[Federal Register Volume 85, Number 208 (Tuesday, October 27, 2020)]
[Rules and Regulations]
[Pages 67966-67988]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-22974]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9927]
RIN 1545-BP27
Consolidated Net Operating Losses
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations under sections 1502
and 1503 of the Internal Revenue Code (Code). These regulations provide
guidance implementing recent statutory amendments to section 172 of the
Code
[[Page 67967]]
relating to the absorption of consolidated net operating loss (CNOL)
carryovers and carrybacks. These regulations also update regulations
applicable to consolidated groups that include both life insurance
companies and other companies to reflect statutory changes. These
regulations affect corporations that file consolidated returns.
DATES:
Effective Date: These regulations are effective on December 28,
2020.
Applicability Date: For dates of applicability, see Sec. Sec.
1.1502-1(l), 1.1502-21(h)(10), 1.1502-47(n), and 1.1503(d)-8(b)(8).
FOR FURTHER INFORMATION CONTACT: Justin O. Kellar at (202) 317-6720,
Gregory J. Galvin at (202) 317-3598, or William W. Burhop at (202) 317-
5363.
SUPPLEMENTARY INFORMATION:
Background
This Treasury decision amends the Income Tax Regulations (26 CFR
part 1) under section 1502 of the Code. Section 1502 authorizes the
Secretary of the Treasury or his delegate (Secretary) to prescribe
regulations for an affiliated group of corporations that join in filing
(or that are required to join in filing) a consolidated return
(consolidated group) to reflect clearly the Federal income tax
liability of the consolidated group and to prevent avoidance of such
tax liability. See Sec. 1.1502-1(h) (defining the term ``consolidated
group''). For purposes of carrying out those objectives, section 1502
also permits the Secretary to prescribe rules that may be different
from the provisions of chapter 1 of the Code that would apply if the
corporations composing the consolidated group filed separate returns.
Terms used in the consolidated return regulations generally are defined
in Sec. 1.1502-1.
On July 8, 2020, the IRS published a notice of proposed rulemaking
(REG-125716-18) in the Federal Register (85 FR 40927) under section
1502 of the Code (proposed regulations). The proposed regulations
provided guidance implementing recent statutory amendments to section
172, relating to net operating loss (NOL) deductions, and withdrew and
re-proposed certain sections of proposed guidance issued in prior
notices of proposed rulemaking relating to the absorption of CNOL
carryovers and carrybacks. In addition, the proposed regulations
updated regulations applicable to consolidated groups that include both
life insurance companies and other companies to reflect statutory
changes.
In connection with the proposed regulations, the IRS published on
the same date temporary regulations under section 1502 (TD 9900) in the
Federal Register (85 FR 40892) (temporary regulations). The temporary
regulations permit consolidated groups that acquire new members that
were members of another consolidated group to elect to waive all or
part of the pre-acquisition portion of an extended carryback period
under section 172 for certain losses attributable to the acquired
members. The text of the temporary regulations also serves as the text
of Sec. 1.1502-21(b)(3)(ii)(C) and (D) of the proposed regulations.
The IRS received seven comments in response to the proposed
regulations. Copies of the comments received are available for public
inspection at http://www.regulations.gov or upon request. No public
hearing was requested or held. This Treasury decision adopts the
proposed regulations, other than proposed Sec. 1.1502-21(b)(3)(ii)(C)
and (D), as final regulations with the changes described in the
following Summary of Comments and Explanation of Revisions. The
Treasury Department and the IRS expect to finalize proposed Sec.
1.1502-21(b)(3)(ii)(C) and (D) at a later date and welcome further
comments on these provisions.
Summary of Comments and Explanation of Revisions
I. Comments On and Changes To Proposed Sec. 1.1502-21
A. Overview of Section 172
These final revisions implement certain statutory amendments to
section 172 made by Public Law 115-97, 131 Stat. 2054 (December 22,
2017), commonly referred to as the Tax Cuts and Jobs Act (TCJA), and by
the Coronavirus Aid, Relief, and Economic Security Act (CARES Act),
Public Law 116-136, 134 Stat. 281 (March 27, 2020). See generally the
Background section of the preamble to the proposed regulations. As
amended, section 172(a)(2) allows an NOL deduction for a taxable year
beginning after December 31, 2020, in an amount equal to the sum of (A)
the aggregate amount of pre-2018 NOLs that are carried to such taxable
year, and (B) the lesser of (i) the aggregate amount of post-2017 NOLs
that are carried to such taxable year, or (ii) the ``80-percent
limitation.'' The 80-percent limitation is equal to 80 percent of the
excess (if any) of (I) taxable income computed without regard to any
deductions under sections 172, 199A, and 250 of the Code, over (II) the
aggregate amount of pre-2018 NOLs carried to the taxable year. See
section 172(a)(2)(B)(ii). For purposes of the foregoing computation,
the term ``pre-2018 NOLs'' refers to NOLs arising in taxable years
beginning before January 1, 2018, and the term ``post-2017 NOLs''
refers to NOLs arising in taxable years beginning after December 31,
2017.
The 80-percent limitation does not apply to the offset of income by
NOLs in taxable years beginning before January 1, 2021. Section
172(a)(1). The 80-percent limitation also does not apply to limit the
use of pre-2018 NOLs. Section 172(a)(2)(A).
Moreover, the 80-percent limitation does not apply to insurance
companies other than life insurance companies (nonlife insurance
companies). Section 172(f). Therefore, the taxable income of nonlife
insurance companies may be fully offset by NOL deductions. In addition,
under section 172(b)(1)(C) and (b)(1)(D)(i), losses of nonlife
insurance companies arising in taxable years beginning after December
31, 2020, may be carried back two years and carried over 20 years. In
contrast, losses (aside from farming losses) of other taxpayers arising
in such taxable years may not be carried back but may be carried
forward indefinitely. Section 172(b)(1). Thus, nonlife insurance
companies are subject to special rules under section 172 both with
respect to the amount of taxable income that may be offset by NOL
deductions and with respect to the taxable years to which NOLs may be
carried.
B. Overview of the Proposed Approach and the Alternative Approach
To implement the special rules under section 172 for nonlife
insurance companies for a consolidated return year beginning after
December 31, 2020, the proposed regulations provided that the
application of the 80-percent limitation within a consolidated group to
post-2017 NOLs depends on the status of the member that generated the
income being offset. The proposed regulations further provided that the
amount of post-2017 CNOLs that may be absorbed by one or more members
of the group in such a consolidated return year (post-2017 CNOL
deduction limit) is determined by applying the 80-percent limitation,
section 172(f) (that is, the special rule for nonlife insurance
companies), or both, to the group's consolidated taxable income (CTI)
for that year. See proposed Sec. 1.1502-21(a)(2)(ii)(A) and (B).
For consolidated groups comprised of both nonlife insurance
companies and other members for a consolidated return year beginning
after December 31, 2020, the proposed regulations adopted a two-factor
computation (proposed
[[Page 67968]]
approach). In general, under the proposed approach, the post-2017 CNOL
deduction limit for such a group equals the sum of two amounts. The
first amount, which relates to the income of those members that are not
nonlife insurance companies (residual income pool), is subject to the
80-percent limitation. The second amount, which relates to the income
of those members that are nonlife insurance companies (nonlife income
pool), is not subject to the 80-percent limitation. See proposed Sec.
1.1502-21(a)(2)(iii)(C). Thus, the proposed approach divides a
consolidated group's nonlife insurance companies and its other members
into two separate ``pools'' for purposes of determining the amount of
CTI that is available to be offset by post-2017 CNOLs after applying
the 80-percent limitation.
In formulating the proposed regulations, the Treasury Department
and the IRS considered another approach (alternative approach). This
alternative approach would have required a group to first offset income
and loss items within a pool of nonlife insurance companies and a pool
of other members for all purposes of section 172 applicable to taxable
years beginning after December 31, 2020. In other words, the
alternative approach would have applied a pooling concept beyond merely
determining the group's post-2017 CNOL deduction limit, but would have
required a group's CTI to be allocated between the operations of its
nonlife insurance company members, which can be offset fully by CNOL
deductions, and the operations of its other members subject to the 80-
percent limitation. This alternative approach would also have applied
similar rules to allocate CNOLs within groups including both nonlife
insurance companies and other members to consistently identify the
portions of CNOLs allocable to nonlife insurance company members, which
are subject to different carryover rules than those of other members.
The alternative approach would have contrasted with the historical
application of Sec. 1.1502-21(b)(2)(iv)(B), under which a CNOL for a
taxable year is attributed pro rata to all members of a group that
produce net loss, without first netting among entities of the same
type. In the preamble to the proposed regulations, the Treasury
Department and the IRS requested comments regarding both the proposed
approach and the alternative approach.
C. Comments on the Proposed Approach and the Alternative Approach
In response to the request for comments, the Treasury Department
and the IRS received comments that uniformly approved the proposed
approach. For example, two commenters commended the proposed
regulations as implementing the statutory amendments to section 172 in
a reasonable manner that is consistent with both the statute and
consolidated return principles. Specifically, both commenters supported
the proposed regulations' approach to computing a group's post-2017
CNOL deduction limit as well as the proposed regulations' retention of
the historical pro rata approach under Sec. 1.1502-21(b)(2)(iv)(B) to
determine the amount of nonlife insurance company losses that can be
carried to other taxable years.
In support of the proposed regulations, one commenter asserted that
the proposed approach is more consistent with the treatment of CNOLs as
consolidated items and with the current CNOL use and absorption rules
in Sec. 1.1502-21 than the alternative approach. The commenter further
asserted that, because the alternative approach would depart from the
general pro rata rules of Sec. 1.1502-21 by first netting income and
loss among entities of the same type within a consolidated group, the
alternative approach could result in computational and compliance
complications in circumstances that may be difficult to anticipate.
In response to the comments received, these final regulations
retain the proposed approach to computing a consolidated group's post-
2017 CNOL deduction limit.
D. Application of the Proposed Approach to Life-Nonlife Groups
One commenter recommended that, for consolidated groups with both
nonlife insurance companies and life insurance companies, the amounts
of the residual income pool and the nonlife income pool in proposed
Sec. 1.1502-21(a)(2)(iii)(C)(2) and (3) be clarified to refer only to
the items of income, gain, deduction, or loss of members of the nonlife
subgroup (as defined in Sec. 1.1502-47(b)(9) of these final
regulations). The commenter further recommended that, in making this
clarification, the Treasury Department and the IRS should not prevent
nonlife CNOLs from offsetting life subgroup income where permitted by
the Code and Sec. 1.1502-47. The commenter noted that this outcome
appears to be the intent of the cross-reference to Sec. 1.1502-47 in
proposed Sec. 1.1502-21(b)(2)(iv)(E), but the commenter indicated that
clarification would be useful. The Treasury Department and the IRS
agree with the commenter regarding the purpose of the cross-reference
to Sec. 1.1502-47 in proposed Sec. 1.1502-21(b)(2)(iv)(E) and have
revised the regulations to more clearly confirm this outcome.
E. Consolidated Capital Gain Net Income
Section 1.1502-11(a)(3) provides that the CTI for a consolidated
return year is determined by taking into account, among other
enumerated items, any consolidated capital gain net income. See
generally Sec. 1.1502-22(a) (providing rules for determining
consolidated capital gain net income). Under Sec. 1.1502-22(a), the
determinations for a consolidated group under section 1222, including
capital gain net income, are not made separately. Instead, such
consolidated amounts are determined for the group as a whole.
Section 1.1502-11 does not provide explicit rules for allocating
consolidated capital gain net income among members. Thus, one commenter
requested that the final regulations clarify that, for groups that
include nonlife insurance companies, consolidated capital gain net
income under Sec. 1.1502-11(a)(3) is allocated to the residual income
pool and the nonlife income pool using a pro rata method based on the
principles of Sec. 1.1502-21(b)(2)(iv), as reflected in the general
rule in Sec. 1.1502-21(b)(1), for the use and absorption of CNOLs.
Section 1.1502-11 also does not provide explicit rules for
determining the amount of each member's income that is offset by losses
(whether incurred in the current year or carried over or back as a part
of a CNOL or consolidated net capital loss). However, the Treasury
Department and the IRS understand that, in the absence of express
rules, consolidated return practitioners generally apply the principles
of Sec. 1.1502-21(b)(2)(iv) to make such determinations. The
methodology for computing a consolidated group's post-2017 CNOL
deduction limit is intended to implement the changes made to section
172(a) by the TCJA and the CARES Act in a manner that is flexible for
taxpayers to apply and administrable for the IRS. The Treasury
Department and the IRS have determined that specific rules regarding
the allocation of consolidated capital gain net income to the residual
income pool and the nonlife income pool under Sec. 1.1502-
21(a)(2)(iii)(C)(2) and (3) would exceed the scope of these final
regulations. Accordingly, the Treasury Department and the IRS continue
to reflect on the commenter's recommendation but have not incorporated
that recommendation into the final regulations.
[[Page 67969]]
F. Example 6 in Proposed Sec. 1.1502-21(b)(2)(v)(F)
Proposed Sec. 1.1502-21(b)(2)(v)(F) (Example 6) contains an
example that illustrates the application of section 172 to a CNOL
incurred by a consolidated group (P group) that includes P, an
includible corporation under section 1504(b) of a type other than a
nonlife insurance company, and PC1, a nonlife insurance company. Both P
and PC1 were incorporated in Year 1, a year beginning after December
31, 2020. In Year 1, the P group has $45 of CTI, $20 of which is
attributable to P and $25 of which is attributable to PC1. In Year 2,
the P group incurs a $16 CNOL that is attributable to PC1 and that is
carried back to Year 1 under section 172(b)(1)(C)(i).
The example illustrates that, under proposed Sec. 1.1502-
21(a)(2)(iii)(C), the P group's post-2017 CNOL deduction limit for Year
1 is $41, which is the sum of the residual income pool ($16) and the
nonlife income pool ($25), as described in proposed Sec. 1.1502-
21(a)(2)(iii)(C)(2) and (3), respectively. More specifically, the
amount of the residual income pool equaled the lesser of the aggregate
amount of post-2017 NOLs carried to Year 1 ($16), or 80 percent of the
excess of P's taxable income for that year ($20) over the aggregate
amount of pre-2018 NOLs allocable to P ($0), which also was $16 (80
percent x ($20-$0)). See proposed Sec. 1.1502-21(b)(2)(v)(F)(3). The
amount of the nonlife income pool equaled the excess of PC1's taxable
income for Year 1 ($25) over the aggregate amount of pre-2018 NOLs
allocable to PC1 ($0). Id.
Two commenters requested clarification as to how much taxable
income in each pool is offset by a CNOL carryover or carryback if each
pool has positive taxable income, as in Example 6. Specifically,
commenters contended that a specific absorption rule is needed to
determine how much taxable income in the residual income pool (which is
subject to the 80-percent limitation) can be offset by subsequent CNOL
carryovers or carrybacks to the same year. For example, assume the same
facts as in Example 6, but that the P group also incurs a $30 CNOL in
Year 3 that is entirely attributable to PC1 and that is eligible to be
carried back to Year 1. Absent a rule specifying how much taxable
income in each pool was offset in Year 1 by the $16 Year 2 CNOL
carryback, the commenters questioned how to compute the residual income
pool for purposes of determining how much of the P group's Year 3 CNOL
carryback could be absorbed by the P group in Year 1.
As noted in part I.A of this Summary of Comments and Explanation of
Revisions, the computation in section 172(a)(2)(B)(ii) is made
``without regard to the deductions under [section 172] and sections
199A and 250.'' Consistent with the statute, the amount of income in
the residual income pool that is subject to the 80-percent limitation
for a particular consolidated return year is not recomputed to reflect
the amount of CNOLs carried over to and absorbed in that year. See
Sec. 1.1502-21(a)(2)(iii)(C)(2) of these final regulations. Rather,
the only component of the post-2017 CNOL deduction limit that is
subject to change upon the carryover or carryback of additional CNOLs
to the same consolidated return year is the aggregate amount of post-
2017 CNOLs carried to that year. See Sec. 1.1502-
21(a)(2)(iii)(C)(1)(i) of these final regulations. Determining this
amount does not require an absorption rule.
With regard to Example 6, if the P group were to incur a $30 CNOL
in Year 3 that was eligible to be carried back to Year 1, the P group
would redetermine the aggregate amount of the P group's post-2017 CNOLs
that are carried to Year 1, but the P group would not recompute the
amount of Year 1 income subject to the 80-percent limitation. Thus, an
absorption rule is not needed to determine how much of the P group's
Year 1 CTI can be offset by subsequent CNOL carrybacks. However, these
final regulations provide additional facts in Example 6 to illustrate
the computation of the amount of additional CNOL carryovers or
carrybacks to the same consolidated return year that can be deducted to
offset income in that year.
G. Split-Waiver Elections
If a member of one consolidated group becomes a member of another
consolidated group, Sec. 1.1502-21(b)(3)(ii)(B) permits the acquiring
group to make an irrevocable election to relinquish, with respect to
all CNOLs attributable to the acquired corporation, the portion of the
carryback period for which the acquired corporation was a member of
another group (so long as any other corporation joining the acquiring
group that was affiliated with the acquired corporation immediately
before it joined the acquiring group also is included in the waiver).
A commenter noted that, pursuant to Sec. 1.1502-21(b)(3)(ii)(B),
an acquiring group may make a split-waiver election only with respect
to acquired corporations that were members of a different consolidated
group in a carryback year. The commenter recommended that Sec. 1.1502-
21(b)(3)(ii) be expanded to allow a split-waiver election if the
acquired corporation was not a member of a consolidated group in the
carryback year.
The Treasury Department and the IRS appreciate the commenter's
suggestion and will continue to consider it in connection with the
future finalization of the temporary regulations. However, this comment
exceeds the scope of these final regulations, which adopt the
provisions of the proposed regulations other than those for which the
text was contained in the temporary regulations (specifically, Sec.
