Consolidated Net Operating Losses, 67966-67988 [2020-22974]

Download as PDF 67966 Federal Register / Vol. 85, No. 208 / Tuesday, October 27, 2020 / Rules and Regulations (b) Affected ADs None. (c) Applicability This AD applies to all the Airbus SAS airplanes identified in paragraphs (c)(1) through (4) of this AD, certificated in any category. (1) Model A318–111, –112, –121, and –122 airplanes. (2) Model A319–111, –112, –113, –114, –115, –131, –132, –133, –151N, –153N, and –171N airplanes. (3) Model A320–211, –212, –214, –216, –231, –232, –233, –251N, –252N, –253N, –271N, –272N, and –273N airplanes. (4) Airbus SAS Model A321–111, –112, –131, –211, –212, –213, –231, –232, –251N, –252N, –253N, –271N, –272N, –251NX, –252NX, –253NX, –271NX, and –272NX airplanes. (d) Subject Air Transport Association (ATA) of America Code 32, Landing gear. (e) Reason This AD was prompted by reports of cracks on the main landing gear (MLG) sliding tubes. The FAA is issuing this AD to address cracks on the MLG sliding tubes, which could cause MLG sliding tube fracture, and could possibly result in the MLG collapsing, damaging the airplane, and injuring occupants. (f) Compliance Comply with this AD within the compliance times specified, unless already done. (g) Requirements Except as specified in paragraph (h) of this AD: Comply with all required actions and compliance times specified in, and in accordance with, EASA AD 2020–0193, dated September 7, 2020 (EASA AD 2020– 0193). jbell on DSKJLSW7X2PROD with RULES (h) Exceptions to EASA AD 2020–0193 (1) Where EASA AD 2020–0193 refers to its effective date, this AD requires using the effective date of this AD. (2) The ‘‘Remarks’’ section of EASA AD 2020–0193 does not apply to this AD. (3) Paragraph (3) of EASA AD 2020–0193 specifies to report inspection results to Airbus within a certain compliance time. For this AD, report inspection results at the applicable time specified in paragraph (h)(3)(i) or (ii) of this AD. (i) If the inspection was done on or after the effective date of this AD: Submit the report within 15 days after the inspection. (ii) If the inspection was done before the effective date of this AD: Submit the report within 15 days after the effective date of this AD. (i) Other FAA AD Provisions The following provisions also apply to this AD: (1) Alternative Methods of Compliance (AMOCs): The Manager, Large Aircraft Section, International Validation Branch, FAA, has the authority to approve AMOCs for this AD, if requested using the procedures VerDate Sep<11>2014 15:51 Oct 26, 2020 Jkt 253001 found in 14 CFR 39.19. In accordance with 14 CFR 39.19, send your request to your principal inspector or responsible Flight Standards Office, as appropriate. If sending information directly to the Large Aircraft Section, International Validation Branch, send it to the attention of the person identified in paragraph (j) of this AD. Information may be emailed to: 9-AVS-AIR730-AMOC@faa.gov. Before using any approved AMOC, notify your appropriate principal inspector, or lacking a principal inspector, the manager of the responsible Flight Standards Office. (2) Contacting the Manufacturer: For any requirement in this AD to obtain instructions from a manufacturer, the instructions must be accomplished using a method approved by the Manager, Large Aircraft Section, International Validation Branch, FAA; or EASA; or Airbus SAS’s EASA Design Organization Approval (DOA). If approved by the DOA, the approval must include the DOA-authorized signature. (3) Required for Compliance (RC): Except as required by paragraphs (h)(3) and (i)(2) of this AD, if any service information referenced in EASA AD 2020–0193 contains paragraphs that are labeled as RC, the instructions in RC paragraphs, including subparagraphs under an RC paragraph, must be done to comply with this AD; any paragraphs, including subparagraphs under those paragraphs, that are not identified as RC are recommended. The instructions in paragraphs, including subparagraphs under those paragraphs, not identified as RC may be deviated from using accepted methods in accordance with the operator’s maintenance or inspection program without obtaining approval of an AMOC, provided the instructions identified as RC can be done and the airplane can be put back in an airworthy condition. Any substitutions or changes to instructions identified as RC require approval of an AMOC. (4) Paperwork Reduction Act Burden Statement: A federal agency may not conduct or sponsor, and a person is not required to respond to, nor shall a person be subject to a penalty for failure to comply with a collection of information subject to the requirements of the Paperwork Reduction Act unless that collection of information displays a current valid OMB Control Number. The OMB Control Number for this information collection is 2120–0056. Public reporting for this collection of information is estimated to be approximately 1 hour per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. All responses to this collection of information are mandatory as required by this AD. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden to Information Collection Clearance Officer, Federal Aviation Administration, 10101 Hillwood Parkway, Fort Worth, TX 76177–1524. (j) Related Information For more information about this AD, contact Sanjay Ralhan, Aerospace Engineer, PO 00000 Frm 00002 Fmt 4700 Sfmt 4700 Large Aircraft Section, International Validation Branch, FAA, 2200 South 216th St., Des Moines, WA 98198; phone and fax: 206–231–3223; email: sanjay.ralhan@faa.gov. (k) Material Incorporated by Reference (1) The Director of the Federal Register approved the incorporation by reference (IBR) of the service information listed in this paragraph under 5 U.S.C. 552(a) and 1 CFR part 51. (2) You must use this service information as applicable to do the actions required by this AD, unless this AD specifies otherwise. (3) The following service information was approved for IBR on October 30, 2020 (85 FR 65200, October 15, 2020). (i) European Union Aviation Safety Agency (EASA) AD 2020–0193, dated September 7, 2020. (ii) [Reserved] (4) For EASA AD 2020–0193, contact the EASA, Konrad-Adenauer-Ufer 3, 50668 Cologne, Germany; telephone +49 221 8999 000; email ADs@easa.europa.eu; internet www.easa.europa.eu. You may find this EASA AD on the EASA website at https:// ad.easa.europa.eu. (5) You may view this material at the FAA, Airworthiness Products Section, Operational Safety Branch, 2200 South 216th St., Des Moines, WA. For information on the availability of this material at the FAA, call 206–231–3195. This material may be found in the AD docket on the internet at https:// www.regulations.gov by searching for and locating Docket No. FAA–2020–0908. (6) You may view this material that is incorporated by reference at the National Archives and Records Administration (NARA). For information on the availability of this material at NARA, email fedreg.legal@ nara.gov, or go to: https://www.archives.gov/ federal-register/cfr/ibr-locations.html. Issued on October 21, 2020. Lance T. Gant, Director, Compliance & Airworthiness Division, Aircraft Certification Service. [FR Doc. 2020–23658 Filed 10–26–20; 8:45 am] BILLING CODE 4910–13–P DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [TD 9927] RIN 1545–BP27 Consolidated Net Operating Losses Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. AGENCY: This document contains final regulations under sections 1502 and 1503 of the Internal Revenue Code (Code). These regulations provide guidance implementing recent statutory amendments to section 172 of the Code SUMMARY: E:\FR\FM\27OCR1.SGM 27OCR1 Federal Register / Vol. 85, No. 208 / Tuesday, October 27, 2020 / Rules and Regulations relating to the absorption of consolidated net operating loss (CNOL) carryovers and carrybacks. These regulations also update regulations applicable to consolidated groups that include both life insurance companies and other companies to reflect statutory changes. These regulations affect corporations that file consolidated returns. DATES: Effective Date: These regulations are effective on December 28, 2020. Applicability Date: For dates of applicability, see §§ 1.1502–1(l), 1.1502–21(h)(10), 1.1502–47(n), and 1.1503(d)–8(b)(8). FOR FURTHER INFORMATION CONTACT: Justin O. Kellar at (202) 317–6720, Gregory J. Galvin at (202) 317–3598, or William W. Burhop at (202) 317–5363. SUPPLEMENTARY INFORMATION: jbell on DSKJLSW7X2PROD with RULES Background This Treasury decision amends the Income Tax Regulations (26 CFR part 1) under section 1502 of the Code. Section 1502 authorizes the Secretary of the Treasury or his delegate (Secretary) to prescribe regulations for an affiliated group of corporations that join in filing (or that are required to join in filing) a consolidated return (consolidated group) to reflect clearly the Federal income tax liability of the consolidated group and to prevent avoidance of such tax liability. See § 1.1502–1(h) (defining the term ‘‘consolidated group’’). For purposes of carrying out those objectives, section 1502 also permits the Secretary to prescribe rules that may be different from the provisions of chapter 1 of the Code that would apply if the corporations composing the consolidated group filed separate returns. Terms used in the consolidated return regulations generally are defined in § 1.1502–1. On July 8, 2020, the IRS published a notice of proposed rulemaking (REG– 125716–18) in the Federal Register (85 FR 40927) under section 1502 of the Code (proposed regulations). The proposed regulations provided guidance implementing recent statutory amendments to section 172, relating to net operating loss (NOL) deductions, and withdrew and re-proposed certain sections of proposed guidance issued in prior notices of proposed rulemaking relating to the absorption of CNOL carryovers and carrybacks. In addition, the proposed regulations updated regulations applicable to consolidated groups that include both life insurance companies and other companies to reflect statutory changes. VerDate Sep<11>2014 15:51 Oct 26, 2020 Jkt 253001 In connection with the proposed regulations, the IRS published on the same date temporary regulations under section 1502 (TD 9900) in the Federal Register (85 FR 40892) (temporary regulations). The temporary regulations permit consolidated groups that acquire new members that were members of another consolidated group to elect to waive all or part of the pre-acquisition portion of an extended carryback period under section 172 for certain losses attributable to the acquired members. The text of the temporary regulations also serves as the text of § 1.1502– 21(b)(3)(ii)(C) and (D) of the proposed regulations. The IRS received seven comments in response to the proposed regulations. Copies of the comments received are available for public inspection at http:// www.regulations.gov or upon request. No public hearing was requested or held. This Treasury decision adopts the proposed regulations, other than proposed § 1.1502–21(b)(3)(ii)(C) and (D), as final regulations with the changes described in the following Summary of Comments and Explanation of Revisions. The Treasury Department and the IRS expect to finalize proposed § 1.1502–21(b)(3)(ii)(C) and (D) at a later date and welcome further comments on these provisions. Summary of Comments and Explanation of Revisions I. Comments On and Changes To Proposed § 1.1502–21 A. Overview of Section 172 These final revisions implement certain statutory amendments to section 172 made by Public Law 115–97, 131 Stat. 2054 (December 22, 2017), commonly referred to as the Tax Cuts and Jobs Act (TCJA), and by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law 116–136, 134 Stat. 281 (March 27, 2020). See generally the Background section of the preamble to the proposed regulations. As amended, section 172(a)(2) allows an NOL deduction for a taxable year beginning after December 31, 2020, in an amount equal to the sum of (A) the aggregate amount of pre-2018 NOLs that are carried to such taxable year, and (B) the lesser of (i) the aggregate amount of post-2017 NOLs that are carried to such taxable year, or (ii) the ‘‘80-percent limitation.’’ The 80percent limitation is equal to 80 percent of the excess (if any) of (I) taxable income computed without regard to any deductions under sections 172, 199A, and 250 of the Code, over (II) the aggregate amount of pre-2018 NOLs carried to the taxable year. See section PO 00000 Frm 00003 Fmt 4700 Sfmt 4700 67967 172(a)(2)(B)(ii). For purposes of the foregoing computation, the term ‘‘pre2018 NOLs’’ refers to NOLs arising in taxable years beginning before January 1, 2018, and the term ‘‘post-2017 NOLs’’ refers to NOLs arising in taxable years beginning after December 31, 2017. The 80-percent limitation does not apply to the offset of income by NOLs in taxable years beginning before January 1, 2021. Section 172(a)(1). The 80-percent limitation also does not apply to limit the use of pre-2018 NOLs. Section 172(a)(2)(A). Moreover, the 80-percent limitation does not apply to insurance companies other than life insurance companies (nonlife insurance companies). Section 172(f). Therefore, the taxable income of nonlife insurance companies may be fully offset by NOL deductions. In addition, under section 172(b)(1)(C) and (b)(1)(D)(i), losses of nonlife insurance companies arising in taxable years beginning after December 31, 2020, may be carried back two years and carried over 20 years. In contrast, losses (aside from farming losses) of other taxpayers arising in such taxable years may not be carried back but may be carried forward indefinitely. Section 172(b)(1). Thus, nonlife insurance companies are subject to special rules under section 172 both with respect to the amount of taxable income that may be offset by NOL deductions and with respect to the taxable years to which NOLs may be carried. B. Overview of the Proposed Approach and the Alternative Approach To implement the special rules under section 172 for nonlife insurance companies for a consolidated return year beginning after December 31, 2020, the proposed regulations provided that the application of the 80-percent limitation within a consolidated group to post-2017 NOLs depends on the status of the member that generated the income being offset. The proposed regulations further provided that the amount of post-2017 CNOLs that may be absorbed by one or more members of the group in such a consolidated return year (post-2017 CNOL deduction limit) is determined by applying the 80-percent limitation, section 172(f) (that is, the special rule for nonlife insurance companies), or both, to the group’s consolidated taxable income (CTI) for that year. See proposed § 1.1502– 21(a)(2)(ii)(A) and (B). For consolidated groups comprised of both nonlife insurance companies and other members for a consolidated return year beginning after December 31, 2020, the proposed regulations adopted a twofactor computation (proposed E:\FR\FM\27OCR1.SGM 27OCR1 jbell on DSKJLSW7X2PROD with RULES 67968 Federal Register / Vol. 85, No. 208 / Tuesday, October 27, 2020 / Rules and Regulations approach). In general, under the proposed approach, the post-2017 CNOL deduction limit for such a group equals the sum of two amounts. The first amount, which relates to the income of those members that are not nonlife insurance companies (residual income pool), is subject to the 80percent limitation. The second amount, which relates to the income of those members that are nonlife insurance companies (nonlife income pool), is not subject to the 80-percent limitation. See proposed § 1.1502–21(a)(2)(iii)(C). Thus, the proposed approach divides a consolidated group’s nonlife insurance companies and its other members into two separate ‘‘pools’’ for purposes of determining the amount of CTI that is available to be offset by post-2017 CNOLs after applying the 80-percent limitation. In formulating the proposed regulations, the Treasury Department and the IRS considered another approach (alternative approach). This alternative approach would have required a group to first offset income and loss items within a pool of nonlife insurance companies and a pool of other members for all purposes of section 172 applicable to taxable years beginning after December 31, 2020. In other words, the alternative approach would have applied a pooling concept beyond merely determining the group’s post2017 CNOL deduction limit, but would have required a group’s CTI to be allocated between the operations of its nonlife insurance company members, which can be offset fully by CNOL deductions, and the operations of its other members subject to the 80-percent limitation. This alternative approach would also have applied similar rules to allocate CNOLs within groups including both nonlife insurance companies and other members to consistently identify the portions of CNOLs allocable to nonlife insurance company members, which are subject to different carryover rules than those of other members. The alternative approach would have contrasted with the historical application of § 1.1502–21(b)(2)(iv)(B), under which a CNOL for a taxable year is attributed pro rata to all members of a group that produce net loss, without first netting among entities of the same type. In the preamble to the proposed regulations, the Treasury Department and the IRS requested comments regarding both the proposed approach and the alternative approach. C. Comments on the Proposed Approach and the Alternative Approach In response to the request for comments, the Treasury Department VerDate Sep<11>2014 15:51 Oct 26, 2020 Jkt 253001 and the IRS received comments that uniformly approved the proposed approach. For example, two commenters commended the proposed regulations as implementing the statutory amendments to section 172 in a reasonable manner that is consistent with both the statute and consolidated return principles. Specifically, both commenters supported the proposed regulations’ approach to computing a group’s post-2017 CNOL deduction limit as well as the proposed regulations’ retention of the historical pro rata approach under § 1.1502– 21(b)(2)(iv)(B) to determine the amount of nonlife insurance company losses that can be carried to other taxable years. In support of the proposed regulations, one commenter asserted that the proposed approach is more consistent with the treatment of CNOLs as consolidated items and with the current CNOL use and absorption rules in § 1.1502–21 than the alternative approach. The commenter further asserted that, because the alternative approach would depart from the general pro rata rules of § 1.1502–21 by first netting income and loss among entities of the same type within a consolidated group, the alternative approach could result in computational and compliance complications in circumstances that may be difficult to anticipate. In response to the comments received, these final regulations retain the proposed approach to computing a consolidated group’s post-2017 CNOL deduction limit. D. Application of the Proposed Approach to Life-Nonlife Groups One commenter recommended that, for consolidated groups with both nonlife insurance companies and life insurance companies, the amounts of the residual income pool and the nonlife income pool in proposed § 1.1502–21(a)(2)(iii)(C)(2) and (3) be clarified to refer only to the items of income, gain, deduction, or loss of members of the nonlife subgroup (as defined in § 1.1502–47(b)(9) of these final regulations). The commenter further recommended that, in making this clarification, the Treasury Department and the IRS should not prevent nonlife CNOLs from offsetting life subgroup income where permitted by the Code and § 1.1502–47. The commenter noted that this outcome appears to be the intent of the crossreference to § 1.1502–47 in proposed § 1.1502–21(b)(2)(iv)(E), but the commenter indicated that clarification would be useful. The Treasury Department and the IRS agree with the PO 00000 Frm 00004 Fmt 4700 Sfmt 4700 commenter regarding the purpose of the cross-reference to § 1.1502–47 in proposed § 1.1502–21(b)(2)(iv)(E) and have revised the regulations to more clearly confirm this outcome. E. Consolidated Capital Gain Net Income Section 1.1502–11(a)(3) provides that the CTI for a consolidated return year is determined by taking into account, among other enumerated items, any consolidated capital gain net income. See generally § 1.1502–22(a) (providing rules for determining consolidated capital gain net income). Under § 1.1502–22(a), the determinations for a consolidated group under section 1222, including capital gain net income, are not made separately. Instead, such consolidated amounts are determined for the group as a whole. Section 1.1502–11 does not provide explicit rules for allocating consolidated capital gain net income among members. Thus, one commenter requested that the final regulations clarify that, for groups that include nonlife insurance companies, consolidated capital gain net income under § 1.1502–11(a)(3) is allocated to the residual income pool and the nonlife income pool using a pro rata method based on the principles of § 1.1502–21(b)(2)(iv), as reflected in the general rule in § 1.1502–21(b)(1), for the use and absorption of CNOLs. Section 1.1502–11 also does not provide explicit rules for determining the amount of each member’s income that is offset by losses (whether incurred in the current year or carried over or back as a part of a CNOL or consolidated net capital loss). However, the Treasury Department and the IRS understand that, in the absence of express rules, consolidated return practitioners generally apply the principles of § 1.1502–21(b)(2)(iv) to make such determinations. The methodology for computing a consolidated group’s post2017 CNOL deduction limit is intended to implement the changes made to section 172(a) by the TCJA and the CARES Act in a manner that is flexible for taxpayers to apply and administrable for the IRS. The Treasury Department and the IRS have determined that specific rules regarding the allocation of consolidated capital gain net income to the residual income pool and the nonlife income pool under § 1.1502– 21(a)(2)(iii)(C)(2) and (3) would exceed the scope of these final regulations. Accordingly, the Treasury Department and the IRS continue to reflect on the commenter’s recommendation but have not incorporated that recommendation into the final regulations. E:\FR\FM\27OCR1.SGM 27OCR1 jbell on DSKJLSW7X2PROD with RULES Federal Register / Vol. 85, No. 208 / Tuesday, October 27, 2020 / Rules and Regulations F. Example 6 in Proposed § 1.1502– 21(b)(2)(v)(F) Proposed § 1.1502–21(b)(2)(v)(F) (Example 6) contains an example that illustrates the application of section 172 to a CNOL incurred by a consolidated group (P group) that includes P, an includible corporation under section 1504(b) of a type other than a nonlife insurance company, and PC1, a nonlife insurance company. Both P and PC1 were incorporated in Year 1, a year beginning after December 31, 2020. In Year 1, the P group has $45 of CTI, $20 of which is attributable to P and $25 of which is attributable to PC1. In Year 2, the P group incurs a $16 CNOL that is attributable to PC1 and that is carried back to Year 1 under section 172(b)(1)(C)(i). The example illustrates that, under proposed § 1.1502–21(a)(2)(iii)(C), the P group’s post-2017 CNOL deduction limit for Year 1 is $41, which is the sum of the residual income pool ($16) and the nonlife income pool ($25), as described in proposed § 1.1502– 21(a)(2)(iii)(C)(2) and (3), respectively. More specifically, the amount of the residual income pool equaled the lesser of the aggregate amount of post-2017 NOLs carried to Year 1 ($16), or 80 percent of the excess of P’s taxable income for that year ($20) over the aggregate amount of pre-2018 NOLs allocable to P ($0), which also was $16 (80 percent × ($20¥$0)). See proposed § 1.1502–21(b)(2)(v)(F)(3). The amount of the nonlife income pool equaled the excess of PC1’s taxable income for Year 1 ($25) over the aggregate amount of pre-2018 NOLs allocable to PC1 ($0). Id. Two commenters requested clarification as to how much taxable income in each pool is offset by a CNOL carryover or carryback if each pool has positive taxable income, as in Example 6. Specifically, commenters contended that a specific absorption rule is needed to determine how much taxable income in the residual income pool (which is subject to the 80-percent limitation) can be offset by subsequent CNOL carryovers or carrybacks to the same year. For example, assume the same facts as in Example 6, but that the P group also incurs a $30 CNOL in Year 3 that is entirely attributable to PC1 and that is eligible to be carried back to Year 1. Absent a rule specifying how much taxable income in each pool was offset in Year 1 by the $16 Year 2 CNOL carryback, the commenters questioned how to compute the residual income pool for purposes of determining how much of the P group’s Year 3 CNOL carryback could be absorbed by the P group in Year 1. VerDate Sep<11>2014 15:51 Oct 26, 2020 Jkt 253001 As noted in part I.A of this Summary of Comments and Explanation of Revisions, the computation in section 172(a)(2)(B)(ii) is made ‘‘without regard to the deductions under [section 172] and sections 199A and 250.’’ Consistent with the statute, the amount of income in the residual income pool that is subject to the 80-percent limitation for a particular consolidated return year is not recomputed to reflect the amount of CNOLs carried over to and absorbed in that year. See § 1.1502–21(a)(2)(iii)(C)(2) of these final regulations. Rather, the only component of the post-2017 CNOL deduction limit that is subject to change upon the carryover or carryback of additional CNOLs to the same consolidated return year is the aggregate amount of post-2017 CNOLs carried to that year. See § 1.1502– 21(a)(2)(iii)(C)(1)(i) of these final regulations. Determining this amount does not require an absorption rule. With regard to Example 6, if the P group were to incur a $30 CNOL in Year 3 that was eligible to be carried back to Year 1, the P group would redetermine the aggregate amount of the P group’s post-2017 CNOLs that are carried to Year 1, but the P group would not recompute the amount of Year 1 income subject to the 80-percent limitation. Thus, an absorption rule is not needed to determine how much of the P group’s Year 1 CTI can be offset by subsequent CNOL carrybacks. However, these final regulations provide additional facts in Example 6 to illustrate the computation of the amount of additional CNOL carryovers or carrybacks to the same consolidated return year that can be deducted to offset income in that year. G. Split-Waiver Elections If a member of one consolidated group becomes a member of another consolidated group, § 1.1502– 21(b)(3)(ii)(B) permits the acquiring group to make an irrevocable election to relinquish, with respect to all CNOLs attributable to the acquired corporation, the portion of the carryback period for which the acquired corporation was a member of another group (so long as any other corporation joining the acquiring group that was affiliated with the acquired corporation immediately before it joined the acquiring group also is included in the waiver). A commenter noted that, pursuant to § 1.1502–21(b)(3)(ii)(B), an acquiring group may make a split-waiver election only with respect to acquired corporations that were members of a different consolidated group in a carryback year. The commenter recommended that § 1.1502–21(b)(3)(ii) be expanded to allow a split-waiver PO 00000 Frm 00005 Fmt 4700 Sfmt 4700 67969 election if the acquired corporation was not a member of a consolidated group in the carryback year. The Treasury Department and the IRS appreciate the commenter’s suggestion and will continue to consider it in connection with the future finalization of the temporary regulations. However, this comment exceeds the scope of these final regulations, which adopt the provisions of the proposed regulations other than those for which the text was contained in the temporary regulations (specifically, § 1.1502–21(b)(3)(ii)(C) and (D)). Therefore, the Treasury Department and the IRS decline to adopt this recommendation in this Treasury decision. H. Modification to SRLY Rules The proposed regulations modify the separate return limitation year (SRLY) rules in § 1.1502–21(c) to take into account the limitations on NOL deductions under section 172, as amended by the TCJA and the CARES Act. See proposed § 1.1502– 21(c)(1)(i)(E). A commenter recommended that this modification not apply for purposes of section 1503(d) (the dual consolidated loss (DCL) rules). In certain cases, the extent to which section 1503(d) restricts the use of a DCL, or requires the recapture of a DCL (or a related interest charge), depends on the application of the SRLY rules in § 1.1502–21(c), subject to certain adjustments. See §§ 1.1503(d)–4(c)(3) and 1.1503(d)–6(h)(2). In these cases, the adjusted SRLY rules are generally intended to ensure that a DCL may be used only to offset income of the dual resident corporation or separate unit that incurred the DCL, such that the use does not result in a ‘‘double dip’’ of the DCL. The commenter recommended that the modification reflected in proposed § 1.1502–21(c)(1)(i)(E) not apply for purposes of the DCL rules because the modification addresses policies specific to the SRLY rules in § 1.1502–21(c) (replicating, to the extent possible, separate-entity usage of SRLY attributes), which differ from the policies underlying the DCL rules (preventing double dipping of losses). In addition, the commenter asserted that applying the rule in proposed § 1.1502– 21(c)(1)(i)(E) for DCL purposes could distort the determination of whether double dipping could occur. The Treasury Department and the IRS agree with the commenter. The final regulations therefore provide that § 1.1502–21(c)(1)(i)(E) does not apply for purposes of the DCL rules. See § 1.1503(d)–4(c)(3)(v). E:\FR\FM\27OCR1.SGM 27OCR1 jbell on DSKJLSW7X2PROD with RULES 67970 Federal Register / Vol. 85, No. 208 / Tuesday, October 27, 2020 / Rules and Regulations I. Clarifying Changes to Proposed § 1.1502–21 In addition to the foregoing comments, a commenter recommended clarifying changes to proposed § 1.1502– 21. The Treasury Department and the IRS appreciate these suggested clarifications and have incorporated many of them into the final regulations. However, the commenter also recommended deleting the reference to section 199A in proposed §§ 1.1502– 21(a)(2)(iii)(A)(2)(ii) and 1.1502– 21(a)(2)(iii)(C)(2)(ii) on the grounds that the deduction under section 199A is available to only noncorporate taxpayers. Because section 199A(g) provides a deduction for specified agricultural or horticultural cooperatives, which (as C corporations) can be members of a consolidated group, these references to section 199A have been retained in the final regulations. The Treasury Department and the IRS also have made additional clarifying revisions based on further review of the proposed regulations. In particular, the final regulations contain corrections to scrivener’s errors in the two-factor computation in proposed § 1.1502– 21(a)(2)(iii). Specifically, the ‘‘lesser of’’ language in proposed § 1.1502– 21(a)(2)(iii)(C)(2), which was intended to reflect the application of section 172(a)(2)(B) to groups that include both nonlife insurance companies and other corporations, was mislocated. To accurately reflect the comparison required under section 172(a)(2)(B), the language at issue has been moved to § 1.1502–21(a)(2)(iii)(C)(1) of the final regulations. Additional edits have been made to enhance the consistency and clarity of the rules in proposed § 1.1502–21(a)(2). For example, language reflecting the ‘‘lesser of’’ comparison described in the preceding paragraph has been explicitly integrated into §§ 1.1502–21(a)(2)(iii)(B) and 1.1502–21(a)(2)(iii)(C)(5)(ii) (concerning CNOL deductions that offset income of nonlife insurance company members) of these final regulations. As discussed in part II.B of this Summary of Comments and Explanation of Revisions, the post-2017 CNOL deduction limit equals the maximum amount of post-2017 CNOLs that can be deducted against taxable income in a consolidated return year beginning after December 31, 2020. This amount could never exceed the total amount of post-2017 CNOLs carried to that year. See section 172(f) (providing that, in the case of a nonlife insurance company, the amount of the NOL deduction allowed under section 172(a) VerDate Sep<11>2014 15:51 Oct 26, 2020 Jkt 253001 in any taxable year equals the aggregate of NOL carrybacks and carryovers to that year). Likewise, in the absence of any other limitation, the taxable income of a taxpayer always constitutes a limit on the deductibility of NOLs. See generally section 172(b)(2). Without such limit, the deduction of NOLs in excess of taxable income would create an additional NOL. The Treasury Department and IRS have determined that explicitly providing the respective post-2017 CNOL and taxable income limitations on the deduction of NOLs to offset taxable income of nonlife insurance companies will enhance the clarity of the final regulations and the consistency of their application. II. Comments On and Changes To Proposed § 1.1502–47 The proposed regulations updated the rules in § 1.1502–47 to reflect statutory changes enacted since these rules were promulgated. Commenters commended the Treasury Department and the IRS for updating these regulations. Additionally, several commenters expressed their understanding that another guidance project has been initiated to propose substantive changes to § 1.1502–47 and urged the Treasury Department and the IRS to give priority to this effort. These commenters argued that the objective of that guidance project should be the elimination of any provisions that depart from general consolidated return principles in lifenonlife consolidation, except to the extent non-conforming provisions are necessary to implement specific provisions of the Code. In particular, these commenters expressed concern about the treatment of consolidated capital gains and losses under § 1.1502– 47 and requested simplification of the eligibility and tacking rules. The Treasury Department and the IRS appreciate the commenters’ input and welcome further comments