Guidance Under Section 1502; Suspension of Losses on Certain Stock Dispositions, 13008-13018 [06-2411]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 71, Number 49 (Tuesday, March 14, 2006)]
[Rules and Regulations]
[Pages 13008-13018]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-2411]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9254]
RIN 1545-BB25


Guidance Under Section 1502; Suspension of Losses on Certain 
Stock Dispositions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final rule and removal of temporary regulations.

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SUMMARY: This document contains final regulations under section 1502 of 
the Internal Revenue Code of 1986. The regulations apply when a member 
of a consolidated group transfers subsidiary stock at a loss. They also 
apply when a member holds loss shares of subsidiary stock and the 
subsidiary ceases to be a member of the group. These regulations 
finalize Sec.  1.1502-35T without substantive change.

DATES: Effective Date: These regulations are effective March 9, 2006.
    Applicability Date: For dates of applicability, see Sec. Sec.  
1.1502-21(h)(8), 1.1502-32(h)(6), 1.1502-35(f), and 1.1502-35(j).

FOR FURTHER INFORMATION CONTACT: Theresa Abell (202) 622-7700 or Martin 
Huck (202) 622-7750 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) under control number 1545-1828.
    The collection of information in these regulations is in Sec. Sec.  
1.1502-35(c), 1.1502-35(c)(5)(iii), and 1.1502-35(g)(3). This 
information is required by the IRS to verify compliance with section 
1502 of the Code. This information will be used to determine whether 
the amount of tax has been calculated correctly. The collection of 
information is required to properly determine the amount permitted to 
be taken into account as a loss. The respondents are corporations 
filing consolidated returns. The collection of information is required 
to obtain a benefit.
    Estimated average annual burden per respondent and/or recordkeeper: 
2 hours.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be directed to the Office 
of Management and Budget, Attn: Desk Officer for the Department of 
Treasury, Office of Information and Regulatory Affairs, Washington, DC 
20503, with copies to the Internal Revenue Service, Attn: IRS Reports 
Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number.
    Books or records relating to the collection of information must be 
retained as long as their contents may become material in the 
administration of any Internal Revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    On September 19, 1991, the IRS and Treasury Department published 
Sec.  1.1502-20 (the loss disallowance rule, or LDR). See TD 8364, 56 
FR 47379. The LDR addressed two problems arising in the consolidated 
return context: the circumvention of General Utilities repeal and the 
duplication of loss.
    On July 6, 2001, in Rite Aid Corp. v. United States, 255 F.3d 1357 
(Fed. Cir. 2001), the Court of Appeals for the Federal Circuit held 
that the duplicated loss provisions of the LDR were an invalid exercise 
of regulatory authority. In response to the court's decision, the IRS 
and Treasury Department promulgated two regulations to replace the LDR. 
The first, Sec.  1.337(d)-2T (temporary General Utilities regulation),

[[Page 13009]]

was published on March 12, 2002, to address the circumvention of 
General Utilities repeal. See TD 8984, 67 FR 11034. The second, Sec.  
1.1502-35T, was published on March 14, 2003, to address the 
inappropriate duplication of loss. See TD 9048, 68 FR 12287. TD 9048 
also included certain related provisions promulgated under Sec. Sec.  
1.1502-21T and 1.1502-32T.

Comments and Explanation of Revisions

    On March 3, 2005, the temporary General Utilities regulation was 
adopted without substantive change as final regulation Sec.  1.337(d)-
2. See TD 9187, 70 FR 10319. The preamble in TD 9187 states that the 
IRS and Treasury Department are continuing to study the issues and 
intend to publish proposed regulations adopting an alternative approach 
to addressing the circumvention of General Utilities repeal.
    In response to the promulgation of Sec.  1.337(d)-2 (in both its 
temporary and final form) and Sec.  1.1502-35T, practitioners have 
provided many comments on the operation and effect of the rules 
contained therein. The IRS and Treasury Department have studied, and 
continue to study, the comments and the issues addressed in both 
regulations. As a result, the IRS and Treasury Department intend to 
publish proposed regulations that address both the circumvention of 
General Utilities repeal and the inappropriate duplication of loss in a 
single integrated regulation. The IRS and Treasury Department intend to 
publish the proposed regulations in the near term.
    Until those proposed regulations are published as final or 
temporary regulations, however, the circumvention of General Utilities 
repeal will continue to be addressed by Sec.  1.337(d)-2 and the 
duplication of loss will continue to be addressed by the rules of Sec.  
1.1502-35T. Accordingly, this Treasury decision adopts the rules of 
Sec.  1.1502-35T (as in effect on February 1, 2006) as final regulation 
Sec.  1.1502-35. The final regulations do not change the rules of the 
temporary regulations substantively. They do, however, modify certain 
examples in the temporary regulations to reflect the enactment of 
section 362(e)(2). These modifications do not change the operation of 
the regulations or address the application of section 362(e)(2) to 
transactions between members of a consolidated group. The final 
regulations also correct an error in Example 2 in paragraph (g)(5) of 
the proposed regulations. This Treasury decision also adopts, without 
substantive change, the related provisions in Sec. Sec.  1.1502-21T and 
1.1502-32T as final regulations.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It is hereby 
certified that these regulations will not have a significant economic 
impact on a substantial number of small entities. This certification is 
based on the fact that these regulations will primarily affect 
affiliated groups of corporations that have elected to file 
consolidated returns, which tend to be larger businesses. Therefore, a 
Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 
U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the 
Code, the NPRM and the temporary regulation preceding these regulations 
was submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact on small business.

Drafting Information

    The principal authors of these regulations are Theresa Abell and 
Martin Huck of the Office of Associate Chief Counsel (Corporate). 
However, other personnel from the IRS and Treasury Department 
participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding 
entries in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.1502-21(b)(1) and (b)(3)(v) also issued under 26 
U.S.C. 1502. * * *
    Section 1.1502-32(a)(2), (b)(3)(iii)(C), (b)(3)(iii)(D), and 
(b)(4)(vi) also issued under 26 U.S.C. 1502. * * *
    Section 1.1502-35 also issued under 26 U.S.C. 1502. * * *

0
Par. 2. Section 1.1502-21 is amended by:
0
1. Removing the language ``Sec.  1,1502-21T'' from paragraph (b)(1) and 
adding the language ``Sec.  1.1502-21'' in its place.
0
2. Revising paragraphs (b)(3)(v) and (h)(8). The revisions read as 
follows.


Sec.  1.1502-21  Net operating losses.

* * * * *
    (b) * * *
    (3) * * *
    (v) Losses treated as expired under Sec.  1.1502-35(f)(1). No loss 
treated as expired by Sec.  1.1502-35(f) may be carried over to any 
consolidated return year of the group.
* * * * *
    (h) * * *
    (8) Losses treated as expired under Sec.  1.1502-35(f)(1). 
Paragraph (b)(3)(v) of this section is effective for losses treated as 
expired under Sec.  1.1502-35(f) on and after March 10, 2006. For rules 
regarding losses treated as expired before March 10, 2006, see Sec.  
1.1502-21T(h)(8) as contained in 26 CFR part 1 in effect on January 1, 
2006.


