Par. 4. Section 1.1502-72 is added to read as follows:
(a) In general —(1) Scope. Section 172(b)(1)(E) and (h), §§ 1.172(h)-1 through 1.172(h)-5, and the rules of this section (the CERT rules) apply to determine whether a corporate equity reduction transaction (CERT) has occurred and to determine the consequences of the CERT, including rules governing the carryback of losses following a CERT, with respect to corporations that become, are, or cease to be members of a consolidated group.
(2) Single entity treatment —(i) In general. All members of a group are treated as a single taxpayer for purposes of the CERT rules. For example, if multiple members of a group acquire in total 50 percent or more (by vote or value) of the stock of another corporation, the group has engaged in a major stock acquisition (MSA) as defined in section 172(h)(3)(B) and § 1.172(h)-1(c)(2). The transactions and expenditures undertaken by a particular group member are generally not separately tracked; instead, the entire group is treated as a single applicable corporation.
(ii) Debt and interest of group members —(A) In general. The computation of a group's corporate equity reduction interest loss (CERIL) under section 172(h)(1) and § 1.172(h)-2(a)(2) for any loss limitation year (as defined in paragraph (a)(3) of this section) that is a consolidated return year includes the debt of all members and all interest deductions that are allowed on the group's consolidated return for that year. This rule applies regardless of whether any particular debt or interest expense is directly related to the CERT, whether any particular member was included in the group on the date of the CERT, or whether any particular debt would not exist in the group if the group had not engaged in the CERT. But see paragraph (a)(2)(iii) of this section (providing that intercompany transactions are generally disregarded).
(B) Debt of acquired corporation. With respect to a corporation that joins a consolidated group (acquired corporation), in applying the CERT rules to consolidated return years that are loss limitation years, any debt of the acquired corporation is treated as debt of the acquiring group for purposes of applying the avoided cost rules of section 263A(f)(2)(A) on any measurement date after the inclusion of the corporation in the group. See section 172(h)(2) and § 1.172(h)-2(b) (applying the principles of section 263A(f)(2)(A)(ii)); see also § 1.263A-9(f)(2) (defining measurement dates).
(iii) Intercompany transactions. In applying the CERT rules, intercompany transactions as defined in § 1.1502-13 are generally disregarded. For example, interest expense attributable to an intercompany obligation is not taken into account in computing the CERIL or three-year average of a group. However, a transaction between group members is not disregarded if a party to the transaction becomes a non-member pursuant to the same plan or arrangement. In such case, any transaction between group members, including a potential excess distribution (ED) as defined in section 172(h)(3)(C), § 1.172(h)-1(c)(3), and paragraph (f)(1) of this section, is tested on a separate entity basis under the CERT rules. It may also be tested as part of a larger, multi-step MSA. See § 1.172(h)-1(d)(2).
(iv) Applicable corporation status following inclusion of member with pre-existing CERT —(A) Acquiring group treated as applicable corporation. If a corporation that is an applicable corporation (including by application of paragraph (b) of this section) with regard to a CERT occurring in a separate return year (pre-existing CERT member) joins a consolidated group, the group is treated as a single applicable corporation with regard to that CERT in the consolidated return year of the acquisition and any succeeding year. A corporation is a pre-existing CERT member regardless of whether the transaction at issue is an MSA that constitutes a CERT with respect to both a consolidated return year of the acquiring group and a separate return year of the acquired corporation.
(B) End of separate tracking of target. Beginning on the first day on which a pre-existing CERT member is included in a consolidated group, the member ceases to be separately tracked as an applicable corporation. See paragraph (a)(2)(i) of this section. The CERT rules thereafter apply to the group, rather than to the member, with regard to any CERT for which the member had been an applicable corporation, including an MSA in which the member was acquired by the group. Therefore, beginning on the day on which the pre-existing CERT member is included in the group, no CERIL is computed with regard to the member, independent of the CERIL computed for the group. But see § 1.1502-21(b)(2)(iv)(C) (providing for allocation and apportionment of a group's CERIL to specific group members) and § 1.172(h)-5(b)(1) (relating to prohibition on carryback of a CERIL).
(3) Loss limitation years —(i) In general. This paragraph applies to identify loss limitation years of a consolidated group and corporations that have been members of a consolidated group. The taxable year in which a CERT actually occurs is a loss limitation year. Any other taxable year (potential loss limitation year) of any applicable corporation (including a consolidated group) constitutes a loss limitation year with regard to the CERT only if, under the carryforward rules of sections 172(b)(1)(A)(ii) and 381(c)(1), the potential loss limitation year would constitute the first or second taxable year following the taxable year of the corporation or consolidated group that actually engaged in the CERT that includes the date on which the CERT occurred. Except as otherwise provided in paragraph (a)(3)(ii) of this section, for purposes of this paragraph (a)(3), sections 172 and 381 are applied as if the inclusion of any corporation in a consolidated group or the deconsolidation of any member from a group were a transaction listed in section 381(a).
(ii) Corporation joins group in an MSA. If a corporation joins a group in an MSA, no separate return year of the acquired corporation ending on or before it joined the acquiring group is treated as a loss limitation year for the purpose of determining the loss limitation years of the acquiring group or any corporation that deconsolidates from that group that relate to the MSA.
(iii) Deconsolidating members. Under this paragraph (a)(3)(iii), a corporation that deconsolidates (deconsolidating member) from a group (former group) that is an applicable corporation may have loss limitation years with regard to a CERT of its former group. See paragraphs (b) (relating to post-deconsolidation status as applicable corporation) and (e)(1) of this section (providing for an irrevocable waiver of carrybacks such that a deconsolidating member is not treated as an applicable corporation). If the consolidated return year during which the deconsolidation occurs (year of deconsolidation) is a first or second loss limitation year with regard to the CERT, then certain separate return years of a deconsolidating member that is treated as an applicable corporation will constitute loss limitation years. If the year of deconsolidation is a first loss limitation year with regard to the CERT, the following two separate return years will constitute loss limitation years. If the year of deconsolidation is a second loss limitation year with regard to the CERT, the separate return year that immediately follows the year of deconsolidation will constitute a loss limitation year. If the deconsolidating member joins another consolidated group, the consolidated return years of that group may also constitute loss limitation years with regard to the CERT of the former group. See paragraph (a)(2)(iv) of this section (relating to inclusion of member with pre-existing CERT).
(4) Application of rules to reverse acquisitions. In the case of any acquisition to which § 1.1502-75(d)(3) applies (a reverse acquisition), for purposes of applying the CERT rules, the first corporation (as defined in § 1.1502-75(d)(3)(i)) is treated as the corporation the stock of which is acquired, and the second corporation (as defined in § 1.1502-75(d)(3)(i)) is treated as the corporation that acquires stock. In addition, for purposes of § 1.172(h)-2(b)(3)(i) (identifying CERT costs of an MSA) in the case of a reverse acquisition, the fair market value of the stock acquired equals the fair market value of the stock of the first corporation that the stockholders (immediately before the acquisition) of the first corporation own immediately after the acquisition, rather than the fair market value of the stock of the second corporation.
