Redetermination of the Consolidated Net Unrealized Built-In Gain and Loss, 65634-65639 [2011-27445]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 76, Number 205 (Monday, October 24, 2011)]
[Proposed Rules]
[Pages 65634-65639]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-27445]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-133002-10]
RIN 1545-BJ79


Redetermination of the Consolidated Net Unrealized Built-In Gain 
and Loss

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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[[Page 65635]]

SUMMARY: This document contains proposed regulations under section 1502 
of the Internal Revenue Code. The regulations will apply to 
corporations filing consolidated returns. The regulations will require 
a loss group or loss subgroup to redetermine its consolidated net 
unrealized built-in gain and loss in certain circumstances. This 
document also invites comments from the public regarding these proposed 
regulations.

DATES: Written or electronic comments and requests for a public hearing 
must be received by January 23, 2012.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-133002-10), room 
5205, Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
133002-10), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically, via the Federal 
eRulemaking Portal at https://www.regulations.gov (IRS REG-133002-10).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Grid Glyer (202) 622-7930; concerning submissions of comments and 
requests for a public hearing, Oluwafunmilayo Taylor (202) 622-7180 
(not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    To prevent loss trafficking, section 382 imposes a limitation (the 
section 382 limitation) on a loss corporation's ability to use net 
operating losses that arose prior to an ownership change. Section 
382(b)(1). In addition, if a loss corporation has a net unrealized 
built-in loss (NUBIL) at the time of an ownership change, built-in 
losses will be subject to the section 382 limitation as if they were 
pre-change losses of the loss corporation if they are recognized during 
the five-year period following the ownership change (the recognition 
period). Section 382(h)(1)(B). If a corporation has a net unrealized 
built-in gain (NUBIG) at the time of its ownership change, recognized 
built-in gains will increase the section 382 limitation if they are 
recognized during the recognition period. Section 382(h)(1)(A). Rules 
for determining whether a loss corporation has a NUBIG or NUBIL are 
found in section 382(h)(3).
    Sections 1.1502-90 through 1.1502-99 provide guidance for applying 
section 382 with respect to a consolidated loss group or loss subgroup. 
In this preamble, the term loss group refers to both loss groups and 
loss subgroups. See Sec. Sec.  1.1502-91(c)(1) and 1.1502-91(d).
    Section 1.1502-91(g) provides rules for determining whether a loss 
group has a NUBIG or NUBIL. Section 1.1502-91(g)(1) provides that the 
determination of whether a loss group has a consolidated NUBIG or NUBIL 
is based on the aggregate amount of the separately determined NUBIGs 
and NUBILs of each member included in the loss group. Under this rule, 
unrealized gain or loss with respect to the stock of a member of the 
loss group (an included subsidiary) is disregarded in determining the 
separately determined NUBIG or NUBIL.

