Par. 9. Sections 1.56A-0 through 1.56A-27 are added to read as follows:
(a) Overview. This section provides rules under section 56A(d) of the Code for determining the AFSI adjustment for FSNOL carryovers, built-in losses, and other attributes. Paragraph (b) of this section defines the term financial statement net operating loss (FSNOL). Paragraph (c) of this section provides general rules regarding the adjustment to AFSI for the utilization of an FSNOL carryover. Paragraph (d) of this section provides rules regarding the amount of an FSNOL that can be carried forward. Paragraph (e) of this section provides limitations on the utilization of certain FSNOL carryovers. Paragraph (f) of this section provides rules regarding the utilization of built-in losses. Paragraph (g) of this section provides the applicability date of this section.
(b) Definition of financial statement net operating loss. The term financial statement net operating loss (FSNOL) means, with respect to a corporation for any taxable year ending after December 31, 2019, the amount of the corporation's negative AFSI for the taxable year (determined after application of the section 56A regulations and without regard to this section).
(c) AFSI adjustments for the utilization of an FSNOL. Subject to the limitation in paragraph (e) of this section, if a corporation's AFSI for a taxable year is positive (determined after application of the section 56A regulations and without regard to this section), the corporation's AFSI is reduced by an amount equal to the lesser of—
(1) The aggregate amount of FSNOL carryovers to the taxable year (as determined under paragraph (d) of this section); or
(2) 80 percent of the AFSI of the corporation for the taxable year (determined after application of the section 56A regulations and without regard to this section).
(d) FSNOL carryovers —(1) In general. An FSNOL for any taxable year (including a taxable year in which the corporation is not an applicable corporation) is carried forward to each taxable year following the taxable year of the loss. The amount of an FSNOL carried forward to a taxable year is the amount of the FSNOL remaining (if any) after the application of paragraphs (c), (e), and (f) of this section. FSNOL carryovers used to reduce a corporation's AFSI under paragraph (c) of this section are used in the order of the taxable years in which the FSNOLs arose. For purposes of determining the amount of an FSNOL carried forward to the first taxable year a corporation is an applicable corporation (and any subsequent taxable year), paragraphs (c), (e), and (f) of this section apply to reduce the FSNOL in taxable years beginning after the taxable year of the loss and before the first taxable year in which the corporation is an applicable corporation.
(2) Example. The following example illustrates the application of paragraph (d)(1) of this section.
(i) Facts. X is a corporation that uses the calendar year as its taxable year. For 2020, X generated an FSNOL of $3,000×. For 2021, 2022, and 2023, X's AFSI (determined without regard to this section) is $900×, $1,100×, and $1,200×, respectively. X first becomes an applicable corporation for 2024. X's FSNOL is not subject to the limitations in paragraph (e) of this section.
(ii) Analysis. X calculates its FSNOL carryover to 2024 by first determining how much of the 2020 FSNOL is absorbed in 2021 through 2023. In 2021, $720× (80% of $900×) of the FSNOL carryover is absorbed, resulting in an FSNOL carryover to 2022 of $2,280× ($3,000×-$720×). In 2022, $880× (80% of $1,100×) of the FSNOL carryover is absorbed, resulting in an FSNOL carryover to 2023 of $1,400x ($2,280x—$880x). In 2023, $960x (80% of $1,200x) of the FSNOL carryover is absorbed, resulting in an FSNOL carryover to 2024 of $440× ($1,400×-$960×).
(e) Limitation on use of FSNOL carryovers following acquisitions —(1) In general. If a corporation or a tax consolidated group (successor) succeeds to the FSNOL carryovers (acquired FSNOLs) of another corporation (predecessor corporation) in a successor transaction, as defined in paragraph (e)(2) of this section, the use of the acquired FSNOLs by the successor is subject to the limitation described in paragraph (e)(3) of this section.
