For Tax Professionals  
T.D. 8766 March 18, 1998

Consolidated Returns--Limitations on the Use of Certain Credits;
Overall Foreign Loss Accounts

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [TD 8766] RIN 1545-AV98

TITLE: Consolidated returns--Limitations on the use of certain
credits; overall foreign loss accounts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains temporary amendments to the
consolidated return regulations. The temporary amendments modify the
date temporary regulations apply as published in the Federal
Register on January 12, 1998, relating to the use of tax credits of
a consolidated group and its members. The amendments provide
guidance to consolidated groups that have a taxable year beginning
on or after January 1, 1997, for which the income tax return is due
on or before March 13, 1998. The text of the temporary regulations
also serves as the text of the proposed regulations set forth in the
notice of proposed rulemaking on this subject in the Proposed Rules
section of this issue of the Federal Register.

DATES: Effective dates: These amendments are effective March 13,
1998.

Applicability dates: For dates of application, see the Effective
Dates portion of the preamble under SUPPLEMENTARY INFORMATION.

FOR FURTHER INFORMATION CONTACT: Roy A. Hirschhorn, (202) 622- 7770.

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

On January 12, 1998, the IRS and Treasury published in the Federal
Register final, temporary and proposed regulations (the January 12,
1998, regulations) relating to limitations on the use of certain tax
credits and related attributes by corporations filing consolidated
income tax returns. In general, the January 12, 1998, regulations
relate to the separate return limitation year provisions (and
certain consolidated return changes in ownership) for general
business credits, alternative minimum tax credits, foreign tax
credits and overall foreign loss accounts.

The January 12, 1998, regulations were generally applicable to
consolidated return years beginning on or after January 1, 1997.

IRS and Treasury have determined that the appropriate effective date
of those regulations should be for consolidated return years for
which the due date (without extensions) of the income tax return is
after March 13, 1998. In lieu of applying this effective date, a
consolidated group may choose to apply the effective date provisions
as published in the January 12, 1998, regulations. Taxpayers making
this choice must apply all of those effective date provisions for
all relevant years. Thus, such taxpayers may not choose to apply one
provision of the January 12, 1998, regulations and not another.

Effective Dates The temporary amendments are applicable to
consolidated return years for which the due date of the income tax
return (without extensions) is after March 13, 1998. As explained in
the Background portion of this preamble, taxpayers may instead
choose to apply the effective date provisions of the January 12,
1998, regulations (i.e., generally taxable years beginning on or
after January 1, 1997).

Special Analyses

It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. 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 these regulations principally affect corporations
filing consolidated federal income tax returns that have carryover
or carryback of credits from separate return limitation years.
Available data indicates that many consolidated return filers are
large companies (not small businesses). In addition, the data
indicates that an insubstantial number of consolidated return filers
that are smaller companies have credit carryovers or carrybacks, and
thus even fewer of these filers have credit carryovers or carrybacks
that are subject to the separate return limitation year rules.

Therefore, a Regulatory Flexibility Analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is not required. It has also
been determined that under section 553(d) of the Administrative
Procedure Act (5 U.S.C. chapter 5) these regulations should be
effective immediately because they involve the applicability of
regulations that modify the limitations on the use of certain tax
attributes for taxable years beginning on or after January 1, 1997.
Pursuant to section 7805(f) of the Internal Revenue Code, the notice
of proposed rulemaking accompanying these regulations is being sent
to the Small Business Administration for comment on their impact on
small businesses.

Drafting Information

The principal author of these regulations is Roy A.

Hirschhorn of the Office of Assistant Chief Counsel (Corporate).

Other personnel from the IRS and Treasury participated in their
development.

List of Subjects in 26 CFR Part 1 Income taxes, Reporting and
recordkeeping requirements.

Adoption of Amendments to the Regulations Accordingly, 26 CFR part 1
is amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in
part as follows:

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

Par. 2. Section 1.1502-3 is amended by revising paragraphs (c)(3),
(d)(2) and (e)(3) to read as follows:

1.1502-3 Consolidated investment credit.

* * * * *

(c) * * *

(3) Special effective date. This paragraph (c) applies to
consolidated return years for which the due date of the income tax
return (without extensions) is on or before March 13, 1998.

See 1.1502-3T(c) for the rule that limits the group's use of a
section 38 credit carryover or carryback from a SRLY for a
consolidated return year for which the due date of the income tax
return (without extensions) is after March 13, 1998. For taxable
years not subject to 1.1502-3T(c), prior law applies. See
1.1502-3(c) in effect prior to January 12, 1998 (1.1502-3(c) as
contained in the 26 CFR part 1 edition revised April 1, 1997) for
prior law. See also 1.1502-3T(c)(4) for an optional effective date
rule (generally making the rules of this paragraph (c) inapplicable
to a consolidated return year beginning after December 31, 1996, if
the due date of the income tax return (without extensions) for such
year is on or before March 13, 1998).

