Consolidated Net Operating Losses
| Published date | 08 July 2020 |
| Citation | 85 FR 40927 |
| Record Number | 2020-14427 |
| Section | Proposed rules |
| Court | Internal Revenue Service |
Federal Register, Volume 85 Issue 131 (Wednesday, July 8, 2020)
[Federal Register Volume 85, Number 131 (Wednesday, July 8, 2020)]
[Proposed Rules]
[Pages 40927-40951]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14427]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 85, No. 131 / Wednesday, July 8, 2020 /
Proposed Rules
[[Page 40927]]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-125716-18]
RIN 1545-BP27
Consolidated Net Operating Losses
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking; partial withdrawal of a notice
of proposed rulemaking.
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SUMMARY: This notice of proposed rulemaking contains proposed
amendments to the consolidated return regulations under section 1502 of
the Internal Revenue Code (Code). The proposed regulations provide
guidance implementing recent statutory amendments to section 172 and
withdraw and re-propose certain sections of proposed regulations issued
in prior notices of proposed rulemaking relating to the absorption of
consolidated net operating loss carryovers and carrybacks. In addition,
the proposed regulations update regulations applicable to consolidated
groups that include both life insurance companies and other companies
to reflect statutory changes. These proposed regulations would affect
corporations that file consolidated returns.
DATES: Written or electronic comments and requests for a public hearing
must be received by August 31, 2020. Requests for a public hearing must
be submitted as prescribed in the ``Comments and Requests for a Public
Hearing'' section.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
eRulemaking Portal at www.regulations.gov (indicate IRS and REG-125716-
18) by following the online instructions for submitting comments. Once
submitted to the Federal eRulemaking Portal, comments cannot be edited
or withdrawn. The IRS expects to have limited personnel available to
process public comments that are submitted on paper through mail. Until
further notice, any comments submitted on paper will be considered to
the extent practicable. The Department of the Treasury (Treasury
Department) and the IRS will publish for public availability any
comment submitted electronically (and, to the extent practicable, any
comment submitted on paper) to its public docket.
Send paper submissions to: CC:PA:LPD:PR (REG-125716-18), Room 5203,
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Justin O. Kellar at (202) 317-6720, Gregory J. Galvin at (202) 317-
3598, or William W. Burhop at (202) 317-5363; concerning submission of
comments or requests for a public hearing, Regina Johnson at (202) 317-
5177 (not toll-free numbers).
SUPPLEMENTARY INFORMATION: In the Rules and Regulations section of this
issue of the Federal Register, the IRS is issuing temporary regulations
to 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 of the Code for certain losses attributable to the acquired
members. The text of those temporary regulations also serves as the
text of Sec. 1.1502-21(b)(3)(ii)(C) and (D) of these proposed
regulations. The proposed and temporary regulations affect corporations
that file consolidated returns.
Background
These proposed regulations revise 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.
These proposed revisions implement certain statutory amendments
made by Public Law 115-97, 131 Stat. 2054 (December 22, 2017), commonly
referred to as the Tax Cuts and Jobs Act (TCJA). Specifically, section
13302 of the TCJA amended section 172 of the Code, relating to net
operating loss (NOL) deductions, and sections 13511 through 13519 of
the TCJA amended subchapter L of chapter 1 of the Code (subchapter L),
relating to the taxation of insurance companies. These proposed
regulations also implement further statutory amendments to section 172
of the Code made by the Coronavirus Aid, Relief, and Economic Security
Act, Public Law 116-136, 134 Stat. 281 (March 27, 2020) (CARES Act).
Additionally, these proposed regulations update regulations under
section 1502 concerning consolidated groups that include life insurance
companies and other companies (life-nonlife groups) to implement
amendments under prior tax legislation.
I. Net Operating Loss Deductions
Prior to amendment by the TCJA, section 172(a) allowed a taxpayer
to use its aggregate NOL carryovers and carrybacks to a taxable year to
offset all taxable income in the taxable year, and section 172(b)(1)
generally permitted taxpayers to carry back NOLs two years and carry
over NOLs 20 years. The TCJA amended section 172 to provide new NOL
deduction rules based on (i) the type of entity generating the NOL or
using an NOL to offset income, or (ii) the character of the loss giving
rise to an NOL. The CARES Act extended the carryback period for NOLs
arising in a taxable year beginning after December 31, 2017, and before
January 1, 2021. See part I.A of this Background. Both the TCJA and the
CARES Act also made other changes to section 172 that are not pertinent
to this notice of proposed rulemaking.
[[Page 40928]]
A. General NOL Rules
As amended by section 13302(a)(1) of the TCJA and section
2303(a)(1) of the CARES Act, section 172(a)(2) of the Code allows an
NOL deduction for a taxable year beginning after December 31, 2020, in
an amount equal to the sum of two factors. The first factor is the
aggregate amount of NOLs arising in taxable years beginning before
January 1, 2018 (pre-2018 NOLs), that are carried to such taxable year.
The second factor is the lesser of (i) the aggregate amount of NOLs
arising in taxable years beginning after December 31, 2017 (post-2017
NOLs), that are carried to such taxable year, or (ii) 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 (this
latter calculation, the 80-percent limitation). The 80-percent
limitation does not apply to taxable years beginning before January 1,
2021. See section 172(a)(1). For any such taxable year, section
172(a)(1) allows an NOL deduction equal to the aggregate amount of NOL
carryovers and carrybacks to such year. See id. Moreover, the 80-
percent limitation does not apply to limit the use of pre-2018 NOLs.
See section 172(a)(2)(A).
Section 13302(b) of the TCJA amended section 172(b) to generally
eliminate NOL carrybacks but permit post-2017 NOLs to be carried over
indefinitely. Section 2303(b) of the CARES Act further amended section
172(b) to require (unless waived under section 172(b)(3)) a five-year
carryback for NOLs arising in taxable years beginning after December
31, 2017, and before January 1, 2021. See section 172(b)(1)(D)(i).
B. Special NOL Rules for Nonlife Insurance Companies
Section 13302(d) of the TCJA added sections 172(b)(1)(C) and
172(f), which provide special rules for insurance companies other than
life insurance companies, as defined in section 816(a) (nonlife
insurance companies, which commonly are referred to as property and
casualty insurance companies or P&C companies). Under section 172(f),
the 80-percent limitation does not apply to nonlife insurance
companies. Therefore, taxable income of nonlife insurance companies may
be fully offset by NOL deductions. In addition, under sections
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. (As noted in part I.A
of this Background, losses arising in taxable years beginning after
December 31, 2017, and before January 1, 2021, are carried back five
years.) Thus, for taxable years beginning after December 31, 2020, the
operative rules under section 172 effectively apply to nonlife
insurance companies in the same manner as those rules applied prior to
enactment of the TCJA.
C. Special NOL Rules for Farming Losses
Section 13302(c) of the TCJA amended the special rules for farming
losses set forth in sections 172(b)(1)(F) and 172(h), as in effect
prior to enactment of the TCJA. For purposes of section 172, a
``farming loss'' is the lesser of (i) the amount that would be the NOL
for the taxable year if only income and deductions attributable to
farming businesses (as defined in section 263A(e)(4) of the Code) were
taken into account, or (ii) the amount of the NOL for that taxable
year. See section 172(b)(1)(B)(ii). Under sections 172(b)(1)(B)(i) and
(b)(1)(D)(i)(II), any portion of an NOL for a taxable year beginning
after December 31, 2020, that is characterized as a farming loss is
treated as an NOL that is carried back two years and, as provided in
section 172(b)(1)(A)(ii)(II), is carried over indefinitely. Farming
losses arising in taxable years beginning after December 31, 2017, and
before January 1, 2021, are carried back five years. Section
172(b)(1)(D)(i).
II. Insurance Company Provisions
The TCJA also made several changes to subchapter L (which addresses
the taxation of insurance companies) that are relevant to this notice
of proposed rulemaking. First, sections 13511(a) and 13511(b) of the
TCJA (i) struck section 805(b)(4), which generally denied life
insurance companies the NOL deduction provided in section 172, and (ii)
made a conforming amendment by striking section 810, which provided a
deduction for operations losses for life insurance companies. As a
result, effective for taxable years beginning after December 31, 2017,
life insurance companies are entitled to an NOL deduction under the
general rules of section 172. Second, section 13001(b)(2)(A) of the
TCJA struck section 1201, which imposed a minimum tax on capital gains.
Third, section 13514(a) of the TCJA struck section 815, which provided
continued deferral of tax on policyholders surplus accounts. Fourth,
under section 13514(d) of the TCJA, stock life insurance companies must
pay the tax imposed by section 801 on the balance of any policyholders
surplus accounts (determined as of the close of such company's last
taxable year beginning before January 1, 2018) ratably over the first
eight taxable years beginning after December 31, 2017.