1.1502-21(b)(3)(ii)(C) and (D)). Therefore, the Treasury Department and
the IRS decline to adopt this recommendation in this Treasury decision.
H. Modification to SRLY Rules
The proposed regulations modify the separate return limitation year
(SRLY) rules in Sec. 1.1502-21(c) to take into account the limitations
on NOL deductions under section 172, as amended by the TCJA and the
CARES Act. See proposed Sec. 1.1502-21(c)(1)(i)(E). A commenter
recommended that this modification not apply for purposes of section
1503(d) (the dual consolidated loss (DCL) rules). In certain cases, the
extent to which section 1503(d) restricts the use of a DCL, or requires
the recapture of a DCL (or a related interest charge), depends on the
application of the SRLY rules in Sec. 1.1502-21(c), subject to certain
adjustments. See Sec. Sec. 1.1503(d)-4(c)(3) and 1.1503(d)-6(h)(2). In
these cases, the adjusted SRLY rules are generally intended to ensure
that a DCL may be used only to offset income of the dual resident
corporation or separate unit that incurred the DCL, such that the use
does not result in a ``double dip'' of the DCL.
The commenter recommended that the modification reflected in
proposed Sec. 1.1502-21(c)(1)(i)(E) not apply for purposes of the DCL
rules because the modification addresses policies specific to the SRLY
rules in Sec. 1.1502-21(c) (replicating, to the extent possible,
separate-entity usage of SRLY attributes), which differ from the
policies underlying the DCL rules (preventing double dipping of
losses). In addition, the commenter asserted that applying the rule in
proposed Sec. 1.1502-21(c)(1)(i)(E) for DCL purposes could distort the
determination of whether double dipping could occur.
The Treasury Department and the IRS agree with the commenter. The
final regulations therefore provide that Sec. 1.1502-21(c)(1)(i)(E)
does not apply for purposes of the DCL rules. See Sec. 1.1503(d)-
4(c)(3)(v).
[[Page 67970]]
I. Clarifying Changes to Proposed Sec. 1.1502-21
In addition to the foregoing comments, a commenter recommended
clarifying changes to proposed Sec. 1.1502-21. The Treasury Department
and the IRS appreciate these suggested clarifications and have
incorporated many of them into the final regulations. However, the
commenter also recommended deleting the reference to section 199A in
proposed Sec. Sec. 1.1502-21(a)(2)(iii)(A)(2)(ii) and 1.1502-
21(a)(2)(iii)(C)(2)(ii) on the grounds that the deduction under section
199A is available to only noncorporate taxpayers. Because section
199A(g) provides a deduction for specified agricultural or
horticultural cooperatives, which (as C corporations) can be members of
a consolidated group, these references to section 199A have been
retained in the final regulations.
The Treasury Department and the IRS also have made additional
clarifying revisions based on further review of the proposed
regulations. In particular, the final regulations contain corrections
to scrivener's errors in the two-factor computation in proposed Sec.
1.1502-21(a)(2)(iii). Specifically, the ``lesser of'' language in
proposed Sec. 1.1502-21(a)(2)(iii)(C)(2), which was intended to
reflect the application of section 172(a)(2)(B) to groups that include
both nonlife insurance companies and other corporations, was
mislocated. To accurately reflect the comparison required under section
172(a)(2)(B), the language at issue has been moved to Sec. 1.1502-
21(a)(2)(iii)(C)(1) of the final regulations.
Additional edits have been made to enhance the consistency and
clarity of the rules in proposed Sec. 1.1502-21(a)(2). For example,
language reflecting the ``lesser of'' comparison described in the
preceding paragraph has been explicitly integrated into Sec. Sec.
1.1502-21(a)(2)(iii)(B) and 1.1502-21(a)(2)(iii)(C)(5)(ii) (concerning
CNOL deductions that offset income of nonlife insurance company
members) of these final regulations. As discussed in part II.B of this
Summary of Comments and Explanation of Revisions, the post-2017 CNOL
deduction limit equals the maximum amount of post-2017 CNOLs that can
be deducted against taxable income in a consolidated return year
beginning after December 31, 2020. This amount could never exceed the
total amount of post-2017 CNOLs carried to that year. See section
172(f) (providing that, in the case of a nonlife insurance company, the
amount of the NOL deduction allowed under section 172(a) in any taxable
year equals the aggregate of NOL carrybacks and carryovers to that
year).
Likewise, in the absence of any other limitation, the taxable
income of a taxpayer always constitutes a limit on the deductibility of
NOLs. See generally section 172(b)(2). Without such limit, the
deduction of NOLs in excess of taxable income would create an
additional NOL. The Treasury Department and IRS have determined that
explicitly providing the respective post-2017 CNOL and taxable income
limitations on the deduction of NOLs to offset taxable income of
nonlife insurance companies will enhance the clarity of the final
regulations and the consistency of their application.
II. Comments On and Changes To Proposed Sec. 1.1502-47
The proposed regulations updated the rules in Sec. 1.1502-47 to
reflect statutory changes enacted since these rules were promulgated.
Commenters commended the Treasury Department and the IRS for updating
these regulations. Additionally, several commenters expressed their
understanding that another guidance project has been initiated to
propose substantive changes to Sec. 1.1502-47 and urged the Treasury
Department and the IRS to give priority to this effort. These
commenters argued that the objective of that guidance project should be
the elimination of any provisions that depart from general consolidated
return principles in life-nonlife consolidation, except to the extent
non-conforming provisions are necessary to implement specific
provisions of the Code. In particular, these commenters expressed
concern about the treatment of consolidated capital gains and losses
under Sec. 1.1502-47 and requested simplification of the eligibility
and tacking rules.
The Treasury Department and the IRS appreciate the commenters'
input and welcome further comments regarding substantive changes to
Sec. 1.1502-47 for purposes of potential future guidance. However,
such changes are beyond the scope of these final regulations.
Additionally, commenters recommended several clarifying changes to
proposed Sec. 1.1502-47. Many of these suggested clarifications have
been incorporated into the final regulations. For example, these final
regulations have added a cross-reference to the definition of ``nonlife
insurance company'' in Sec. 1.1502-1(k). However, one commenter
recommended that Sec. 1.1502-47(g)(3) of these final regulations be
modified to more closely parallel Sec. 1.1502-47(f)(3) of these final
regulations. The commenter further requested that paragraph (d)(5) of
these final regulations be modified to explicitly set forth the various
rules (both statutory and regulatory) that apply to certain dividends
received by an includible member from another member of the
consolidated group. These comments exceed the scope of these final
regulations, but the Treasury Department and the IRS will continue to
consider these comments for purposes of potential future guidance
regarding Sec. 1.1502-47.
Effective/Applicability Dates
The final regulations in Sec. Sec. 1.1502-1(k), 1.1502-21(a),
(b)(1), (b)(2)(iv), and (c)(1)(i)(E), 1.1502-47, and 1.1503(d)-8(b)(8)
apply to taxable years beginning after December 31, 2020. However, a
taxpayer may choose to apply the rules in Sec. Sec. 1.1502-1(k) and
1.1502-47 of these final regulations to taxable years beginning on or
before December 31, 2020. If a taxpayer makes the choice described in
the previous sentence with regard to the rules in Sec. 1.1502-47, the
corporation must apply those rules in their entirety and consistently
with the provisions of the Internal Revenue Code applicable to the
years at issue.
Special Analyses
I. Regulatory Planning and Review--Economic Analysis
Executive Orders 13563, 13771, and 12866 direct agencies to assess
costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, distributive impacts, and equity). Executive
Order 13563 emphasizes the importance of quantifying both costs and
benefits, of reducing costs, of harmonizing rules, and of promoting
flexibility.
These final regulations have been designated as subject to review
under Executive Order 12866 pursuant to the Memorandum of Agreement
(April 11, 2018) between the Treasury Department and the Office of
Management and Budget (OMB) regarding review of tax regulations. The
Office of Information and Regulatory Affairs (OIRA) has designated the
final regulations as economically significant under section 1(c) of the
Memorandum of Agreement. Accordingly, OMB has reviewed the final
regulations.
A. Background and Need for Regulations
In general, taxpayers whose deductions exceed their income generate
a net operating loss (NOL),
[[Page 67971]]
calculated under the rules of section 172. Section 172 also governs the
use of NOLs generated in other years to offset taxable income in the
current year. Regulations issued under the authority of section 1502
may be used to govern how section 172 applies to consolidated groups of
C corporations. In general, a consolidated group generates a combined
NOL at an aggregate level (CNOL), with the CNOL generally equal to the
loss generated from treating the consolidated group as a single entity.
Under regulations promulgated prior to the Tax Cuts and Jobs Act
(TCJA), the allowed CNOL deduction was equal to the lesser of the CNOL
carryover or the combined taxable income of the group (before the CNOL
deduction).
The TCJA and the Coronavirus Aid, Relief, and Economic Security
(CARES) Act made several changes to section 172. First, the TCJA and
the CARES Act disallowed the carry back of NOLs generated in taxable
years beginning after 2020, except for farming losses and losses
incurred by corporations that are insurance companies other than life
insurance companies (nonlife insurance companies). Second, the TCJA and
the CARES Act limited the NOL deduction in taxable years beginning
after 2020 for NOLs generated in 2018 or later (post-2017 NOLs) to 80
percent of taxable income determined after the deduction for pre-2018
NOLs but before the deduction for post-2017 NOLs. This 80-percent
limitation does not apply to nonlife insurance companies.
These final regulations implement the changes to section 172 in the
context of consolidated groups. In particular, regulations are needed
to address three issues related to consolidated groups that were not
expressly addressed in the TCJA or the CARES Act. First, the final
regulations describe how to determine the 80-percent limitation in the
case of a ``mixed'' group--that is, a consolidated group containing
nonlife insurance companies and other members. Second, the final
regulations address the calculation and allocation of farming losses.
Third, the final regulations implement the 80-percent limitation into
existing regulations to determine the CNOL deduction attributable to
losses from a member arising during periods in which that member was
not part of that group. Part I.B of this Special Analyses describes the
manner by which the final regulations addresses each of these issues.
Part I.B also describes an alternative approach that was
contemplated by the Treasury Department and the IRS regarding the
allocation of currently generated losses to nonlife insurance companies
and other members. The Treasury Department and the IRS elected not to
implement this approach.
B. Overview of the Final Regulations
In this part I.B the following terms are used. The term ``P group''
means a consolidated group of which P is the common parent. The term
``P&C member'' means a member of the P group that is a nonlife
insurance company. The term ``C member'' means a member of the P group
that is a C corporation other than a nonlife insurance company.
1. Application of 80-Percent Limitation in Mixed Groups
Under the statute, the general rule for determining the NOL
deduction (for a taxable year beginning after December 31, 2020)
effectively proceeds in two steps. First, the taxpayer deducts pre-2018
NOLs without limit. Second, the taxpayer deducts post-2017 NOLs up to
80 percent of the taxpayer's taxable income (computed without regard to
the deductions under sections 199A and 250) determined after the
deduction of pre-2018 NOLs (but, naturally, before the deduction for
post-2017 NOLs). However, this 80-percent limitation does not apply for
corporations that are nonlife insurance companies.
The application of the 80-percent limitation to the P group is
straightforward if (i) there are no pre-2018 NOLs and (ii) both classes
of P&C members and C members have positive income before the CNOL
deduction. In that case, these final regulations provide, quite
naturally, that the CNOL limitation is determined by adding (i) the
pre-CNOL income generated by the class of C members (C member income
pool), determined by applying the 80-percent limitation, plus (ii) 100
percent of the pre-CNOL income generated by the class of P&C members
(P&C member income pool). This latter treatment reflects the rule in
section 172(f) that nonlife insurance companies are not subject to the
80-percent limitation.
One complication arises when the pre-CNOL C member income pool is
positive and the pre-CNOL P&C income pool is negative, and the P group
has positive combined pre-CNOL taxable income. In this case (where the
pre-CNOL income is generated by C members, rather than P&C members),
these final regulations provide that the post-2017 CNOL deduction limit
is determined by applying the 80-percent limitation to the income of
the P group. If the situation were reversed, such that the P group had
positive combined taxable income but the pre-CNOL income is generated
by P&C members, rather than the C members, the post-2017 CNOL deduction
limit is equal to the income of the P group (that is, determined
without regard to the 80-percent limitation). In essence, in these
situations, the amount of the P group's income able to absorb a post-
2017 CNOL carryover is defined by the member pool (that is, the C
member income pool or the P&C member income pool) that is generating
the income.
The other complication occurs when there is a pre-2018 NOL. In this
situation, it matters whether the pre-2018 NOL is treated as reducing
the amount of the C member income pool or reducing the amount of P&C
member income pool. Consider the following example (Example 1). In
Example 1, the P group carries $50 in pre-2018 NOLs and $1000 in post-
2017 NOLs to 2021. In 2021, the P&C members and the C members,
respectively, earn (pre-CNOL) income of $100. If the pre-2018 NOL were
treated as solely reducing the amount of C member income pool, then the
limitation for the post-2017 CNOL deduction would be $100 plus 80
percent of $50 ($100 minus $50), equal to $140. If the pre-2018 NOL
were treated as solely reducing the amount of the P&C member income
pool, then the post-2017 CNOL deduction limit for the P group would be
$50 ($100 minus $50) plus 80 percent of $100, or $130.
These final regulations allocate the pre-2018 NOL pro-rata to the C
member income pool and the P&C member income pool in proportion to
their current-year income. In Example 1, $25 of the pre-2018 NOL would
be allocated to the C member income pool and $25 to the P&C member
income pool. Therefore, the post-2017 CNOL deduction limit for the P
group would be $75 ($100 minus $25) plus 80 percent of $75 ($100 minus
$25), or $135.
2. Farming Losses
Section 172 provides that NOLs arising in a taxable year beginning
after December 31, 2020, may not be carried back to prior years, with
two exceptions: (1) Farming losses and (2) nonlife insurance company
losses. Section 172(b)(1)(B) defines a ``farming loss'' as the smaller
of the actual loss from farming activities in a given year (that is,
the excess of the deductions in farming activities over income in
farming activities) and the total NOL generated in that year. This
statutory provision means that if a taxpayer incurs a loss in farming
activities but has overall income in other activities, the farming loss
will be smaller than the loss in farming activities (and can possibly
be zero).
[[Page 67972]]
Regulations were needed to clarify two issues that arise in the
context of consolidated groups. First, these regulations clarify that
the maximum amount of farming loss is the CNOL of the group rather than
the NOL of the specific member generating the loss in farming
activities. This approach follows closely regulations issued by the
Treasury Department and the IRS in 2012 in an analogous setting.
Second, given the overlapping categories of carryback-eligible NOLs
(farming losses and nonlife insurance companies), regulations are
needed to allocate the farming loss to the various members to determine
the total amount of CNOL that can be carried back. Consider the
following example (Example 2). In Example 2, the P group consists of
one C member and one P&C member. In 2021, the C member's only activity
is farming and the C member incurs a loss of $30, while the P&C member
incurs a loss of $10. The total farming loss is $30, since $30 is less
than the P group CNOL of $40. If this farming loss were allocated
entirely to the C member, then the total amount eligible for carryback
would be $40 (that is, $30 for the farming loss and $10 for the loss
incurred by the P&C member). By contrast, if the farming loss were
allocated entirely to the P&C member, only $30 would be eligible to be
carried back.
Again, following a similar rule as the 2012 regulations, these
final regulations allocate the farming loss to each member of the group
in proportion with their share of total losses, without regard to
whether each member actually engaged in farming. In Example 2, this
would allocate $7.50 (that is, one-fourth of $30) of the farming loss
to the P&C member and the remaining $22.50 (that is, three-fourths of
$30) to the C member. Therefore, the P group would be allowed to carry
back $32.50 total (that is, the $10 of loss generated by the P&C member
and the $22.50 of farming losses allocated to the C member).
3. Separate Return Limitation Year
To reduce ``loss trafficking,'' existing regulations under section
1502 limit the extent to which a consolidated group (that is, the P
group) can claim a CNOL attributable to losses generated by some member
(M) in years in which M was not a member. In particular, existing rules
limit this amount of loss to the amount of the loss that would have
been deductible had M remained a separate entity; that is, the rules
are designed to preserve neutrality in loss use between being a
separate entity or a member of a group. Existing rules operationalize
this principle using the mechanic of a ``cumulative register.'' The
cumulative register is equal to the (cumulative) amount of M's income
that is taken into account in the P group's income. Income earned by M
while a member of the P group increases the cumulative register, while
losses (carried over or otherwise) taken into account by the group
reduce the cumulative register. In general, the existing rules provide
that M's pre-group NOLs cannot offset the P group's income when the
cumulative register is less than or equal to zero.
The introduction of the 80-percent limitation in the TCJA and CARES
Act necessitates an adjustment to this mechanism in order to retain
this neutrality-in-loss-use property. In particular, these final
regulations provide that any losses by M that are absorbed by the P
group and subject to the 80-percent limitation cause a reduction to the
register equal to the full amount of income needed to support that
deduction. The following example (Example 3) demonstrates why this
adjustment is necessary. In Example 3, P and S are each corporations
other than nonlife insurance companies (that is, they are subject to
the 80-percent limitation). Suppose in 2021, S incurs a loss of $800,
which is the only loss ever incurred by S. In 2022, S incurs income of
$400. If S were not a member of a consolidated group, its 2022 NOL
deduction would be limited to $320 (80 percent of $400). Suppose
instead that P acquires S in 2022 and that P has separate income of
$600 in 2022, so the consolidated group has $1000 in pre-CNOL income in
2022. Before claiming any CNOLs, S's cumulative register would increase
to $400 in 2022. Without any additional rules, the $400 cumulative
register would allow P to claim a CNOL of $400 (bringing the register
down to zero), greater than what would have been allowed had S remained
a separate entity. By contrast, requiring the register to be reduced by
125 percent of the NOL (as under the final regulations) allows P to
claim only a $320 CNOL, replicating the result if S were a separate
entity.