(i) Successor after stock acquisitions. For purposes of this paragraph (e), the acquired corporation in a transaction described in paragraph (e)(2)(ii) of this section is treated as the successor to the acquired corporation after the acquisition.
(ii) Tax consolidated groups. If the consolidated group continues under § 1.1502-75(d)(1), this paragraph (e) applies to the tax consolidated group as if it were a single corporation.
(2) Successor transaction. For purposes of this paragraph (e), with respect to a particular acquired FSNOL, the term successor transaction means—
(i) A transaction described under section 381(a) of the Code; or
(ii) The acquisition of stock of a corporation in a transaction—
(A) That constitutes an ownership change within the meaning of § 1.59-2(f); or
(B) In which the predecessor corporation joins a tax consolidated group.
(3) Limitation— (i) In general. Acquired FSNOLs generated by an acquired business of a predecessor corporation can be used to reduce the AFSI of a successor under paragraph (c) of this section—
(A) Only if the business that generated the acquired FSNOLs (predecessor business) is separately tracked in the successor's books and records (separately tracked business); and
(B) Only to the extent of the amount of AFSI generated by the separately tracked business after the successor transaction (separately tracked income), subject to the limitation in section 56A(d) and paragraph (e)(3)(ii)(E) of this section.
(ii) Separately tracked income. For purposes of paragraph (e)(3)(i) of this section, the separately tracked income of a business is determined as provided in this paragraph (e)(3)(ii).
(A) Tracked register. The aggregate of the acquired FSNOLs of a predecessor corporation that are utilized to reduce a successor's AFSI for all taxable years under this paragraph (e) may not exceed the aggregate AFSI for all separately tracked businesses (tracked register) for all taxable years computed under this paragraph (e)(3).
(B) Taxable periods. The tracked register applicable to a taxable year to which an FSNOL is carried includes items taken into account in AFSI solely in taxable periods following the successor transaction, but excludes items taken into account in AFSI in any taxable years ending after the taxable year to which the loss is carried. If the successor transaction does not occur at the close of the predecessor corporation's taxable year, separately tracked income is allocated to the portions of the taxable year before and after the successor transaction as if the predecessor corporation's books were closed on the acquisition date.
(C) Computation of tracked register generally. Except as provided in paragraph (e)(3)(ii)(D) of this section, the tracked register is computed by reference to only the items taken into account in AFSI that are generated by the separately tracked business without regard to FSNOLs that reduce that AFSI.
(D) FSNOL reductions. The tracked register takes into account the expenses, FSNOLs, and other losses of the separately tracked business actually absorbed by the successor corporation or the successor group in the taxable periods included in the tracked register (whether or not absorbed against income of the separately tracked business).
(E) 80-percent limitation. The amount of acquired FSNOL that may be used in a taxable year is subject to limitation under paragraph (c)(2) of this section. The tracked register is decreased in a taxable year by the full amount of AFSI required to support the amount of FSNOL absorption in such taxable year.
(F) Built-in losses. The treatment under paragraph (f) of this section of a built-in loss as a hypothetical FSNOL in the taxable year recognized for AFSI purposes applies solely for purposes of determining the limitation under this paragraph (e)(3) with respect to the loss in that taxable year.
(iii) Separation of predecessor business from related FSNOLs —(A) In general. If, following a successor transaction, the assets constituting a predecessor business are transferred to a corporation that is not a member of the same tax consolidated group as the transferor in exchange for stock of the transferee corporation, and if the exchange is not described in paragraph (e)(2)(i)(A) of this section, the amount of separately tracked income derived from those assets after the exchange for purposes of paragraph (e)(3)(ii) of this section is limited to the amount of AFSI resulting from the ownership of the stock received in the exchange (for example, dividends received with respect to the stock, or gain on the sale or exchange of the stock).
(B) Transfer to member of same tax consolidated group. If, following a successor transaction, the assets constituting a predecessor business are transferred from one member of the successor group to another member, this paragraph (e) applies as if all members of the successor group were a single corporation. See § 1.1502-56A(a)(2).