Additionally, section 2303(b) of the CARES Act added a special rule
for life insurance companies. Section 172(b)(1)(D)(iii) provides that,
in the case of a life insurance company, if an NOL is carried back
under section 172(b)(1)(D)(i)(I) to a life insurance company taxable
year beginning before January 1, 2018, such NOL carryback shall be
treated in the same manner as an operations loss carryback (within the
meaning of section 810 as in effect before its repeal) of such company
to such taxable year.
Because the repeal of section 810 is effective for losses arising
in taxable years beginning after December 31, 2017, operations loss
carryovers from taxable years beginning before January 1, 2018,
continue to be allowed as deductions in taxable years beginning after
December 31, 2017, in accordance with section 810 as in effect before
its repeal by the TCJA. See Staff of the Joint Comm. on Tax'n, 115th
Cong., General Explanation of Public Law 115-97, at 226 (Dec. 2018).
Final regulations applicable to life-nonlife groups under Sec.
1.1502-47 were published in the Federal Register on March 18, 1983. See
48 FR 11441 (March 18, 1983) (current life-nonlife regulations). In the
years that followed that publication, other legislation also
significantly altered the taxation of insurance companies.
Explanation of Provisions
I. Overview
These proposed regulations provide guidance for consolidated groups
regarding the application of the 80-percent limitation, as originally
enacted as part of the TCJA and subsequently amended by the CARES Act.
These proposed regulations also provide guidance regarding the
application of the NOL carryback provisions following enactment of the
TCJA and the CARES Act. In addition, the proposed regulations withdraw
and re-propose certain sections of proposed regulations issued under
section 1502 in prior notices of proposed rulemaking that relate to the
absorption of NOL carrybacks and carryovers. See part II of this
Explanation of Provisions for a further discussion.
These proposed regulations also update Sec. 1.1502-47 to reflect
certain changes to the insurance company rules
[[Page 40929]]
made by the CARES Act, the TCJA, and prior tax legislation. See part
III of this Explanation of Provisions for a further discussion. The
Treasury Department and the IRS continue to study other issues
pertinent to life-nonlife groups for purposes of potential future
guidance.
II. Amendments to Sec. 1.1502-21
A. In General
Under section 172, as amended by the TCJA and the CARES Act, NOLs
generated by certain members of a consolidated group (that is, nonlife
insurance companies), as well as NOLs generated by certain business
activity within a consolidated group (that is, farming losses), are
subject to different rules than other NOLs in taxable years beginning
after December 31, 2020. The proposed regulations implement these
statutory rules with regard to affiliated groups of corporations that
file consolidated returns.
B. Application of the 80-Percent Limitation
1. In General
Section 1.1502-21(a) defines the consolidated net operating loss
(CNOL) deduction for any consolidated return year as ``the aggregate of
the net operating loss carryovers and carrybacks to the year.'' This
section specifies that ``[t]he net operating loss carryovers and
carrybacks consist of (1) [a]ny CNOLs . . . of the consolidated group;
and (2) [a]ny net operating losses of the members arising in separate
return years.'' NOL carryovers and carrybacks to a consolidated return
year are determined under the principles of section 172 and Sec.
1.1502-21. See Sec. 1.1502-21(b)(1). For example, losses permitted to
be absorbed in a consolidated return year generally are absorbed in the
order of the taxable years in which they arose. See id.
As discussed in part I.A of the Background, the 80-percent
limitation on the use of post-2017 NOLs to offset taxable income (other
than taxable income of nonlife insurance companies) applies to taxable
years beginning after December 31, 2020. Consistent with longstanding
provisions in Sec. 1.1502-21(b)(1), these proposed regulations
generally implement the 80-percent limitation on a consolidated group
basis by limiting a group's deduction of post-2017 NOLs for any such
taxable year to the lesser of (1) the aggregate amount of post-2017
NOLs carried to such year, or (2) 80 percent of the excess (if any) of
the group's consolidated taxable income (CTI) (computed without regard
to any deductions under sections 172, 199A, and 250) over the aggregate
amount of pre-2018 NOLs carried to such year. Thus, the amount allowed
as a deduction for a particular consolidated return year beginning
after December 31, 2020, equals the sum of (1) pre-2018 NOLs carried to
that year (see section 172(a)(2)(A)), and (2) post-2017 NOLs carried to
that year after applying the 80-percent limitation (see section
172(a)(2)(B)). Additionally, the proposed regulations provide special
rules applicable to consolidated groups that include at least one
nonlife insurance company, as well as rules applicable to losses
arising in a separate return limitation year (SRLY).
2. Application of the 80-Percent Limitation to Groups Comprised of
Nonlife Insurance Companies, Members Other Than Nonlife Insurance
Companies, or Both
Application of the 80-percent limitation depends on the status of
the entity whose income is being offset, rather than on the status of
the entity whose loss is being absorbed. As noted in part I.B of the
Background, section 172(f) provides that the 80-percent limitation does
not apply when the taxable income of a nonlife insurance company is
offset by an NOL carryback or carryover.
To implement the special rules under section 172 regarding income
of nonlife insurance companies, these proposed regulations clarify that
application of the 80-percent limitation within a consolidated group to
post-2017 NOLs (post-2017 CNOL deduction limit) depends on the status
of the entity that generated the income being offset in a consolidated
return year beginning after December 31, 2020. Therefore, if a group is
comprised solely of members other than nonlife insurance companies
during a consolidated return year beginning after December 31, 2020,
the post-2017 CNOL deduction limit for the group for that year is
determined by applying the 80-percent limitation to all of the group's
consolidated taxable income for that year. In contrast, if a group is
comprised solely of nonlife insurance companies during a consolidated
return year beginning after December 31, 2020, the post-2017 CNOL
deduction limit for the group for that year simply equals the group's
CTI less the aggregate amount of pre-2018 NOLs carried to that year.
A two-factor computation is required if a consolidated group is
comprised of both nonlife insurance companies and other members in a
consolidated return year beginning after December 31, 2020. In general,
under these proposed regulations, the post-2017 CNOL deduction limit
for the group would equal the sum of two amounts.
The first amount relates to the income of those members that are
not nonlife insurance companies (residual income pool). This amount
equals the lesser of (i) the aggregate amount of post-2017 NOLs carried
to that year, or (ii) 80 percent of the excess of the group's CTI for
that year (determined without regard to 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 the aggregate
amount of pre-2018 NOLs carried to that year that are allocated to the
positive net income of members other than nonlife insurance companies.
The second amount relates to the income of those members that are
nonlife insurance companies (nonlife income pool). This amount equals
100 percent of the group's CTI for the year (determined without regard
to any income, gain, deduction, or loss of members that are not nonlife
insurance companies), less the aggregate amount of pre-2018 NOLs
carried to that year that are allocated to the positive net income of
nonlife insurance company members.
For purposes of computing the foregoing amounts, pre-2018 NOLs are
allocated pro rata between the two types of income pools in the group
(that is, the income pool for nonlife insurance companies and the
income pool for all other members, respectively). This allocation is
based on the relative amounts of positive net income in each pool in
the particular consolidated return year.
For example, assume that P, PC1, and PC2 are members of a calendar-
year consolidated group (P Group). PC1 and PC2 are nonlife insurance
companies, and P is a holding company. In 2017, the P Group has a CNOL
of $10 (that is, a pre-2018 NOL). In 2021, P has income of $50, PC1 has
income of $70, and PC2 has a loss of $20. Therefore, the P Group has
$100 of CTI in 2021. In 2022, the P Group has a $100 CNOL (all of which
is attributable to PC1 and PC2) that is carried back to 2021. Under
sections 172(a)(2)(B) and 172(f), the P Group's 2022 CNOL would offset
P's 2021 income subject to the 80-percent limitation, but it would
offset PC1's 2021 income without limitation.
The total amount allowed as a CNOL deduction in the P Group's 2021
consolidated return year equals the aggregate amount of pre-2018 NOLs
carried to that year plus the P Group's post-2017 CNOL deduction limit
for that year. The P Group has $10 of pre-2018 NOLs carried to 2021.
Under section
[[Page 40930]]
172(a)(2)(A) and Sec. 1.1502-21(b)(1), this loss would offset $10 of
the P Group's 2021 income.
Under these proposed regulations, the P Group's post-2017 CNOL
deduction limit for its 2021 consolidated return year is equal to the
sum of the following two amounts. The first amount reflects the
application of the 80-percent limitation to P's income (that is, the
residual income pool). This amount is $36, which equals the lesser of
(i) the aggregate amount of the P Group's post-2017 NOLs carried to its
2021 consolidated return year ($100), or (ii) the product obtained by
multiplying 80 percent by $45 (the excess of $50 (P's 2021 income) over
$5 (the pro rata amount of pre-2018 NOLs allocated to P's income)).