Sec.  1.1502-21T  [Amended]

0
Par. 3. Section 1.1502-21T is amended by removing paragraphs (b)(3)(v) 
and (h)(8).

0
Par. 4. Section 1.1502-32 is amended by revising paragraphs (a)(2), 
(b)(3)(iii)(C) and (D), (b)(4)(vi), and (h)(6) to read as follows:


Sec.  1.1502-32  Investment adjustments.

    (a) * * *
    (1) * * *
    (2) Application of other rules of law. The rules of this section 
are in addition to other rules of law. See, e.g., section 358 (basis 
determinations for distributees), section 1016 (adjustments to basis), 
Sec.  1.1502-11(b) (limitations on the use of losses), Sec.  1.1502-19 
(treatment of excess loss accounts), Sec.  1.1502-31 (basis after a 
group structure change), and Sec.  1.1502-35 (additional rules relating 
to stock loss, including losses attributable to worthlessness and 
certain dispositions not followed by a separate return year). P's basis 
in S's stock must not be adjusted under this section and other rules of 
law in a manner that has the effect of duplicating an adjustment. For 
example, if pursuant to Sec.  1.1502-35(c)(3) and paragraph 
(b)(3)(iii)(C) of this section the basis in stock is reduced to take 
into account a loss suspended under Sec.  1.1502-35(c)(1), such basis 
shall not be further reduced to take into account such loss, or a 
portion of such loss, if any, that is later allowed pursuant to Sec.  
1.1502-35(c)(5). See also paragraph (h)(5) of this section for basis 
reductions applicable to certain former subsidiaries.
* * * * *
    (b) * * *

[[Page 13010]]

    (3) * * *
    (iii) * * *
    (C) Loss suspended under Sec.  1.1502-35(c). Any loss suspended 
pursuant to Sec.  1.1502-35(c) is treated as a noncapital, 
nondeductible expense incurred during the taxable year that includes 
the date of the disposition to which such section applies. See Sec.  
1.1502-35(c)(3). Consequently, the basis of a higher-tier member's 
stock of P is reduced by the suspended loss in the year it is 
suspended.
    (D) Loss disallowed under Sec.  1.1502-35(g)(3)(iii). Any loss or 
deduction the use of which is disallowed pursuant to Sec.  1.1502-
35(g)(3)(iii) (other than a loss or deduction described in Sec.  
1.1502-35(g)(3)(i)(B)(11)), and with respect to which no waiver 
described in paragraph (b)(4) of this section is filed, is treated as a 
noncapital, nondeductible expense incurred during the taxable year that 
such loss would otherwise be absorbed. See Sec.  1.1502-35(g)(3)(iv).
* * * * *
    (4) * * *
    (vi) Special rules in the case of certain transactions subject to 
Sec.  1.1502-35. If a member of a consolidated group transfers stock of 
a subsidiary and such stock has a basis that exceeds its value 
immediately before such transfer or a subsidiary is deconsolidated and 
any stock of such subsidiary owned by members of the group immediately 
before such deconsolidation has a basis that exceeds its value, all 
members of the group are subject to the provisions of Sec.  1.1502-
35(b), which generally require a redetermination of members' basis in 
all shares of subsidiary stock.
* * * * *
    (h) * * *
    (6) Loss suspended under Sec.  1.1502-35(c) or disallowed under 
Sec.  1.1502-35(g)(3)(iii). Paragraphs (a)(2), (b)(3)(iii)(C), 
(b)(3)(iii)(D) and (b)(4)(vi) of this section are applicable on and 
after March 10, 2006. For rules applicable before March 10, 2006, see 
Sec.  1.1502-32T(h)(6) as contained in 26 CFR part 1 in effect on 
January 1, 2006.
* * * * *


Sec.  1.1502-32T  [Removed]

0
Par. 5. Section 1.1502-32T is removed.

0
Par. 6. Section 1.1502-35 is added to read as follows:


Sec.  1.1502-35  Transfers of subsidiary stock and deconsolidations of 
subsidiaries.

    (a) Purpose. The purpose of this section is to prevent a group from 
obtaining more than one tax benefit from a single economic loss. The 
provisions of this section shall be construed in a manner consistent 
with that purpose and in a manner that reasonably carries out that 
purpose.
    (b) Redetermination of basis on certain nondeconsolidating 
transfers of subsidiary stock and on certain deconsolidations of 
subsidiaries--(1) Redetermination of basis on certain 
nondeconsolidating transfers of subsidiary stock. Except as provided in 
paragraph (b)(3)(i) of this section, if, immediately after a transfer 
of stock of a subsidiary that has a basis that exceeds its value, the 
subsidiary remains a member of the group, then the basis in each share 
of subsidiary stock owned by each member of the group shall be 
redetermined in accordance with the provisions of this paragraph (b)(1) 
immediately before such transfer. All of the members' bases in the 
shares of subsidiary stock immediately before such transfer shall be 
aggregated. Such aggregated basis shall be allocated first to the 
shares of the subsidiary's preferred stock that are owned by the 
members of the group immediately before such transfer, in proportion 
to, but not in excess of, the value of those shares at such time. After 
allocation of the aggregated basis to all shares of the preferred stock 
of the subsidiary pursuant to the preceding sentence, any remaining 
basis shall be allocated among all common shares of subsidiary stock 
held by members of the group immediately before the transfer, in 
proportion to the value of such shares at such time.
    (2) Redetermination of basis on certain deconsolidations of 
subsidiaries--(i) Allocation of reallocable basis amount. Except as 
provided in paragraph (b)(3)(ii) of this section, if, immediately 
before a deconsolidation of a subsidiary, any share of stock of such 
subsidiary owned by a member of the group has a basis that exceeds its 
value, then the basis in each share of the subsidiary's stock owned by 
each member of the group shall be redetermined in accordance with the 
provisions of this paragraph (b)(2) immediately before such 
deconsolidation. The basis in each share of the subsidiary's stock held 
by members of the group immediately before the deconsolidation that has 
a basis in excess of value at such time shall be reduced, but not below 
such share's value, in a manner that, to the greatest extent possible, 
causes the ratio of the basis to the value of each such share to be the 
same; provided, however, that the aggregate amount of such reduction 
shall not exceed the reallocable basis amount (as computed pursuant to 
paragraph (b)(2)(ii) of this section). Then, to the extent of the 
reallocable basis amount, the basis of each share of the preferred 
stock of the subsidiary that are held by members of the group 
immediately before the deconsolidation shall be increased, but not 
above such share's value, in a manner that, to the greatest extent 
possible, causes the ratio of the basis to the value of each such share 
to be the same. Then, to the extent that the reallocable basis amount 
does not increase the basis of shares of preferred stock of the 
subsidiary pursuant to the third sentence of this paragraph (b)(2)(i), 
such amount shall increase the basis of all common shares of the 
subsidiary's stock held by members of the group immediately before the 
deconsolidation in a manner that, to the greatest extent possible, 
causes the ratio of the basis to the value of each such share to be the 
same.
    (ii) Calculation of reallocable basis amount. The reallocable basis 
amount shall equal the lesser of--
    (A) The aggregate of all amounts by which, immediately before the 
deconsolidation, the basis exceeds the value of a share of subsidiary 
stock owned by any member of the group at such time; and
    (B) The total of the subsidiary's (and any predecessor's) items of 
deduction and loss, and the subsidiary's (and any predecessor's) 
allocable share of items of deduction and loss of all lower-tier 
subsidiaries, that were taken into account in computing the adjustment 
under Sec.  1.1502-32 to the bases of shares of stock of the subsidiary 
(and any predecessor) held by members of the group immediately before 
the deconsolidation, other than shares that have bases in excess of 
value immediately before the deconsolidation.
    (3) Exceptions to application of redetermination rules. (i) 
Paragraph (b)(1) of this section shall not apply to a transfer of 
subsidiary stock if--
    (A) During the taxable year of such transfer, in one or more fully 
taxable transactions, the members of the group dispose of all of the 
shares of the subsidiary stock that they own immediately before the 
transfer, other than the shares the transfer of which would otherwise 
trigger the application of paragraph (b)(1) of this section, to a 
person or persons that are not members of the group;
    (B) During the taxable year of such transfer, the members of the 
group are allowed a worthless stock loss under section 165(g) (taking 
into account the provisions of Sec.  1.1502-80(c)) with respect to all 
of the shares of subsidiary stock that they own immediately before the 
transfer, other than the shares the transfer of which would otherwise