(iv) Integration of predecessor and acquiror businesses. If, following a successor transaction, a predecessor business is integrated with a business that previously had been separately tracked and reported on the successor's books and records, the acquired FSNOLs may be used—
(A) Only to the extent of the AFSI of the predecessor business that would have been separately tracked under paragraph (e)(3)(ii) of this section if the predecessor business had remained a separately tracked business; and
(B) Only if the successor generates and maintains pro forma income statements supporting any use of the acquired FSNOLs under this paragraph (e)(3)(iv).
(v) Successor transaction involving multiple separately tracked businesses —(A) In general. If a predecessor has more than one separately tracked business before the successor transaction, the acquired FSNOLs may be used to the extent of the combined AFSI from all separately tracked businesses of the predecessor corporation.
(B) Subgroup acquisition. If multiple members of the same tax consolidated group are acquired in a successor transaction and are members of a consolidated group immediately after the acquisition (limitation subgroup), paragraph (e)(3)(v)(A) of this section applies to the limitation subgroup (during its period of consolidation immediately following the successor transaction) as if the subgroup's members were a single predecessor corporation.
(4) Examples. The following examples illustrate the application of the rules in this paragraph (e). Except as otherwise provided: each entity is a domestic corporation that uses the calendar year as its taxable year and is not a member of a tax consolidated group; Target and Acquiror are unrelated before the transaction; and the successor in the transaction has available AFSI in each year in excess of the amount of FSNOL available for use under this section.
(i) Example 1: Acquisition of Target stock followed by contribution of assets —(A) Facts. Acquiror purchases all of Target's stock for cash (Acquisition) on December 31, 2023. At the time of the Acquisition, Target operates Business X, and Target has a $200x FSNOL. Target has no other separately tracked businesses. Following the Acquisition, Acquiror contributes assets to Target to expand Business X (Expansion). Following the Expansion, Business X (including the contributed assets) is separately tracked in Target's books and records. In 2024, Business X has separately tracked income of $25x.
(B) Analysis. The Acquisition is a successor transaction. See paragraph (e)(2)(ii)(A) of this section. Target is treated as the successor after the Acquisition. See paragraph (e)(1)(ii) of this section. Because Business X is a separately tracked business, the tracked register at the end of 2024 is $25x. See paragraph (e)(3)(i) of this section. Accordingly, $25x of the $200x FSNOL can be applied against the $25x of tracked income for the year, subject to the 80-percent limitation in paragraph (c)(2) of this section. See paragraph (e)(3)(ii) of this section. As a result, Target may deduct $20x (80% of $25x) of the acquired FSNOL in 2024, and the tracked register is reduced to $0x. See paragraph (e)(3)(ii)(E) of this section. The remaining $180x of acquired FSNOL ($200x-$20x) is carried forward to 2025.
(ii) Example 2: Acquisition of Target assets —(A) Facts. On January 1, 2024, Target merges with and into Acquiror in a transaction described under section 381(a) (Merger). At the time of the Merger, Target operates Business X, and Target has a $400x FSNOL. Acquiror also operates Business X. Following the Merger, Acquiror integrates Target's Business X operations with Acquiror's historic Business X operations and separately tracks the combined Business X operations on Acquiror's books and records. In 2024, Business X generates AFSI of $40x, with $15x attributable to the Business X operations acquired from Target in the Merger, and $25x attributable to Acquiror's historic Business X operations, as reflected in pro forma income statements generated and maintained by Acquiror.
(B) Analysis: In general. The Merger is a successor transaction. See paragraph (e)(2)(i) of this section. An acquired FSNOL may be used only to the extent the business that generated that FSNOL is separately tracked, and only to the extent of the separately tracked income of that business (as determined under paragraph (e)(3)(ii) of this section). See paragraph (e)(3)(i) of this section. Although Target's Business X is integrated with Acquiror's Business X after the Merger, the acquired FSNOL may be used to the extent of the income that would have been separately tracked under paragraph (e)(3)(ii) of this section if Target's Business X had remained a separately tracked business, provided that the successor generates and maintains pro forma income statements. See paragraph (e)(3)(iv) of this section.