4. Allocation of Current Losses to Nonlife Insurance Companies
In general, under the TCJA and CARES Act, taxpayers may not carry
back any losses generated in tax years beginning after 2020, with the
exception of losses generated by nonlife insurance companies and
farming losses. Existing regulations clarify that CNOLs are allocated
to each member in proportion to the total loss. This allocation rule
can be illustrated by example (Example 4). In Example 4, the C member
has a current loss of $10 (in a tax year beginning in 2021 or later).
The P&C members are corporations PC1 and PC2. PC1 has a gain of $40 and
PC2 has a loss of $40. Assume that the P group does not engage in any
farming activities. The CNOL for the P group is $10. The $10 of CNOL is
allocated to the C member and PC2 in proportion to their total losses.
The C member has one-fifth of the total loss ($10 divided by $50) and
PC2 has four-fifths. Therefore, under the existing regulations, the C
member is allocated $2 ($10 times one-fifth) and PC2 is allocated $8
($10 times four-fifths). In the end, $8 of the CNOL may be carried back
in Example 4. The final regulations do not alter these existing
regulations.
In formulating these final regulations, the Treasury Department and
the IRS contemplated an alternative approach. Under this alternative,
consolidated groups would be required to compute gain and loss by
grouping P&C members and C members separately prior to allocating CNOL
to members. The application of this approach can be seen by revisiting
Example 4. Under this alternative approach, because the P&C members as
a whole do not have a loss, no CNOL would be allocated to any P&C
member regardless of the gain or loss of any of the individual P&C
members. Thus, under the alternative approach, none of the $10 CNOL
would be eligible for carryback in Example 4.
C. Economic Analysis
1. Baseline
In this analysis, the Treasury Department and the IRS assess the
benefits and costs of the final regulations relative to a no-action
baseline reflecting anticipated Federal income tax-related behavior in
the absence of these regulations.
2. Summary of Economic Effects
The final regulations provide certainty and clarity to taxpayers
regarding the treatment of NOLs under section 172 and the regulations
under section 1502. In the absence of such guidance, the chance that
different taxpayers would interpret the statute and the regulations
differently would be exacerbated. Similarly situated taxpayers might
interpret those rules differently, with one taxpayer pursuing an
economic opportunity that another taxpayer might decline to make
because of different interpretations of the ability of losses to offset
taxable income. If this second taxpayer's activity were more
profitable, the resulting economic decisions are inefficient. Such
situations are more likely to arise in the absence of guidance. While
no guidance can
[[Page 67973]]
curtail all differential or inaccurate interpretations of the statute,
the regulations significantly mitigate the chance for differential or
inaccurate interpretations and thereby increase economic efficiency.
To the extent that the specific provisions of the final regulations
result in the acceleration or delay of the tax year in which taxpayers
deduct an NOL relative to the baseline, those taxpayers may face a
change in the present value of the after-tax return to new investment,
particularly investment that may result in losses. The resulting
changes in the incentives facing the taxpayer are complex and may lead
the taxpayer either to increase, decrease, or leave unchanged the
volume and risk level of its investment portfolio, relative to the
baseline, in ways that depend on the taxpayer's stock of NOLs and the
depreciation schedules and income patterns of investments they would
typically consider, including whether the investment is subject to
bonus depreciation. Because these elements are complex and taxpayer-
specific and because the sign of the effect on investment is generally
ambiguous, the Treasury Department and the IRS have not projected the
specific effects on economic activity arising from the final
regulations.
The Treasury Department and the IRS project that these regulations
will have annual effects below $100 million ($2020) relative to the
baseline. The effects are small because the regulations apply only to
consolidated groups; in addition, several provisions of the final
regulations apply only to the extent that a consolidated group contains
a mix of member types. Moreover, the effects are small because: (i) For
provisions of the final regulations that affect the deduction for pre-
2018 NOLs, the effects are limited to the stock of the pre-2018 NOLs;
and (ii) for provisions that affect the allowable rate of loss usage of
post-2017 NOLs, the effect arises only from the 20 percentage point
differential in the deduction for these NOLs. This latter effect in
particular, to which the bulk of the provisions apply, is too small to
substantially affect taxpayers' use of NOLs and thus too small to lead
to meaningful changes in economic decisions.
The Treasury Department and the IRS did not estimate more precisely
the economic effects of these regulations because (i) the effects are
expected to be small and (ii) data or models that would address the
effects of these regulations are not readily available. In the absence
of quantitative estimates, the subsequent discussion provides
qualitative analysis of these economic effects.
The proposed regulations solicited comments on the economic effects
of the proposed regulations. No such comments were received.
3. Allocation of CNOLs to Specific Members of Consolidated Groups
The final regulations do not amend existing rules for the
allocation of the CNOL within consolidated groups. The final
regulations follow existing rules and allocate the CNOLs to each member
of the group in proportion to the total loss.
The Treasury Department and the IRS considered an alternative
approach that would have required groups to compute gain and loss at
the subgroup level prior to allocating CNOL to members. Recall Example
4 in which the P&C subgroup had no gain or loss but the C subgroup had
a loss of $10. Under this alternative approach, because the P&C
subgroup as a whole does not have a loss, no CNOL would be allocated to
any member in the P&C group regardless of the gain or loss of any of
the individual members of PC. Thus, in Example 4, none of the $10 CNOL
would be eligible for carryback.
The Treasury Department and the IRS recognize that as a result of
the TCJA and the CARES Act, the final regulations may provide groups
with an incentive to split their C members into several corporations--
some with loss and some with gain; this potential incentive would not
exist under the alternative regulatory approach. In certain
circumstances, such a strategy would effectively enable some share of
the losses generated by the other C members to be carried back. This
change in the business structure of consolidated groups may entail
economic costs because, to the extent this strategy is pursued, it
would result from tax-driven rather than market-driven considerations.
The Treasury Department and the IRS project, however, that the adopted
approach will have lower compliance costs for taxpayers, relative to
the alternative regulatory approach, because it generally follows
existing regulatory practice for allocating losses within a
consolidated group.
The Treasury Department and the IRS have not attempted to estimate
the economic consequences of either of these effects but project them
to be small. The effects are projected to be small because (i) only a
small number of taxpayers are likely to be affected; (ii) any
reorganization that occurs due to the final regulations will primarily
be ``on paper'' and entail little or no economic loss; and (iii) the
compliance burden of loss allocation, under either the final
regulations or the alternative approach, is not high.
No additional substantive alternatives were raised by the comments.
4. Affected Taxpayers
The Treasury Department and the IRS project that these regulations
will primarily affect consolidated groups that contain at least one
nonlife insurance member and at least one member that is not a nonlife
insurance company. Based on data from 2015, the Treasury Department and
the IRS calculate that there were 1,130 such consolidated groups.
Approximately 460 of these groups were of ``mixed loss'' status,
meaning that at least one nonlife insurance member had a gain and one
other member had a loss, or vice versa.
D. Summary
In sum, these regulations clarify the recent statutory changes to
section 172 as they apply to consolidated corporate groups. The
Treasury Department and IRS project the economic effect of these
regulations to be small given that (1) the effect of NOL usage on
investment incentives is of ambiguous sign, (2) these regulations are
projected to have only a small effect on NOL usage, and (3) it is
expected that most taxpayers would have come to a similar
interpretation of the statute in the absence of these regulations.
II. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it
is hereby certified that these final regulations will not have a
significant economic impact on a substantial number of small entities.
This certification is based on the fact that these final regulations
apply only to corporations that file consolidated Federal income tax
returns, and that such corporations almost exclusively consist of
larger businesses. Specifically, based on data available to the IRS,
corporations that file consolidated Federal income tax returns
represent only approximately two percent of all filers of Forms 1120
(U.S. Corporation Income Tax Return). However, these consolidated
Federal income tax returns account for approximately 95 percent of the
aggregate amount of receipts provided on all Forms 1120. Therefore,
these final regulations would not create additional obligations for, or
impose an economic impact on, small entities. Accordingly, the
Secretary certifies that the final regulations will not have a
significant economic impact on a substantial number of small entities.
[[Page 67974]]
Pursuant to section 7805(f) of the Internal Revenue Code, the
notice of proposed rulemaking that preceded these final regulations was
submitted to the Chief Counsel for the Office of Advocacy of the Small
Business Administration for comment on its impact on small business. No
comments on the notice were received from the Chief Counsel for the
Office of Advocacy of the Small Business Administration.
III. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 requires
that agencies assess anticipated costs and benefits and take certain
other actions before issuing a final rule that includes any Federal
mandate that may result in expenditures in any one year by a state,
local, or tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. In 2020, that threshold is approximately $156 million. This
rule does not include any Federal mandate that may result in
expenditures by state, local, or tribal governments, or by the private
sector in excess of that threshold.
IV. Executive Order 13132: Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either imposes substantial, direct compliance costs on state and local
governments, and is not required by statute, or preempts state law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive Order. This rule does not have federalism
implications, does not impose substantial direct compliance costs on
state and local governments, and does not preempt state law within the
meaning of the Executive Order.
V. Congressional Review Act
The Administrator of OIRA has determined that this is a major rule
for purposes of the Congressional Review Act (5 U.S.C. 801 et seq.)
(CRA). Under section 801(3) of the CRA, a major rule takes effect 60
days after the rule is published in the Federal Register. Consistent
with this requirement, the effective date of this Treasury decision is
December 28, 2020, whereas the rules in this Treasury decision apply
for taxable years beginning after December 31, 2020.
Drafting Information
The principal authors of these regulations are Justin O. Kellar,
Gregory J. Galvin, and William W. Burhop of the Office of Associate
Chief Counsel (Corporate). However, other personnel from the Treasury
Department and the IRS 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 TAX
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.1502-1 is amended by adding paragraphs (k) and (l) to
read as follows:
Sec. 1.1502-1 Definitions.
* * * * *
(k) Nonlife insurance company. The term nonlife insurance company
means a member that is an insurance company other than a life insurance
company, each as defined in section 816(a).
(l) Applicability date. Paragraph (k) of this section applies to
taxable years beginning after December 31, 2020. However, a taxpayer
may choose to apply paragraph (k) of this section to taxable years
beginning on or before December 31, 2020.
0
Par. 3. Section 1.1502-21 is amended:
0
1. By revising paragraph (a).
0
2. By revising paragraph (b)(1).
0
3. By revising paragraph (b)(2)(iv).
0
4. By revising paragraph (b)(2)(v) introductory text.
0
5. In paragraph (b)(2)(v), by designating Examples 1 through 3 as
paragraphs (b)(2)(v)(A) through (C), respectively, and removing the
period after each example number in the paragraph headings and
replacing them with a colon.
0
6. In newly designated paragraphs (b)(2)(v)(A) through (C), by
redesignating paragraphs (b)(2)(v)(A)(i) and (ii) as paragraphs
(b)(2)(v)(A)(1) and (2), paragraphs (b)(2)(v)(B)(i) and (ii) as
paragraphs (b)(2)(v)(B)(1) and (2), and paragraphs (b)(2)(v)(C)(i) and
(ii) as paragraphs (b)(2)(v)(C)(1) and (2).
0
7. By adding paragraphs (b)(2)(v)(D) through (G).
0
8. In paragraph (b)(3)(ii)(B), by removing the text ``Sec. 1.1502-
21(b)(3)(ii)(B)(2)'' and adding in its place ``Sec. 1.1502-
21(b)(3)(ii)(B)''.
0
9. By revising paragraph (b)(3)(ii)(C).
0
10. By adding paragraph (b)(3)(ii)(D).
0
11. By revising paragraph (c)(1)(i) introductory text.
0
12. In paragraph (c)(1)(i)(C)(2), by removing the word ``and''.
0
13. In paragraph (c)(1)(i)(D), by removing the word ``account.'' and
adding in its place ``account; and''.
0
14. By adding paragraph (c)(1)(i)(E).
0
15. By revising paragraph (c)(1)(iii) introductory text.
0
16. In paragraph (c)(1)(iii), by designating Examples 1 through 5 as
paragraphs (c)(1)(iii)(A) through (E), respectively, and removing the
period after each example number in the paragraph headings and
replacing them with a colon.
0
17. In newly redesignated paragraphs (c)(1)(iii)(A) through (E), by
redesignating paragraphs (c)(1)(iii)(A)(i) through (iii) as paragraphs
(c)(1)(iii)(A)(1) through (3), paragraphs (c)(1)(iii)(B)(i) through
(vi) as paragraphs (c)(1)(iii)(B)(1) through (6), paragraphs
(c)(1)(iii)(C)(i) through (iii) as paragraphs (c)(1)(iii)(C)(1) through
(3), paragraphs (c)(1)(iii)(D)(i) through (iv) as paragraphs
(c)(1)(iii)(D)(1) through (4), and paragraphs (c)(1)(iii)(E)(i) through
(v) as paragraphs (c)(1)(iii)(E)(1) through (5).
0
18. By revising newly redesignated paragraphs (c)(1)(iii)(A)(2) and
(c)(1)(iii)(B)(2) through (6).
0
19. In newly redesignated paragraph (c)(1)(iii)(C)(2), by adding the
words ``, a taxable year that begins on January 1, 2021'' after the
words ``at the beginning of Year 4''.
0
20. By revising newly redesignated paragraphs (c)(1)(iii)(D)(2) through
(4).
0
21. By adding paragraph (c)(1)(iii)(D)(5).
0
22. By revising newly redesignated paragraphs (c)(1)(iii)(E)(2) through
(5).
0
23. By adding paragraphs (c)(1)(iii)(E)(6) and (c)(1)(iii)(F).
0
24. By revising paragraph (c)(2)(v).
0
25. By revising paragraph (c)(2)(viii) introductory text,.
0
26. In paragraph (c)(2)(viii), by designating Examples 1 through 4 as
paragraphs (c)(2)(viii)(A) through (D), respectively, and removing the
period after each example number in the paragraph headings and
replacing them with a colon.
0
27. In newly designated paragraphs (c)(2)(viii)(A) through (D), by
redesignating paragraphs (c)(2)(viii)(A)(i) through (vii) as paragraphs
(c)(2)(viii)(A)(1) through (7), paragraphs (c)(2)(viii)(B)(i) through
(iv) as paragraphs (c)(2)(viii)(B)(1) through (4), paragraphs
(c)(2)(viii)(C)(i) through (iii) as paragraphs (c)(2)(viii)(C)(1)
through (3), and paragraphs (c)(2)(viii)(D)(i) and (ii) as paragraphs
(c)(2)(viii)(D)(1) and (2).
0
28. In newly redesignated paragraphs (c)(2)(viii)(A)(3) through (7),
the first
[[Page 67975]]
sentence of each, by adding the words ``, including the limitation
under paragraph (c)(1)(i)(E) of this section'' after the words ``under
paragraph (c) of this section''.
0
29. In newly redesignated paragraph (c)(2)(viii)(B)(1), the first
sentence, by adding the words ``, none of which is a nonlife insurance
company'' after the text ``S, T, P and M''.
0
30. In newly redesignated paragraph (c)(2)(viii)(B)(1), the fourth
sentence, by adding the text ``(a taxable year beginning after December
31, 2020)'' after the language ``Year 3''.
0
31. By revising newly designated paragraph (c)(2)(viii)(B)(3).
0
32. By redesignating newly redesignated paragraph (c)(2)(viii)(B)(4) as
paragraph (c)(2)(viii)(B)(5).
0
33. By adding a new paragraph (c)(2)(viii)(B)(4).
0
34. By revising newly redesignated paragraph (c)(2)(viii)(B)(5).
0
35. By adding paragraph (c)(2)(viii)(B)(6).
0
36. In paragraph (g)(5), by designating Examples 1 through 9 as
paragraphs (g)(5)(i) through (ix), respectively, and removing the
period after each example number in the paragraph headings and
replacing them with a colon.
0
37. In newly redesignated paragraphs (g)(5)(i) through (ix), by
redesignating paragraphs (g)(5)(i)(i) through (iv) as paragraphs
(g)(5)(i)(A) through (D), paragraphs (g)(5)(ii)(i) through (iv) as
paragraphs (g)(5)(ii)(A) through (D), paragraphs (g)(5)(iii)(i) through
(iii) as paragraphs (g)(5)(iii)(A) through (C), paragraphs
(g)(5)(iv)(i) through (iv) as paragraphs (g)(5)(iv)(A) through (D),
paragraphs (g)(5)(v)(i) through (iv) as paragraphs (g)(5)(v)(A) through
(D), paragraphs (g)(5)(vi)(i) through (iv) as paragraphs (g)(5)(vi)(A)
through (D), paragraphs (g)(5)(vii)(i) through (vi) as paragraphs
(g)(5)(vii)(A) through (F), paragraphs (g)(5)(viii)(i) through (v) as
paragraphs (g)(5)(viii)(A) through (E), and paragraphs (g)(5)(ix)(i)
through (vii) as paragraphs (g)(5)(ix)(A) through (G).
0
38. By revising paragraph (h)(9).
0
39. By adding paragraph (h)(10).
The revisions and additions read as follows:
Sec. 1.1502-21 Net operating losses.
(a) Consolidated net operating loss deduction--(1) In general.
Subject to any limitations under the Internal Revenue Code or this
chapter (for example, the limitations under section 172(a)(2) and
paragraph (a)(2) of this section), the consolidated net operating loss
deduction (or CNOL deduction) for any consolidated return year is the
aggregate of the net operating loss carryovers and carrybacks to the
year. The net operating loss carryovers and carrybacks consist of--
(i) Any CNOLs (as defined in paragraph (e) of this section) of the
consolidated group; and
(ii) Any net operating losses (or NOLs) of the members arising in
separate return years.