[[Page 13011]]

trigger the application of paragraph (b)(1) of this section; or
    (C) Such transfer is to a member of the group and section 332 
(provided the stock is transferred to an 80-percent distributee), 
section 351, section 354, or section 361 applies to such transfer.
    (ii) Paragraph (b)(2) of this section shall not apply to a 
deconsolidation of a subsidiary if--
    (A) During the taxable year of such deconsolidation, in one or more 
fully taxable transactions, the members of the group dispose of all of 
the shares of the subsidiary stock that they own immediately before the 
deconsolidation to a person or persons that are not members of the 
group;
    (B) Such deconsolidation results from a fully taxable disposition, 
to a person or persons that are not members of the group, of some of 
the shares of the subsidiary, and, during the taxable year of such 
deconsolidation, the members of the group are allowed a worthless stock 
loss under section 165(g) with respect to all of the shares of the 
subsidiary stock that they own immediately after the deconsolidation;
    (C) The members of the group are allowed a worthless stock loss 
under section 165(g) with respect to all of the shares of the 
subsidiary stock that they own immediately before the deconsolidation;
    (D) The deconsolidation of the subsidiary results from the 
deconsolidation of a higher-tier subsidiary and, immediately after the 
deconsolidation of the subsidiary, none of the stock of the subsidiary 
is owned by a group member; or
    (E) The deconsolidation of the subsidiary results from a 
termination of the group.
    (4) Special rule for lower-tier subsidiaries. If, immediately after 
a transfer of subsidiary stock or a deconsolidation of a subsidiary, a 
lower-tier subsidiary some of the stock of which is owned by the 
subsidiary is a member of the group, then, for purposes of applying 
this paragraph (b), the subsidiary shall be treated as having 
transferred its stock of the lower-tier subsidiary. This principle 
shall apply to stock of subsidiaries that are owned by such lower-tier 
subsidiary.
    (5) Stock basis adjustments for higher-tier stock. The basis 
adjustments required under this paragraph (b) result in basis 
adjustments to higher-tier member stock. The adjustments are applied in 
the order of the tiers, from the lowest to highest. For example, if a 
common parent owns stock of a subsidiary that owns stock of a lower-
tier subsidiary and the subsidiary recognizes a loss on the disposition 
of a portion of its shares of the lower-tier subsidiary stock, the 
common parent must adjust its basis in its subsidiary stock under the 
principles of Sec.  1.1502-32 to reflect the adjustments that the 
subsidiary must make to its basis in its stock of the lower-tier 
subsidiary.
    (6) Ordering rules. (i) The rules of this paragraph (b) apply after 
the rules of Sec.  1.1502-32 are applied.
    (ii) The rules of this paragraph (b) apply before the rules of 
Sec.  1.337(d)-2 and paragraphs (c) and (f) of this section are 
applied.
    (iii) This paragraph (b) (and any resulting basis adjustments to 
higher-tier member stock made pursuant to paragraph (b)(5) of this 
section) applies to redetermine the basis of stock of a lower-tier 
subsidiary before this paragraph (b) applies to a higher-tier member of 
such lower-tier subsidiary.
    (c) Loss suspension--(1) General rule. Any loss recognized by a 
member of a consolidated group with respect to the disposition of a 
share of subsidiary stock shall be suspended to the extent of the 
duplicated loss with respect to such share of stock if, immediately 
after the disposition, the subsidiary is a member of the consolidated 
group of which it was a member immediately prior to the disposition (or 
any successor group).
    (2) Special rule for lower-tier subsidiaries. This paragraph (c)(2) 
applies if neither paragraph (c)(1) nor (f) of this section applies to 
a member's disposition of a share of stock of a subsidiary (the 
departing member), a loss is recognized on the disposition of such 
share, and the departing member owns stock of one or more other 
subsidiaries (a remaining member) that is a member of such group 
immediately after the disposition. In that case, such loss shall be 
suspended to the extent the duplicated loss with respect to the 
departing member stock disposed of is attributable to the remaining 
member or members.
    (3) Treatment of suspended loss. For purposes of the rules of Sec.  
1.1502-32, any loss suspended pursuant to paragraph (c)(1) or (c)(2) of 
this section is treated as a noncapital, nondeductible expense of the 
member that disposes of subsidiary stock, incurred during the taxable 
year that includes the date of the disposition of stock to which 
paragraph (c)(1) or (c)(2) of this section applies. See Sec.  1.1502-
32(b)(3)(iii)(C). Consequently, the basis of a higher-tier member's 
stock of the member that disposes of subsidiary stock is reduced by the 
suspended loss in the year it is suspended.
    (4) Reduction of suspended loss--(i) General rule. The amount of 
any loss suspended pursuant to paragraphs (c)(1) and (c)(2) of this 
section shall be reduced, but not below zero, by the subsidiary's (and 
any successor's) items of deduction and loss, and the subsidiary's (and 
any successor's) allocable share of items of deduction and loss of all 
lower-tier subsidiaries, that are allocable to the period beginning on 
the date of the disposition that gave rise to the suspended loss and 
ending on the day before the first date on which the subsidiary (or any 
successor) is not a member of the group of which it was a member 
immediately prior to the disposition (or any successor group), and that 
are taken into account in determining consolidated taxable income (or 
loss) of such group for any taxable year that includes any date on or 
after the date of the disposition and before the first date on which 
the subsidiary (or any successor) is not a member of such group; 
provided, however, that such reduction shall not exceed the excess of 
the amount of such items over the amount of such items that are taken 
into account in determining the basis adjustments made under Sec.  
1.1502-32 to stock of the subsidiary (or any successor) owned by 
members of the group. The preceding sentence shall not apply to items 
of deduction and loss to the extent that the group can establish that 
all or a portion of such items was not reflected in the computation of 
the duplicated loss with respect to the subsidiary on the date of the 
disposition of stock that gave rise to the suspended loss.
    (ii) Operating rules--(A) Year in which deduction or loss is taken 
into account. For purposes of paragraph (c)(4)(i) of this section, a 
subsidiary's (or any successor's) deductions and losses are treated as 
taken into account when and to the extent they are absorbed by the 
subsidiary (or any successor) or any other member. To the extent that 
the subsidiary's (or any successor's) deduction or loss is absorbed in 
the year it arises or is carried forward and absorbed in a subsequent 
year (e.g., under section 172, 465, or 1212), the deduction is treated 
as taken into account in the year in which it is absorbed. To the 
extent that a subsidiary's (or any successor's) deduction or loss is 
carried back and absorbed in a prior year (whether consolidated or 
separate), the deduction or loss is treated as taken into account in 
the year in which it arises and not in the year in which it is 
absorbed.
    (B) Determination of items that are allocable to the post-
disposition, pre-deconsolidation period. For purposes of paragraph 
(c)(4)(i) of this section, the determination of whether a subsidiary's

