For Tax Professionals  
T.D. 8825 August 02, 1999

Regulations Under Section 382 of the Internal Revenue Code of 1986;
Application of Section 382 in Short Taxable Years &
With Respect to Controlled Groups

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Parts 1 and 602 [TD 8825] RIN 1545-
AU33

TITLE: Regulations Under Section 382 of the Internal Revenue Code of
1986; Application of Section 382 in Short Taxable Years and With
Respect to Controlled Groups

AGENCY: Internal Revenue Service (IRS), Treasury

ACTION: Final and temporary regulations

SUMMARY: This document contains final regulations relating to
limitations on net operating loss carryovers and certain built-in
losses following an ownership change of a corporation. The
regulations implement the statutory authority under section 382(m)
of the Internal Revenue Code to prescribe regulations concerning
short taxable years and controlled groups of corporations.

Additional rules are adopted relating principally to corporations
that cease to exist following a merger (or similar transaction) or
that have two or more ownership changes. These final regulations
replace temporary regulations that provided guidance on these
topics.

DATES: Effective Dates: These regulations are effective June 25,
1999.

Applicability Dates: For dates of application and special transition
rules, see Effective Dates under SUPPLEMENTARY INFORMATION.

FOR FURTHER INFORMATION CONTACT: Lee A. Kelley at 202-622-7550 (not
a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in these final regulations
has been reviewed and approved by the Office of Management and
Budget in accordance with the Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545-1434. Responses to this collection
of information are required to obtain a benefit relating to the
value of a controlled group member.

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 control number.

The estimated annual burden per respondent is one quarter hour.

Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be sent to the Internal
Revenue Service, Attn: IRS Reports Clearance Officer, OP:FS:FP,
Washington, DC 20224, and to the Office of Management and Budget,
Attn: Desk Officer for the Department of the Treasury, Office of
Information and Regulatory Affairs, Washington, DC, 20503.

Books and records relating to this 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 February 4, 1991, the IRS and Treasury issued a notice of
proposed rulemaking, CO-077- 90 (56 FR 4183) (the 1991 controlled
group proposed regulations), setting forth rules regarding the
application of section 382 to controlled groups of corporations and
to corporations that undergo a merger or similar transaction. The
1991 controlled group proposed regulations also related to the
determination of the section 382 limitation following an ownership
change in the case of short taxable year, and to the valuation of
the stock of a loss corporation for purposes of determining the
amount of the section 382 limitation. On the same day, the IRS and
Treasury also issued proposed regulations relating to the
application of section 382 to affiliated groups of corporations
filing consolidated returns (CO-132-87, 56 FR 4194), and to the use
of built-in deductions and net operating losses and capital losses,
including the carryover and carryback of separate return year (SRLY)
losses, of members of consolidated groups (CO-078-90, 56 FR 4228). A
public hearing regarding the three sets of proposed regulations was
held on April 8, 1991.

On June 27, 1996, the IRS and Treasury published temporary
regulations (TD 8679, 61 FR 33313) (the 1996 controlled group
temporary regulations) relating to section 382. Except for the
addition of a provision relating to the effects of successive
ownership changes, these regulations were substantially identical to
the 1991 controlled group proposed regulations. A notice of proposed
rulemaking cross-referencing the temporary regulations was published
in the Federal Register on the same day (CO-026-96, 61 FR 33391)
(the 1996 controlled group proposed regulations) and the 1991
controlled group proposed regulations were withdrawn. No written
comments were received on the 1996 controlled group proposed
regulations and no public hearing was held. Also on June 27, 1996,
the IRS and Treasury published temporary regulations relating to the
application of section 382 to affiliated groups of corporations
filing consolidated returns (TD 8678, 61 FR 33335) and the SRLY
limitation (TD 8677, 61 FR 33321). Notices of proposed rulemaking
cross-referencing these temporary regulations were published on the
same day (CO-025-96, 61 FR 33395 and CO-024-96, 61 FR 33393), and
the corresponding proposed regulations published in 1991 were
withdrawn.