Explanation of Provisions

    The current regulations under Sec.  1.1502-91(g) are premised upon 
the observation that unrecognized gain or loss on included subsidiary 
stock generally reflects the same economic gain or loss reflected in 
the subsidiary's assets and that the consolidated return regulations 
generally prevent the group from taking that duplicative gain or loss 
into account more than once. This is the case because, if the 
subsidiary first recognizes the duplicated gain or loss on its assets, 
Sec.  1.1502-32 eliminates the duplicative gain or loss reflected in 
stock basis. Conversely, if a member first recognizes duplicated loss 
on the subsidiary stock, Sec.  1.1502-36 eliminates the duplicative 
asset loss. Although the regulations do not specifically address the 
recognition of duplicated gain on subsidiary stock, taxpayers generally 
avoid duplicative gain recognition, for example, through actual and 
section 338 deemed asset sales and through stock elimination 
transactions, such as section 332 liquidations. Because duplicative 
gain and loss is expected to be taken into account only once, the 
determination of NUBIG and NUBIL would be distorted if it included such 
amounts more than once.
    To illustrate, assume P, the common parent of a consolidated group, 
contributes $100 to S in exchange for S's sole share of stock. S uses 
the $100 to purchase a truck. The value of the truck then declines to 
$70. At this point, the stock has a basis of $100 and a value of $70, 
reflecting a $30 loss. In addition, the truck has a basis of $100 and 
value of $70, also reflecting a $30 loss. Thus, it would appear the 
group has $60 of loss available. However, if S sells the truck and the 
group absorbs the $30 loss, P will reduce its basis in the S stock by 
$30 under Sec.  1.1502-32, and the duplicative stock loss will be 
eliminated. On the other hand, if P sells its S share before the loss 
on the truck is recognized and absorbed, the duplicated loss (on either 
the truck or the stock, as P chooses) will be eliminated by Sec.  
1.1502-36. As a result, the group takes into account a single $30 
economic loss, and the inclusion of both the unrecognized stock loss 
and the unrecognized asset loss in the NUBIL determination would 
overstate the amount of loss actually available to the group.
    However, if an unrecognized gain or loss on subsidiary stock 
exceeds the included subsidiary's gain or loss on its assets, 
disregarding this unduplicated gain or loss on the stock understates 
the amount that the group may take into account.
    To illustrate, assume the same facts as in the previous example 
except that P originally purchased the S stock for $150 (S's basis in 
the truck is still $100). In this case, there is $80 of loss available 
to the group, the $30 loss that is duplicated (reflected in the bases 
of both the stock and the truck), as well as the $50 unduplicated stock 
loss. Disregarding P's loss in its S stock causes the group's NUBIL to 
be understated by $50. These proposed regulations are intended to 
prevent such understatement.
    The current rule is administratively less burdensome to taxpayers 
and the government than a rule that would require taxpayers to identify 
and take into account all unduplicated gain and loss on stock of 
included subsidiaries when determining NUBIG and NUBIL. Nevertheless, 
the IRS and the Treasury Department believe that the purpose of section 
382(h) would be better served by a rule that does not wholly disregard 
such gain and loss. A rule that takes into account unduplicated gain or 
loss on stock would avoid both the understating of loss available to 
the group (when there is unduplicated stock loss) and the overstating 
of loss trafficking potential (when there is unduplicated stock gain).
    The IRS and the Treasury Department are concerned, however, that 
requiring all consolidated NUBIG and NUBIL determinations to include 
all unduplicated stock gains and losses would significantly increase 
the administrative burden on both taxpayers and the government.
    Accordingly, the IRS and the Treasury Department propose to modify 
the current regulations to take into account the unduplicated gain or 
loss on stock of included subsidiaries, but only to the extent that 
such gain or loss is taken into account by the group during the 
recognition period. This will generally be the case only if, within the 
recognition period, such stock is sold to

[[Page 65636]]

a nonmember or becomes worthless, or a member takes an intercompany 
item into account with respect to such stock.
    More specifically, the proposed regulations would revise Sec.  
1.1502-91(g) by adding a rule that would apply when any member of the 
consolidated group directly or indirectly (for example, through a 
partnership) takes any amount of gain or loss into account with respect 
to a share of stock of an included subsidiary (S), whether or not such 
amount is absorbed. When the rule applies, the loss group would be 
required to redetermine NUBIG or NUBIL to include any unduplicated 
built-in gain or loss with respect to the share. As used in these 
proposed regulations, the term unduplicated built-in stock gain or loss 
refers to the portion of the built-in stock gain or loss that was not 
originally reflected in the loss group's NUBIG or NUBIL as unrealized 
gain or loss on the assets of a lower-tier included subsidiary. The 
proposed regulations identify unduplicated built-in stock gain or loss 
by treating the separate NUBIG or NUBIL of each included subsidiary 
that is lower-tier to S as having been taken into account and absorbed 
immediately before the change date. These amounts are then deemed to 
tier-up to tentatively adjust the basis in the S shares under the 
principles of Sec.  1.1502-32. The difference between the tentatively 
adjusted change-date basis in a share of S stock and the fair market 
value of the share (as of the change date) is the unduplicated gain or 
loss in the S share. However, if, immediately before the change date, a 
member of the loss group has a deferred gain or loss on S stock and 
that gain or loss is taken into account during the recognition period, 
the unduplicated portion of such gain or loss is determined as of the 
date of the transaction in which the deferred gain or loss was 
recognized, notwithstanding that such date would be prior to the change 
date.
    The loss group then redetermines its NUBIG or NUBIL by including 
its unduplicated gain or loss on the S share (or shares) with respect 
to which an amount is taken into account. Under the proposed 
regulations, the redetermined NUBIG or NUBIL is given effect only 
immediately before the gain or loss on the stock is taken into account. 
It has no effect on the treatment of built-in gain or loss that is 
recognized and taken into account prior to the time that built-in stock 
gain or loss is taken into account. Thus, for example, the fact that a 
NUBIL group was redetermined to be a NUBIG group, or that a NUBIL that 
exceeded the 15 percent threshold amount in section 382(h)(3)(B) no 
longer exceeds such amount, has no effect on the tax treatment of 
amounts taken into account prior to the redetermination of NUBIG or 
NUBIL.
    The proposed regulations also reorganize Sec.  1.1502-91(g) and 
revise Sec.  1.1502-91(h)(2) and (h)(4) without substantive change.