The second amount reflects the application of section 172(f) to the
income of PC1 and PC2 (that is, the nonlife income pool). This amount
is $45, which is obtained by subtracting $5 (the pro rata amount of
pre-2018 NOLs allocated to the income of PC1 and PC2) from $50 (PC1's
2021 income of $70-PC2's 2021 loss of $20).
Thus, the P Group has a CNOL deduction of $91 for 2021, which
includes (1) the aggregate amount of pre-2018 NOLs carried to 2021
($10), plus (2) the P Group's post-2017 deduction limit ($36 + $45 =
$81). The P Group has $9 of CTI in 2021 and carries over the remaining
$19 of its 2022 CNOL ($100-$81) to future taxable years.
If a group's nonlife insurance company members have net income for
a particular consolidated return year beginning after December 31,
2020, and its other members have a net loss for that year (or vice-
versa), these proposed regulations modify the foregoing computation to
ensure that the group's post-2017 CNOL deduction limit for that year is
not overstated. If the group's nonlife insurance company members have a
loss for the consolidated return year and its other members have income
for that year, the group's post-2017 CNOL deduction limit equals the
lesser of (i) the aggregate amount of post-2017 CNOLs carried to the
year, or (ii) 80 percent of the excess of the group's CTI (determined
without regard to any deductions under sections 172, 199A, and 250)
over the aggregate amount of pre-2018 NOLs carried to that year. That
is, because none of the group's net income has been produced by the
group's P&C insurance operations, the 80-percent limitation will apply
to all CTI for the year. Conversely, if the group's nonlife insurance
company members have income for the consolidated return year and its
other members have a loss for that year, the group's post-2017 CNOL
deduction limit equals the group's CTI less the aggregate amount of
pre-2018 NOLs carried to that year. That is, because all net income of
the group has been produced by the operation of members that are
nonlife insurance companies (whose income is not subject to the 80-
percent limitation), all CTI for the year may be offset by post-2017
CNOL deductions.
In formulating these proposed regulations, the Treasury Department
and the IRS considered an alternative approach. Following the enactment
of the TCJA and the CARES Act, section 172 provides special rules
applicable to entities of different tax status, both with regard to the
use of NOLs to offset income and with regard to the manner in which
NOLs are carried over. 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.
Specifically, this alternative approach would have adopted a
threshold computational step under which the principles of Sec.
1.1502-21(b)(2)(iv)(B) would apply to offset the income and loss items
solely among members that are nonlife insurance companies. The
remaining members of the group would be subject to a parallel offset.
Following this initial offsetting of pooled items, Sec. 1.1502-
21(b)(2)(iv)(B) (or the principles of Sec. 1.1502-21(b)(2)(iv)(B), in
the case of a group with CTI) would apply to allocate a post-2017 CNOL
among all group members with taxable income. This approach contrasts
with the historical application of Sec. 1.1502-21(b)(2)(iv)(B), under
which a CNOL for a year is attributed pro rata to all members of a
group that produce net loss, without first netting among entities of
the same type. This historical approach developed before the enactment
of the TCJA, and thus before special carryover rules applied to nonlife
insurance companies.
The Treasury Department and the IRS request comments regarding the
proposed regulations' methodology for computing a group's post-2017
CNOL deduction limit. The Treasury Department and the IRS also request
comments regarding the alternative approach described in the preceding
two paragraphs to identify the portion of the CNOL to which the special
carryback and carryover rules of section 172(b) (regarding nonlife
insurance company losses) would apply.
3. Losses Arising in a SRLY
Generally, an unaffiliated corporation determines its taxable
income by offsetting its NOLs against its income. In contrast, a
consolidated group member generally offsets its NOLs against the income
of all group members. See Sec. Sec. 1.1502-11 and 1.1502-21. However,
an exception to this general rule for consolidated groups applies to a
group's use of NOLs incurred by a member (SRLY member) in a taxable
year other than a year of the current group (that is, a separate return
limitation year or SRLY). A SRLY member may carry its NOLs that arose
in a SRLY into the consolidated group, but those NOLs can be absorbed
by the group only to the extent that the SRLY member generates income
on a separate-entity basis while a member of the group (that is, to the
extent of the amount of net income generated by the SRLY member as a
member of the group). See generally Sec. 1.1502-21(c)(1)(i) (setting
forth the general SRLY limitation rule).
The SRLY rules attempt to replicate, to the extent possible,
separate-entity usage of the SRLY attributes of the SRLY member. In
other words, the SRLY regulations were designed to obtain an absorption
result that varies as little as possible from the absorption that would
have occurred if the SRLY member had not joined the consolidated group.
To approximate a SRLY member's absorption of NOLs on a separate-
entity basis, the SRLY member's net contribution to the CTI of the
group is measured cumulatively over the period during which the
corporation is a member of the group by using what is commonly referred
to as a ``cumulative register.'' The cumulative register tracks the
SRLY member's net positive (or negative) contribution to the income of
the group. See Sec. 1.1502-21(c)(1)(i). If the SRLY member has net
positive income in a consolidated taxable year, the
[[Page 40931]]
member's cumulative register increases. See Sec. 1.1502-21(c)(1)(i)(A)
and (C). In turn, if the losses of a SRLY member (including SRLY-
limited NOL carryovers) are absorbed by the group, the SRLY member's
cumulative register decreases. See Sec. 1.1502-21(c)(1)(i)(B) and (C).
These proposed regulations would modify the cumulative register
rules to reflect the application of the 80-percent limitation under
section 172(a)(2)(B). Under the proposed regulations, as in current
Sec. 1.1502-21, the full amount of the SRLY member's current-year
income (or current-year absorbed loss) increases (or decreases) the
member's cumulative register. However, when the cumulative register is
reduced to account for the group's absorption of any SRLY member's NOLs
that are subject to the 80-percent limitation (whether or not those
losses are subject to the SRLY limitation), the amount of the reduction
equals the full amount of income that would be necessary to support the
deduction by the SRLY member.
For example, after absorption of any pre-2018 NOLs of a SRLY
member, the SRLY member (other than a nonlife insurance company) would
need to have $100 of remaining income to enable the group to absorb $80
of the SRLY member's SRLY-limited post-2017 NOLs in a taxable year
beginning after December 31, 2020 (that is, 80 percent of the excess of
$100 over $0). Therefore, upon the group's deduction of $80 of NOL
(SRLY or otherwise) of the SRLY member, the cumulative register would
be reduced to reflect the full $100 of income, not just the $80 of
losses absorbed by the group.
The Treasury Department and the IRS have determined that, without
the adjustment described, the SRLY member would achieve a different
result as a member of a group than as a stand-alone entity. Such result
would be contrary to the objective of the SRLY rules, which attempt to
replicate the hypothetical separate-entity treatment of the SRLY
member. Therefore, the above-described adjustment would be necessary to
ensure that the SRLY member achieves the same Federal income tax result
as if the SRLY member continued to be a stand-alone entity.
For example, assume that P owns 79 percent of S, and that neither P
nor S is a nonlife insurance company. In Year 1 (a taxable year
beginning after December 31, 2020), S incurs an $800 NOL that it
carries over into Year 2. S has no other NOL carryovers or carrybacks.
In Year 2, S has $400 of income; accordingly, S's 80-percent limitation
for Year 2 is $320 (that is, the lesser of $800 or 80 percent of the
excess of $400 over $0). As a result, S may use $320 of its $800 Year 1
NOL to offset $320 of its $400 Year 2 income. Under section 172(b)(2),
the amount of the $800 Year 1 NOL that is carried into Year 3 is the
excess of the entire $800 NOL over $320, or $480. S's ability to use
any portion of its remaining Year 1 NOL in Year 3 is dependent on its
generation of additional taxable income in Year 3.
Now assume that, instead of S filing a separate return for Year 2,
P acquires the remaining stock of S at the end of Year 1, and P and S
file a consolidated return for Year 2. The P group has $1,000 of income
in Year 2, of which S has $400. Thus, S's cumulative register increases
from $0 to $400. Because S's $800 Year 1 NOL arose in a SRLY, the
absorption of this NOL in Year 2 is subject to both the SRLY limitation
and the 80-percent limitation. Under the proposed regulations, the P
group may use only $320 (that is, the lesser of $800 or 80 percent of
the excess of $400 over $0) of S's Year 1 SRLY NOL to offset the P
group's Year 2 income. Upon the absorption of $320 of S's Year 1 SRLY
NOL, S's cumulative register is reduced by $400 (that is, the full
amount of income necessary to support the $320 deduction of S's Year 1
SRLY NOL) to $0. The remainder of S's Year 1 SRLY NOL is carried over.