The 1996 controlled group proposed regulations are adopted as
revised by this Treasury decision and the corresponding temporary
regulations are removed. The final regulations are substantially the
same as the 1996 controlled group proposed regulations, with one
significant change relating to built-in losses of a member of a
controlled group of corporations. This change is discussed below.

Under section 382, if an ownership change occurs with respect to a
loss corporation (as defined in section 382 and the regulations
thereunder), the amount of the loss corporation's taxable income for
a post-change year that may be offset by the net operating loss
carryovers arising before the ownership change are subject to a
limitation known as the section 382 limitation. The section 382
limitation for a post-change taxable year of the loss corporation
generally equals the fair market value of the stock of the
corporation immediately before the ownership change multiplied by
the long-term tax exempt rate (a rate of return published
periodically in the Internal Revenue Bulletin).

In addition to net operating loss carryovers, the recognized built-
in losses of corporations that have a net unrealized built-in loss
on the ownership change date are also subject to the section 382
limitation. In general, a corporation has a net unrealized built-in
loss on its ownership change date if the adjusted basis of its
assets exceeds their fair market value, and such excess is greater
than the threshold amount under section 382(h)(3)(B). In general,
recognized built-in losses are losses with respect to assets held on
the change date that are recognized within the 5- year period
beginning on the ownership change date. The recognized built-in loss
on an asset, however, is limited to the lesser of the loss
recognized on its disposition or the amount by which the adjusted
basis of the asset exceeded its fair market value on the change
date.

Consistent with the proposed regulations, the final regulations
require appropriate adjustments to the value of a loss corporation
that is a member of a controlled group of corporations so that the
same value is not included more than once in computing the section
382 limitations for the loss corporations that are members of the
controlled group. In general, adjustments are required only when
corporations are members of the same controlled group both when a
pre-change loss arises and on the date of the ownership change.
Thus, adjustments are required if a loss corporation is a component
member of the same controlled group as another member (i) on
December 31 of the taxable year in which a pre-change loss arises
(or the change date, if earlier) and (ii) on the date that the loss
corporation has an ownership change. If a loss corporation has pre-
change losses that arise in different taxable years, the component
members of the controlled group with respect to losses arising in
each taxable year may differ. Therefore, as in the 1996 controlled
group proposed regulations, the final regulations are applied by
determining a controlled group with respect to each year's pre-
change loss of the corporation (a controlled group loss).

To avoid duplication of value in connection with a controlled group
loss, the value of the stock of each corporation that is a component
member of the controlled group with respect to a controlled group
loss is reduced by the value of the stock of other component members
that it directly owns immediately before the ownership change. A
second adjustment (more fully explained in the preamble to the 1991
controlled group proposed regulations) permits a lower tier member
to elect to restore some or all of the previously reduced value to a
member that directly owns its stock.

In identifying controlled group losses, the determination of the
taxable year to which a net operating loss carryover is attributable
usually presents no difficulty. The determination of the taxable
year in which a net unrealized built-in loss accrues, however, is
more problematic. To address some concerns in this area, the final
regulations include an irrebutable presumption that certain built-in
losses are attributable to the period before a particular taxable
year. The presumption applies to a loss corporation that had an
ownership change prior to the first day of the taxable year in
question, and whose net unrealized built-in losses became subject to
a section 382 limitation as a result of that ownership change. Under
the presumption, any built-in loss in such an asset is considered to
be attributable to a period prior to the taxable year in question to
the extent of the built-in loss in that asset on the previous change
date.

Effective Dates

Section 1.382-5 (relating to the section 382 limitation) generally
applies to a loss corporation that has an ownership change to which
section 382(a), as amended by the Tax Reform Act of 1986, applies.
The rules in that section relating to successive ownership changes,
however, apply to taxable years of a loss corporation beginning on
or after January 1, 1997.