(2) Application of section 172 for computing net operating loss
deductions--(i) Overview. For purposes of Sec. 1.1502-11(a)(2)
(regarding a CNOL deduction), the rules of section 172 regarding the
use of net operating losses are taken into account as provided by this
paragraph (a)(2) in calculating the consolidated taxable income of a
group for a particular consolidated return year. More specifically, in
computing taxable income for taxable years beginning after December 31,
2020, section 172(a) generally limits the deductibility of net
operating losses arising in taxable years beginning after December 31,
2017 (post-2017 NOLs). However, these limitations do not apply to net
operating losses arising in taxable years beginning before January 1,
2018 (pre-2018 NOLs). Therefore, in any particular consolidated return
year beginning after December 31, 2020, the group's CNOL deduction
includes CNOLs arising in taxable years beginning before January 1,
2018 (pre-2018 CNOLs), without limitation under section 172(a).
Following the deduction of pre-2018 CNOLs, this paragraph (a)(2)
applies to compute the maximum amount of CNOLs from taxable years
beginning after December 31, 2017 (post-2017 CNOLs), that can be
deducted against taxable income in a consolidated return year beginning
after December 31, 2020 (post-2017 CNOL deduction limit). See section
172(a)(2)(A) and (B).
(ii) Computation of the 80-percent limitation and special rule for
nonlife insurance companies--(A) Determinations based on status of
group members. If a portion of a post-2017 CNOL is carried back or
carried over to a consolidated return year beginning after December 31,
2020, whether the members of the group include nonlife insurance
companies, other types of corporations, or both determines whether
section 172(a) (including the limitation described in section
172(a)(2)(B)(ii) (80-percent limitation)), section 172(f) (providing
special rules for nonlife insurance companies), or both, apply to the
group for the consolidated return year.
(B) Determination of post-2017 CNOL deduction limit. The post-2017
CNOL deduction limit is determined under paragraph (a)(2)(iii) of this
section by applying section 172(a)(2)(B)(ii) (that is, the 80-percent
limitation), section 172(f) (that is, the special rule for nonlife
insurance companies), or both, to the group's consolidated taxable
income for that year.
(C) Inapplicability of 80-percent limitation. The 80-percent
limitation does not apply to CNOL deductions taken in taxable years
beginning before January 1, 2021, or to CNOLs arising in taxable years
beginning before January 1, 2018 (that is, pre-2018 CNOLs). See section
172(a).
(iii) Computations under sections 172(a)(2)(B) and 172(f). This
paragraph (a)(2)(iii) provides rules for applying sections 172(f) and
172(a)(2)(B) to consolidated return years beginning after December 31,
2020 (that is, for computing the post-2017 CNOL deduction limit).
Section 172(f) applies to income of nonlife insurance company members,
whereas section 172(a)(2)(B)(ii) applies to income of members that are
not nonlife insurance companies. Thus, this paragraph (a)(2)(iii)
provides specific rules for groups with no nonlife insurance company
members, only nonlife insurance company members, or a combination of
nonlife insurance company members and other members. For groups with
both nonlife insurance company members and life insurance company
members, see paragraph (b)(2)(iv)(E) of this section.
(A) Groups without nonlife insurance company members. If no member
of a group is a nonlife insurance company during a particular
consolidated return year beginning after December 31, 2020, section
172(a)(2)(B)(ii) (that is, the 80-percent limitation) applies to all
income of the group for that year. Therefore, the post-2017 CNOL
deduction limit for the group for that year is the lesser of--
(1) The aggregate amount of post-2017 NOLs carried to that year; or
(2) The amount determined by multiplying--
(i) 80 percent, by
(ii) Consolidated taxable income for the group for that year
(determined without regard to any deductions under sections 172, 199A,
and 250) less the aggregate amount of pre-2018 NOLs carried to that
year.
(B) Groups comprised solely of nonlife insurance companies. If a
group is comprised solely of nonlife insurance companies during a
particular consolidated return year beginning after December 31, 2020,
section 172(f) applies to all income of the group for that year.
Therefore, the post-2017 CNOL deduction limit for the group for that
year equals the lesser of--
(1) The aggregate amount of post-2017 NOLs carried to that year, or
[[Page 67976]]
(2) Consolidated taxable income less the aggregate amount of pre-
2018 NOLs carried to that year.
(C) Groups that include both nonlife insurance companies and other
corporations--(1) General rule. Except as provided in paragraph
(a)(2)(iii)(C)(5) of this section, if a group has at least one member
that is a nonlife insurance company and at least one member that is not
a nonlife insurance company during a particular consolidated return
year beginning after December 31, 2020, the post-2017 CNOL deduction
limit for the group for that year equals the lesser of--
(i) The aggregate amount of post-2017 NOLs carried to that year, or
(ii) The sum of the amounts in the income pools determined under
paragraphs (a)(2)(iii)(C)(2) and (3) of this section.
(2) Residual income pool. The amount determined under this
paragraph (a)(2)(iii)(C)(2) (residual income pool) is eighty percent of
the excess of--
(i) The consolidated taxable income of the group for a consolidated
return year beginning after December 31, 2020, determined without
regard to any income, gain, deduction, or loss of members that are
nonlife insurance companies and without regard to any deductions under
sections 172, 199A, and 250, over
(ii) The aggregate amount of pre-2018 NOLs carried to that year
that are allocated to this income pool under paragraph
(a)(2)(iii)(C)(4) of this section (that is, by applying the 80-percent
limitation). See section 172(a)(2)(B)(ii).
(3) Nonlife income pool. The amount determined under this paragraph
(a)(2)(iii)(C)(3) (nonlife income pool) is the consolidated taxable
income of the group for a consolidated return year beginning after
December 31, 2020, determined without regard to any income, gain,
deduction, or loss of members included in the computation under
paragraph (a)(2)(iii)(C)(2) of this section, less the aggregate amount
of pre-2018 NOLs carried to that year that are allocated to this income
pool under paragraph (a)(2)(iii)(C)(4) of this section. See section
172(f).
(4) Pro rata allocation of pre-2018 NOLs between pools of income.
For purposes of paragraphs (a)(2)(iii)(C)(2) and (3) of this section,
the aggregate amount of pre-2018 NOLs carried to any particular
consolidated return year beginning after December 31, 2020, is prorated
between the residual income pool and the nonlife income pool based on
the relative amounts of positive income of those two pools. For
example, if $30 of pre-2018 NOLs is carried over to a consolidated
return year in which the residual income pool contains $75 and the
nonlife income pool contains $150, the residual income pool is
allocated $10 of the pre-2018 NOLs ($30 x $75/($75 + $150), or $30 x
\1/3\), and the nonlife income pool is allocated the remaining $20 of
pre-2018 NOLs ($30 x $150/($75 + $150), or $30 x \2/3\).
(5) Exception. The post-2017 CNOL deduction limit for the group for
a consolidated return year is determined under this paragraph
(a)(2)(iii)(C)(5) if the amounts computed under paragraphs
(a)(2)(iii)(C)(2) and (3) of this section for that year are not both
positive.
(i) Positive residual income pool and negative nonlife income pool.
This paragraph (a)(2)(iii)(C)(5)(i) applies if the amount computed
under paragraph (a)(2)(iii)(C)(2) of this section for the residual
income pool is positive and the amount computed under paragraph
(a)(2)(iii)(C)(3) of this section for the nonlife income pool is
negative. If this paragraph (a)(2)(iii)(C)(5)(i) applies, the post-2017
CNOL deduction limit for the group for a consolidated return year
equals the lesser of the aggregate amount of post-2017 NOLs carried to
that year, or 80 percent of the consolidated taxable income of the
entire group (determined without regard to any deductions under
sections 172, 199A, and 250) after subtracting the aggregate amount of
pre-2018 NOLs carried to that year (that is, by applying the 80-percent
limitation). See section 172(a)(2)(B).
(ii) Positive nonlife income pool and negative residual income
pool. If the amount computed under paragraph (a)(2)(iii)(C)(3) of this
section for the nonlife income pool is positive and the amount computed
under paragraph (a)(2)(iii)(C)(2) of this section for the residual
income pool is negative, the post-2017 CNOL deduction limit for the
group for a consolidated return year equals the lesser of the aggregate
amount of post-2017 NOLs carried to that year, or the consolidated
taxable income of the entire group less the aggregate amount of pre-
2018 NOLs carried to that year. See section 172(f).
(b) * * *
(1) Carryovers and carrybacks generally. The net operating loss
carryovers and carrybacks to a taxable year are determined under the
principles of, and are subject to any limitations under, 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. In addition, except as otherwise provided in this
section, the amount of any CNOL absorbed by the group in any year is
apportioned among members based on the percentage of the CNOL eligible
for carryback or carryover that is attributable to each member as of
the beginning of the year. The percentage of the CNOL attributable to a
member is determined pursuant to paragraph (b)(2)(iv)(B) of this
section. Additional rules provided under the Internal Revenue Code or
regulations also apply. See, for example, 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 paragraph (c)(1)(iii)(B)
of this section, (Example 2), for an illustration of pro rata
absorption of losses subject to a SRLY limitation.
(2) * * *
(iv) Operating rules. (A) Amount of CNOL attributable to a member.
The amount of a CNOL that is attributable to a member equals the
product obtained by multiplying the CNOL and the percentage of the CNOL
attributable to the member.
(B) Percentage of CNOL attributable to a member--(1) In general.
Except as provided in paragraph (b)(2)(iv)(B)(2) of this section, the
percentage of the CNOL for the consolidated return year attributable to
a member equals the separate net operating loss of the member for the
consolidated return year divided by the sum of the separate net
operating losses for that year of all members having such losses for
that year. For this purpose, the separate net operating loss of a
member is determined by computing the CNOL by reference to only the
member's items of income, gain, deduction, and loss, including the
member's losses and deductions actually absorbed by the group in the
consolidated return year (whether or not absorbed by the member).
(2) Recomputed percentage. If, for any reason, a member's portion
of a CNOL is absorbed or reduced on a non-pro rata basis (for example,
under Sec. 1.1502-11(b) or (c), paragraph (b)(2)(iv)(C) of this
section, Sec. 1.1502-28, or 1.1502-36(d), or as the result of a
carryback to a separate return year), the percentage of the CNOL
attributable to each member is recomputed. In addition, if a member
with a separate net operating loss ceases to be a member, the
percentage of the CNOL attributable to each remaining member is
recomputed. The recomputed percentage of the CNOL attributable to each
member equals the remaining
[[Page 67977]]
CNOL attributable to the member at the time of the recomputation
divided by the sum of the remaining CNOL attributable to all of the
remaining members at the time of the recomputation. For purposes of
this paragraph (b)(2)(iv)(B)(2), a CNOL that is permanently disallowed
or eliminated is treated as absorbed.
(C) Net operating loss carryovers and carrybacks--(1) General
rules. Subject to the rules regarding allocation of special status
losses under paragraph (b)(2)(iv)(D) of this section--
(i) Nonlife insurance companies. The portion of a CNOL attributable
to any members of the group that are nonlife insurance companies is
carried back or carried over under the rules in section 172(b)
applicable to nonlife insurance companies.
(ii) Corporations other than nonlife insurance companies. The
portion of a CNOL attributable to any other members of the group is
carried back or carried over under the rules in section 172(b)
applicable to corporations other than nonlife insurance companies.
(2) Recomputed percentage. For rules governing the recomputation of
the percentage of a CNOL attributable to each remaining member if any
portion of the CNOL attributable to a member is carried back under
section 172(b)(1)(B) or (C) and absorbed on a non-pro rata basis, see
paragraph (b)(2)(iv)(B)(2) of this section.
(D) Allocation of special status losses. The amount of the group's
CNOL that is determined to constitute a farming loss (as defined in
section 172(b)(1)(B)(ii)) or any other net operating loss that is
subject to special carryback or carryover rules (special status loss)
is allocated to each member separately from the remainder of the CNOL
based on the percentage of the CNOL attributable to the member, as
determined under paragraph (b)(2)(iv)(B) of this section. This
allocation is made without regard to whether a particular member
actually incurred specific expenses or engaged in specific activities
required by the special status loss provisions. This paragraph
(b)(2)(iv)(D) applies only with regard to losses for which the special
carryback or carryover rules are dependent on the type of expense
generating the loss, rather than on the special status of the entity to
which the loss is allocable. See section 172(b)(1)(C) and paragraph
(b)(2)(iv)(C)(1)(i) of this section (applicable to losses of nonlife
insurance companies). This paragraph (b)(2)(iv)(D) does not apply to
farming losses incurred by a consolidated group in any taxable year
beginning after December 31, 2017, and before January 1, 2021.
(E) Coordination with rules for life-nonlife groups under Sec.
1.1502-47. For groups that include at least one member that is a life
insurance company and for which an election is in effect under section
1504(c)(2), any computation of the 80-percent limitation under
paragraph (a)(2)(iii)(C) of this section is computed only with respect
to items of income, gain, deduction, and loss of the members of the
nonlife subgroup (as defined in Sec. 1.1502-47(b)(9)). For rules
regarding the use of CNOLs of the nonlife subgroup to offset life
insurance company taxable income of the life subgroup (each as defined
in Sec. 1.1502-47(b)), or the use of CNOLs of the life subgroup to
offset consolidated taxable income of the nonlife subgroup, see
generally section 1503(c)(1) and Sec. 1.1502-47.
(v) Examples. For purposes of the examples in this paragraph
(b)(2)(v), unless otherwise stated, all groups file consolidated
returns, all corporations have calendar taxable years, all losses are
farming losses within the meaning of section 172(b)(1)(B)(ii), all
taxable years begin after December 31, 2020, the facts set forth the
only corporate activity, value means fair market value and the adjusted
basis of each asset equals its value, all transactions are with
unrelated persons, and the application of any limitation or threshold
under section 382 is disregarded. The principles of this paragraph (b)
are illustrated by the following examples:
* * * * *
(D) Example 4: Allocation of a CNOL arising in a consolidated
return year beginning after December 31, 2020. (1) P is the common
parent of a consolidated group that includes S. Neither P nor S is a
nonlife insurance company. The P group also includes nonlife insurance
companies PC1, PC2, and PC3. In the P group's 2021 consolidated return
year, all members except S have separate net operating losses, and the
P group's CNOL in that year is $40. No member of the P group engages in
farming activities. See section 172(b)(1)(B)(ii).
(2) Under paragraphs (b)(1) and (b)(2)(iv)(B)(1) of this section,
for purposes of carrying losses to other taxable years, the P group's
$40 CNOL is allocated pro rata among the group members that have
separate net operating losses. Under paragraph (b)(2)(iv)(C) of this
section, those respective portions of the CNOL attributable to PC1,
PC2, and PC3 (that is, members that are nonlife insurance companies)
are carried back to each of the two preceding taxable years and then
carried over to each of the 20 subsequent taxable years. See section
172(b)(1)(C). The portion attributable to P (which is not a nonlife
insurance company) may not be carried back but is carried over to
future years. See section 172(b)(1)(A).
(E) Example 5: Allocation of a CNOL arising in a consolidated
return year beginning before January 1, 2021. The facts are the same as
in paragraph (b)(2)(v)(D)(1) of this section, except that the P group
incurred the CNOL during the P group's 2020 consolidated return year.
The allocation among the P group members of the CNOL described in
paragraph (b)(2)(v)(D)(2) of this section would be the same. However,
those respective portions of the CNOL attributable to PC1, PC2, and PC3
(that is, members that are nonlife insurance companies) will be carried
back to each of the five preceding taxable years and then carried over
to each of the 20 subsequent taxable years. See section 172(b)(1)(C)
and section 172(b)(1)(D)(i). The portion attributable to P (which is
not a nonlife insurance company) will be carried back to each of the
five preceding taxable years and then carried over to future years. See
section 172(b)(1)(A) and section 172(b)(1)(D)(i).
(F) Example 6: CNOL deduction and application of section 172. (1) P
(a type of corporation other than a nonlife insurance company) is the
common parent of a consolidated group that includes PC1 (a nonlife
insurance company). P and PC1 were both incorporated in Year 1 (a year
beginning after December 31, 2020). In Year 1, P and PC1 have separate
taxable income of $20 and $25, respectively. As a result, the P group
has Year 1 consolidated taxable income of $45. In Year 2, P has
separate taxable income of $24, and PC1 has a separate taxable loss of
$40, resulting in a P group CNOL of $16. Additionally, in Year 3, P has
separate taxable income of $15, and PC1 has a separate taxable loss of
$45, resulting in a P group CNOL of $30. No member of the P group
engages in farming activities. See section 172(b)(1)(B)(ii).
(2) Under paragraph (b)(2)(iv)(B) of this section, the P group's
Year 2 CNOL and Year 3 CNOL are entirely attributable to PC1, a nonlife
insurance company. Therefore, under section 172(b)(1)(C)(i), the entire
amount of each of these CNOLs is eligible to be carried back to Year 1.
(3) Under paragraph (a)(2)(ii) of this section, the amount of the
Year 2 CNOL that may be used by the P group in Year 1 is determined by
taking into account the status (nonlife insurance company or other type
of corporation) of the member that has separate taxable income
composing in whole or in part
[[Page 67978]]
the P group's consolidated taxable income. Because the P group includes
both a nonlife insurance company member and a member that is not a
nonlife insurance company, paragraph (a)(2)(iii)(C) of this section
applies to determine the computation of the post-2017 CNOL deduction
limit for the group for Year 1. Therefore, the 80-percent limitation is
applied to the residual income pool, which consists of the taxable
income of P, a type of corporation other than a nonlife insurance
company. Under the 80-percent limitation, the maximum amount of P's
Year 1 income that may be offset by the P group's post-2017 CNOLs is
$16, which equals 80 percent of the excess of P's taxable income for
Year 1 ($20) over the aggregate amount of pre-2018 NOLs allocable to P
($0) (80 percent x ($20-$0)). See paragraph (a)(2)(iii)(C)(2) and
(a)(2)(iii)(C)(4) of this section. PC1 is a nonlife insurance company
to which section 172(f), rather than the 80-percent limitation in
section 172(a)(2)(B)(ii), applies. Therefore, the maximum amount of
PC1's Year 1 income that may be offset by the P group's post-2017 CNOLs
is $25, which equals the excess of PC1's taxable income for Year 1
($25) over the aggregate amount of pre-2018 NOLs allocable to PC1 ($0).