Effective/Applicability Date

    These proposed regulations will apply to amounts taken into account 
with respect to a share of stock of an included subsidiary on or after 
the date that final regulations are published in the Federal Register, 
but only with respect to ownership changes occurring on or after 
October 24, 2011.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866, as supplemented by Executive Order 13565. Therefore, a 
regulatory assessment is not required. Pursuant to the Regulatory 
Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that these 
proposed regulations would not have a significant economic impact on a 
substantial number of small entities. This certification is based on 
the fact that these proposed regulations would primarily affect members 
of consolidated groups which tend to be large corporations. 
Accordingly, a regulatory flexibility analysis is not required. 
Pursuant to section 7805(f) of the Internal Revenue Code, these 
regulations have been submitted to the Chief Counsel for Advocacy of 
the Small Business Administration for comment on their impact on small 
business.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. All comments will be available for public inspection and copying. 
A public hearing may be scheduled if requested in writing by any person 
that timely submits written or electronic comments. If a public hearing 
is scheduled, notice of the date, time, and place for the public 
hearing will be published in the Federal Register.

Drafting Information

    The principal author of these regulations is Grid Glyer of the 
Office of Associate Chief Counsel (Corporate). However, other personnel 
from the IRS and the Treasury Department participated in its 
development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *
    Section 1.1502-91 also issued under 26 U.S.C. 1502.

    Par. 2. Section 1.1502-91 is amended by:
    1. Revising paragraph (g)(1).
    2. Adding paragraphs (g)(7) and (g)(8).
    3. Revising paragraph (h)(2) and the heading of paragraph 
(h)(4).
    4. Adding paragraph (k).
    The revisions and additions read as follows:


Sec.  1.1502-91  Application of section 382 with respect to a 
consolidated group.

* * * * *
    (g) Net unrealized built-in gain and loss--(1) In general. The 
determination of whether a loss group or loss subgroup has a net 
unrealized built-in gain (NUBIG) or loss (NUBIL) under section 
382(h)(3) is based on the aggregate amount of the separately determined 
NUBIGs or NUBILs (including items of built-in income and deduction 
described in section 382(h)(6)) of each member that is included in the 
loss group or loss subgroup, as the case may be, under paragraph (g)(2) 
of this section. The threshold requirement under section 382(h)(3)(B) 
applies on an aggregate basis.
    (i) Members included in group. If a member is not included in the 
determination of whether a loss group or loss subgroup has a NUBIL 
under paragraph (g)(2)(ii) or (g)(2)(iv) of this section, that member 
is not included in the loss group or loss subgroup. See Sec.  1.1502-
94(c) (relating to built-in gain or loss of a new loss member) and 
Sec.  1.1502-96(a) (relating to the end of separate tracking of certain 
losses).
    (ii) Determination of separate NUBIG or NUBIL. For purposes of 
determining a member's separate NUBIG or NUBIL--
    (A) Stock of a subsidiary that is a member of the loss group or 
loss subgroup (an included subsidiary) is disregarded, except as 
provided for in paragraph (g)(7) of this section. For this purpose, the 
term stock includes stock described in section 1504(a)(4) and Sec.  
1.382-2T(f)(18)(ii) and (f)(18)(iii);