(b) Applicable corporation status following deconsolidation —(1) In general. If a corporation deconsolidates in a loss limitation year from a group that is treated as an applicable corporation with regard to a CERT, the deconsolidating corporation and the former group are both treated as applicable corporations following the deconsolidation. If the corporation joins another consolidated group (acquiring group) following the deconsolidation, the rules of this section apply to the acquiring group, and this paragraph (b) applies with regard to the deconsolidation of any member from the acquiring group during a loss limitation year associated with the CERT. See paragraph (a)(2)(iv) of this section regarding treatment of a group as a single applicable corporation following an acquisition; see also paragraph (a)(3)(ii) of this section for identification of loss limitation years following a deconsolidation. This paragraph (b) applies without regard to whether any particular corporation would on a separate entity basis have constituted an applicable corporation with regard to the CERT under section 172(b)(1)(E)(iii) and § 1.172(h)-1(b), with or without the application of section 172(h)(4)(C) and paragraph (a)(2) of this section, or whether the CERT occurred in a consolidated return year. However, under this paragraph (b), the deconsolidating corporation may be treated as an applicable corporation with regard to a CERT of a former group only if the group engages in the CERT on or before the date of the deconsolidation, or if a pre-existing CERT member, as described in paragraph (a)(2)(iv)(A) of this section, joins the group on or before the date of the deconsolidation.
(2) Exception if waiver filed. In general, a corporation that deconsolidates from a group (or the parent of a group acquiring the deconsolidating member), may, pursuant to paragraph (e)(1) of this section, make an irrevocable election to relinquish the carryback of all net operating losses (NOLs) (and attributable portions of consolidated net operating losses (CNOLs)) to taxable years of the former group and any preceding years. If such an election is made, the deconsolidating member is not treated as an applicable corporation with regard to any CERT of the former group after the deconsolidation. Any group that acquires the deconsolidating member is not treated as an applicable corporation with regard to any CERT of the former group solely as a result of the acquisition of that member. The former group will continue to be treated as an applicable corporation with regard to the CERT.
(3) Examples. The following examples illustrate the rules of paragraph (a) of this section and this paragraph (b). For purposes of these examples, assume that all entities are domestic C corporations unless otherwise stated. Assume that all applicable corporations have substantial NOLs in their loss limitation years:
Example 1.
Single entity treatment of acquisition indebtedness. (i) Facts. Corporation T is a calendar-year taxpayer that has significant debt outstanding, which was incurred to fund operations. Unrelated P is the common parent of a calendar-year consolidated group. The following steps occur pursuant to an integrated plan. On May 1, Year 5, P acquires 10 percent of the T stock for $100. On June 30, Year 5, T borrows $700 and immediately thereafter uses the money to redeem some of its shares from its shareholders. On the same day, the P group acquires all of the remaining T stock in exchange for $200. Assume that the $700 cash payment from T to the T shareholders is treated as a redemption. T is first included in the P group on July 1, Year 5. Under § 1.172(h)-1(d)(2), the steps of the integrated plan (including the redemption of the former T shareholders) constitute a single MSA.
(ii) Analysis. T's short taxable year ending June 30, Year 5 is T's year of the CERT. The P group's consolidated return Year 5 is the taxable year of the CERT for the group. For purposes of allocating to the single MSA interest paid or accrued during the P group's loss limitation years (Years 5, 6, and 7) under § 1.172(h)-2(b), the P group takes into account the debt of all members, including the $700 loan and all of T's other debt. See paragraph (a)(2)(ii)(B) of this section. The allocation of interest also takes into account all deductions for interest paid or accrued that are included in the consolidated return for the relevant loss limitation year. See paragraph (a)(2)(ii)(A) of this section.
Example 2.
Loss limitation years if a corporation joins group in an MSA. Corporation T maintains a taxable year ending June 30. Unrelated X is the common parent of a calendar-year consolidated group. On March 31, Year 5, the X group acquires all of the T stock in a CERT, and T is first included in the X group on April 1, Year 5. On the date of the acquisition, both the X group and T constitute applicable corporations with regard to the Year 5 CERT. See § 1.172(h)-1(b) and paragraph (a)(2) of this section. T's short taxable year ending on March 31, Year 5, was T's taxable year in which the CERT occurred. T's only loss limitation year with respect to the Year 5 CERT is its short taxable year ending on March 31, Year 5. See § 1.172(h)-1(e) and paragraph (a)(3) of this section. Beginning on April 1, Year 5, T ceases to be separately tracked as an applicable corporation. See paragraph (a)(2)(i) and (iv)(B) of this section. The X group's year in which the CERT occurred is its consolidated return Year 5. The X group's loss limitation years with respect to the Year 5 CERT are its full taxable calendar Years 5, 6, and 7. See paragraph (a)(3)(i) and (ii) of this section.
Example 3.
Loss limitation years of a group and deconsolidating member. (i) Facts. P is the common parent of a calendar-year consolidated group that includes S. On June 30, Year 6, a member of the P group engages in an acquisition that constitutes a CERT. S is not a party to the acquisition. On September 30, Year 6, S deconsolidates from the P group. No election under paragraph (e)(1) of this section is made with respect to the deconsolidation of S. Following its deconsolidation, S does not join in the filing of a consolidated return with another group, and it maintains a calendar taxable year.
(ii) Analysis. Because no election is made under paragraph (e)(1) of this section, following the deconsolidation, both the P group and S are treated as applicable corporations with regard to the Year 6 CERT. See paragraph (b)(1) of this section. The P group's loss limitation years with regard to the CERT are its consolidated return Years 6, 7, and 8. See section 172(b)(1)(E)(ii) and paragraph (a)(3)(i) of this section. S deconsolidates from the P group during consolidated return Year 6, which is the first loss limitation year with regard to the CERT. See paragraph (a)(3)(i) of this section. For purposes of applying paragraph (a)(3) of this section to identify loss limitation years, S is treated as deconsolidating from the P group in a transaction to which section 381(a) applies. Therefore, S's two taxable years that follow the deconsolidation, the short year ending December 31, Year 6, and the full taxable calendar Year 7, are its additional loss limitation years with regard to the Year 6 CERT. See paragraph (a)(3)(iii) of this section. See section 172(b)(1)(E)(i) and § 1.172(h)-5(b)(1) for rules regarding the prohibition on carryback of a CERIL.
Example 4.
Loss limitation years if a pre-existing CERT member joins the group. (i) Acquiring group has loss limitation years. Corporation T maintains a calendar taxable year and does not join in the filing of a consolidated return. On July 1, Year 5, T engages in a CERT (Year 5 CERT). Unrelated X is the common parent of a calendar-year consolidated group that includes S. On December 31, Year 5, the X group acquires all of the outstanding T stock. T is first included in the X group on January 1, Year 6. The first loss limitation year with respect to the Year 5 CERT is T's calendar Year 5. See § 1.172(h)-1(e). As a result of the X group's acquisition of T, the X group is treated as a single applicable corporation with respect to the Year 5 CERT. See paragraph (a)(2)(iv) of this section. For purposes of applying paragraph (a)(3) of this section to identify loss limitation years, T is treated as joining the X group in a transaction to which section 381(a) applies. Because T has one loss limitation year with regard to the CERT before it joins the X group, the X group has two loss limitation years with respect to the Year 5 CERT: Its calendar Years 6 and 7. See paragraph (a)(3)(i) of this section. However, the X group must test its acquisition of T under the CERT rules.