(C) Analysis: Computation of limitation. Because Acquiror generates and maintains pro forma income statements for Target's Business X, the tracked register for 2024 is $15x. Accordingly, $15x of the $400x FSNOL can be applied against the $15x of tracked income for the year, subject to the 80-percent limitation in paragraph (c)(2) of this section. See paragraph (e)(3)(ii) of this section. As a result, Acquiror may include $12x (80% of $15x) of the acquired FSNOL in its aggregate FSNOL deduction for 2024, and the tracked register is reduced to $0x. See paragraph (e)(3)(ii)(E) of this section. The remaining $388x of acquired FSNOL ($400x-$12x) is carried forward to 2025.
(iii) Example 3: Acquisition of multiple lines of business —(A) Facts. Acquiror is the common parent of a tax consolidated group (Acquiror group). Acquiror purchases all the stock of Target for cash (Acquisition) on December 31, 2023. As a result, Target becomes a member of the Acquiror group. At the time of the Acquisition, Target operates two lines of business (Business X and Business Y), and Target has a $400x FSNOL, all of which is allocable to Business X. Following the Acquisition, each of Business X and Business Y is separately tracked in the Acquiror group's books and records. In 2024, Business X generates AFSI of $25x, and Business Y generates AFSI of $20x.
(B) Analysis. The Acquisition is a successor transaction. See paragraph (e)(2)(ii)(B) of this section. Target is treated as the successor after the Acquisition. See paragraph (e)(1)(ii) of this section. Because each of Business X and Business Y is a separately tracked business, the tracked register at the end of 2024 is $45x ($25x + $20x)). See paragraphs (e)(3)(i) and (v) of this section. Accordingly, $45x of the $400x FSNOL can be applied against the $45x of tracked income for the year, subject to the 80-percent limitation in paragraph (c)(2) of this section. See paragraph (e)(3)(ii) of this section. As a result, the Acquiror group may include $36x (80% of $45x) of the acquired FSNOL in its aggregate FSNOL deduction for 2024, and the tracked register is reduced to $0. See paragraph (e)(3)(ii)(E) of this section. The remaining $364x of acquired FSNOL ($400x-$36x) is carried forward to 2025.
(iv) Example 4: Negative tracked register. The facts are the same as in paragraph (e)(4)(iii)(A) of this section ( Example 3 ), except that, in 2024, Business Y generates AFSI of -$30x. The tracked register at the end of 2024 is -$5x ($25x + -$30x). See paragraphs (e)(3)(i) and (v) of this section. Because the tracked register is not a positive number, the Acquiror group may include none of the $400x acquired FSNOL in its aggregate FSNOL deduction in 2024. See paragraph (c)(2) of this section. The entire $400x of acquired FSNOL is carried forward to 2025.
(v) Example 5: Acquisition of subgroup. The facts are the same as in paragraph (e)(4)(iii)(A) of this section ( Example 3 ), except that, at the time of the Acquisition, Target is the comment parent of a tax consolidated group that includes subsidiary member T1. Target operates Business X, and T1 operates Business Y. The results are the same as in paragraph (e)(4)(iii)(B) of this section. See paragraph (e)(3)(v)(B) of this section.