[[Page 65637]]

    (B) Intercompany obligations are disregarded; and
    (C) Deferred amounts, such as amounts deferred under section 267 or 
Sec.  1.1502-13, are built-in items unless they are deferred with 
respect to--
    (1) An intercompany obligation; or
    (2) A share of stock of an included subsidiary; however, if an 
amount deferred with respect to a share of such stock is taken into 
account at any time during the recognition period (whether or not any 
such loss amount is absorbed), NUBIG or NUBIL must be redetermined in 
accordance with paragraph (g)(7) of this section.
* * * * *
    (7) Redetermination of NUBIG or NUBIL of a loss group or loss 
subgroup to reflect unduplicated built-in gain or loss with respect to 
stock of an included subsidiary--
    (i) In general. This paragraph (g)(7) applies if, during the 
recognition period, any member of the consolidated group directly or 
indirectly takes into account any gain or loss with respect to a share 
of stock of an included subsidiary (S) that was held by another member 
of the loss group or loss subgroup immediately before the change date, 
regardless of whether any such loss is absorbed. If this paragraph 
(g)(7) applies, the loss group or loss subgroup must redetermine its 
NUBIG or NUBIL to include any unduplicated built-in gain or loss with 
respect to the S share in accordance with the provisions of paragraphs 
(g)(7)(ii) and (g)(7)(iii) of this section. The redetermination is 
given effect immediately before the time the gain or loss on stock of 
an included subsidiary is taken into account. The redetermined NUBIG or 
NUBIL does not affect the tax treatment of transactions taken into 
account prior to the event that causes a redetermination of NUBIG or 
NUBIL under this paragraph (g)(7). However, the redetermined NUBIG or 
NUBIL is effective for all purposes immediately before the gain or loss 
on stock of an included subsidiary is taken into account. Thus, for 
example, the redetermined NUBIG or NUBIL is used to determine whether 
the loss group or subgroup is a NUBIG or NUBIL group, as well as 
whether the group meets the threshold requirement of section 
382(h)(3)(B), at the time of the redetermination.
    (ii) Computation of unduplicated built-in gain or loss with respect 
to shares of S stock that are subject to this paragraph (g)(7). The 
loss group or loss subgroup computes its unduplicated built-in gain or 
loss with respect to each share of S stock that is subject to this 
paragraph (g)(7) by first treating the basis in the share as 
tentatively adjusted immediately before the change date or, in the case 
of an amount with respect to S stock that was deferred on the change 
date, as of the date of the transaction that gave rise to the amount, 
as though the following occurred immediately before the ownership 
change or the transaction that gave rise to the deferred amount--
    (A) Deemed recognition of built-in gain or loss of lower-tier 
included subsidiaries. The separate NUBIG and NUBIL of S and all 
included subsidiaries that are lower-tier to S are treated as 
recognized, taken into account, and absorbed.
    (B) Tiering up of recognized amounts. All amounts deemed 
recognized, taken into account, and absorbed under paragraph 
(g)(7)(ii)(A) of this section are then deemed to tier up under the 
principles of Sec.  1.1502-32 to tentatively adjust the basis in all of 
the S shares that are subject to this paragraph (g)(7).
    (C) Unduplicated gain or loss with respect to S stock. If the 
aggregate tentatively adjusted basis in the S shares subject to this 
paragraph (g)(7) exceeds the aggregate fair market value of those 
shares immediately before the change date or, in the case of a deferred 
amount, on the date of the transaction that gave rise to the item, the 
excess is the unduplicated loss with respect to those shares. 
Alternatively, if the aggregate fair market value of the S shares 
subject to this paragraph (g)(7) exceeds the aggregate tentatively 
adjusted basis in those shares on such date, the excess is the 
unduplicated gain with respect to those shares.
    (iii) Redetermination of the group's NUBIG or NUBIL. The loss group 
or loss subgroup's redetermined NUBIG or NUBIL is the sum of--
    (A) The loss group or loss subgroup's NUBIG or NUBIL as originally 
determined without regard to the stock of any included subsidiary;
    (B) Any unduplicated gain or loss with respect to a share of stock 
of an included subsidiary that was previously included in the loss 
group or loss subgroup's NUBIG or NUBIL under this paragraph (g)(7); 
and
    (C) The unduplicated gain or loss on shares of S stock computed 
under paragraph (g)(7)(ii) of this section.
    (iv) Anti-avoidance rule. If any person acts with a principal 
purpose contrary to the purposes of this paragraph (g), to avoid the 
effect of the rules of this paragraph (g), or to apply the rules of 
this paragraph (g) to avoid the effect of any other provision of the 
consolidated return regulations, adjustments must be made as necessary 
to carry out the purposes of this paragraph (g).
    (8) Examples. The following examples illustrate the application of 
the provisions of paragraph (g) of this section. Unless otherwise 
stated, P is the common parent of a consolidated group that is a loss 
group and all members of the P group are included subsidiaries with 
respect to the loss group. P can establish that its gains are 
recognized built-in gains; P cannot establish that its losses are not 
recognized built-in losses. In addition, the threshold requirement of 
section 382(h)(3)(B) is satisfied. All other relevant facts are set 
forth in the examples.

