Par. 2. Sections 1.172(h)-0 through 1.172(h)-5 are added to read as follows:
(a) Date on which CERT occurs in a multi-step transaction.
(b) Prohibition on carryback.
(1) In general.
(2) Example.
(c) Stock issuances and computation of three-year distribution average.
(1) In general.
(2) Example.
(d) Computation of the alternative minimum tax net operating loss deduction.
(e) Effective/applicability date.
(a) Date on which CERT occurs in a multi-step transaction. For purposes of applying section 172(b)(1)(E) and (h), §§ 1.172(h)-1 through 1.172(h)-4, and this section, and § 1.1502-72 (the CERT rules), if a corporate equity reduction transaction (CERT) consists of multiple steps, the date on which the CERT occurs is the earliest date on which the requirements for CERT status are satisfied. For example, if multiple distributions are made in a single year, an excess distribution (ED) is treated as occurring on the earliest date on which the amount of distributions satisfies the greater of the two thresholds contained in section 172(h)(3)(C)(ii) and § 1.172(h)-1(c)(3). A major stock acquisition (MSA) is treated as occurring on the earliest date on which at least 50 percent of the stock of a corporation is acquired, subject to the provisions of section 172(h)(3)(B) and § 1.172(h)-1(c)(2).
(b) Prohibition on carryback —(1) In general. No corporate equity reduction interest loss (CERIL) attributable to a CERT may be carried back under section 172 or § 1.1502-21(b) to any taxable year (including a consolidated return year) that includes solely dates that precede the date on which the CERT occurred. In addition, if a corporation becomes a member of a consolidated group as a result of a CERT, no CERIL allocable to that CERT may be carried back under section 172 or § 1.1502-21(b) to the taxable year of the acquired corporation that includes the date on which the CERT occurred, or to any preceding taxable year. See § 1.172(h)-3(d)(4) regarding allocation of a CERIL among CERTs, and § 1.1502-21(b)(2)(iv)(C)(1) for the apportionment of a CERIL among consolidated group members.
(2) Example. The following example illustrates the rules of this paragraph (b):
Example.
Prohibition on carryback. (i) Facts. T corporation maintains a taxable year ending June 30. X corporation is the parent of a group that maintains a calendar taxable year. 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. During its consolidated return Year 5, the X group has a consolidated net operating loss (CNOL), a portion of which constitutes a CERIL, pursuant to section 172(h)(1) and § 1.172(h)-2(a)(2). Part of the CERIL is apportioned to T, pursuant to § 1.1502-21(b)(2)(iv)(C)(1).
(ii) Analysis. On the date of the acquisition, both the X group and T constitute applicable corporations with regard to the Year 5 CERT. See section 172(b)(1)(E)(iii)(I) and § 1.172(h)-1(b). T's short taxable year ending on March 31, Year 5, was T's taxable year in which the CERT occurred. The X group's year in which the CERT occurred was its consolidated return Year 5. Section 172(b)(1)(E)(i) and paragraph (b) of this section prohibit the carryback of a CERIL to years preceding the taxable year in which the CERT occurs. Pursuant to paragraph (b)(1) of this section, no portion of a CERIL relating to the X group CNOL can be carried back to any taxable year that includes solely dates that precede the date on which the CERT occurred. As a result, no portion of the CERIL can be carried back to the X group's Year 4, or any preceding year. Moreover, because T becomes a member of the X group as a result of the CERT, no portion of the CERIL can be carried back to T's short taxable year ending March 31, Year 5, or any preceding taxable year. See paragraph (b)(1) of this section.
(c) Stock issuances and computation of three-year distribution average —(1) In general. In determining whether an ED has occurred, aggregate distributions made during a taxable year are reduced by the aggregate amount of stock issued by the applicable corporation during the year in which the potential ED occurred in exchange for money or property other than stock of the applicable corporation. Similarly, the computation of any three-year distribution average under section 172(h)(3)(C)(ii)(I) and § 1.172(h)-1(f) is reduced by the average of the stock issuances described in section 172(h)(3)(E)(ii) and this paragraph (c)(1) during the three years of the distribution lookback period (three-year stock issuance average).
(2) Example. The following example illustrates the rules of this paragraph (c):
Example.
(i) Facts. C is a corporation that maintains a calendar taxable year. During Year 5, C makes a large distribution to its shareholders. During taxable Years 2, 3, and 4, C distributes an average of $100,000 per year. In addition, during taxable Year 2, C issued stock in exchange for $90,000 cash. During taxable Year 3, C issued stock in exchange for $15,000 cash. C issued no stock during taxable Year 4.
(ii) Analysis. C must test its Year 5 distribution as a potential ED. C's three-year distribution average without respect to any stock issued during the distribution lookback period is $100,000. C's three-year distribution average is reduced by the average of the stock issued by the corporation in exchange for money or property other than stock in C during the years of the distribution lookback period (three-year stock issuance average). See paragraph (c)(1) of this section. C's three-year stock issuance average is $35,000 [($90,000 + $15,000 + 0)/3]. Therefore, T's three-year distribution average is $65,000 ($100,000−$35,000).
(d) Computation of the alternative minimum tax net operating loss deduction. The CERT rules governing the carryback of net operating losses following a CERT also apply to the carryback of an alternative minimum tax net operating loss.
(e) Effective/applicability date. This section is applicable to CERTs occurring on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register . This section is also applicable 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 .