of which have
not changed since its contribution to S. On
the sale of Asset A for $20, S recognizes a
$30 loss. The P group cannot establish that
all or a portion of the $30 loss was not
reflected in the calculation of the duplicated
loss of S on the date of the Year 3 stock sale.
The $30 loss is used on the P group return
to offset income of P. In Year 5, P sells its
remaining S common stock for $80.
(ii) Application of basis redetermination
and loss suspension rules. Because P’s basis
in the common stock sold exceeds its value
immediately prior to the sale and S is a
member of the P group immediately after the
sale, P’s basis in all of the stock of S is
redetermined pursuant to paragraph (b)(1) of
this section. Of P’s total basis of $130 in the
S common stock, a proportionate amount is
allocated to each of the 100 shares of S
common stock. Accordingly, $26 is allocated
to the common stock of S that is sold and
$104 is allocated to the common stock of S
that is retained. On P’s sale of the 20 shares
of the common stock of S for $20, P
recognizes a loss of $6. Because the sale of
the 20 shares of common stock of S does not
result in the deconsolidation of S, under
paragraph (c)(1) of this section, that loss is
suspended to the extent of the duplicated
loss with respect to the shares sold. The
duplicated loss with respect to the shares
sold is $6. Therefore, the entire $6 loss is
suspended.
(iii) Effect of subsequent asset sale on stock
basis. Of the $30 loss recognized on the sale
of Asset A, $24 is taken into account in
determining the basis adjustments made
under § 1.1502–32 to the stock of S owned by
P. Accordingly, P’s basis in its S stock is
reduced by $24 from $104 to $80.
(iv) Effect of subsequent asset sale on
suspended loss. Because P cannot establish
that all or a portion of the loss recognized on
the sale of Asset A was not reflected in the
calculation of the duplicated loss of S on the
date of the Year 3 stock sale and such loss
is allocable to the period beginning on the
date of the Year 3 disposition of the S stock
and ending on the day before the first date
on which S is not a member of the P group
and is taken into account in determining
consolidated taxable income (or loss) of the
P group for a taxable year that includes a date
on or after the date of the Year 3 disposition
and before the first date on which S is not
a member of the P group, such asset loss
reduces the suspended loss pursuant to
paragraph (c)(4) of this section. The amount
of such reduction, however, cannot exceed
$6, the excess of the amount of such loss,
$30, over the amount of such loss that is
taken into account in determining the basis
adjustment made to the stock of S owned by

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P, $24. Therefore, the suspended loss is
reduced to zero.
(v) Effect of subsequent stock sale. P
recognizes $0 gain/loss on the Year 5 sale of
its remaining S common stock. No amount of
suspended loss remains to be allowed under
paragraph (c)(5) of this section.
Example 4. Nondeconsolidating sale of
common stock of lower-tier subsidiary. (i)
Facts. In Year 1, P forms S1 with a
contribution of $200 in exchange for all of
the common stock of S1, which represents all
of the outstanding stock of S1. In the same
year, S1 forms S2 with a contribution of $80
in exchange for 80 shares of the common
stock of S2, which at that time represents all
of the outstanding stock of S2. S1 and S2
become members of the P group. In the same
year, S2 purchases Asset A for $80. In Year
2, S1 contributes Asset B with a basis of $50
and a value of $20 in exchange for 20 shares
of the common stock of S2 in a transfer to
which section 351 applies. In Year 3, S1 sells
the 20 shares of the common stock of S2 that
it acquired in Year 2 for $20. Immediately
after the Year 3 stock sale, S2 is a member
of the P group. At the time of the Year 3 stock
sale, the bases and values of Asset A and
Asset B are unchanged. In Year 4, S2 sells
Asset B for $45, recognizing a $5 loss. The
P group cannot establish that all or a portion
of the $5 loss was not reflected in the
calculation of the duplicated loss of S2 on
the date of the Year 3 stock sale. The $5 loss
is used on the P group return to offset income
of P. In Year 5, S1 sells its remaining S2
common stock for $100.
(ii) Application of basis redetermination
and loss suspension rules. Because S1’s basis
in the S2 common stock sold exceeds its
value immediately prior to the sale and S2
is a member of the P group immediately after
the sale, S1’s basis in all of the stock of S2
is redetermined pursuant to paragraph (b)(1)
of this section. Of S1’s total basis of $130 in
the S2 common stock, a proportionate
amount is allocated to each of the 100 shares
of S2 common stock. Accordingly, a total of
$26 is allocated to the common stock of S2
that is sold and $104 is allocated to the
common stock of S2 that is retained. On S1’s
sale of the 20 shares of the common stock of
S2 for $20, S1 recognizes a loss of $6.
Because the sale of the 20 shares of common
stock of S2 does not result in the
deconsolidation of S2, under paragraph (c)(1)
of this section, that loss is suspended to the
extent of the duplicated loss with respect to
the shares sold. The duplicated loss with
respect to the shares sold is $6. Therefore, the
entire $6 loss is suspended. Pursuant to
paragraph (c)(3) of this section and § 1.1502–
32T(b)(3)(iii)(C), the suspended loss is treated
as a noncapital, nondeductible expense
incurred by S1 during the tax year that
includes the date of the disposition of stock
to which paragraph (c)(1) of this section
applies. Accordingly, P’s basis in its S1 stock
is reduced from $200 to $194.
(iii) Effect of subsequent asset sale on stock
basis. Of the $5 loss recognized on the sale
of Asset B, $4 is taken into account in
determining the basis adjustments made
under § 1.1502–32 to the stock of S2 owned
by S1. Accordingly, S1’s basis in its S2 stock
is reduced by $4 from $104 to $100 and P’s