[[Page 13012]]

(or any successor's) items of deduction and loss and allocable share of 
items of deduction and loss of all lower-tier subsidiaries are 
allocable to the period beginning on the date of the disposition of 
subsidiary stock that gave rise to the suspended loss and ending on the 
day before the first date on which the subsidiary (or any successor) is 
not a member of the consolidated group of which it was a member 
immediately prior to the disposition (or any successor group) is 
determined pursuant to the rules of Sec.  1.1502-76(b)(2), without 
regard to Sec.  1.1502-76(b)(2)(ii)(D), as if the subsidiary ceased to 
be a member of the group at the end of the day before the disposition 
and filed separate returns for the period beginning on the date of the 
disposition and ending on the day before the first date on which it is 
not a member of such group.
    (5) Allowable loss--(i) General rule. To the extent not reduced 
under paragraph (c)(4) of this section, any loss suspended pursuant to 
paragraph (c)(1) or (c)(2) of this section shall be allowed, to the 
extent otherwise allowable under applicable provisions of the Internal 
Revenue Code and regulations thereunder, on a return filed by the group 
of which the subsidiary was a member on the date of the disposition of 
subsidiary stock that gave rise to the suspended loss (or any successor 
group) for the taxable year that includes the day before the first date 
on which the subsidiary (and any successor) is not a member of such 
group or the date the group is allowed a worthless stock loss under 
section 165(g) (taking into account the provisions of Sec.  1.1502-
80(c)) with respect to all of the subsidiary stock owned by members.
    (ii) No tiering up of certain adjustments. No adjustments shall be 
made to a member's basis of stock of a subsidiary (or any successor) 
for a suspended loss that is taken into account under paragraph 
(c)(5)(i) of this section. See Sec.  1.1502-32(a)(2).
    (iii) Statement of allowed loss. Paragraph (c)(5)(i) of this 
section applies only if the separate statement required under this 
paragraph (c)(5)(iii) is filed with, or as part of, the taxpayer's 
return for the year in which the loss is allowable. The statement must 
be entitled ``ALLOWED LOSS UNDER Sec.  1.1502-35(c)(5)'' and must 
contain the name and employer identification number of the subsidiary 
the stock of which gave rise to the loss.
    (6) Special rule for dispositions of certain carryover basis 
assets. If--
    (i) A member of a group recognizes a loss on the disposition of an 
asset other than stock of a subsidiary;
    (ii) Such member's basis in the asset disposed of was determined, 
directly or indirectly, in whole or in part, by reference to the basis 
of stock of a subsidiary and, at the time of the determination of the 
member's basis in the asset disposed of, there was a duplicated loss 
with respect to such stock of the subsidiary; and
    (iii) Immediately after the disposition, the subsidiary is a member 
of such group, then such loss shall be suspended pursuant to the 
principles of paragraphs (c)(1) and (c)(2) of this section to the 
extent of the duplicated loss with respect to such stock at the time of 
the determination of basis of the asset disposed of. Principles similar 
to those set forth in paragraphs (c)(3), (c)(4), and (c)(5) of this 
section shall apply to a loss suspended pursuant to this paragraph 
(c)(6).
    (7) Coordination with loss deferral, loss disallowance, and other 
rules--(i) In general. Loss recognized on the disposition of subsidiary 
stock or another asset is subject to redetermination, deferral, or 
disallowance under other applicable provisions of the Internal Revenue 
Code and regulations thereunder, including sections 267(f) and 482. 
Paragraphs (c)(1), (c)(2), and (c)(6) of this section do not apply to a 
loss that is disallowed under any other provision. If loss is deferred 
under any other provision, paragraphs (c)(1), (c)(2), and (c)(6) of 
this section apply when the loss would otherwise be taken into account 
under such other provision. However, if an overriding event described 
in paragraph (c)(7)(ii) of this section occurs before the deferred loss 
is taken into account, paragraphs (c)(1), (c)(2), and (c)(6) of this 
section apply to the loss immediately before the event occurs, even 
though the loss may not be taken into account until a later time.
    (ii) Overriding events. For purposes of paragraph (c)(7)(i) of this 
section, the following are overriding events--
    (A) The stock ceases to be owned by a member of the consolidated 
group;
    (B) The stock is canceled or redeemed (regardless of whether it is 
retired or held as treasury stock); or
    (C) The stock is treated as disposed of under Sec.  1.1502-
19(c)(1)(ii)(B) or (c)(1)(iii).
    (8) Application. This paragraph (c) shall not be applied in a 
manner that permanently disallows a deduction for an economic loss, 
provided that such deduction is otherwise allowable. If the application 
of any provision of this paragraph (c) results in such a disallowance, 
proper adjustment may be made to prevent such a disallowance. Whether a 
provision of this paragraph (c) has resulted in such a disallowance is 
determined on the date on which the subsidiary (or any successor) the 
disposition of the stock of which gave rise to a suspended stock loss 
is not a member of the group or the date the group is allowed a 
worthless stock loss under section 165(g) (taking into account the 
provisions of Sec.  1.1502-80(c)) with respect to all of such 
subsidiary stock owned by members. Proper adjustment in such cases 
shall be made by restoring the suspended stock loss immediately before 
the subsidiary ceases to be a member of the group or the group is 
allowed a worthless stock loss under section 165(g) (taking into 
account the provisions of Sec.  1.1502-80(c)) with respect to all of 
such subsidiary stock owned by members, to the extent that its 
reduction pursuant to paragraph (c)(4) of this section had the result 
of permanently disallowing a deduction for an economic loss.
    (9) Ordering rule. The rules of this paragraph (c) apply after the 
rules of paragraph (b) of this section and Sec.  1.337(d)-2 are 
applied.
    (d) Definitions--(1) Disposition means any event in which gain or 
loss is recognized, in whole or in part.
    (2) Deconsolidation means any event that causes a subsidiary to no 
longer be a member of the consolidated group.
    (3) Value means fair market value.
    (4) Duplicated loss--(i) In general. Duplicated loss is determined 
immediately after a disposition and equals the excess, if any, of--
    (A) The sum of--
    (1) The aggregate adjusted basis of the subsidiary's assets other 
than any stock that subsidiary owns in another subsidiary;
    (2) Any losses attributable to the subsidiary and carried to the 
subsidiary's first taxable year following the disposition; and
    (3) Any deductions of the subsidiary that have been recognized but 
are deferred under a provision of the Internal Revenue Code (such as 
deductions deferred under section 469); over
    (B) The sum of--
    (1) The value of the subsidiary's stock; and
    (2) Any liabilities of the subsidiary that have been taken account 
for tax purposes.
    (ii) Special rules. (A) The amounts determined under paragraph 
(d)(4)(i) (other than amounts described in paragraph (d)(4)(i)(B)(1)) 
of this section with respect to a subsidiary include its allocable 
share of corresponding amounts with respect to all lower-tier 
subsidiaries. If 80 percent or more in value of the stock of a 
subsidiary is