Section 1.382-8 (relating to controlled groups of corporations)
generally applies to a loss corporation that has an ownership change
with respect to a controlled group loss on or after January 1, 1997.
Transition rules are provided for members of controlled groups that
have ownership changes before that date. The rules in 1.382-1(a)
(iv) (relating to separate tracking of certain loss corporations)
apply to testing dates on or after January 29, 1991. The rules in
1.382-2 (a) (4) and (a) (5) relating to successor or predecessor
corporations in other than corporate reorganizations apply to
testing dates on or after January 1, 1997.

Special Analysis

It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. It has also
been determined that section 553 of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations. It is
hereby certified that these regulations do not have a significant
economic impact on a substantial number of small entities. This
certification is based on the fact that the collection of
information in this regulation is a statement of election that it is
estimated will take less than one hour to prepare. The statement
will be filed by electing corporations that are members of a
controlled group of corporations (determined by applying a 50%
common control requirement) both (1) when a net operating loss
carryover (or certain other tax attributes ) arises and (2) a member
of the controlled group has an ownership change under section 382 of
the Internal Revenue Code with respect to that net operating loss
carryover (or other attribute). (An affiliated group of corporations
that files a consolidated return is treated as a single corporation
for this purpose, which reduces the number of potential filers.)
Because the election is only filed with respect to an ownership
change, it is unlikely that a corporation will file the election
frequently. Therefore, a Regulatory Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.

Pursuant to section 7805(f) of the Internal Revenue Code, the notice
of proposed rulemaking preceding these regulations was submitted to
the Small Business Administration for comment on its impact on small
business.

Drafting information

The principal author of these regulations is Lee A. Kelley of the
Office of Assistant Chief Counsel (Corporate). Other personnel from
the IRS and Treasury 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.

Adoption of 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
removing entries for sections 1.382-5T and 1.382-8T and by adding
entries in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.382-5 also issued under 26 U.S.C. 382(m). * * *

Section 1.382-8 also issued under 26 U.S.C. 382(m). * * *

Par. 2. Section 382-1 is amended by:

1. Revising the entry for 1.382-2, paragraph (a)(1)(iv).

2. Adding an entry for 1.382-2, paragraph (a)(1)(v).

3. Adding entries for 1.382-2, paragraphs (a)(5) and (a)(6).

4. Removing the entries for 1.382-2T, paragraphs (f)(1)(i), (f)(1)
(ii), and (f)(1)(iii).

5. The entry for 1.382-4 is amended as follows:

a. The entry for paragraph (b) is revised.

b. Entries for paragraphs (b)(1) and (b)(2) are added Removing the
entry for 1.382-5.

7. Redesignating the entry for 1.382-5T as  1.382-5 and revising
the section heading.

8. Removing the entry for 1.382-8.

9. Redesignating the entry for 1.382-8T as 1.382-8, revising the
section heading, and adding entries for paragraphs (b) (1) and (b)
(2).

The revision and additions read as follows:

1.382-1 Table of contents.

* * * * *

1.382-2 General rules for ownership change.

(a) * * *

(1) * * *

(iv) End of separate accounting for losses and credits of
distributor or transferor corporation.

(v) Application to other successor corporations.

* * * * *

(5) Successor corporation.

(6) Predecessor corporation.

* * * * *

1.382-4 Constructive ownership of stock.

* * * * *

(b) Attribution from corporations, partnerships, estates and trusts.

(1) [Reserved].

(2) Limitation.

* * * * *

1.382-5 Section 382 limitation.

* * * * *

1.382-8 Controlled groU.S.

* * * * *

(b) * * *

(1) In general.

(2) Presumption regarding net unrealized built-in loss.

* * * * *

1.1382-2 [Amended]

Par. 2a. Section 1.382-2 is amended by removing paragraph (a)(1)
(iv).

Par. 3. Section 1.382-2T is amended as follows:

1. In paragraph (e)(2)(iv) Example (2)(ii), remove the reference
"paragraph (f)(1)(ii)" and add "1.382-2(a)(1)(iv)" in its place.