(ii) Acquiring group has no loss limitation years. The facts are the same as in paragraph (i) of this Example 4, except that the X group acquires T on January 31, Year 7. Because T has three loss limitation years before it is included in the X group (calendar Years 5 and 6, and a short taxable year ending on January 31, Year 7), none of the X group's consolidated return years are loss limitation years with regard to the Year 5 CERT. See section 172(b)(1)(E)(ii) and paragraph (a)(3)(i) of this section.
(iii) Member deconsolidates from acquiring group. The facts are the same as in paragraph (i) of this Example 4, except that S deconsolidates from the X group on June 30, Year 6. No election under paragraph (e)(1) of this section is made on the deconsolidation of S. Following its deconsolidation from the X group, S does not join in the filing of a consolidated return. T and the X group's loss limitation years remain the same as in paragraph (i) of this Example 4. Because no election is made under paragraph (e)(1) of this section with respect to S's deconsolidation, following the deconsolidation, S and the X group are both treated as applicable corporations with regard to T's Year 5 CERT. See paragraph (b)(1) of this section. S deconsolidates from the P group during consolidated return Year 6, which is the second loss limitation year with regard to the CERT. See paragraph (a)(3)(i) of this section. Therefore, following its deconsolidation, S's only loss limitation year with respect to the Year 5 CERT is its short taxable year July 1, Year 6 through December 31, Year 6. See paragraph (a)(3)(iii) of this section.
Example 5.
Deconsolidation before group engages in CERT. Corporation T is a member of the P group, which maintains a calendar taxable year. On February 28, Year 4, T deconsolidates from the P group due to T's acquisition by the X group, which also maintains a calendar taxable year. T is included in the X group as of March 1, Year 4. No election under paragraph (e)(1) of this section is made on the deconsolidation of T from the P group. On March 31, Year 4, the P group engages in a CERT. Because the P group engages in the CERT after the date of the deconsolidation, T is not treated as an applicable corporation following the deconsolidation. See paragraph (b)(1) of this section. However, the X group must apply the CERT rules to the X group's acquisition of T.
Example 6.
Member that engages in CERT deconsolidates with a waiver election. (i) Facts. P is the common parent of a calendar-year consolidated group. On March 31, Year 4, the P group engages in an MSA, when member T acquires all of the stock of T1. On June 30, Year 4, T and its subsidiaries (including T1) deconsolidate from the P group due to the acquisition of T by the X group. T and its subsidiaries are first included in the X group as of July 1, Year 4. The X group makes an election under paragraph (e)(1) of this section on the deconsolidation.
(ii) Analysis. Because an election under paragraph (e)(1) of this section is made on the deconsolidation of T and its subsidiaries from the P group, following the deconsolidation, only the P group is treated as an applicable corporation with regard to the March 31, Year 4 CERT. Neither T, T1, nor the X group is treated as an applicable corporation with regard to the March 31, Year 4 CERT, even though T directly engaged in the MSA, and T1 was the acquired corporation in that MSA. See paragraph (b)(2) of this section. However, the X group must apply the CERT rules to the X group's acquisition of T.
(c) Identification and allocation of CERT costs —(1) In general. The portion of an NOL that is treated as a CERIL is subject to limitation on carryback. See section 172(b)(1)(E)(i) and § 1.172(h)-5(b)(1). A CERIL is computed in part by identifying the deductions allowed for interest allocable to the CERT. The computation of interest allocable to a CERT under section 172(h)(2) and § 1.172(h)-2(b) takes into account all CERT costs as defined in § 1.172(h)-2(b)(3). This paragraph (c) contains rules applicable to the identification and allocation of CERT costs of a consolidated group.
(2) Single entity treatment of CERT costs. The computation of interest allocable to a CERT in any particular loss limitation year of a consolidated group includes CERT costs incurred (including costs deemed incurred under this paragraph (c)) with regard to the CERT by all corporations that are members of a group during the loss limitation year.
(3) CERT costs of acquired corporation. With respect to a corporation that joins a consolidated group (acquired corporation), for purposes of applying the CERT rules, any CERT costs incurred (or treated as incurred under this paragraph (c)) by the acquired corporation during separate return years prior to the acquired corporation's inclusion in the group are attributed to the acquiring group. Such costs are treated as having been incurred by the acquiring group for purposes of applying the avoided cost rules of section 263A(f)(2)(A) to any measurement date after the acquisition of the corporation. Those CERT costs are no longer separately identified as CERT costs incurred by the acquired corporation.
(4) Allocation of CERT costs on deconsolidation —(i) In general. This paragraph (c)(4) applies to determine the CERT costs allocable to a corporation that deconsolidates in a loss limitation year from a group that is treated as an applicable corporation with regard to a CERT. Under this paragraph (c)(4), CERT costs may be allocated to a deconsolidating corporation only if the group engages in the relevant CERT on or before the date of the deconsolidation, or if a pre-existing CERT member, as described in paragraph (a)(2)(iv)(A) of this section, joins the group on or before the date of the deconsolidation. This paragraph (c)(4) applies regardless of whether any particular corporation would have constituted an applicable corporation under section 172(b)(1)(E)(iii) and § 1.172(h)-1(b) without the application of section 172(h)(4)(C) and paragraph (a)(2) of this section, whether the CERT occurred in a consolidated return year, or whether any particular corporation actually incurred CERT costs.
(ii) No waiver election made. If no election under paragraph (e)(1) of this section is made with regard to the deconsolidation, CERT costs incurred by the group (including costs treated as incurred by the group under this paragraph (c)) are allocated between the deconsolidating corporation and the former group, solely for purposes of computing allocable interest deductions of the deconsolidating corporation and the continuing group with regard to the CERT under section 172(h)(2) and § 1.172(h)-2(b). For purposes of computing interest allocable to the CERT under section 172(h)(2) and § 1.172(h)-2(b) during the loss limitation year of the former group that is the year of the deconsolidation, the CERT costs allocated to the deconsolidating member are included in the group's accumulated CERT costs on those measurement dates on which the deconsolidating corporation was included in the group. The portion of the group's total CERT costs that is allocated to a deconsolidating member equals the group's total CERT costs multiplied by a fraction, the numerator of which equals the value of the deconsolidating corporation immediately after its deconsolidation, and the denominator of which equals the value of the entire group immediately prior to the deconsolidation.
(iii) Waiver election made. If an election under paragraph (e)(1) of this section is made with regard to a deconsolidation, no CERT costs are allocated to the deconsolidating corporation. All CERT costs remain with the former group for purposes of identifying its allocable interest deductions under section 172(h)(2) and § 1.172(h)-2(b) with regard to the CERT.
(5) Examples. The following examples illustrate the rules of this paragraph (c). For purposes of the examples in this paragraph (c)(5), assume that all entities are domestic C corporations unless otherwise stated. Assume that all applicable corporations have substantial NOLs in their loss limitation years:
Example 1.
Aggregation of CERT costs of consolidated group and target. (i) Facts. P is the common parent of a calendar-year consolidated group that includes S1 and S2. On June 30, Year 5, S1 acquires all of the stock of T for $10 million. P incurs CERT costs of $100,000 and $250,000 for work performed by its outside counsel and an investment banker, respectively, that facilitates the acquisition. In addition, T incurs CERT costs of $175,000 for work performed by its outside counsel that facilitates the acquisition. All of these costs are incurred on or before the date of the acquisition. In all relevant years preceding its acquisition, T does not join in the filing of a consolidated return.