[[Page 13013]]

acquired by purchase in a single transaction (or in a series of related 
transactions during any 12-month period), the value of the subsidiary's 
stock may not exceed the purchase price of the stock divided by the 
percentage of the stock (by value) so purchased. For this purpose, 
stock is acquired by purchase if the transferee is not related to the 
transferor within the meaning of sections 267(b) and 707(b)(1), using 
the language ``10 percent'' instead of ``50 percent'' each place that 
it appears, and the transferee's basis in the stock is determined 
wholly by reference to the consideration paid for such stock.
    (B) The amounts determined under paragraph (d)(4)(i) of this 
section are not applied more than once to suspend a loss under this 
section.
    (5) Predecessor and successor. A predecessor is a transferor of 
assets to a transferee (the successor) in a transaction--
    (i) To which section 381(a) applies;
    (ii) In which substantially all of the assets of the transferor are 
transferred to members in a complete liquidation;
    (iii) In which the successor's basis in assets is determined 
(directly or indirectly, in whole or in part) by reference to the 
transferor's basis in such assets, but the transferee is a successor 
only with respect to the assets the basis of which is so determined; or
    (iv) Which is an intercompany transaction, but only with respect to 
assets that are being accounted for by the transferor in a prior 
intercompany transaction.
    (6) Successor group. A surviving group is treated as a successor 
group of a consolidated group (the terminating group) that ceases to 
exist as a result of--
    (i) The acquisition by a member of another consolidated group of 
either the assets of the common parent of the terminating group in a 
reorganization described in section 381(a)(2), or the stock of the 
common parent of the terminating group; or
    (ii) The application of the principles of Sec.  1.1502-75(d)(2) or 
(3).
    (7) Preferred stock, common stock. Preferred stock and common stock 
shall have the meanings set forth in Sec.  1.1502-32(d)(2) and (3), 
respectively.
    (8) Higher-tier. A subsidiary is higher-tier with respect to a 
member if or to the extent investment basis adjustments under Sec.  
1.1502-32 with respect to the stock of the latter member would affect 
investment basis adjustments with respect to the stock of the former 
member.
    (9) Lower-tier. A subsidiary is lower-tier with respect to a member 
if or to the extent investment basis adjustments under Sec.  1.1502-32 
with respect to the stock of the former member would affect investment 
basis adjustments with respect to the stock of the latter member.
    (e) Examples. For purposes of the examples in this section, unless 
otherwise stated, all groups file consolidated returns on a calendar-
year basis, the facts set forth the only corporate activity, all 
transactions are between unrelated persons, and tax liabilities are 
disregarded. In addition, all transactions described in section 362(a) 
are completed before October 22, 2004, and therefore are not subject to 
section 362(e)(2). The principles of paragraphs (a) through (d) of this 
section are illustrated by the following examples:

    Example 1. Nondeconsolidating sale of preferred stock of lower-
tier subsidiary--(i) Facts. P owns 100 percent of the common stock 
of each of S1 and S2. S1 and S2 each have only one class of stock 
outstanding. P's basis in the stock of S1 is $100 and the value of 
such stock is $130. P's basis in the stock of S2 is $120 and the 
value of such stock is $90. P, S1, and S2 are all members of the P 
group. S1 and S2 form S3. In Year 1, in transfers to which section 
351 applies, S1 contributes $100 to S3 in exchange for all of the 
common stock of S3 and S2 contributes an asset with a basis of $50 
and a value of $20 to S3 in exchange for all of the preferred stock 
of S3. S3 becomes a member of the P group. In Year 3, in a 
transaction that is not part of the plan that includes the 
contributions to S3, S2 sells the preferred stock of S3 for $20. 
Immediately after the sale, S3 is a member of the P group.
    (ii) Application of basis redetermination rule. Because S2's 
basis in the preferred stock of S3 exceeds its value immediately 
prior to the sale and S3 is a member of the P group immediately 
after the sale, all of the P group members' bases in the stock of S3 
is redetermined pursuant to paragraph (b)(1) of this section. Of the 
group members' total basis of $150 in the S3 stock, $20 is allocated 
to the preferred stock, the fair market value of the preferred stock 
on the date of the sale, and $130 is allocated to the common stock. 
S2's sale of the preferred stock results in the recognition of $0 of 
gain/loss. Pursuant to paragraph (b)(5) of this section, the 
redetermination of S1's and S2's bases in the stock of S3 results in 
adjustments to P's basis in the stock of S1 and S2. In particular, 
P's basis in the stock of S1 is increased by $30 to $130 and its 
basis in the stock of S2 is decreased by $30 to $90.
    Example 2. Deconsolidating sale of common stock--(i) Facts. In 
Year 1, in a transfer to which section 351 applies, P contributes 
Asset A with a basis of $900 and a value of $200 to S in exchange 
for one share of S common stock (CS1). In Years 2 and 3, in 
successive but unrelated transfers to which section 351 applies, P 
transfers $200 to S in exchange for one share of S common stock 
(CS2), Asset B with a basis of $300 and a value of $200 in exchange 
for one share of S common stock (CS3), and Asset C with a basis of 
$1000 and a value of $200 in exchange for one share of S common 
stock (CS4). In Year 4, S sells Asset A for $200, recognizing $700 
of loss that is used to offset income of P recognized during Year 4. 
As a result of the sale of Asset A, the basis of each of P's four 
shares of S common stock is reduced by $175. Therefore, the basis of 
CS1 is $725. The basis of CS2 is $25. The basis of CS3 is $125, and 
the basis of CS4 is $825. In Year 5 in a transaction that is not 
part of a plan that includes the Year 1 contribution, P sells CS4 
for $200. Immediately after the sale of CS4, S is not a member of 
the P group.
    (ii) Application of basis redetermination rule. Because P's 
basis in each of CS1 and CS4 exceeds its value immediately prior to 
the deconsolidation of S, P's basis in its shares of S common stock 
is redetermined pursuant to paragraph (b)(2) of this section. 
Pursuant to paragraph (b)(2)(ii) of this section, the reallocable 
basis amount is $350 (the lesser of $1150, the gross loss inherent 
in the stock of S owned by P immediately before the sale, and $350, 
the aggregate amount of S's items of deduction and loss that were 
previously taken into account in the computation of the adjustment 
to the basis of the stock of S that P did not hold at a loss 
immediately before the deconsolidation). Pursuant to paragraph 
(b)(2)(i) of this section, first, P's basis in CS1 is reduced from 
$725 to $600 and P's basis in CS4 is reduced from $825 to $600. 
Then, the reallocable basis amount increases P's basis in CS2 from 
$25 to $250 and P's basis in CS3 from $125 to $250. P recognizes 
$400 of loss on the sale of CS4. The loss suspension rule does not 
apply because S is no longer a member of the P group. Thus, the loss 
is allowable at that time.
    Example 3. Nondeconsolidating sale of common stock--(i) Facts. 
In Year 1, P forms S with a contribution of $80 in exchange for 80 
shares of the common stock of S, which at that time represents all 
of the outstanding stock of S. S becomes a member of the P group. In 
Year 2, P contributes Asset A with a basis of $50 and a value of $20 
in exchange for 20 shares of the common stock of S in a transfer to 
which section 351 applies. In Year 4, in a transaction that is not 
part of the plan that includes the Year 2 contribution, P sells the 
20 shares of the common stock of S that it acquired in Year 2 for 
$20. Immediately after the Year 4 stock sale, S is a member of the P 
group. At the time of the Year 4 stock sale, S has $80 and Asset A. 
In Year 5, S sells Asset A, the basis and value of which have not 
changed since its contribution to S. On the sale of Asset A for $20, 
S recognizes a $30 loss. The P group cannot establish that all or a 
portion of the $30 loss was not reflected in the calculation of the 
duplicated loss of S on the date of the Year 4 stock sale. The $30 
loss is used on the P group return to offset income of P. In Year 6, 
P sells its remaining S common stock for $80.
    (ii) Application of basis redetermination and loss suspension 
rules. Because P's basis in the common stock sold exceeds its value 
immediately prior to the sale and S is a member of the P group 
immediately after the sale, P's basis in all of the stock of S is 
redetermined pursuant to paragraph (b)(1) of this section. Of P's 
total basis of $130 in the S common stock, a proportionate amount is