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basis in its S1 stock is reduced by $4 from
$194 to $190.
(iv) Effect of subsequent asset sale on
suspended loss. Because P cannot establish
that all or a portion of the loss recognized on
the sale of Asset B was not reflected in the
calculation of the duplicated loss of S2 on
the date of the Year 3 stock sale and such loss
is allocable to the period beginning on the
date of the Year 3 disposition of the S2 stock
and ending on the day before the first date
on which S2 is not a member of the P group
and is taken into account in determining
consolidated taxable income (or loss) of the
P group for a taxable year that includes a date
on or after the date of the Year 3 disposition
and before the first date on which S2 is not
a member of the P group, such asset loss
reduces the suspended loss pursuant to
paragraph (c)(4) of this section. The amount
of such reduction, however, cannot exceed
$1, the excess of the amount of such loss, $5,
over the amount of such loss that is taken
into account in determining the basis
adjustment made to the stock of S2 owned by
members of the P group, $4. Therefore, the
suspended loss is reduced to $5.
(v) Effect of subsequent stock sale. In Year
5, when S1 sells its remaining S2 stock for
$100, it recognizes $0 gain/loss. Pursuant to
paragraph (c)(5) of this section, the remaining
$5 of the suspended loss is allowed on the
P group’s return for Year 5 when S1 sells its
remaining S2 stock.
Example 5. Deconsolidating sale of
subsidiary member owning stock of another
subsidiary member that remains in group. (i)
Facts. In Year 1, P forms S1 with a
contribution of Asset A with a basis of $50
and a value of $20 in exchange for 100 shares
of common stock of S1 in a transfer to which
section 351 applies. Also in Year 1, P and S1
form S2. P contributes $80 to S2 in exchange
for 80 shares of common stock of S2. S1
contributes Asset A to S2 in exchange for 20
shares of common stock of S2 in a transfer
to which section 351 applies. In Year 3, in
a transaction that is not part of a plan that
includes the Year 1 contributions, P sells its
100 shares of S1 common stock for $20.
Immediately after the Year 3 stock sale, S2
is a member of the P group. At the time of
the Year 3 stock sale, S1 owns 20 shares of
common stock of S2, and S2 has $80 and
Asset A. In Year 4, S2 sells Asset A, the basis
and value of which have not changed since
its contribution to S2. On the sale of Asset
A for $20, S2 recognizes a $30 loss. That $30
loss is used on the P group return to offset
income of P. In Year 5, P sells its S2 common
stock for $80.
(ii) Application of basis redetermination
and loss suspension rules. Pursuant to
paragraph (b)(4) of this section, because
immediately before P’s transfer of S1 stock S1
owns stock of S2 (another subsidiary member
of the same group) that has a basis that
exceeds its value, paragraph (b) of this
section applies as if S1 had transferred its
stock of S2. Because S2 is a member of the
group immediately after the transfer of the S1
stock, the group member’s basis in the S2
stock is redetermined pursuant to paragraph
(b)(1) of this section immediately prior to the
sale of the S1 stock. Of the group members’
total basis of $130 in the S2 stock, $26 is