If S's cumulative register were not reduced by the full amount of
income necessary to support the deduction, the P group's ability to use
S's loss would exceed S's ability to use the loss if S had not joined
the P group. As an illustration, assume further that, in Year 3, the P
group has $200 of income, with no net amount of income or loss
attributable to S. Because S's cumulative register would remain at $0,
the P group would not be able to offset any of its $200 Year 3 income
with S's Year 1 SRLY NOL. If S's cumulative register were reduced
solely by the amount of the SRLY NOL deducted in Year 2 ($320), S would
have $80 remaining in its cumulative register ($400-$320), and the P
group could absorb an additional $64 (that is, the lesser of $480 or 80
percent of the excess of $80 over $0) of S's remaining Year 1 SRLY NOL
in Year 3. In contrast, if S had not joined the P group and had not
generated any income in Year 3, it would not have been able to use any
of its $480 remaining Year 1 SRLY NOL in Year 3. In other words, S
would have been able to use a total of only $320 of its Year 1 SRLY NOL
in Years 2 and 3.
Therefore, absent an adjustment to S's cumulative register to
account for the 80-percent limitation, S would achieve a different
result as a member of a consolidated group than if S had remained a
stand-alone entity. As explained earlier in this part II.B.3 of this
Explanation of Provisions, such a result would be inconsistent with the
purpose of the SRLY regime. See the preamble to TD 8823 published in
the Federal Register July 2, 1999 (64 FR 36092).
C. Recomputation of Amount of CNOL Attributable to Each Member
Section 1.1502-21(b)(2)(i) generally provides that, if a group has
a CNOL that is carried to another taxable year, the CNOL is apportioned
among the group's members. For this purpose, Sec. 1.1502-21(b)(2)(iv)
provides a fraction, the numerator of which is the separate NOL of each
member for the consolidated return year of the loss (determined by
taking into account only the member's items of income, gain, deduction,
and loss), and the denominator of which is the sum of the separate NOLs
of all members for that year.
If a member's portion of a CNOL is absorbed or reduced on a non-pro
rata basis, the percentage of the CNOL attributable to each member must
be recomputed to reflect the proper allocation of the remaining CNOL.
For instance, if a portion of a CNOL allocable to a nonlife insurance
company is carried back to and absorbed in a prior taxable year under
the special rule for nonlife insurance companies that applies for
taxable years beginning after December 31, 2020 (see part I.B of the
Background), all or some portion of the CNOL allocable to the nonlife
insurance company is reduced even though the portion of the CNOL
allocable to other members remains untouched. Therefore, the allocation
of the remaining CNOL must be recomputed.
Accordingly, these proposed regulations provide that, if a member's
portion of a CNOL is absorbed or reduced on a non-pro rata basis, the
percentage of the CNOL attributable to each member is recomputed. The
recomputed percentage of the CNOL attributable to each member equals
the remaining 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. In other
words, if at the time of the recomputation a member's attributable
portion of the group's remaining CNOL equals $20, and the sum of the
remaining CNOL attributable to all of the group's remaining members
equals $80, the
[[Page 40932]]
recomputed percentage of the CNOL attributable to the member would
equal 25 percent.
Proposed regulations (REG-101652-10) published in the Federal
Register (80 FR 33211) on June 11, 2015 (2015 proposed regulations)
contained a similar rule (see Sec. 1.1502-21(b)(2)(iv)(B)(2) of the
2015 proposed regulations). These proposed regulations withdraw
proposed Sec. 1.1502-21(b)(2)(iv)(B)(2) of the 2015 proposed
regulations and re-propose substantially similar language in new
proposed Sec. 1.1502-21(b)(2)(iv)(B)(2).
D. Farming Losses
For a taxable year beginning after December 31, 2020, section
172(b)(1)(B) permits the portion of a taxpayer's NOL for the taxable
year that is a farming loss to be carried back two years. Under that
provision, the term ``farming loss'' means the lesser of the amount
that would be the NOL if only the income and deductions attributable to
farming businesses (as defined in section 263A(e)(4)) were taken into
account, or the amount of a taxpayer's NOL for the year.
Whereas the special nonlife insurance company rules in section 172
apply based on the status of the entity that generated the loss, the
special farming loss carryback rules in section 172 apply based on the
character of the loss; that is, whether the loss resulted from farming
activity. The special rule for farming losses creates a situation
similar to that addressed in United Dominion Industries, Inc. v. United
States, 532 U.S. 822 (2001), which involved the calculation within a
consolidated group of a product liability loss (PLL). A PLL was a
``special status loss'' that was subject to a 10-year carryback period
and that was equal to the aggregate of all members' product liability
expenses (PLEs), limited by the NOL for the year. A consolidated group
generally is treated as having a single, unitary CNOL for a taxable
year (based on all items of income and loss in the group) that is
allocated among members only for specified purposes, including
carrybacks and carryovers to other taxable years. See Sec. 1.1502-
21(e) (defining the term ``CNOL''); Sec. 1.1502-11(a) (setting forth
the general computation for determining CTI). Because the regulations
under section 1502 did not allocate the CNOL for purposes of
calculating the limitation on PLL, the Supreme Court held that the
amount of a group's PLL was limited by the entire amount of the group's
CNOL.
In a notice of proposed rulemaking (REG-140668-07) published in the
Federal Register (77 FR 57452) on September 17, 2012 (2012 proposed
regulations), the Treasury Department and the IRS provided rules
regarding the apportionment of CNOLs that contain a component portion
of a special status loss, such as a corporate equity reduction interest
loss or a specified liability loss. Such losses, like farming losses
and the PLLs that were considered in United Dominion, were subject to
special carryback rules. The 2012 proposed regulations effectuated the
holding in United Dominion that a group's CNOL, which is the limit on
the amount of a group's special status losses, may be generated
anywhere in the group. See 77 FR 57452, 57458. On that basis, the 2012
proposed regulations apportioned such special status losses to each
group member that generated a loss in the year in which the special
status loss was incurred, regardless of whether any specific member had
undertaken the activities that generated the expenses that effectively
were granted special status. See id.
Consistent with the 2012 proposed regulations, these proposed
regulations re-propose, in modified form, a specific rule regarding the
apportionment of CNOLs that include farming losses arising in taxable
years beginning after December 31, 2020, or other special status
losses. See proposed Sec. 1.1502-21(b)(2)(iv)(D). (Due to the TCJA's
removal of the corporate equity reduction interest loss provisions in
former section 172(g), proposed Sec. 1.1502-21(b)(2)(iv)(D) does not
contain explicit rules governing such losses.) Under proposed Sec.
1.1502-21(b)(2)(iv)(D), the portion of the CNOL constituting a special
status loss is apportioned to each group member separately from the
remainder of the CNOL under the method provided in Sec. 1.1502-
21(b)(2)(iv). Consistent with the 2012 proposed regulations, this
apportionment occurs without separate inquiry into whether a particular
member actually incurred the special status loss. See 77 FR 57452,
57458. These proposed regulations withdraw Sec. 1.1502-
21(b)(2)(iv)(C), as proposed in the 2012 proposed regulations. The
Treasury Department and the IRS request comments regarding this
approach.
E. Elections To Waive Portions of the Five-Year Carryback Period Under
Section 172(b)(1)(D)(i)
Temporary regulations in the Rules and Regulations section of this
issue of the Federal Register add new paragraphs (b)(3)(ii)(C) and (D)
to the regulations in Sec. 1.1502-21. The temporary regulations
provide rules to 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 those regulations also serves as the text of Sec.
1.1502-21(b)(3)(ii)(C) and (D) of these proposed regulations. The
preamble to the temporary regulations explains the amendments.
III. Amendments to Sec. 1.1502-47
A. Overview
1. Legislative Background at the Time the Current Life-Nonlife
Regulations Were Promulgated
The Life Insurance Company Income Tax Act of 1959, Public Law 86-
69, 73 Stat. 112 (June 25, 1959), established a three-phase system of
taxation for life insurance companies (also referred to as life
companies). Under the first phase of this three-phase system (phase 1),
a life company was taxed on the lesser of its taxable investment income
(TII) or its gain from operations (GO). If a company's GO exceeded its
TII, the company was taxed on 50 percent of such excess (phase 2). The
other half of the GO in excess of TII was added, along with certain
other items, to the policyholders surplus account, which was taxed when
distributed to shareholders of a stock company (phase 3). Life
companies also were permitted certain deductions that were unique to
insurance companies, such as increases in reserves to the extent not
funded out of the policyholders' share of investment income.
Prior to the enactment of the Tax Reform Act of 1976, Public Law
94-455, 90 Stat. 1520 (October 4, 1976) (1976 Act), life companies were
prohibited from filing consolidated returns with nonlife companies,
including both nonlife insurance companies and other types of
corporations. This prohibition resulted in part from historical
differences between the taxation of life companies and nonlife
companies.