[[Page 13014]]

allocated to each of the 100 shares of S common stock. Accordingly, 
$26 is allocated to the common stock of S that is sold and $104 is 
allocated to the common stock of S that is retained. On P's sale of 
the 20 shares of the common stock of S for $20, P recognizes a loss 
of $6. Because the sale of the 20 shares of common stock of S does 
not result in the deconsolidation of S, under paragraph (c)(1) of 
this section, that loss is suspended to the extent of the duplicated 
loss with respect to the shares sold. The duplicated loss with 
respect to the shares sold is $6. Therefore, the entire $6 loss is 
suspended.
    (iii) Effect of subsequent asset sale on stock basis. Of the $30 
loss recognized on the sale of Asset A, $24 is taken into account in 
determining the basis adjustments made under Sec.  1.1502-32 to the 
stock of S owned by P. Accordingly, P's basis in its S stock is 
reduced by $24 from $104 to $80.
    (iv) Effect of subsequent asset sale on suspended loss. Because 
P cannot establish that all or a portion of the loss recognized on 
the sale of Asset A was not reflected in the calculation of the 
duplicated loss of S on the date of the Year 4 stock sale and such 
loss is allocable to the period beginning on the date of the Year 4 
disposition of the S stock and ending on the day before the first 
date on which S is not a member of the P group and is taken into 
account in determining consolidated taxable income (or loss) of the 
P group for a taxable year that includes a date on or after the date 
of the Year 4 disposition and before the first date on which S is 
not a member of the P group, such asset loss reduces the suspended 
loss pursuant to paragraph (c)(4) of this section. The amount of 
such reduction, however, cannot exceed $6, the excess of the amount 
of such loss, $30, over the amount of such loss that is taken into 
account in determining the basis adjustment made to the stock of S 
owned by P, $24. Therefore, the suspended loss is reduced to zero.
    (v) Effect of subsequent stock sale. P recognizes $0 gain/loss 
on the Year 5 sale of its remaining S common stock. No amount of 
suspended loss remains to be allowed under paragraph (c)(5) of this 
section.
    Example 4. Nondeconsolidating sale of common stock of lower-tier 
subsidiary--(i) Facts. In Year 1, P forms S1 with a contribution of 
$200 in exchange for all of the common stock of S1, which represents 
all of the outstanding stock of S1. In the same year, S1 forms S2 
with a contribution of $80 in exchange for 80 shares of the common 
stock of S2, which at that time represents all of the outstanding 
stock of S2. S1 and S2 become members of the P group. In the same 
year, S2 purchases Asset A for $80. In Year 2, S1 contributes Asset 
B with a basis of $50 and a value of $20 in exchange for 20 shares 
of the common stock of S2 in a transfer to which section 351 
applies. In Year 4, S1 sells the 20 shares of the common stock of S2 
that it acquired in Year 2 for $20. Immediately after the Year 4 
stock sale, S2 is a member of the P group. At the time of the Year 4 
stock sale, the bases and values of Asset A and Asset B are 
unchanged. In Year 5, S2 sells Asset B for $45, recognizing a $5 
loss. The P group cannot establish that all or a portion of the $5 
loss was not reflected in the calculation of the duplicated loss of 
S2 on the date of the Year 4 stock sale. The $5 loss is used on the 
P group return to offset income of P. In Year 6, S1 sells its 
remaining S2 common stock for $100.
    (ii) Application of basis redetermination and loss suspension 
rules. Because S1's basis in the S2 common stock sold exceeds its 
value immediately prior to the sale and S2 is a member of the P 
group immediately after the sale, S1's basis in all of the stock of 
S2 is redetermined pursuant to paragraph (b)(1) of this section. Of 
S1's total basis of $130 in the S2 common stock, a proportionate 
amount is allocated to each of the 100 shares of S2 common stock. 
Accordingly, a total of $26 is allocated to the common stock of S2 
that is sold and $104 is allocated to the common stock of S2 that is 
retained. On S1's sale of the 20 shares of the common stock of S2 
for $20, S1 recognizes a loss of $6. Because the sale of the 20 
shares of common stock of S2 does not result in the deconsolidation 
of S2, under paragraph (c)(1) of this section, that loss is 
suspended to the extent of the duplicated loss with respect to the 
shares sold. The duplicated loss with respect to the shares sold is 
$6. Therefore, the entire $6 loss is suspended. Pursuant to 
paragraph (c)(3) of this section and Sec.  1.1502-32(b)(3)(iii)(C), 
the suspended loss is treated as a noncapital, nondeductible expense 
incurred by S1 during the tax year that includes the date of the 
disposition of stock to which paragraph (c)(1) of this section 
applies. Accordingly, P's basis in its S1 stock is reduced from $200 
to $194.
    (iii) Effect of subsequent asset sale on stock basis. Of the $5 
loss recognized on the sale of Asset B, $4 is taken into account in 
determining the basis adjustments made under Sec.  1.1502-32 to the 
stock of S2 owned by S1. Accordingly, S1's basis in its S2 stock is 
reduced by $4 from $104 to $100 and P's basis in its S1 stock is 
reduced by $4 from $194 to $190.
    (iv) Effect of subsequent asset sale on suspended loss. Because 
P cannot establish that all or a portion of the loss recognized on 
the sale of Asset B was not reflected in the calculation of the 
duplicated loss of S2 on the date of the Year 4 stock sale and such 
loss is allocable to the period beginning on the date of the Year 4 
disposition of the S2 stock and ending on the day before the first 
date on which S2 is not a member of the P group and is taken into 
account in determining consolidated taxable income (or loss) of the 
P group for a taxable year that includes a date on or after the date 
of the Year 3 disposition and before the first date on which S2 is 
not a member of the P group, such asset loss reduces the suspended 
loss pursuant to paragraph (c)(4) of this section. The amount of 
such reduction, however, cannot exceed $1, the excess of the amount 
of such loss, $5, over the amount of such loss that is taken into 
account in determining the basis adjustment made to the stock of S2 
owned by members of the P group, $4. Therefore, the suspended loss 
is reduced to $5.
    (v) Effect of subsequent stock sale. In Year 6, when S1 sells 
its remaining S2 stock for $100, it recognizes $0 gain/loss. 
Pursuant to paragraph (c)(5) of this section, the remaining $5 of 
the suspended loss is allowed on the P group's return for Year 5 
when S1 sells its remaining S2 stock.
    Example 5. Deconsolidating sale of subsidiary owning stock of 
another subsidiary that remains in group--(i) Facts. In Year 1, P 
forms S1 with a contribution of Asset A with a basis of $50 and a 
value of $20 in exchange for 100 shares of common stock of S1 in a 
transfer to which section 351 applies. Also in Year 1, P and S1 form 
S2. P contributes $80 to S2 in exchange for 80 shares of common 
stock of S2. S1 contributes Asset A to S2 in exchange for 20 shares 
of common stock of S2 in a transfer to which section 351 applies. In 
Year 3, in a transaction that is not part of a plan that includes 
the Year 1 contributions, P sells its 100 shares of S1 common stock 
for $20. Immediately after the Year 3 stock sale, S2 is a member of 
the P group. At the time of the Year 3 stock sale, S1 owns 20 shares 
of common stock of S2, and S2 has $80 and Asset A. In Year 4, S2 
sells Asset A, the basis and value of which have not changed since 
its contribution to S2. On the sale of Asset A for $20, S2 
recognizes a $30 loss. That $30 loss is used on the P group return 
to offset income of P. In Year 5, P sells its S2 common stock for 
$80.
    (ii) Application of basis redetermination and loss suspension 
rules. Pursuant to paragraph (b)(4) of this section, because 
immediately before P's transfer of S1 stock S1 owns stock of S2 
(another subsidiary of the same group) that has a basis that exceeds 
its value, paragraph (b) of this section applies as if S1 had 
transferred its stock of S2. Because S2 is a member of the group 
immediately after the transfer of the S1 stock, the group member's 
basis in the S2 stock is redetermined pursuant to paragraph (b)(1) 
of this section immediately prior to the sale of the S1 stock. Of 
the group members' total basis of $130 in the S2 stock, $26 is 
allocated to S1's 20 shares of S2 common stock and $104 is allocated 
to P's 80 shares of S2 common stock. Pursuant to paragraph (b)(5) of 
this section, the redetermination of S1's basis in the stock of S2 
results in an adjustment to P's basis in the stock of S1. In 
particular, P's basis in the stock of S1 is decreased by $24 to $26. 
On P's sale of its 100 shares of S1 common stock for $20, P 
recognizes a loss of $6. Because S1 is not a member of the P group 
immediately after P's sale of the S1 stock, paragraph (c)(1) of this 
section does not apply to suspend such loss. However, because P 
recognizes a loss with respect to the disposition of the S1 stock 
and S1 owns stock of S2 (which is a member of the P group 
immediately after the disposition), paragraph (c)(2) of this section 
does apply to suspend up to $6 of that loss, an amount equal to the 
amount by which the duplicated loss with respect to the stock of S1 
sold is attributable to S2's adjusted basis in its assets, loss 
carryforwards, and deferred deductions.
    (iii) Effect of subsequent asset sale on stock basis. Of the $30 
loss recognized on the sale of Asset A, $24 is taken into account in 
determining the basis adjustments made under Sec.  1.1502-32 to the 
stock of S2 owned by P. Accordingly, P's basis in its S2 stock is 
reduced by $24 from $104 to $80.