regarding substantive changes to § 1.1502–47 for purposes of potential future guidance. However, such changes are beyond the scope of these final regulations. Additionally, commenters recommended several clarifying changes to proposed § 1.1502–47. Many of these suggested clarifications have been incorporated into the final regulations. For example, these final regulations have added a cross-reference to the definition of ‘‘nonlife insurance company’’ in § 1.1502–1(k). However, one commenter recommended that § 1.1502–47(g)(3) of these final regulations be modified to more closely parallel § 1.1502–47(f)(3) of these final regulations. The commenter further PO 00000 Frm 00006 Fmt 4700 Sfmt 4700 requested that paragraph (d)(5) of these final regulations be modified to explicitly set forth the various rules (both statutory and regulatory) that apply to certain dividends received by an includible member from another member of the consolidated group. These comments exceed the scope of these final regulations, but the Treasury Department and the IRS will continue to consider these comments for purposes of potential future guidance regarding § 1.1502–47. Effective/Applicability Dates The final regulations in §§ 1.1502– 1(k), 1.1502–21(a), (b)(1), (b)(2)(iv), and (c)(1)(i)(E), 1.1502–47, and 1.1503(d)– 8(b)(8) apply to taxable years beginning after December 31, 2020. However, a taxpayer may choose to apply the rules in §§ 1.1502–1(k) and 1.1502–47 of these final regulations to taxable years beginning on or before December 31, 2020. If a taxpayer makes the choice described in the previous sentence with regard to the rules in § 1.1502–47, the corporation must apply those rules in their entirety and consistently with the provisions of the Internal Revenue Code applicable to the years at issue. Special Analyses I. Regulatory Planning and Review— Economic Analysis Executive Orders 13563, 13771, and 12866 direct agencies to assess costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. These final regulations have been designated as subject to review under Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Treasury Department and the Office of Management and Budget (OMB) regarding review of tax regulations. The Office of Information and Regulatory Affairs (OIRA) has designated the final regulations as economically significant under section 1(c) of the Memorandum of Agreement. Accordingly, OMB has reviewed the final regulations. A. Background and Need for Regulations In general, taxpayers whose deductions exceed their income generate a net operating loss (NOL), E:\FR\FM\27OCR1.SGM 27OCR1 jbell on DSKJLSW7X2PROD with RULES Federal Register / Vol. 85, No. 208 / Tuesday, October 27, 2020 / Rules and Regulations calculated under the rules of section 172. Section 172 also governs the use of NOLs generated in other years to offset taxable income in the current year. Regulations issued under the authority of section 1502 may be used to govern how section 172 applies to consolidated groups of C corporations. In general, a consolidated group generates a combined NOL at an aggregate level (CNOL), with the CNOL generally equal to the loss generated from treating the consolidated group as a single entity. Under regulations promulgated prior to the Tax Cuts and Jobs Act (TCJA), the allowed CNOL deduction was equal to the lesser of the CNOL carryover or the combined taxable income of the group (before the CNOL deduction). The TCJA and the Coronavirus Aid, Relief, and Economic Security (CARES) Act made several changes to section 172. First, the TCJA and the CARES Act disallowed the carry back of NOLs generated in taxable years beginning after 2020, except for farming losses and losses incurred by corporations that are insurance companies other than life insurance companies (nonlife insurance companies). Second, the TCJA and the CARES Act limited the NOL deduction in taxable years beginning after 2020 for NOLs generated in 2018 or later (post2017 NOLs) to 80 percent of taxable income determined after the deduction for pre-2018 NOLs but before the deduction for post-2017 NOLs. This 80percent limitation does not apply to nonlife insurance companies. These final regulations implement the changes to section 172 in the context of consolidated groups. In particular, regulations are needed to address three issues related to consolidated groups that were not expressly addressed in the TCJA or the CARES Act. First, the final regulations describe how to determine the 80-percent limitation in the case of a ‘‘mixed’’ group—that is, a consolidated group containing nonlife insurance companies and other members. Second, the final regulations address the calculation and allocation of farming losses. Third, the final regulations implement the 80-percent limitation into existing regulations to determine the CNOL deduction attributable to losses from a member arising during periods in which that member was not part of that group. Part I.B of this Special Analyses describes the manner by which the final regulations addresses each of these issues. Part I.B also describes an alternative approach that was contemplated by the Treasury Department and the IRS regarding the allocation of currently generated losses to nonlife insurance VerDate Sep<11>2014 15:51 Oct 26, 2020 Jkt 253001 companies and other members. The Treasury Department and the IRS elected not to implement this approach. B. Overview of the Final Regulations In this part I.B the following terms are used. The term ‘‘P group’’ means a consolidated group of which P is the common parent. The term ‘‘P&C member’’ means a member of the P group that is a nonlife insurance company. The term ‘‘C member’’ means a member of the P group that is a C corporation other than a nonlife insurance company. 1. Application of 80-Percent Limitation in Mixed Groups Under the statute, the general rule for determining the NOL deduction (for a taxable year beginning after December 31, 2020) effectively proceeds in two steps. First, the taxpayer deducts pre2018 NOLs without limit. Second, the taxpayer deducts post-2017 NOLs up to 80 percent of the taxpayer’s taxable income (computed without regard to the deductions under sections 199A and 250) determined after the deduction of pre-2018 NOLs (but, naturally, before the deduction for post-2017 NOLs). However, this 80-percent limitation does not apply for corporations that are nonlife insurance companies. The application of the 80-percent limitation to the P group is straightforward if (i) there are no pre2018 NOLs and (ii) both classes of P&C members and C members have positive income before the CNOL deduction. In that case, these final regulations provide, quite naturally, that the CNOL limitation is determined by adding (i) the pre-CNOL income generated by the class of C members (C member income pool), determined by applying the 80percent limitation, plus (ii) 100 percent of the pre-CNOL income generated by the class of P&C members (P&C member income pool). This latter treatment reflects the rule in section 172(f) that nonlife insurance companies are not subject to the 80-percent limitation. One complication arises when the pre-CNOL C member income pool is positive and the pre-CNOL P&C income pool is negative, and the P group has positive combined pre-CNOL taxable income. In this case (where the preCNOL income is generated by C members, rather than P&C members), these final regulations provide that the post-2017 CNOL deduction limit is determined by applying the 80-percent limitation to the income of the P group. If the situation were reversed, such that the P group had positive combined taxable income but the pre-CNOL income is generated by P&C members, PO 00000 Frm 00007 Fmt 4700 Sfmt 4700 67971 rather than the C members, the post2017 CNOL deduction limit is equal to the income of the P group (that is, determined without regard to the 80percent limitation). In essence, in these situations, the amount of the P group’s income able to absorb a post-2017 CNOL carryover is defined by the member pool (that is, the C member income pool or the P&C member income pool) that is generating the income. The other complication occurs when there is a pre-2018 NOL. In this situation, it matters whether the pre2018 NOL is treated as reducing the amount of the C member income pool or reducing the amount of P&C member income pool. Consider the following example (Example 1). In Example 1, the P group carries $50 in pre-2018 NOLs and $1000 in post-2017 NOLs to 2021. In 2021, the P&C members and the C members, respectively, earn (pre-CNOL) income of $100. If the pre-2018 NOL were treated as solely reducing the amount of C member income pool, then the limitation for the post-2017 CNOL deduction would be $100 plus 80 percent of $50 ($100 minus $50), equal to $140. If the pre-2018 NOL were treated as solely reducing the amount of the P&C member income pool, then the post-2017 CNOL deduction limit for the P group would be $50 ($100 minus $50) plus 80 percent of $100, or $130. These final regulations allocate the pre-2018 NOL pro-rata to the C member income pool and the P&C member income pool in proportion to their current-year income. In Example 1, $25 of the pre-2018 NOL would be allocated to the C member income pool and $25 to the P&C member income pool. Therefore, the post-2017 CNOL deduction limit for the P group would be $75 ($100 minus $25) plus 80 percent of $75 ($100 minus $25), or $135. 2. Farming Losses Section 172 provides that NOLs arising in a taxable year beginning after December 31, 2020, may not be carried back to prior years, with two exceptions: (1) Farming losses and (2) nonlife insurance company losses. Section 172(b)(1)(B) defines a ‘‘farming loss’’ as the smaller of the actual loss from farming activities in a given year (that is, the excess of the deductions in farming activities over income in farming activities) and the total NOL generated in that year. This statutory provision means that if a taxpayer incurs a loss in farming activities but has overall income in other activities, the farming loss will be smaller than the loss in farming activities (and can possibly be zero). E:\FR\FM\27OCR1.SGM 27OCR1 67972 Federal Register / Vol. 85, No. 208 / Tuesday, October 27, 2020 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES Regulations were needed to clarify two issues that arise in the context of consolidated groups. First, these regulations clarify that the maximum amount of farming loss is the CNOL of the group rather than the NOL of the specific member generating the loss in farming activities. This approach follows closely regulations issued by the Treasury Department and the IRS in 2012 in an analogous setting. Second, given the overlapping categories of carryback-eligible NOLs (farming losses and nonlife insurance companies), regulations are needed to allocate the farming loss to the various members to determine the total amount of CNOL that can be carried back. Consider the following example (Example 2). In Example 2, the P group consists of one C member and one P&C member. In 2021, the C member’s only activity is farming and the C member incurs a loss of $30, while the P&C member incurs a loss of $10. The total farming loss is $30, since $30 is less than the P group CNOL of $40. If this farming loss were allocated entirely to the C member, then the total amount eligible for carryback would be $40 (that is, $30 for the farming loss and $10 for the loss incurred by the P&C member). By contrast, if the farming loss were allocated entirely to the P&C member, only $30 would be eligible to be carried back. Again, following a similar rule as the 2012 regulations, these final regulations allocate the farming loss to each member of the group in proportion with their share of total losses, without regard to whether each member actually engaged in farming. In Example 2, this would allocate $7.50 (that is, one-fourth of $30) of the farming loss to the P&C member and the remaining $22.50 (that is, three-fourths of $30) to the C member. Therefore, the P group would be allowed to carry back $32.50 total (that is, the $10 of loss generated by the P&C member and the $22.50 of farming losses allocated to the C member). 3. Separate Return Limitation Year To reduce ‘‘loss trafficking,’’ existing regulations under section 1502 limit the extent to which a consolidated group (that is, the P group) can claim a CNOL attributable to losses generated by some member (M) in years in which M was not a member. In particular, existing rules limit this amount of loss to the amount of the loss that would have been deductible had M remained a separate entity; that is, the rules are designed to preserve neutrality in loss use between being a separate entity or a member of a group. Existing rules operationalize this principle using the mechanic of a VerDate Sep<11>2014 15:51 Oct 26, 2020 Jkt 253001 ‘‘cumulative register.’’ The cumulative register is equal to the (cumulative) amount of M’s income that is taken into account in the P group’s income. Income earned by M while a member of the P group increases the cumulative register, while losses (carried over or otherwise) taken into account by the group reduce the cumulative register. In general, the existing rules provide that M’s pre-group NOLs cannot offset the P group’s income when the cumulative register is less than or equal to zero. The introduction of the 80-percent limitation in the TCJA and CARES Act necessitates an adjustment to this mechanism in order to retain this neutrality-in-loss-use property. In particular, these final regulations provide that any losses by M that are absorbed by the P group and subject to the 80-percent limitation cause a reduction to the register equal to the full amount of income needed to support that deduction. The following example (Example 3) demonstrates why this adjustment is necessary. In Example 3, P and S are each corporations other than nonlife insurance companies (that is, they are subject to the 80-percent limitation). Suppose in 2021, S incurs a loss of $800, which is the only loss ever incurred by S. In 2022, S incurs income of $400. If S were not a member of a consolidated group, its 2022 NOL deduction would be limited to $320 (80 percent of $400). Suppose instead that P acquires S in 2022 and that P has separate income of $600 in 2022, so the consolidated group has $1000 in preCNOL income in 2022. Before claiming any CNOLs, S’s cumulative register would increase to $400 in 2022. Without any additional rules, the $400 cumulative register would allow P to claim a CNOL of $400 (bringing the register down to zero), greater than what would have been allowed had S remained a separate entity. By contrast, requiring the register to be reduced by 125 percent of the NOL (as under the final regulations) allows P to claim only a $320 CNOL, replicating the result if S were a separate entity. 4. Allocation of Current Losses to Nonlife Insurance Companies In general, under the TCJA and CARES Act, taxpayers may not carry back any losses generated in tax years beginning after 2020, with the exception of losses generated by nonlife insurance companies and farming losses. Existing regulations clarify that CNOLs are allocated to each member in proportion to the total loss. This allocation rule can be illustrated by example (Example 4). In Example 4, the C member has a current loss of $10 (in a tax year PO 00000 Frm 00008 Fmt 4700 Sfmt 4700 beginning in 2021 or later). The P&C members are corporations PC1 and PC2. PC1 has a gain of $40 and PC2 has a loss of $40. Assume that the P group does not engage in any farming activities. The CNOL for the P group is $10. The $10 of CNOL is allocated to the C member and PC2 in proportion to their total losses. The C member has one-fifth of the total loss ($10 divided by $50) and PC2 has four-fifths. Therefore, under the existing regulations, the C member is allocated $2 ($10 times one-fifth) and PC2 is allocated $8 ($10 times fourfifths). In the end, $8 of the CNOL may be carried back in Example 4. The final regulations do not alter these existing regulations. In formulating these final regulations, the Treasury Department and the IRS contemplated an alternative approach. Under this alternative, consolidated groups would be required to compute gain and loss by grouping P&C members and C members separately prior to allocating CNOL to members. The application of this approach can be seen by revisiting Example 4. Under this alternative approach, because the P&C members as a whole do not have a loss, no CNOL would be allocated to any P&C member regardless of the gain or loss of any of the individual P&C members. Thus, under the alternative approach, none of the $10 CNOL would be eligible for carryback in Example 4. C. Economic Analysis 1. Baseline In this analysis, the Treasury Department and the IRS assess the benefits and costs of the final regulations relative to a no-action baseline reflecting anticipated Federal income tax-related behavior in the absence of these regulations. 2. Summary of Economic Effects The final regulations provide certainty and clarity to taxpayers regarding the treatment of NOLs under section 172 and the regulations under section 1502. In the absence of such guidance, the chance that different taxpayers would interpret the statute and the regulations differently would be exacerbated. Similarly situated taxpayers might interpret those rules differently, with one taxpayer pursuing an economic opportunity that another taxpayer might decline to make because of different interpretations of the ability of losses to offset taxable income. If this second taxpayer’s activity were more profitable, the resulting economic decisions are inefficient. Such situations are more likely to arise in the absence of guidance. While no guidance can E:\FR\FM\27OCR1.SGM 27OCR1 jbell on DSKJLSW7X2PROD with RULES Federal Register / Vol. 85, No. 208 / Tuesday, October 27, 2020 / Rules and Regulations curtail all differential or inaccurate interpretations of the statute, the regulations significantly mitigate the chance for differential or inaccurate interpretations and thereby increase economic efficiency. To the extent that the specific provisions of the final regulations result in the acceleration or delay of the tax year in which taxpayers deduct an NOL relative to the baseline, those taxpayers may face a change in the present value of the after-tax return to new investment, particularly investment that may result in losses. The resulting changes in the incentives facing the taxpayer are complex and may lead the taxpayer either to increase, decrease, or leave unchanged the volume and risk level of its investment portfolio, relative to the baseline, in ways that depend on the taxpayer’s stock of NOLs and the depreciation schedules and income patterns of investments they would typically consider, including whether the investment is subject to bonus depreciation. Because these elements are complex and taxpayer-specific and because the sign of the effect on investment is generally ambiguous, the Treasury Department and the IRS have not projected the specific effects on economic activity arising from the final regulations. The Treasury Department and the IRS project that these regulations will have annual effects below $100 million ($2020) relative to the baseline. The effects are small because the regulations apply only to consolidated groups; in addition, several provisions of the final regulations apply only to the extent that a consolidated group contains a mix of member types. Moreover, the effects are small because: (i) For provisions of the final regulations that affect the deduction for pre-2018 NOLs, the effects are limited to the stock of the pre-2018 NOLs; and (ii) for provisions that affect the allowable rate of loss usage of post2017 NOLs, the effect arises only from the 20 percentage point differential in the deduction for these NOLs. This latter effect in particular, to which the bulk of the provisions apply, is too small to substantially affect taxpayers’ use of NOLs and thus too small to lead to meaningful changes in economic decisions. The Treasury Department and the IRS did not estimate more precisely the economic effects of these regulations because (i) the effects are expected to be small and (ii) data or models that would address the effects of these regulations are not readily available. In the absence of quantitative estimates, the subsequent discussion provides qualitative analysis of these economic effects. VerDate Sep<11>2014 15:51 Oct 26, 2020 Jkt 253001 67973 The proposed regulations solicited comments on the economic effects of the proposed regulations. No such comments were received. the final regulations or the alternative approach, is not high. No additional substantive alternatives were raised by the comments. 3. Allocation of CNOLs to Specific Members of Consolidated Groups 4. Affected Taxpayers The final regulations do not amend existing rules for the allocation of the CNOL within consolidated groups. The final regulations follow existing rules and allocate the CNOLs to each member of the group in proportion to the total loss. The Treasury Department and the IRS considered an alternative approach that would have required groups to compute gain and loss at the subgroup level prior to allocating CNOL to members. Recall Example 4 in which the P&C subgroup had no gain or loss but the C subgroup had a loss of $10. Under this alternative approach, because the P&C subgroup as a whole does not have a loss, no CNOL would be allocated to any member in the P&C group regardless of the gain or loss of any of the individual members of PC. Thus, in Example 4, none of the $10 CNOL would be eligible for carryback. The Treasury Department and the IRS recognize that as a result of the TCJA and the CARES Act, the final regulations may provide groups with an incentive to split their C members into several corporations—some with loss and some with gain; this potential incentive would not exist under the alternative regulatory approach. In certain circumstances, such a strategy would effectively enable some share of the losses generated by the other C members to be carried back. This change in the business structure of consolidated groups may entail economic costs because, to the extent this strategy is pursued, it would result from tax-driven rather than market-driven considerations. The Treasury Department and the IRS project, however, that the adopted approach will have lower compliance costs for taxpayers, relative to the alternative regulatory approach, because it generally follows existing regulatory practice for allocating losses within a consolidated group. The Treasury Department and the IRS have not attempted to estimate the economic consequences of either of these effects but project them to be small. The effects are projected to be small because (i) only a small number of taxpayers are likely to be affected; (ii) any reorganization that occurs due to the final regulations will primarily be ‘‘on paper’’ and entail little or no economic loss; and (iii) the compliance burden of loss allocation, under either PO 00000 Frm 00009 Fmt 4700 Sfmt 4700 The Treasury Department and the IRS project that these regulations will primarily affect consolidated groups that contain at least one nonlife insurance member and at least one member that is not a nonlife insurance company. Based on data from 2015, the Treasury Department and the IRS calculate that there were 1,130 such consolidated groups. Approximately 460 of these groups were of ‘‘mixed loss’’ status, meaning that at least one nonlife insurance member had a gain and one other member had a loss, or vice versa. D. Summary In sum, these regulations clarify the recent statutory changes to section 172 as they apply to consolidated corporate groups. The Treasury Department and IRS project the economic effect of these regulations to be small given that (1) the effect of NOL usage on investment incentives is of ambiguous sign, (2) these regulations are projected to have only a small effect on NOL usage, and (3) it is expected that most taxpayers would have come to a similar interpretation of the statute in the absence of these regulations. II. Regulatory Flexibility Act Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that these final regulations will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that these final regulations apply only to corporations that file consolidated Federal income tax returns, and that such corporations almost exclusively consist of larger businesses. Specifically, based on data available to the IRS, corporations that file consolidated Federal income tax returns represent only approximately two percent of all filers of Forms 1120 (U.S. Corporation Income Tax Return). However, these consolidated Federal income tax returns account for approximately 95 percent of the aggregate amount of receipts provided on all Forms 1120. Therefore, these final regulations would not create additional obligations for, or impose an economic impact on, small entities. Accordingly, the Secretary certifies that the final regulations will not have a significant economic impact on a substantial number of small entities. E:\FR\FM\27OCR1.SGM 27OCR1 67974 Federal Register / Vol. 85, No. 208 / Tuesday, October 27, 2020 / Rules and Regulations Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking that preceded these final regulations was submitted to the Chief Counsel for the Office of Advocacy of the Small Business Administration for comment on its impact on small business. No comments on the notice were received from the Chief Counsel for the Office of Advocacy of the Small Business Administration. III. Unfunded Mandates Reform Act Section 202 of the Unfunded Mandates Reform Act of 1995 requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a state, local, or tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. In 2020, that threshold is approximately $156 million. This rule does not include any Federal mandate that may result in expenditures by state, local, or tribal governments, or by the private sector in excess of that threshold. jbell on DSKJLSW7X2PROD with RULES IV. Executive Order 13132: Federalism Executive Order 13132 (entitled ‘‘Federalism’’) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on state and local governments, and is not required by statute, or preempts state law, unless the agency meets the consultation and funding requirements of section 6 of the Executive Order. This rule does not have federalism implications, does not impose substantial direct compliance costs on state and local governments, and does not preempt state law within the meaning of the Executive Order. V. Congressional Review Act The Administrator of OIRA has determined that this is a major rule for purposes of the Congressional Review Act (5 U.S.C. 801 et seq.) (CRA). Under section 801(3) of the CRA, a major rule takes effect 60 days after the rule is published in the Federal Register. Consistent with this requirement, the effective date of this Treasury decision is December 28, 2020, whereas the rules in this Treasury decision apply for taxable years beginning after December 31, 2020. Drafting Information The principal authors of these regulations are Justin O. Kellar, Gregory J. Galvin, and William W. Burhop of the VerDate Sep<11>2014 15:51 Oct 26, 2020 Jkt 253001 Office of Associate Chief Counsel (Corporate). However, other personnel from the Treasury Department and the IRS participated in their development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Adoption of Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PART 1—INCOME TAX Paragraph 1. The authority citation for part 1 continues to read in part as follows: ■ Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.1502–1 is amended by adding paragraphs (k) and (l) to read as follows: ■ § 1.1502–1 Definitions. * * * * * (k) Nonlife insurance company. The term nonlife insurance company means a member that is an insurance company other than a life insurance company, each as defined in section 816(a). (l) Applicability date. Paragraph (k) of this section applies to taxable years beginning after December 31, 2020. However, a taxpayer may choose to apply paragraph (k) of this section to taxable years beginning on or before December 31, 2020. ■ Par. 3. Section 1.1502–21 is amended: ■ 1. By revising paragraph (a). ■ 2. By revising paragraph (b)(1). ■ 3. By revising paragraph (b)(2)(iv). ■ 4. By revising paragraph (b)(2)(v) introductory text. ■ 5. In paragraph (b)(2)(v), by designating Examples 1 through 3 as paragraphs (b)(2)(v)(A) through (C), respectively, and removing the period after each example number in the paragraph headings and replacing them with a colon. ■ 6. In newly designated paragraphs (b)(2)(v)(A) through (C), by redesignating paragraphs (b)(2)(v)(A)(i) and (ii) as paragraphs (b)(2)(v)(A)(1) and (2), paragraphs (b)(2)(v)(B)(i) and (ii) as paragraphs (b)(2)(v)(B)(1) and (2), and paragraphs (b)(2)(v)(C)(i) and (ii) as paragraphs (b)(2)(v)(C)(1) and (2). ■ 7. By adding paragraphs (b)(2)(v)(D) through (G). ■ 8. In paragraph (b)(3)(ii)(B), by removing the text ‘‘§ 1.1502– 21(b)(3)(ii)(B)(2)’’ and adding in its place ‘‘§ 1.1502–21(b)(3)(ii)(B)’’. ■ 9. By revising paragraph (b)(3)(ii)(C). ■ 10. By adding paragraph (b)(3)(ii)(D). ■ 11. By revising paragraph (c)(1)(i) introductory text. PO 00000 Frm 00010 Fmt 4700 Sfmt 4700 12. In paragraph (c)(1)(i)(C)(2), by removing the word ‘‘and’’. ■ 13. In paragraph (c)(1)(i)(D), by removing the word ‘‘account.’’ and adding in its place ‘‘account; and’’. ■ 14. By adding paragraph (c)(1)(i)(E). ■ 15. By revising paragraph (c)(1)(iii) introductory text. ■ 16. In paragraph (c)(1)(iii), by designating Examples 1 through 5 as paragraphs (c)(1)(iii)(A) through (E), respectively, and removing the period after each example number in the paragraph headings and replacing them with a colon. ■ 17. In newly redesignated paragraphs (c)(1)(iii)(A) through (E), by redesignating paragraphs (c)(1)(iii)(A)(i) through (iii) as paragraphs (c)(1)(iii)(A)(1) through (3), paragraphs (c)(1)(iii)(B)(i) through (vi) as paragraphs (c)(1)(iii)(B)(1) through (6), paragraphs (c)(1)(iii)(C)(i) through (iii) as paragraphs (c)(1)(iii)(C)(1) through (3), paragraphs (c)(1)(iii)(D)(i) through (iv) as paragraphs (c)(1)(iii)(D)(1) through (4), and paragraphs (c)(1)(iii)(E)(i) through (v) as paragraphs (c)(1)(iii)(E)(1) through (5). ■ 18. By revising newly redesignated paragraphs (c)(1)(iii)(A)(2) and (c)(1)(iii)(B)(2) through (6). ■ 19. In newly redesignated paragraph (c)(1)(iii)(C)(2), by adding the words ‘‘, a taxable year that begins on January 1, 2021’’ after the words ‘‘at the beginning of Year 4’’. ■ 20. By revising newly redesignated paragraphs (c)(1)(iii)(D)(2) through (4). ■ 21. By adding paragraph (c)(1)(iii)(D)(5). ■ 22. By revising newly redesignated paragraphs (c)(1)(iii)(E)(2) through (5). ■ 23. By adding paragraphs (c)(1)(iii)(E)(6) and (c)(1)(iii)(F). ■ 24. By revising paragraph (c)(2)(v). ■ 25. By revising paragraph (c)(2)(viii) introductory text,. ■ 26. In paragraph (c)(2)(viii), by designating Examples 1 through 4 as paragraphs (c)(2)(viii)(A) through (D), respectively, and removing the period after each example number in the paragraph headings and replacing them with a colon. ■ 27. In newly designated paragraphs (c)(2)(viii)(A) through (D), by redesignating paragraphs (c)(2)(viii)(A)(i) through (vii) as paragraphs (c)(2)(viii)(A)(1) through (7), paragraphs (c)(2)(viii)(B)(i) through (iv) as paragraphs (c)(2)(viii)(B)(1) through (4), paragraphs (c)(2)(viii)(C)(i) through (iii) as paragraphs (c)(2)(viii)(C)(1) through (3), and paragraphs (c)(2)(viii)(D)(i) and (ii) as paragraphs (c)(2)(viii)(D)(1) and (2). ■ 28. In newly redesignated paragraphs (c)(2)(viii)(A)(3) through (7), the first ■ E:\FR\FM\27OCR1.SGM 27OCR1 Federal Register / Vol. 85, No. 208 / Tuesday, October 27, 2020 / Rules and Regulations sentence of each, by adding the words ‘‘, including the limitation under paragraph (c)(1)(i)(E) of this section’’ after the words ‘‘under paragraph (c) of this section’’. ■ 29. In newly redesignated paragraph (c)(2)(viii)(B)(1), the first sentence, by adding the words ‘‘, none of which is a nonlife insurance company’’ after the text ‘‘S, T, P and M’’. ■ 30. In newly redesignated paragraph (c)(2)(viii)(B)(1), the fourth sentence, by adding the text ‘‘(a taxable year beginning after December 31, 2020)’’ after the language ‘‘Year 3’’. ■ 31. By revising newly designated paragraph (c)(2)(viii)(B)(3). ■ 32. By redesignating newly redesignated paragraph (c)(2)(viii)(B)(4) as paragraph (c)(2)(viii)(B)(5). ■ 33. By adding a new paragraph (c)(2)(viii)(B)(4). ■ 34. By revising newly redesignated paragraph (c)(2)(viii)(B)(5). ■ 35. By adding paragraph (c)(2)(viii)(B)(6). ■ 36. In paragraph (g)(5), by designating Examples 1 through 9 as paragraphs (g)(5)(i) through (ix), respectively, and removing the period after each example number in the paragraph headings and replacing them with a colon. ■ 37. In newly redesignated paragraphs (g)(5)(i) through (ix), by redesignating paragraphs (g)(5)(i)(i) through (iv) as paragraphs (g)(5)(i)(A) through (D), paragraphs (g)(5)(ii)(i) through (iv) as paragraphs (g)(5)(ii)(A) through (D), paragraphs (g)(5)(iii)(i) through (iii) as paragraphs (g)(5)(iii)(A) through (C), paragraphs (g)(5)(iv)(i) through (iv) as paragraphs (g)(5)(iv)(A) through (D), paragraphs (g)(5)(v)(i) through (iv) as paragraphs (g)(5)(v)(A) through (D), paragraphs (g)(5)(vi)(i) through (iv) as paragraphs (g)(5)(vi)(A) through (D), paragraphs (g)(5)(vii)(i) through (vi) as paragraphs (g)(5)(vii)(A) through (F), paragraphs (g)(5)(viii)(i) through (v) as paragraphs (g)(5)(viii)(A) through (E), and paragraphs (g)(5)(ix)(i) through (vii) as paragraphs (g)(5)(ix)(A) through (G). ■ 38. By revising paragraph (h)(9). ■ 39. By adding paragraph (h)(10). The revisions and additions read as follows: jbell on DSKJLSW7X2PROD with RULES § 1.1502–21 Net operating losses. (a) Consolidated net operating loss deduction—(1) In general. Subject to any limitations under the Internal Revenue Code or this chapter (for example, the limitations under section 172(a)(2) and paragraph (a)(2) of this section), the consolidated net operating loss deduction (or CNOL deduction) for any consolidated return year is the aggregate of the net operating loss carryovers and carrybacks to the year. VerDate Sep<11>2014 15:51 Oct 26, 2020 Jkt 253001 The net operating loss carryovers and carrybacks consist of— (i) Any CNOLs (as defined in paragraph (e) of this section) of the consolidated group; and (ii) Any net operating losses (or NOLs) of the members arising in separate return years. (2) Application of section 172 for computing net operating loss deductions—(i) Overview. For purposes of § 1.1502–11(a)(2) (regarding a CNOL deduction), the rules of section 172 regarding the use of net operating losses are taken into account as provided by this paragraph (a)(2) in calculating the consolidated taxable income of a group for a particular consolidated return year. More specifically, in computing taxable income for taxable years beginning after December 31, 2020, section 172(a) generally limits the deductibility of net operating losses arising in taxable years beginning after December 31, 2017 (post-2017 NOLs). However, these limitations do not apply to net operating losses arising in taxable years beginning before January 1, 2018 (pre-2018 NOLs). Therefore, in any particular consolidated return year beginning after December 31, 2020, the group’s CNOL deduction includes CNOLs arising in taxable years beginning before January 1, 2018 (pre-2018 CNOLs), without limitation under section 172(a). Following the deduction of pre-2018 CNOLs, this paragraph (a)(2) applies to compute the maximum amount of CNOLs from taxable years beginning after December 31, 2017 (post-2017 CNOLs), that can be deducted against taxable income in a consolidated return year beginning after December 31, 2020 (post-2017 CNOL deduction limit). See section 172(a)(2)(A) and (B). (ii) Computation of the 80-percent limitation and special rule for nonlife insurance companies—(A) Determinations based on status of group members. If a portion of a post-2017 CNOL is carried back or carried over to a consolidated return year beginning after December 31, 2020, whether the members of the group include nonlife insurance companies, other types of corporations, or both determines whether section 172(a) (including the limitation described in section 172(a)(2)(B)(ii) (80-percent limitation)), section 172(f) (providing special rules for nonlife insurance companies), or both, apply to the group for the consolidated return year. (B) Determination of post-2017 CNOL deduction limit. The post-2017 CNOL deduction limit is determined under paragraph (a)(2)(iii) of this section by applying section 172(a)(2)(B)(ii) (that is, the 80-percent limitation), section 172(f) PO 00000 Frm 00011 Fmt 4700 Sfmt 4700 67975 (that is, the special rule for nonlife insurance companies), or both, to the group’s consolidated taxable income for that year. (C) Inapplicability of 80-percent limitation. The 80-percent limitation does not apply to CNOL deductions taken in taxable years beginning before January 1, 2021, or to CNOLs arising in taxable years beginning before January 1, 2018 (that is, pre-2018 CNOLs). See section 172(a). (iii) Computations under sections 172(a)(2)(B) and 172(f). This paragraph (a)(2)(iii) provides rules for applying sections 172(f) and 172(a)(2)(B) to consolidated return years beginning after December 31, 2020 (that is, for computing the post-2017 CNOL deduction limit). Section 172(f) applies to income of nonlife insurance company members, whereas section 172(a)(2)(B)(ii) applies to income of members that are not nonlife insurance companies. Thus, this paragraph (a)(2)(iii) provides specific rules for groups with no nonlife insurance company members, only nonlife insurance company members, or a combination of nonlife insurance company members and other members. For groups with both nonlife insurance company members and life insurance company members, see paragraph (b)(2)(iv)(E) of this section. (A) Groups without nonlife insurance company members. If no member of a group is a nonlife insurance company during a particular consolidated return year beginning after December 31, 2020, section 172(a)(2)(B)(ii) (that is, the 80percent limitation) applies to all income of the group for that year. Therefore, the post-2017 CNOL deduction limit for the group for that year is the lesser of— (1) The aggregate amount of post-2017 NOLs carried to that year; or (2) The amount determined by multiplying— (i) 80 percent, by (ii) Consolidated taxable income for the group for that year (determined without regard to any deductions under sections 172, 199A, and 250) less the aggregate amount of pre-2018 NOLs carried to that year. (B) Groups comprised solely of nonlife insurance companies. If a group is comprised solely of nonlife insurance companies during a particular consolidated return year beginning after December 31, 2020, section 172(f) applies to all income of the group for that year. Therefore, the post-2017 CNOL deduction limit for the group for that year equals the lesser of— (1) The aggregate amount of post-2017 NOLs carried to that year, or E:\FR\FM\27OCR1.SGM 27OCR1 jbell on DSKJLSW7X2PROD with RULES 67976 Federal Register / Vol. 85, No. 208 / Tuesday, October 27, 2020 / Rules and Regulations (2) Consolidated taxable income less the aggregate amount of pre-2018 NOLs carried to that year. (C) Groups that include both nonlife insurance companies and other corporations—(1) General rule. Except as provided in paragraph (a)(2)(iii)(C)(5) of this section, if a group has at least one member that is a nonlife insurance company and at least one member that is not a nonlife insurance company during a particular consolidated return year beginning after December 31, 2020, the post-2017 CNOL deduction limit for the group for that year equals the lesser of— (i) The aggregate amount of post-2017 NOLs carried to that year, or (ii) The sum of the amounts in the income pools determined under paragraphs (a)(2)(iii)(C)(2) and (3) of this section. (2) Residual income pool. The amount determined under this paragraph (a)(2)(iii)(C)(2) (residual income pool) is eighty percent of the excess of— (i) The consolidated taxable income of the group for a consolidated return year beginning after December 31, 2020, determined without regard to any income, gain, deduction, or loss of members that are nonlife insurance companies and without regard to any deductions under sections 172, 199A, and 250, over (ii) The aggregate amount of pre-2018 NOLs carried to that year that are allocated to this income pool under paragraph (a)(2)(iii)(C)(4) of this section (that is, by applying the 80-percent limitation). See section 172(a)(2)(B)(ii). (3) Nonlife income pool. The amount determined under this paragraph (a)(2)(iii)(C)(3) (nonlife income pool) is the consolidated taxable income of the group for a consolidated return year beginning after December 31, 2020, determined without regard to any income, gain, deduction, or loss of members included in the computation under paragraph (a)(2)(iii)(C)(2) of this section, less the aggregate amount of pre-2018 NOLs carried to that year that are allocated to this income pool under paragraph (a)(2)(iii)(C)(4) of this section. See section 172(f). (4) Pro rata allocation of pre-2018 NOLs between pools of income. For purposes of paragraphs (a)(2)(iii)(C)(2) and (3) of this section, the aggregate amount of pre-2018 NOLs carried to any particular consolidated return year beginning after December 31, 2020, is prorated between the residual income pool and the nonlife income pool based on the relative amounts of positive income of those two pools. For example, if $30 of pre-2018 NOLs is carried over to a consolidated return year in which VerDate Sep<11>2014 15:51 Oct 26, 2020 Jkt 253001 the residual income pool contains $75 and the nonlife income pool contains $150, the residual income pool is allocated $10 of the pre-2018 NOLs ($30 × $75/($75 + $150), or $30 × 1⁄3), and the nonlife income pool is allocated the remaining $20 of pre-2018 NOLs ($30 × $150/($75 + $150), or $30 × 2⁄3). (5) Exception. The post-2017 CNOL deduction limit for the group for a consolidated return year is determined under this paragraph (a)(2)(iii)(C)(5) if the amounts computed under paragraphs (a)(2)(iii)(C)(2) and (3) of this section for that year are not both positive. (i) Positive residual income pool and negative nonlife income pool. This paragraph (a)(2)(iii)(C)(5)(i) applies if the amount computed under paragraph (a)(2)(iii)(C)(2) of this section for the residual income pool is positive and the amount computed under paragraph (a)(2)(iii)(C)(3) of this section for the nonlife income pool is negative. If this paragraph (a)(2)(iii)(C)(5)(i) applies, the post-2017 CNOL deduction limit for the group for a consolidated return year equals the lesser of the aggregate amount of post-2017 NOLs carried to that year, or 80 percent of the consolidated taxable income of the entire group (determined without regard to any deductions under sections 172, 199A, and 250) after subtracting the aggregate amount of pre-2018 NOLs carried to that year (that is, by applying the 80-percent limitation). See section 172(a)(2)(B). (ii) Positive nonlife income pool and negative residual income pool. If the amount computed under paragraph (a)(2)(iii)(C)(3) of this section for the nonlife income pool is positive and the amount computed under paragraph (a)(2)(iii)(C)(2) of this section for the residual income pool is negative, the post-2017 CNOL deduction limit for the group for a consolidated return year equals the lesser of the aggregate amount of post-2017 NOLs carried to that year, or the consolidated taxable income of the entire group less the aggregate amount of pre-2018 NOLs carried to that year. See section 172(f). (b) * * * (1) Carryovers and carrybacks generally. The net operating loss carryovers and carrybacks to a taxable year are determined under the principles of, and are subject to any limitations under, section 172 and this section. Thus, losses permitted to be absorbed in a consolidated return year generally are absorbed in the order of the taxable years in which they arose, and losses carried from taxable years ending on the same date, and which are available to offset consolidated taxable PO 00000 Frm 00012 Fmt 4700 Sfmt 4700 income for the year, generally are absorbed on a pro rata basis. In addition, except as otherwise provided in this section, the amount of any CNOL absorbed by the group in any year is apportioned among members based on the percentage of the CNOL eligible for carryback or carryover that is attributable to each member as of the beginning of the year. The percentage of the CNOL attributable to a member is determined pursuant to paragraph (b)(2)(iv)(B) of this section. Additional rules provided under the Internal Revenue Code or regulations also apply. See, for example, section 382(l)(2)(B) (if losses are carried from the same taxable year, losses subject to limitation under section 382 are absorbed before losses that are not subject to limitation under section 382). See paragraph (c)(1)(iii)(B) of this section, (Example 2), for an illustration of pro rata absorption of losses subject to a SRLY limitation. (2) * * * (iv) Operating rules. (A) Amount of CNOL attributable to a member. The amount of a CNOL that is attributable to a member equals the product obtained by multiplying the CNOL and the percentage of the CNOL attributable to the member. (B) Percentage of CNOL attributable to a member—(1) In general. Except as provided in paragraph (b)(2)(iv)(B)(2) of this section, the percentage of the CNOL for the consolidated return year attributable to a member equals the separate net operating loss of the member for the consolidated return year divided by the sum of the separate net operating losses for that year of all members having such losses for that year. For this purpose, the separate net operating loss of a member is determined by computing the CNOL by reference to only the member’s items of income, gain, deduction, and loss, including the member’s losses and deductions actually absorbed by the group in the consolidated return year (whether or not absorbed by the member). (2) Recomputed percentage. If, for any reason, a member’s portion of a CNOL is absorbed or reduced on a non-pro rata basis (for example, under § 1.1502–11(b) or (c), paragraph (b)(2)(iv)(C) of this section, § 1.1502–28, or 1.1502–36(d), or as the result of a carryback to a separate return year), the percentage of the CNOL attributable to each member is recomputed. In addition, if a member with a separate net operating loss ceases to be a member, the percentage of the CNOL attributable to each remaining member is recomputed. The recomputed percentage of the CNOL attributable to each member equals the remaining E:\FR\FM\27OCR1.SGM 27OCR1 jbell on DSKJLSW7X2PROD with RULES Federal Register / Vol. 85, No. 208 / Tuesday, October 27, 2020 / Rules and Regulations CNOL attributable to the member at the time of the recomputation divided by the sum of the remaining CNOL attributable to all of the remaining members at the time of the recomputation. For purposes of this paragraph (b)(2)(iv)(B)(2), a CNOL that is permanently disallowed or eliminated is treated as absorbed. (C) Net operating loss carryovers and carrybacks—(1) General rules. Subject to the rules regarding allocation of special status losses under paragraph (b)(2)(iv)(D) of this section— (i) Nonlife insurance companies. The portion of a CNOL attributable to any members of the group that are nonlife insurance companies is carried back or carried over under the rules in section 172(b) applicable to nonlife insurance companies. (ii) Corporations other than nonlife insurance companies. The portion of a CNOL attributable to any other members of the group is carried back or carried over under the rules in section 172(b) applicable to corporations other than nonlife insurance companies. (2) Recomputed percentage. For rules governing the recomputation of the percentage of a CNOL attributable to each remaining member if any portion of the CNOL attributable to a member is carried back under section 172(b)(1)(B) or (C) and absorbed on a non-pro rata basis, see paragraph (b)(2)(iv)(B)(2) of this section. (D) Allocation of special status losses. The amount of the group’s CNOL that is determined to constitute a farming loss (as defined in section 172(b)(1)(B)(ii)) or any other net operating loss that is subject to special carryback or carryover rules (special status loss) is allocated to each member separately from the remainder of the CNOL based on the percentage of the CNOL attributable to the member, as determined under paragraph (b)(2)(iv)(B) of this section. This allocation is made without regard to whether a particular member actually incurred specific expenses or engaged in specific activities required by the special status loss provisions. This paragraph (b)(2)(iv)(D) applies only with regard to losses for which the special carryback or carryover rules are dependent on the type of expense generating the loss, rather than on the special status of the entity to which the loss is allocable. See section 172(b)(1)(C) and paragraph (b)(2)(iv)(C)(1)(i) of this section (applicable to losses of nonlife insurance companies). This paragraph (b)(2)(iv)(D) does not apply to farming losses incurred by a consolidated group in any taxable year beginning after December 31, 2017, and before January 1, 2021. VerDate Sep<11>2014 15:51 Oct 26, 2020 Jkt 253001 (E) Coordination with rules for lifenonlife groups under § 1.1502–47. For groups that include at least one member that is a life insurance company and for which an election is in effect under section 1504(c)(2), any computation of the 80-percent limitation under paragraph (a)(2)(iii)(C) of this section is computed only with respect to items of income, gain, deduction, and loss of the members of the nonlife subgroup (as defined in § 1.1502–47(b)(9)). For rules regarding the use of CNOLs of the nonlife subgroup to offset life insurance company taxable income of the life subgroup (each as defined in § 1.1502– 47(b)), or the use of CNOLs of the life subgroup to offset consolidated taxable income of the nonlife subgroup, see generally section 1503(c)(1) and § 1.1502–47. (v) Examples. For purposes of the examples in this paragraph (b)(2)(v), unless otherwise stated, all groups file consolidated returns, all corporations have calendar taxable years, all losses are farming losses within the meaning of section 172(b)(1)(B)(ii), all taxable years begin after December 31, 2020, the facts set forth the only corporate activity, value means fair market value and the adjusted basis of each asset equals its value, all transactions are with unrelated persons, and the application of any limitation or threshold under section 382 is disregarded. The principles of this paragraph (b) are illustrated by the following examples: * * * * * (D) Example 4: Allocation of a CNOL arising in a consolidated return year beginning after December 31, 2020. (1) P is the common parent of a consolidated group that includes S. Neither P nor S is a nonlife insurance company. The P group also includes nonlife insurance companies PC1, PC2, and PC3. In the P group’s 2021 consolidated return year, all members except S have separate net operating losses, and the P group’s CNOL in that year is $40. No member of the P group engages in farming activities. See section 172(b)(1)(B)(ii). (2) Under paragraphs (b)(1) and (b)(2)(iv)(B)(1) of this section, for purposes of carrying losses to other taxable years, the P group’s $40 CNOL is allocated pro rata among the group members that have separate net operating losses. Under paragraph (b)(2)(iv)(C) of this section, those respective portions of the CNOL attributable to PC1, PC2, and PC3 (that is, members that are nonlife insurance companies) are carried back to each of the two preceding taxable years and then carried over to each of the 20 PO 00000 Frm 00013 Fmt 4700 Sfmt 4700 67977 subsequent taxable years. See section 172(b)(1)(C). The portion attributable to P (which is not a nonlife insurance company) may not be carried back but is carried over to future years. See section 172(b)(1)(A). (E) Example 5: Allocation of a CNOL arising in a consolidated return year beginning before January 1, 2021. The facts are the same as in paragraph (b)(2)(v)(D)(1) of this section, except that the P group incurred the CNOL during the P group’s 2020 consolidated return year. The allocation among the P group members of the CNOL described in paragraph (b)(2)(v)(D)(2) of this section would be the same. However, those respective portions of the CNOL attributable to PC1, PC2, and PC3 (that is, members that are nonlife insurance companies) will be carried back to each of the five preceding taxable years and then carried over to each of the 20 subsequent taxable years. See section 172(b)(1)(C) and section 172(b)(1)(D)(i). The portion attributable to P (which is not a nonlife insurance company) will be carried back to each of the five preceding taxable years and then carried over to future years. See section 172(b)(1)(A) and section 172(b)(1)(D)(i). (F) Example 6: CNOL deduction and application of section 172. (1) P (a type of corporation other than a nonlife insurance company) is the common parent of a consolidated group that includes PC1 (a nonlife insurance company). P and PC1 were both incorporated in Year 1 (a year beginning after December 31, 2020). In Year 1, P and PC1 have separate taxable income of $20 and $25, respectively. As a result, the P group has Year 1 consolidated taxable income of $45. In Year 2, P has separate taxable income of $24, and PC1 has a separate taxable loss of $40, resulting in a P group CNOL of $16. Additionally, in Year 3, P has separate taxable income of $15, and PC1 has a separate taxable loss of $45, resulting in a P group CNOL of $30. No member of the P group engages in farming activities. See section 172(b)(1)(B)(ii). (2) Under paragraph (b)(2)(iv)(B) of this section, the P group’s Year 2 CNOL and Year 3 CNOL are entirely attributable to PC1, a nonlife insurance company. Therefore, under section 172(b)(1)(C)(i), the entire amount of each of these CNOLs is eligible to be carried back to Year 1. (3) Under paragraph (a)(2)(ii) of this section, the amount of the Year 2 CNOL that may be used by the P group in Year 1 is determined by taking into account the status (nonlife insurance company or other type of corporation) of the member that has separate taxable income composing in whole or in part E:\FR\FM\27OCR1.SGM 27OCR1 67978 Federal Register / Vol. 85, No. 208 / Tuesday, October 27, 2020 / Rules and Regulations the P group’s consolidated taxable income. Because the P group includes both a nonlife insurance company member and a member that is not a nonlife insurance company, paragraph (a)(2)(iii)(C) of this section applies to determine the computation of the post2017 CNOL deduction limit for the group for Year 1. Therefore, the 80percent limitation is applied to the residual income pool, which consists of the taxable income of P, a type of corporation other than a nonlife insurance company. Under the 80percent limitation, the maximum amount of P’s Year 1 income that may be offset by the P group’s post-2017 CNOLs is $16, which equals 80 percent of the excess of P’s taxable income for Year 1 ($20) over the aggregate amount of pre-2018 NOLs allocable to P ($0) (80 percent × ($20¥$0)). See paragraph (a)(2)(iii)(C)(2) and (a)(2)(iii)(C)(4) of this section. PC1 is a nonlife insurance company to which section 172(f), rather than the 80-percent limitation in section 172(a)(2)(B)(ii), applies. Therefore, the maximum amount of PC1’s Year 1 income that may be offset by the P group’s post-2017 CNOLs is $25, which equals the excess of PC1’s taxable income for Year 1 ($25) over the aggregate amount of pre-2018 NOLs allocable to PC1 ($0). See paragraph (a)(2)(iii)(C)(3) and (4) of this section. (4) Based on paragraph (a)(2)(iii)(C) of this section and the analysis set forth in paragraph (b)(2)(v)(F)(3) of this section, at the end of Year 2, the P group’s post2017 CNOL deduction limit for Year 1 is the lesser of the aggregate amount of post-2017 NOLs carried to Year 1 ($16), or $41 ($16 + $25). Therefore, the P group can offset $16 of its Year 1 income with its CNOL carryback from Year 2. (5) When the Year 3 CNOL is carried back to Year 1, the P group’s post-2017 CNOL deduction limit for Year 1 is the lesser of $46 (the aggregate amount of post-2017 NOLs carried to Year 1) or $41 ($16 + $25; see the computation in paragraph (b)(2)(v)(F)(3) of this section). Thus, the total amount of the P group’s Year 1 income that may be offset by the P group’s Year 2 and Year 3 CNOLs is $41 ($16 from Year 2 + $25 from Year 3). As a result, the P group reports $4 of income ($45¥$41) in Year 1 that is ineligible for offset by any other NOLs. The P group carries over its remaining $5 CNOL ($46¥$41) to future years. (G) Example 7: Pre-2018 and post2017 CNOLs. (1) P is the common parent of a consolidated group. No member of the P group is a nonlife insurance company or is engaged in a farming business, and no member of the P group has a loss that is subject to a SRLY limitation. The P group had the following consolidated taxable income or CNOL for the following taxable years: jbell on DSKJLSW7X2PROD with RULES TABLE 1 TO PARAGRAPH (b)(2)(v)(G)(1) 2014 2015 2016 2017 2018 2019 2020 2021 $60 $0 $0 ($90) $30 ($40) ($100) $120 (2) Under section 172(a)(1), all $30 of the P group’s 2018 consolidated taxable income is offset by the 2017 CNOL carryover without limitation. The remaining $60 of the P group’s 2017 CNOL is carried over to 2021 under section 172(b)(1)(A)(ii)(I). (3) Under section 172(b)(1)(D)(i)(I), the P group’s $40 2019 CNOL is carried back to the five taxable years preceding the year of the loss. Thus, the P group’s $40 2019 CNOL is carried back to offset $40 of its 2014 consolidated taxable income. (4) Under section 172(a)(2) and paragraph (a)(2)(i) of this section, the P group’s CNOL deduction for 2021 equals the aggregate amount of pre-2018 NOLs carried to 2021 plus the group’s post-2017 CNOL deduction limit. The P group has $60 of pre-2018 NOLs carried to 2021 ($90¥$30). Because no member of the P group is a nonlife insurance company, paragraph (a)(2)(iii)(A) of this section applies to determine the computation of the group’s post-2017 CNOL deduction limit for 2021. See also section 172(a)(2)(B). Therefore, the post2017 CNOL deduction limit of the P group for 2021 is $48, which equals the lesser of the aggregate amount of post2017 NOLs carried to 2021 ($100), or 80 percent of the excess of the P group’s consolidated taxable income for that year computed without regard to any deductions under sections 172, 199A, VerDate Sep<11>2014 15:51 Oct 26, 2020 Jkt 253001 and 250 ($120) over the aggregate amount of pre-2018 NOLs carried to 2021 ($60) (that is, 80 percent × $60). Thus, the P group’s CNOL deduction for 2021 equals $108 ($60 pre-2018 NOLs carried to 2021 + $48 post-2017 CNOL deduction limit). See section 172(a)(2) and paragraph (a)(2)(i) of this section. The P group offsets $108 of its $120 of 2021 consolidated taxable income, resulting in $12 of consolidated taxable income in 2021. The remaining $52 of the P group’s 2020 CNOL ($100¥$48) is carried over to future taxable years. See section 172(b)(1)(A)(ii)(II). (3) * * * (ii) * * * (C) Waiver of carryback period for losses in taxable years to which statutorily amended carryback rules apply. For further information, see § 1.1502–21T(b)(3)(ii)(C). (D) Examples. For further information, see § 1.1502– 21T(b)(3)(ii)(D). * * * * * (c) * * * (1) * * * (i) General rule. Except as provided in paragraph (g) of this section (relating to an overlap with section 382), the aggregate of the net operating loss carryovers and carrybacks of a member (SRLY member) arising (or treated as arising) in SRLYs (SRLY NOLs) that are included in the CNOL deductions for all consolidated return years of the group PO 00000 Frm 00014 Fmt 4700 Sfmt 4700 under paragraph (a) of this section may not exceed the aggregate consolidated taxable income for all consolidated return years of the group determined by reference to only the member’s items of income, gain, deduction, and loss (cumulative register). For this purpose— * * * * * (E) If a limitation on the amount of taxable income that may be offset under section 172(a) (see paragraph (a)(2) of this section) applies in a taxable year to a member whose carryovers or carrybacks are subject to a SRLY limitation (SRLY member), the amount of net operating loss subject to a SRLY limitation that is available for use by the group in that year is limited to the percentage of the balance in the cumulative register that would be available for offset under section 172(a) if the SRLY member filed a separate return and reported as taxable income in that year the amount contained in the cumulative register. For example, assume that a consolidated group has a SRLY member that is a corporation other than a nonlife insurance company, and that the SRLY member has a SRLY NOL that arose in a taxable year beginning after December 31, 2017 (post-2017 NOL). The group’s consolidated taxable income for a consolidated return year beginning after December 31, 2020 is $200, but the cumulative register has a positive E:\FR\FM\27OCR1.SGM 27OCR1 jbell on DSKJLSW7X2PROD with RULES Federal Register / Vol. 85, No. 208 / Tuesday, October 27, 2020 / Rules and Regulations balance of only $120 (and no other net operating loss carryovers or carrybacks are available for the year). Because the SRLY limitation would be $96 ($120 × 80 percent), only $96 of SRLY loss may be used, rather than $160 ($200 × 80 percent). In addition, to the extent that this paragraph (c)(1)(i)(E) applies, the cumulative register is decreased by the full amount of income required under section 172(a) to support the amount of SRLY NOL absorption. See, for example, paragraph (c)(1)(iii)(A) and (B) of this section for examples illustrating the application of this rule. * * * * * (iii) Examples. For purposes of the examples in this paragraph (c)(1)(iii), no corporation is a nonlife insurance company and, unless otherwise specified, all taxable years begin after December 31, 2020, and all CNOLs arise in taxable years beginning after December 31, 2020. The principles of this paragraph (c)(1) are illustrated by the following examples: (A) * * * (2) T’s $100 net operating loss carryover from Year 1 arose in a SRLY. See § 1.1502–1(f)(2)(iii). P’s acquisition of T was not an ownership change as defined by section 382(g). Thus, the $100 net operating loss carryover is subject to the SRLY limitation in paragraph (c)(1) of this section. The positive balance of the cumulative register of T for Year 2 equals the consolidated taxable income of the P group determined by reference to only T’s items, or $70. However, due to the 80-percent limitation and the application of paragraph (c)(1)(i)(E) of this section, the SRLY limitation is $56 ($70 × 80 percent). No losses from equivalent years are available, and the P group otherwise has sufficient consolidated taxable income to support the CNOL deduction ($300 × 80 percent = $240). Therefore, $56 of the SRLY net operating loss is included under paragraph (a) of this section in the P group’s CNOL deduction for Year 2. Although only $56 is absorbed, the cumulative register of T is reduced by $70, the full amount of income necessary to support the $56 deduction after taking into account the 80-percent limitation ($70 × 80 percent = $56). * * * * * (B) * * * (2) P’s Year 1, Year 2, and Year 3 are not SRLYs with respect to the P group. See § 1.1502–1(f)(2)(i). Thus, P’s $40 net operating loss arising in Year 1 and $120 net operating loss arising in Year 3 are not subject to the SRLY limitation under paragraph (c) of this section. Although the P group has $160 of VerDate Sep<11>2014 15:51 Oct 26, 2020 Jkt 253001 taxable income in Year 4, the 80-percent limitation reduces the P group’s net operating loss deduction in that year to $128 ($160 × 80 percent). Under the principles of section 172, paragraph (b) of this section requires that P’s $40 loss arising in Year 1 be the first loss absorbed by the P group in Year 4. Absorption of this loss leaves $88 ($128¥$40) of the P group’s Year 4 consolidated taxable income available for offset by loss carryovers. (3) T’s Year 2 and Year 3 are SRLYs with respect to the P group. See § 1.1502–1(f)(2)(ii). P’s acquisition of T was not an ownership change as defined by section 382(g). Thus, T’s $50 net operating loss arising in Year 2 and $60 net operating loss arising in Year 3 are subject to the SRLY limitation. The positive balance of the cumulative register of T for Year 4 equals the P group’s consolidated taxable income determined by reference to only T’s items, or $70. Under paragraph (c)(1)(i)(E) of this section, after taking into account the 80-percent limitation, T’s SRLY limitation is $56 ($70 × 80 percent). Therefore, the P group can absorb up to $56 of T’s SRLY net operating losses in Year 4. Under the principles of section 172, T’s $50 SRLY net operating loss from Year 2 is included under paragraph (a) of this section in the P group’s CNOL deduction for Year 4. After absorption of this loss, under paragraph (c)(1)(i) of this section, $6 of SRLY limit remains in Year 4 ($56¥$50). Further, the total amount of Year 4 consolidated taxable income available for offset by other loss carryovers under section 172(a) is $38 ($88¥$50). (4) P and T each carry over net operating losses to Year 4 from a taxable year ending on the same date (that is, Year 3). The losses carried over from Year 3 total $180. However, the remaining Year 4 SRLY limit is $6. Therefore, the total amount of loss available for absorption is $126 ($120 allocable to P and $6 allocable to T). Under paragraph (b) of this section, the losses available for absorption that are carried over from Year 3 are absorbed on a pro rata basis, even though one loss arises in a SRLY and the other loss does not. Thus, $36.19 of P’s Year 3 loss is absorbed ($120/($120 + $6)) × $38 = $36.19. In addition, $1.81 of T’s Year 3 loss is absorbed ($6/($120 + $6)) × $38 = $1.81. (5) After deduction of T’s SRLY net operating losses in Year 4, the cumulative register of T is adjusted pursuant to paragraph (c)(1)(i)(E) of this section. A total of $51.81 of SRLY net operating losses were absorbed in Year 4 ($50 + $1.81). After taking into PO 00000 Frm 00015 Fmt 4700 Sfmt 4700 67979 account the 80-percent limitation, the amount of income necessary to support this deduction is $64.76 ($64.76 × 80 percent = $51.81). Therefore, the cumulative register of T is decreased by $64.76, and $5.24 remains in the cumulative register ($70¥$64.76). (6) P carries its remaining $83.81 ($120¥$36.19) Year 3 net operating loss and T carries its remaining $58.19 ($60¥$1.81) Year 3 net operating loss over to Year 5. Assume that, in Year 5, the P group has $90 of consolidated taxable income (computed without regard to the CNOL deduction). The P group’s consolidated taxable income determined by reference to only T’s items is a CNOL of $4. Therefore, the positive balance of the cumulative register of T in Year 5 equals $1.24 ($5.24¥$4). Under paragraph (c)(1)(i)(E) of this section, after taking into account the 80-percent limitation, T’s SRLY limitation is $0.99 ($1.24 × 80 percent). For Year 5, the total amount of Year 5 consolidated taxable income available for offset by loss carryovers as a result of the 80-percent limitation is $72 ($90 × 80 percent). Under paragraph (b) of this section, the losses carried over from Year 3 are absorbed on a pro rata basis, even though one loss arises in a SRLY and the other loss does not. Therefore, $71.16 of P’s Year 3 loss is absorbed (($83.81/($83.81 + $0.99)) × $72 = $71.16). In addition, $0.84 of T’s Year 3 losses is absorbed (($0.99/($83.81 + $0.99)) × $72 = $0.84). * * * * * (D) * * * (2) Under § 1.1502–15(a), T’s $100 of ordinary loss in Year 3 constitutes a built-in loss that is subject to the SRLY limitation under paragraph (c) of this section. The amount of the limitation is determined by treating the deduction as a net operating loss carryover from a SRLY. The built-in loss is therefore subject to both a SRLY limitation and the 80-percent limitation for Year 3. The built-in loss is treated as a net operating loss carryover solely for purposes of determining the extent to which the loss is not allowed by reason of the