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allocated to S1’s 20 shares of S2 common
stock and $104 is allocated to P’s 80 shares
of S2 common stock. Pursuant to paragraph
(b)(5) of this section, the redetermination of
S1’s basis in the stock of S2 results in an
adjustment to P’s basis in the stock of S1. In
particular, P’s basis in the stock of S1 is
decreased by $24 to $26. On P’s sale of its
100 shares of S1 common stock for $20, P
recognizes a loss of $6. Because S1 is not a
member of the P group immediately after P’s
sale of the S1 stock, paragraph (c)(1) of this
section does not apply to suspend such loss.
However, because P recognizes a loss with
respect to the disposition of the S1 stock and
S1 owns stock of S2 (which is a member of
the P group immediately after the
disposition), paragraph (c)(2) of this section
does apply to suspend up to $6 of that loss,
an amount equal to the amount by which the
duplicated loss with respect to the stock of
S1 sold is attributable to S2’s adjusted basis
in its assets, loss carryforwards, and deferred
deductions.
(iii) Effect of subsequent asset sale on stock
basis. Of the $30 loss recognized on the sale
of Asset A, $24 is taken into account in
determining the basis adjustments made
under § 1.1502–32 to the stock of S2 owned
by P. Accordingly, P’s basis in its S2 stock
is reduced by $24 from $104 to $80.
(iv) Effect of subsequent asset sale on
suspended loss. Because P cannot establish
that all or a portion of the loss recognized on
the sale of Asset A was not reflected in the
calculation of the duplicated loss of S2 on
the date of the Year 3 stock sale and such loss
is allocable to the period beginning on the
date of the Year 3 deemed disposition of the
S2 stock and ending on the day before the
first date on which S2 is not a member of the
P group and is taken into account in
determining consolidated taxable income (or
loss) of the P group for a taxable year that
includes a date on or after the date of the
Year 3 deemed disposition and before the
first date on which S2 is not a member of the
P group, such asset loss reduces the
suspended loss pursuant to paragraph (c)(4)
of this section. The amount of such
reduction, however, cannot exceed $6, the
excess of the amount of such loss, $30, over
the amount of such loss that is taken into
account in determining the basis adjustment
made to the stock of S2 owned by P, $24.
Therefore, the suspended loss is reduced to
zero.
(v) Effect of subsequent stock sale. P
recognizes $0 gain/loss on the Year 5 sale of
its remaining S2 common stock. No amount
of suspended loss remains to be allowed
under paragraph (c)(5) of this section.
Example 6. Loss recognized on asset with
basis determined by reference to stock basis
of subsidiary member. (i) Facts. In Year 1, P
forms S with a contribution of $80 in
exchange for 80 shares of common stock of
S which at that time represents all of the
outstanding stock of S. S becomes a member
of the P group. In Year 2, P contributes Asset
A with a basis of $50 and a value of $20 in
exchange for 20 shares of common stock of
S in a transfer to which section 351 applies.
In Year 3, in a transaction that is not part of
a plan that includes the Year 1 and Year 2
contributions, P contributes the 20 shares of

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S common stock it acquired in Year 2 to PS,
a partnership, in exchange for a 20 percent
capital and profits interest in a transaction
described in section 721. Immediately after
the contribution to PS, S is a member of the
P group. In Year 4, P sells its interest in PS
for $20, recognizing a $30 loss.
(ii) Application of basis redetermination
rule upon nonrecognition transfer. Because
P’s basis in the S common stock contributed
to PS exceeds its value immediately prior to
the transfer and S is a member of the P group
immediately after the transfer, P’s basis in all
of the S stock is redetermined pursuant to
paragraph (b)(1) of this section. Of P’s total
basis of $130 in the common stock of S, a
proportionate amount is allocated to each
share of S common stock. Accordingly, $26
is allocated to the S common stock that is
contributed to PS and, under section 722, P’s
basis in its interest in PS is $26.
(iii) Application of loss suspension rule on
disposition of asset with basis determined by
reference to stock basis of subsidiary
member. P recognizes a $6 loss on its
disposition of its interest in PS. Because P’s
basis in its interest in PS was determined by
reference to the basis of S stock and at the
time of the determination of P’s basis in its
interest in PS such S stock had a duplicated
loss of $6, and, immediately after the
disposition, S is a member of the P group,
such loss is suspended to the extent of such
duplicated loss. Principles similar to those of
paragraphs (c)(3), (c)(4), and (c)(5) of this
section shall apply to such suspended loss.

(f) Worthlessness and certain
dispositions not followed by separate
return years—(1) General rule.
Notwithstanding any other provision in
the regulations under section 1502, if
stock of a subsidiary member is treated
as worthless under section 165 (taking
into account the provisions of § 1.1502–
80(c)), or if a member of a group
disposes of subsidiary member stock
and on the following day the subsidiary
is not a member of the group and does
not have a separate return year, then all
losses treated as attributable to the
subsidiary member under the principles
of § 1.1502–21(b)(2)(iv), after computing
the taxable income of the group, the
subsidiary member, or a group of which
the subsidiary member was previously a
member for the taxable year that
includes the determination of
worthlessness or the disposition and
any prior taxable year, shall be treated
as expired, but not as absorbed by the
group, as of the beginning of the group’s
taxable year that follows the taxable
year that includes the determination of
worthlessness or the disposition.
(2) Election in the case of
determinations of worthlessness and
dispositions not followed by a separate
return that occurred prior to March 14,
2003. If stock of a subsidiary member is
treated as worthless under section 165
(taking into account the provisions of
§ 1.1502–80(c)) on or after March 7,