2. Paragraph (f)(1)(ii) is redesignated as paragraph (a)(1)(iv) of
1.382-2.

3. Paragraph (f)(1) is revised.

4. Paragraphs (f)(4) and (f)(5) are redesignated as paragraphs (a)
(5) and (a)(6) of 1.382- 2, respectively.

5. New paragraphs (f)(4) and (f)(5) are added.

6. In paragraph (h)(2)(i)(A), remove the language "and solely for
purposes of determining whether a loss corporation has an ownership
change".

The revision and additions read as follows:

1.382-2T Definition of ownership change under section 382, as
amended by the Tax Reform Act of 1986 (temporary).

* * * * *

(f) Definitions. * * *

(1) Loss corporation. See section 382 and 1.382-2(a)(1) for the
definition of a loss corporation.

* * * * *

(4) Successor corporation. See 1.382-2(a)(5) for the definition of
successor corporation.

(5) Predecessor corporation. See 1.382-2(a)(6) for the definitions
of predecessor corporation.

* * * * *

Par. 4. Section 1.382-2 is amended as follows:

1. In the first sentence of paragraph (a)(1)(iii), remove the
reference "1.382-2T(f)(1)(ii)" and add "paragraph (a)(1)(iv) of
this section" in its place.

2. In the first sentence of newly designated paragraph (a)(1)(iv),
remove the reference "1.382-2(a)(1)(iii)" and add " paragraph (a)
(1)(iii) of this section" in its place.

3. In the first sentence of newly designated paragraph (a)(1)(iv),
remove the reference "1.382-2(a)(1)(ii)" and add "paragraph (a)(1)
(ii) of this section" in its place.

4. In the last sentence of newly designated paragraph (a)(1)(iv),
remove the reference "paragraph (f)(1)(ii)" and add "paragraph (a)
(1)(iv)" in its place.

5. Paragraph (a)(1)(v) is added.

6. In the first sentence of paragraph (a)(3)(i), remove the
reference "paragraph (f)(18)" and add "paragraph (a)(3)(i) and
1.382-2T(f)(18)(ii) and (iii)" in its place.

7. In the last sentence of newly designated paragraph (a)(5), remove
the reference "paragraph (f)(4)" and add "paragraph (a)(5)" in its
place.

8. In the last sentence of newly designated paragraph (a)(6), remove
the reference "paragraph (f)(5)" and add "paragraph (a)(6)" in its
place.

The addition reads as follows:

1.382-2 General rules for ownership change.

(a) * * *

(1) * * *

(v) Application to other successor corporations. This paragraph (a)
(1) also applies, as the context may require, to successor
corporations other than successors in section 381(a) transactions.
For example, if a corporation receives assets from the loss
corporation that have basis in excess of value, the recipient
corporation's basis for the assets is determined, directly or
indirectly, in whole or in part, by reference to the loss
corporation's basis, and the amount by which basis exceeds value is
material, the recipient corporation is a successor corporation
subject to this paragraph (a)(1). This paragraph (a)(1)(v) applies
to any testing date occurring on or after January 1, 1997.

* * * * *

Par. 5. Section 1.382-4 is amended by revising paragraph (b) to read
as follows:

1.382-4 Constructive ownership of stock.

* * * * *

(b) Attribution from corporations, partnerships, estates and trusts.
(1) [Reserved].

(2) Limitation. Section 1.382-2T(h)(2)(i)(A) applies solely for
purposes of determining whether a loss corporation has an ownership
change.

* * * * *

1.382-5 [Removed]

Par. 6. Section 1.382-5 is removed.

Par. 7. Section 1.382-5T is redesignated as 1.382-5 and amended as
follows:

1. The section heading is revised.

2. In paragraph (e), the reference "1.382-8T" is removed and
"1.382-8" is added in its place.

The revision reads as follows:

1.382-5 Section 382 limitation.

* * * * *

1.382-8 [Removed] Par. 8. Section 1.382-8 is removed.