(vi) Example 6: Asset transfer to affiliate that is not a member of the transferor's tax consolidated group —(A) Facts. Acquiror is the common parent of a tax consolidated group (Acquiror group). Acquiror also owns 70 percent of the stock of Affiliate, which is engaged in Business X. Acquiror is not engaged in Business X or Business Y. On January 1, 2024, Target merges with and into Acquiror in a transaction described in section 381(a) (Merger). At the time of the Merger, Target operates Business X and Business Y, and Target has a $400x FSNOL, all of which is allocable to Business Y. Following the Merger, Acquiror operates and separately tracks Business Y, which generates AFSI of $12x in 2024. Acquiror contributes Business X to Affiliate in exchange for an additional five percent of Affiliate stock. Business X generates AFSI of $45x in 2024. On December 31, 2024, Affiliate pays a dividend to Acquiror, $8x of which (net of DRD) is attributable to the stock issued to Acquiror in exchange for Target's Business X assets.
(B) Analysis. The Merger is a successor transaction. See paragraph (e)(2)(i) of this section. Because Acquiror transferred Target's Business X assets to a corporation that is not a member of Acquiror's tax consolidated group, the tracked register at the end of 2024 with respect to Business X includes only AFSI attributable to stock received in the exchange, or $8x. See paragraph (e)(3)(iii)(A) of this section. Because Business Y is a separately tracked business, the tracked register at the end of 2024 with respect to Business Y is $12x. See paragraph (e)(3)(i) of this section. Accordingly, the tracked register at the end of 2024 is $20x ($8x + $12x). As a result, $20x of the $400x FSNOL can be applied against the $20x of tracked income for the year, subject to the 80-percent limitation in paragraph (c)(2) of this section. See paragraph (e)(3)(ii) of this section. The Acquiror group may include $16x (80% of $20x) of the acquired FSNOL in its aggregate FSNOL deduction for 2024, and the tracked register is reduced to $0x. See paragraph (e)(3)(ii)(E) of this section. The remaining $384x of the acquired FSNOL ($400x-16x) is carried forward to 2025.
(f) Limitation on use of built-in losses following acquisitions —(1) Scope. This paragraph (f) applies if a predecessor corporation (as defined in paragraph (e)(1)(i) of this section) has a CAMT net unrealized built-in loss (as defined in paragraph (f)(4) of this section) immediately before a successor transaction (as defined in paragraph (e)(2) of this section). Under this paragraph (f), the limitation in paragraph (e) of this section applies to the use of the built-in losses (as defined in paragraph (f)(3) of this section) recognized for AFSI purposes following the successor transaction.
(2) Operating rules —(i) General rule. For purposes of applying the limitation in paragraph (e) of this section, all built-in losses are treated as if they were acquired FSNOLs.
(ii) Asset acquisition. For purposes of applying this paragraph (f), assets and liabilities acquired directly from the same transferor (whether corporate or non-corporate, and whether foreign or domestic) pursuant to the same plan are treated as the assets and liabilities of a corporation that becomes a member of the consolidated group on the date of the acquisition. See paragraph (e)(2)(ii)(B) of this section.
(iii) Association of built-in loss with separately tracked acquired business. Every built-in loss is treated as allocable to the separately tracked acquired business with which it was associated immediately before the successor transaction, regardless of whether the built-in loss is associated with that separately tracked acquired business when the built-in loss is recognized for AFSI purposes.
(iv) Ordering rule. To the extent that a built-in loss is allowed to reduce AFSI of the successor under paragraph (e) of this section in the taxable year the built-in loss is recognized for AFSI purposes, the built-in loss reduces AFSI for the taxable year before any acquired FSNOLs are allowed to reduce AFSI for the taxable year.
(v) Carryover of built-in loss not allowed in year of recognition. To the extent that a built-in loss is not allowed to reduce AFSI under paragraph (e) of this section in the taxable year the built-in loss is recognized for AFSI purposes, the built-in loss is treated for purposes of paragraph (e) of this section as a separate FSNOL carryover arising in a taxable period immediately preceding the successor transaction.
(3) Built-in losses —(i) Definition. All losses of a separately tracked business that are recognized for AFSI purposes during the five-year period beginning on the date of the successor transaction are built-in losses subject to limitation under this paragraph (f), except to the extent the successor establishes that—
(A) The asset at issue was not held by the predecessor corporation immediately before the successor transaction; or
(B) The loss exceeds the built-in loss in the asset, measured as of the date of the successor transaction, taking into account the CAMT basis of any relevant property.