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2002, and prior to March 14, 2003, or if
a member of a group disposes of
subsidiary member stock on or after
March 7, 2002, and prior to March 14,
2003 and on the following day the
subsidiary is not a member of the group
and does not have a separate return
year, then, notwithstanding paragraph
(f)(1) of this section, the common parent
may make an irrevocable election to
reattribute to itself all or any portion of
the losses treated as attributable to such
subsidiary member under the principles
of § 1.1502–21(b)(2)(iv). The election
shall be in the form of a statement filed
with or as part of the group’s return for
the taxable year in which the
worthlessness is established or the
disposition occurs. The statement shall
be entitled ‘‘Election under Section
1.1502–35T(f)(2)’’ and must state that
the common parent is making an
irrevocable election under this
paragraph (f)(2) to reattribute to itself
the losses of the subsidiary member the
stock of which is worthless or disposed
of. In addition, it must identify the
subsidiary to which the election relates
and the portion of losses subject to the
election. If the election provided in this
paragraph is made, the common parent
shall be treated as succeeding to the
reattributed losses as if the losses were
succeeded to in a transaction described
in section 381(a). For purposes of
applying the provisions of § 1.1502–32,
the reattributed losses shall be treated as
absorbed by the group immediately
prior to the allowance of any loss or
inclusion of any income or gain with
respect to the determination of
worthlessness or the disposition. In the
case of an election to reattribute less
than all of the losses otherwise treated
as attributable to such subsidiary
member under the principles of
§ 1.1502–21(b)(2)(iv), paragraph (f)(1) of
this section shall apply to that portion
of the losses for which an election under
this paragraph (f)(2) is not made.
(g) Anti-avoidance rules—(1) Transfer
of share without a loss in avoidance. If
a share of subsidiary member stock has
a basis that does not exceed its value
and the share is transferred with a view
to avoiding application of the rules of
paragraph (b) of this section prior to the
transfer of a share of subsidiary member
stock that has a basis that does exceed
its value or a deconsolidation of a
subsidiary member, the rules of
paragraph (b) of this section shall apply
immediately prior to the transfer of
stock that has a basis that does not
exceed its value.
(2) Transfers of loss property in
avoidance. If a member of a
consolidated group contributes an asset
with a basis that exceeds its value to a

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partnership in a transaction described in
section 721 or a corporation that is not
a member of such group in a transfer
described in section 351, such
partnership or corporation contributes
such asset to a subsidiary member in a
transfer described in section 351, and
such contributions are undertaken with
a view to avoiding the rules of
paragraph (b) or (c) of this section,
adjustments must be made to carry out
the purposes of this section.
(3) Anti-loss reimportation—(i)
Application. This paragraph (g)(3)
applies if—
(A) A member of a group recognizes
and is allowed a loss on the disposition
of a share of stock of a subsidiary
member with respect to which there is
a duplicated loss; and
(B) Within the 10-year period
beginning on the date the subsidiary
member (or any successor) ceases to be
a member of such group—
(1) The subsidiary member (or any
successor) again becomes a member of
such group (or any successor group)
when the subsidiary member (or any
successor) owns any asset that has a
basis in excess of value at such time and
that was owned by the subsidiary
member (or any successor) on the date
of a disposition of stock of such
subsidiary member (or any successor)
and that had a basis in excess of value
on such date;
(2) The subsidiary member (or any
successor) again becomes a member of
such group (or any successor group)
when the subsidiary member (or any
successor) owns any asset that has a
basis in excess of value at such time and
that has a basis that reflects, directly or
indirectly, in whole or in part, the basis
of any asset that was owned by the
subsidiary member on the date of a
disposition of stock of such subsidiary
member (or any successor) and that had
a basis in excess of value on such date;
(3) In a transaction described in
section 381 or section 351, any member
of such group (or any successor group)
acquires any asset of the subsidiary
member (or any successor) that was
owned by the subsidiary member (or
any successor) on the date of a
disposition of stock of such subsidiary
member (or any successor) and that had
a basis in excess of its value on such
date, or any asset that has a basis that
reflects, directly or indirectly, in whole
or in part, the basis of any asset that was
owned by the subsidiary member (or
any successor) on the date of a
disposition of stock of such subsidiary
member (or any successor) and that had
a basis in excess of its value on such
date, and, immediately after the