SRLY limitation, and for all other purposes the loss remains a loss arising in Year 3. See § 1.1502–21(c)(1)(i)(D). Consequently, under paragraph (b) of this section, the built-in loss is absorbed by the P group before the net operating loss carryover from Year 1 is absorbed. The positive balance of the cumulative register of T for Year 3 equals the P group’s consolidated taxable income determined by reference to only T’s items, or $60. Under paragraph (c)(1)(i)(E) of this section, after taking into account the 80percent limitation, the SRLY limitation E:\FR\FM\27OCR1.SGM 27OCR1 jbell on DSKJLSW7X2PROD with RULES 67980 Federal Register / Vol. 85, No. 208 / Tuesday, October 27, 2020 / Rules and Regulations for Year 3 is $48 ($60 × 80 percent). Therefore, $48 of the built-in loss is absorbed by the P group. None of T’s $100 SRLY net operating loss carryover from Year 1 is allowed. (3) After deduction of T’s $48 SRLY built-in loss in Year 4, the cumulative register of T is adjusted pursuant to paragraph (c)(1)(i)(E) of this section. After taking into account the 80-percent limitation, the amount of income necessary to support this deduction is $60 ($60 × 80 percent = $48). Therefore, the cumulative register of T is decreased by $60, and zero remains in the cumulative register ($60¥$60). (4) Under § 1.1502–15(a), the $52 balance of the built-in loss that is not allowed in Year 3 because of the SRLY limitation and the 80-percent limitation is treated as a $52 net operating loss arising in Year 3 that is subject to the SRLY limitation because, under paragraph (c)(1)(ii) of this section, Year 3 is treated as a SRLY. The built-in loss is carried to other years in accordance with the rules of paragraph (b) of this section. The positive balance of the cumulative register of T for Year 4 equals $40 (zero from Year 3 + $40). Under paragraph (c)(1)(i)(E) of this section, after taking into account the 80percent limitation, the SRLY limitation for Year 4 is $32 ($40 × 80 percent). Therefore, under paragraph (c) of this section, $32 of T’s $100 net operating loss carryover from Year 1 is included in the CNOL deduction under paragraph (a) of this section in Year 4. (5) After deduction of T’s $32 SRLY net operating loss in Year 4, the cumulative register of T is adjusted pursuant to paragraph (c)(1)(i)(E) of this section. After taking into account the 80-percent limitation, the amount of income necessary to support this deduction is $40 ($40 × 80 percent = $32). Therefore, the cumulative register is decreased by $40, and zero remains in the cumulative register ($40¥$40). (E) * * * (2) For Year 2, the P group computes separate SRLY limits for each of T’s SRLY carryovers from Year 1. The group determines its ability to use its capital loss carryover before it determines its ability to use its ordinary loss carryover. Under section 1212, because the P group has no Year 2 capital gain, it cannot absorb any capital losses in Year 2. T’s Year 1 net capital loss and the P group’s Year 2 consolidated net capital loss (all of which is attributable to T) are carried over to Year 3. (3) The P group’s ability to deduct net operating losses in Year 2 is subject to the 80-percent limitation, based on the P group’s consolidated taxable income for the year. Thus, the group’s limitation VerDate Sep<11>2014 15:51 Oct 26, 2020 Jkt 253001 for Year 2 is $72 ($90 × 80 percent). However, use of the Year 1 net operating loss also is subject to the SRLY limitation. The positive balance of the cumulative register of T applicable to SRLY net operating losses for Year 2 equals the P group’s consolidated taxable income determined by reference to only T’s items, or $60. Under paragraph (c)(1)(i)(E) of this section, after taking into account the 80-percent limitation, the SRLY limitation for Year 2 is $48 ($60 × 80 percent). Therefore, only $48 of T’s Year 1 SRLY net operating loss is absorbed by the P group in Year 2. T carries over its remaining $52 of its Year 1 loss to Year 3. (4) After deduction of T’s SRLY net operating losses in Year 2, the net operating loss cumulative register is adjusted pursuant to paragraph (c)(1)(i)(E) of this section. The P group deducted $48 of T’s SRLY net operating losses in Year 2. After taking into account the 80-percent limitation, the amount of taxable income necessary to support this deduction is $60 ($60 × 80 percent = $48). Therefore, the net operating loss cumulative register of T is decreased by $60, and zero remains in the net operating loss cumulative register ($60¥$60). (5) For Year 3, the P group again computes separate SRLY limits for each of T’s SRLY carryovers from Year 1. The group has consolidated net capital gain (without taking into account a net capital loss carryover deduction) of $30. Under § 1.1502–22(c), the aggregate amount of T’s $50 capital loss carryover from Year 1 that is included in computing the P group’s consolidated net capital gain for all years of the group (in this case, Years 2 and 3) may not exceed $30 (the aggregate consolidated net capital gain computed by reference only to T’s items, including losses and deductions actually absorbed (that is, $30 of capital gain in Year 3)). Thus, the P group may include $30 of T’s Year 1 capital loss carryover in its computation of consolidated net capital gain for Year 3, which offsets the group’s capital gains for Year 3. T carries over its remaining $20 of its Year 1 capital loss to Year 4. Therefore, the capital loss cumulative register of T is decreased by $30, and zero remains in the capital loss cumulative register ($30¥$30). Further, because the net operating loss cumulative register includes all taxable income of T included in the P group, as well as all absorbed losses of T (including capital items), a zero net increase occurs in the net operating loss cumulative register. The P group carries over the Year 2 consolidated net capital loss to Year 4. PO 00000 Frm 00016 Fmt 4700 Sfmt 4700 (6) The P group’s ability to deduct net operating losses in Year 3 is subject to the 80-percent limitation, based on the P group’s consolidated taxable income for the year. Thus, the P group’s taxable income for Year 3 that can be offset, before use of net operating losses, is $40 (80 percent × the sum of zero capital gain, after use of the capital loss carryover, plus $50 of ordinary income). However, use of the Year 1 net operating loss also is subject to the SRLY limitation. The positive balance of the cumulative register of T applicable to SRLY net operating losses for Year 3 equals the P group’s consolidated taxable income determined by reference only to T’s items, or $40. This amount equals the sum obtained by adding the zero carryover from Year 2, a net inclusion of zero from capital items implicated in Year 3 ($30¥$30), and $40 of taxable income in Year 3. Under paragraph (c)(1)(i)(E) of this section, after taking into account the 80-percent limitation, the SRLY limitation for Year 3 is $32 ($40 × 80 percent). Therefore, only $32 of the Year 1 net operating loss is absorbed by the P group in Year 3. T carries over its remaining $20 of its Year 1 loss to Year 4. (F) Example 6: Pre-2018 NOLs and post-2017 NOLs. (1) Individual A owns P. On January 1, 2017, A forms T. P and T are calendar-year taxpayers. In 2017, T sustains a $100 net operating loss that is carried over. During 2018, 2019, and 2020, T deducts a total of $90 of its 2017 net operating loss against its taxable income, and T carries over the remaining $10 of its 2017 net operating loss. In 2021, T sustains a net operating loss of $50. On December 31, 2021, P acquires all the stock of T, and T becomes a member of the P group. The P group has $300 of consolidated taxable income in 2022 (computed without regard to the CNOL deduction). Such consolidated taxable income would be $70 if determined by reference to only T’s items. The P group has no other SRLY net operating loss carryovers or CNOL carryovers. (2) T’s remaining $10 of net operating loss carryover from 2017 and its $50 net operating loss carryover from 2021 are both SRLY losses in the P group. See § 1.1502–1(f)(2)(iii). P’s acquisition of T was not an ownership change as defined by section 382(g). Thus, T’s net operating loss carryovers are subject to the SRLY limitation in paragraph (c)(1) of this section. The SRLY limitation for the P group’s 2022 consolidated return year is consolidated taxable income determined by reference to only T’s $70 of items. (3) Because T’s oldest (2017) carryover was sustained in a year E:\FR\FM\27OCR1.SGM 27OCR1 jbell on DSKJLSW7X2PROD with RULES Federal Register / Vol. 85, No. 208 / Tuesday, October 27, 2020 / Rules and Regulations beginning before January 1, 2018, its use is not subject to limitation under section 172(a)(2)(B). Therefore, all $10 of T’s 2017 SRLY net operating loss (that is, a pre-2018 NOL) is included under paragraph (a) of this section in the P group’s CNOL deduction for 2022. After deduction of T’s $10 SRLY net operating loss from 2017, the cumulative register of T is reduced on a dollar-for-dollar basis, pursuant to paragraph (c)(1)(i) of this section. Therefore, the cumulative register of T is decreased by $10, and $60 remains in the cumulative register ($70¥$10). (4) The P group’s deduction of T’s 2021 net operating loss is subject to both a SRLY limitation and the 80-percent limitation under section 172(a)(2)(B)(ii). Therefore, the total limitation on the use of T’s 2021 net operating loss in the P group is $48 (the remaining cumulative register of $60 × 80 percent). No losses from equivalent years are available, and the P group otherwise has sufficient consolidated taxable income to support the CNOL deduction ($290 × 80 percent = $232). Therefore, $48 of T’s 2021 SRLY net operating loss is included under paragraph (a) of this section in the P group’s CNOL deduction for 2022. The remaining $2 of T’s 2021 SRLY net operating loss ($50¥$48) is carried over to the P group’s 2023 consolidated return year. (5) After deduction of T’s $48 SRLY NOL in 2022, the cumulative register of T is adjusted pursuant to paragraph (c)(1)(i)(E) of this section. After taking into account the 80-percent limitation, the amount of income necessary to support this deduction is $60 ($60 × 80 percent = $48). Therefore, the cumulative register of T is decreased by $60, and zero remains in the cumulative register ($60¥$60). (2) * * * (v) Coordination with other limitations. This paragraph (c)(2) does not allow a net operating loss to offset income to the extent inconsistent with other limitations or restrictions on the use of losses, such as a limitation based on the nature or activities of members. For example, a net operating loss may not offset income in excess of any limitations under section 172(a) and paragraph (a)(2) of this section. Additionally, any dual consolidated loss may not reduce the taxable income to an extent greater than that allowed under section 1503(d) and §§ 1.1503(d)–1 through 1.1503(d)–8. See also § 1.1502– 47(k) (relating to preemption of rules for life-nonlife groups). * * * * * (viii) Examples. For purposes of the examples in this paragraph (c)(2)(viii), VerDate Sep<11>2014 15:51 Oct 26, 2020 Jkt 253001 no corporation is a nonlife insurance company or has any farming losses. The principles of this paragraph (c)(2) are illustrated by the following examples: * * * * * (B) * * * (3) In Year 4, the M group has $10 of consolidated taxable income (computed without regard to the CNOL deduction for Year 4). That consolidated taxable income would be $45 if determined by reference only to the items of P, S, and T, the members included in the SRLY subgroup with respect to P’s loss carryover. Therefore, the positive balance of the cumulative register of the P SRLY subgroup for Year 4 equals $45 and, due to the application of the 80percent limitation under paragraph (c)(2)(v) of this section, the SRLY subgroup limitation under this paragraph (c)(2) is $36 ($45 × 80 percent). However, the M group has only $10 of consolidated taxable income in Year 4. Thus, due to the 80-percent limitation and the application of paragraph (b)(1) of this section, the M group’s deduction of all net operating losses in Year 4 is limited to $8 ($10 × 80 percent). As a result, the M group deducts $8 of P’s SRLY net operating loss carryover, and the remaining $37 is carried over to Year 5. (4) After deduction of $8 of P’s SRLY net operating loss in Year 4, the cumulative register of the P SRLY subgroup is adjusted pursuant to paragraph (c)(1)(i)(E) of this section. After taking into account the 80-percent limitation, the amount of income necessary to support this deduction is $10 ($10 × 80 percent = $8). Therefore, the cumulative register of the P SRLY subgroup is decreased by $10, and $35 remains in the cumulative register ($45¥$10). (5) In Year 5, the M group has $100 of consolidated taxable income (computed without regard to the CNOL deduction for Year 5). None of P, S, or T has any items of income, gain, deduction, or loss in Year 5. Although the members of the P SRLY subgroup do not contribute to the $100 of consolidated taxable income in Year 5, the positive balance of the cumulative register of the P SRLY subgroup for Year 5 is $35 and, due to the application of the 80-percent limitation under paragraph (c)(2)(v) of this section, the SRLY subgroup limitation under this paragraph (c)(2) is $28 ($35 × 80 percent). Because of the 80-percent limitation and the application of paragraph (b)(1) of this section, the M group’s deduction of net operating losses in Year 5 is limited to $80 ($100 × 80 percent). Because the $28 of net PO 00000 Frm 00017 Fmt 4700 Sfmt 4700 67981 operating loss available to be absorbed is less than 80 percent of the M group’s consolidated taxable income, $28 of P’s SRLY net operating loss is absorbed in Year 5, and the remaining $9 ($37¥$28) is carried over to Year 6. (6) After deduction of $28 of P’s SRLY net operating loss in Year 5, the cumulative register of the P SRLY subgroup is adjusted pursuant to paragraph (c)(1)(i)(E) of this section. After taking into account the 80-percent limitation, the amount of income necessary to support this deduction is $35 ($35 × 80 percent = $28). Therefore, the cumulative register of the P SRLY subgroup is decreased by $35, and zero remains in the cumulative register ($35¥$35). * * * * * (h) * * * (9) For the applicability dates of paragraphs (b)(3)(ii)(C) and (b)(3)(ii)(D) of this section, see § 1.1502–21T(h)(9). (10) The rules of paragraphs (a), (b)(1), (b)(2)(iv), and (c)(1)(i)(E) of this section apply to taxable years beginning after December 31, 2020. ■ Par. 4. Section 1.1502–47 is amended: ■ 1. By revising paragraphs (a)(2)(i) and (ii). ■ 2. By removing paragraph (a)(3). ■ 3. By redesignating paragraph (a)(4) as paragraph (a)(3). ■ 4. By removing paragraphs (b) and (c). ■ 5. By redesignating paragraph (d) as paragraph (b). ■ 6. By revising newly redesignated paragraphs (b)(1), (2), (3), (4), (5), (10), (11), and (13). ■ 7. In newly redesignated paragraph (b)(14), by designating Examples 1 through 14 as paragraphs (b)(14)(i) through (xiv), respectively. ■ 8. In newly redesignated paragraph (b)(14)(i), by adding a sentence at the end of the paragraph. ■ 9. By revising newly redesignated paragraph (b)(14)(ii). ■ 10. By removing newly redesignated paragraph (b)(14)(xiv). ■ 11. By redesignating paragraph (e) as paragraph (c). ■ 12. By removing newly redesignated paragraphs (c)(4) and (5). ■ 13. By redesignating paragraph (c)(6) as paragraph (c)(4). ■ 14. By redesignating paragraph (f) as paragraph (d). ■ 15. By revising newly redesignated paragraph (d)(5). ■ 16. By removing the last sentence of newly redesignated paragraph (d)(6). ■ 17. By removing newly redesignated paragraph (d)(7)(ii). ■ 18. By redesignating paragraph (d)(7)(iii) as paragraph (d)(7)(ii). ■ 19. By revising newly redesignated paragraph (d)(7)(ii). E:\FR\FM\27OCR1.SGM 27OCR1 67982 Federal Register / Vol. 85, No. 208 / Tuesday, October 27, 2020 / Rules and Regulations 20. By redesignating paragraph (g) as paragraph (e). ■ 21. In newly redesignated paragraph (e)(2), by removing the language ‘‘partial’’ everywhere it appears. ■ 22. By removing newly redesignated paragraph (e)(3). ■ 23. By redesignating paragraph (h) as paragraph (f). ■ 24. By revising newly redesignated paragraph (f)(2)(iii). ■ 25. In newly designated paragraph (f)(2)(v), by removing the word ‘‘partial’’ everywhere it appears. ■ 26. In newly redesignated paragraph (f)(2)(v), by adding a sentence at the end of the paragraph. ■ 27. By revising newly redesignated paragraph (f)(2)(vi) and (vii). ■ 28. By removing newly redesignated paragraph (f)(3). ■ 29. By redesignating newly redesignated paragraph (f)(4) as paragraph (f)(3). ■ 30. By revising newly redesignated paragraph (f)(3)(ii). ■ 31. By adding a new paragraph (g). ■ 32. By removing paragraphs (j), (k), and (l). jbell on DSKJLSW7X2PROD with RULES ■ 33. By redesignating paragraph (m) as paragraph (h), and redesignating paragraph (n) as paragraph (j). ■ 34. In newly redesignated paragraph (h), by removing the language ‘‘partial’’ everywhere it appears. ■ 35. In newly redesignated paragraph (h)(2)(ii), by adding a sentence at the end of the paragraph. ■ 36. In newly redesignated paragraph (h)(3)(iv), by adding a sentence at the end of the paragraph. ■ 37. In newly redesignated paragraph (h)(3)(viii), by removing the language ‘‘common parent’s election’’ and adding in its place ‘‘election by the agent for the group (within the meaning of § 1.1502– 77)’’. ■ 38. In newly redesignated paragraph (h)(3)(ix), by removing the last two sentences. ■ 39. By removing newly redesignated paragraph (h)(4). ■ 40. By redesignating newly redesignated paragraph (h)(5) as paragraph (h)(4). ■ 41. By revising newly redesignated paragraph (h)(4) introductory text. ■ 42. In newly redesignated paragraph (h)(4), by redesignating Examples 1 ■ Paragraph Redesignations Remove 1.1502–47(a)(1) .............. N/A ................................ 1.1502–47(a)(1) .............. N/A ................................ 1.1502–47(a)(1) .............. N/A ................................ section 802 or 821 (relating respectively to life insurance companies and to certain mutual insurance companies). life insurance companies and mutual insurance companies may. composition and its consolidated tax ...... 1.1502–47(a)(4) .............. 1.1502–47(a)(4) .............. 1.1502–47(d)(12)(i)(A), (d)(12)(i)(C), (d)(12)(i)(D), (d)(12)(iii), (d)(12)(iv), (d)(12)(v), (d)(12)(v)(B), (d)(12)(v)(C), (d)(12)(v)(D), (d)(12)(vi), (d)(12)(vii), and (d)(12)(viii)(F). 1.1502–47(d)(12)(iii) ....... 1.1502–47(d)(12)(iv) ....... 1.1502–47(d)(12)(v)(B) ... 1.1502–47(a)(3) ............ 1.1502–47(a)(3) ............ 1.1502–47(b)(12)(i)(A), (b)(12)(i)(C), (b)(12)(i)(D), (b)(12)(iii), (b)(12)(iv), (b)(12)(v), (b)(12)(v)(B), (b)(12)(v)(C), (b)(12)(v)(D), (b)(12)(vi), (b)(12)(vii), and (b)(12)(viii)(F), respectively. 1.1502–47(b)(12)(iii) ..... 1.1502–47(b)(12)(iv) ..... 1.1502–47(b)(12)(v)(B) subdivision (iii) ......................................... subdivision (iv) ........................................ (i.e., sections 11, 802, 821, or 831) ........ 1.1502–47(d)(12)(vi) ....... 1.1502–47(d)(12)(vii) ...... 1.1502–47(d)(12)(viii)(A) 1.1502–47(b)(12)(vi) ..... 1.1502–47(b)(12)(vii) .... 1.1502–47(b)(12)(viii)(A) subdivision (vi) ........................................ return year and even ............................... (i.e., total reserves in section 801(c)) ..... 1.1502–47(d)(12)(viii)(D) and (F). 1.1502–47(d)(14) ............ 1.1502–47(d)(14) ............ 1.1502–47(d)(14), Example 1. 1.1502–47(d)(14), Examples 2 through 4, 8, 10, and 12. 1.1502–47(d)(14), Examples 1 through 3. 1.1502–47(b)(12)(viii)(D) and (F), respectively. 1.1502–47(b)(14) .......... 1.1502–47(b)(14) .......... 1.1502–47(b)(14)(i) ....... 1.1502–47(d)(14), Examples 1 through 5 and 8 through 13. VerDate Sep<11>2014 1.1502–47(b)(14)(ii) through (iv), (viii), (x), and (xii), respectively. 1.1502–47(b)(14)(i) through (iii), respectively. 1.1502–47(b)(14)(i) through (v) and (viii) through (xiii), respectively. 15:51 Oct 26, 2020 Jkt 253001 through 6 as paragraphs (h)(4)(i) through (vi). ■ 43. By revising newly redesignated paragraphs (h)(4)(ii) and (iii). ■ 44. By removing newly redesignated paragraphs (h)(4)(v) and (vi). ■ 45. By revising redesignated paragraph (j)(2)(iii). ■ 46. By removing newly redesignated paragraph (j)(2)(v). ■ 47. By redesignating newly redesignated paragraph (j)(2)(vi) as paragraph (j)(2)(v). ■ 48. By revising newly redesignated paragraph (j)(3). ■ 49. By redesignating paragraphs (q), (r), and (s) as paragraphs (k), (l), and (m), respectively. ■ 50. By adding a new paragraph (n). ■ 51. By removing paragraphs (o), (p), and (t). ■ 52. In the following table, for each section designated or redesignated under these regulations (as indicated in the second column), removing the language in the third column and adding the language in the fourth column with the frequency indicated in the fifth column: Add §§ 1.1502–1 through 1.1502–80 ............. 844 .......................................................... (d)(12) ...................................................... Frequency section 801 (relating to life insurance companies). Once. life insurance companies may ................ Once. composition, its consolidated taxable income (or loss), and its consolidated tax. §§ 1.1502–0 through 1.1502–100 ........... 848 .......................................................... (b)(12) ...................................................... Once. Once. Once. Each place it appears. Once. Once. Once. subdivision (viii) ....................................... paragraph (b)(12)(iii) ............................... paragraph (b)(12)(iv) ............................... (for example, section 11, section 801, or section 831). paragraph (b)(12)(vi) ............................... return year even ...................................... (that is, total reserves in section 816(c), as modified by section 816(h)). paragraph (b)(12)(viii) ............................. Illustrations .............................................. paragraph (d) .......................................... 1913 ........................................................ Examples ................................................. paragraph (b) .......................................... 2012 ........................................................ Once. Once. Once. 1974 ........................................................ 2012 ........................................................ Each place it appears. 1980 ........................................................ 2018 ........................................................ Each place it appears. 1982 ........................................................ 2020 ........................................................ Each place it appears. PO 00000 Frm 00018 Fmt 4700 Sfmt 4700 E:\FR\FM\27OCR1.SGM 27OCR1 Once. Once. Once. Once. 67983 Federal Register / Vol. 85, No. 208 / Tuesday, October 27, 2020 / Rules and Regulations Paragraph Redesignations Remove Add 1.1502–47(d)(14), Examples 5 through 7 and 9. 1.1502–47(b)(14)(v) through (vii) and (ix), respectively. 1.1502–47(b)(14)(ii) through (v) and (viii) through (xii), respectively. 1.1502–47(b)(14)(ii), (iii), and (xii), respectively. 1.1502–47(b)(14)(iii) ..... 1983 ........................................................ 2021 ........................................................ Each place it appears. (d)(12) ...................................................... (b)(12) ...................................................... Each place it appears. stock casualty .......................................... nonlife insurance ..................................... Each place it appears. subparagraph (d)(12)(v)(B) and (E) ........ paragraph (b)(12)(v)(B) and (D) .............. Once. 1.1502–47(b)(14)(iii) ..... e.g. .......................................................... for example ............................................. Once. 1.1502–47(b)(14)(v) ...... i.e. ............................................................ in other words ......................................... Once. 1.1502–47(d)(14), Examples 2 through 5 and 8 through 12. jbell on DSKJLSW7X2PROD with RULES 1.1502–47(d)(14), Examples 2, 3, and 12. Frequency 1.1502–47(d)(14), Example 3. 1.1502–47(d)(14), Example 3. 1.1502–47(d)(14), Example 5. 1.1502–47(d)(14), Example 12. 1.1502–47(e)(1) .............. 1.1502–47(b)(14)(xii) .... casualty ................................................... nonlife insurance ..................................... Once. 1.1502–47(c)(1) ............ life company ............................................ Once. 1.1502–47(e)(3) .............. 1.1502–47(c)(3) ............ § 1.1502–75(c) ......................................... Once. 1.1502–47(f)(3) ............... 1.1502–47(f)(3) ............... 1.1502–47(f)(3) ............... 1.1502–47(d)(3) ............ 1.1502–47(d)(3) ............ 1.1502–47(d)(3) ............ 2019 ........................................................ 2020 ........................................................ applying §§ 1.1502–13 and 1.1502–19 ... Each place it appears. Each place it appears. Once. 1.1502–47(f)(7)(i) ............ 1.1502–47(f)(7)(i) ............ 1.1502–47(g) .................. 1.1502–47(g)(1) .............. 1.1502–47(g)(1) .............. 1.1502–47(g)(1) .............. 1.1502–47(g)(2) .............. 1.1502–47(g)(2) .............. 1.1502–47(g)(2) .............. 1.1502–47(h)(1) .............. 1.1502–47(h)(1) .............. 1.1502–47(d)(7)(i) ......... 1.1502–47(d)(7)(i) ......... 1.1502–47(e) ................. 1.1502–47(e)(1) ............ 1.1502–47(e)(1) ............ 1.1502–47(e)(1) ............ 1.1502–47(e)(2) ............ 1.1502–47(e)(2) ............ 1.1502–47(e)(2) ............ 1.1502–47(f)(1) ............. 1.1502–47(f)(1) ............. paragraph (e) .......................................... sections 801(a) and 831(a) ..................... two ........................................................... paragraph (f) ........................................... paragraph (j) ............................................ paragraph (e)(1) ...................................... paragraph (g)(1) ...................................... paragraph (h) .......................................... paragraph (e)(2) ...................................... paragraph (f) ........................................... includes insurance company taxable income. Once. Once. Once. Once. Once. Once. Once. Once. Once. Once. Once. 1.1502–47(h)(2)(i) ........... 1.1502–47(f)(2)(i) .......... § 1.1502–21, the rules in this paragraph (f)(2). Once. 1.1502–47(h)(2)(ii) .......... 1.1502–47(f)(2)(ii) ......... § 1.1502–21(e) ........................................ Once. 1.1502–47(h)(2)(iv) ......... 1.1502–47(f)(2)(iv) ........ year, § 1.1502–21 .................................... Once. 1.1502–47(h)(2)(iv) ......... 1.1502–47(h)(2)(v) .......... 1.1502–47(h)(4)(i) ........... 1.1502–47(f)(2)(iv) ........ 1.1502–47(f)(2)(v) ......... 1.1502–47(f)(3)(i) .......... nonlife subgroup loss .............................. paragraph (f)(2) ....................................... § 1.1502–22 ............................................. Once. Once. Once. 1.1502–47(h)(4)(i) ........... 1.1502–47(h)(4)(i) ........... 1.1502–47(f)(3)(i) .......... 1.1502–47(f)(3)(i) .......... paragraph (f)(3) ....................................... § 1.1502–22 ............................................. Once. Once. 1.1502–47(h)(4)(iii) ......... 1.1502–47(h)(4)(iii)(A) .... 1.1502–47(f)(3)(iii) ........ 1.1502–47(f)(3)(iii)(A) .... § 1.1502–22(b) ........................................ allowed under section 832(c)(5) ............. Once. Once. 1.1502–47(m) ................. 1.1502–47(m) ................. 1.1502–47(m) ................. 1.1502–47(m) ................. 1.1502–47(m)(2)(ii) ......... 1.1502–47(h) ................. 1.1502–47(h) ................. 1.1502–47(h) ................. 1.1502–47(h) ................. 1.1502–47(h)(2)(ii) ........ paragraph (e) .......................................... paragraph (f) ........................................... paragraph (g) .......................................... paragraph (h) .......................................... § 1.1502–21 ............................................. Each place Each place Each place Each place Once. 1.1502–47(m)(2)(ii) ......... 1.1502–47(h)(2)(ii) ........ § 1.1502–22 ............................................. Once. 1.1502–47(m)(3)(i) .......... 1.1502–47(h)(3)(i) ......... 1.1502–47(h)(3)(i) ......... But see paragraph (h)(3)(ix) of this section. arising in separate return years .............. Once. 1.1502–47(m)(3)(i) .......... Once. 1.1502–47(m)(3)(i) .......... 1.1502–47(h)(3)(i) ......... and 1.1502–22 ........................................ Once. 1.1502–47(m)(3)(iii) ........ 1.1502–47(m)(3)(v) ......... 1.1502–47(m)(3)(v) ......... 1.1502–47(h)(3)(iii) ....... 1.1502–47(h)(3)(v) ........ 1.1502–47(h)(3)(v) ........ life consolidated net operating loss ........ taxable income ........................................ LICTI for any ........................................... Once. Once. Once. 1.1502–47(m)(3)(vi)(A) ... 1.1502–47(m)(3)(vii)(A) .. 1.1502–47(h)(3)(vi)(A) .. 1.1502–47(h)(3)(vii)(A) .. paragraph (h)(3) ...................................... notwithstanding § 1.1502–21(b) .............. Once. Once. 1.1502–47(m)(3)(vii)(A) .. 1.1502–47(h)(3)(vii)(A) .. life company or an ineligible mutual company. § 1.1502–75(c) and paragraph (e)(4) of this section. 1981 ........................................................ 1982 ........................................................ applying §§ 1.1502–13, 1.1502–18, and 1.1502–19. paragraph (g) .......................................... sections 802(a), 821(a), and 831(a) ....... three ........................................................ paragraph (h) .......................................... paragraph (n) .......................................... paragraph (g)(1) ...................................... paragraph (j) ............................................ paragraph (m) ......................................... paragraph (g)(2) ...................................... paragraph (h) .......................................... includes separate mutual insurance company taxable income (as defined in section 821(b)) and insurance company taxable income. §§ 1.1502–21 or 1.1502–21A (as appropriate), the rules in this subparagraph (2). §§ 1.1502–21(A)(f) or 1.1502–21(e) (as appropriate). year beginning after December 31, 1981, §§ 1.1502–21A or 1.1502–21 (as appropriate). nonlife loss .............................................. subparagraph (2) ..................................... §§ 1.1502–22 or 1.1502–22A (as appropriate). subparagraph (4) ..................................... §§ 1.1502–22 or 1.1502–22A(a) (as appropriate). §§ 1.1502–22A(b)(1) or 1.1502–22(b) ..... allowed under section 822(c)(6) or section 832(c)(5). paragraph (g) .......................................... paragraph (h) .......................................... paragraph (l) ............................................ paragraph (m) ......................................... §§ 1502–21 or 1.1502–21A (as appropriate). §§ 1.1502–22 or 1.1502–22A (as appropriate). But see subdivision (ix) of this paragraph (m)(3). arising in separate return years ending after December 31, 1980. and 1.1502–22 (or §§ 1.1502–21A and 1.1502–22A, as appropriate). consolidated LO ...................................... GO or TII ................................................. LICTI (as determined under paragraph (j) of this section) for any. subparagraph (3) ..................................... notwithstanding § 1.1502–21A(b)(3)(ii) or 1.1502–21(b). taxable income for that year ................... Once. 1.1502–47(m)(3)(vii)(B) .. 1.1502–47(m)(3)(viii) ...... 1.1502–47(h)(3)(vii)(B) .. 1.1502–47(h)(3)(viii) ...... (A) of this subdivision (vii) ....................... section 172(b)(3)(C) ................................ taxable income for that year, subject to the limitation in section 172(a). paragraph (h)(3)(vii)(A) of this section .... section 172(b)(3) ..................................... VerDate Sep<11>2014 15:51 Oct 26, 2020 Jkt 253001 PO 00000 Frm 00019 Fmt 4700 Sfmt 4700 E:\FR\FM\27OCR1.SGM 27OCR1 Once. Once. it it it it appears. appears. appears. appears. 67984 Federal Register / Vol. 85, No. 208 / Tuesday, October 27, 2020 / Rules and Regulations Paragraph Redesignations Remove Add 1.1502–47(m)(3)(ix) ........ 1.1502–47(m)(3)(ix) ........ 1.1502–47(h)(3)(ix) ....... 1.1502–47(h)(3)(ix) ....... 243(b)(3) .................................................. return year ............................................... Once. Once. 1.1502–47(m)(3)(x) ......... 1.1502–47(h)(3)(x) ........ LICTI in the particular ............................. Once. 1.1502–47(m)(3)(xii) ....... 1.1502–47(h)(3)(xii) ...... 243(b)(2) .................................................. return year ending after December 31, 1980. LICTI (as defined in paragraph (j) of this section) in the particular. carryback of a consolidated LO .............. Once. 1.1502–47(m)(3)(xii) ....... 1.1502–47(m)(5), Examples 1 through 4. 1.1502–47(h)(3)(xii) ...... 1.1502–47(h)(4)(i) through (iv), respectively. 1.1502–47(h)(4)(i) through (iv), respectively. 1.1502–47(h)(4)(i) ......... (2) or (4) .................................................. 1982 ........................................................ carryback of a life consolidated net operating loss. (2) or (3) .................................................. 2021 ........................................................ Once. Each place it appears. i.e. ............................................................ that is ....................................................... Each place it appears. paragraph (d)(13) .................................... paragraph (b)(13) .................................... Once. 1.1502–47(h)(4)(i) ......... attributable to I (an ineligible member) ... Once. 1.1502–47(h)(4)(i) ......... of this section. The result would be ........ 1.1502–47(h)(4)(iv) ....... of this section or under § 1.1502–15A .... attributable to I (an ineligible member that is not a nonlife insurance company). of this section and section 172(a). The result would be. of this section .......................................... Once. 1.1502–47(h)(4)(iv) ....... taxable income is $35 ............................. taxable income is $32.5 .......................... Once. 1.1502–47(h)(4)(iv) ....... 