See paragraph (a)(2)(iii)(C)(3) and (4) of this section.
(4) Based on paragraph (a)(2)(iii)(C) of this section and the
analysis set forth in paragraph (b)(2)(v)(F)(3) of this section, at the
end of Year 2, the P group's post-2017 CNOL deduction limit for Year 1
is the lesser of the aggregate amount of post-2017 NOLs carried to Year
1 ($16), or $41 ($16 + $25). Therefore, the P group can offset $16 of
its Year 1 income with its CNOL carryback from Year 2.
(5) When the Year 3 CNOL is carried back to Year 1, the P group's
post-2017 CNOL deduction limit for Year 1 is the lesser of $46 (the
aggregate amount of post-2017 NOLs carried to Year 1) or $41 ($16 +
$25; see the computation in paragraph (b)(2)(v)(F)(3) of this section).
Thus, the total amount of the P group's Year 1 income that may be
offset by the P group's Year 2 and Year 3 CNOLs is $41 ($16 from Year 2
+ $25 from Year 3). As a result, the P group reports $4 of income ($45-
$41) in Year 1 that is ineligible for offset by any other NOLs. The P
group carries over its remaining $5 CNOL ($46-$41) to future years.
(G) Example 7: Pre-2018 and post-2017 CNOLs. (1) P is the common
parent of a consolidated group. No member of the P group is a nonlife
insurance company or is engaged in a farming business, and no member of
the P group has a loss that is subject to a SRLY limitation. The P
group had the following consolidated taxable income or CNOL for the
following taxable years:
Table 1 to Paragraph (b)(2)(v)(G)(1)
------------------------------------------------------------------------
2014 2015 2016 2017 2018 2019 2020 2021
------------------------------------------------------------------------
$60 $0 $0 ($90) $30 ($40) ($100) $120
------------------------------------------------------------------------
(2) Under section 172(a)(1), all $30 of the P group's 2018
consolidated taxable income is offset by the 2017 CNOL carryover
without limitation. The remaining $60 of the P group's 2017 CNOL is
carried over to 2021 under section 172(b)(1)(A)(ii)(I).
(3) Under section 172(b)(1)(D)(i)(I), the P group's $40 2019 CNOL
is carried back to the five taxable years preceding the year of the
loss. Thus, the P group's $40 2019 CNOL is carried back to offset $40
of its 2014 consolidated taxable income.
(4) Under section 172(a)(2) and paragraph (a)(2)(i) of this
section, the P group's CNOL deduction for 2021 equals the aggregate
amount of pre-2018 NOLs carried to 2021 plus the group's post-2017 CNOL
deduction limit. The P group has $60 of pre-2018 NOLs carried to 2021
($90-$30). Because no member of the P group is a nonlife insurance
company, paragraph (a)(2)(iii)(A) of this section applies to determine
the computation of the group's post-2017 CNOL deduction limit for 2021.
See also section 172(a)(2)(B). Therefore, the post-2017 CNOL deduction
limit of the P group for 2021 is $48, which equals the lesser of the
aggregate amount of post-2017 NOLs carried to 2021 ($100), or 80
percent of the excess of the P group's consolidated taxable income for
that year computed without regard to any deductions under sections 172,
199A, and 250 ($120) over the aggregate amount of pre-2018 NOLs carried
to 2021 ($60) (that is, 80 percent x $60). Thus, the P group's CNOL
deduction for 2021 equals $108 ($60 pre-2018 NOLs carried to 2021 + $48
post-2017 CNOL deduction limit). See section 172(a)(2) and paragraph
(a)(2)(i) of this section. The P group offsets $108 of its $120 of 2021
consolidated taxable income, resulting in $12 of consolidated taxable
income in 2021. The remaining $52 of the P group's 2020 CNOL ($100-$48)
is carried over to future taxable years. See section
172(b)(1)(A)(ii)(II).
(3) * * *
(ii) * * *
(C) Waiver of carryback period for losses in taxable years to which
statutorily amended carryback rules apply. For further information, see
Sec. 1.1502-21T(b)(3)(ii)(C).
(D) Examples. For further information, see Sec. 1.1502-
21T(b)(3)(ii)(D).
* * * * *
(c) * * *
(1) * * *
(i) General rule. Except as provided in paragraph (g) of this
section (relating to an overlap with section 382), the aggregate of the
net operating loss carryovers and carrybacks of a member (SRLY member)
arising (or treated as arising) in SRLYs (SRLY NOLs) that are included
in the CNOL deductions for all consolidated return years of the group
under paragraph (a) of this section may not exceed the aggregate
consolidated taxable income for all consolidated return years of the
group determined by reference to only the member's items of income,
gain, deduction, and loss (cumulative register). For this purpose--
* * * * *
(E) If a limitation on the amount of taxable income that may be
offset under section 172(a) (see paragraph (a)(2) of this section)
applies in a taxable year to a member whose carryovers or carrybacks
are subject to a SRLY limitation (SRLY member), the amount of net
operating loss subject to a SRLY limitation that is available for use
by the group in that year is limited to the percentage of the balance
in the cumulative register that would be available for offset under
section 172(a) if the SRLY member filed a separate return and reported
as taxable income in that year the amount contained in the cumulative
register. For example, assume that a consolidated group has a SRLY
member that is a corporation other than a nonlife insurance company,
and that the SRLY member has a SRLY NOL that arose in a taxable year
beginning after December 31, 2017 (post-2017 NOL). The group's
consolidated taxable income for a consolidated return year beginning
after December 31, 2020 is $200, but the cumulative register has a
positive
[[Page 67979]]
balance of only $120 (and no other net operating loss carryovers or
carrybacks are available for the year). Because the SRLY limitation
would be $96 ($120 x 80 percent), only $96 of SRLY loss may be used,
rather than $160 ($200 x 80 percent). In addition, to the extent that
this paragraph (c)(1)(i)(E) applies, the cumulative register is
decreased by the full amount of income required under section 172(a) to
support the amount of SRLY NOL absorption. See, for example, paragraph
(c)(1)(iii)(A) and (B) of this section for examples illustrating the
application of this rule.
* * * * *
(iii) Examples. For purposes of the examples in this paragraph
(c)(1)(iii), no corporation is a nonlife insurance company and, unless
otherwise specified, all taxable years begin after December 31, 2020,
and all CNOLs arise in taxable years beginning after December 31, 2020.
The principles of this paragraph (c)(1) are illustrated by the
following examples:
(A) * * *
(2) T's $100 net operating loss carryover from Year 1 arose in a
SRLY. See Sec. 1.1502-1(f)(2)(iii). P's acquisition of T was not an
ownership change as defined by section 382(g). Thus, the $100 net
operating loss carryover is subject to the SRLY limitation in paragraph
(c)(1) of this section. The positive balance of the cumulative register
of T for Year 2 equals the consolidated taxable income of the P group
determined by reference to only T's items, or $70. However, due to the
80-percent limitation and the application of paragraph (c)(1)(i)(E) of
this section, the SRLY limitation is $56 ($70 x 80 percent). No losses
from equivalent years are available, and the P group otherwise has
sufficient consolidated taxable income to support the CNOL deduction
($300 x 80 percent = $240). Therefore, $56 of the SRLY net operating
loss is included under paragraph (a) of this section in the P group's
CNOL deduction for Year 2. Although only $56 is absorbed, the
cumulative register of T is reduced by $70, the full amount of income
necessary to support the $56 deduction after taking into account the
80-percent limitation ($70 x 80 percent = $56).
* * * * *
(B) * * *
(2) P's Year 1, Year 2, and Year 3 are not SRLYs with respect to
the P group. See Sec. 1.1502-1(f)(2)(i). Thus, P's $40 net operating
loss arising in Year 1 and $120 net operating loss arising in Year 3
are not subject to the SRLY limitation under paragraph (c) of this
section. Although the P group has $160 of taxable income in Year 4, the
80-percent limitation reduces the P group's net operating loss
deduction in that year to $128 ($160 x 80 percent). Under the
principles of section 172, paragraph (b) of this section requires that
P's $40 loss arising in Year 1 be the first loss absorbed by the P
group in Year 4. Absorption of this loss leaves $88 ($128-$40) of the P
group's Year 4 consolidated taxable income available for offset by loss
carryovers.
(3) T's Year 2 and Year 3 are SRLYs with respect to the P group.
See Sec. 1.1502-1(f)(2)(ii). P's acquisition of T was not an ownership
change as defined by section 382(g). Thus, T's $50 net operating loss
arising in Year 2 and $60 net operating loss arising in Year 3 are
subject to the SRLY limitation. The positive balance of the cumulative
register of T for Year 4 equals the P group's consolidated taxable
income determined by reference to only T's items, or $70. Under
paragraph (c)(1)(i)(E) of this section, after taking into account the
80-percent limitation, T's SRLY limitation is $56 ($70 x 80 percent).
Therefore, the P group can absorb up to $56 of T's SRLY net operating
losses in Year 4. Under the principles of section 172, T's $50 SRLY net
operating loss from Year 2 is included under paragraph (a) of this
section in the P group's CNOL deduction for Year 4. After absorption of
this loss, under paragraph (c)(1)(i) of this section, $6 of SRLY limit
remains in Year 4 ($56-$50). Further, the total amount of Year 4
consolidated taxable income available for offset by other loss
carryovers under section 172(a) is $38 ($88-$50).
(4) P and T each carry over net operating losses to Year 4 from a
taxable year ending on the same date (that is, Year 3). The losses
carried over from Year 3 total $180. However, the remaining Year 4 SRLY
limit is $6. Therefore, the total amount of loss available for
absorption is $126 ($120 allocable to P and $6 allocable to T). Under
paragraph (b) of this section, the losses available for absorption that
are carried over from Year 3 are absorbed on a pro rata basis, even
though one loss arises in a SRLY and the other loss does not. Thus,
$36.19 of P's Year 3 loss is absorbed ($120/($120 + $6)) x $38 =
$36.19. In addition, $1.81 of T's Year 3 loss is absorbed ($6/($120 +
$6)) x $38 = $1.81.
(5) After deduction of T's SRLY net operating losses in Year 4, the
cumulative register of T is adjusted pursuant to paragraph (c)(1)(i)(E)
of this section. A total of $51.81 of SRLY net operating losses were
absorbed in Year 4 ($50 + $1.81). After taking into account the 80-
percent limitation, the amount of income necessary to support this
deduction is $64.76 ($64.76 x 80 percent = $51.81). Therefore, the
cumulative register of T is decreased by $64.76, and $5.24 remains in
the cumulative register ($70-$64.76).
(6) P carries its remaining $83.81 ($120-$36.19) Year 3 net
operating loss and T carries its remaining $58.19 ($60-$1.81) Year 3
net operating loss over to Year 5. Assume that, in Year 5, the P group
has $90 of consolidated taxable income (computed without regard to the
CNOL deduction). The P group's consolidated taxable income determined
by reference to only T's items is a CNOL of $4. Therefore, the positive
balance of the cumulative register of T in Year 5 equals $1.24 ($5.24-
$4). Under paragraph (c)(1)(i)(E) of this section, after taking into
account the 80-percent limitation, T's SRLY limitation is $0.99 ($1.24
x 80 percent). For Year 5, the total amount of Year 5 consolidated
taxable income available for offset by loss carryovers as a result of
the 80-percent limitation is $72 ($90 x 80 percent). Under paragraph
(b) of this section, the losses carried over from Year 3 are absorbed
on a pro rata basis, even though one loss arises in a SRLY and the
other loss does not. Therefore, $71.16 of P's Year 3 loss is absorbed
(($83.81/($83.81 + $0.99)) x $72 = $71.16). In addition, $0.84 of T's
Year 3 losses is absorbed (($0.99/($83.81 + $0.99)) x $72 = $0.84).
* * * * *
(D) * * *
(2) Under Sec. 1.1502-15(a), T's $100 of ordinary loss in Year 3
constitutes a built-in loss that is subject to the SRLY limitation
under paragraph (c) of this section. The amount of the limitation is
determined by treating the deduction as a net operating loss carryover
from a SRLY. The built-in loss is therefore subject to both a SRLY
limitation and the 80-percent limitation for Year 3. The built-in loss
is treated as a net operating loss carryover solely for purposes of
determining the extent to which the loss is not allowed by reason of
the SRLY limitation, and for all other purposes the loss remains a loss
arising in Year 3. See Sec. 1.1502-21(c)(1)(i)(D). Consequently, under
paragraph (b) of this section, the built-in loss is absorbed by the P
group before the net operating loss carryover from Year 1 is absorbed.
The positive balance of the cumulative register of T for Year 3 equals
the P group's consolidated taxable income determined by reference to
only T's items, or $60. Under paragraph (c)(1)(i)(E) of this section,
after taking into account the 80-percent limitation, the SRLY
limitation
[[Page 67980]]
for Year 3 is $48 ($60 x 80 percent). Therefore, $48 of the built-in
loss is absorbed by the P group. None of T's $100 SRLY net operating
loss carryover from Year 1 is allowed.
(3) After deduction of T's $48 SRLY built-in loss in Year 4, the
cumulative register of T is adjusted pursuant to paragraph (c)(1)(i)(E)
of this section. After taking into account the 80-percent limitation,
the amount of income necessary to support this deduction is $60 ($60 x
80 percent = $48). Therefore, the cumulative register of T is decreased
by $60, and zero remains in the cumulative register ($60-$60).
(4) Under Sec. 1.1502-15(a), the $52 balance of the built-in loss
that is not allowed in Year 3 because of the SRLY limitation and the
80-percent limitation is treated as a $52 net operating loss arising in
Year 3 that is subject to the SRLY limitation because, under paragraph
(c)(1)(ii) of this section, Year 3 is treated as a SRLY. The built-in
loss is carried to other years in accordance with the rules of
paragraph (b) of this section. The positive balance of the cumulative
register of T for Year 4 equals $40 (zero from Year 3 + $40). Under
paragraph (c)(1)(i)(E) of this section, after taking into account the
80-percent limitation, the SRLY limitation for Year 4 is $32 ($40 x 80
percent). Therefore, under paragraph (c) of this section, $32 of T's
$100 net operating loss carryover from Year 1 is included in the CNOL
deduction under paragraph (a) of this section in Year 4.
(5) After deduction of T's $32 SRLY net operating loss in Year 4,
the cumulative register of T is adjusted pursuant to paragraph
(c)(1)(i)(E) of this section. After taking into account the 80-percent
limitation, the amount of income necessary to support this deduction is
$40 ($40 x 80 percent = $32). Therefore, the cumulative register is
decreased by $40, and zero remains in the cumulative register ($40-
$40).
(E) * * *
(2) For Year 2, the P group computes separate SRLY limits for each
of T's SRLY carryovers from Year 1. The group determines its ability to
use its capital loss carryover before it determines its ability to use
its ordinary loss carryover. Under section 1212, because the P group
has no Year 2 capital gain, it cannot absorb any capital losses in Year
2. T's Year 1 net capital loss and the P group's Year 2 consolidated
net capital loss (all of which is attributable to T) are carried over
to Year 3.
(3) The P group's ability to deduct net operating losses in Year 2
is subject to the 80-percent limitation, based on the P group's
consolidated taxable income for the year. Thus, the group's limitation
for Year 2 is $72 ($90 x 80 percent). However, use of the Year 1 net
operating loss also is subject to the SRLY limitation. The positive
balance of the cumulative register of T applicable to SRLY net
operating losses for Year 2 equals the P group's consolidated taxable
income determined by reference to only T's items, or $60. Under
paragraph (c)(1)(i)(E) of this section, after taking into account the
80-percent limitation, the SRLY limitation for Year 2 is $48 ($60 x 80
percent). Therefore, only $48 of T's Year 1 SRLY net operating loss is
absorbed by the P group in Year 2. T carries over its remaining $52 of
its Year 1 loss to Year 3.
(4) After deduction of T's SRLY net operating losses in Year 2, the
net operating loss cumulative register is adjusted pursuant to
paragraph (c)(1)(i)(E) of this section. The P group deducted $48 of T's
SRLY net operating losses in Year 2. After taking into account the 80-
percent limitation, the amount of taxable income necessary to support
this deduction is $60 ($60 x 80 percent = $48). Therefore, the net
operating loss cumulative register of T is decreased by $60, and zero
remains in the net operating loss cumulative register ($60-$60).
(5) For Year 3, the P group again computes separate SRLY limits for
each of T's SRLY carryovers from Year 1. The group has consolidated net
capital gain (without taking into account a net capital loss carryover
deduction) of $30. Under Sec. 1.1502-22(c), the aggregate amount of
T's $50 capital loss carryover from Year 1 that is included in
computing the P group's consolidated net capital gain for all years of
the group (in this case, Years 2 and 3) may not exceed $30 (the
aggregate consolidated net capital gain computed by reference only to
T's items, including losses and deductions actually absorbed (that is,
$30 of capital gain in Year 3)). Thus, the P group may include $30 of
T's Year 1 capital loss carryover in its computation of consolidated
net capital gain for Year 3, which offsets the group's capital gains
for Year 3. T carries over its remaining $20 of its Year 1 capital loss
to Year 4. Therefore, the capital loss cumulative register of T is
decreased by $30, and zero remains in the capital loss cumulative
register ($30-$30). Further, because the net operating loss cumulative
register includes all taxable income of T included in the P group, as
well as all absorbed losses of T (including capital items), a zero net
increase occurs in the net operating loss cumulative register. The P
group carries over the Year 2 consolidated net capital loss to Year 4.