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acquisition of such asset, such asset has
a basis in excess of its value;
(4) The subsidiary member (or any
successor) again becomes a member of
such group (or any successor group)
when the subsidiary member (or any
successor) has a liability (within the
meaning of section 358(h)(3)) that it had
on the date of a disposition of stock of
such subsidiary member (or any
successor) and such liability will give
rise to a deduction;
(5) In a transaction described in
section 381 or section 351, any member
of such group (or any successor group)
assumes a liability (within the meaning
of section 358(h)(3)) that was a liability
of the subsidiary member (or any
successor) on the date of a disposition
of stock of such subsidiary member (or
any successor);
(6) The subsidiary member (or any
successor) again becomes a member of
such group (or any successor group)
when the subsidiary member (or any
successor) has any losses or deferred
deductions that were losses or deferred
deductions of the subsidiary member (or
any successor) on the date of a
disposition of stock of such subsidiary
member (or any successor);
(7) The subsidiary member (or any
successor) again becomes a member of
such group (or any successor group)
when the subsidiary member (or any
successor) has any losses or deferred
deductions that are attributable to any
asset that was owned by the subsidiary
member (or any successor) on the date
of a disposition of stock of such
subsidiary member (or any successor)
and that had a basis in excess of value
on such date;
(8) The subsidiary member (or any
successor) again becomes a member of
such group (or any successor group)
when the subsidiary member (or any
successor) has any losses or deferred
deductions that are attributable to any
asset that had a basis that reflected,
directly or indirectly, in whole or in
part, the basis of any asset that was
owned by the subsidiary member (or
any successor) on the date of a
disposition of stock of such subsidiary
member (or any successor) and that had
a basis in excess of value on such date;
(9) The subsidiary member (or any
successor) again becomes a member of
such group (or any successor group)
when the subsidiary member (or any
successor) has any losses or deferred
deductions that are attributable to a
liability (within the meaning of section
358(h)(3)) that it had on the date of a
disposition of stock of such subsidiary
member (or any successor);
(10) Any member of such group (or
any successor group) succeeds to any

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losses or deferred deductions of the
subsidiary member (or any successor)
that were losses or deferred deductions
of the subsidiary member (or any
successor) on the date of a disposition
of stock of such subsidiary member (or
any successor), that are attributable to
any asset that was owned by the
subsidiary member (or any successor)
on the date of a disposition of stock of
such subsidiary member (or any
successor) and that had a basis in excess
of value on such date, that are
attributable to any asset that had a basis
that reflected, directly or indirectly, in
whole or in part, the basis of any asset
that was owned by the subsidiary
member (or any successor) on the date
of a disposition of stock of such
subsidiary member (or any successor)
and that had a basis in excess of value
on such date, or that are attributable to
a liability (within the meaning of
section 358(h)(3)) of the subsidiary
member (or any successor) on the date
of a disposition of stock of such
subsidiary member (or any successor);
or
(11) Any losses or deferred
deductions of the subsidiary member (or
any successor) that were losses or
deferred deductions of the subsidiary
member (or any successor) on the date
of a disposition of stock of such
subsidiary member (or any successor),
that are attributable to any asset that
was owned by the subsidiary member
(or any successor) on the date of a
disposition of stock of such subsidiary
member (or any successor) and that had
a basis in excess of value on such date,
that are attributable to any asset that had
a basis that reflected, directly or
indirectly, in whole or in part, the basis
of any asset that was owned by the
subsidiary member (or any successor)
on the date of a disposition of stock of
such subsidiary member (or any
successor) and that had a basis in excess
of value on such date, or that are
attributable to a liability (within the
meaning of section 358(h)(3)) of the
subsidiary member (or any successor)
on the date of a disposition of stock of
such subsidiary member (or any
successor) are carried back to a predisposition taxable year of the
subsidiary member.
(ii) Operating rules. (A) For purposes
of paragraph (g)(3)(i)(B) of this section,
assets shall include stock and securities
and the subsidiary member (or any
successor) shall be treated as having its
allocable share of losses and deferred
deductions of all lower-tier subsidiary
members and as owning its allocable
share of each asset of all lower-tier
subsidiary members.