30% ......................................................... 35% ......................................................... Once. 1.1502–47(h)(4)(iv) ....... (15) .......................................................... (17.5) ....................................................... Once. 1.1502–47(h)(4)(iv) ....... (65) .......................................................... (67.5) ....................................................... Once. 1.1502–47(m)(5), Examples 1 through 4. 1.1502–47(m)(5), Example 1. 1.1502–47(m)(5), Example 1. 1.1502–47(m)(5), Example 1. 1.1502–47(m)(5), Example 4. 1.1502–47(m)(5), Example 4. 1.1502–47(m)(5), Example 4. 1.1502–47(m)(5), Example 4. 1.1502–47(m)(5), Example 4. 1.1502–47(m)(5), Example 4. 1.1502–47(n) .................. 1.1502–47(h)(4)(iv) ....... (85) .......................................................... (82.5) ....................................................... Once. 1.1502–47(j) .................. consolidated LO ...................................... Each place it appears. 1.1502–47(n)(1) .............. 1.1502–47(n)(1) .............. 1.1502–47(j)(1) ............. 1.1502–47(j)(1) ............. paragraph (g)(1) ...................................... paragraph (n)(2) of this section .............. Once. Once. 1.1502–47(n)(1) .............. 1.1502–47(j)(1) ............. 1.1502–47(n)(2) .............. 1.1502–47(n)(2) .............. 1.1502–47(n)(2)(ii) .......... 1.1502–47(n)(2)(iv) ......... 1.1502–47(q) .................. 1.1502–47(q) .................. 1.1502–47(q) .................. 1.1502–47(j)(2) ............. 1.1502–47(j)(2) ............. 1.1502–47(j)(2)(ii) ......... 1.1502–47(j)(2)(iv) ........ 1.1502–47(k) ................. 1.1502–47(k) ................. 1.1502–47(k) ................. paragraph (f) ........................................... paragraphs (h)(2) and (3) ....................... consolidated LICTI .................................. Paragraphs (h)(3)(vi), (vii), (x), and (xi) .. §§ 1.1502–0 through 1.1502–100 ........... paragraph (h)(3)(vi) ................................. § 1.1502–21 ............................................. Once. Once. Once. Once. Once. Once. Once. 1.1502–47(r) ................... 1.1502–47(l) .................. consolidated net capital loss (as determined under paragraph (l)(4) of this section). paragraph (h) .......................................... paragraphs (m)(2) and (3) ...................... consolidated partial LICTI ....................... Paragraphs (m)(3)(vi), (vii), (x), and (xi) § 1.1502–1 through 1.1502–80 ............... paragraph (m)(3)(vi) ................................ §§ 1.1502–21A(b)(3) and 1.1502– 79A(a)(3) (or § 1.1502–21, as appropriate). partial LICTI (or LO) ................................ life consolidated net operating loss and consolidated operations loss carryovers. paragraph (e)(1) ...................................... paragraph (j)(2) of this section, subject to the rules and limitations in paragraph (j)(3) of this section. consolidated net capital loss ................... Once. 1.1502–47(r) ................... 1.1502–47(s)(1)(iii) ......... 1.1502–47(s)(1)(iv) ......... 1.1502–47(s)(1)(v) .......... 1.1502–47(s)(1)(v) .......... 1.1502–47(l) .................. 1.1502–47(m)(1)(iii) ...... 1.1502–47(m)(1)(iv) ...... 1.1502–47(m)(1)(v) ....... 1.1502–47(m)(1)(v) ....... LICTI (or life consolidated net operating loss). §§ 1.1502–0 through 1.1502–100 ........... paragraphs (e), (h), and (j) ..................... paragraph (f) ........................................... consolidated Life ..................................... or life consolidated net operating loss .... The additions and revisions read as follows: § 1.1502–47 Consolidated returns by lifenonlife groups. jbell on DSKJLSW7X2PROD with RULES Frequency (a) * * * (2) General method of consolidation— (i) Subgroup method. The regulations adopt a subgroup method to determine consolidated taxable income. One subgroup is the group’s nonlife companies. The other subgroup is the group’s life insurance companies. Initially, the nonlife subgroup computes nonlife consolidated taxable income and VerDate Sep<11>2014 15:51 Oct 26, 2020 Jkt 253001 §§ 1.1502–0—1.1502–80 ........................ paragraphs (g), (m), and (n) ................... paragraph (h) .......................................... consolidated partial Life .......................... (as defined by paragraph (d)(3) of this section), determined under paragraph (j) of this section the life subgroup computes consolidated LICTI. A subgroup’s income may in effect be reduced by a loss of the other subgroup, subject to the limitations in sections 172 and 1503(c). The life subgroup losses consist of life consolidated net operating loss, consolidated operations loss carryovers from taxable years beginning before January 1, 2018 (consolidated operations loss carryovers), and life consolidated net capital loss. The nonlife subgroup losses consist of nonlife consolidated net operating loss and nonlife consolidated net capital PO 00000 Frm 00020 Fmt 4700 Sfmt 4700 Once. Once. Once. Once. Once. Once. Once. loss. Consolidated taxable income is therefore defined in pertinent part as the sum of nonlife consolidated taxable income and consolidated LICTI, reduced by life subgroup losses and/or nonlife subgroup losses. (ii) Subgroup loss. A subgroup loss does not actually affect the computation of nonlife consolidated taxable income or consolidated LICTI. It merely constitutes a bottom-line adjustment in reaching consolidated taxable income. Furthermore, the amount of a subgroup’s loss, if any, that is eligible to be carried back to a prior taxable year E:\FR\FM\27OCR1.SGM 27OCR1 jbell on DSKJLSW7X2PROD with RULES Federal Register / Vol. 85, No. 208 / Tuesday, October 27, 2020 / Rules and Regulations first must be carried back against income of the same subgroup before it may be used as a setoff against the other subgroup’s income in the taxable year the loss arose. (See sections 172(b)(1) and 1503(c)(1); see also § 1.1502–21(b).) The carryback of losses from one subgroup may not be used to offset income of the other subgroup in the year to which the loss is to be carried. This carryback of one subgroup’s loss may ‘‘bump’’ the other subgroup’s loss that, in effect, previously reduced the income of the first subgroup. The subgroup’s loss that is bumped in appropriate cases may, in effect, reduce a succeeding year’s income of either subgroup. This approach gives the group the tax savings of the use of losses, but the bumping rule assures that, insofar as possible, life deductions will be matched against life income and nonlife deductions against nonlife income. * * * * * (b) * * * (1) Life company. The term life company means a life insurance company as defined in section 816 and subject to tax under section 801. Section 816 applies to each company separately. (2) Nonlife insurance company. The term nonlife insurance company has the meaning provided in § 1.1502–1(k). (3) Life insurance company taxable income. The term life insurance company taxable income or LICTI has the meaning provided in section 801(b). (4) Group. The term group has the meaning provided in § 1.1502–1(a). Unless otherwise indicated in this section, a group’s composition is determined without regard to section 1504(b)(2). (5) Member. The term member has the meaning provided in § 1.1502–1(b). A life company is tentatively treated as a member for any taxable year for purposes of determining if it is an eligible corporation under paragraph (b)(12) of this section and, therefore, if it is an includible corporation under section 1504(c)(2). If such a company is eligible and includible (under section 1504(c)(2)), it will actually be treated as a member of the group. * * * * * (10) Separate return year. The term separate return year has the meaning provided in § 1.1502–1(e). For purposes of this paragraph (b)(10), the term group is defined with regard to section 1504(b)(2) for years in which an election under section 1504(c)(2) is not in effect. Thus, a separate return year includes a taxable year for which that election is not in effect. (11) Separate return limitation year. Section 1.1502–1(f)(2) provides VerDate Sep<11>2014 15:51 Oct 26, 2020 Jkt 253001 exceptions to the definition of the term separate return limitation year. For purposes of applying those exceptions to this section, the term group is defined without regard to section 1504(b)(2), and the definition in this paragraph (b)(11) applies separately to the nonlife subgroup in determining nonlife consolidated taxable income under paragraph (f) of this section and to the life subgroup in determining consolidated LICTI under paragraph (g) of this section. Paragraph (h)(3)(ix) of this section defines the term separate return limitation year for purposes of determining whether the losses of one subgroup may be used against the income of the other subgroup. * * * * * (13) Ineligible corporation. A corporation that is not an eligible corporation is ineligible. If a life company is ineligible, it is not treated under section 1504(c)(2) as an includible corporation. Losses of a nonlife member arising in years when it is ineligible may not be used under section 1503(c)(2) and paragraph (g) of this section to set off the income of a life member. If a life company is ineligible and is the common parent of the group (without regard to section 1504(b)(2)), the election under section 1504(c)(2) may not be made. (14) * * * (i) * * * S2 must file its own separate return for 2020. (ii) Example 2. Since 2012, L1 has been a life company owning all the stock of L2. In 2018, L1 transfers assets to S1, a new nonlife insurance company subject to taxation under section 831(a). For 2020, only L1 and L2 are eligible corporations. The tacking rule in paragraph (b)(12)(v) of this section does not apply in 2020 because the old corporation (L1) and the new corporation (S1) do not have the same tax character. * * * * * (d) * * * (5) Dividends received deduction—(i) Dividends received by an includible insurance company. Dividends received by an includible member insurance company, taxed under either section 801 or section 831, from another includible member of the group are treated for Federal income tax purposes as if the group did not file a consolidated return. See sections 818(e)(2) and 805(a)(4) for rules regarding a member taxed under section 801, and see sections 832(g) and 832(b)(5)(B) through (E) for rules regarding a member taxed under section 831. PO 00000 Frm 00021 Fmt 4700 Sfmt 4700 67985 (ii) Other dividends. Dividends received from a life company member of the group that are not subject to paragraph (d)(5)(i) of this section are not included in gross income of the distributee member. See section 1504(c)(2)(B)(i). If the distributee corporation is a nonlife insurance company subject to tax under section 831, the rules of section 832(b)(5)(B) through (E) apply. * * * * * (7) * * * (ii) Any taxes described in § 1.1502– 2 (other than in § 1.1502–2(a)(1), (a)(6), and (a)(7)). * * * * * (f) * * * (2) * * * (iii) Carrybacks. The portion of the nonlife consolidated net operating loss for the nonlife subgroup described in paragraph (f)(2)(vi) of this section, if any, that is eligible to be carried back to prior taxable years under § 1.1502–21 is carried back to the appropriate years (whether consolidated or separate) before the nonlife consolidated net operating loss may be used as a nonlife subgroup loss under paragraphs (e)(2) and (h) of this section to set off consolidated LICTI in the year the loss arose. The election under section 172(b)(3) to relinquish the entire carryback period for the net operating loss of the nonlife subgroup may be made by the agent for the group within the meaning of § 1.1502–77. * * * * * (v) * * * For limitations on the use of nonlife carryovers to offset nonlife consolidated taxable income or consolidated LICTI, see § 1.1502–21. (vi) Portion of nonlife consolidated net operating loss that is carried back to prior taxable years. The portion of the nonlife consolidated net operating loss that (absent an election to waive carrybacks) is carried back to the two preceding taxable years is the sum of the nonlife subgroup’s farming loss (within the meaning of section 172(b)(1)(B)(ii)) and the amount of the subgroup’s net operating loss that is attributable to nonlife insurance companies (as determined under § 1.1502–21). For rules governing the absorption of net operating loss carrybacks, including limitations on the amount of net operating loss carrybacks that may be absorbed in prior taxable years, see § 1.1502–21(b). (vii) Example. P, a holding company that is not an insurance company, owns all of the stock of S, a nonlife insurance company, and L1, a life insurance company. L1 owns all of the stock of L2, a life insurance company. Both L1 and E:\FR\FM\27OCR1.SGM 27OCR1 jbell on DSKJLSW7X2PROD with RULES 67986 Federal Register / Vol. 85, No. 208 / Tuesday, October 27, 2020 / Rules and Regulations L2 satisfy the eligibility requirements of § 1.1502–47(b)(12). Each corporation uses the calendar year as its taxable year, and no corporation has incurred farming losses (within the meaning of section 172(b)(1)(B)(ii)). For 2021, the group first files a consolidated return for which the election under section 1504(c)(2) is effective. P and S filed consolidated returns for 2019 and 2020. In 2021, the P–S group sustains a nonlife consolidated net operating loss that is attributable entirely to S (see § 1.1502–21(b)). The election in 2021 under section 1504(c)(2) does not result under paragraph (d)(1) of this section in the creation of a new group or the termination of the P–S group. The loss is carried back to the consolidated return years 2019 and 2020 of P and S. Pursuant to § 1.1502–21(b), the loss may be used to offset S’s income in 2019 and 2020 without limitation, and the loss may be used to offset P’s income in those years, subject to the limitation in section 172(a) (see § 1.1502–21(b)). The portion of the loss not absorbed in 2019 and 2020 may serve as a nonlife subgroup loss in 2021 that may set off the consolidated LICTI of L1 and L2 under paragraphs (e)(2) and (h) of this section. (3) * * * (ii) Additional principles. In applying § 1.1502–22 to nonlife consolidated net capital loss carryovers and carrybacks, the principles set forth in paragraph (f)(2)(iii) through (v) of this section for applying § 1.1502–21 to nonlife consolidated net operating loss carryovers and carrybacks also apply, without regard to the limitation in paragraph (f)(2)(vi) of this section. * * * * * (g) Consolidated LICTI—(1) General rule. Consolidated LICTI is the consolidated taxable income of the life subgroup, computed under § 1.1502–11 as modified by this paragraph (g). (2) Life consolidated net operating loss deduction—(i) In general. In applying § 1.1502–21, the rules in this paragraph (g)(2) apply in determining for the life subgroup the life net operating loss and the portion of the life net operating loss carryovers and carrybacks to the taxable year. (ii) Life CNOL. The life consolidated net operating loss is determined under § 1.1502–21(e) by treating the life subgroup as the group. (iii) Carrybacks—(A) General rule. The portion of the life consolidated net operating loss for the life subgroup, if any, that is eligible to be carried back under § 1.1502–21 is carried back to the appropriate years (whether consolidated or separate) before the life consolidated VerDate Sep<11>2014 15:51 Oct 26, 2020 Jkt 253001 net operating loss may be used as a life subgroup loss under paragraphs (e)(1) and (j) of this section to set off nonlife consolidated taxable income in the year the loss arose. The election under section 172(b)(3) to relinquish the entire carryback period for the consolidated net operating loss of the life subgroup may be made by the agent for the group within the meaning of § 1.1502–77. (B) Special rule for life consolidated net operating losses arising in 2018, 2019, or 2020. If a life consolidated net operating loss arising in a taxable year beginning after December 31, 2017, and before January 1, 2021, is carried back to a life insurance company taxable year beginning before January 1, 2018, then such life consolidated net operating loss is treated as an operations loss carryback (within the meaning of section 810, as in effect prior to its repeal) of such company to such taxable year. (iv) Subgroup rule. In determining the portion of the life consolidated net operating loss that is absorbed when the loss is carried back to a consolidated return year, § 1.1502–21 is applied by treating the life subgroup as the group. Therefore, the absorption is determined without taking into account any nonlife subgroup losses that were previously reported on a consolidated return as setting off life consolidated taxable income for the year to which the life subgroup loss is carried back. (v) Carryovers. The portion of the life consolidated net operating loss that is not absorbed in a prior year as a carryback, or as a life subgroup loss that set off nonlife consolidated taxable income for the year the loss arose, constitutes a life carryover under this paragraph (g)(2) to reduce consolidated LICTI before that portion may constitute a life subgroup loss that sets off nonlife consolidated taxable income for that particular year. For limitations on the use of life carryovers to offset nonlife consolidated taxable income or consolidated LICTI, see § 1.1502–21(b). (3) Life consolidated capital gain net income or loss—(i) [Reserved]. (ii) Life consolidated net capital loss carryovers and carrybacks. The life consolidated net capital loss carryovers and carrybacks for the life subgroup are determined by applying the principles of § 1.1502–22 as modified by the following rules in this paragraph (g)(3)(ii): (A) Life consolidated net capital loss is first carried back (or apportioned to the life members for separate return years) to be absorbed by life consolidated capital gain net income without regard to any nonlife subgroup capital losses and before the life PO 00000 Frm 00022 Fmt 4700 Sfmt 4700 consolidated net capital loss may serve as a life subgroup capital loss that sets off nonlife consolidated capital gain net income in the year the life consolidated net capital loss arose. (B) If a life consolidated net capital loss is not carried back or is not a life subgroup loss that sets off nonlife consolidated capital gain net income in the year the life consolidated net capital loss arose, then it is carried over to the particular year under this paragraph (g)(3)(ii) first against life consolidated capital gain net income before it may serve as a life subgroup capital loss that sets off nonlife consolidated capital gain net income in that particular year. (h) * * * (2) * * * (ii) * * * Additionally, the amount of consolidated LICTI that may be offset by nonlife consolidated net operating loss carryovers may be subject to limitation (see section 172 and § 1.1502–21). * * * * * (3) * * * (iv) * * * The amount of consolidated LICTI that may be offset by nonlife consolidated net operating loss carryovers may be subject to limitation (see section 172 and § 1.1502–21). * * * * * (4) Examples. The following examples illustrate the principles of this paragraph (h). In the examples, L indicates a life company, S is a nonlife insurance company, another letter indicates a nonlife company that is not an insurance company, no company has farming losses (within the meaning of section 172(b)(1)(B)(ii)), and each corporation uses the calendar year as its taxable year. * * * * * (ii) Example 2. (A) The facts are the same as in paragraph (h)(4)(i) of this section, except that, for 2021, S’s separate net operating loss is $200. Assume further that L’s consolidated LICTI is $200. Under paragraph (h)(3)(vi) of this section, the offsettable nonlife consolidated net operating loss is $100 (the nonlife consolidated net operating loss computed under paragraph (f)(2)(ii) of this section ($200), reduced by the separate net operating loss of I ($100)). The offsettable nonlife consolidated net operating loss that may be set off against consolidated LICTI in 2021 is $35 (35 percent of the lesser of the offsettable $100 or consolidated LICTI of $200). See section 1503(c)(1) and paragraph (h)(3)(x) of this section. S carries over a loss of $65, and I carries over a loss of $100, to 2022 under paragraph (f)(2) of this section to be used against nonlife consolidated taxable income (consolidated net E:\FR\FM\27OCR1.SGM 27OCR1 Federal Register / Vol. 85, No. 208 / Tuesday, October 27, 2020 / Rules and Regulations operating loss ($200) less amount used in 2021 ($35)). Under paragraph (h)(2)(ii) of this section, the offsettable nonlife consolidated net operating loss that may be carried to 2022 is $65 ($100 67987 minus $35). The facts and results are summarized in the following table. TABLE 1 TO PARAGRAPH (h)(4)(ii)(A) [Dollars omitted] jbell on DSKJLSW7X2PROD with RULES 1. 2. 3. 4. 5. 6. 7. P .................................................................................................................. S .................................................................................................................. I .................................................................................................................... Nonlife Subgroup ......................................................................................... L ................................................................................................................... 35% of lower of line 4(c) or 5(c) .................................................................. Unused offsettable loss ............................................................................... (B) Accordingly, under paragraph (e) of this section, consolidated taxable income is $165 (line 5(a) minus line 6(c)). (iii) Example 3. The facts are the same as in paragraph (h)(4)(ii) of this section, with the following additions for 2022. The nonlife subgroup has nonlife consolidated taxable income of $50 (all of which is attributable to I) before the nonlife consolidated net operating loss deduction under paragraph (f)(2) of this section. Consolidated LICTI is $100. Under paragraph (f)(2) of this section, $50 of the nonlife consolidated net operating loss carryover ($165) is used in 2022 and, under paragraph (h)(3)(vi) and (vii) of this section, the portion used in 2022 is attributable to I, the ineligible nonlife member. Accordingly, the offsettable nonlife consolidated net operating loss from 2021 under paragraph (h)(3)(ii) of this section is $65, the unused loss from 2021. The offsettable nonlife consolidated net operating loss in 2022 is $22.75 (35 percent of the lesser of the offsettable loss of $65 or consolidated LICTI of $100). Accordingly, under paragraph (e) of this section, consolidated taxable income is $77.25 (consolidated LICTI of $100 minus the offsettable loss of $22.75). * * * * * (j) * * * (2) * * * (iii) Substitute the term ‘‘life consolidated net operating loss and consolidated operations loss carryovers’’ for ‘‘nonlife consolidated net operating loss’’, and ‘‘paragraph (g)’’ for ‘‘paragraph (f)’’. (3) Examples. The following examples illustrate the principles of this paragraph (j). In the examples, L indicates a life company, S is a nonlife insurance company, another letter indicates a nonlife company that is not an insurance company, no company has VerDate Sep<11>2014 15:51 Oct 26, 2020 Jkt 253001 Facts Offsettable Limit Unused Loss (a) (b) (c) (d) 100 (200) (100) (200) 200 ........................ ........................ ........................ (100) ........................ (100) ........................ ........................ ........................ ........................ ........................ ........................ (100) 200 35 ........................ ........................ (65) (100) (165) ........................ ........................ (65) farming losses (within the meaning of section 172(b)(1)(B)(ii)), and each corporation uses the calendar year as its taxable year. (i) Example 1. P, S, L1 and L2 constitute a group that elects under section 1504(c)(2) to file a consolidated return for 2021. In 2021, the nonlife subgroup consolidated taxable income is $100 and there is $20 of nonlife consolidated net capital loss that cannot be carried back under paragraph (f) of this section to taxable years (whether consolidated or separate) preceding 2021. The nonlife subgroup has no carryover from years prior to 2021. The life consolidated net operating loss is $150, which under paragraph (g) of this section includes life consolidated capital gain net income of $25. Since life consolidated capital gain net income is zero for 2021 (see paragraph (h)(3)(iii) of this section), the nonlife capital loss offset is zero (see paragraph (h)(3)(ii) of this section). However, $100 of life consolidated net operating loss sets off the $100 nonlife consolidated taxable income in 2021. The life subgroup carries under paragraph (g)(2) of this section to 2022 $50 of the life consolidated net operating loss ($150 minus $100). The $50 carryover will be used in 2022 (subject to the limitation in section 172(a)) against life subgroup income before it may be used in 2022 to setoff nonlife consolidated taxable income. (ii) Example 2. The facts are the same as in paragraph (j)(3)(i) of this section, except that, for 2021, the nonlife consolidated taxable income is $150 (this amount is entirely attributable to S and includes nonlife consolidated capital gain net income of $50), consolidated LICTI is $200, and a life consolidated net capital loss is $50. The $50 life consolidated net capital loss sets off the $50 nonlife consolidated capital gain net income. Consolidated PO 00000 Frm 00023 Fmt 4700 Sfmt 4700 taxable income under paragraph (e) of this section is $300 (nonlife consolidated taxable income ($150) minus the setoff of the life consolidated net capital loss ($50), plus consolidated LICTI ($200)). (iii) Example 3. The facts are the same as in paragraph (j)(3)(ii) of this section, except that, for 2022, the nonlife consolidated net operating loss is $150. This entire amount is attributable to S; thus, it is eligible to be carried back to 2021 against nonlife consolidated taxable income under paragraph (f)(2) of this section and § 1.1502–21(b). If P, the agent for the group within the meaning of § 1.1502–77, does not elect to relinquish the carryback under section 172(b)(3), the entire $150 will be carried back, reducing 2021 nonlife consolidated taxable income to zero and nonlife consolidated capital gain net income to zero. Under paragraph (h)(3)(xii) of this section, the setoff in 2021 of the nonlife consolidated capital gain net income ($50) by the life consolidated net capital loss ($50) is restored. Accordingly, the 2021 life consolidated net capital loss may be carried over by the life subgroup to 2022. Under paragraph (e) of this section, after the carryback, consolidated taxable income for 2021 is $200 (nonlife consolidated taxable income ($0) plus consolidated LICTI ($200)). (iv) Example 4. The facts are the same as in paragraph (j)(3)(iii) of this section, except that P elects under section 172(b)(3) to relinquish the carryback of $150 arising in 2022. The setoff in Example 2 is not restored. However, the offsettable nonlife consolidated net operating loss for 2022 (or that may be carried over from 2022) is zero. See paragraph (h)(3)(viii) of this section. Nevertheless, the $150 nonlife consolidated net operating loss may be E:\FR\FM\27OCR1.SGM 27OCR1 67988 Federal Register / Vol. 85, No. 208 / Tuesday, October 27, 2020 / Rules and Regulations carried over to be used by the nonlife group. (v) Example 5. P owns all of the stock of S1 and of L1. On January 1, 2017, L1 purchases all of the stock of L2. For 2021, the group elects under section 1504(c)(2) to file a consolidated return. For 2021, L1 is an eligible corporation under paragraph (b)(12) of this section but L2 is ineligible. Thus, L1 but not L2 is a member for 2021. For 2021, L2 sustains a net operating loss, which cannot be carried back (see section 172(b)). For 2021, L2 is treated under paragraph (d)(6) of this section as a member of a controlled group of corporations under section 1563 with P, S, and L1. For 2022, L2 is eligible and is included on the group’s consolidated return. L2’s net operating loss for 2021 that may be carried to 2022 is not treated under paragraph (b)(11) of this section as having been sustained in a separate return limitation year for purposes of computing consolidated LICTI of the L1–L2 life subgroup for 2022. Furthermore, the portion of L2’s net operating loss not used under paragraph (g)(2) of this section against life subgroup income in 2022 may be included in offsettable life consolidated net operating loss under paragraph (j)(2) and (h)(3)(i) of this section that reduces in 2022 nonlife consolidated taxable income (subject to the limitation in section 172(a)) because L2’s loss in 2021 was not sustained in a separate return limitation year under paragraph (j)(2) and (h)(3)(ix)(A) of this section or in a separate return year (2021) when an election was in effect under neither section 1504(c)(2) nor section 243(b)(3). * * * * * (n) Effective/applicability dates. The rules of this section apply to taxable years beginning after December 31, 2020. However, a taxpayer may choose to apply the rules of this section to taxable years beginning on or before December 31, 2020. If a taxpayer makes the choice described in the previous sentence, the taxpayer must apply those rules in their entirety and consistently with the provisions of subchapter L of the Internal Revenue Code applicable to the years at issue. Par. 5. Section 1.1503(d)–4 is amended by: ■ 1. In paragraph (c)(3)(iii)(B), removing the period and adding in its place a semi-colon. ■ 2. In paragraph (c)(3)(iv), removing the period and adding in its place ‘‘; and’’. ■ 3. Adding paragraph (c)(3)(v). The addition reads as follows: jbell on DSKJLSW7X2PROD with RULES ■ VerDate Sep<11>2014 15:51 Oct 26, 2020 Jkt 253001 § 1.1503(d)–4 Domestic use limitation and related operating rules. * * * * * (c) * * * (3) * * * (v) The SRLY limitation is applied without regard to § 1.1502–21(c)(1)(i)(E) (section 172(a) limitation applicable to a SRLY member). * * * * * ■ Par. 6. Section 1.1503(d)–8 is amended by adding paragraph (b)(8) to read as follows: § 1.1503(d)–8 Effective dates. * * * * * (b) * * * (8) Rule providing that SRLY limitation applies without regard to § 1.1502–21(c)(1)(i)(E). Section 1.1503(d)–4(c)(3)(v) applies to any period to which § 1.1502–21(c)(1)(i)(E) applies. Sunita Lough, Deputy Commissioner for Services and Enforcement. Approved: September 29, 2020. David J. Kautter, Assistant Secretary of the Treasury (Tax Policy). [FR Doc. 2020–22974 Filed 10–23–20; 11:15 am] BILLING CODE 4830–01–P DEPARTMENT OF THE TREASURY Office of Foreign Assets Control 31 CFR Part 515 Cuban Assets Control Regulations Office of Foreign Assets Control, Treasury. ACTION: Final rule. AGENCY: The Department of the Treasury’s Office of Foreign Assets Control (OFAC) is amending the Cuban Assets Control Regulations to further implement portions of the President’s foreign policy toward Cuba to deny the Cuban government access to funds in connection with remittances to Cuba. DATES: This rule is effective November 26, 2020. FOR FURTHER INFORMATION CONTACT: OFAC: Assistant Director for Licensing, 202–622–2480, Assistant Director for Regulatory Affairs, 202–622–4855, or Assistant Director for Sanctions Compliance & Evaluation, 202–622– 2490. SUPPLEMENTARY INFORMATION: SUMMARY: Electronic Availability This document and additional information concerning OFAC are PO 00000 Frm 00024 Fmt 4700 Sfmt 4700 available on OFAC’s website (www.treasury.gov/ofac). Background The Department of the Treasury issued the Cuban Assets Control Regulations, 31 CFR part 515 (the ‘‘Regulations’’), on July 8, 1963, under various authorities, including the Trading With the Enemy Act (50 U.S.C. 4301–41). OFAC has amended the Regulations on numerous occasions, including to implement the President’s foreign policy toward Cuba as set forth in National Security Presidential Memorandum-5, ‘‘Strengthening the Policy of the United States Toward Cuba,’’ signed by the President on June 16, 2017. Today, OFAC, in consultation with the State Department, is taking additional action to implement the Administration’s foreign policy toward Cuba, as set forth in more detail below. This rule provides for a 30-day implementation period before it is effective in order to allow for technical implementation of these additional restrictions. Restrictions on Certain RemittanceRelated Transactions To and From Cuba OFAC is amending the Regulations to remove from the scope of certain remittance-related general authorizations any transactions involving entities or subentities identified on the Cuba Restricted List, as maintained by the State Department and published in the Federal Register. This action is intended to restrict such entities’ and subentities’ access to funds obtained in connection with remittancerelated activities, including in their role as intermediaries or in their receipt of fees or commissions from processing remittance transactions. Specifically, OFAC is amending three general licenses in Subpart E of the Regulations to exclude from the scope of such authorizations any transaction involving any entity or subentity identified on the Cuba Restricted List: (i) § 515.570, which relates to remittances from persons subject to U.S. jurisdiction or from blocked accounts; (ii) § 515.572(a)(3), which relates to the provision of remittance forwarding services; and (iii) § 515.587, which relates to remittances from Cuban nationals to persons subject to U.S. jurisdiction. OFAC is also amending § 515.421, which provides interpretative guidance with respect to transactions ordinarily incident to a licensed transaction, to make clear that a transaction relating to the collection, forwarding, or receipt of remittances involving any entity or subentity E:\FR\FM\27OCR1.SGM 27OCR1