    Example 1. Basic application of provision. (i) Facts. On January 
1, Year 1, P owns the sole outstanding share of S stock (basis $210, 
value $160) and the sole outstanding share of M stock. S owns the 
sole outstanding share of S1 stock (basis $100, value $80) and Truck 
(basis $70, value $80). S1 owns three of the five outstanding shares 
of S2 common stock (basis $40, value $20 for each share; thus, basis 
$120, value $60 in the aggregate). S2 owns Truck 2 (basis $70, value 
$40) and Truck 3 (basis $30, value $40). M owns the fourth of the 
five outstanding shares of S2 stock. X, a nonmember of the P group, 
owns the fifth outstanding share of S2 stock. January 1, Year 1, is 
a change date for the P group.

    (ii) Determination of the separate NUBIG or NUBIL of each member 
of the P loss group. (A) S2's separate NUBIG or NUBIL. S2's assets 
are Truck 2 (with a built-in loss of $30) and Truck 3 (with a built-
in gain of $10); therefore, S2 has a NUBIL of $20.
    (B) S1's separate NUBIG or NUBIL. S1's only assets are the 
shares of S2 stock, which are disregarded under paragraph 
(g)(1)(ii)(A) of this section; therefore, S1 has a NUBIG or NUBIL of 
zero.
    (C) S's separate NUBIG or NUBIL. S's assets are Truck (with a 
built-in gain of $10) and the share of S1 stock (which is 
disregarded); therefore, S has a NUBIG of $10.
    (D) M's separate NUBIG or NUBIL. M's only asset is the share of 
S2 stock, which is disregarded under paragraph (g)(1)(ii)(A) of this 
section; therefore, M has a NUBIG or NUBIL of zero.
    (E) P's separate NUBIG or NUBIL. P's only assets are the shares 
of M and S stock, which are disregarded; therefore, P has a NUBIG or 
NUBIL of zero.
    (iii) Determination of the P group's NUBIG or NUBIL. The P group 
has a NUBIL of $10, reflecting the sum of S2's $20 NUBIL and S's $10 
NUBIG.

    Example 2. Transfer of shares of stock of an included subsidiary 
during recognition period. (i) Sale to nonmember. (A) Facts. The 
facts are the same as in Example 1. In addition, in Year 4, S sells 
its share of S1 stock for $65 to an unrelated party. At the time of 
the sale, S's basis in the share had been reduced to $90 due to 
adjustments for depreciation on S2's assets that tiered up under 
Sec.  1.1502-32. (No adjustments are made to S's basis in the S1 
share under Sec.  1.1502-36, including by reason of an election to