Section 1507 of the 1976 Act (90 Stat. 1520, 1739-41) permitted
life companies to consolidate with nonlife companies, subject to
additional restrictions that do not apply to a regular consolidated
group. Section 1503(c)(1) (as amended by the 1976 Act and subsequent
tax legislation) provides that, if the nonlife company members of a
life-nonlife group (nonlife members) have a loss for the taxable year,
then under regulations to be issued by the Secretary, the amount of the
loss that cannot be carried back and absorbed by the taxable income of
the nonlife
[[Page 40933]]
members can be taken into account in determining the CTI of the group
only to the extent of the lesser of 35 percent of such loss or 35
percent of the taxable income of the life company members of the group
(life members). Further, section 1503(c)(2) (as so amended) provides
that the losses of a recent nonlife affiliate may not be used by a life
company before the sixth taxable year the companies have been members
of the same affiliated group.
2. Current Life-Nonlife Regulations
The current life-nonlife regulations adopted a subgroup method for
computing a life-nonlife group's CTI. Under the subgroup method, the
nonlife members and the life members generally are treated as if the
members compose two separate consolidated groups, with certain
exceptions (including intercompany transactions, as defined in Sec.
1.1502-13(b)(1)(i)). Thus, each of the life subgroup and the nonlife
subgroup separately calculates its taxable income. Subgroup losses that
are eligible to be carried back must be carried back to offset subgroup
income in prior taxable years before being used to offset income of the
other subgroup in the current taxable year, and subgroup losses may not
be carried back to offset income of the other subgroup in prior taxable
years.
Further, a carryback of a subgroup loss may ``bump'' the loss of
the other subgroup used in the carryback year (that is, the loss that
is carried back may supplant a loss of the other subgroup in the
carryback year). See Sec. 1.1502-47(a)(2)(ii). For example, assume
that life subgroup losses were used to offset nonlife subgroup income
in Year 1. If the nonlife subgroup incurs losses in Year 2 that are
eligible to be carried back to Year 1, those Year 2 nonlife subgroup
losses (rather than the Year 1 life subgroup losses) would be used to
offset the nonlife subgroup's income in Year 1. The ``bumped'' life
subgroup losses from Year 1 then would be carried over to future
taxable years.
3. Legislative Changes Regarding the Taxation of Insurance Companies
Since Promulgation of the Current Life-Nonlife Regulations
The Deficit Reduction Act of 1984, Public Law 98-369, 98 Stat. 494
(July 18, 1984) (1984 Act), significantly altered the taxation of life
companies. The 1984 Act replaced the three-phase system with a
statutory mechanism similar to that used to calculate the Federal
income tax liability of other corporate taxpayers. Specifically,
section 801(a) imposes an income tax on the life insurance company
taxable income (LICTI) of a life company, and section 801(b) defines
``life insurance company taxable income'' as life insurance gross
income less life insurance deductions. The legislative history of the
1984 Act indicates that, in part, Congress changed the taxation of life
companies in order to simplify the Code. See Staff of the Joint Comm.
on Tax'n, 98th Cong., General Explanation of the Revenue Provisions of
the Deficit Reduction Act of 1984, at 577 (December 31, 1984).
In turn, the Tax Reform Act of 1986, Public Law 99-514, 100 Stat.
2085 (October 22, 1986) (1986 Act), modified the taxation of nonlife
insurance companies. Prior to the 1986 Act, nonlife insurance companies
were permitted to defer unearned premium income while currently
deducting the expenses associated with earning such income, which
created a timing mismatch between the income and expenses of nonlife
insurance companies. The 1986 Act addressed this mismatch by requiring
a nonlife insurance company to reduce its deduction for unearned
premium income by 20 percent. The 1986 Act also repealed special rates,
deductions, and exemptions for small mutual insurance companies and
added a single provision (section 831(b)) for both small mutual
insurance companies and small stock insurance companies.
Lastly, the TCJA made significant additional changes to the
taxation of life insurance companies, and the CARES Act added a special
rule for such companies in section 172(b)(1)(D)(iii). These changes are
described in detail in part II of the Background.
B. Summary of Proposed Changes to Sec. 1.1502-47
As a result of changes in the taxation of insurance companies under
the TCJA and prior legislation, various provisions in Sec. 1.1502-47
currently are outdated. Accordingly, to the extent preempted by
statute, the current regulations have no application. These proposed
regulations update Sec. 1.1502-47 by: (1) Removing paragraphs
implementing statutory provisions that have been repealed; (2) revising
paragraphs implementing statutory provisions that have been
substantially revised; (3) updating terminology and statutory
references to account for other statutory changes; and (4) removing
paragraphs that contain obsolete transition rules or that are no longer
applicable because the effective dates in the current life-nonlife
regulations have passed.
1. Removal of Paragraphs Due to Repealed Statutory Provisions
Certain paragraphs in Sec. 1.1502-47 are no longer relevant to the
calculation of life-nonlife CTI because of the repeal of the three-
phase system by the 1984 Act and later amendments to the Code.
Therefore, these proposed regulations remove numerous paragraphs
including current Sec. Sec. 1.1502-47(k) and (l), which provide rules
for calculating consolidated TII and the consolidated GO or loss from
operations (LO). These proposed regulations also remove (i) Sec.
1.1502-47(f)(7)(ii), which generally provides that the consolidated tax
liability of a life-nonlife group includes the tax described by section
1201, and (ii) Sec. 1.1502-47(o), which provides rules for calculating
the alternative tax imposed by section 1201 on consolidated capital
gain. (As noted in part II of the Background, section 1201 was repealed
by the TCJA.)
2. Updates Reflecting Substantially Revised Statutory Provisions
These proposed regulations also update Sec. 1.1502-47 to reflect
changes to certain statutory provisions since the current life-nonlife
regulations were promulgated. For example, these proposed regulations
modify current Sec. 1.1502-47(f)(5) (relating to the dividends
received deduction) to reflect changes by the 1986 Act to sections
805(a)(4) and 818(e)(2) (for life companies) and to reflect changes by
the 1986 Act and the Technical and Miscellaneous Revenue Act of 1988,
Public Law 100-647, 102 Stat. 3342 (November 10, 1988), respectively,
to sections 832(b)(5)(B) and (g) (for nonlife insurance companies).
Under modified Sec. 1.1502-47(f)(5) (that is, proposed Sec. 1.1502-
47(d)(5)), dividends received by an insurance company from another
includible member of the group are treated as if the group were not
filing a consolidated return. To reflect the repeal of section 815 by
the TCJA, these proposed regulations also remove current Sec. 1.1502-
47(g)(3) (which provides that life-nonlife groups must include any
amounts subtracted under section 815 from life members' policyholders
surplus accounts).
Additionally, these proposed regulations update the rules relating
to consolidated LICTI to reflect the repeal of the three-phase system
by the 1984 Act and other changes to the taxation of life companies.
These proposed regulations also move certain provisions in current
Sec. 1.1502-47(k) (consolidated TII) and (l) (consolidated GO or LO)
that remain applicable following the repeal of the three-phase system
to revised
[[Page 40934]]
paragraph (g), and they implement the special rule for life insurance
companies in section 172(b)(1)(D)(iii) under the CARES Act.
3. Revisions to Account for Other Statutory Changes
These proposed regulations also update terminology and citations to
the Code to reflect current law. For example, these proposed
regulations remove references to section 821 and mutual insurance
companies because the statutory provisions regarding mutual insurance
companies were repealed by the 1986 Act. Additionally, these proposed
regulations replace references to section 802 with references to
section 801 because section 802 was repealed by the 1984 Act.
Similarly, these proposed regulations replace references to the LO with
references to the NOL deduction under section 172 to reflect the repeal
of section 810 by the TCJA.
4. Removal of Obsolete Transition Rules and Other Rules That No Longer
Are Applicable
These proposed regulations propose the removal of transition rules
regarding the implementation of the current life-nonlife regulations,
since those transition rules apply to carryovers that either have been
absorbed or have expired. For example, the proposed regulations propose
the removal of current Sec. 1.1502-47(h)(3) (setting forth transition
rules for NOLs attributable to taxable years ending before January 1,
1981), current Sec. 1.1502-47(k)(6) (containing a similar rule for
certain capital loss carryovers), and current Sec. 1.1502-47(e)(4)
(granting certain life-nonlife groups permission to discontinue filing
a consolidated return for the group's first taxable year for which the
current life-nonlife regulations were effective).
These proposed regulations also would remove cross-references to
certain prior-law regulations that are designated with an ``A'' because
those regulations generally are applicable to years ending in 1999 or
earlier. Additionally, these proposed regulations would remove cross-
references to Sec. 1.1502-18 (relating to inventory adjustments)
because that section does not apply to taxable years beginning after
July 11, 1995.
Proposed Effective/Applicability Dates
The regulations in proposed Sec. 1.1502-21 generally are proposed
to be applicable to losses arising in taxable years beginning after the
date of publication in the Federal Register of a Treasury decision
adopting these proposed rules as final regulations (Publication Date).