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Federal Register / Vol. 68, No. 50 / Friday, March 14, 2003 / Rules and Regulations
(B) For purposes of paragraphs
(g)(3)(i)(B)(6), (7), (8), and (9) of this
section, unless the group can establish
otherwise, if the subsidiary member (or
any successor) again becomes a member
of such group (or any successor group)
at a time when the subsidiary member
(or any successor) has any losses or
deferred deductions, such losses and
deferred deductions shall be treated as
losses or deferred deductions that were
losses or deferred deductions of the
subsidiary member (or any successor)
on the date of a disposition of stock of
such subsidiary member (or any
successor), losses or deferred
deductions that are attributable to assets
that were owned by the subsidiary
member (or any successor) on the date
of a disposition of stock of such
subsidiary member (or any successor)
and that had bases in excess of value on
such date, losses or deferred deductions
that are attributable to assets that had
bases that reflected, directly or
indirectly, in whole or in part, the bases
of assets that were owned by the
subsidiary member (or any successor)
on the date of a disposition of stock of
such subsidiary member (or any
successor) and that had bases in excess
of value on such date, or losses or
deferred deductions attributable to a
liability (within the meaning of section
358(h)(3)) of the subsidiary member (or
any successor) on the date of a
disposition of stock of such subsidiary
member (or any successor).
(C) For purposes of paragraph
(g)(3)(i)(B)(10) of this section, unless the
group can establish otherwise, if a
member of such group (or any successor
group) succeeds to any losses or
deferred deductions of the subsidiary
member (or any successor), such losses
and deferred deductions shall be treated
as losses or deferred deductions that
were losses or deferred deductions of
the subsidiary member (or any
successor) on the date of a disposition
of stock of such subsidiary member (or
any successor), losses or deferred
deductions that are attributable to assets
that were owned by the subsidiary
member (or any successor) on the date
of a disposition of stock of such
subsidiary member (or any successor)
and that had bases in excess of value on
such date, losses or deferred deductions
that are attributable to assets that had
bases that reflected, directly or
indirectly, in whole or in part, the bases
of assets that were owned by the
subsidiary member (or any successor)
on the date of a disposition of stock of
such subsidiary member (or any
successor) and that had bases in excess
of value on such date, or losses or

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deferred deductions attributable to a
liability (within the meaning of section
358(h)(3)) of the subsidiary member (or
any successor) on the date of a
disposition of stock of such subsidiary
member (or any successor).
(D) For purposes of paragraph
(g)(3)(i)(B)(11) of this section, unless the
group can establish otherwise, if any
losses or deferred deductions of the
subsidiary member (or any successor)
are carried back to a pre-disposition
taxable year of the subsidiary member,
such losses and deferred deductions
shall be treated as losses or deferred
deductions that were losses or deferred
deductions of the subsidiary member (or
any successor) on the date of a
disposition of stock of such subsidiary
member (or any successor), losses or
deferred deductions that are attributable
to assets that were owned by the
subsidiary member (or any successor)
on the date of a disposition of stock of
such subsidiary member (or any
successor) and that had a basis in excess
of value on such date, losses or deferred
deductions that are attributable to assets
that had bases that reflected, directly or
indirectly, in whole or in part, the bases
of assets that were owned by the
subsidiary member (or any successor)
on the date of a disposition of stock of
such subsidiary member (or any
successor) and that had a basis in excess
of value on such date, or losses or
deferred deductions that are attributable
to a liability (within the meaning of
section 358(h)(3)) of the subsidiary
member (or any successor) on the date
of a disposition of stock of such
subsidiary member (or any successor).
(iii) Loss disallowance. If this
paragraph (g)(3) applies, then, to the
extent that the aggregate amount of loss
recognized by members of the group
(and any successor group) on
dispositions of the subsidiary member
stock was attributable to a duplicated
loss of such subsidiary member that was
allowed, such group (or any successor
group) will be denied the use of—
(A) Any loss recognized that is
attributable to, directly or indirectly, an
asset that was owned by the subsidiary
member (or any successor) on the date
of a disposition of stock of such
subsidiary member (or any successor)
and that had a basis in excess of value
on such date, to the extent of the lesser
of the loss inherent in such asset on the
date of a disposition of the stock of the
subsidiary member (or any successor)
and the loss inherent in such asset on
the date of the event described in
paragraph (g)(3)(i)(B) of this section that
gives rise to the application of this
paragraph (g)(3);