(d) Examples. * * *

(2) Example (2) and Example (3) of this paragraph (d) do not apply
to consolidated return years for which the due date of the income
tax return (without extensions) is after March 13, 1998. For
consolidated return years for which the due date of the income tax
return (without extensions) is after March 13, 1998, see
1.1502-3T(d).

(e) * * *

(3) Special effective date. This paragraph (e) applies only to a
consolidated return change of ownership that occurred during a
consolidated return year for which the due date of the income tax
return (without extensions) is on or before March 13, 1998. See
1.1502-3T(c)(4) for an optional effective date rule (generally
making the rules of this paragraph (e) inapplicable if the
consolidated return change of ownership occurred on or after January
1, 1997, and during a consolidated return year for which the due
date of the income tax return (without extensions) is on or before
March 13, 1998).

* * * * *

Par. 3. Section 1.1502-3T is amended by revising paragraphs (c)(3)
and (d)(2) and adding a new paragraph (c)(4) to read as follows:

1.1502-3T Consolidated investment credit (temporary).

* * * * *

(c) * * *

(3) Effective date. This paragraph (c) applies to consolidated
return years for which the due date of the income tax return
(without extensions) is after March 13, 1998.

However, a group does not take into account a consolidated taxable
year for which the due date of the income tax return (without
extensions) is on or before March 13, 1998, in determining a
member's (or subgroup's) contributions to the consolidated section
38(c) limitation under this paragraph (c).

See also 1.1502-3(c).

(4) Optional effective date of January 1, 1997. In lieu of
paragraphs (c)(3) and (d)(2) of this section and 1.1502- 3(c)(3),
(d)(2) and (e)(3) (relating to the general business credit),
1.1502-4(f)(3) and (g)(3), 1.1502-4T(f) and (g)(3) (relating to the
foreign tax credit), 1.1502-9(a) (the next to last sentence),
1.1502-9T(b)(1)(v) (relating to overall foreign losses), and
1.1502-55T(h)(4)(iii)(C) (relating to the alternative minimum tax
credit), a consolidated group may apply such paragraphs as they
appear in 1998-10 I.R.B. 23 (see 601.601(d)(2) of this chapter). A
consolidated group making this choice must apply all such paragraphs
for all relevant years.

(d) * * *

(2) This paragraph (d) applies to consolidated return years for
which the due date of the income tax return (without extensions) is
after March 13, 1998. See also 1.1502-3(d) for years for which the
due date of the income tax return (without extensions) is on or
before March 13, 1998.

* * * * *

Par. 4. Section 1.1502-4 is amended by revising paragraphs (f)(3)
and (g)(3) to read as follows:

1.1502-4 Consolidated foreign tax credit.

* * * * *

(f) * * *

(3) Special effective date ending SRLY limitation. See 1.1502-4T(f)
for the rule that ends the SRLY limitation with respect to foreign
tax credits for consolidated return years for which the due date of
the income tax return (without extensions) is after March 13, 1998.
See also 1.1502-3T(c)(4) for an optional effective date rule
(generally making the rules of this paragraph (f) inapplicable to a
consolidated return year beginning after December 31, 1996, if the
due date of the income tax return (without extensions) for such year
is on or before March 13, 1998.

(g) * * *

(3) Special effective date for CRCO limitation. See 1.1502-4T(g)(3)
for the rule that ends the CRCO limitation with respect to a
consolidated return change of ownership that occurs on or after the
first day of a taxable year for which the due date of the income tax
return (without extensions) is after March 13, 1998. See also
1.1502-3T(c)(4) for an optional effective date rule (generally
making the rules of this paragraph (g) inapplicable if the
consolidated return change of ownership occurred on or after January
1, 1997, and during a consolidated return year for which the due
date of the income tax return (without extensions) is on or before
March 13, 1998).

* * * * *

Par. 5. Section 1.1502-4T is amended by revising paragraphs (f) and
(g)(3) to read as follows:

1.1502-4T Consolidated foreign tax credit (temporary).