(ii) Analysis. For purposes of computing the P group's allocable interest deductions under section 172(h)(2) and § 1.172(h)-2(b), the P group's CERT costs include CERT costs incurred by all members of the P group. See paragraph (c)(2) of this section. In addition, when T joins the P group, the CERT costs incurred by T prior to its inclusion in the P group are attributed to the P group and are treated as having been incurred by the P group for purposes of applying the avoided cost rules of section 263A(f)(2)(A) to any measurement date after the acquisition of T. See paragraph (c)(3) of this section. As a result, the P group's accumulated CERT costs on July 1, Year 5, are $10,525,000 [$10,000,000 + $100,000 + 250,000 + 175,000]. See § 1.172(h)-2(b)(3) for rules defining CERT costs.
Example 2.
Acquiring group treated as incurring CERT costs associated with unrelated CERT of target. T is a calendar-year taxpayer that does not join in the filing of a consolidated return. P is the common parent of a calendar-year consolidated group. P also owns 70 percent of the only class of T stock. During Year 4, T engages in a CERT. On June 30, Year 5, P acquires the remainder of the stock of T, and T is first included in the P group on July 1, Year 5. Following the acquisition, the P group is treated as an applicable corporation with regard to T's Year 4 CERT. See paragraph (a)(2)(iv) of this section. The P group's consolidated return Year 5 is the third and final loss limitation year with regard to the Year 4 CERT. See paragraph (a)(3)(i) of this section. The P group is treated as having incurred all of T's expenses allocable to the CERT for purposes of computing any CERIL for consolidated return Year 5. Because T was a member of the P group for less than the entire calendar taxable Year 5, T's CERT costs are included in the P group's accumulated CERT costs only on those measurement dates on which T is included in the group (that is, measurement dates on or after July 1, Year 5). See paragraph (c)(3) of this section and § 1.172(h)-2(b)(4). See also paragraph (d)(3)(iii) for rules relating to the interest history of a partial-year member.
Example 3.
Allocation of CERT costs to deconsolidating member. (i) Facts. P is the common parent of a calendar-year consolidated group. P owns 60 percent of the sole class of stock of T, a calendar-year taxpayer. On January 31, Year 5, the P group engages in a CERT. On March 31, Year 5, P acquires the remainder of the stock of T, and T is first included in the P group on April 1, Year 5. On June 30, Year 6, T deconsolidates from the P group, with no election made under paragraph (e)(1) of this section.
(ii) Analysis. T is not a member of the P group at the time of the CERT. However, following its deconsolidation, T is treated as an applicable corporation with regard to the Year 5 CERT because the P group engages in the CERT before T deconsolidates, and no election is made under paragraph (e)(1) of this section on the deconsolidation. See paragraph (b)(1) of this section. Further, a portion of the P group's CERT costs is allocated to T for purposes of computing any CERIL of T (or of any group of which T becomes a member following its deconsolidation from the P group) with regard to the Year 5 CERT. See paragraphs (b)(1) and (c)(4)(ii) of this section. However, the CERT costs of the group otherwise allocated to T are included in the P group's accumulated CERT costs on those measurement dates during which T is included in the group (that is, measurement dates before July 1, Year 6). See paragraph (c)(4)(ii) of this section and § 1.172(h)-2(b)(4).
(d) Determining the three-year average of a group —(1) In general. Section 172(h)(2)(C) and § 1.172(h)-3(a) limit the amount of allocable interest deductions to the excess (if any) of the amount allowable as a deduction for interest paid or accrued by the taxpayer during the loss limitation year, over the average of interest paid or accrued by the taxpayer (the three-year average) for the three taxable years preceding the taxable year in which the CERT occurred (the lookback period). The computation under section 172(h)(2)(C)(ii) and § 1.172(h)-3(b) of a group's three-year average for the lookback period that is relevant to any loss limitation year includes interest paid or accrued (or treated as paid or accrued under this paragraph (d)) during the lookback period by all corporations that are members of the consolidated group during the loss limitation year.
(2) Varying group membership. If group membership varies from one loss limitation year to another, a different three-year average is computed with regard to each loss limitation year of the group.
(3) Interest history —(i) Combination of interest history of acquired member with group history. With respect to a corporation that joins a consolidated group (acquired corporation), for purposes of applying the CERT rules, the interest paid or accrued (or treated as paid or accrued under this paragraph (d)) by the acquired corporation during each separate return year prior to its inclusion in the group is apportioned equally to each day within each of its separate return years. The interest apportioned to dates within the lookback period is then combined with the interest paid or accrued by the acquiring group and is treated as interest paid or accrued by the acquiring group during the lookback period for purposes of computing the three-year average that is relevant to any loss limitation year beginning with the consolidated return year during which the acquired corporation is first included in the group. For purposes of the CERT rules, the interest from the separate return years is no longer separately traced as interest paid or accrued by the acquired corporation. But see paragraph (d)(3)(iii) of this section for rules requiring proration of interest history attributable to corporations that are members of a group for less than an entire loss limitation year. The interest paid or accrued by a predecessor (as defined in § 1.172(h)-(1)(b)(2)) of a member of the group is similarly combined with the interest paid or accrued by the group. See § 1.172(h)-4(c)(2)(ii)(A).
(ii) Interest treated as paid or accrued by a corporation that deconsolidates —(A) In general. This paragraph (d)(3)(ii) provides rules that apply for purposes of determining any three-year average of a corporation that deconsolidates from a group (or a three-year average of any other group of which it becomes a member) and any three-year average of the group from which the corporation deconsolidates (former group). These rules apply to the computation of any three-year average with regard to a CERT of the former group or any other CERT.
(B) Waiver election made. If an election under paragraph (e)(1) of this section is made with respect to the deconsolidation of a corporation from a group, then, following the deconsolidation, the deconsolidating member is treated as having paid or accrued zero interest during the period of its inclusion in the former group and preceding years. The group retains the interest history that would otherwise be allocated and apportioned to the deconsolidating member under this paragraph (d)(3)(ii).
(C) No waiver election made. If no election under paragraph (e)(1) of this section is made with respect to the deconsolidation of a corporation, a portion of the group's amount of interest treated as paid or accrued during the period of the corporation's consolidation and any preceding years is allocated and apportioned to the deconsolidating corporation. The allocated and apportioned interest is subtracted from the group's interest history and is unavailable to the group (or any other group member) for purposes of computing a three-year average with regard to any loss limitation year of the group (or any other group member) after the year of deconsolidation. But see paragraph (d)(3)(iii) of this section for rules requiring proration of interest history attributable to corporations that are members of a group for less than an entire loss limitation year.
(D) Method of allocation. If no election under paragraph (e)(1) of this section is made when a corporation deconsolidates, solely for purposes of the CERT rules, the corporation is treated as having paid or accrued interest equal to the amount of interest paid or accrued by the group in each consolidated return year through the date of the deconsolidation (including any combination of interest history pursuant to paragraph (d)(3)(i) of this section), multiplied by a fraction, the numerator of which equals the value of the deconsolidating corporation immediately after its deconsolidation, and the denominator of which equals the value of the entire group immediately prior to the deconsolidation.