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12299

(B) Any loss recognized that is
attributable to, directly or indirectly, an
asset that has a basis that reflects,
directly or indirectly, in whole or in
part, the basis of any asset that was
owned by the subsidiary member (or
any successor) on the date of a
disposition of stock of such subsidiary
member (or any successor) and that had
a basis in excess of its value on such
date, to the extent of the lesser of the
loss inherent in the asset that was
owned by the subsidiary member (or
any successor) on the date of a
disposition of stock of such subsidiary
member (or any successor) the basis of
which is reflected, directly or indirectly,
in whole or in part, in the basis of such
asset on the date of the disposition and
the loss inherent in such asset on the
date of the event described in paragraph
(g)(3)(i)(B) of this section that gives rise
to the application of this paragraph
(g)(3);
(C) Any loss or deduction that is
attributable to a liability described in
paragraph (g)(3)(i)(B)(4) or (5) of this
section; and
(D) Any loss or deduction described
in paragraph (g)(3)(i)(B)(6), (7), (8), (9),
(10), or (11) of this section, provided
that a loss or deferred deduction
described in paragraph (g)(3)(i)(B)(11) of
this section shall be allowed to be
carried forward to a post-disposition
taxable year of the subsidiary member.
(iv) Treatment of disallowed loss. For
purposes of § 1.1502–32(b)(3)(iii), any
loss or deduction the use of which is
disallowed pursuant to paragraph
(g)(3)(iii) of this section (other than a
loss or deduction described in
paragraph (g)(3)(i)(B)(11) of this
section), and with respect to which no
waiver described in § 1.1502–32(b)(4) is
filed, is treated as a noncapital,
nondeductible expense incurred during
the taxable year that such loss would
otherwise be absorbed.
(4) Avoidance of recognition of gain.
(i) If a transaction is structured with a
view to, and has the effect of, deferring
or avoiding the recognition of gain on a
disposition of stock by invoking the
application of paragraph (b)(1) of this
section to redetermine the basis of stock
of a subsidiary member, and the stock
loss that gives rise to the application of
paragraph (b)(1) of this section is not
significant, paragraphs (b) and (c) of this
section shall not apply.
(ii) If a transaction is structured with
a view to, and has the effect of, deferring
or avoiding the recognition of gain on a
disposition of stock by invoking the
application of paragraph (b)(2) of this
section to redetermine the basis of stock
of a subsidiary member, and the
duplicated loss of the subsidiary

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member that is reflected in stock of the
subsidiary member owned by members
of the group immediately before the
deconsolidation is not significant,
paragraphs (b) and (c) of this section
shall not apply.
(5) Examples. The principles of this
paragraph (g) are illustrated by the
following examples:
Example 1. Transfers of property in
avoidance of basis redetermination rule. (i)
Facts. In Year 1, P forms S with a
contribution of $100 in exchange for 100
shares of common stock of S which at that
time represents all of the outstanding stock
of S. S becomes a member of the P group. In
Year 2, P contributes 20 shares of common
stock of S to PS, a partnership, in exchange
for a 20 percent capital and profits interest
in a transaction described in section 721. In
Year 3, P contributes Asset A with a basis of
$50 and a value of $20 to PS in exchange for
an additional capital and profits interest in
PS in a transaction described in section 721.
Also in Year 3, PS contributes Asset A to S
and P contributes an additional $80 to S in
transfers to which section 351 applies. In
Year 4, S sells Asset A for $20, recognizing
a loss of $30. The P group uses that loss to
offset income of P. Also in Year 4, P sells its
entire interest in PS for $40, recognizing a
loss of $30.
(ii) Analysis. Pursuant to paragraph (g)(2)
of this section, if P’s contributions of S stock
and Asset A to PS were undertaken with a
view to avoiding the application of the basis
redetermination or the loss suspension rule,
adjustments must be made such that the
group does not obtain more than one tax
benefit from the $30 loss inherent in Asset
A.
Example 2. Transfers effecting a
reimportation of loss. (i) Facts. In Year 1, P
forms S with a contribution of Asset A with
a value of $100 and a basis of $120, Asset B
with a value of $50 and a basis of $70, Asset
C with a value of $90 and a basis of $100 in
exchange for all of the common stock of S
and S becomes a member of the P group. In
Year 2, in a transaction that is not part of a
plan that includes the contribution, P sells
the stock of S for $240, recognizing a loss of
$50. At such time, the bases and values of
Assets A, B, and C have not changed since
their contribution to S. In Year 3, S sells
Asset A, recognizing a $20 loss. In Year 3, S
merges into M in a reorganization described
in section 368(a)(1)(A). In Year 8, P
purchases all of the stock of M for $300. At
that time, M has a $10 net operating loss. In
addition, M owns Asset D, which was
acquired in an exchange described in section
1031 in connection with the surrender of
Asset B. Asset C has a value of $80 and a
basis of $100. Asset D has a value of $60 and
a basis of $70. In Year 9, P has operating
income of $100 and M recognizes $20 of loss
on the sale of Asset C. In Year 10, P has
operating income of $50 and M recognizes
$50 of loss on the sale of Asset D.
(ii) Analysis. P’s $50 loss on the sale of S
stock is entirely attributable to duplicated
loss. Therefore, pursuant to paragraph (g)(3)
of this section, assuming the P group cannot
establish otherwise, M’s $10 net operating