The regulations in proposed Sec. Sec. 1.1502-1 and 1.1502-47 generally
are proposed to be applicable to taxable years beginning after the
Publication Date. However, a taxpayer deducting post-2017 NOLs on (1)
original returns, (2) amended returns, or (3) applications for
tentative carryback adjustments, filed for taxable years beginning on
or before the Publication Date, may rely on these proposed regulations
concerning the Federal income tax treatment of post-2017 NOLs with
regard to those filings if the taxpayer relies on the proposed
regulations in their entirety and in a consistent manner.
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 proposed 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 has
designated the proposed regulations as significant under section 1(b)
of the Memorandum of Agreement. Accordingly, OMB has reviewed the
proposed regulations.
A. Background and Need for Regulations
In general, taxpayers whose deductions exceed their income generate
a net operating loss (NOL), 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 Act
(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 proposed 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
proposed 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 proposed regulations address the calculation and allocation of
farming losses. Third, the proposed regulations implement the 80-
percent limitation into existing regulations to determine the CNOL
deduction attributable to losses 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 proposed 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 Proposed 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
[[Page 40935]]
group that is a nonlife insurance company. The term ``C member'' means
a member of the P group that is a corporation other than 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 172, 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 proposed 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 proposed 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 proposed 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 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).
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 closely follows 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
proposed 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 Loss Year Limitation
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
[[Page 40936]]
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 proposed
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 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 current NPRM) 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 proposed regulations do not alter these existing
regulations.
In formulating these proposed 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 proposed 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 proposed 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 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 proposed
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 proposed
regulations.
The Treasury Department and the IRS project that any such effects
will be small relative to the baseline. The effects are small because
the regulations apply only to consolidated groups; in addition, several
provisions of the proposed 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 proposed
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 have not provided quantitative
estimates of the effects of these regulations relative to the baseline
because they do not have readily available models that predict the
effects of these tax treatments of consolidated group NOLs on the
investments or other activities that consolidated groups might
undertake. The Treasury Department and the IRS solicit comments on this
analysis and on the economic effects of these proposed regulations, and
particularly solicit data, models, or other evidence that could enhance
the rigor with which the final regulations are developed.
[[Page 40937]]
3. Allocation of CNOLs to Specific Members of Consolidated Groups
The proposed regulations do not amend existing rules for the
allocation of the CNOL within consolidated groups. The proposed
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 PC subgroup had no gain or loss but the C subgroup had a
loss of $10. Under this alternative approach, because the PC subgroup
as a whole does not have a loss, no CNOL would be allocated to any
member in the PC 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 adopted approach of allocating losses to
each member may provide groups with a potential incentive, relative to
the alternative approach, to split their C members into several
corporations--some with loss and some with gain. 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 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 proposed regulations will
primarily be ``on paper'' and entail little or no economic loss; and
(iii) the compliance burden of loss allocation, under either the
proposed regulations or the alternative approach, is not high.
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.
II. Paperwork Reduction Act
For information regarding the collection of information in Sec.
1.1502-21(b)(3)(ii)(C) of these proposed regulations (including where
to submit comments on this collection of information and on the
accuracy of the estimated burden), please refer to the preamble to the
temporary regulations under section 1502 published elsewhere in this
issue of the Federal Register. This collection of information will be
under Office of Management and Budget control number 1545-0123, the
same control number as the collection of information in those temporary
regulations, and the estimated burden of this collection of information
is described in the preamble to those temporary regulations.
III. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it
is hereby certified that these proposed regulations would not have a
significant economic impact on a substantial number of small entities.
This certification is based on the fact that these proposed 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 proposed regulations would not create additional obligations for,
or impose an economic impact on, small entities. Accordingly, the
Secretary certifies that the proposed regulations will not have a
significant economic impact on a substantial number of small entities.
Pursuant to section 7805(f) of the Internal Revenue Code, this
notice of proposed rulemaking has been submitted to the Chief Counsel
for Advocacy of the Small Business Administration for comment on its
impact on small business.
IV. 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.
V. 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 proposed 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.
Comments and Requests for a Public Hearing
Before the proposed amendments to the regulations are adopted as
final regulations, consideration will be given to comments that are
submitted timely to the IRS as prescribed in this preamble under the
ADDRESSES heading. The Treasury Department and the IRS request comments
on all aspects of the proposed regulations. Any electronic comments
submitted, and to the extent practicable any paper comments submitted,
will be made available at www.regulations.gov or upon request.
A public hearing will be scheduled if requested in writing by any
person who timely submits electronic or written comments. Requests for
a public hearing are also encouraged to be made electronically. If a
public hearing is scheduled, notice of the date and time for the public
hearing will be published in the Federal Register. Announcement
[[Page 40938]]
2020-4, 2020-17 IRB 1, provides that until further notice, public
hearings conducted by the IRS will be held telephonically. Any
telephonic hearing will be made accessible to people with disabilities.
Statement of Availability of IRS Documents
IRS Revenue Procedures, Revenue Rulings, and Notices cited in this
preamble are published in the Internal Revenue Bulletin (or Cumulative
Bulletin) and are available from the Superintendent of Documents, U.S.
Government Publishing Office, Washington, DC 20402, or by visiting the
IRS website at http://www.irs.gov.
Drafting Information
The principal authors of these proposed 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.
Partial Withdrawal of Notices of Proposed Rulemaking
Accordingly, under the authority of 26 U.S.C. 1502 and 7805, Sec.
1.1502-21(b)(2)(iv)(C) of the notice of proposed rulemaking (REG-
140668-07) published in the Federal Register (77 FR 57451) on September
17, 2012 is withdrawn, and Sec. 1.1502-21(b)(2)(iv)(B) of the notice
of proposed rulemaking (REG-101652-10) published in the Federal
Register (80 FR 33211) on June 11, 2015 is withdrawn.
List of Subjects in 26 CFR Part 1
Income Taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be 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 [EFFECTIVE DATE OF FINAL RULE].
0
Par. 3. Section 1.1502-21 is amended by:
0
1. Revising paragraph (a).Redesignating paragraph (a) introductory text
as paragraph (a)(1).
0
2. Revising paragraph (b)(1).
0
3. In paragraph (b)(2)(iv)(A), removing the language ``shall equal the
product of'' with the language ``equals the product obtained by
multiplying'', and adding in its place ``such member'' with the
language ``the member''.
0
4. Revising paragraph (b)(2)(iv)(B).
0
5. Adding paragraphs (b)(2)(iv)(C) through (E).
0
6. Revising paragraph (b)(2)(v) introductory text.
0
7. In paragraph (b)(2)(v), redesignating Examples 1 through 3 as
paragraphs (b)(2)(v)(A) through (C), respectively.
0
8. In newly redesignated paragraphs (b)(2)(v)(A) through (C),
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
9. Adding paragraphs (b)(2)(v)(D) through (G).
0
10. In paragraph (b)(3)(ii)(B), removing the language ``Sec. 1.1502-
21(b)(3)(ii)(B)(2)'' and adding in its place ``Sec. 1.1502-
21(b)(3)(ii)(B)''.
0
11. Revising paragraph (b)(3)(ii)(C).
0
12. Adding paragraph (b)(3)(ii)(D).
0
13. Revising paragraph (c)(1)(i) introductory text.
0
14. In paragraph (c)(1)(i)(C)(2), removing the language ``and''.
0
15. In paragraph (c)(1)(i)(D), removing the language ``account.'' and
adding in its place ``account; and''.
0
16. Adding paragraph (c)(1)(i)(E).
0
17. In paragraph (c)(1)(iii) introductory text, adding a new first
sentence.
0
18. In paragraph (c)(1)(iii), designating Examples 1 through 5 as
paragraphs (c)(1)(iii)(A) through (E), respectively.
0
19. In newly redesignated paragraphs (c)(1)(iii)(A) through (E),
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
20. In newly redesignated paragraph (c)(1)(iii)(C)(2), adding the
language ``, a taxable year that begins on January 1, 2021'' after the
language ``at the beginning of Year 4''.
0
21. Revising paragraphs (c)(1)(iii)(D)(2) through (4).
0
22. Adding paragraph (c)(1)(iii)(D)(5).
0
23. Revising paragraphs (c)(1)(iii)(E)(2) through (5).
0
24. Adding paragraphs (c)(1)(iii)(E)(6) and (c)(1)(iii)(F).
0
25. Revising paragraph (c)(2)(v).
0
26. In paragraph (c)(2)(viii) introductory text, adding a new first
sentence.
0
27. In paragraph (c)(2)(viii), redesignating Examples 1 through 4 as
paragraphs (c)(2)(viii)(A) through (D), respectively.
0
28. In newly redesignated paragraphs (c)(2)(viii)(A) through (D),
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
29. In newly redesignated paragraphs (c)(2)(viii)(A)(3) through (7),
the first sentence of each, adding the language ``, including the
limitation under paragraph (c)(1)(i)(E) of this section'' after the
language ``under paragraph (c) of this section''.