(6) The P group's ability to deduct net operating losses in Year 3
is subject to the 80-percent limitation, based on the P group's
consolidated taxable income for the year. Thus, the P group's taxable
income for Year 3 that can be offset, before use of net operating
losses, is $40 (80 percent x the sum of zero capital gain, after use of
the capital loss carryover, plus $50 of ordinary income). However, use
of the Year 1 net operating loss also is subject to the SRLY
limitation. The positive balance of the cumulative register of T
applicable to SRLY net operating losses for Year 3 equals the P group's
consolidated taxable income determined by reference only to T's items,
or $40. This amount equals the sum obtained by adding the zero
carryover from Year 2, a net inclusion of zero from capital items
implicated in Year 3 ($30-$30), and $40 of taxable income in Year 3.
Under paragraph (c)(1)(i)(E) of this section, after taking into account
the 80-percent limitation, the SRLY limitation for Year 3 is $32 ($40 x
80 percent). Therefore, only $32 of the Year 1 net operating loss is
absorbed by the P group in Year 3. T carries over its remaining $20 of
its Year 1 loss to Year 4.
(F) Example 6: Pre-2018 NOLs and post-2017 NOLs. (1) Individual A
owns P. On January 1, 2017, A forms T. P and T are calendar-year
taxpayers. In 2017, T sustains a $100 net operating loss that is
carried over. During 2018, 2019, and 2020, T deducts a total of $90 of
its 2017 net operating loss against its taxable income, and T carries
over the remaining $10 of its 2017 net operating loss. In 2021, T
sustains a net operating loss of $50. On December 31, 2021, P acquires
all the stock of T, and T becomes a member of the P group. The P group
has $300 of consolidated taxable income in 2022 (computed without
regard to the CNOL deduction). Such consolidated taxable income would
be $70 if determined by reference to only T's items. The P group has no
other SRLY net operating loss carryovers or CNOL carryovers.
(2) T's remaining $10 of net operating loss carryover from 2017 and
its $50 net operating loss carryover from 2021 are both SRLY losses in
the P group. See Sec. 1.1502-1(f)(2)(iii). P's acquisition of T was
not an ownership change as defined by section 382(g). Thus, T's net
operating loss carryovers are subject to the SRLY limitation in
paragraph (c)(1) of this section. The SRLY limitation for the P group's
2022 consolidated return year is consolidated taxable income determined
by reference to only T's $70 of items.
(3) Because T's oldest (2017) carryover was sustained in a year
[[Page 67981]]
beginning before January 1, 2018, its use is not subject to limitation
under section 172(a)(2)(B). Therefore, all $10 of T's 2017 SRLY net
operating loss (that is, a pre-2018 NOL) is included under paragraph
(a) of this section in the P group's CNOL deduction for 2022. After
deduction of T's $10 SRLY net operating loss from 2017, the cumulative
register of T is reduced on a dollar-for-dollar basis, pursuant to
paragraph (c)(1)(i) of this section. Therefore, the cumulative register
of T is decreased by $10, and $60 remains in the cumulative register
($70-$10).
(4) The P group's deduction of T's 2021 net operating loss is
subject to both a SRLY limitation and the 80-percent limitation under
section 172(a)(2)(B)(ii). Therefore, the total limitation on the use of
T's 2021 net operating loss in the P group is $48 (the remaining
cumulative register of $60 x 80 percent). No losses from equivalent
years are available, and the P group otherwise has sufficient
consolidated taxable income to support the CNOL deduction ($290 x 80
percent = $232). Therefore, $48 of T's 2021 SRLY net operating loss is
included under paragraph (a) of this section in the P group's CNOL
deduction for 2022. The remaining $2 of T's 2021 SRLY net operating
loss ($50-$48) is carried over to the P group's 2023 consolidated
return year.
(5) After deduction of T's $48 SRLY NOL in 2022, the cumulative
register of T is adjusted pursuant to paragraph (c)(1)(i)(E) of this
section. After taking into account the 80-percent limitation, the
amount of income necessary to support this deduction is $60 ($60 x 80
percent = $48). Therefore, the cumulative register of T is decreased by
$60, and zero remains in the cumulative register ($60-$60).
(2) * * *
(v) Coordination with other limitations. This paragraph (c)(2) does
not allow a net operating loss to offset income to the extent
inconsistent with other limitations or restrictions on the use of
losses, such as a limitation based on the nature or activities of
members. For example, a net operating loss may not offset income in
excess of any limitations under section 172(a) and paragraph (a)(2) of
this section. Additionally, any dual consolidated loss may not reduce
the taxable income to an extent greater than that allowed under section
1503(d) and Sec. Sec. 1.1503(d)-1 through 1.1503(d)-8. See also Sec.
1.1502-47(k) (relating to preemption of rules for life-nonlife groups).
* * * * *
(viii) Examples. For purposes of the examples in this paragraph
(c)(2)(viii), no corporation is a nonlife insurance company or has any
farming losses. The principles of this paragraph (c)(2) are illustrated
by the following examples:
* * * * *
(B) * * *
(3) In Year 4, the M group has $10 of consolidated taxable income
(computed without regard to the CNOL deduction for Year 4). That
consolidated taxable income would be $45 if determined by reference
only to the items of P, S, and T, the members included in the SRLY
subgroup with respect to P's loss carryover. Therefore, the positive
balance of the cumulative register of the P SRLY subgroup for Year 4
equals $45 and, due to the application of the 80-percent limitation
under paragraph (c)(2)(v) of this section, the SRLY subgroup limitation
under this paragraph (c)(2) is $36 ($45 x 80 percent). However, the M
group has only $10 of consolidated taxable income in Year 4. Thus, due
to the 80-percent limitation and the application of paragraph (b)(1) of
this section, the M group's deduction of all net operating losses in
Year 4 is limited to $8 ($10 x 80 percent). As a result, the M group
deducts $8 of P's SRLY net operating loss carryover, and the remaining
$37 is carried over to Year 5.
(4) After deduction of $8 of P's SRLY net operating loss in Year 4,
the cumulative register of the P SRLY subgroup is adjusted pursuant to
paragraph (c)(1)(i)(E) of this section. After taking into account the
80-percent limitation, the amount of income necessary to support this
deduction is $10 ($10 x 80 percent = $8). Therefore, the cumulative
register of the P SRLY subgroup is decreased by $10, and $35 remains in
the cumulative register ($45-$10).
(5) In Year 5, the M group has $100 of consolidated taxable income
(computed without regard to the CNOL deduction for Year 5). None of P,
S, or T has any items of income, gain, deduction, or loss in Year 5.
Although the members of the P SRLY subgroup do not contribute to the
$100 of consolidated taxable income in Year 5, the positive balance of
the cumulative register of the P SRLY subgroup for Year 5 is $35 and,
due to the application of the 80-percent limitation under paragraph
(c)(2)(v) of this section, the SRLY subgroup limitation under this
paragraph (c)(2) is $28 ($35 x 80 percent). Because of the 80-percent
limitation and the application of paragraph (b)(1) of this section, the
M group's deduction of net operating losses in Year 5 is limited to $80
($100 x 80 percent). Because the $28 of net operating loss available to
be absorbed is less than 80 percent of the M group's consolidated
taxable income, $28 of P's SRLY net operating loss is absorbed in Year
5, and the remaining $9 ($37-$28) is carried over to Year 6.
(6) After deduction of $28 of P's SRLY net operating loss in Year
5, the cumulative register of the P SRLY subgroup is adjusted pursuant
to paragraph (c)(1)(i)(E) of this section. After taking into account
the 80-percent limitation, the amount of income necessary to support
this deduction is $35 ($35 x 80 percent = $28). Therefore, the
cumulative register of the P SRLY subgroup is decreased by $35, and
zero remains in the cumulative register ($35-$35).
* * * * *
(h) * * *
(9) For the applicability dates of paragraphs (b)(3)(ii)(C) and
(b)(3)(ii)(D) of this section, see Sec. 1.1502-21T(h)(9).
(10) The rules of paragraphs (a), (b)(1), (b)(2)(iv), and
(c)(1)(i)(E) of this section apply to taxable years beginning after
December 31, 2020.
0
Par. 4. Section 1.1502-47 is amended:
0
1. By revising paragraphs (a)(2)(i) and (ii).
0
2. By removing paragraph (a)(3).
0
3. By redesignating paragraph (a)(4) as paragraph (a)(3).
0
4. By removing paragraphs (b) and (c).
0
5. By redesignating paragraph (d) as paragraph (b).
0
6. By revising newly redesignated paragraphs (b)(1), (2), (3), (4),
(5), (10), (11), and (13).
0
7. In newly redesignated paragraph (b)(14), by designating Examples 1
through 14 as paragraphs (b)(14)(i) through (xiv), respectively.
0
8. In newly redesignated paragraph (b)(14)(i), by adding a sentence at
the end of the paragraph.
0
9. By revising newly redesignated paragraph (b)(14)(ii).
0
10. By removing newly redesignated paragraph (b)(14)(xiv).
0
11. By redesignating paragraph (e) as paragraph (c).
0
12. By removing newly redesignated paragraphs (c)(4) and (5).
0
13. By redesignating paragraph (c)(6) as paragraph (c)(4).
0
14. By redesignating paragraph (f) as paragraph (d).
0
15. By revising newly redesignated paragraph (d)(5).
0
16. By removing the last sentence of newly redesignated paragraph
(d)(6).
0
17. By removing newly redesignated paragraph (d)(7)(ii).
0
18. By redesignating paragraph (d)(7)(iii) as paragraph (d)(7)(ii).
0
19. By revising newly redesignated paragraph (d)(7)(ii).
[[Page 67982]]
0
20. By redesignating paragraph (g) as paragraph (e).
0
21. In newly redesignated paragraph (e)(2), by removing the language
``partial'' everywhere it appears.
0
22. By removing newly redesignated paragraph (e)(3).
0
23. By redesignating paragraph (h) as paragraph (f).
0
24. By revising newly redesignated paragraph (f)(2)(iii).
0
25. In newly designated paragraph (f)(2)(v), by removing the word
``partial'' everywhere it appears.
0
26. In newly redesignated paragraph (f)(2)(v), by adding a sentence at
the end of the paragraph.
0
27. By revising newly redesignated paragraph (f)(2)(vi) and (vii).
0
28. By removing newly redesignated paragraph (f)(3).
0
29. By redesignating newly redesignated paragraph (f)(4) as paragraph
(f)(3).
0
30. By revising newly redesignated paragraph (f)(3)(ii).
0
31. By adding a new paragraph (g).
0
32. By removing paragraphs (j), (k), and (l).
0
33. By redesignating paragraph (m) as paragraph (h), and redesignating
paragraph (n) as paragraph (j).
0
34. In newly redesignated paragraph (h), by removing the language
``partial'' everywhere it appears.
0
35. In newly redesignated paragraph (h)(2)(ii), by adding a sentence at
the end of the paragraph.
0
36. In newly redesignated paragraph (h)(3)(iv), by adding a sentence at
the end of the paragraph.
0
37. In newly redesignated paragraph (h)(3)(viii), by removing the
language ``common parent's election'' and adding in its place
``election by the agent for the group (within the meaning of Sec.
1.1502-77)''.
0
38. In newly redesignated paragraph (h)(3)(ix), by removing the last
two sentences.
0
39. By removing newly redesignated paragraph (h)(4).
0
40. By redesignating newly redesignated paragraph (h)(5) as paragraph
(h)(4).
0
41. By revising newly redesignated paragraph (h)(4) introductory text.
0
42. In newly redesignated paragraph (h)(4), by redesignating Examples 1
through 6 as paragraphs (h)(4)(i) through (vi).
0
43. By revising newly redesignated paragraphs (h)(4)(ii) and (iii).
0
44. By removing newly redesignated paragraphs (h)(4)(v) and (vi).
0
45. By revising redesignated paragraph (j)(2)(iii).
0
46. By removing newly redesignated paragraph (j)(2)(v).
0
47. By redesignating newly redesignated paragraph (j)(2)(vi) as
paragraph (j)(2)(v).
0
48. By revising newly redesignated paragraph (j)(3).
0
49. By redesignating paragraphs (q), (r), and (s) as paragraphs (k),
(l), and (m), respectively.
0
50. By adding a new paragraph (n).
0
51. By removing paragraphs (o), (p), and (t).
0
52. In the following table, for each section designated or redesignated
under these regulations (as indicated in the second column), removing
the language in the third column and adding the language in the fourth
column with the frequency indicated in the fifth column:
----------------------------------------------------------------------------------------------------------------
Paragraph Redesignations Remove Add Frequency
----------------------------------------------------------------------------------------------------------------
1.1502-47(a)(1)................. N/A............... section 802 or 821 section 801 Once.
(relating (relating to life
respectively to insurance
life insurance companies).
companies and to
certain mutual
insurance
companies).
1.1502-47(a)(1)................. N/A............... life insurance life insurance Once.
companies and companies may.
mutual insurance
companies may.
1.1502-47(a)(1)................. N/A............... composition and composition, its Once.
its consolidated consolidated
tax. taxable income
(or loss), and
its consolidated
tax.
1.1502-47(a)(4)................. 1.1502-47(a)(3)... Sec. Sec. Sec. Sec. Once.
1.1502-1 through 1.1502-0 through
1.1502-80. 1.1502-100.
1.1502-47(a)(4)................. 1.1502-47(a)(3)... 844............... 848............... Once.
1.1502-47(d)(12)(i)(A), 1.1502-47(b)(12)(i (d)(12)........... (b)(12)........... Each place it
(d)(12)(i)(C), (d)(12)(i)(D), )(A), appears.
(d)(12)(iii), (d)(12)(iv), (b)(12)(i)(C),
(d)(12)(v), (d)(12)(v)(B), (b)(12)(i)(D),
(d)(12)(v)(C), (d)(12)(v)(D), (b)(12)(iii),
(d)(12)(vi), (d)(12)(vii), and (b)(12)(iv),
(d)(12)(viii)(F). (b)(12)(v),
(b)(12)(v)(B),
(b)(12)(v)(C),
(b)(12)(v)(D),
(b)(12)(vi),
(b)(12)(vii), and
(b)(12)(viii)(F),
respectively.
1.1502-47(d)(12)(iii)........... 1.1502-47(b)(12)(i subdivision (iii). paragraph Once.
ii). (b)(12)(iii).
1.1502-47(d)(12)(iv)............ 1.1502-47(b)(12)(i subdivision (iv).. paragraph Once.
v). (b)(12)(iv).
1.1502-47(d)(12)(v)(B).......... 1.1502-47(b)(12)(v (i.e., sections (for example, Once.
)(B). 11, 802, 821, or section 11,
831). section 801, or
section 831).
1.1502-47(d)(12)(vi)............ 1.1502-47(b)(12)(v subdivision (vi).. paragraph Once.
i). (b)(12)(vi).
1.1502-47(d)(12)(vii)........... 1.1502-47(b)(12)(v return year and return year even.. Once.
ii). even.
1.1502-47(d)(12)(viii)(A)....... 1.1502-47(b)(12)(v (i.e., total (that is, total Once.
iii)(A). reserves in reserves in
section 801(c)). section 816(c),
as modified by
section 816(h)).
1.1502-47(d)(12)(viii)(D) and 1.1502-47(b)(12)(v subdivision (viii) paragraph Once.
(F). iii)(D) and (F), (b)(12)(viii).
respectively.
1.1502-47(d)(14)................ 1.1502-47(b)(14).. Illustrations..... Examples.......... Once.
1.1502-47(d)(14)................ 1.1502-47(b)(14).. paragraph (d)..... paragraph (b)..... Once.
1.1502-47(d)(14), Example 1..... 1.1502-47(b)(14)(i 1913.............. 2012.............. Once.
).
1.1502-47(d)(14), Examples 2 1.1502-47(b)(14)(i 1974.............. 2012.............. Each place it
through 4, 8, 10, and 12. i) through (iv), appears.
(viii), (x), and
(xii),
respectively.
1.1502-47(d)(14), Examples 1 1.1502-47(b)(14)(i 1980.............. 2018.............. Each place it
through 3. ) through (iii), appears.
respectively.
1.1502-47(d)(14), Examples 1 1.1502-47(b)(14)(i 1982.............. 2020.............. Each place it
through 5 and 8 through 13. ) through (v) and appears.
(viii) through
(xiii),
respectively.
[[Page 67983]]
1.1502-47(d)(14), Examples 5 1.1502-47(b)(14)(v 1983.............. 2021.............. Each place it
through 7 and 9. ) through (vii) appears.
and (ix),
respectively.
1.1502-47(d)(14), Examples 2 1.1502-47(b)(14)(i (d)(12)........... (b)(12)........... Each place it
through 5 and 8 through 12. i) through (v) appears.
and (viii)
through (xii),
respectively.
1.1502-47(d)(14), Examples 2, 3, 1.1502-47(b)(14)(i stock casualty.... nonlife insurance. Each place it
and 12. i), (iii), and appears.
(xii),
respectively.
1.1502-47(d)(14), Example 3..... 1.1502-47(b)(14)(i subparagraph paragraph Once.
ii). (d)(12)(v)(B) and (b)(12)(v)(B) and
(E). (D).
1.1502-47(d)(14), Example 3..... 1.1502-47(b)(14)(i e.g............... for example....... Once.
ii).
1.1502-47(d)(14), Example 5..... 1.1502-47(b)(14)(v i.e............... in other words.... Once.
).
1.1502-47(d)(14), Example 12.... 1.1502-47(b)(14)(x casualty.......... nonlife insurance. Once.
ii).
1.1502-47(e)(1)................. 1.1502-47(c)(1)... life company or an life company...... Once.
ineligible mutual
company.
1.1502-47(e)(3)................. 1.1502-47(c)(3)... Sec. 1.1502- Sec. 1.1502- Once.