* * * * *

(f) Limitation on unused foreign tax carryover or carryback from
separate return limitation years. Section 1.1502-4(f) does not apply
for consolidated return years for which the due date of the income
tax return (without extensions) is after March 13, 1998. For
consolidated return years for which the due date of the income tax
return (without extensions) is after March 13, 1998, a group shall
include an unused foreign tax of a member arising in a SRLY without
regard to the contribution of the member to consolidated tax
liability for the consolidated return year. See also 1.1502-3T(c)
(4) for an optional effective date rule (generally making the rules
of this paragraph (f) applicable to a consolidated return year
beginning after December 31, 1996, if the due date of the income tax
return (without extensions) for such year is on or before March 13,
1998).

* * * * *

(g)(3) Special effective date for CRCO limitation. Section
1.1502-4(g) applies only to a consolidated return change of
ownership that occurred during a consolidated return year for which
the due date of the income tax return (without extensions) is on or
before March 13, 1998. See also 1.1502-3T(c)(4) for an optional
effective date rule (generally making the rules of this paragraph
(g)(3) applicable if the consolidated return change of ownership
occurred on or after January 1, 1997, and during a consolidated
return year for which the due date of the income tax return (without
extensions) is on or before March 13, 1998).

Par. 6. In 1.1502-9, paragraph (a) is amended by removing the last
sentence and adding two sentences in its place to read as follows:

1.1502-9 Application of overall foreign loss recapture rules to
corporations filing consolidated returns.

(a) * * * See 1.1502-9T(b)(1)(v) for the rule that ends the
separate return limitation year limitation for consolidated return
years for which the due date of the income tax return (without
extensions) is after March 13, 1998. See also 1.1502- 3T(c)(4) for
an optional effective date rule (generally making the rules of
paragraphs (b)(1)(iii) and (iv) of this section inapplicable for a
consolidated return year beginning after December 31, 1996, if the
due date of the income tax return (without extensions) for such year
is on or before March 13, 1998).

* * * * *

Par. 7. Section 1.1502-9T is amended by revising paragraph (b)(1)(v)
to read as follows:

1.1502-9T Application of overall foreign loss recapture rules to
corporations filing consolidated returns (temporary).

* * * * *

(b)(1)(v) Special effective date for SRLY limitation.

Sections 1.1502-9(b)(1)(iii) and (iv) apply only to consolidated
return years for which the due date of the income tax return
(without extensions) is on or before March 13, 1998. For
consolidated return years for which the due date of the income tax
return (without extensions) is after March 13, 1998, the rules of
1.1502-9(b)(1)(ii) shall apply to overall foreign losses from
separate return years that are separate return limitation years. For
purposes of applying 1.1502-9(b)(1)(ii) in such years, the group
treats a member with a balance in an overall foreign loss account
from a separate return limitation year on the first day of the first
consolidated return year for which the due date of the income tax
return (without extensions) is after March 13, 1998, as a
corporation joining the group on such first day. An overall foreign
loss that is part of a net operating loss or net capital loss
carryover from a separate return limitation year of a member that is
absorbed in a consolidated return year for which the due date of the
income tax return (without extensions) is after March 13, 1998,
shall be added to the appropriate consolidated overall foreign loss
account in the year that it is absorbed. For consolidated return
years for which the due date of the income tax return (without
extensions) is after March 13, 1998, similar principles apply to
overall foreign losses when there has been a consolidated return
change of ownership (regardless of when the change of ownership
occurred). See also 1.1502-3T(c)(4) for an optional effective date
rule (generally making this paragraph (b)(1)(v) applicable to a
consolidated return year beginning after December 31, 1996, if the
due date of the income tax return (without extensions) for such year
is on or before March 13, 1998).

* * * * *

Par. 8. Section 1.1502-55T is amended by revising paragraph (h)(4)
(iii)(C) to read as follows:

1.1502-55T Computation of alternative minimum tax of consolidated
groups (temporary).

* * * * *

(h)(4) * * *

(iii) * * *

(C) Effective date. This paragraph (h)(4)(iii) applies to
consolidated return years for which the due date of the income tax
return (without extensions) is after March 13, 1998.

However, a group does not take into account a consolidated taxable
year for which the due date of the income tax return (without
extensions) is on or before March 13, 1998, in determining a
member's (or subgroup's) contributions to the consolidated section
53(c) limitation under paragraph (h)(4)(iii) of this section. See
1.1502-3T(c)(4) for an optional effective date rule (generally
making this paragraph (h)(4)(iii) applicable to a consolidated
return year beginning after December 31, 1996, if the due date of
the income tax return (without extensions) for such year is on or
before March 13, 1998).

Michael P. Dolan
Deputy Commissioner of Internal Revenue
Approved: March 9, 1998
Donald C. Lubick
Assistant Secretary of the Treasury


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