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loss is treated as attributable to assets that
were owned by S on the date of the
disposition and that had bases in excess of
value on such date. Without regard to any
other limitations on the group’s use of M’s
net operating loss, the P group cannot use
M’s $10 net operating loss pursuant to
paragraph (g)(3)(iii)(D) of this section.
Pursuant to paragraph (g)(3)(iv) of this
section and § 1.1502–32T(b)(3)(iii)(D), such
loss is treated as a noncapital, nondeductible
expense of M incurred during the taxable
year that includes the day after the
reorganization. In addition, the P group is
denied the use of $10 of the loss recognized
on the sale of Asset C. Finally, the P group
is denied the use of $10 of the loss
recognized on the sale of Asset D. Pursuant
to paragraph (g)(3)(iv) of this section and
§ 1.1502–32T(b)(3)(iii)(D), each such
disallowed loss is treated as a noncapital,
nondeductible expense of M incurred during
the taxable year that includes the date of the
disposition of the asset with respect to which
such loss was recognized.
Example 3. Transfers to avoid recognition
of gain. (i) Facts. P owns all of the stock of
S1 and S2. The S2 stock has a basis of $400
and a value of $500. S1 owns 50% of the
stock of the S3 common stock with a basis
of $150. S2 owns the remaining 50% of the
S3 common stock with a basis of $100 and
a value of $200 and one share of S3 preferred
stock with a basis of $10 and a value of $9.
P intends to sell all of its S2 stock to an
unrelated buyer. P, therefore, engages in the
following steps to dispose of S2 without
recognizing a substantial portion of the builtin gain in S2. First, P causes a
recapitalization of S3 in which S2’s S3
common stock is exchanged for new S3
preferred shares. P then sells all of its S2
stock. Immediately after the sale of the S2
stock, S3 is a member of the P group.
(ii) Analysis. Pursuant to paragraph (b)(4)
of this section, because S2 owns stock of S3
(another subsidiary member of the same
group) and, immediately after the sale of the
S2 stock, S3 is a member of the group, then
for purposes of applying paragraph (b) of this
section, S2 is deemed to have transferred its
S3 stock. Because S3 is a member of the
group immediately after the transfer of the S2
stock and the S3 stock deemed transferred
has a basis in excess of value, the group
member’s basis in the S3 stock is
redetermined pursuant to paragraph (b)(1) of
this section immediately prior to the sale of
the S2 stock. Pursuant to paragraph (b)(1) of
this section, the total basis of S3 stock held
by members of the P group is allocated first
to the S3 preferred shares, up to their value
of $209, and then to the remaining shares of
S3 common held by S1. S2’s aggregate basis
in the S3 preferred stock is increased from
$110 to $209. This increase tiers up and
increases P’s basis in the S2 stock from $400
to $499. Accordingly, P will recognize only
$1 of gain on the sale of its S2 stock.
However, because the recapitalization of S3
was structured with a view to, and has the
effect of, avoiding the recognition of gain on
a disposition of stock by invoking the
application of paragraph (b) of this section,
paragraph (g)(4)(i) of this section applies.
Accordingly, paragraph (b) of this section

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does not apply upon P’s disposition of the S2
stock and P recognizes $100 of gain on the
disposition of the S2 stock.

(h) Application of other anti-abuse
rules. The rules of this section do not
preclude the application of anti-abuse
rules under other provisions of the
Internal Revenue Code and regulations
thereunder.
(i) [Reserved].
(j) Effective date. This section, except
for paragraph (g)(3) of this section,
applies with respect to stock transfers,
deconsolidations of subsidiary
members, determinations of
worthlessness, and stock dispositions
on or after March 7, 2002, and no later
than March 11, 2006, but only if such
events occur during a taxable year the
original return for which is due (without
regard to extensions) after March 14,
2003. Paragraph (g)(3) of this section
applies to events described in paragraph
(g)(3)(iii) of this section occurring on or
after October 18, 2002, and no later than
March 11, 2006, but only if such events
occur during a taxable year the original
return for which is due (without regard
to extensions) after March 14, 2003.
PART 602—[AMENDED]
Par. 8. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805 * * *

Par. 9. In § 602.101, paragraph (b) is
amended by adding an entry to the table
in numerical order for to read as
follows:
§ 602.101

*

OMB Control numbers.

*
*
(b) * * *

*

*

Current
OMB control
No.

CFR part or section where
identified and described

*
*
*
*
*
1.1502–35T ...............................
1545–1828
*

*

*

*

*

David A. Mader,
Assistant Deputy Commissioner of Internal
Revenue.
Approved: March 7, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury.
[FR Doc. 03–6119 Filed 3–11–03; 1:04 pm]
BILLING CODE 4830–01–P

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