[[Page 65638]]

waive stock loss or reattribute losses.) As a result of the sale of 
the S1 share during the recognition period, the P group must 
redetermine its NUBIL under paragraph (g)(7) of this section.
    (B) Redetermination of the P group's NUBIG or NUBIL. (1) 
Unduplicated built-in gain or loss with respect to S1 share. Under 
paragraph (g)(7)(ii)(A) of this section, the unduplicated built-in 
gain or loss with respect to the S1 share sold in Year 4 is computed 
by first treating the separate NUBIG or NUBIL of S1 and S2 (the only 
included subsidiary that is lower-tier to S1) as having been 
recognized, taken into account, and absorbed immediately before the 
change date. Under paragraph (g)(7)(ii)(B) of this section, those 
amounts are then treated as tiering up under the principles of Sec.  
1.1502-32 and tentatively adjusting S's basis in its S1 share, in 
order to identify the unduplicated gain or loss in the basis of the 
share under paragraph (g)(7)(ii)(C) of this section. S1 has no 
separate NUBIG or NUBIL to be treated as recognized, taken into 
account, and absorbed. S2 has a $20 separate NUBIL that is treated 
as recognized, taken into account, and absorbed and that is then 
treated as tiering up to adjust S's basis in the S1 share under the 
principles of Sec.  1.1502-32. As a result, $12 of S2's $20 NUBIL 
would be treated as tiering up to S1 through the three S2 shares (of 
the total five outstanding) held by S1, and that $12 would then be 
treated as tiering up through S1 to tentatively adjust S's basis in 
the S1 share. S's tentatively reduced basis in the S1 share is 
therefore $100 - $12, or $88. Because the tentatively reduced basis 
of the share exceeds the value of the share by $8 ($88 - $80), S has 
an $8 unduplicated loss in its basis in its S1 stock.
    (2) Redetermined NUBIG or NUBIL of the P group. Immediately 
before S takes into account the $25 loss on the sale of its share of 
S1 stock, the P group's NUBIL is redetermined to be $18, the sum of 
S2's NUBIL of $20, S1's NUBIL of $0, S's NUBIG of $10, P's NUBIG or 
NUBIL of $0, M's NUBIG or NUBIL of $0, and the $8 unduplicated loss 
in the S1 stock.
    (C) Effect of redetermination. Of the $25 loss on the sale of 
the S1 share, $20 is recognized built-in loss, but the group only 
has an $18 NUBIL and so only $18 of the recognized built-in loss is 
subject to limitation under section 382.
    (ii) Nonrecognition transfer to member followed by sale to 
nonmember. The facts are the same as in paragraph (i)(A) of this 
Example 2, except that, in Year 3, M1 joined the P group and S 
transferred its share of S1 stock to M1 in a transaction qualifying 
under section 351; as a result, it is M1, not S, that sells the S1 
share to X in Year 4. The analysis and results are the same as in 
paragraphs (i)(B) and (i)(C) of this Example 2 because this section 
applies when any member of the group recognizes gain or loss with 
respect to stock of an included subsidiary that was held by a member 
of the loss group immediately before the change date.

    Example 3. Recognition of built-in loss prior to stock sale. (i) 
Facts. The facts are the same as in paragraph (i)(A) of Example 2 
except that, in addition, in Year 2, S2 sold Truck 2 and recognized 
the $30 built-in loss on Truck 2, and the P group absorbed the $30 
loss. The loss is a recognized built-in loss under section 
382(h)(2)(B) and thus subject to limitation to the extent of the 
originally determined $10 NUBIL.
    (ii) Redetermination of the P group's NUBIG or NUBIL. (A) 
Unduplicated built-in gain or loss with respect to the S1 share. 
Because unduplicated stock gain or loss is computed immediately 
before the change date, the unduplicated stock loss is $8 for the 
reasons set forth in paragraph (i)(B)(1) of Example 2.
    (B) Redetermined NUBIG or NUBIL of the P group. The computation 
of the P group's redetermined NUBIG or NUBIL is the same as in 
paragraph (i)(B)(2) of Example 2, except that the $30 of recognized 
built-in loss in Year 2 reduces the P group's $10 NUBIL (before 
NUBIL is redetermined under paragraph (g)(7) of this section) to 
zero. As a result, immediately before the sale of the S1 share, the 
P group's NUBIL is redetermined to be $8, which is the sum of zero 
and the $8 unduplicated loss in the S1 stock.
    (iii) Effect of redetermination. Of the $25 loss on the sale of 
the S1 share, $20 is recognized built-in loss, but the group only 
has an $8 NUBIL and so only $8 of the recognized built-in loss is 
subject to limitation under section 382. The treatment of the loss 
recognized on the Year 2 sale of Truck 2 is not affected by the Year 
4 redetermination.