(iii) Proration of lookback period interest for members that are part of a group for less than the entire loss limitation year. If any member is included in the group for less than an entire consolidated return year that is a loss limitation year (partial-year member), then the group takes into account a pro rata portion of the partial-year member's amount of interest paid or accrued during the lookback period for purposes of determining a group's three-year average relevant to that loss limitation year. The amount of interest treated as paid or accrued that is subject to proration under this paragraph (d)(3)(iii) is the interest of the partial-year member that would otherwise be fully combined with the interest history of the acquiring group under paragraph (d)(3)(i) of this section (with regard to corporations acquired during the loss limitation year) or the interest that is otherwise allocated to a deconsolidating member under paragraph (d)(3)(ii) of this section. The pro rata amount equals the partial-year member's interest treated as paid or accrued for the dates of the lookback period, multiplied by a fraction, the numerator of which equals the number of days of the loss limitation year during which the partial-year member was a member of the group, and the denominator of which equals the number of days in the loss limitation year. This proration applies to interest paid or accrued during the entire lookback period, including portions of the lookback period during which the partial-year member was a member of the group.
(4) Lookback period —(i) In general. The lookback period with regard to a CERT is the three taxable years preceding the taxable year in which the CERT occurs. See section 172(h)(2)(C)(ii) and § 1.172(h)-3(a). The lookback period that is relevant to any CERIL of a consolidated group is the three taxable years preceding the taxable year of the group that includes the date on which the CERT occurred. See § 1.172(h)-5(a) (defining the date on which a CERT occurs if the CERT consists of multiple steps). This rule applies whether the group actually engaged in the CERT or is treated as an applicable corporation with regard to a CERT solely by application of paragraph (a)(2)(iv) of this section.
(ii) Group not in existence for entire lookback period. If a group was not in existence for three taxable years prior to the consolidated return year that includes the date of the CERT, the lookback period includes the group's taxable years preceding the year of the CERT plus the preceding taxable years of the corporation that was the common parent of the group on the first day of the group's first consolidated return year (original common parent). If the group and the original common parent together have fewer than three taxable years that precede the consolidated return year that includes the date of the CERT, the lookback period will be deemed to include full 12-month periods that end on the calendar date that is one day prior to the date of organization of the original common parent.
(iii) Group not in existence on date of CERT. If a group was not in existence on the date on which the CERT occurred, for purposes of determining the lookback period, the group's taxable years will be deemed to include the taxable years of the group's original common parent. If the original common parent was not in existence on the date of the CERT, or it does not have three taxable years that precede its taxable year that includes the date of the CERT, the group will be deemed to have additional 12-month taxable periods that end on the calendar date that is one day prior to the date of the original common parent's organization. From these deemed taxable periods, the group will identify the deemed period that includes the date on which the CERT occurred and the three immediately preceding deemed periods that constitute the lookback period. See § 1.172(h)-5(a) regarding date on which CERT occurred in multi-step transaction.
(iv) Interest history of corporations not in existence. If any member of a group is not in existence for the entire lookback period, for purposes of the CERT rules, that member is treated as having paid or accrued zero interest before its organization. But see § 1.172(h)-4(c)(2)(ii) (regarding interest history of successors).
(5) Examples. The following examples illustrate the rules of this paragraph (d). Unless otherwise stated, assume that all entities are domestic C corporations that have full, 12-month taxable years. Assume that all applicable corporations have substantial NOLs in their loss limitation years:
Example 1.
Acquired member's interest history combined with interest history of group. (i) Facts. P is the common parent of a calendar-year consolidated group that includes S on all relevant dates. On December 31, Year 5, S acquires the stock of T in a CERT, and T is first included in the P group on January 1, Year 6. Membership in the P group is otherwise stable for all relevant years. Prior to joining the P group, T does not join in the filing of a consolidated return and maintains a calendar taxable year. T's amounts of interest paid or accrued in Years 2, 3, and 4, respectively, are $600, $200, and $400. The P group's amounts of interest paid or accrued in Years 2, 3, and 4, respectively, are $1,400, $1,000, and $1,200.
(ii) Analysis. The P group's loss limitation years are calendar Years 5, 6, and 7. See paragraph (a)(3)(i) of this section. Year 5 is also a loss limitation year for T. The P group's lookback period with regard to the CERT is calendar Years 2, 3, and 4. See paragraph (d)(4)(i) of this section. For purposes of computing any three-year average of the P group for its lookback period, on the acquisition of T, the interest history of T is generally combined with the interest history of the P group. See paragraph (d)(3)(i) of this section. However, because T is not a member of the P group on any date during consolidated return Year 5, the computation of the P group's three-year average relevant to Year 5 will not include any of T's interest paid or accrued during the lookback period. See paragraph (d)(3)(iii) of this section. Thus, the P group's three-year average for loss limitation Year 5 is $1,200 ([$1,400 + $1,000 + 1,200]/3). Because T is a member of the P group during each day of loss limitation Years 6 and 7, T's history of interest paid or accrued during the lookback period is fully included in the P group's computation of its three-year average relevant to loss limitation Years 6 and 7. See paragraph (d)(3)(i) and (iii) of this section. Thus, the P group's three-year average for loss limitation Years 6 and 7 is $1,600 ([$1,400 + $1,000 + 1,200 + $600 + $200 + $400]/3).
(iii) Interest combination if acquired member included in group for part of loss limitation year. The facts are the same as in paragraph (i) of this Example 1, except that S acquires the stock of T on March 31, Year 5, and T is included in the P group for 275 days. Because T is a partial-year member of the P group during loss limitation Year 5, the computation of the three-year average relevant to loss limitation Year 5 includes the interest of T for the lookback period, prorated as required under paragraph (d)(3)(iii) of this section. Because T is in the P group for 275 days during Year 5, the computation of the P group's three-year average relevant to Year 5 takes into account an amount of T's interest history equal to T's actual amount of interest paid or accrued for each year of the lookback period, multiplied by a fraction equal to 275/365 (number of days of the loss limitation year during which T is a member of the P group divided by the number of days in the loss limitation year), or $452 ($600 × [275/365]), $151 ($200 × [275/365]), and $301 ($400 × [275/365]) for Years 2, 3, and 4, respectively.
Example 2.
Lookback period if corporation with CERT history joins group. (i) Facts. P is the common parent of a calendar-year consolidated group. P also owns 55 percent of the sole class of stock of Corporation T, which maintains a taxable year ending June 30. On September 30, Year 4, T engages in a CERT. On December 31, Year 5, P acquires the remainder of the stock of T, and T is first included in the P group on January 1, Year 6.
(ii) Analysis. T's full taxable year ending June 30, Year 5, and its short year ending December 31, Year 5 are loss limitation years with regard to the September Year 4 CERT. The lookback period for the CERT relevant to these two loss limitation years is T's three taxable years ending on June 30, Years 2, 3, and 4. See section 172(h)(2)(C)(ii) and § 1.172(h)-3(a). The P group's calendar Year 6 is its sole loss limitation year with regard to T's September Year 4 CERT. See paragraph (a)(3)(i) of this section. In determining any CERIL with regard to the P group's calendar Year 6, the lookback period is the three taxable years prior to the taxable year of the group that includes the date on which the CERT occurred. See paragraph (d)(4)(i) of this section. Therefore, the lookback period with regard to the P group's loss limitation Year 6 is calendar consolidated return Years 1, 2, and 3.