Agencies

[Federal Register Volume 85, Number 208 (Tuesday, October 27, 2020)]
[Rules and Regulations]
[Pages 67966-67988]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-22974]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9927]
RIN 1545-BP27


Consolidated Net Operating Losses

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations under sections 1502 
and 1503 of the Internal Revenue Code (Code). These regulations provide 
guidance implementing recent statutory amendments to section 172 of the 
Code

[[Page 67967]]

relating to the absorption of consolidated net operating loss (CNOL) 
carryovers and carrybacks. These regulations also update regulations 
applicable to consolidated groups that include both life insurance 
companies and other companies to reflect statutory changes. These 
regulations affect corporations that file consolidated returns.

DATES: 
    Effective Date: These regulations are effective on December 28, 
2020.
    Applicability Date: For dates of applicability, see Sec. Sec.  
1.1502-1(l), 1.1502-21(h)(10), 1.1502-47(n), and 1.1503(d)-8(b)(8).

FOR FURTHER INFORMATION CONTACT: Justin O. Kellar at (202) 317-6720, 
Gregory J. Galvin at (202) 317-3598, or William W. Burhop at (202) 317-
5363.

SUPPLEMENTARY INFORMATION:

Background

    This Treasury decision amends the Income Tax Regulations (26 CFR 
part 1) under section 1502 of the Code. Section 1502 authorizes the 
Secretary of the Treasury or his delegate (Secretary) to prescribe 
regulations for an affiliated group of corporations that join in filing 
(or that are required to join in filing) a consolidated return 
(consolidated group) to reflect clearly the Federal income tax 
liability of the consolidated group and to prevent avoidance of such 
tax liability. See Sec.  1.1502-1(h) (defining the term ``consolidated 
group''). For purposes of carrying out those objectives, section 1502 
also permits the Secretary to prescribe rules that may be different 
from the provisions of chapter 1 of the Code that would apply if the 
corporations composing the consolidated group filed separate returns. 
Terms used in the consolidated return regulations generally are defined 
in Sec.  1.1502-1.
    On July 8, 2020, the IRS published a notice of proposed rulemaking 
(REG-125716-18) in the Federal Register (85 FR 40927) under section 
1502 of the Code (proposed regulations). The proposed regulations 
provided guidance implementing recent statutory amendments to section 
172, relating to net operating loss (NOL) deductions, and withdrew and 
re-proposed certain sections of proposed guidance issued in prior 
notices of proposed rulemaking relating to the absorption of CNOL 
carryovers and carrybacks. In addition, the proposed regulations 
updated regulations applicable to consolidated groups that include both 
life insurance companies and other companies to reflect statutory 
changes.
    In connection with the proposed regulations, the IRS published on 
the same date temporary regulations under section 1502 (TD 9900) in the 
Federal Register (85 FR 40892) (temporary regulations). The temporary 
regulations permit consolidated groups that acquire new members that 
were members of another consolidated group to elect to waive all or 
part of the pre-acquisition portion of an extended carryback period 
under section 172 for certain losses attributable to the acquired 
members. The text of the temporary regulations also serves as the text 
of Sec.  1.1502-21(b)(3)(ii)(C) and (D) of the proposed regulations.
    The IRS received seven comments in response to the proposed 
regulations. Copies of the comments received are available for public 
inspection at http://www.regulations.gov or upon request. No public 
hearing was requested or held. This Treasury decision adopts the 
proposed regulations, other than proposed Sec.  1.1502-21(b)(3)(ii)(C) 
and (D), as final regulations with the changes described in the 
following Summary of Comments and Explanation of Revisions. The 
Treasury Department and the IRS expect to finalize proposed Sec.  
1.1502-21(b)(3)(ii)(C) and (D) at a later date and welcome further 
comments on these provisions.

Summary of Comments and Explanation of Revisions

I. Comments On and Changes To Proposed Sec.  1.1502-21

A. Overview of Section 172

    These final revisions implement certain statutory amendments to 
section 172 made by Public Law 115-97, 131 Stat. 2054 (December 22, 
2017), commonly referred to as the Tax Cuts and Jobs Act (TCJA), and by 
the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), 
Public Law 116-136, 134 Stat. 281 (March 27, 2020). See generally the 
Background section of the preamble to the proposed regulations. As 
amended, section 172(a)(2) allows an NOL deduction for a taxable year 
beginning after December 31, 2020, in an amount equal to the sum of (A) 
the aggregate amount of pre-2018 NOLs that are carried to such taxable 
year, and (B) the lesser of (i) the aggregate amount of post-2017 NOLs 
that are carried to such taxable year, or (ii) the ``80-percent 
limitation.'' The 80-percent limitation is equal to 80 percent of the 
excess (if any) of (I) taxable income computed without regard to any 
deductions under sections 172, 199A, and 250 of the Code, over (II) the 
aggregate amount of pre-2018 NOLs carried to the taxable year. See 
section 172(a)(2)(B)(ii). For purposes of the foregoing computation, 
the term ``pre-2018 NOLs'' refers to NOLs arising in taxable years 
beginning before January 1, 2018, and the term ``post-2017 NOLs'' 
refers to NOLs arising in taxable years beginning after December 31, 
2017.
    The 80-percent limitation does not apply to the offset of income by 
NOLs in taxable years beginning before January 1, 2021. Section 
172(a)(1). The 80-percent limitation also does not apply to limit the 
use of pre-2018 NOLs. Section 172(a)(2)(A).
    Moreover, the 80-percent limitation does not apply to insurance 
companies other than life insurance companies (nonlife insurance 
companies). Section 172(f). Therefore, the taxable income of nonlife 
insurance companies may be fully offset by NOL deductions. In addition, 
under section 172(b)(1)(C) and (b)(1)(D)(i), losses of nonlife 
insurance companies arising in taxable years beginning after December 
31, 2020, may be carried back two years and carried over 20 years. In 
contrast, losses (aside from farming losses) of other taxpayers arising 
in such taxable years may not be carried back but may be carried 
forward indefinitely. Section 172(b)(1). Thus, nonlife insurance 
companies are subject to special rules under section 172 both with 
respect to the amount of taxable income that may be offset by NOL 
deductions and with respect to the taxable years to which NOLs may be 
carried.

B. Overview of the Proposed Approach and the Alternative Approach

    To implement the special rules under section 172 for nonlife 
insurance companies for a consolidated return year beginning after 
December 31, 2020, the proposed regulations provided that the 
application of the 80-percent limitation within a consolidated group to 
post-2017 NOLs depends on the status of the member that generated the 
income being offset. The proposed regulations further provided that the 
amount of post-2017 CNOLs that may be absorbed by one or more members 
of the group in such a consolidated return year (post-2017 CNOL 
deduction limit) is determined by applying the 80-percent limitation, 
section 172(f) (that is, the special rule for nonlife insurance 
companies), or both, to the group's consolidated taxable income (CTI) 
for that year. See proposed Sec.  1.1502-21(a)(2)(ii)(A) and (B).
    For consolidated groups comprised of both nonlife insurance 
companies and other members for a consolidated return year beginning 
after December 31, 2020, the proposed regulations adopted a two-factor 
computation (proposed

[[Page 67968]]

approach). In general, under the proposed approach, the post-2017 CNOL 
deduction limit for such a group equals the sum of two amounts. The 
first amount, which relates to the income of those members that are not 
nonlife insurance companies (residual income pool), is subject to the 
80-percent limitation. The second amount, which relates to the income 
of those members that are nonlife insurance companies (nonlife income 
pool), is not subject to the 80-percent limitation. See proposed Sec.  
1.1502-21(a)(2)(iii)(C). Thus, the proposed approach divides a 
consolidated group's nonlife insurance companies and its other members 
into two separate ``pools'' for purposes of determining the amount of 
CTI that is available to be offset by post-2017 CNOLs after applying 
the 80-percent limitation.
    In formulating the proposed regulations, the Treasury Department 
and the IRS considered another approach (alternative approach). This 
alternative approach would have required a group to first offset income 
and loss items within a pool of nonlife insurance companies and a pool 
of other members for all purposes of section 172 applicable to taxable 
years beginning after December 31, 2020. In other words, the 
alternative approach would have applied a pooling concept beyond merely 
determining the group's post-2017 CNOL deduction limit, but would have 
required a group's CTI to be allocated between the operations of its 
nonlife insurance company members, which can be offset fully by CNOL 
deductions, and the operations of its other members subject to the 80-
percent limitation. This alternative approach would also have applied 
similar rules to allocate CNOLs within groups including both nonlife 
insurance companies and other members to consistently identify the 
portions of CNOLs allocable to nonlife insurance company members, which 
are subject to different carryover rules than those of other members.
    The alternative approach would have contrasted with the historical 
application of Sec.  1.1502-21(b)(2)(iv)(B), under which a CNOL for a 
taxable year is attributed pro rata to all members of a group that 
produce net loss, without first netting among entities of the same 
type. In the preamble to the proposed regulations, the Treasury 
Department and the IRS requested comments regarding both the proposed 
approach and the alternative approach.

C. Comments on the Proposed Approach and the Alternative Approach

    In response to the request for comments, the Treasury Department 
and the IRS received comments that uniformly approved the proposed 
approach. For example, two commenters commended the proposed 
regulations as implementing the statutory amendments to section 172 in 
a reasonable manner that is consistent with both the statute and 
consolidated return principles. Specifically, both commenters supported 
the proposed regulations' approach to computing a group's post-2017 
CNOL deduction limit as well as the proposed regulations' retention of 
the historical pro rata approach under Sec.  1.1502-21(b)(2)(iv)(B) to 
determine the amount of nonlife insurance company losses that can be 
carried to other taxable years.
    In support of the proposed regulations, one commenter asserted that 
the proposed approach is more consistent with the treatment of CNOLs as 
consolidated items and with the current CNOL use and absorption rules 
in Sec.  1.1502-21 than the alternative approach. The commenter further 
asserted that, because the alternative approach would depart from the 
general pro rata rules of Sec.  1.1502-21 by first netting income and 
loss among entities of the same type within a consolidated group, the 
alternative approach could result in computational and compliance 
complications in circumstances that may be difficult to anticipate.
    In response to the comments received, these final regulations 
retain the proposed approach to computing a consolidated group's post-
2017 CNOL deduction limit.

D. Application of the Proposed Approach to Life-Nonlife Groups

    One commenter recommended that, for consolidated groups with both 
nonlife insurance companies and life insurance companies, the amounts 
of the residual income pool and the nonlife income pool in proposed 
Sec.  1.1502-21(a)(2)(iii)(C)(2) and (3) be clarified to refer only to 
the items of income, gain, deduction, or loss of members of the nonlife 
subgroup (as defined in Sec.  1.1502-47(b)(9) of these final 
regulations). The commenter further recommended that, in making this 
clarification, the Treasury Department and the IRS should not prevent 
nonlife CNOLs from offsetting life subgroup income where permitted by 
the Code and Sec.  1.1502-47. The commenter noted that this outcome 
appears to be the intent of the cross-reference to Sec.  1.1502-47 in 
proposed Sec.  1.1502-21(b)(2)(iv)(E), but the commenter indicated that 
clarification would be useful. The Treasury Department and the IRS 
agree with the commenter regarding the purpose of the cross-reference 
to Sec.  1.1502-47 in proposed Sec.  1.1502-21(b)(2)(iv)(E) and have 
revised the regulations to more clearly confirm this outcome.

E. Consolidated Capital Gain Net Income

    Section 1.1502-11(a)(3) provides that the CTI for a consolidated 
return year is determined by taking into account, among other 
enumerated items, any consolidated capital gain net income. See 
generally Sec.  1.1502-22(a) (providing rules for determining 
consolidated capital gain net income). Under Sec.  1.1502-22(a), the 
determinations for a consolidated group under section 1222, including 
capital gain net income, are not made separately. Instead, such 
consolidated amounts are determined for the group as a whole.
    Section 1.1502-11 does not provide explicit rules for allocating 
consolidated capital gain net income among members. Thus, one commenter 
requested that the final regulations clarify that, for groups that 
include nonlife insurance companies, consolidated capital gain net 
income under Sec.  1.1502-11(a)(3) is allocated to the residual income 
pool and the nonlife income pool using a pro rata method based on the 
principles of Sec.  1.1502-21(b)(2)(iv), as reflected in the general 
rule in Sec.  1.1502-21(b)(1), for the use and absorption of CNOLs.
    Section 1.1502-11 also does not provide explicit rules for 
determining the amount of each member's income that is offset by losses 
(whether incurred in the current year or carried over or back as a part 
of a CNOL or consolidated net capital loss). However, the Treasury 
Department and the IRS understand that, in the absence of express 
rules, consolidated return practitioners generally apply the principles 
of Sec.  1.1502-21(b)(2)(iv) to make such determinations. The 
methodology for computing a consolidated group's post-2017 CNOL 
deduction limit is intended to implement the changes made to section 
172(a) by the TCJA and the CARES Act in a manner that is flexible for 
taxpayers to apply and administrable for the IRS. The Treasury 
Department and the IRS have determined that specific rules regarding 
the allocation of consolidated capital gain net income to the residual 
income pool and the nonlife income pool under Sec.  1.1502-
21(a)(2)(iii)(C)(2) and (3) would exceed the scope of these final 
regulations. Accordingly, the Treasury Department and the IRS continue 
to reflect on the commenter's recommendation but have not incorporated 
that recommendation into the final regulations.

[[Page 67969]]

F. Example 6 in Proposed Sec.  1.1502-21(b)(2)(v)(F)

    Proposed Sec.  1.1502-21(b)(2)(v)(F) (Example 6) contains an 
example that illustrates the application of section 172 to a CNOL 
incurred by a consolidated group (P group) that includes P, an 
includible corporation under section 1504(b) of a type other than a 
nonlife insurance company, and PC1, a nonlife insurance company. Both P 
and PC1 were incorporated in Year 1, a year beginning after December 
31, 2020. In Year 1, the P group has $45 of CTI, $20 of which is 
attributable to P and $25 of which is attributable to PC1. In Year 2, 
the P group incurs a $16 CNOL that is attributable to PC1 and that is 
carried back to Year 1 under section 172(b)(1)(C)(i).
    The example illustrates that, under proposed Sec.  1.1502-
21(a)(2)(iii)(C), the P group's post-2017 CNOL deduction limit for Year 
1 is $41, which is the sum of the residual income pool ($16) and the 
nonlife income pool ($25), as described in proposed Sec.  1.1502-
21(a)(2)(iii)(C)(2) and (3), respectively. More specifically, the 
amount of the residual income pool equaled the lesser of the aggregate 
amount of post-2017 NOLs carried to Year 1 ($16), or 80 percent of the 
excess of P's taxable income for that year ($20) over the aggregate 
amount of pre-2018 NOLs allocable to P ($0), which also was $16 (80 
percent x ($20-$0)). See proposed Sec.  1.1502-21(b)(2)(v)(F)(3). The 
amount of the nonlife income pool equaled the excess of PC1's taxable 
income for Year 1 ($25) over the aggregate amount of pre-2018 NOLs 
allocable to PC1 ($0). Id.
    Two commenters requested clarification as to how much taxable 
income in each pool is offset by a CNOL carryover or carryback if each 
pool has positive taxable income, as in Example 6. Specifically, 
commenters contended that a specific absorption rule is needed to 
determine how much taxable income in the residual income pool (which is 
subject to the 80-percent limitation) can be offset by subsequent CNOL 
carryovers or carrybacks to the same year. For example, assume the same 
facts as in Example 6, but that the P group also incurs a $30 CNOL in 
Year 3 that is entirely attributable to PC1 and that is eligible to be 
carried back to Year 1. Absent a rule specifying how much taxable 
income in each pool was offset in Year 1 by the $16 Year 2 CNOL 
carryback, the commenters questioned how to compute the residual income 
pool for purposes of determining how much of the P group's Year 3 CNOL 
carryback could be absorbed by the P group in Year 1.
    As noted in part I.A of this Summary of Comments and Explanation of 
Revisions, the computation in section 172(a)(2)(B)(ii) is made 
``without regard to the deductions under [section 172] and sections 
199A and 250.'' Consistent with the statute, the amount of income in 
the residual income pool that is subject to the 80-percent limitation 
for a particular consolidated return year is not recomputed to reflect 
the amount of CNOLs carried over to and absorbed in that year. See 
Sec.  1.1502-21(a)(2)(iii)(C)(2) of these final regulations. Rather, 
the only component of the post-2017 CNOL deduction limit that is 
subject to change upon the carryover or carryback of additional CNOLs 
to the same consolidated return year is the aggregate amount of post-
2017 CNOLs carried to that year. See Sec.  1.1502-
21(a)(2)(iii)(C)(1)(i) of these final regulations. Determining this 
amount does not require an absorption rule.
    With regard to Example 6, if the P group were to incur a $30 CNOL 
in Year 3 that was eligible to be carried back to Year 1, the P group 
would redetermine the aggregate amount of the P group's post-2017 CNOLs 
that are carried to Year 1, but the P group would not recompute the 
amount of Year 1 income subject to the 80-percent limitation. Thus, an 
absorption rule is not needed to determine how much of the P group's 
Year 1 CTI can be offset by subsequent CNOL carrybacks. However, these 
final regulations provide additional facts in Example 6 to illustrate 
the computation of the amount of additional CNOL carryovers or 
carrybacks to the same consolidated return year that can be deducted to 
offset income in that year.

G. Split-Waiver Elections

    If a member of one consolidated group becomes a member of another 
consolidated group, Sec.  1.1502-21(b)(3)(ii)(B) permits the acquiring 
group to make an irrevocable election to relinquish, with respect to 
all CNOLs attributable to the acquired corporation, the portion of the 
carryback period for which the acquired corporation was a member of 
another group (so long as any other corporation joining the acquiring 
group that was affiliated with the acquired corporation immediately 
before it joined the acquiring group also is included in the waiver).
    A commenter noted that, pursuant to Sec.  1.1502-21(b)(3)(ii)(B), 
an acquiring group may make a split-waiver election only with respect 
to acquired corporations that were members of a different consolidated 
group in a carryback year. The commenter recommended that Sec.  1.1502-
21(b)(3)(ii) be expanded to allow a split-waiver election if the 
acquired corporation was not a member of a consolidated group in the 
carryback year.
    The Treasury Department and the IRS appreciate the commenter's 
suggestion and will continue to consider it in connection with the 
future finalization of the temporary regulations. However, this comment 
exceeds the scope of these final regulations, which adopt the 
provisions of the proposed regulations other than those for which the 
text was contained in the temporary regulations (specifically, Sec.  
1.1502-21(b)(3)(ii)(C) and (D)). Therefore, the Treasury Department and 
the IRS decline to adopt this recommendation in this Treasury decision.

H. Modification to SRLY Rules

    The proposed regulations modify the separate return limitation year 
(SRLY) rules in Sec.  1.1502-21(c) to take into account the limitations 
on NOL deductions under section 172, as amended by the TCJA and the 
CARES Act. See proposed Sec.  1.1502-21(c)(1)(i)(E). A commenter 
recommended that this modification not apply for purposes of section 
1503(d) (the dual consolidated loss (DCL) rules). In certain cases, the 
extent to which section 1503(d) restricts the use of a DCL, or requires 
the recapture of a DCL (or a related interest charge), depends on the 
application of the SRLY rules in Sec.  1.1502-21(c), subject to certain 
adjustments. See Sec. Sec.  1.1503(d)-4(c)(3) and 1.1503(d)-6(h)(2). In 
these cases, the adjusted SRLY rules are generally intended to ensure 
that a DCL may be used only to offset income of the dual resident 
corporation or separate unit that incurred the DCL, such that the use 
does not result in a ``double dip'' of the DCL.
    The commenter recommended that the modification reflected in 
proposed Sec.  1.1502-21(c)(1)(i)(E) not apply for purposes of the DCL 
rules because the modification addresses policies specific to the SRLY 
rules in Sec.  1.1502-21(c) (replicating, to the extent possible, 
separate-entity usage of SRLY attributes), which differ from the 
policies underlying the DCL rules (preventing double dipping of 
losses). In addition, the commenter asserted that applying the rule in 
proposed Sec.  1.1502-21(c)(1)(i)(E) for DCL purposes could distort the 
determination of whether double dipping could occur.
    The Treasury Department and the IRS agree with the commenter. The 
final regulations therefore provide that Sec.  1.1502-21(c)(1)(i)(E) 
does not apply for purposes of the DCL rules. See Sec.  1.1503(d)-
4(c)(3)(v).

[[Page 67970]]

I. Clarifying Changes to Proposed Sec.  1.1502-21

    In addition to the foregoing comments, a commenter recommended 
clarifying changes to proposed Sec.  1.1502-21. The Treasury Department 
and the IRS appreciate these suggested clarifications and have 
incorporated many of them into the final regulations. However, the 
commenter also recommended deleting the reference to section 199A in 
proposed Sec. Sec.  1.1502-21(a)(2)(iii)(A)(2)(ii) and 1.1502-
21(a)(2)(iii)(C)(2)(ii) on the grounds that the deduction under section 
199A is available to only noncorporate taxpayers. Because section 
199A(g) provides a deduction for specified agricultural or 
horticultural cooperatives, which (as C corporations) can be members of 
a consolidated group, these references to section 199A have been 
retained in the final regulations.
    The Treasury Department and the IRS also have made additional 
clarifying revisions based on further review of the proposed 
regulations. In particular, the final regulations contain corrections 
to scrivener's errors in the two-factor computation in proposed Sec.  
1.1502-21(a)(2)(iii). Specifically, the ``lesser of'' language in 
proposed Sec.  1.1502-21(a)(2)(iii)(C)(2), which was intended to 
reflect the application of section 172(a)(2)(B) to groups that include 
both nonlife insurance companies and other corporations, was 
mislocated. To accurately reflect the comparison required under section 
172(a)(2)(B), the language at issue has been moved to Sec.  1.1502-
21(a)(2)(iii)(C)(1) of the final regulations.
    Additional edits have been made to enhance the consistency and 
clarity of the rules in proposed Sec.  1.1502-21(a)(2). For example, 
language reflecting the ``lesser of'' comparison described in the 
preceding paragraph has been explicitly integrated into Sec. Sec.  
1.1502-21(a)(2)(iii)(B) and 1.1502-21(a)(2)(iii)(C)(5)(ii) (concerning 
CNOL deductions that offset income of nonlife insurance company 
members) of these final regulations. As discussed in part II.B of this 
Summary of Comments and Explanation of Revisions, the post-2017 CNOL 
deduction limit equals the maximum amount of post-2017 CNOLs that can 
be deducted against taxable income in a consolidated return year 
beginning after December 31, 2020. This amount could never exceed the 
total amount of post-2017 CNOLs carried to that year. See section 
172(f) (providing that, in the case of a nonlife insurance company, the 
amount of the NOL deduction allowed under section 172(a) in any taxable 
year equals the aggregate of NOL carrybacks and carryovers to that 
year).
    Likewise, in the absence of any other limitation, the taxable 
income of a taxpayer always constitutes a limit on the deductibility of 
NOLs. See generally section 172(b)(2). Without such limit, the 
deduction of NOLs in excess of taxable income would create an 
additional NOL. The Treasury Department and IRS have determined that 
explicitly providing the respective post-2017 CNOL and taxable income 
limitations on the deduction of NOLs to offset taxable income of 
nonlife insurance companies will enhance the clarity of the final 
regulations and the consistency of their application.

II. Comments On and Changes To Proposed Sec.  1.1502-47

    The proposed regulations updated the rules in Sec.  1.1502-47 to 
reflect statutory changes enacted since these rules were promulgated. 
Commenters commended the Treasury Department and the IRS for updating 
these regulations. Additionally, several commenters expressed their 
understanding that another guidance project has been initiated to 
propose substantive changes to Sec.  1.1502-47 and urged the Treasury 
Department and the IRS to give priority to this effort. These 
commenters argued that the objective of that guidance project should be 
the elimination of any provisions that depart from general consolidated 
return principles in life-nonlife consolidation, except to the extent 
non-conforming provisions are necessary to implement specific 
provisions of the Code. In particular, these commenters expressed 
concern about the treatment of consolidated capital gains and losses 
under Sec.  1.1502-47 and requested simplification of the eligibility 
and tacking rules.
    The Treasury Department and the IRS appreciate the commenters' 
input and welcome further comments regarding substantive changes to 
Sec.  1.1502-47 for purposes of potential future guidance. However, 
such changes are beyond the scope of these final regulations.
    Additionally, commenters recommended several clarifying changes to 
proposed Sec.  1.1502-47. Many of these suggested clarifications have 
been incorporated into the final regulations. For example, these final 
regulations have added a cross-reference to the definition of ``nonlife 
insurance company'' in Sec.  1.1502-1(k). However, one commenter 
recommended that Sec.  1.1502-47(g)(3) of these final regulations be 
modified to more closely parallel Sec.  1.1502-47(f)(3) of these final 
regulations. The commenter further requested that paragraph (d)(5) of 
these final regulations be modified to explicitly set forth the various 
rules (both statutory and regulatory) that apply to certain dividends 
received by an includible member from another member of the 
consolidated group. These comments exceed the scope of these final 
regulations, but the Treasury Department and the IRS will continue to 
consider these comments for purposes of potential future guidance 
regarding Sec.  1.1502-47.

Effective/Applicability Dates

    The final regulations in Sec. Sec.  1.1502-1(k), 1.1502-21(a), 
(b)(1), (b)(2)(iv), and (c)(1)(i)(E), 1.1502-47, and 1.1503(d)-8(b)(8) 
apply to taxable years beginning after December 31, 2020. However, a 
taxpayer may choose to apply the rules in Sec. Sec.  1.1502-1(k) and 
1.1502-47 of these final regulations to taxable years beginning on or 
before December 31, 2020. If a taxpayer makes the choice described in 
the previous sentence with regard to the rules in Sec.  1.1502-47, the 
corporation must apply those rules in their entirety and consistently 
with the provisions of the Internal Revenue Code applicable to the 
years at issue.

Special Analyses

I. Regulatory Planning and Review--Economic Analysis

    Executive Orders 13563, 13771, and 12866 direct agencies to assess 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing rules, and of promoting 
flexibility.
    These final regulations have been designated as subject to review 
under Executive Order 12866 pursuant to the Memorandum of Agreement 
(April 11, 2018) between the Treasury Department and the Office of 
Management and Budget (OMB) regarding review of tax regulations. The 
Office of Information and Regulatory Affairs (OIRA) has designated the 
final regulations as economically significant under section 1(c) of the 
Memorandum of Agreement. Accordingly, OMB has reviewed the final 
regulations.