    Example 4. Sale of less than all shares of stock of an included 
subsidiary. (i) Facts. The facts are the same as in paragraph (i)(A) 
of Example 2, except that S1 has ten shares of stock outstanding, 
designated Share 1 through Share 10, all of which are owned by S. 
S's basis in Share 1 is $15.50, and S's basis in Share 2 is $4.50. 
In addition, instead of selling its one share of S1 stock, on 
January 1, Year 4, S sells Share 1 and Share 2 to an unrelated party 
for $16 (their aggregate fair market value).
    (ii) Redetermination of the P group's NUBIG or NUBIL. (A) 
Unduplicated built-in gain or loss with respect to S1 Share 1 and S1 
Share 2. The analysis is the same as in paragraph (i)(B)(1) of 
Example 2 except that the unduplicated loss is $1.60, computed as 
the excess of $17.60 ($20 aggregate basis in the shares that are 
sold, tentatively reduced by $2.40, the shares' portion (2/10) of 
the $12 tentative adjustment that tiered-up from S2) over $16 (the 
shares' aggregate value).
    (B) Redetermined NUBIG or NUBIL of the P group. The P group's 
redetermined NUBIL is $11.60, which is the sum of S2's NUBIL of $20, 
S1's NUBIL of $0, S's NUBIG of $10, P's NUBIG or NUBIL of $0, M's 
NUBIG or NUBIL of $0, and the unduplicated stock loss of $1.60.
    (C) Effect of redetermination. Of the $4 loss recognized on the 
Year 4 sale of Share 1 and Share 2, all $4 is recognized built-in 
loss. The group's redetermined NUBIL is $11.60, and thus all $4 of 
the $4 recognized built-in loss is subject to limitation under 
section 382.

    Example 5. NUBIL redetermined to be NUBIG. (i) Disposition of 
stock of included member. (A) Facts. On January 1, Year 1, P owns 
the sole outstanding share of S stock (basis $10, value $100). S 
owns Truck 1 (basis $65, value $50) and Truck 2 (basis $45, value 
$50). January 1, Year 1, is a change date for the P group. In Year 
3, P sells its S share for $100.
    (B) Determination of the P group's NUBIG or NUBIL on change 
date. S's assets are Truck 1 (with a built-in loss of $15) and Truck 
2 (with a built-in gain of $5); therefore S has a separate NUBIL of 
$10. P's sole asset is the share of S stock, which is disregarded; 
therefore, P has a separate NUBIG or NUBIL of zero. Accordingly, on 
the change date, the P group has a NUBIL of $10, reflecting the sum 
of S's $10 NUBIL and P's $0 NUBIG/NUBIL.
    (C) Redetermination of the P group's NUBIG or NUBIL on 
disposition of stock of included subsidiary. (1) Unduplicated built-
in gain or loss with respect to the S share. Under paragraph 
(g)(7)(ii)(A) of this section, the unduplicated built-in gain or 
loss with respect to the S share sold in Year 3 is computed by first 
treating S's $10 NUBIL as having been recognized, taken into 
account, and absorbed immediately before the ownership change. Then, 
under paragraph (g)(7)(ii)(B) of this section, S's $10 NUBIL is 
treated as tentatively adjusting P's basis in the S share under the 
principles of Sec.  1.1502-32. Accordingly, P's tentatively reduced 
basis in the S share is $10 - $10, or $0. Further, the value of the 
S share was $100 immediately before the change date. The share's 
$100 value exceeds the $0 tentatively reduced basis in the share by 
$100, and thus P has a $100 unduplicated gain in its S stock.
    (2) Redetermined NUBIG or NUBIL of the P group. Immediately 
before P takes into account the $90 gain on the sale of its share of 
S stock, the P group's $10 NUBIL is redetermined to be a $90 NUBIG, 
the sum of S's NUBIL of $10 and the unduplicated gain in the S stock 
of $100.
    (D) Effect of redetermination. Of the $90 gain P recognized on 
the sale of the S share, all $90 is recognized built-in gain and 
therefore, under section 382(h)(2)(A), the group's section 382 
limitation is increased by $90.
    (ii) Disposition of loss asset prior to disposition of stock of 
included subsidiary. (A) Facts. The facts are the same as in 
paragraph (i)(A) of this Example 5, except that, in addition, in 
Year 2, S sells Truck 1 for $50, recognizing a $15 loss that is 
taken into account and absorbed. As a result of the $15 loss 
absorption, P's basis in the S share is reduced to an excess loss 
account of $5 in Year 2 and, thus, when P sells the S share in Year 
3, P recognizes $105 gain on the sale ($100 sale proceeds + $5 
excess loss account recapture).
    (B) Determination of the P group's NUBIG or NUBIL on change 
date. For the reasons set forth in paragraph (i)(B) of this Example 
5, the P group has a NUBIL of $10 on the change date. Accordingly, 
S's $15 loss on Truck 1 is a recognized built-in loss under section 
382(h)(2)(B), and therefore subject to limitation to the extent of 
the $10 NUBIL.
    (C) Redetermination of the P group's NUBIG or NUBIL on 
disposition of stock of included subsidiary. (1) Unduplicated built-
in gain or loss with respect to the S share. For the reasons set 
forth in paragraph (i)(C)(1)