Example 3.
Interest history if no waiver election made on member deconsolidation. (i) Facts. P is the common parent of a calendar-year consolidated group that includes S. The P group engaged in a CERT on December 27, Year 5. S deconsolidates from the P group on December 31, Year 5. No election under paragraph (e)(1) of this section is made on the deconsolidation of S. S's value immediately after its deconsolidation is $4,000. The P group's value immediately before S's deconsolidation is $10,000. The P group and its members engaged in no prior CERTs.
(ii) Analysis. Because the CERT occurs during the P group's calendar consolidated return Year 5, Years 5, 6, and 7 are the P group's loss limitation years. Because no election is made under paragraph (e)(1) of this section with regard to the deconsolidation of S, S is treated as an applicable corporation with regard to the Year 5 CERT under paragraph (b)(1) of this section and the interest history of the P group during the period of S's consolidation and any preceding years is allocated to S and the remaining members of the P group. See paragraph (d)(3)(ii)(C) of this section. The amount of the P group's interest for each year that is allocated to S is the amount of interest paid or accrued by the P group in the relevant consolidated return year multiplied by a fraction equal to 4,000 divided by 10,000 (the value of the deconsolidating corporation immediately after its deconsolidation divided by the value of the entire group immediately prior to the deconsolidation), or 2/5 . See paragraph (d)(3)(ii)(D) of this section. The interest allocated to S is subtracted from the interest history of the group and is unavailable to the P group for purposes of computing a three-year average with regard to any loss limitation year of the P group after the year of the deconsolidation, including Years 6 and 7. The interest history allocated to S will be maintained by S to be used in the computation of any CERIL of S, or any CERIL of any group of which S is later a member. See paragraph (d)(3)(ii)(C) of this section.
(iii) Waiver election filed. The facts are the same as in paragraph (i) of this Example 3, except that an election under paragraph (e)(1) of this section is filed on the deconsolidation of S. As a result of that election, S is not treated as an applicable corporation with regard to the Year 5 CERT under paragraph (b)(2) of this section and none of the interest history of the P group is allocated to S under paragraph (d)(3)(ii)(B) of this section. Therefore, in any post-deconsolidation year, for purposes of computing a CERIL in connection with any CERT with regard to which S (or of any group of which S is later a member) is an applicable corporation, S is treated as having paid or accrued zero interest for the period of its inclusion in the P group and preceding years. The P group will retain the interest history that would otherwise be allocated to S. See paragraph (d)(3)(ii)(B) of this section.
Example 4.
Interest history if no waiver election made for member that deconsolidates prior to CERT. (i) Facts. P is the parent of a calendar-year consolidated group that includes S. On December 31, Year 4, S deconsolidates from the P group. No election is made under paragraph (e)(1) of this section with regard to the deconsolidation. On July 1, Year 5, the P group engages in a CERT. The P group and its members engaged in no prior CERTs.
(ii) Analysis. Because no election is made under paragraph (e)(1) of this section with regard to the deconsolidation of S, the interest history of the P group is allocated between S and the remaining members of the P group. See paragraph (d)(3)(ii)(C) of this section. This allocation occurs despite the fact that, at the time of the deconsolidation, the P group has not engaged in a CERT. Therefore, for purposes of computing any three-year average for the P group relevant to the Year 5 CERT, the portion of the interest history allocated to S is unavailable to the P group for purposes of computing a three-year average with regard to any loss limitation year of the P group after the year of the deconsolidation. See paragraph (d)(3)(ii)(C) of this section.
Example 5.
Interest history if waiver election made for member that deconsolidates and then engages in a CERT. (i) Facts. P is the parent of a calendar-year consolidated group that includes X. On December 31, Year 5, X deconsolidates from the P group and makes an election under paragraph (e)(1) of this section. After its deconsolidation, X maintains a calendar taxable year. During Year 7, X engages in a CERT.
(ii) Analysis. X's loss limitation years with regard to the Year 7 CERT are Years 7, 8, and 9. X's lookback period with regard to the CERT is comprised of its Years 4 and 5 in the P consolidated group, and X's separate return Year 6. See section 172(h)(2)(C)(ii) and paragraph (d)(4)(i) of this section. As a result of the filing of the election under paragraph (e)(1) of this section, none of the interest history of the P group is allocated to X. Therefore, for purposes of computing X's three-year average for loss limitation Years 7, 8, and 9, X is treated as having paid or accrued zero interest during Years 4 and 5 of the lookback period. See paragraph (d)(3)(ii)(B) of this section.
Example 6.
Interest history if member deconsolidates mid-year. (i) Facts. P is the common parent of a calendar-year consolidated group that includes S. S deconsolidates from the P group on June 30, Year 5. No election under paragraph (e)(1) of this section is made on the deconsolidation of S. During Year 5, but prior to the deconsolidation, the P group engages in a CERT. S is not a party to the CERT, and, throughout its history in the group, S paid or accrued only nominal interest.
(ii) Analysis. The P group's lookback period is calendar Years 2, 3, and 4. Consolidated return Years 5, 6, and 7 are the P group's loss limitation years. Because no election is made under paragraph (e)(1) of this section with regard to the deconsolidation of S, the interest history of the P group is allocated between S and the remaining members of the P group. See paragraph (d)(3)(ii)(C) of this section. This is true although S played no part in the CERT, and it actually paid or accrued only nominal interest. In the consolidated return year of the deconsolidation (here, the P group's Year 5), S was a member for 181 days. Therefore, the P group includes in the computation of its three-year average relevant to Year 5 a pro rata portion of the interest history allocated to S. See paragraph (d)(3)(ii)(C) and (iii) of this section. The pro rata portion equals the group's interest history allocated to S under paragraph (d)(3)(ii)(C) and (D) of this section, multiplied by a fraction equal to 181/365 (number of days of the loss limitation year during which S is a member divided by the number of days in the loss limitation year). See paragraph (d)(3)(iii) of this section. The portion of the interest history allocated to S is excluded in its entirety from the computation of the group's three-year average relevant to Years 6 and 7. The interest history allocated to S will be used in the computation of any CERIL of S, and any CERIL of any group of which S is later a member. See paragraph (d)(3)(ii)(C) of this section.
Example 7.
Group not in existence for the entire lookback period. (i) Facts. Corporation P is formed on October 1, Year 3, and maintains a calendar taxable year. On January 1, Year 4, P forms S in a transaction meeting the requirements of section 351. Beginning in Year 4, P files consolidated returns with S, its only subsidiary. The P group maintains a calendar taxable year. During Year 5, the P group engages in an ED.
(ii) Analysis. For purposes of limiting any CERIL related to the Year 5 CERT, the P group must measure its interest deductions for the three years preceding the taxable year in which the CERT occurs (three-year average). See section 172(h)(2)(C)(ii) and § 1.172(h)-3(a). However, the P group was not in existence for three taxable years before the year that includes the date of the CERT (calendar Year 5). Rather, the P group was in existence for one full calendar taxable year (Year 4). Because the group does not have a three-year history, the lookback period includes the common parent's (P's) short taxable year (October 1 through December 31, Year 3), and is also deemed to include an additional taxable period (October 1, Year 2 through September 30, Year 3). See paragraph (d)(4)(ii) of this section. Further, in computing the three-year average, the P group members are treated as having paid or accrued zero interest for dates on which they did not exist. However, the P group is treated as having paid any interest paid by P during its short taxable year (October 1 through December 31, Year 3). See paragraph (d)(4)(iv) of this section.