A. Background and Need for Regulations

    In general, taxpayers whose deductions exceed their income generate 
a net operating loss (NOL),

[[Page 67971]]

calculated under the rules of section 172. Section 172 also governs the 
use of NOLs generated in other years to offset taxable income in the 
current year. Regulations issued under the authority of section 1502 
may be used to govern how section 172 applies to consolidated groups of 
C corporations. In general, a consolidated group generates a combined 
NOL at an aggregate level (CNOL), with the CNOL generally equal to the 
loss generated from treating the consolidated group as a single entity. 
Under regulations promulgated prior to the Tax Cuts and Jobs Act 
(TCJA), the allowed CNOL deduction was equal to the lesser of the CNOL 
carryover or the combined taxable income of the group (before the CNOL 
deduction).
    The TCJA and the Coronavirus Aid, Relief, and Economic Security 
(CARES) Act made several changes to section 172. First, the TCJA and 
the CARES Act disallowed the carry back of NOLs generated in taxable 
years beginning after 2020, except for farming losses and losses 
incurred by corporations that are insurance companies other than life 
insurance companies (nonlife insurance companies). Second, the TCJA and 
the CARES Act limited the NOL deduction in taxable years beginning 
after 2020 for NOLs generated in 2018 or later (post-2017 NOLs) to 80 
percent of taxable income determined after the deduction for pre-2018 
NOLs but before the deduction for post-2017 NOLs. This 80-percent 
limitation does not apply to nonlife insurance companies.
    These final regulations implement the changes to section 172 in the 
context of consolidated groups. In particular, regulations are needed 
to address three issues related to consolidated groups that were not 
expressly addressed in the TCJA or the CARES Act. First, the final 
regulations describe how to determine the 80-percent limitation in the 
case of a ``mixed'' group--that is, a consolidated group containing 
nonlife insurance companies and other members. Second, the final 
regulations address the calculation and allocation of farming losses. 
Third, the final regulations implement the 80-percent limitation into 
existing regulations to determine the CNOL deduction attributable to 
losses from a member arising during periods in which that member was 
not part of that group. Part I.B of this Special Analyses describes the 
manner by which the final regulations addresses each of these issues.
    Part I.B also describes an alternative approach that was 
contemplated by the Treasury Department and the IRS regarding the 
allocation of currently generated losses to nonlife insurance companies 
and other members. The Treasury Department and the IRS elected not to 
implement this approach.

B. Overview of the Final Regulations

    In this part I.B the following terms are used. The term ``P group'' 
means a consolidated group of which P is the common parent. The term 
``P&C member'' means a member of the P group that is a nonlife 
insurance company. The term ``C member'' means a member of the P group 
that is a C corporation other than a nonlife insurance company.
1. Application of 80-Percent Limitation in Mixed Groups
    Under the statute, the general rule for determining the NOL 
deduction (for a taxable year beginning after December 31, 2020) 
effectively proceeds in two steps. First, the taxpayer deducts pre-2018 
NOLs without limit. Second, the taxpayer deducts post-2017 NOLs up to 
80 percent of the taxpayer's taxable income (computed without regard to 
the deductions under sections 199A and 250) determined after the 
deduction of pre-2018 NOLs (but, naturally, before the deduction for 
post-2017 NOLs). However, this 80-percent limitation does not apply for 
corporations that are nonlife insurance companies.
    The application of the 80-percent limitation to the P group is 
straightforward if (i) there are no pre-2018 NOLs and (ii) both classes 
of P&C members and C members have positive income before the CNOL 
deduction. In that case, these final regulations provide, quite 
naturally, that the CNOL limitation is determined by adding (i) the 
pre-CNOL income generated by the class of C members (C member income 
pool), determined by applying the 80-percent limitation, plus (ii) 100 
percent of the pre-CNOL income generated by the class of P&C members 
(P&C member income pool). This latter treatment reflects the rule in 
section 172(f) that nonlife insurance companies are not subject to the 
80-percent limitation.
    One complication arises when the pre-CNOL C member income pool is 
positive and the pre-CNOL P&C income pool is negative, and the P group 
has positive combined pre-CNOL taxable income. In this case (where the 
pre-CNOL income is generated by C members, rather than P&C members), 
these final regulations provide that the post-2017 CNOL deduction limit 
is determined by applying the 80-percent limitation to the income of 
the P group. If the situation were reversed, such that the P group had 
positive combined taxable income but the pre-CNOL income is generated 
by P&C members, rather than the C members, the post-2017 CNOL deduction 
limit is equal to the income of the P group (that is, determined 
without regard to the 80-percent limitation). In essence, in these 
situations, the amount of the P group's income able to absorb a post-
2017 CNOL carryover is defined by the member pool (that is, the C 
member income pool or the P&C member income pool) that is generating 
the income.
    The other complication occurs when there is a pre-2018 NOL. In this 
situation, it matters whether the pre-2018 NOL is treated as reducing 
the amount of the C member income pool or reducing the amount of P&C 
member income pool. Consider the following example (Example 1). In 
Example 1, the P group carries $50 in pre-2018 NOLs and $1000 in post-
2017 NOLs to 2021. In 2021, the P&C members and the C members, 
respectively, earn (pre-CNOL) income of $100. If the pre-2018 NOL were 
treated as solely reducing the amount of C member income pool, then the 
limitation for the post-2017 CNOL deduction would be $100 plus 80 
percent of $50 ($100 minus $50), equal to $140. If the pre-2018 NOL 
were treated as solely reducing the amount of the P&C member income 
pool, then the post-2017 CNOL deduction limit for the P group would be 
$50 ($100 minus $50) plus 80 percent of $100, or $130.
    These final regulations allocate the pre-2018 NOL pro-rata to the C 
member income pool and the P&C member income pool in proportion to 
their current-year income. In Example 1, $25 of the pre-2018 NOL would 
be allocated to the C member income pool and $25 to the P&C member 
income pool. Therefore, the post-2017 CNOL deduction limit for the P 
group would be $75 ($100 minus $25) plus 80 percent of $75 ($100 minus 
$25), or $135.
2. Farming Losses
    Section 172 provides that NOLs arising in a taxable year beginning 
after December 31, 2020, may not be carried back to prior years, with 
two exceptions: (1) Farming losses and (2) nonlife insurance company 
losses. Section 172(b)(1)(B) defines a ``farming loss'' as the smaller 
of the actual loss from farming activities in a given year (that is, 
the excess of the deductions in farming activities over income in 
farming activities) and the total NOL generated in that year. This 
statutory provision means that if a taxpayer incurs a loss in farming 
activities but has overall income in other activities, the farming loss 
will be smaller than the loss in farming activities (and can possibly 
be zero).

[[Page 67972]]

    Regulations were needed to clarify two issues that arise in the 
context of consolidated groups. First, these regulations clarify that 
the maximum amount of farming loss is the CNOL of the group rather than 
the NOL of the specific member generating the loss in farming 
activities. This approach follows closely regulations issued by the 
Treasury Department and the IRS in 2012 in an analogous setting.
    Second, given the overlapping categories of carryback-eligible NOLs 
(farming losses and nonlife insurance companies), regulations are 
needed to allocate the farming loss to the various members to determine 
the total amount of CNOL that can be carried back. Consider the 
following example (Example 2). In Example 2, the P group consists of 
one C member and one P&C member. In 2021, the C member's only activity 
is farming and the C member incurs a loss of $30, while the P&C member 
incurs a loss of $10. The total farming loss is $30, since $30 is less 
than the P group CNOL of $40. If this farming loss were allocated 
entirely to the C member, then the total amount eligible for carryback 
would be $40 (that is, $30 for the farming loss and $10 for the loss 
incurred by the P&C member). By contrast, if the farming loss were 
allocated entirely to the P&C member, only $30 would be eligible to be 
carried back.
    Again, following a similar rule as the 2012 regulations, these 
final regulations allocate the farming loss to each member of the group 
in proportion with their share of total losses, without regard to 
whether each member actually engaged in farming. In Example 2, this 
would allocate $7.50 (that is, one-fourth of $30) of the farming loss 
to the P&C member and the remaining $22.50 (that is, three-fourths of 
$30) to the C member. Therefore, the P group would be allowed to carry 
back $32.50 total (that is, the $10 of loss generated by the P&C member 
and the $22.50 of farming losses allocated to the C member).
3. Separate Return Limitation Year
    To reduce ``loss trafficking,'' existing regulations under section 
1502 limit the extent to which a consolidated group (that is, the P 
group) can claim a CNOL attributable to losses generated by some member 
(M) in years in which M was not a member. In particular, existing rules 
limit this amount of loss to the amount of the loss that would have 
been deductible had M remained a separate entity; that is, the rules 
are designed to preserve neutrality in loss use between being a 
separate entity or a member of a group. Existing rules operationalize 
this principle using the mechanic of a ``cumulative register.'' The 
cumulative register is equal to the (cumulative) amount of M's income 
that is taken into account in the P group's income. Income earned by M 
while a member of the P group increases the cumulative register, while 
losses (carried over or otherwise) taken into account by the group 
reduce the cumulative register. In general, the existing rules provide 
that M's pre-group NOLs cannot offset the P group's income when the 
cumulative register is less than or equal to zero.
    The introduction of the 80-percent limitation in the TCJA and CARES 
Act necessitates an adjustment to this mechanism in order to retain 
this neutrality-in-loss-use property. In particular, these final 
regulations provide that any losses by M that are absorbed by the P 
group and subject to the 80-percent limitation cause a reduction to the 
register equal to the full amount of income needed to support that 
deduction. The following example (Example 3) demonstrates why this 
adjustment is necessary. In Example 3, P and S are each corporations 
other than nonlife insurance companies (that is, they are subject to 
the 80-percent limitation). Suppose in 2021, S incurs a loss of $800, 
which is the only loss ever incurred by S. In 2022, S incurs income of 
$400. If S were not a member of a consolidated group, its 2022 NOL 
deduction would be limited to $320 (80 percent of $400). Suppose 
instead that P acquires S in 2022 and that P has separate income of 
$600 in 2022, so the consolidated group has $1000 in pre-CNOL income in 
2022. Before claiming any CNOLs, S's cumulative register would increase 
to $400 in 2022. Without any additional rules, the $400 cumulative 
register would allow P to claim a CNOL of $400 (bringing the register 
down to zero), greater than what would have been allowed had S remained 
a separate entity. By contrast, requiring the register to be reduced by 
125 percent of the NOL (as under the final regulations) allows P to 
claim only a $320 CNOL, replicating the result if S were a separate 
entity.
4. Allocation of Current Losses to Nonlife Insurance Companies
    In general, under the TCJA and CARES Act, taxpayers may not carry 
back any losses generated in tax years beginning after 2020, with the 
exception of losses generated by nonlife insurance companies and 
farming losses. Existing regulations clarify that CNOLs are allocated 
to each member in proportion to the total loss. This allocation rule 
can be illustrated by example (Example 4). In Example 4, the C member 
has a current loss of $10 (in a tax year beginning in 2021 or later). 
The P&C members are corporations PC1 and PC2. PC1 has a gain of $40 and 
PC2 has a loss of $40. Assume that the P group does not engage in any 
farming activities. The CNOL for the P group is $10. The $10 of CNOL is 
allocated to the C member and PC2 in proportion to their total losses. 
The C member has one-fifth of the total loss ($10 divided by $50) and 
PC2 has four-fifths. Therefore, under the existing regulations, the C 
member is allocated $2 ($10 times one-fifth) and PC2 is allocated $8 
($10 times four-fifths). In the end, $8 of the CNOL may be carried back 
in Example 4. The final regulations do not alter these existing 
regulations.
    In formulating these final regulations, the Treasury Department and 
the IRS contemplated an alternative approach. Under this alternative, 
consolidated groups would be required to compute gain and loss by 
grouping P&C members and C members separately prior to allocating CNOL 
to members. The application of this approach can be seen by revisiting 
Example 4. Under this alternative approach, because the P&C members as 
a whole do not have a loss, no CNOL would be allocated to any P&C 
member regardless of the gain or loss of any of the individual P&C 
members. Thus, under the alternative approach, none of the $10 CNOL 
would be eligible for carryback in Example 4.

C. Economic Analysis

1. Baseline
    In this analysis, the Treasury Department and the IRS assess the 
benefits and costs of the final regulations relative to a no-action 
baseline reflecting anticipated Federal income tax-related behavior in 
the absence of these regulations.
2. Summary of Economic Effects
    The final regulations provide certainty and clarity to taxpayers 
regarding the treatment of NOLs under section 172 and the regulations 
under section 1502. In the absence of such guidance, the chance that 
different taxpayers would interpret the statute and the regulations 
differently would be exacerbated. Similarly situated taxpayers might 
interpret those rules differently, with one taxpayer pursuing an 
economic opportunity that another taxpayer might decline to make 
because of different interpretations of the ability of losses to offset 
taxable income. If this second taxpayer's activity were more 
profitable, the resulting economic decisions are inefficient. Such 
situations are more likely to arise in the absence of guidance. While 
no guidance can

[[Page 67973]]

curtail all differential or inaccurate interpretations of the statute, 
the regulations significantly mitigate the chance for differential or 
inaccurate interpretations and thereby increase economic efficiency.
    To the extent that the specific provisions of the final regulations 
result in the acceleration or delay of the tax year in which taxpayers 
deduct an NOL relative to the baseline, those taxpayers may face a 
change in the present value of the after-tax return to new investment, 
particularly investment that may result in losses. The resulting 
changes in the incentives facing the taxpayer are complex and may lead 
the taxpayer either to increase, decrease, or leave unchanged the 
volume and risk level of its investment portfolio, relative to the 
baseline, in ways that depend on the taxpayer's stock of NOLs and the 
depreciation schedules and income patterns of investments they would 
typically consider, including whether the investment is subject to 
bonus depreciation. Because these elements are complex and taxpayer-
specific and because the sign of the effect on investment is generally 
ambiguous, the Treasury Department and the IRS have not projected the 
specific effects on economic activity arising from the final 
regulations.
    The Treasury Department and the IRS project that these regulations 
will have annual effects below $100 million ($2020) relative to the 
baseline. The effects are small because the regulations apply only to 
consolidated groups; in addition, several provisions of the final 
regulations apply only to the extent that a consolidated group contains 
a mix of member types. Moreover, the effects are small because: (i) For 
provisions of the final regulations that affect the deduction for pre-
2018 NOLs, the effects are limited to the stock of the pre-2018 NOLs; 
and (ii) for provisions that affect the allowable rate of loss usage of 
post-2017 NOLs, the effect arises only from the 20 percentage point 
differential in the deduction for these NOLs. This latter effect in 
particular, to which the bulk of the provisions apply, is too small to 
substantially affect taxpayers' use of NOLs and thus too small to lead 
to meaningful changes in economic decisions.
    The Treasury Department and the IRS did not estimate more precisely 
the economic effects of these regulations because (i) the effects are 
expected to be small and (ii) data or models that would address the 
effects of these regulations are not readily available. In the absence 
of quantitative estimates, the subsequent discussion provides 
qualitative analysis of these economic effects.
    The proposed regulations solicited comments on the economic effects 
of the proposed regulations. No such comments were received.
3. Allocation of CNOLs to Specific Members of Consolidated Groups
    The final regulations do not amend existing rules for the 
allocation of the CNOL within consolidated groups. The final 
regulations follow existing rules and allocate the CNOLs to each member 
of the group in proportion to the total loss.
    The Treasury Department and the IRS considered an alternative 
approach that would have required groups to compute gain and loss at 
the subgroup level prior to allocating CNOL to members. Recall Example 
4 in which the P&C subgroup had no gain or loss but the C subgroup had 
a loss of $10. Under this alternative approach, because the P&C 
subgroup as a whole does not have a loss, no CNOL would be allocated to 
any member in the P&C group regardless of the gain or loss of any of 
the individual members of PC. Thus, in Example 4, none of the $10 CNOL 
would be eligible for carryback.
    The Treasury Department and the IRS recognize that as a result of 
the TCJA and the CARES Act, the final regulations may provide groups 
with an incentive to split their C members into several corporations--
some with loss and some with gain; this potential incentive would not 
exist under the alternative regulatory approach. In certain 
circumstances, such a strategy would effectively enable some share of 
the losses generated by the other C members to be carried back. This 
change in the business structure of consolidated groups may entail 
economic costs because, to the extent this strategy is pursued, it 
would result from tax-driven rather than market-driven considerations. 
The Treasury Department and the IRS project, however, that the adopted 
approach will have lower compliance costs for taxpayers, relative to 
the alternative regulatory approach, because it generally follows 
existing regulatory practice for allocating losses within a 
consolidated group.
    The Treasury Department and the IRS have not attempted to estimate 
the economic consequences of either of these effects but project them 
to be small. The effects are projected to be small because (i) only a 
small number of taxpayers are likely to be affected; (ii) any 
reorganization that occurs due to the final regulations will primarily 
be ``on paper'' and entail little or no economic loss; and (iii) the 
compliance burden of loss allocation, under either the final 
regulations or the alternative approach, is not high.
    No additional substantive alternatives were raised by the comments.
4. Affected Taxpayers
    The Treasury Department and the IRS project that these regulations 
will primarily affect consolidated groups that contain at least one 
nonlife insurance member and at least one member that is not a nonlife 
insurance company. Based on data from 2015, the Treasury Department and 
the IRS calculate that there were 1,130 such consolidated groups. 
Approximately 460 of these groups were of ``mixed loss'' status, 
meaning that at least one nonlife insurance member had a gain and one 
other member had a loss, or vice versa.

D. Summary

    In sum, these regulations clarify the recent statutory changes to 
section 172 as they apply to consolidated corporate groups. The 
Treasury Department and IRS project the economic effect of these 
regulations to be small given that (1) the effect of NOL usage on 
investment incentives is of ambiguous sign, (2) these regulations are 
projected to have only a small effect on NOL usage, and (3) it is 
expected that most taxpayers would have come to a similar 
interpretation of the statute in the absence of these regulations.

II. Regulatory Flexibility Act

    Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it 
is hereby certified that these final regulations will not have a 
significant economic impact on a substantial number of small entities. 
This certification is based on the fact that these final regulations 
apply only to corporations that file consolidated Federal income tax 
returns, and that such corporations almost exclusively consist of 
larger businesses. Specifically, based on data available to the IRS, 
corporations that file consolidated Federal income tax returns 
represent only approximately two percent of all filers of Forms 1120 
(U.S. Corporation Income Tax Return). However, these consolidated 
Federal income tax returns account for approximately 95 percent of the 
aggregate amount of receipts provided on all Forms 1120. Therefore, 
these final regulations would not create additional obligations for, or 
impose an economic impact on, small entities. Accordingly, the 
Secretary certifies that the final regulations will not have a 
significant economic impact on a substantial number of small entities.

[[Page 67974]]

    Pursuant to section 7805(f) of the Internal Revenue Code, the 
notice of proposed rulemaking that preceded these final regulations was 
submitted to the Chief Counsel for the Office of Advocacy of the Small 
Business Administration for comment on its impact on small business. No 
comments on the notice were received from the Chief Counsel for the 
Office of Advocacy of the Small Business Administration.

III. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits and take certain 
other actions before issuing a final rule that includes any Federal 
mandate that may result in expenditures in any one year by a state, 
local, or tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. In 2020, that threshold is approximately $156 million. This 
rule does not include any Federal mandate that may result in 
expenditures by state, local, or tribal governments, or by the private 
sector in excess of that threshold.

IV. Executive Order 13132: Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial, direct compliance costs on state and local 
governments, and is not required by statute, or preempts state law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive Order. This rule does not have federalism 
implications, does not impose substantial direct compliance costs on 
state and local governments, and does not preempt state law within the 
meaning of the Executive Order.

V. Congressional Review Act

    The Administrator of OIRA has determined that this is a major rule 
for purposes of the Congressional Review Act (5 U.S.C. 801 et seq.) 
(CRA). Under section 801(3) of the CRA, a major rule takes effect 60 
days after the rule is published in the Federal Register. Consistent 
with this requirement, the effective date of this Treasury decision is 
December 28, 2020, whereas the rules in this Treasury decision apply 
for taxable years beginning after December 31, 2020.

Drafting Information

    The principal authors of these regulations are Justin O. Kellar, 
Gregory J. Galvin, and William W. Burhop of the Office of Associate 
Chief Counsel (Corporate). However, other personnel from the Treasury 
Department and the IRS participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAX

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *


0
Par. 2. Section 1.1502-1 is amended by adding paragraphs (k) and (l) to 
read as follows:


Sec.  1.1502-1  Definitions.

* * * * *
    (k) Nonlife insurance company. The term nonlife insurance company 
means a member that is an insurance company other than a life insurance 
company, each as defined in section 816(a).
    (l) Applicability date. Paragraph (k) of this section applies to 
taxable years beginning after December 31, 2020. However, a taxpayer 
may choose to apply paragraph (k) of this section to taxable years 
beginning on or before December 31, 2020.

0
Par. 3. Section 1.1502-21 is amended:
0
1. By revising paragraph (a).
0
2. By revising paragraph (b)(1).
0
3. By revising paragraph (b)(2)(iv).
0
4. By revising paragraph (b)(2)(v) introductory text.
0
5. In paragraph (b)(2)(v), by designating Examples 1 through 3 as 
paragraphs (b)(2)(v)(A) through (C), respectively, and removing the 
period after each example number in the paragraph headings and 
replacing them with a colon.
0
6. In newly designated paragraphs (b)(2)(v)(A) through (C), by 
redesignating paragraphs (b)(2)(v)(A)(i) and (ii) as paragraphs 
(b)(2)(v)(A)(1) and (2), paragraphs (b)(2)(v)(B)(i) and (ii) as 
paragraphs (b)(2)(v)(B)(1) and (2), and paragraphs (b)(2)(v)(C)(i) and 
(ii) as paragraphs (b)(2)(v)(C)(1) and (2).
0
7. By adding paragraphs (b)(2)(v)(D) through (G).
0
8. In paragraph (b)(3)(ii)(B), by removing the text ``Sec.  1.1502-
21(b)(3)(ii)(B)(2)'' and adding in its place ``Sec.  1.1502-
21(b)(3)(ii)(B)''.
0
9. By revising paragraph (b)(3)(ii)(C).
0
10. By adding paragraph (b)(3)(ii)(D).
0
11. By revising paragraph (c)(1)(i) introductory text.
0
12. In paragraph (c)(1)(i)(C)(2), by removing the word ``and''.
0
13. In paragraph (c)(1)(i)(D), by removing the word ``account.'' and 
adding in its place ``account; and''.
0
14. By adding paragraph (c)(1)(i)(E).
0
15. By revising paragraph (c)(1)(iii) introductory text.
0
16. In paragraph (c)(1)(iii), by designating Examples 1 through 5 as 
paragraphs (c)(1)(iii)(A) through (E), respectively, and removing the 
period after each example number in the paragraph headings and 
replacing them with a colon.
0
17. In newly redesignated paragraphs (c)(1)(iii)(A) through (E), by 
redesignating paragraphs (c)(1)(iii)(A)(i) through (iii) as paragraphs 
(c)(1)(iii)(A)(1) through (3), paragraphs (c)(1)(iii)(B)(i) through 
(vi) as paragraphs (c)(1)(iii)(B)(1) through (6), paragraphs 
(c)(1)(iii)(C)(i) through (iii) as paragraphs (c)(1)(iii)(C)(1) through 
(3), paragraphs (c)(1)(iii)(D)(i) through (iv) as paragraphs 
(c)(1)(iii)(D)(1) through (4), and paragraphs (c)(1)(iii)(E)(i) through 
(v) as paragraphs (c)(1)(iii)(E)(1) through (5).
0
18. By revising newly redesignated paragraphs (c)(1)(iii)(A)(2) and 
(c)(1)(iii)(B)(2) through (6).
0
19. In newly redesignated paragraph (c)(1)(iii)(C)(2), by adding the 
words ``, a taxable year that begins on January 1, 2021'' after the 
words ``at the beginning of Year 4''.
0
20. By revising newly redesignated paragraphs (c)(1)(iii)(D)(2) through 
(4).
0
21. By adding paragraph (c)(1)(iii)(D)(5).
0
22. By revising newly redesignated paragraphs (c)(1)(iii)(E)(2) through 
(5).
0
23. By adding paragraphs (c)(1)(iii)(E)(6) and (c)(1)(iii)(F).
0
24. By revising paragraph (c)(2)(v).
0
25. By revising paragraph (c)(2)(viii) introductory text,.
0
26. In paragraph (c)(2)(viii), by designating Examples 1 through 4 as 
paragraphs (c)(2)(viii)(A) through (D), respectively, and removing the 
period after each example number in the paragraph headings and 
replacing them with a colon.
0
27. In newly designated paragraphs (c)(2)(viii)(A) through (D), by 
redesignating paragraphs (c)(2)(viii)(A)(i) through (vii) as paragraphs 
(c)(2)(viii)(A)(1) through (7), paragraphs (c)(2)(viii)(B)(i) through 
(iv) as paragraphs (c)(2)(viii)(B)(1) through (4), paragraphs 
(c)(2)(viii)(C)(i) through (iii) as paragraphs (c)(2)(viii)(C)(1) 
through (3), and paragraphs (c)(2)(viii)(D)(i) and (ii) as paragraphs 
(c)(2)(viii)(D)(1) and (2).
0
28. In newly redesignated paragraphs (c)(2)(viii)(A)(3) through (7), 
the first

[[Page 67975]]

sentence of each, by adding the words ``, including the limitation 
under paragraph (c)(1)(i)(E) of this section'' after the words ``under 
paragraph (c) of this section''.
0
29. In newly redesignated paragraph (c)(2)(viii)(B)(1), the first 
sentence, by adding the words ``, none of which is a nonlife insurance 
company'' after the text ``S, T, P and M''.
0
30. In newly redesignated paragraph (c)(2)(viii)(B)(1), the fourth 
sentence, by adding the text ``(a taxable year beginning after December 
31, 2020)'' after the language ``Year 3''.
0
31. By revising newly designated paragraph (c)(2)(viii)(B)(3).
0
32. By redesignating newly redesignated paragraph (c)(2)(viii)(B)(4) as 
paragraph (c)(2)(viii)(B)(5).
0
33. By adding a new paragraph (c)(2)(viii)(B)(4).
0
34. By revising newly redesignated paragraph (c)(2)(viii)(B)(5).
0
35. By adding paragraph (c)(2)(viii)(B)(6).
0
36. In paragraph (g)(5), by designating Examples 1 through 9 as 
paragraphs (g)(5)(i) through (ix), respectively, and removing the 
period after each example number in the paragraph headings and 
replacing them with a colon.
0
37. In newly redesignated paragraphs (g)(5)(i) through (ix), by 
redesignating paragraphs (g)(5)(i)(i) through (iv) as paragraphs 
(g)(5)(i)(A) through (D), paragraphs (g)(5)(ii)(i) through (iv) as 
paragraphs (g)(5)(ii)(A) through (D), paragraphs (g)(5)(iii)(i) through 
(iii) as paragraphs (g)(5)(iii)(A) through (C), paragraphs 
(g)(5)(iv)(i) through (iv) as paragraphs (g)(5)(iv)(A) through (D), 
paragraphs (g)(5)(v)(i) through (iv) as paragraphs (g)(5)(v)(A) through 
(D), paragraphs (g)(5)(vi)(i) through (iv) as paragraphs (g)(5)(vi)(A) 
through (D), paragraphs (g)(5)(vii)(i) through (vi) as paragraphs 
(g)(5)(vii)(A) through (F), paragraphs (g)(5)(viii)(i) through (v) as 
paragraphs (g)(5)(viii)(A) through (E), and paragraphs (g)(5)(ix)(i) 
through (vii) as paragraphs (g)(5)(ix)(A) through (G).
0
38. By revising paragraph (h)(9).
0
39. By adding paragraph (h)(10).
    The revisions and additions read as follows:


Sec.  1.1502-21  Net operating losses.