0
30. In newly redesignated paragraph (c)(2)(viii)(B)(1), the first
sentence, adding the language ``, none of which is a nonlife insurance
company'' after the language ``S, T, P and M''.
0
31. In newly redesignated paragraph (c)(2)(viii)(B)(1), the fourth
sentence, adding the language ``(a taxable year beginning after
December 31, 2020)'' after the language ``Year 3''.
0
32. Revising newly designated paragraph (c)(2)(viii)(B)(3).
0
33. Redesignating newly redesignated paragraph (c)(2)(viii)(B)(4) as
paragraph (c)(2)(viii)(B)(5).
0
34. Adding a new paragraph (c)(2)(viii)(B)(4).
0
35. Revising newly redesignated paragraph (c)(2)(viii)(B)(5).
0
36. Adding paragraph (c)(2)(viii)(B)(6).
0
37. In paragraph (g)(5), redesignating Examples 1 through 9 as
paragraphs (g)(5)(i) through (ix), respectively.
0
38. In newly redesignated paragraphs (g)(5)(i) through (ix),
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),
[[Page 40939]]
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
39. Revising paragraph (h)(9).
0
40. 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, the
aggregate amount of net operating losses arising in taxable years
beginning before January 1, 2018 (pre-2018 NOLs) carried to a
particular consolidated return year beginning after December 31, 2020,
is added to the group's post-2017 CNOL deduction limit (as determined
under this paragraph (a)(2)) for such year for purposes of determining
the total CNOL deduction allowed for such year. 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 CNOL arising in a taxable year
beginning after December 31, 2017 (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) (80-percent limitation)), section 172(f), or both, apply
to the group for the consolidated return year.
(B) Determination of post-2017 CNOL deduction limit. The amount of
post-2017 CNOLs that may be absorbed by one or more members of the
group in a consolidated return year beginning after December 31, 2020
(post-2017 CNOL deduction limit) is determined under paragraph
(a)(2)(iii) of this section by applying section 172(a)(2)(B) (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) 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.
(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) (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 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 sum of the amounts
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) is the lesser of--
(i) The aggregate amount of post-2017 NOLs carried to a
consolidated return year beginning after December 31, 2020, or
(ii) Eighty percent of the consolidated taxable income of the group
for that year (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)
(residual income pool) after subtracting the aggregate amount of pre-
2018 NOLs carried to that year that are allocated to the residual
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).
(3) Nonlife income pool. The amount determined under this paragraph
(a)(2)(iii)(C)(3) 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) (nonlife income pool) less the aggregate amount of pre-2018
NOLs carried to that year that are allocated to the nonlife 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
[[Page 40940]]
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 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 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) of
this section, Example 2, for an illustration of pro rata absorption of
losses subject to a SRLY limitation.
(2) * * *
(iv) * * *
(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 Sec. 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 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)) 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
[[Page 40941]]
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), see 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. Thus, the P group has a Year 2 CNOL of
$16. 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 is entirely attributable to PC1, a nonlife insurance
company. Therefore, under section 172(b)(1)(C)(i), the P group may
carry back to Year 1 all $16 of its Year 2 CNOL.
(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 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 amount of P's Year 1
income that may be offset by the P group's Year 2 CNOL is $16, which
equals 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 is $16 (80 percent x ($20-$0)). See
paragraph (a)(2)(iii)(C)(2) and (4) of this section. PC1 is a
nonlife insurance company to which section 172(f), rather than the
80-percent limitation, applies. Therefore, the amount of PC1's Year
1 income that may be offset by the P group's Year 2 CNOL 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 the analysis set forth in paragraph (b)(2)(v)(F)(3)
of this section, the P group's post-2017 CNOL deduction limit for
Year 1 is $41 ($16 + $25). Because the P group's Year 2 CNOL is $16,
this amount would offset the Year 1 income of the P group.
(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).
[[Page 40942]]
(3) * * *
(ii) * * *
(C) [The text of proposed Sec. 1.1502-21(b)(3)(ii)(C) is the same
as the text of Sec. 1.1502-21T(b)(3)(ii)(C) published elsewhere in
this issue of the Federal Register.]
(D) [The text of proposed Sec. 1.1502-21(b)(3)(ii)(D) is the same
as the text of Sec. 1.1502-21T(b)(3)(ii)(D) published elsewhere in
this issue of the Federal Register.]
* * * * *
(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 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) * * * 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.
* * *
(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, $0.83 of T's Year 3 losses is
absorbed (($0.99/($83.81 + $0.99)) x $72 = $0.83).
* * * * *
(D) * * *
[[Page 40943]]
(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 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
items, or $70.
(3) Because T's oldest (2017) carryover was sustained in a year
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). Therefore, the total limitation on the
use of T's 2021 net operating loss in the P group is $48 (the
[[Page 40944]]
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) * * * For purposes of the examples in this paragraph
(c)(2)(viii), no corporation is a nonlife insurance company or has
any farming losses. * * *
* * * * *
(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) [The text of proposed Sec. 1.1502-21(h)(9) is the same as
the text of Sec. 1.1502-21T(h)(9) published elsewhere in this issue
of the Federal Register.]
(10) The rules of paragraphs (a), (b)(1), (b)(2)(iv), and
(c)(1)(i)(E) of this section apply to losses arising in taxable
years beginning after [the date the Treasury decision adopting these
rules as final regulations is published in the Federal Register].
0
Par. 4. Section 1.1502-47 is amended by:
0
1. Revising paragraphs (a)(2)(i) and (ii).
0
2. Removing paragraph (a)(3).
0
3. Redesignating paragraph (a)(4) as paragraph (a)(3).
0
4. Removing paragraph (j).
0
5. Redesignating paragraph (n) as paragraph (j).
0
6. Redesignating paragraph (b) as paragraph (n).
0
7. Redesignating paragraph (t) as paragraph (n)(3).
0
8. Removing paragraph (c).
0
9. Redesignating paragraph (d) as paragraph (b).
0
10. Revising newly redesignated paragraph (b)(1).
0
11. Removing newly redesignated paragraph (b)(2).
0
12. Redesignating newly redesignated paragraphs (b)(3) through (14) as
paragraphs (b)(2) through (13), respectively.
0
13. Revising newly redesignated paragraphs (b)(2), (3), (4), (9), (10),
and (12).
0
14. In newly redesignated paragraph (b)(13), designating Examples 1
through 14 as paragraphs (b)(13)(i) through (xiv), respectively.
0
15. In newly redesignated paragraph (b)(13)(i), adding a new last
sentence.
0
16. Revising newly redesignated paragraph (b)(13)(ii).
0
17. Removing newly redesignated paragraph (b)(13)(xiv).
0
18. Redesignating paragraph (e) as paragraph (c).
0
19. Removing newly redesignated paragraphs (c)(4) and (5).
0
20. Redesignating paragraph (c)(6) as paragraph (c)(4).
0
21. Redesignating paragraph (f) as paragraph (d).
0
22. Revising newly redesignated paragraph (d)(5).
0
23. Removing the last sentence of newly redesignated paragraph (d)(6).
0
24. Removing newly redesignated paragraph (d)(7)(ii).
0
25. Redesignating paragraph (d)(7)(iii) as paragraph (d)(7)(ii) and
revising it.
0
26. Redesignating paragraph (g) as paragraph (e).
0
27. In newly redesignated paragraph (e)(2), removing the language
``partial'' each place it appears.
0
28. Removing newly redesignated paragraph (e)(3).
0
29. Redesignating paragraph (h) as paragraph (f).
0
30. Revising newly redesignated paragraph (f)(2)(iii).
0
31. In newly designated paragraph (f)(2)(v), removing the language
``partial'' each place it appears.
0
32. In newly designated paragraph (f)(2)(v), adding a new last
sentence.
0
33. Revising newly designated paragraph (f)(2)(vi) and (vii).
0
34. Removing newly designated paragraph (f)(3).
0
35. Redesignating newly designated paragraph (f)(4) as paragraph
(f)(3).
0
36. Revising newly redesignated paragraph (f)(3)(ii).
0
37. Adding a new paragraph (g).
0
38. Redesignating paragraph (k)(5) introductory text as paragraph
(g)(3)(ii), and redesignating paragraphs (k)(5)(i) through (iv) as
paragraphs (g)(3)(ii)(A) through (D), respectively.
0
39. Removing newly redesignated paragraphs (g)(3)(ii)(C) and (D).
0
40. Removing paragraphs (k) and (l).
0
41. Redesignating paragraph (m) as paragraph (h).
0
42. In newly redesignated paragraph (h), removing the language
``partial'' each place it appears.
[[Page 40945]]
0
43. In newly redesignated paragraph (h)(2)(ii), adding a new last
sentence.
0
44. In newly redesignated paragraph (h)(3)(iv), adding a new last
sentence.