Par. 9. Section 1.382-8T is redesignated as 1.382-8 and amended as
follows:

1. The section heading is revised.

2. Redesignate paragraphs (b) introductory text, (b)(1) and (b)(2)
as paragraphs (b)(1) introductory text, (b)(1)(i) and (b)(1)(ii),
respectively.

3. A paragraph heading for newly designated paragraph (b)(1) is
added.

4. Paragraph (b)(2) is added.

5. The first three sentences of paragraph (f) are revised.

6. The graphics of paragraph (g) Example 1(a) are revised.

7. The graphics of paragraph (g) Example 2(a) are revised.

8. Paragraph (g) Example 4 is amended as follows:

a. In the last sentence of paragraph (a), remove the reference
"1.1502-92T(b)(1)(i)" and add "1.1502-92(b)(1(i)" in its place.

b. In paragraph (b)(2), remove the reference "1.1502-91T(c)" and
add "1.1502-91(c)" in its place.

c. In paragraph (c), remove the reference "1.1502-93T" and add
"1.1502-93" in its place.

9. In the fifth sentence of paragraph (h)(1), remove the reference
"1.382-8T" and add "1.382-8" in its place.

10. Paragraph (i) is added.

The additions and revisions read as follows:

1.382-8 Controlled groU.S.

* * * * *

(b) Controlled group loss and controlled group with respect to a
controlled group loss-(1) In general. * * *

(2) Presumption regarding net unrealized built-in loss. For purposes
of determining whether a net unrealized built-in loss of a loss
corporation is attributable to a taxable year (the determination
year) with respect to which the corporation is a component member of
a controlled group, the built-in loss in a prior change date asset
is deemed to be attributable to a period ending before the
determination year. A prior change date asset is any asset held by
the loss corporation at all times during the period beginning on the
change date of its most recent ownership change after 1986 (the
first change date), and ending on the first day of the determination
year. The built-in loss in a prior change date asset is the amount
by which the adjusted basis of the asset on the first change date
exceeds the fair market value of the asset on that date. The
principles of this paragraph (b)(2) also apply to items described in
section 382(h)(6)(B).

* * * * *

(f) Coordination between consolidated groups and controlled groups.
Some or all of the component members of a controlled group may also
be members of a consolidated group, and a controlled group loss may
be subject to a consolidated section 382 limitation or subgroup
section 382 limitation determined under 1.1502-93. Except as
otherwise provided in this paragraph (f) and 1.1502-91 through
1.1502-99, 1.1502-93 applies instead of this section when both
sections, by their terms, are otherwise applicable. This section is
applicable and may require an adjustment to value if a member of a
consolidated group, a loss group, or loss subgroup (as those terms
are defined in 1.1502-1(h) and 1.1502-91) is also a component
member of a controlled group with respect to a controlled group
loss. * * * (g) ***

Example 1. * * *(a)***

* * * * *

Example 2. * * *(a)***

* * * * *

(i) References to former temporary regulations. As the context
requires, a reference in this section to 1.382-8 includes a
reference to 1.382-8T in effect prior to June 25, 1999, as
contained in 26 CFR part 1 revised as of April 1, 1999, a reference
to 1.1502-91, 1.1502-92, 1.1502-93, and 1.1502-91 through
1.1502-99 includes a reference to 1.1502-91A, 1.1502- 92A,
1.1502-93A and  1.1502-91A through 1.1502-99A.

* * * * *

PART 602-OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 10. The authority citation for part 602 continues to read as
follows:

Authority: 26 U.S.C. 7805.

Par. 11. In  602.101, paragraph (b) is amended in the table by
removing the entry for 1.382-8T and adding an entry in numerical
order to read as follows:

602.101 OMB Control numbers.

* * * * *

(b) * * *

CFR part or section where Current OMB identified and described
control No.

* * * * *

1.382-8.................................................1545-1434

* * * * *

John M. Dalrymple
Acting Deputy Commissioner of Internal Revenue
Approved: June 18, 1999
Donald C. Lubick
Assistant Secretary of the Treasury


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