[[Page 13015]]

    (iv) Effect of subsequent asset sale on suspended loss. Because 
P cannot establish that all or a portion of the loss recognized on 
the sale of Asset A was not reflected in the calculation of the 
duplicated loss of S2 on the date of the Year 3 stock sale and such 
loss is allocable to the period beginning on the date of the Year 3 
deemed disposition of the S2 stock and ending on the day before the 
first date on which S2 is not a member of the P group and is taken 
into account in determining consolidated taxable income (or loss) of 
the P group for a taxable year that includes a date on or after the 
date of the Year 3 deemed disposition and before the first date on 
which S2 is not a member of the P group, such asset loss reduces the 
suspended loss pursuant to paragraph (c)(4) of this section. The 
amount of such reduction, however, cannot exceed $6, the excess of 
the amount of such loss, $30, over the amount of such loss that is 
taken into account in determining the basis adjustment made to the 
stock of S2 owned by P, $24. Therefore, the suspended loss is 
reduced to zero.
    (v) Effect of subsequent stock sale. P recognizes $0 gain/loss 
on the Year 5 sale of its remaining S2 common stock. No amount of 
suspended loss remains to be allowed under paragraph (c)(5) of this 
section.
    Example 6. Loss recognized on asset with basis determined by 
reference to stock basis of subsidiary--(i) Facts. In Year 1, P 
forms S with a contribution of $80 in exchange for 80 shares of 
common stock of S which at that time represents all of the 
outstanding stock of S. S becomes a member of the P group. In Year 
2, P contributes Asset A with a basis of $50 and a value of $20 in 
exchange for 20 shares of common stock of S in a transfer to which 
section 351 applies. In Year 4, in a transaction that is not part of 
a plan that includes the Year 1 and Year 2 contributions, P 
contributes the 20 shares of S common stock it acquired in Year 2 to 
PS, a partnership, in exchange for a 20 percent capital and profits 
interest in a transaction described in section 721. Immediately 
after the contribution to PS, S is a member of the P group. In Year 
5, P sells its interest in PS for $20, recognizing a $30 loss.
    (ii) Application of basis redetermination rule upon 
nonrecognition transfer. Because P's basis in the S common stock 
contributed to PS exceeds its value immediately prior to the 
transfer and S is a member of the P group immediately after the 
transfer, P's basis in all of the S stock is redetermined pursuant 
to paragraph (b)(1) of this section. Of P's total basis of $130 in 
the common stock of S, a proportionate amount is allocated to each 
share of S common stock. Accordingly, $26 is allocated to the S 
common stock that is contributed to PS and, under section 722, P's 
basis in its interest in PS is $26.
    (iii) Application of loss suspension rule on disposition of 
asset with basis determined by reference to stock basis of 
subsidiary. P recognizes a $6 loss on its disposition of its 
interest in PS. Because P's basis in its interest in PS was 
determined by reference to the basis of S stock and at the time of 
the determination of P's basis in its interest in PS such S stock 
had a duplicated loss of $6, and, immediately after the disposition, 
S is a member of the P group, such loss is suspended to the extent 
of such duplicated loss. Principles similar to those of paragraphs 
(c)(3), (c)(4), and (c)(5) of this section shall apply to such 
suspended loss.