Example 8.
Group not in existence prior to year of the CERT but target in existence. (i) Facts. Corporation P is formed on January 1, Year 4. On the same day, P organizes wholly-owned, special-purpose corporation S. T is an unrelated, calendar-year corporation with a significant tax history. On February 1, Year 4, S merges into T, with T surviving. In the merger, all of T's historic shareholders receive cash in exchange for their shares. Following the merger, P owns all of the outstanding stock of T, and P is treated as acquiring all the stock of T in an MSA. The P group files consolidated returns beginning in Year 4 and maintains a calendar taxable year. T is first included in the P group on February 2, Year 4.
(ii) Analysis. Neither P (the original common parent) nor the P group is in existence before the year that includes the date of the CERT (calendar Year 4). Therefore, for purposes of applying the interest allocation limitation of section 172(h)(2)(C) and § 1.172(h)-3(a), the P group's lookback period is deemed to include three additional taxable periods (January 1 through December 31 for Years 1, 2, and 3). See paragraph (d)(4)(ii) of this section. Further in computing the three-year average, P is treated as having paid or accrued zero interest during the deemed years (January 1, Year 1 through December 30, Year 3). See paragraph (d)(4)(iv) of this section. However, with respect to the group's acquisition of T, the interest history of T is combined with the interest history of the P group. Because T is not a member of the P group for each day of loss limitation Year 4, the computation of the three-year average applicable to loss limitation Year 4 will include only a pro rata portion of the interest of T for the lookback period. See paragraph (d)(3)(i), (d)(3)(iii), and paragraph (iii) of Example 1 of paragraph (d)(5) of this section.
(e) Election to waive carryback from all separate return years —(1) In general. In addition to any other elections available under section 172(b)(3) and § 1.1502-21(b)(3), if a member becomes a non-member of a group (former group), the former member may make an irrevocable election to relinquish the carryback of all NOLs (and attributable portions of CNOLs) to taxable years of the former group and any preceding years. If the former member becomes a member of another group (acquiring group) immediately after its deconsolidation from the former group, the election described in this paragraph (e)(1) is available only to the common parent of the acquiring group. The election is not an annual election and applies to all losses that would otherwise be subject to carryback to years of the former group (or preceding years) under section 172 or § 1.1502-21(b). The election is binding on the deconsolidating corporation and any group of which it may become a member. Further, the election is available without regard to whether the former group is treated as an applicable corporation with regard to any CERT at the time of the deconsolidation. Any election under this paragraph (e)(1) by the common parent of an acquiring group must include all deconsolidating corporations that were members of the former group and that joined the acquiring group during the same consolidated return year of the acquiring group. The election is made in a separate statement entitled, “THIS IS AN ELECTION UNDER § 1.1502-72(e)(1) TO WAIVE THE PRE- [insert the first taxable year following the deconsolidation of the former member(s) from the former group] CARRYBACK PERIOD FOR ALL NOLs AND ALL CNOLs ATTRIBUTABLE TO [insert the name(s) and EIN(s) of the corporation(s)].” The statement must be filed with the timely filed original return of the former member or the acquiring group for the first taxable year following the deconsolidation of the former member from the former group. See paragraphs (b)(2), (c)(4)(iii), and (d)(3)(ii)(B) of this section relating to treatment of a deconsolidating member making an election under this paragraph (e)(1).
(2) Example. The following example illustrates the rules of this paragraph (e):
Example.
P, a publicly-held corporation, is the common parent of a calendar-year consolidated group that includes T. On July 30, Year 5, the P group engages in a CERT. On December 31, Year 5, T deconsolidates from the P group, and it continues to maintain a calendar taxable year. With respect to its deconsolidation, T makes an election under paragraph (e)(1) of this section. As a result of such election, T is not treated as an applicable corporation with regard to the P group's Year 5 CERT and none of the CERT costs or interest history of the P group are allocated to T. See paragraphs (b)(2), (c)(4)(iii), and (d)(3)(ii)(B) of this section. On March 30, Year 6, the X group acquires all of the stock of T. The X group maintains a calendar taxable year. A portion of the X group's Year 6 CNOL is attributable to T under § 1.1502-21(b)(2)(iv)(B). Because T filed an election under paragraph (e)(1) of this section with respect to its deconsolidation from the P group, no portion of the X group's Year 6 CNOL attributable to T can be carried back to any taxable years of T, of the P group, or any preceding years.
(f) Excess distribution —(1) Defined. Section 172(h)(3)(C) and § 1.172(h)-1(c)(3) provide that an ED means the excess (if any) of the aggregate distributions (including redemptions) made during a taxable year by a corporation with respect to its stock, over the greater of 150 percent of the average of such distributions (three-year distribution average) for the three taxable years immediately preceding such taxable year (distribution lookback period), or 10 percent of the fair market value of the stock of such corporation as of the beginning of such taxable year.
(2) Determination of an ED by a group —(i) Aggregation of distributions to non-members. For purposes of determining whether a group has made an ED during any consolidated return year (potential ED year), distributions by all members of the group to non-members during the potential ED year are aggregated and tested under section 172(h)(3)(C), § 1.172(h)-1(c)(3), and paragraph (f)(1) of this section.
(ii) Distributions between members of the same group. Distributions between members of the same group are generally disregarded for purposes of applying the CERT rules. However, the preceding sentence does not apply if a party to the transaction is deconsolidated pursuant to the same plan or arrangement. See paragraph (a)(2)(iii) of this section.
(3) Computation of three-year distribution average —(i) In general. The computation under section 172(h)(3)(C)(ii)(I) and § 1.172(h)-1(f) of the group's three-year distribution average includes distributions made during the distribution lookback period to non-members by each corporation that is a member of the consolidated group during the potential ED year. Distributions made during the distribution lookback period by predecessors of those members are also included. See § 1.172(h)-4(d). The computation includes distributions made by corporations during separate return years, subject to additional rules of this paragraph (f) and paragraph (a)(2)(iii) of this section. If a corporation was a member of a prior group during a portion of a distribution lookback period, the distribution history of that corporation during taxable years of the prior group includes only distributions made by that corporation to non-members of the prior group.
(ii) Corporation deconsolidated from a group. If a corporation deconsolidates from a group (former group), the corporation's actual distribution history is subtracted from the group's distribution history and is available to the deconsolidating corporation (or any group of which it becomes a member) for purposes of computing any three-year distribution average following the deconsolidation. The deconsolidating member's distribution history will be unavailable to the former group for purposes of computing its three-year distribution average with regard to any potential ED year of the former group after the year of deconsolidation. See § 1.172(h)-1(f)(1) (excluding from three-year distribution average those distributions treated as part of an MSA).
(iii) Members included in group for less than entire loss limitation year. If any member is included in the group for less than an entire potential ED year (partial-year member), then a pro rata portion of the partial-year member's distribution history is computed under the principles of paragraph (d)(3)(iii) of this section and is included for purposes of determining the group's three-year distribution average relevant to that potential ED year.