75(c) and 75(c).
paragraph (e)(4)
of this section.
1.1502-47(f)(3)................. 1.1502-47(d)(3)... 1981.............. 2019.............. Each place it
appears.
1.1502-47(f)(3)................. 1.1502-47(d)(3)... 1982.............. 2020.............. Each place it
appears.
1.1502-47(f)(3)................. 1.1502-47(d)(3)... applying Sec. applying Sec. Once.
Sec. 1.1502-13, Sec. 1.1502-13
1.1502-18, and and 1.1502-19.
1.1502-19.
1.1502-47(f)(7)(i).............. 1.1502-47(d)(7)(i) paragraph (g)..... paragraph (e)..... Once.
1.1502-47(f)(7)(i).............. 1.1502-47(d)(7)(i) sections 802(a), sections 801(a) Once.
821(a), and and 831(a).
831(a).
1.1502-47(g).................... 1.1502-47(e)...... three............. two............... Once.
1.1502-47(g)(1)................. 1.1502-47(e)(1)... paragraph (h)..... paragraph (f)..... Once.
1.1502-47(g)(1)................. 1.1502-47(e)(1)... paragraph (n)..... paragraph (j)..... Once.
1.1502-47(g)(1)................. 1.1502-47(e)(1)... paragraph (g)(1).. paragraph (e)(1).. Once.
1.1502-47(g)(2)................. 1.1502-47(e)(2)... paragraph (j)..... paragraph (g)(1).. Once.
1.1502-47(g)(2)................. 1.1502-47(e)(2)... paragraph (m)..... paragraph (h)..... Once.
1.1502-47(g)(2)................. 1.1502-47(e)(2)... paragraph (g)(2).. paragraph (e)(2).. Once.
1.1502-47(h)(1)................. 1.1502-47(f)(1)... paragraph (h)..... paragraph (f)..... Once.
1.1502-47(h)(1)................. 1.1502-47(f)(1)... includes separate includes insurance Once.
mutual insurance company taxable
company taxable income.
income (as
defined in
section 821(b))
and insurance
company taxable
income.
1.1502-47(h)(2)(i).............. 1.1502-47(f)(2)(i) Sec. Sec. Sec. 1.1502-21, Once.
1.1502-21 or the rules in this
1.1502-21A (as paragraph (f)(2).
appropriate), the
rules in this
subparagraph (2).
1.1502-47(h)(2)(ii)............. 1.1502-47(f)(2)(ii Sec. Sec. Sec. 1.1502- Once.
). 1.1502-21(A)(f) 21(e).
or 1.1502-21(e)
(as appropriate).
1.1502-47(h)(2)(iv)............. 1.1502-47(f)(2)(iv year beginning year, Sec. Once.
). after December 1.1502-21.
31, 1981, Sec.
Sec. 1.1502-21A
or 1.1502-21 (as
appropriate).
1.1502-47(h)(2)(iv)............. 1.1502-47(f)(2)(iv nonlife loss...... nonlife subgroup Once.
). loss.
1.1502-47(h)(2)(v).............. 1.1502-47(f)(2)(v) subparagraph (2).. paragraph (f)(2).. Once.
1.1502-47(h)(4)(i).............. 1.1502-47(f)(3)(i) Sec. Sec. Sec. 1.1502-22.. Once.
1.1502-22 or
1.1502-22A (as
appropriate).
1.1502-47(h)(4)(i).............. 1.1502-47(f)(3)(i) subparagraph (4).. paragraph (f)(3).. Once.
1.1502-47(h)(4)(i).............. 1.1502-47(f)(3)(i) Sec. Sec. Sec. 1.1502-22.. Once.
1.1502-22 or
1.1502-22A(a) (as
appropriate).
1.1502-47(h)(4)(iii)............ 1.1502-47(f)(3)(ii Sec. Sec. Sec. 1.1502- Once.
i). 1.1502-22A(b)(1) 22(b).
or 1.1502-22(b).
1.1502-47(h)(4)(iii)(A)......... 1.1502-47(f)(3)(ii allowed under allowed under Once.
i)(A). section 822(c)(6) section 832(c)(5).
or section
832(c)(5).
1.1502-47(m).................... 1.1502-47(h)...... paragraph (g)..... paragraph (e)..... Each place it
appears.
1.1502-47(m).................... 1.1502-47(h)...... paragraph (h)..... paragraph (f)..... Each place it
appears.
1.1502-47(m).................... 1.1502-47(h)...... paragraph (l)..... paragraph (g)..... Each place it
appears.
1.1502-47(m).................... 1.1502-47(h)...... paragraph (m)..... paragraph (h)..... Each place it
appears.
1.1502-47(m)(2)(ii)............. 1.1502-47(h)(2)(ii Sec. Sec. 1502- Sec. 1.1502-21.. Once.
). 21 or 1.1502-21A
(as appropriate).
1.1502-47(m)(2)(ii)............. 1.1502-47(h)(2)(ii Sec. Sec. Sec. 1.1502-22.. Once.
). 1.1502-22 or
1.1502-22A (as
appropriate).
1.1502-47(m)(3)(i).............. 1.1502-47(h)(3)(i) But see But see paragraph Once.
subdivision (ix) (h)(3)(ix) of
of this paragraph this section.
(m)(3).
1.1502-47(m)(3)(i).............. 1.1502-47(h)(3)(i) arising in arising in Once.
separate return separate return
years ending years.
after December
31, 1980.
1.1502-47(m)(3)(i).............. 1.1502-47(h)(3)(i) and 1.1502-22 (or and 1.1502-22..... Once.
Sec. Sec.
1.1502-21A and
1.1502-22A, as
appropriate).
1.1502-47(m)(3)(iii)............ 1.1502-47(h)(3)(ii consolidated LO... life consolidated Once.
i). net operating
loss.
1.1502-47(m)(3)(v).............. 1.1502-47(h)(3)(v) GO or TII......... taxable income.... Once.
1.1502-47(m)(3)(v).............. 1.1502-47(h)(3)(v) LICTI (as LICTI for any..... Once.
determined under
paragraph (j) of
this section) for
any.
1.1502-47(m)(3)(vi)(A).......... 1.1502-47(h)(3)(vi subparagraph (3).. paragraph (h)(3).. Once.
)(A).
1.1502-47(m)(3)(vii)(A)......... 1.1502-47(h)(3)(vi notwithstanding notwithstanding Once.
i)(A). Sec. 1.1502- Sec. 1.1502-
21A(b)(3)(ii) or 21(b).
1.1502-21(b).
1.1502-47(m)(3)(vii)(A)......... 1.1502-47(h)(3)(vi taxable income for taxable income for Once.
i)(A). that year. that year,
subject to the
limitation in
section 172(a).
1.1502-47(m)(3)(vii)(B)......... 1.1502-47(h)(3)(vi (A) of this paragraph Once.
i)(B). subdivision (vii). (h)(3)(vii)(A) of
this section.
1.1502-47(m)(3)(viii)........... 1.1502-47(h)(3)(vi section section 172(b)(3). Once.
ii). 172(b)(3)(C).
[[Page 67984]]
1.1502-47(m)(3)(ix)............. 1.1502-47(h)(3)(ix 243(b)(2)......... 243(b)(3)......... Once.
).
1.1502-47(m)(3)(ix)............. 1.1502-47(h)(3)(ix return year ending return year....... Once.
). after December
31, 1980.
1.1502-47(m)(3)(x).............. 1.1502-47(h)(3)(x) LICTI (as defined LICTI in the Once.
in paragraph (j) particular.
of this section)
in the particular.
1.1502-47(m)(3)(xii)............ 1.1502-47(h)(3)(xi carryback of a carryback of a Once.
i). consolidated LO. life consolidated
net operating
loss.
1.1502-47(m)(3)(xii)............ 1.1502-47(h)(3)(xi (2) or (4)........ (2) or (3)........ Once.
i).
1.1502-47(m)(5), Examples 1 1.1502-47(h)(4)(i) 1982.............. 2021.............. Each place it
through 4. through (iv), appears.
respectively.
1.1502-47(m)(5), Examples 1 1.1502-47(h)(4)(i) i.e............... that is........... Each place it
through 4. through (iv), appears.
respectively.
1.1502-47(m)(5), Example 1...... 1.1502-47(h)(4)(i) paragraph (d)(13). paragraph (b)(13). Once.
1.1502-47(m)(5), Example 1...... 1.1502-47(h)(4)(i) attributable to I attributable to I Once.
(an ineligible (an ineligible
member). member that is
not a nonlife
insurance
company).
1.1502-47(m)(5), Example 1...... 1.1502-47(h)(4)(i) of this section. of this section Once.
The result would and section
be. 172(a). The
result would be.
1.1502-47(m)(5), Example 4...... 1.1502-47(h)(4)(iv of this section or of this section... Once.
). under Sec.
1.1502-15A.
1.1502-47(m)(5), Example 4...... 1.1502-47(h)(4)(iv taxable income is taxable income is Once.
). $35. $32.5.
1.1502-47(m)(5), Example 4...... 1.1502-47(h)(4)(iv 30%............... 35%............... Once.
).
1.1502-47(m)(5), Example 4...... 1.1502-47(h)(4)(iv (15).............. (17.5)............ Once.
).
1.1502-47(m)(5), Example 4...... 1.1502-47(h)(4)(iv (65).............. (67.5)............ Once.
).
1.1502-47(m)(5), Example 4...... 1.1502-47(h)(4)(iv (85).............. (82.5)............ Once.
).
1.1502-47(n).................... 1.1502-47(j)...... consolidated LO... life consolidated Each place it
net operating appears.
loss and
consolidated
operations loss
carryovers.
1.1502-47(n)(1)................. 1.1502-47(j)(1)... paragraph (g)(1).. paragraph (e)(1).. Once.
1.1502-47(n)(1)................. 1.1502-47(j)(1)... paragraph (n)(2) paragraph (j)(2) Once.
of this section. of this section,
subject to the
rules and
limitations in
paragraph (j)(3)
of this section.
1.1502-47(n)(1)................. 1.1502-47(j)(1)... consolidated net consolidated net Once.
capital loss (as capital loss.
determined under
paragraph (l)(4)
of this section).
1.1502-47(n)(2)................. 1.1502-47(j)(2)... paragraph (h)..... paragraph (f)..... Once.
1.1502-47(n)(2)................. 1.1502-47(j)(2)... paragraphs (m)(2) paragraphs (h)(2) Once.
and (3). and (3).
1.1502-47(n)(2)(ii)............. 1.1502-47(j)(2)(ii consolidated consolidated LICTI Once.
). partial LICTI.
1.1502-47(n)(2)(iv)............. 1.1502-47(j)(2)(iv Paragraphs Paragraphs Once.
). (m)(3)(vi), (h)(3)(vi),
(vii), (x), and (vii), (x), and
(xi). (xi).
1.1502-47(q).................... 1.1502-47(k)...... Sec. 1.1502-1 Sec. Sec. Once.
through 1.1502-80. 1.1502-0 through
1.1502-100.
1.1502-47(q).................... 1.1502-47(k)...... paragraph paragraph Once.
(m)(3)(vi). (h)(3)(vi).
1.1502-47(q).................... 1.1502-47(k)...... Sec. Sec. Sec. 1.1502-21.. Once.
1.1502-21A(b)(3)
and 1.1502-
79A(a)(3) (or
Sec. 1.1502-21,
as appropriate).
1.1502-47(r).................... 1.1502-47(l)...... partial LICTI (or LICTI (or life Once.
LO). consolidated net
operating loss).
1.1502-47(r).................... 1.1502-47(l)...... Sec. Sec. Sec. Sec. Once.
1.1502-0--1.1502- 1.1502-0 through
80. 1.1502-100.
1.1502-47(s)(1)(iii)............ 1.1502-47(m)(1)(ii paragraphs (g), paragraphs (e), Once.
i). (m), and (n). (h), and (j).
1.1502-47(s)(1)(iv)............. 1.1502-47(m)(1)(iv paragraph (h)..... paragraph (f)..... Once.
).
1.1502-47(s)(1)(v).............. 1.1502-47(m)(1)(v) consolidated consolidated Life. Once.
partial Life.
1.1502-47(s)(1)(v).............. 1.1502-47(m)(1)(v) (as defined by or life Once.
paragraph (d)(3) consolidated net
of this section), operating loss.
determined under
paragraph (j) of
this section
----------------------------------------------------------------------------------------------------------------
The additions and revisions read as follows:
Sec. 1.1502-47 Consolidated returns by life-nonlife groups.
(a) * * *
(2) General method of consolidation--(i) Subgroup method. The
regulations adopt a subgroup method to determine consolidated taxable
income. One subgroup is the group's nonlife companies. The other
subgroup is the group's life insurance companies. Initially, the
nonlife subgroup computes nonlife consolidated taxable income and the
life subgroup computes consolidated LICTI. A subgroup's income may in
effect be reduced by a loss of the other subgroup, subject to the
limitations in sections 172 and 1503(c). The life subgroup losses
consist of life consolidated net operating loss, consolidated
operations loss carryovers from taxable years beginning before January
1, 2018 (consolidated operations loss carryovers), and life
consolidated net capital loss. The nonlife subgroup losses consist of
nonlife consolidated net operating loss and nonlife consolidated net
capital loss. Consolidated taxable income is therefore defined in
pertinent part as the sum of nonlife consolidated taxable income and
consolidated LICTI, reduced by life subgroup losses and/or nonlife
subgroup losses.
(ii) Subgroup loss. A subgroup loss does not actually affect the
computation of nonlife consolidated taxable income or consolidated
LICTI. It merely constitutes a bottom-line adjustment in reaching
consolidated taxable income. Furthermore, the amount of a subgroup's
loss, if any, that is eligible to be carried back to a prior taxable
year
[[Page 67985]]
first must be carried back against income of the same subgroup before
it may be used as a setoff against the other subgroup's income in the
taxable year the loss arose. (See sections 172(b)(1) and 1503(c)(1);
see also Sec. 1.1502-21(b).) The carryback of losses from one subgroup
may not be used to offset income of the other subgroup in the year to
which the loss is to be carried. This carryback of one subgroup's loss
may ``bump'' the other subgroup's loss that, in effect, previously
reduced the income of the first subgroup. The subgroup's loss that is
bumped in appropriate cases may, in effect, reduce a succeeding year's
income of either subgroup. This approach gives the group the tax
savings of the use of losses, but the bumping rule assures that,
insofar as possible, life deductions will be matched against life
income and nonlife deductions against nonlife income.
* * * * *
(b) * * *
(1) Life company. The term life company means a life insurance
company as defined in section 816 and subject to tax under section 801.
Section 816 applies to each company separately.
(2) Nonlife insurance company. The term nonlife insurance company
has the meaning provided in Sec. 1.1502-1(k).
(3) Life insurance company taxable income. The term life insurance
company taxable income or LICTI has the meaning provided in section
801(b).
(4) Group. The term group has the meaning provided in Sec. 1.1502-
1(a). Unless otherwise indicated in this section, a group's composition
is determined without regard to section 1504(b)(2).
(5) Member. The term member has the meaning provided in Sec.
1.1502-1(b). A life company is tentatively treated as a member for any
taxable year for purposes of determining if it is an eligible
corporation under paragraph (b)(12) of this section and, therefore, if
it is an includible corporation under section 1504(c)(2). If such a
company is eligible and includible (under section 1504(c)(2)), it will
actually be treated as a member of the group.
* * * * *
(10) Separate return year. The term separate return year has the
meaning provided in Sec. 1.1502-1(e). For purposes of this paragraph
(b)(10), the term group is defined with regard to section 1504(b)(2)
for years in which an election under section 1504(c)(2) is not in
effect. Thus, a separate return year includes a taxable year for which
that election is not in effect.
(11) Separate return limitation year. Section 1.1502-1(f)(2)
provides exceptions to the definition of the term separate return
limitation year. For purposes of applying those exceptions to this
section, the term group is defined without regard to section
1504(b)(2), and the definition in this paragraph (b)(11) applies
separately to the nonlife subgroup in determining nonlife consolidated
taxable income under paragraph (f) of this section and to the life
subgroup in determining consolidated LICTI under paragraph (g) of this
section. Paragraph (h)(3)(ix) of this section defines the term separate
return limitation year for purposes of determining whether the losses
of one subgroup may be used against the income of the other subgroup.
* * * * *
(13) Ineligible corporation. A corporation that is not an eligible
corporation is ineligible. If a life company is ineligible, it is not
treated under section 1504(c)(2) as an includible corporation. Losses
of a nonlife member arising in years when it is ineligible may not be
used under section 1503(c)(2) and paragraph (g) of this section to set
off the income of a life member. If a life company is ineligible and is
the common parent of the group (without regard to section 1504(b)(2)),
the election under section 1504(c)(2) may not be made.
(14) * * *
(i) * * * S2 must file its own separate return for 2020.
(ii) Example 2. Since 2012, L1 has been a life company owning all
the stock of L2. In 2018, L1 transfers assets to S1, a new nonlife
insurance company subject to taxation under section 831(a). For 2020,
only L1 and L2 are eligible corporations. The tacking rule in paragraph
(b)(12)(v) of this section does not apply in 2020 because the old
corporation (L1) and the new corporation (S1) do not have the same tax
character.
* * * * *
(d) * * *
(5) Dividends received deduction--(i) Dividends received by an
includible insurance company. Dividends received by an includible
member insurance company, taxed under either section 801 or section
831, from another includible member of the group are treated for
Federal income tax purposes as if the group did not file a consolidated
return. See sections 818(e)(2) and 805(a)(4) for rules regarding a
member taxed under section 801, and see sections 832(g) and
832(b)(5)(B) through (E) for rules regarding a member taxed under
section 831.