    (f) Worthlessness not followed by separate return years. 
Notwithstanding any other provision in the regulations under section 
1502, if a member of a group (the claiming group) treats stock of a 
subsidiary as worthless under section 165 (taking into account the 
provisions of Sec.  1.1502-80(c)) and, on the day following the last 
day of the claiming group's taxable year in which the worthless stock 
deduction is claimed, the subsidiary (or its successor, determined 
without regard to paragraphs (d)(5)(iii) and (iv) of this section) is a 
member of a group that includes any corporation that, during that 
taxable year, was a member of the claiming group (other than a lower-
tier subsidiary of the subsidiary) or is a successor (determined 
without regard to paragraphs (d)(5)(iii) and (iv) of this section) of 
such a member, then all losses treated as attributable to the 
subsidiary under the principles of Sec.  1.1502-21(b)(2)(iv) shall be 
treated as expired as of the beginning of the day following the last 
day of the claiming group's taxable year in which the worthless stock 
deduction is claimed. In addition, notwithstanding any other provision 
in the regulations under section 1502, if a member recognizes a loss 
with respect to subsidiary stock and on the following day the 
subsidiary is not a member of the group and does not have a separate 
return year, then all losses treated as attributable to the subsidiary 
under the principles of Sec.  1.1502-21(b)(2)(iv) shall be treated as 
expired as of the beginning of the day following the last day of the 
group's taxable year in which the stock loss is claimed. For purposes 
of this paragraph (f), the determination of the losses attributable to 
the subsidiary shall be made after computing the taxable income of the 
group for the taxable year in which the group treats the stock of the 
subsidiary as worthless or the subsidiary liquidates and after 
computing the taxable income for any taxable year to which such losses 
may be carried back. The loss treated as expired under this paragraph 
(f) shall not be treated as a noncapital, nondeductible expense under 
Sec.  1.1502-32(b)(2)(iii). This paragraph (f) applies to worthlessness 
determinations and liquidations that occur on or after March 10, 2006. 
For rules applicable to worthless determinations and liquidations 
before March 10, 2006, see Sec.  1.1502-35T(f)(1) and (2) as contained 
in 26 CFR part 1 in effect on January 1, 2006.
    (g) Anti-avoidance rules--(1) Transfer of share without a loss in 
avoidance. If a share of subsidiary stock has a basis that does not 
exceed its value and the share is transferred with a view to avoiding 
application of the rules of paragraph (b) of this section prior to the 
transfer of a share of subsidiary stock that has a basis that does 
exceed its value or a deconsolidation of a subsidiary, the rules of 
paragraph (b) of this section shall apply immediately prior to the 
transfer of stock that has a basis that does not exceed its value.
    (2) Transfers of loss property in avoidance. If a member of a 
consolidated group contributes an asset with a basis that exceeds its 
value to a partnership in a transaction described in section 721 or a 
corporation that is not a member of such group in a transfer described 
in section 351, such partnership or corporation contributes such asset 
to a subsidiary in a transfer described in section 351, and such 
contributions are undertaken with a view to avoiding the rules of 
paragraph (b) or (c) of this section, adjustments must be made to carry 
out the purposes of this section.
    (3) Anti-loss reimportation--(i) Application. This paragraph (g)(3) 
applies if--
    (A) A member of a group recognizes and is allowed a loss on the 
disposition of a share of stock of a subsidiary with respect to which 
there is a duplicated loss; and
    (B) Within the 10-year period beginning on the date the subsidiary 
(or any successor) ceases to be a member of such group--
    (1) The subsidiary (or any successor) again becomes a member of 
such group (or any successor group) when the subsidiary (or any 
successor) owns any asset that has a basis in excess of value at such 
time and that was owned by the subsidiary (or any successor) on the 
date of a disposition of stock of such subsidiary (or any successor) 
and that had a basis in excess of value on such date;
    (2) The subsidiary (or any successor) again becomes a member of 
such group (or any successor group) when the subsidiary (or any 
successor) owns any asset that has a basis in excess of value at such 
time and that has a basis that reflects, directly or indirectly, in 
whole or in part, the basis of any asset that was owned by the 
subsidiary on the date of a disposition of stock of such subsidiary (or 
any successor) and that had a basis in excess of value on such date;
    (3) In a transaction described in section 381 or section 351, any 
member

[[Page 13016]]

of such group (or any successor group) acquires any asset of the 
subsidiary (or any successor) that was owned by the subsidiary (or any 
successor) on the date of a disposition of stock of such subsidiary (or 
any successor) and that had a basis in excess of its value on such 
date, or any asset that has a basis that reflects, directly or 
indirectly, in whole or in part, the basis of any asset that was owned 
by the subsidiary (or any successor) on the date of a disposition of 
stock of such subsidiary (or any successor) and that had a basis in 
excess of its value on such date, and, immediately after the 
acquisition of such asset, such asset has a basis in excess of its 
value;
    (4) The subsidiary (or any successor) again becomes a member of 
such group (or any successor group) when the subsidiary (or any 
successor) has a liability (within the meaning of section 358(h)(3)) 
that it had on the date of a disposition of stock of such subsidiary 
(or any successor) and such liability will give rise to a deduction;
    (5) In a transaction described in section 381 or section 351, any 
member of such group (or any successor group) assumes a liability 
(within the meaning of section 358(h)(3)) that was a liability of the 
subsidiary (or any successor) on the date of a disposition of stock of 
such subsidiary (or any successor);
    (6) The subsidiary (or any successor) again becomes a member of 
such group (or any successor group) when the subsidiary (or any 
successor) has any losses or deferred deductions that were losses or 
deferred deductions of the subsidiary (or any successor) on the date of 
a disposition of stock of such subsidiary (or any successor);
    (7) The subsidiary (or any successor) again becomes a member of 
such group (or any successor group) when the subsidiary (or any 
successor) has any losses or deferred deductions that are attributable 
to any asset that was owned by the subsidiary (or any successor) on the 
date of a disposition of stock of such subsidiary (or any successor) 
and that had a basis in excess of value on such date;
    (8) The subsidiary (or any successor) again becomes a member of 
such group (or any successor group) when the subsidiary (or any 
successor) has any losses or deferred deductions that are attributable 
to any asset that had a basis that reflected, directly or indirectly, 
in whole or in part, the basis of any asset that was owned by the 
subsidiary (or any successor) on the date of a disposition of stock of 
such subsidiary (or any successor) and that had a basis in excess of 
value on such date;
    (9) The subsidiary (or any successor) again becomes a member of 
such group (or any successor group) when the subsidiary (or any 
successor) has any losses or deferred deductions that are attributable 
to a liability (within the meaning of section 358(h)(3)) that it had on 
the date of a disposition of stock of such subsidiary (or any 
successor);
    (10) Any member of such group (or any successor group) succeeds to 
any losses or deferred deductions of the subsidiary (or any successor) 
that were losses or deferred deductions of the subsidiary (or any 
successor) on the date of a disposition of stock of such subsidiary (or 
any successor), that are attributable to any asset that was owned by 
the subsidiary (or any successor) on the date of a disposition of stock 
of such subsidiary (or any successor) and that had a basis in excess of 
value on such date, that are attributable to any asset that had a basis 
that reflected, directly or indirectly, in whole or in part, the basis 
of any asset that was owned by the subsidiary (or any successor) on the 
date of a disposition of stock of such subsidiary (or any successor) 
and that had a basis in excess of value on such date, or that are 
attributable to a liability (within the meaning of section 358(h)(3)) 
of the subsidiary (or any successor) on the date of a disposition of 
stock of such subsidiary (or any successor); or
    (11) Any losses o