(4) Stock value and stock issuances of a group —(i) Stock issuances taken into account in computing distributions. Stock issued by a member of a group is taken into account in applying section 172(h)(3)(E)(ii) and § 1.172(h)-5(c)(1) only if the stock is issued to a non-member. Intercompany stock issuances are disregarded. This rule is applicable whether the stock issuance occurred in the current group or a previous group.
(ii) Value of stock of group. For purposes of applying section 172(h)(3)(C)(ii)(II), § 1.172(h)-1(c)(3), and paragraph (f)(1) of this section (relating to the fair market value of the stock of a distributing corporation), the value of the stock of the group is the value of the stock of all members, other than stock that is owned directly or indirectly by another member. But see section 172(h)(3)(E)(i) for rules regarding the exclusion of certain preferred stock for purposes of applying sections 172(h)(3)(C), § 1.172(h)-1(c)(3) and (f), and this paragraph (f). See also paragraphs (a)(2)(iii) and (f)(2)(ii) of this section, requiring separate entity analysis of certain transactions between members of a consolidated group.
(5) Examples. The following examples illustrate the rules of this paragraph (f). For purposes of these examples, assume that all entities are domestic C corporations:
Example 1.
Corporation deconsolidates from group. (i) Facts. P is the common parent of a calendar-year consolidated group that includes T. P owns 90 percent of the outstanding stock of T, and A (an unrelated party) owns the remaining 10 percent of the outstanding stock of T. T regularly makes distributions to its shareholders, P and A. On December 31, Year 4, X, the common parent of another calendar-year consolidated group, acquires all of the outstanding stock of T, and T deconsolidates from the P group. T is first included in the X group on January 1, Year 5. On March 31, Year 5, X makes a large distribution to its non-member shareholders. X makes no further distributions during its taxable year.
(ii) Analysis. The X group's distribution to its non-member shareholders on March 31, Year 5, is tested as a potential ED under section 172(h)(3)(C), § 1.172(h)-1(c)(3) and (f), and paragraph (f) of this section. The X group's distribution lookback period with regard to the potential ED is January 1 through December 31, for each of Years 2, 3, and 4. For purposes of computing the X group's three-year distribution average, the computation includes any distributions made by T to A, its former non-member shareholder, during the distribution lookback period, because T is a member of the X group during the year of the potential ED. See paragraph (f)(3) of this section. Distributions between members of the X group and between members of the P group are disregarded. See paragraph (f)(2)(ii) of this section.
Example 2.
Integrated plan to deconsolidate. T is a wholly-owned subsidiary of P, and is a member of the P group. As part of a plan that includes the deconsolidation of T from the P group, T makes a distribution to P. Because T's distribution to P is part of an integrated plan that results in the deconsolidation of T, T's distribution to P is tested on a separate entity basis as a potential ED under section 172(h)(3)(C) § 1.172(h)-1(c)(3) and (f), and paragraph (f) of this section. See paragraphs (a)(2)(iii) and (f)(2)(ii) of this section. Therefore, the rules of section 172(h)(3)(C), § 1.172(h)-1(c)(3) and (f), and paragraph (f) of this section are applied based on the separate entity value and distribution history of T. See § 1.172(h)-1(d)(2) regarding testing of the distribution as part of a plan of major stock acquisition.
(g) Life-nonlife groups —(1) Scope. This paragraph (g) provides rules for applying the CERT rules to a group that elects under section 1504(c)(2) to file a consolidated return (life-nonlife group). See § 1.1502-47 (rules regarding life-nonlife groups).
(2) Single entity treatment —(i) In general. All members of a life-nonlife group are generally treated as a single taxpayer for purposes of the CERT rules. Accordingly, the rules of paragraphs (a) through (f) and (h) of this section and the rules of §§ 1.172(h)-1 through 1.172(h)-5 are applied by treating the life-nonlife group as a single taxpayer, and are not applied on a subgroup basis. For example, all members of a life-nonlife group are treated as a single entity for purposes of determining whether a CERT has occurred under sections 172(h)(3)(B) and (C) and § 1.172(h)-1. See paragraph (a)(2)(i) of this section. Furthermore, all intercompany transactions between and within subgroups are generally disregarded. In addition, if a pre-existing CERT member becomes a member of a life-nonlife group, the life-nonlife group is treated as a single applicable corporation with regard to that CERT in the consolidated return year of the acquisition and any succeeding year. See paragraph (a)(2)(iv) of this section. If it is determined that a CERT exists, the amount of the CERIL is determined for the entire life-nonlife consolidated group as described in paragraph (g)(2)(ii)(A) of this section, and the CERIL is allocated to each subgroup as described in paragraph (g)(3) of this section.
(ii) CERIL —(A) Single CERIL computation. For any loss limitation year, a single CERIL is computed under section 172(h)(1) and § 1.172(h)-2(a)(2) for the life-nonlife group. The computation of the life-nonlife group's CERIL for any loss limitation year includes all life-nonlife group members' CERT costs, debt, and interest paid or accrued for that year.
(B) Net operating loss. For purposes of determining the CERIL of a life-nonlife group under section 172(h)(1) and § 1.172(h)-2(a)(2), the net operating loss of the group in any loss limitation year is the sum of the nonlife consolidated net operating loss (nonlife CNOL) (if any) and the consolidated loss from operations (consolidated LO) (if any) for that year. For this purpose, nonlife consolidated taxable income does not offset any LO, and consolidated partial life insurance company taxable income (as used in § 1.1502-47(g)) does not offset any nonlife CNOL.
(iii) Carryover to separate return years. If any nonlife CNOL or consolidated LO that is attributable to a member of a subgroup may be carried to a separate return year (as defined in § 1.1502-47(d)(10)), the CERIL that is associated with the nonlife CNOL or consolidated LO is apportioned to each member, as relevant, under the method provided by § 1.1502-21(b)(2)(iv)(C)(1).
(iv) Deconsolidation. If a member deconsolidates from a life-nonlife group without an election under paragraph (e)(1) of this section, then paragraphs (b)(1), (c)(4)(i) and (ii), and (d)(3)(ii)(A) and (C) of this section (relating to treatment of a deconsolidating member) apply to allocate CERT status, CERT costs, and interest history from the entire life-nonlife group to the deconsolidating member, and not from a specific subgroup.
(3) Allocation of a CERIL. If a CERIL exists under paragraph (g)(2)(ii)(A) of this section, that CERIL is allocated to each subgroup that has a nonlife CNOL or consolidated LO. The amount of the nonlife CNOL and consolidated LO in a loss limitation year that constitutes a CERIL is equal to the total amount of the CERIL for the loss limitation year multiplied by a fraction, the numerator of which equals the nonlife CNOL or consolidated LO (as relevant), and the denominator of which equals the nonlife CNOL plus the consolidated LO.
(h) Effective/applicability date —(1) In general. Other than paragraph (e) of this section, the rules of this section apply to CERTs occurring on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register . The rules of this section also apply to the deconsolidation of a member from, or the acquisition of a corporation by, a consolidated group that occurs on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register . However, in each case, this section does not apply to any CERT, deconsolidation, or acquisition occurring pursuant to a written agreement that is binding before the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register .
(2) Waiver election. Paragraph (e) of this section applies to the deconsolidation of a member from a consolidated group that occurs on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register , except that it does not apply to any deconsolidation occurring pursuant to a written agreement that is binding before the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register .