0
45. In newly redesignated paragraph (h)(3)(ix), removing the last two
sentences.
0
46. Removing newly redesignated paragraph (h)(4).
0
47. Redesignating newly redesignated paragraph (h)(5) as paragraph
(h)(4).
0
48. Revising newly redesignated paragraph (h)(4) introductory text.
0
49. In newly redesignated paragraph (h)(4), redesignating Examples 1
through 6 as paragraphs (h)(4)(i) through (vi).
0
50. Revising newly designated paragraphs (h)(4)(ii) and (iii).
0
51. Removing newly designated paragraphs (h)(4)(v) and (vi).
0
52. In newly redesignated paragraph (j)(2)(iii), removing the language
``, and ``section 812(b)(3)'' and adding in its place ``section
172(b)(3)(C)''.
0
53. Removing newly redesignated paragraph (j)(2)(v).
0
54. Redesignating newly redesignated paragraph (j)(2)(vi) as paragraph
(j)(2)(v).
0
55. Revising newly redesignated paragraph (j)(3).
0
56. In newly redesignated paragraph (n)(3), removing the language
``Effective/applicability date'' and adding the language ``Filing
requirements effective dates'' in its place.
0
57. Adding paragraph (n)(4).
0
58. Removing paragraphs (o) and (p).
0
59. Redesignating paragraphs (q), (r), and (s) as paragraphs (k), (l),
and (m), respectively.
0
59. In the following table, for each section designated or redesignated
under these proposed 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 Redesignation 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(b).................... 1.1502-47(n)...... Effective dates... Effective/ Once.
applicability
dates.
1.1502-47(b)(1)................. 1.1502-47(n)(1)... paragraph (b)(2).. paragraph (n)(2) Once.
and (3).
1.1502-47(b)(2)(i).............. 1.1502-47(n)(2)(i) Paragraph Paragraph Once.
(d)(12)(v). (b)(11)(v).
1.1502-47(d)(12)(i)(A), 1.1502-47(b)(11)(i (d)(12)........... (b)(11)........... Each place it
(d)(12)(i)(C), (d)(12)(i)(D), )(A), appears.
(d)(12)(iii), (d)(12)(iv), (b)(11)(i)(C),
(d)(12)(v), (d)(12)(v)(B), (b)(11)(i)(D),
(d)(12)(v)(C), (d)(12)(v)(D), (b)(11)(iii),
(d)(12)(vi), (d)(12)(vii), and (b)(11)(iv),
(d)(12)(viii)(F). (b)(11)(v),
(b)(11)(v)(B),
(b)(11)(v)(C),
(b)(11)(v)(D),
(b)(11)(vi),
(b)(11)(vii), and
(b)(11)(viii)(F),
respectively.
1.1502-47(d)(12)(iii)........... 1.1502-47(b)(11)(i subdivision (iii). paragraph Once.
ii). (b)(11)(iii).
1.1502-47(d)(12)(iv)............ 1.1502-47(b)(11)(i subdivision (iv).. paragraph Once.
v). (b)(11)(iv).
1.1502-47(d)(12)(v)(B).......... 1.1502-47(b)(11)(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)(11)(v subdivision (vi).. paragraph Once.
i). (b)(11)(vi).
1.1502-47(d)(12)(vii)........... 1.1502-47(b)(11)(v return year and return year even.. Once.
ii). even.
1.1502-47(d)(12)(viii)(A)....... 1.1502-47(b)(11)(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)(11)(v subdivision (viii) paragraph Once.
(F). iii)(D) and (F), (b)(11)(viii).
respectively.
1.1502-47(d)(14)................ 1.1502-47(b)(13).. Illustrations..... Examples.......... Once.
1.1502-47(d)(14)................ 1.1502-47(b)(13).. paragraph (d)..... paragraph (b)..... Once.
1.1502-47(d)(14), Example 1..... 1.1502-47(b)(13)(i 1913.............. 2012.............. Once.
).
1.1502-47(d)(14), Examples 2 1.1502-47(b)(13)(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)(13)(i 1980.............. 2018.............. Each place it
through 3. ) through (iii), appears.
respectively.
1.1502-47(d)(14), Examples 1 1.1502-47(b)(13)(i 1982.............. 2020.............. Each place it
through 5 and 8 through 13. ) through (v) and appears.
(viii) through
(xiii),
respectively.
1.1502-47(d)(14), Examples 5 1.1502-47(b)(13)(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)(13)(i (d)(12)........... (b)(11)........... 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)(13)(i stock casualty.... nonlife insurance. Each place it
and 12. i), (iii), and appears.
(xii),
respectively.
[[Page 40946]]
1.1502-47(d)(14), Example 3..... 1.1502-47(b)(13)(i subparagraph paragraph Once.
ii). (d)(12)(v)(B) and (b)(11)(v)(B) and
(E). (D).
1.1502-47(d)(14), Example 3..... 1.1502-47(b)(13)(i e.g............... for example....... Once.
ii).
1.1502-47(d)(14), Example 5..... 1.1502-47(b)(13)(v i.e............... in other words.... Once.
).
1.1502-47(d)(14), Example 12.... 1.1502-47(b)(13)(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
or section 832(c)(5),.
832(c)(5),.
1.1502-47(k)(5)................. 1.1502-47(g)(3)(ii Sec. Sec. Sec. 1.1502-22.. Once.
). 1.1502-22 or
1.1502-22A (as
appropriate).
1.1502-47(k)(5)................. 1.1502-47(g)(3)(ii this subparagraph this paragraph Once.
). (5). (g)(3)(ii).
1.1502-47(k)(5)(ii)............. 1.1502-47(g)(3)(ii paragraph (k)(5).. paragraph Once.
)(B). (g)(3)(ii).
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,.
[[Page 40947]]
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).
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)(12). 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)(iii)............ 1.1502-47(j)(2)(ii ``paragraph (l)'' ``paragraph (g)''. Once.
i). or ``paragraph
(j)''.
1.1502-47(n)(2)(iii)............ 1.1502-47(j)(2)(ii paragraph (h)..... paragraph (f)..... Once.
i).
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)...... 1.1502-80......... 1.1502-100........ Once.
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.
[[Page 40948]]
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,.
1.1502-47(t).................... 1.1502-47(n)(3)... Paragraph (s)..... Paragraph (m)..... Once.
1.1502-47(t).................... 1.1502-47(n)(3)... paragraph (s)..... paragraph (m)..... Once.
----------------------------------------------------------------------------------------------------------------
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 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) Life insurance company taxable income. The term life insurance
company taxable income or LICTI has the meaning provided in section
801(b).
(3) 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).
(4) 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)(10) 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.
* * * * *
(9) Separate return year. The term separate return year has the
meaning provided in Sec. 1.1502-1(e). For purposes of this paragraph
(b)(9), 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.
(10) 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)(10) 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.
* * * * *
(12) 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.
(13) * * *
(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)(11)(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
insurance company. Dividends received by an eligible member insurance
company, taxed under either section 801 or section 831, from another
eligible
[[Page 40949]]
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)(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(a).
(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 L2 satisfy the eligibility requirements
of Sec. 1.1502-47(b)(11). Each corporation uses the calendar year as
its taxable year and none of P, S, L1 or L2 are engaged in a farming
business (within the meaning of section 263A(e)(4)). 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 2020 under section 1502(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 common parent of the group.
(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 nonlife
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]
* * * * *
(h) * * *
(2) * * *
(ii) * * * Additionally, the amount of consolidated LICTI that may
be offset by nonlife consolidated net operating loss
[[Page 40950]]
carryovers may be subject to limitation (see section 172 and Sec.
1.1502-21(a)).
* * * * *
(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(a)).
* * * * *
(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)), 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 operating loss ($200)
less amount used in 2020 ($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 2021 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 2020. 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) * * *
(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)), 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, the nonlife capital loss
offset is zero. 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. Assume
that 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
[[Page 40951]]
taxable income under paragraph (f)(2) of this section and Sec. 1.1502-
21(b). If P, the common parent, 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 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 (c)(11) 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)(10) 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 not in effect under
section 1504(c)(2) or section 243(b)(2).
* * * * *
(n) * * *
(4) The rules of paragraphs (a)(2)(i), (a)(2)(ii), (b)(1) through
(b)(4), (b)(9), (b)(10), (b)(12), (b)(13)(ii), (d)(5)(i), (d)(5)(ii),
(d)(7)(ii), (f)(2)(iii), (f)(2)(vi), (f)(2)(vii), (f)(3)(ii), (g),
(h)(4)(ii), (h)(4)(iii), and (j)(3) of this section apply to taxable
years beginning after [EFFECTIVE DATE OF FINAL RULE].
Douglas W. O'Donnell,
Acting Deputy Commissioner for Services and Enforcement.
[FR Doc. 2020-14427 Filed 7-2-20; 4:15 pm]
BILLING CODE 4830-01-P