(ii) Timing rule. A loss that is recognized but disallowed or deferred for AFSI purposes ( see, for example, § 1.56A-26(b)) is not treated as a built-in loss unless and until the loss would be allowed to be taken into AFSI without regard to the application of this paragraph (f).
(4) CAMT net unrealized built-in loss —(i) Successor transaction results in a section 382 ownership change. If a successor transaction results in an ownership change, as defined in section 382(g) of the Code or § 1.1502-92, then the predecessor corporation in the successor transaction is treated as having a CAMT net unrealized built-in loss (CAMT NUBIL) if the predecessor corporation has a net unrealized built-in loss (NUBIL), as defined in section 382(h)(3), based on CAMT basis.
(ii) Successor transaction does not result in a section 382 ownership change. This paragraph (f)(4)(ii) applies if a successor transaction does not result in an ownership change. Under this paragraph (f)(4)(ii), a predecessor corporation has a CAMT NUBIL if that predecessor corporation would have a NUBIL under section 382(h)(3) on the day of the successor transaction, taking into account—
(A) The CAMT basis of property; and
(B) Income, expenses, gains, and losses for AFSI purposes that are attributable to periods before the successor transaction.
(iii) Inapplicability of NUBIL limitation. For purposes of paragraphs (f)(4)(i) and (ii) of this section, section 382(h)(1)(B)(ii) does not apply to the extent it limits the amount of RBIL that may be treated as a pre-change loss to the amount of the NUBIL.
(iv) Successor transaction treated as ownership change. In applying section 382(h) to identify a NUBIL for purposes of paragraph (f)(4)(ii) of this section, every successor transaction is treated as if it were an ownership change under section 382(g).
(v) No consideration in excess of fair market value. For purposes of determining CAMT NUBIL under this paragraph (f)(4), no consideration or deemed consideration in excess of fair market value is taken into account.
(5) Example: Determination of recognized built-in loss. The following example illustrates the application of the rules in this paragraph (f).
(i) Facts. Target and Acquiror are unrelated domestic corporations, each of which uses the calendar year as its taxable year. Target merges with and into Acquiror in a successor transaction described in paragraph (e)(2)(i) of this section (Merger). At the time of the Merger, Target holds two assets that are used in the same business. Asset 1 has an unrealized loss for AFSI purposes of $55x (CAMT basis $75x, value $20x), and Asset 2 has an unrealized gain for AFSI purposes of $20x (CAMT basis $30x, value $50x). Target has no other income or expense items that would be treated as built-in items under section 382(h)(6).
(ii) Analysis: Computation of NUBIL. The Merger results in an ownership change under section 382(g). Under section 382(h)(3)(A), computed using CAMT basis, Target has a $35x NUBIL at the time of the Merger (−$55x + $20x = −$35x). Under paragraph (f)(4)(i) of this section, Target has a CAMT NUBIL. Assume that $35x exceeds the threshold requirement in section 382(h)(3)(B).
(iii) Analysis: Imposition of limitation. Under paragraph (f)(4)(iii) of this section, the restriction under section 382(h)(1)(B)(ii), which limits the amount of recognized built-in loss that is treated as pre-change loss to the amount of the NUBIL, does not apply for purposes of this paragraph (f). As a result, the entire $55x of unrealized loss (and not just the $35x net unrealized loss) is treated under paragraphs (f)(2) and (3) of this section as a built-in loss to the extent it is recognized within 5 years of the Merger. Under paragraph (e)(1) of this section, this $55x built-in loss is subject to limitation under paragraph (e)(3) of this section. The use of the $55x built-in loss is not limited by section 382.
(g) Applicability date. This section applies to taxable years ending after [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL REGISTER ].