(ii) Other dividends. Dividends received from a life company member
of the group that are not subject to paragraph (d)(5)(i) of this
section are not included in gross income of the distributee member. See
section 1504(c)(2)(B)(i). If the distributee corporation is a nonlife
insurance company subject to tax under section 831, the rules of
section 832(b)(5)(B) through (E) apply.
* * * * *
(7) * * *
(ii) Any taxes described in Sec. 1.1502-2 (other than in Sec.
1.1502-2(a)(1), (a)(6), and (a)(7)).
* * * * *
(f) * * *
(2) * * *
(iii) Carrybacks. The portion of the nonlife consolidated net
operating loss for the nonlife subgroup described in paragraph
(f)(2)(vi) of this section, if any, that is eligible to be carried back
to prior taxable years under Sec. 1.1502-21 is carried back to the
appropriate years (whether consolidated or separate) before the nonlife
consolidated net operating loss may be used as a nonlife subgroup loss
under paragraphs (e)(2) and (h) of this section to set off consolidated
LICTI in the year the loss arose. The election under section 172(b)(3)
to relinquish the entire carryback period for the net operating loss of
the nonlife subgroup may be made by the agent for the group within the
meaning of Sec. 1.1502-77.
* * * * *
(v) * * * For limitations on the use of nonlife carryovers to
offset nonlife consolidated taxable income or consolidated LICTI, see
Sec. 1.1502-21.
(vi) Portion of nonlife consolidated net operating loss that is
carried back to prior taxable years. The portion of the nonlife
consolidated net operating loss that (absent an election to waive
carrybacks) is carried back to the two preceding taxable years is the
sum of the nonlife subgroup's farming loss (within the meaning of
section 172(b)(1)(B)(ii)) and the amount of the subgroup's net
operating loss that is attributable to nonlife insurance companies (as
determined under Sec. 1.1502-21). For rules governing the absorption
of net operating loss carrybacks, including limitations on the amount
of net operating loss carrybacks that may be absorbed in prior taxable
years, see Sec. 1.1502-21(b).
(vii) Example. P, a holding company that is not an insurance
company, owns all of the stock of S, a nonlife insurance company, and
L1, a life insurance company. L1 owns all of the stock of L2, a life
insurance company. Both L1 and
[[Page 67986]]
L2 satisfy the eligibility requirements of Sec. 1.1502-47(b)(12). Each
corporation uses the calendar year as its taxable year, and no
corporation has incurred farming losses (within the meaning of section
172(b)(1)(B)(ii)). For 2021, the group first files a consolidated
return for which the election under section 1504(c)(2) is effective. P
and S filed consolidated returns for 2019 and 2020. In 2021, the P-S
group sustains a nonlife consolidated net operating loss that is
attributable entirely to S (see Sec. 1.1502-21(b)). The election in
2021 under section 1504(c)(2) does not result under paragraph (d)(1) of
this section in the creation of a new group or the termination of the
P-S group. The loss is carried back to the consolidated return years
2019 and 2020 of P and S. Pursuant to Sec. 1.1502-21(b), the loss may
be used to offset S's income in 2019 and 2020 without limitation, and
the loss may be used to offset P's income in those years, subject to
the limitation in section 172(a) (see Sec. 1.1502-21(b)). The portion
of the loss not absorbed in 2019 and 2020 may serve as a nonlife
subgroup loss in 2021 that may set off the consolidated LICTI of L1 and
L2 under paragraphs (e)(2) and (h) of this section.
(3) * * *
(ii) Additional principles. In applying Sec. 1.1502-22 to nonlife
consolidated net capital loss carryovers and carrybacks, the principles
set forth in paragraph (f)(2)(iii) through (v) of this section for
applying Sec. 1.1502-21 to nonlife consolidated net operating loss
carryovers and carrybacks also apply, without regard to the limitation
in paragraph (f)(2)(vi) of this section.
* * * * *
(g) Consolidated LICTI--(1) General rule. Consolidated LICTI is the
consolidated taxable income of the life subgroup, computed under Sec.
1.1502-11 as modified by this paragraph (g).
(2) Life consolidated net operating loss deduction--(i) In general.
In applying Sec. 1.1502-21, the rules in this paragraph (g)(2) apply
in determining for the life subgroup the life net operating loss and
the portion of the life net operating loss carryovers and carrybacks to
the taxable year.
(ii) Life CNOL. The life consolidated net operating loss is
determined under Sec. 1.1502-21(e) by treating the life subgroup as
the group.
(iii) Carrybacks--(A) General rule. The portion of the life
consolidated net operating loss for the life subgroup, if any, that is
eligible to be carried back under Sec. 1.1502-21 is carried back to
the appropriate years (whether consolidated or separate) before the
life consolidated net operating loss may be used as a life subgroup
loss under paragraphs (e)(1) and (j) of this section to set off nonlife
consolidated taxable income in the year the loss arose. The election
under section 172(b)(3) to relinquish the entire carryback period for
the consolidated net operating loss of the life subgroup may be made by
the agent for the group within the meaning of Sec. 1.1502-77.
(B) Special rule for life consolidated net operating losses arising
in 2018, 2019, or 2020. If a life consolidated net operating loss
arising in a taxable year beginning after December 31, 2017, and before
January 1, 2021, is carried back to a life insurance company taxable
year beginning before January 1, 2018, then such life consolidated net
operating loss is treated as an operations loss carryback (within the
meaning of section 810, as in effect prior to its repeal) of such
company to such taxable year.
(iv) Subgroup rule. In determining the portion of the life
consolidated net operating loss that is absorbed when the loss is
carried back to a consolidated return year, Sec. 1.1502-21 is applied
by treating the life subgroup as the group. Therefore, the absorption
is determined without taking into account any nonlife subgroup losses
that were previously reported on a consolidated return as setting off
life consolidated taxable income for the year to which the life
subgroup loss is carried back.
(v) Carryovers. The portion of the life consolidated net operating
loss that is not absorbed in a prior year as a carryback, or as a life
subgroup loss that set off nonlife consolidated taxable income for the
year the loss arose, constitutes a life carryover under this paragraph
(g)(2) to reduce consolidated LICTI before that portion may constitute
a life subgroup loss that sets off nonlife consolidated taxable income
for that particular year. For limitations on the use of life carryovers
to offset nonlife consolidated taxable income or consolidated LICTI,
see Sec. 1.1502-21(b).
(3) Life consolidated capital gain net income or loss--(i)
[Reserved].
(ii) Life consolidated net capital loss carryovers and carrybacks.
The life consolidated net capital loss carryovers and carrybacks for
the life subgroup are determined by applying the principles of Sec.
1.1502-22 as modified by the following rules in this paragraph
(g)(3)(ii):
(A) Life consolidated net capital loss is first carried back (or
apportioned to the life members for separate return years) to be
absorbed by life consolidated capital gain net income without regard to
any nonlife subgroup capital losses and before the life consolidated
net capital loss may serve as a life subgroup capital loss that sets
off nonlife consolidated capital gain net income in the year the life
consolidated net capital loss arose.
(B) If a life consolidated net capital loss is not carried back or
is not a life subgroup loss that sets off nonlife consolidated capital
gain net income in the year the life consolidated net capital loss
arose, then it is carried over to the particular year under this
paragraph (g)(3)(ii) first against life consolidated capital gain net
income before it may serve as a life subgroup capital loss that sets
off nonlife consolidated capital gain net income in that particular
year.
(h) * * *
(2) * * *
(ii) * * * Additionally, the amount of consolidated LICTI that may
be offset by nonlife consolidated net operating loss carryovers may be
subject to limitation (see section 172 and Sec. 1.1502-21).
* * * * *
(3) * * *
(iv) * * * The amount of consolidated LICTI that may be offset by
nonlife consolidated net operating loss carryovers may be subject to
limitation (see section 172 and Sec. 1.1502-21).
* * * * *
(4) Examples. The following examples illustrate the principles of
this paragraph (h). In the examples, L indicates a life company, S is a
nonlife insurance company, another letter indicates a nonlife company
that is not an insurance company, no company has farming losses (within
the meaning of section 172(b)(1)(B)(ii)), and each corporation uses the
calendar year as its taxable year.
* * * * *
(ii) Example 2. (A) The facts are the same as in paragraph
(h)(4)(i) of this section, except that, for 2021, S's separate net
operating loss is $200. Assume further that L's consolidated LICTI is
$200. Under paragraph (h)(3)(vi) of this section, the offsettable
nonlife consolidated net operating loss is $100 (the nonlife
consolidated net operating loss computed under paragraph (f)(2)(ii) of
this section ($200), reduced by the separate net operating loss of I
($100)). The offsettable nonlife consolidated net operating loss that
may be set off against consolidated LICTI in 2021 is $35 (35 percent of
the lesser of the offsettable $100 or consolidated LICTI of $200). See
section 1503(c)(1) and paragraph (h)(3)(x) of this section. S carries
over a loss of $65, and I carries over a loss of $100, to 2022 under
paragraph (f)(2) of this section to be used against nonlife
consolidated taxable income (consolidated net
[[Page 67987]]
operating loss ($200) less amount used in 2021 ($35)). Under paragraph
(h)(2)(ii) of this section, the offsettable nonlife consolidated net
operating loss that may be carried to 2022 is $65 ($100 minus $35). The
facts and results are summarized in the following table.
Table 1 to Paragraph (h)(4)(ii)(A)
[Dollars omitted]
----------------------------------------------------------------------------------------------------------------
Facts Offsettable Limit Unused Loss
(a) (b) (c) (d)
----------------------------------------------------------------------------------------------------------------
1. P............................................ 100 .............. .............. ..............
2. S............................................ (200) (100) .............. (65)
3. I............................................ (100) .............. .............. (100)
4. Nonlife Subgroup............................. (200) (100) (100) (165)
5. L............................................ 200 .............. 200 ..............
6. 35% of lower of line 4(c) or 5(c)............ .............. .............. 35 ..............
7. Unused offsettable loss...................... .............. .............. .............. (65)
----------------------------------------------------------------------------------------------------------------
(B) Accordingly, under paragraph (e) of this section, consolidated
taxable income is $165 (line 5(a) minus line 6(c)).
(iii) Example 3. The facts are the same as in paragraph (h)(4)(ii)
of this section, with the following additions for 2022. The nonlife
subgroup has nonlife consolidated taxable income of $50 (all of which
is attributable to I) before the nonlife consolidated net operating
loss deduction under paragraph (f)(2) of this section. Consolidated
LICTI is $100. Under paragraph (f)(2) of this section, $50 of the
nonlife consolidated net operating loss carryover ($165) is used in
2022 and, under paragraph (h)(3)(vi) and (vii) of this section, the
portion used in 2022 is attributable to I, the ineligible nonlife
member. Accordingly, the offsettable nonlife consolidated net operating
loss from 2021 under paragraph (h)(3)(ii) of this section is $65, the
unused loss from 2021. The offsettable nonlife consolidated net
operating loss in 2022 is $22.75 (35 percent of the lesser of the
offsettable loss of $65 or consolidated LICTI of $100). Accordingly,
under paragraph (e) of this section, consolidated taxable income is
$77.25 (consolidated LICTI of $100 minus the offsettable loss of
$22.75).
* * * * *
(j) * * *
(2) * * *
(iii) Substitute the term ``life consolidated net operating loss
and consolidated operations loss carryovers'' for ``nonlife
consolidated net operating loss'', and ``paragraph (g)'' for
``paragraph (f)''.
(3) Examples. The following examples illustrate the principles of
this paragraph (j). In the examples, L indicates a life company, S is a
nonlife insurance company, another letter indicates a nonlife company
that is not an insurance company, no company has farming losses (within
the meaning of section 172(b)(1)(B)(ii)), and each corporation uses the
calendar year as its taxable year.
(i) Example 1. P, S, L1 and L2 constitute a group that elects under
section 1504(c)(2) to file a consolidated return for 2021. In 2021, the
nonlife subgroup consolidated taxable income is $100 and there is $20
of nonlife consolidated net capital loss that cannot be carried back
under paragraph (f) of this section to taxable years (whether
consolidated or separate) preceding 2021. The nonlife subgroup has no
carryover from years prior to 2021. The life consolidated net operating
loss is $150, which under paragraph (g) of this section includes life
consolidated capital gain net income of $25. Since life consolidated
capital gain net income is zero for 2021 (see paragraph (h)(3)(iii) of
this section), the nonlife capital loss offset is zero (see paragraph
(h)(3)(ii) of this section). However, $100 of life consolidated net
operating loss sets off the $100 nonlife consolidated taxable income in
2021. The life subgroup carries under paragraph (g)(2) of this section
to 2022 $50 of the life consolidated net operating loss ($150 minus
$100). The $50 carryover will be used in 2022 (subject to the
limitation in section 172(a)) against life subgroup income before it
may be used in 2022 to setoff nonlife consolidated taxable income.
(ii) Example 2. The facts are the same as in paragraph (j)(3)(i) of
this section, except that, for 2021, the nonlife consolidated taxable
income is $150 (this amount is entirely attributable to S and includes
nonlife consolidated capital gain net income of $50), consolidated
LICTI is $200, and a life consolidated net capital loss is $50. The $50
life consolidated net capital loss sets off the $50 nonlife
consolidated capital gain net income. Consolidated taxable income under
paragraph (e) of this section is $300 (nonlife consolidated taxable
income ($150) minus the setoff of the life consolidated net capital
loss ($50), plus consolidated LICTI ($200)).
(iii) Example 3. The facts are the same as in paragraph (j)(3)(ii)
of this section, except that, for 2022, the nonlife consolidated net
operating loss is $150. This entire amount is attributable to S; thus,
it is eligible to be carried back to 2021 against nonlife consolidated
taxable income under paragraph (f)(2) of this section and Sec. 1.1502-
21(b). If P, the agent for the group within the meaning of Sec.
1.1502-77, does not elect to relinquish the carryback under section
172(b)(3), the entire $150 will be carried back, reducing 2021 nonlife
consolidated taxable income to zero and nonlife consolidated capital
gain net income to zero. Under paragraph (h)(3)(xii) of this section,
the setoff in 2021 of the nonlife consolidated capital gain net income
($50) by the life consolidated net capital loss ($50) is restored.
Accordingly, the 2021 life consolidated net capital loss may be carried
over by the life subgroup to 2022. Under paragraph (e) of this section,
after the carryback, consolidated taxable income for 2021 is $200
(nonlife consolidated taxable income ($0) plus consolidated LICTI
($200)).
(iv) Example 4. The facts are the same as in paragraph (j)(3)(iii)
of this section, except that P elects under section 172(b)(3) to
relinquish the carryback of $150 arising in 2022. The setoff in Example
2 is not restored. However, the offsettable nonlife consolidated net
operating loss for 2022 (or that may be carried over from 2022) is
zero. See paragraph (h)(3)(viii) of this section. Nevertheless, the
$150 nonlife consolidated net operating loss may be
[[Page 67988]]
carried over to be used by the nonlife group.
(v) Example 5. P owns all of the stock of S1 and of L1. On January
1, 2017, L1 purchases all of the stock of L2. For 2021, the group
elects under section 1504(c)(2) to file a consolidated return. For
2021, L1 is an eligible corporation under paragraph (b)(12) of this
section but L2 is ineligible. Thus, L1 but not L2 is a member for 2021.
For 2021, L2 sustains a net operating loss, which cannot be carried
back (see section 172(b)). For 2021, L2 is treated under paragraph
(d)(6) of this section as a member of a controlled group of
corporations under section 1563 with P, S, and L1. For 2022, L2 is
eligible and is included on the group's consolidated return. L2's net
operating loss for 2021 that may be carried to 2022 is not treated
under paragraph (b)(11) of this section as having been sustained in a
separate return limitation year for purposes of computing consolidated
LICTI of the L1-L2 life subgroup for 2022. Furthermore, the portion of
L2's net operating loss not used under paragraph (g)(2) of this section
against life subgroup income in 2022 may be included in offsettable
life consolidated net operating loss under paragraph (j)(2) and
(h)(3)(i) of this section that reduces in 2022 nonlife consolidated
taxable income (subject to the limitation in section 172(a)) because
L2's loss in 2021 was not sustained in a separate return limitation
year under paragraph (j)(2) and (h)(3)(ix)(A) of this section or in a
separate return year (2021) when an election was in effect under
neither section 1504(c)(2) nor section 243(b)(3).
* * * * *
(n) Effective/applicability dates. The rules of this section apply
to taxable years beginning after December 31, 2020. However, a taxpayer
may choose to apply the rules of this section to taxable years
beginning on or before December 31, 2020. If a taxpayer makes the
choice described in the previous sentence, the taxpayer must apply
those rules in their entirety and consistently with the provisions of
subchapter L of the Internal Revenue Code applicable to the years at
issue.
0
Par. 5. Section 1.1503(d)-4 is amended by:
0
1. In paragraph (c)(3)(iii)(B), removing the period and adding in its
place a semi-colon.
0
2. In paragraph (c)(3)(iv), removing the period and adding in its place
``; and''.
0
3. Adding paragraph (c)(3)(v).
The addition reads as follows:
Sec. 1.1503(d)-4 Domestic use limitation and related operating rules.
* * * * *
(c) * * *
(3) * * *
(v) The SRLY limitation is applied without regard to Sec. 1.1502-
21(c)(1)(i)(E) (section 172(a) limitation applicable to a SRLY member).
* * * * *
0
Par. 6. Section 1.1503(d)-8 is amended by adding paragraph (b)(8) to
read as follows:
Sec. 1.1503(d)-8 Effective dates.
* * * * *
(b) * * *
(8) Rule providing that SRLY limitation applies without regard to
Sec. 1.1502-21(c)(1)(i)(E). Section 1.1503(d)-4(c)(3)(v) applies to
any period to which Sec. 1.1502-21(c)(1)(i)(E) applies.
Sunita Lough,
Deputy Commissioner for Services and Enforcement.
Approved: September 29, 2020.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2020-22974 Filed 10-23-20; 11:15 am]
BILLING CODE 4830-01-P