[[Page 65639]]

of this Example 5, the unduplicated built-in gain with respect to 
the S share is $100.
    (2) Redetermined NUBIG or NUBIL of the P group. For the reasons 
set forth in paragraph (i)(C)(2) of this Example 5, the P group's 
NUBIG is redetermined to be $90. Immediately before P takes into 
account the $100 gain on the sale of its share of S stock, the P 
group's $10 NUBIL is redetermined to be a $90 NUBIG, the sum of S's 
NUBIL of $10 and P's NUBIG of $100.
    (D) Effect of redetermination. Of the $105 gain P recognized on 
the sale of the S share, $90 is recognized built-in gain and 
therefore, under section 382(h)(2)(A), the group's section 382 
limitation is increased by $90. The redetermination of P's original 
$10 NUBIL to a $100 NUBIG in Year 4 has no effect on the treatment 
of the Year 2 recognized built-in loss from the sale of Truck 1.

    (h) * * *
    (2) Disposition of stock or an intercompany obligation of a member. 
Built-in gain or loss recognized by a member on the disposition of 
stock (including stock described in section 1504(a)(4) and Sec.  1.382-
2T(f)(18)(ii) and (f)(18)(iii)) of another member is treated as a 
recognized gain or loss for purposes of section 382(h)(2) (unless 
disallowed) without regard to the extent to which such gain or loss was 
included in the determination of a net unrealized built-in gain or loss 
under paragraph (g) of this section. Built-in gain or loss recognized 
by a member with respect to an intercompany obligation is treated as 
recognized gain or loss only to the extent (if any) that the 
transaction gives rise to aggregate income or loss within the 
consolidated group.
* * * * *
    (4) Successor assets. * * *
* * * * *
    (k) Effective/Applicability date. Paragraphs (g)(1), (g)(7), 
(g)(8), (h)(2) and (h)(4) of this section apply to amounts taken into 
account with respect to a share of stock of an included subsidiary on 
or after the date that final regulations are published in the Federal 
Register, but only with respect to ownership changes occurring on or 
after October 24, 2011. For amounts taken into account with respect to 
a share of stock of an included subsidiary not described in the 
preceding sentence, see Sec. Sec.  1.1502-91(g) and 1.1502-91(h) as 
contained in 26 CFR part 1 in effect on April 1, 2011.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2011-27445 Filed 10-21-11; 8:45 am]
BILLING CODE 4830-01-P