    (a) Consolidated net operating loss deduction--(1) In general. 
Subject to any limitations under the Internal Revenue Code or this 
chapter (for example, the limitations under section 172(a)(2) and 
paragraph (a)(2) of this section), the consolidated net operating loss 
deduction (or CNOL deduction) for any consolidated return year is the 
aggregate of the net operating loss carryovers and carrybacks to the 
year. The net operating loss carryovers and carrybacks consist of--
    (i) Any CNOLs (as defined in paragraph (e) of this section) of the 
consolidated group; and
    (ii) Any net operating losses (or NOLs) of the members arising in 
separate return years.
    (2) Application of section 172 for computing net operating loss 
deductions--(i) Overview. For purposes of Sec.  1.1502-11(a)(2) 
(regarding a CNOL deduction), the rules of section 172 regarding the 
use of net operating losses are taken into account as provided by this 
paragraph (a)(2) in calculating the consolidated taxable income of a 
group for a particular consolidated return year. More specifically, in 
computing taxable income for taxable years beginning after December 31, 
2020, section 172(a) generally limits the deductibility of net 
operating losses arising in taxable years beginning after December 31, 
2017 (post-2017 NOLs). However, these limitations do not apply to net 
operating losses arising in taxable years beginning before January 1, 
2018 (pre-2018 NOLs). Therefore, in any particular consolidated return 
year beginning after December 31, 2020, the group's CNOL deduction 
includes CNOLs arising in taxable years beginning before January 1, 
2018 (pre-2018 CNOLs), without limitation under section 172(a). 
Following the deduction of pre-2018 CNOLs, this paragraph (a)(2) 
applies to compute the maximum amount of CNOLs from taxable years 
beginning after December 31, 2017 (post-2017 CNOLs), that can be 
deducted against taxable income in a consolidated return year beginning 
after December 31, 2020 (post-2017 CNOL deduction limit). See section 
172(a)(2)(A) and (B).
    (ii) Computation of the 80-percent limitation and special rule for 
nonlife insurance companies--(A) Determinations based on status of 
group members. If a portion of a post-2017 CNOL is carried back or 
carried over to a consolidated return year beginning after December 31, 
2020, whether the members of the group include nonlife insurance 
companies, other types of corporations, or both determines whether 
section 172(a) (including the limitation described in section 
172(a)(2)(B)(ii) (80-percent limitation)), section 172(f) (providing 
special rules for nonlife insurance companies), or both, apply to the 
group for the consolidated return year.
    (B) Determination of post-2017 CNOL deduction limit. The post-2017 
CNOL deduction limit is determined under paragraph (a)(2)(iii) of this 
section by applying section 172(a)(2)(B)(ii) (that is, the 80-percent 
limitation), section 172(f) (that is, the special rule for nonlife 
insurance companies), or both, to the group's consolidated taxable 
income for that year.
    (C) Inapplicability of 80-percent limitation. The 80-percent 
limitation does not apply to CNOL deductions taken in taxable years 
beginning before January 1, 2021, or to CNOLs arising in taxable years 
beginning before January 1, 2018 (that is, pre-2018 CNOLs). See section 
172(a).
    (iii) Computations under sections 172(a)(2)(B) and 172(f). This 
paragraph (a)(2)(iii) provides rules for applying sections 172(f) and 
172(a)(2)(B) to consolidated return years beginning after December 31, 
2020 (that is, for computing the post-2017 CNOL deduction limit). 
Section 172(f) applies to income of nonlife insurance company members, 
whereas section 172(a)(2)(B)(ii) applies to income of members that are 
not nonlife insurance companies. Thus, this paragraph (a)(2)(iii) 
provides specific rules for groups with no nonlife insurance company 
members, only nonlife insurance company members, or a combination of 
nonlife insurance company members and other members. For groups with 
both nonlife insurance company members and life insurance company 
members, see paragraph (b)(2)(iv)(E) of this section.
    (A) Groups without nonlife insurance company members. If no member 
of a group is a nonlife insurance company during a particular 
consolidated return year beginning after December 31, 2020, section 
172(a)(2)(B)(ii) (that is, the 80-percent limitation) applies to all 
income of the group for that year. Therefore, the post-2017 CNOL 
deduction limit for the group for that year is the lesser of--
    (1) The aggregate amount of post-2017 NOLs carried to that year; or
    (2) The amount determined by multiplying--
    (i) 80 percent, by
    (ii) Consolidated taxable income for the group for that year 
(determined without regard to any deductions under sections 172, 199A, 
and 250) less the aggregate amount of pre-2018 NOLs carried to that 
year.
    (B) Groups comprised solely of nonlife insurance companies. If a 
group is comprised solely of nonlife insurance companies during a 
particular consolidated return year beginning after December 31, 2020, 
section 172(f) applies to all income of the group for that year. 
Therefore, the post-2017 CNOL deduction limit for the group for that 
year equals the lesser of--
    (1) The aggregate amount of post-2017 NOLs carried to that year, or

[[Page 67976]]

    (2) Consolidated taxable income less the aggregate amount of pre-
2018 NOLs carried to that year.
    (C) Groups that include both nonlife insurance companies and other 
corporations--(1) General rule. Except as provided in paragraph 
(a)(2)(iii)(C)(5) of this section, if a group has at least one member 
that is a nonlife insurance company and at least one member that is not 
a nonlife insurance company during a particular consolidated return 
year beginning after December 31, 2020, the post-2017 CNOL deduction 
limit for the group for that year equals the lesser of--
    (i) The aggregate amount of post-2017 NOLs carried to that year, or
    (ii) The sum of the amounts in the income pools determined under 
paragraphs (a)(2)(iii)(C)(2) and (3) of this section.
    (2) Residual income pool. The amount determined under this 
paragraph (a)(2)(iii)(C)(2) (residual income pool) is eighty percent of 
the excess of--
    (i) The consolidated taxable income of the group for a consolidated 
return year beginning after December 31, 2020, determined without 
regard to any income, gain, deduction, or loss of members that are 
nonlife insurance companies and without regard to any deductions under 
sections 172, 199A, and 250, over
    (ii) The aggregate amount of pre-2018 NOLs carried to that year 
that are allocated to this income pool under paragraph 
(a)(2)(iii)(C)(4) of this section (that is, by applying the 80-percent 
limitation). See section 172(a)(2)(B)(ii).
    (3) Nonlife income pool. The amount determined under this paragraph 
(a)(2)(iii)(C)(3) (nonlife income pool) is the consolidated taxable 
income of the group for a consolidated return year beginning after 
December 31, 2020, determined without regard to any income, gain, 
deduction, or loss of members included in the computation under 
paragraph (a)(2)(iii)(C)(2) of this section, less the aggregate amount 
of pre-2018 NOLs carried to that year that are allocated to this income 
pool under paragraph (a)(2)(iii)(C)(4) of this section. See section 
172(f).
    (4) Pro rata allocation of pre-2018 NOLs between pools of income. 
For purposes of paragraphs (a)(2)(iii)(C)(2) and (3) of this section, 
the aggregate amount of pre-2018 NOLs carried to any particular 
consolidated return year beginning after December 31, 2020, is prorated 
between the residual income pool and the nonlife income pool based on 
the relative amounts of positive income of those two pools. For 
example, if $30 of pre-2018 NOLs is carried over to a consolidated 
return year in which the residual income pool contains $75 and the 
nonlife income pool contains $150, the residual income pool is 
allocated $10 of the pre-2018 NOLs ($30 x $75/($75 + $150), or $30 x 
\1/3\), and the nonlife income pool is allocated the remaining $20 of 
pre-2018 NOLs ($30 x $150/($75 + $150), or $30 x \2/3\).
    (5) Exception. The post-2017 CNOL deduction limit for the group for 
a consolidated return year is determined under this paragraph 
(a)(2)(iii)(C)(5) if the amounts computed under paragraphs 
(a)(2)(iii)(C)(2) and (3) of this section for that year are not both 
positive.
    (i) Positive residual income pool and negative nonlife income pool. 
This paragraph (a)(2)(iii)(C)(5)(i) applies if the amount computed 
under paragraph (a)(2)(iii)(C)(2) of this section for the residual 
income pool is positive and the amount computed under paragraph 
(a)(2)(iii)(C)(3) of this section for the nonlife income pool is 
negative. If this paragraph (a)(2)(iii)(C)(5)(i) applies, the post-2017 
CNOL deduction limit for the group for a consolidated return year 
equals the lesser of the aggregate amount of post-2017 NOLs carried to 
that year, or 80 percent of the consolidated taxable income of the 
entire group (determined without regard to any deductions under 
sections 172, 199A, and 250) after subtracting the aggregate amount of 
pre-2018 NOLs carried to that year (that is, by applying the 80-percent 
limitation). See section 172(a)(2)(B).
    (ii) Positive nonlife income pool and negative residual income 
pool. If the amount computed under paragraph (a)(2)(iii)(C)(3) of this 
section for the nonlife income pool is positive and the amount computed 
under paragraph (a)(2)(iii)(C)(2) of this section for the residual 
income pool is negative, the post-2017 CNOL deduction limit for the 
group for a consolidated return year equals the lesser of the aggregate 
amount of post-2017 NOLs carried to that year, or the consolidated 
taxable income of the entire group less the aggregate amount of pre-
2018 NOLs carried to that year. See section 172(f).
    (b) * * *
    (1) Carryovers and carrybacks generally. The net operating loss 
carryovers and carrybacks to a taxable year are determined under the 
principles of, and are subject to any limitations under, section 172 
and this section. Thus, losses permitted to be absorbed in a 
consolidated return year generally are absorbed in the order of the 
taxable years in which they arose, and losses carried from taxable 
years ending on the same date, and which are available to offset 
consolidated taxable income for the year, generally are absorbed on a 
pro rata basis. In addition, except as otherwise provided in this 
section, the amount of any CNOL absorbed by the group in any year is 
apportioned among members based on the percentage of the CNOL eligible 
for carryback or carryover that is attributable to each member as of 
the beginning of the year. The percentage of the CNOL attributable to a 
member is determined pursuant to paragraph (b)(2)(iv)(B) of this 
section. Additional rules provided under the Internal Revenue Code or 
regulations also apply. See, for example, section 382(l)(2)(B) (if 
losses are carried from the same taxable year, losses subject to 
limitation under section 382 are absorbed before losses that are not 
subject to limitation under section 382). See paragraph (c)(1)(iii)(B) 
of this section, (Example 2), for an illustration of pro rata 
absorption of losses subject to a SRLY limitation.
    (2) * * *
    (iv) Operating rules. (A) Amount of CNOL attributable to a member. 
The amount of a CNOL that is attributable to a member equals the 
product obtained by multiplying the CNOL and the percentage of the CNOL 
attributable to the member.
    (B) Percentage of CNOL attributable to a member--(1) In general. 
Except as provided in paragraph (b)(2)(iv)(B)(2) of this section, the 
percentage of the CNOL for the consolidated return year attributable to 
a member equals the separate net operating loss of the member for the 
consolidated return year divided by the sum of the separate net 
operating losses for that year of all members having such losses for 
that year. For this purpose, the separate net operating loss of a 
member is determined by computing the CNOL by reference to only the 
member's items of income, gain, deduction, and loss, including the 
member's losses and deductions actually absorbed by the group in the 
consolidated return year (whether or not absorbed by the member).
    (2) Recomputed percentage. If, for any reason, a member's portion 
of a CNOL is absorbed or reduced on a non-pro rata basis (for example, 
under Sec.  1.1502-11(b) or (c), paragraph (b)(2)(iv)(C) of this 
section, Sec.  1.1502-28, or 1.1502-36(d), or as the result of a 
carryback to a separate return year), the percentage of the CNOL 
attributable to each member is recomputed. In addition, if a member 
with a separate net operating loss ceases to be a member, the 
percentage of the CNOL attributable to each remaining member is 
recomputed. The recomputed percentage of the CNOL attributable to each 
member equals the remaining

[[Page 67977]]

CNOL attributable to the member at the time of the recomputation 
divided by the sum of the remaining CNOL attributable to all of the 
remaining members at the time of the recomputation. For purposes of 
this paragraph (b)(2)(iv)(B)(2), a CNOL that is permanently disallowed 
or eliminated is treated as absorbed.
    (C) Net operating loss carryovers and carrybacks--(1) General 
rules. Subject to the rules regarding allocation of special status 
losses under paragraph (b)(2)(iv)(D) of this section--
    (i) Nonlife insurance companies. The portion of a CNOL attributable 
to any members of the group that are nonlife insurance companies is 
carried back or carried over under the rules in section 172(b) 
applicable to nonlife insurance companies.
    (ii) Corporations other than nonlife insurance companies. The 
portion of a CNOL attributable to any other members of the group is 
carried back or carried over under the rules in section 172(b) 
applicable to corporations other than nonlife insurance companies.
    (2) Recomputed percentage. For rules governing the recomputation of 
the percentage of a CNOL attributable to each remaining member if any 
portion of the CNOL attributable to a member is carried back under 
section 172(b)(1)(B) or (C) and absorbed on a non-pro rata basis, see 
paragraph (b)(2)(iv)(B)(2) of this section.
    (D) Allocation of special status losses. The amount of the group's 
CNOL that is determined to constitute a farming loss (as defined in 
section 172(b)(1)(B)(ii)) or any other net operating loss that is 
subject to special carryback or carryover rules (special status loss) 
is allocated to each member separately from the remainder of the CNOL 
based on the percentage of the CNOL attributable to the member, as 
determined under paragraph (b)(2)(iv)(B) of this section. This 
allocation is made without regard to whether a particular member 
actually incurred specific expenses or engaged in specific activities 
required by the special status loss provisions. This paragraph 
(b)(2)(iv)(D) applies only with regard to losses for which the special 
carryback or carryover rules are dependent on the type of expense 
generating the loss, rather than on the special status of the entity to 
which the loss is allocable. See section 172(b)(1)(C) and paragraph 
(b)(2)(iv)(C)(1)(i) of this section (applicable to losses of nonlife 
insurance companies). This paragraph (b)(2)(iv)(D) does not apply to 
farming losses incurred by a consolidated group in any taxable year 
beginning after December 31, 2017, and before January 1, 2021.
    (E) Coordination with rules for life-nonlife groups under Sec.  
1.1502-47. For groups that include at least one member that is a life 
insurance company and for which an election is in effect under section 
1504(c)(2), any computation of the 80-percent limitation under 
paragraph (a)(2)(iii)(C) of this section is computed only with respect 
to items of income, gain, deduction, and loss of the members of the 
nonlife subgroup (as defined in Sec.  1.1502-47(b)(9)). For rules 
regarding the use of CNOLs of the nonlife subgroup to offset life 
insurance company taxable income of the life subgroup (each as defined 
in Sec.  1.1502-47(b)), or the use of CNOLs of the life subgroup to 
offset consolidated taxable income of the nonlife subgroup, see 
generally section 1503(c)(1) and Sec.  1.1502-47.
    (v) Examples. For purposes of the examples in this paragraph 
(b)(2)(v), unless otherwise stated, all groups file consolidated 
returns, all corporations have calendar taxable years, all losses are 
farming losses within the meaning of section 172(b)(1)(B)(ii), all 
taxable years begin after December 31, 2020, the facts set forth the 
only corporate activity, value means fair market value and the adjusted 
basis of each asset equals its value, all transactions are with 
unrelated persons, and the application of any limitation or threshold 
under section 382 is disregarded. The principles of this paragraph (b) 
are illustrated by the following examples:
* * * * *
    (D) Example 4: Allocation of a CNOL arising in a consolidated 
return year beginning after December 31, 2020. (1) P is the common 
parent of a consolidated group that includes S. Neither P nor S is a 
nonlife insurance company. The P group also includes nonlife insurance 
companies PC1, PC2, and PC3. In the P group's 2021 consolidated return 
year, all members except S have separate net operating losses, and the 
P group's CNOL in that year is $40. No member of the P group engages in 
farming activities. See section 172(b)(1)(B)(ii).
    (2) Under paragraphs (b)(1) and (b)(2)(iv)(B)(1) of this section, 
for purposes of carrying losses to other taxable years, the P group's 
$40 CNOL is allocated pro rata among the group members that have 
separate net operating losses. Under paragraph (b)(2)(iv)(C) of this 
section, those respective portions of the CNOL attributable to PC1, 
PC2, and PC3 (that is, members that are nonlife insurance companies) 
are carried back to each of the two preceding taxable years and then 
carried over to each of the 20 subsequent taxable years. See section 
172(b)(1)(C). The portion attributable to P (which is not a nonlife 
insurance company) may not be carried back but is carried over to 
future years. See section 172(b)(1)(A).
    (E) Example 5: Allocation of a CNOL arising in a consolidated 
return year beginning before January 1, 2021. The facts are the same as 
in paragraph (b)(2)(v)(D)(1) of this section, except that the P group 
incurred the CNOL during the P group's 2020 consolidated return year. 
The allocation among the P group members of the CNOL described in 
paragraph (b)(2)(v)(D)(2) of this section would be the same. However, 
those respective portions of the CNOL attributable to PC1, PC2, and PC3 
(that is, members that are nonlife insurance companies) will be carried 
back to each of the five preceding taxable years and then carried over 
to each of the 20 subsequent taxable years. See section 172(b)(1)(C) 
and section 172(b)(1)(D)(i). The portion attributable to P (which is 
not a nonlife insurance company) will be carried back to each of the 
five preceding taxable years and then carried over to future years. See 
section 172(b)(1)(A) and section 172(b)(1)(D)(i).
    (F) Example 6: CNOL deduction and application of section 172. (1) P 
(a type of corporation other than a nonlife insurance company) is the 
common parent of a consolidated group that includes PC1 (a nonlife 
insurance company). P and PC1 were both incorporated in Year 1 (a year 
beginning after December 31, 2020). In Year 1, P and PC1 have separate 
taxable income of $20 and $25, respectively. As a result, the P group 
has Year 1 consolidated taxable income of $45. In Year 2, P has 
separate taxable income of $24, and PC1 has a separate taxable loss of 
$40, resulting in a P group CNOL of $16. Additionally, in Year 3, P has 
separate taxable income of $15, and PC1 has a separate taxable loss of 
$45, resulting in a P group CNOL of $30. No member of the P group 
engages in farming activities. See section 172(b)(1)(B)(ii).
    (2) Under paragraph (b)(2)(iv)(B) of this section, the P group's 
Year 2 CNOL and Year 3 CNOL are entirely attributable to PC1, a nonlife 
insurance company. Therefore, under section 172(b)(1)(C)(i), the entire 
amount of each of these CNOLs is eligible to be carried back to Year 1.
    (3) Under paragraph (a)(2)(ii) of this section, the amount of the 
Year 2 CNOL that may be used by the P group in Year 1 is determined by 
taking into account the status (nonlife insurance company or other type 
of corporation) of the member that has separate taxable income 
composing in whole or in part

[[Page 67978]]

the P group's consolidated taxable income. Because the P group includes 
both a nonlife insurance company member and a member that is not a 
nonlife insurance company, paragraph (a)(2)(iii)(C) of this section 
applies to determine the computation of the post-2017 CNOL deduction 
limit for the group for Year 1. Therefore, the 80-percent limitation is 
applied to the residual income pool, which consists of the taxable 
income of P, a type of corporation other than a nonlife insurance 
company. Under the 80-percent limitation, the maximum amount of P's 
Year 1 income that may be offset by the P group's post-2017 CNOLs is 
$16, which equals 80 percent of the excess of P's taxable income for 
Year 1 ($20) over the aggregate amount of pre-2018 NOLs allocable to P 
($0) (80 percent x ($20-$0)). See paragraph (a)(2)(iii)(C)(2) and 
(a)(2)(iii)(C)(4) of this section. PC1 is a nonlife insurance company 
to which section 172(f), rather than the 80-percent limitation in 
section 172(a)(2)(B)(ii), applies. Therefore, the maximum amount of 
PC1's Year 1 income that may be offset by the P group's post-2017 CNOLs 
is $25, which equals the excess of PC1's taxable income for Year 1 
($25) over the aggregate amount of pre-2018 NOLs allocable to PC1 ($0). 
See paragraph (a)(2)(iii)(C)(3) and (4) of this section.
    (4) Based on paragraph (a)(2)(iii)(C) of this section and the 
analysis set forth in paragraph (b)(2)(v)(F)(3) of this section, at the 
end of Year 2, the P group's post-2017 CNOL deduction limit for Year 1 
is the lesser of the aggregate amount of post-2017 NOLs carried to Year 
1 ($16), or $41 ($16 + $25). Therefore, the P group can offset $16 of 
its Year 1 income with its CNOL carryback from Year 2.
    (5) When the Year 3 CNOL is carried back to Year 1, the P group's 
post-2017 CNOL deduction limit for Year 1 is the lesser of $46 (the 
aggregate amount of post-2017 NOLs carried to Year 1) or $41 ($16 + 
$25; see the computation in paragraph (b)(2)(v)(F)(3) of this section). 
Thus, the total amount of the P group's Year 1 income that may be 
offset by the P group's Year 2 and Year 3 CNOLs is $41 ($16 from Year 2 
+ $25 from Year 3). As a result, the P group reports $4 of income ($45-
$41) in Year 1 that is ineligible for offset by any other NOLs. The P 
group carries over its remaining $5 CNOL ($46-$41) to future years.
    (G) Example 7: Pre-2018 and post-2017 CNOLs. (1) P is the common 
parent of a consolidated group. No member of the P group is a nonlife 
insurance company or is engaged in a farming business, and no member of 
the P group has a loss that is subject to a SRLY limitation. The P 
group had the following consolidated taxable income or CNOL for the 
following taxable years:

                  Table 1 to Paragraph (b)(2)(v)(G)(1)
------------------------------------------------------------------------
  2014      2015      2016     2017     2018     2019     2020     2021
------------------------------------------------------------------------
    $60        $0       $0    ($90)      $30    ($40)   ($100)     $120
------------------------------------------------------------------------

    (2) Under section 172(a)(1), all $30 of the P group's 2018 
consolidated taxable income is offset by the 2017 CNOL carryover 
without limitation. The remaining $60 of the P group's 2017 CNOL is 
carried over to 2021 under section 172(b)(1)(A)(ii)(I).
    (3) Under section 172(b)(1)(D)(i)(I), the P group's $40 2019 CNOL 
is carried back to the five taxable years preceding the year of the 
loss. Thus, the P group's $40 2019 CNOL is carried back to offset $40 
of its 2014 consolidated taxable income.
    (4) Under section 172(a)(2) and paragraph (a)(2)(i) of this 
section, the P group's CNOL deduction for 2021 equals the aggregate 
amount of pre-2018 NOLs carried to 2021 plus the group's post-2017 CNOL 
deduction limit. The P group has $60 of pre-2018 NOLs carried to 2021 
($90-$30). Because no member of the P group is a nonlife insurance 
company, paragraph (a)(2)(iii)(A) of this section applies to determine 
the computation of the group's post-2017 CNOL deduction limit for 2021. 
See also section 172(a)(2)(B). Therefore, the post-2017 CNOL deduction 
limit of the P group for 2021 is $48, which equals the lesser of the 
aggregate amount of post-2017 NOLs carried to 2021 ($100), or 80 
percent of the excess of the P group's consolidated taxable income for 
that year computed without regard to any deductions under sections 172, 
199A, and 250 ($120) over the aggregate amount of pre-2018 NOLs carried 
to 2021 ($60) (that is, 80 percent x $60). Thus, the P group's CNOL 
deduction for 2021 equals $108 ($60 pre-2018 NOLs carried to 2021 + $48 
post-2017 CNOL deduction limit). See section 172(a)(2) and paragraph 
(a)(2)(i) of this section. The P group offsets $108 of its $120 of 2021 
consolidated taxable income, resulting in $12 of consolidated taxable 
income in 2021. The remaining $52 of the P group's 2020 CNOL ($100-$48) 
is carried over to future taxable years. See section 
172(b)(1)(A)(ii)(II).
    (3) * * *
    (ii) * * *
    (C) Waiver of carryback period for losses in taxable years to which 
statutorily amended carryback rules apply. For further information, see 
Sec.  1.1502-21T(b)(3)(ii)(C).
    (D) Examples. For further information, see Sec.  1.1502-
21T(b)(3)(ii)(D).
* * * * *
    (c) * * *
    (1) * * *
    (i) General rule. Except as provided in paragraph (g) of this 
section (relating to an overlap with section 382), the aggregate of the 
net operating loss carryovers and carrybacks of a member (SRLY member) 
arising (or treated as arising) in SRLYs (SRLY NOLs) that are included 
in the CNOL deductions for all consolidated return years of the group 
under paragraph (a) of this section may not exceed the aggregate 
consolidated taxable income for all consolidated return years of the 
group determined by reference to only the member's items of income, 
gain, deduction, and loss (cumulative register). For this purpose--
* * * * *
    (E) If a limitation on the amount of taxable income that may be 
offset under section 172(a) (see paragraph (a)(2) of this section) 
applies in a taxable year to a member whose carryovers or carrybacks 
are subject to a SRLY limitation (SRLY member), the amount of net 
operating loss subject to a SRLY limitation that is available for use 
by the group in that year is limited to the percentage of the balance 
in the cumulative register that would be available for offset under 
section 172(a) if the SRLY member filed a separate return and reported 
as taxable income in that year the amount contained in the cumulative 
register. For example, assume that a consolidated group has a SRLY 
member that is a corporation other than a nonlife insurance company, 
and that the SRLY member has a SRLY NOL that arose in a taxable year 
beginning after December 31, 2017 (post-2017 NOL). The group's 
consolidated taxable income for a consolidated return year beginning 
after December 31, 2020 is $200, but the cumulative register has a 
positive

[[Page 67979]]

balance of only $120 (and no other net operating loss carryovers or 
carrybacks are available for the year). Because the SRLY limitation 
would be $96 ($120 x 80 percent), only $96 of SRLY loss may be used, 
rather than $160 ($200 x 80 percent). In addition, to the extent that 
this paragraph (c)(1)(i)(E) applies, the cumulative register is 
decreased by the full amount of income required under section 172(a) to 
support the amount of SRLY NOL absorption. See, for example, paragraph 
(c)(1)(iii)(A) and (B) of this section for examples illustrating the 
application of this rule.
* * * * *
    (iii) Examples. For purposes of the examples in this paragraph 
(c)(1)(iii), no corporation is a nonlife insurance company and, unless 
otherwise specified, all taxable years begin after December 31, 2020, 
and all CNOLs arise in taxable years beginning after December 31, 2020. 
The principles of this paragraph (c)(1) are illustrated by the 
following examples:
    (A) * * *
    (2) T's $100 net operating loss carryover from Year 1 arose in a 
SRLY. See Sec.  1.1502-1(f)(2)(iii). P's acquisition of T was not an 
ownership change as defined by section 382(g). Thus, the $100 net 
operating loss carryover is subject to the SRLY limitation in paragraph 
(c)(1) of this section. The positive balance of the cumulative register 
of T for Year 2 equals the consolidated taxable income of the P group 
determined by reference to only T's items, or $70. However, due to the 
80-percent limitation and the application of paragraph (c)(1)(i)(E) of 
this section, the SRLY limitation is $56 ($70 x 80 percent). No losses 
from equivalent years are available, and the P group otherwise has 
sufficient consolidated taxable income to support the CNOL deduction 
($300 x 80 percent = $240). Therefore, $56 of the SRLY net operating 
loss is included under paragraph (a) of this section in the P group's 
CNOL deduction for Year 2. Although only $56 is absorbed, the 
cumulative register of T is reduced by $70, the full amount of income 
necessary to support the $56 deduction after taking into account the 
80-percent limitation ($70 x 80 percent = $56).
* * * * *
    (B) * * *
    (2) P's Year 1, Year 2, and Year 3 are not SRLYs with respect to 
the P group. See Sec.  1.1502-1(f)(2)(i). Thus, P's $40 net operating 
loss arising in Year 1 and $120 net operating loss arising in Year 3 
are not subject to the SRLY limitation under paragraph (c) of this 
section. Although the P group has $160 of taxable income in Year 4, the 
80-percent limitation reduces the P group's net operating loss 
deduction in that year to $128 ($160 x 80 percent). Under the 
principles of section 172, paragraph (b) of this section requires that 
P's $40 loss arising in Year 1 be the first loss absorbed by the P 
group in Year 4. Absorption of this loss leaves $88 ($128-$40) of the P 
group's Year 4 consolidated taxable income available for offset by loss 
carryovers.
    (3) T's Year 2 and Year 3 are SRLYs with respect to the P group. 
See Sec.  1.1502-1(f)(2)(ii). P's acquisition of T was not an ownership 
change as defined by section 382(g). Thus, T's $50 net operating loss 
arising in Year 2 and $60 net operating loss arising in Year 3 are 
subject to the SRLY limitation. The positive balance of the cumulative 
register of T for Year 4 equals the P group's consolidated taxable 
income determined by reference to only T's items, or $70. Under 
paragraph (c)(1)(i)(E) of this section, after taking into account the 
80-percent limitation, T's SRLY limitation is $56 ($70 x 80 percent). 
Therefore, the P group can absorb up to $56 of T's SRLY net operating 
losses in Year 4. Under the principles of section 172, T's $50 SRLY net 
operating loss from Year 2 is included under paragraph (a) of this 
section in the P group's CNOL deduction for Year 4. After absorption of 
this loss, under paragraph (c)(1)(i) of this section, $6 of SRLY limit 
remains in Year 4 ($56-$50). Further, the total amount of Year 4 
consolidated taxable income available for offset by other loss 
carryovers under section 172(a) is $38 ($88-$50).
    (4) P and T each carry over net operating losses to Year 4 from a 
taxable year ending on the same date (that is, Year 3). The losses 
carried over from Year 3 total $180. However, the remaining Year 4 SRLY 
limit is $6. Therefore, the total amount of loss available for 
absorption is $126 ($120 allocable to P and $6 allocable to T). Under 
paragraph (b) of this section, the losses available for absorption that 
are carried over from Year 3 are absorbed on a pro rata basis, even 
though one loss arises in a SRLY and the other loss does not. Thus, 
$36.19 of P's Year 3 loss is absorbed ($120/($120 + $6)) x $38 = 
$36.19. In addition, $1.81 of T's Year 3 loss is absorbed ($6/($120 + 
$6)) x $38 = $1.81.
    (5) After deduction of T's SRLY net operating losses in Year 4, the 
cumulative register of T is adjusted pursuant to paragraph (c)(1)(i)(E) 
of this section. A total of $51.81 of SRLY net operating losses were 
absorbed in Year 4 ($50 + $1.81). After taking into account the 80-
percent limitation, the amount of income necessary to support this 
deduction is $64.76 ($64.76 x 80 percent = $51.81). Therefore, the 
cumulative register of T is decreased by $64.76, and $5.24 remains in 
the cumulative register ($70-$64.76).
    (6) P carries its remaining $83.81 ($120-$36.19) Year 3 net 
operating loss and T carries its remaining $58.19 ($60-$1.81) Year 3 
net operating loss over to Year 5. Assume that, in Year 5, the P group 
has $90 of consolidated taxable income (computed without regard to the 
CNOL deduction). The P group's consolidated taxable income determined 
by reference to only T's items is a CNOL of $4. Therefore, the positive 
balance of the cumulative register of T in Year 5 equals $1.24 ($5.24-
$4). Under paragraph (c)(1)(i)(E) of this section, after taking into 
account the 80-percent limitation, T's SRLY limitation is $0.99 ($1.24 
x 80 percent). For Year 5, the total amount of Year 5 consolidated 
taxable income available for offset by loss carryovers as a result of 
the 80-percent limitation is $72 ($90 x 80 percent). Under paragraph 
(b) of this section, the losses carried over from Year 3 are absorbed 
on a pro rata basis, even though one loss arises in a SRLY and the 
other loss does not. Therefore, $71.16 of P's Year 3 loss is absorbed 
(($83.81/($83.81 + $0.99)) x $72 = $71.16). In addition, $0.84 of T's 
Year 3 losses is absorbed (($0.99/($83.81 + $0.99)) x $72 = $0.84).
* * * * *
    (D) * * *
    (2) Under Sec.  1.1502-15(a), T's $100 of ordinary loss in Year 3 
constitutes a built-in loss that is subject to the SRLY limitation 
under paragraph (c) of this section. The amount of the limitation is 
determined by treating the deduction as a net operating loss carryover 
from a SRLY. The built-in loss is therefore subject to both a SRLY 
limitation and the 80-percent limitation for Year 3. The built-in loss 
is treated as a net operating loss carryover solely for purposes of 
determining the extent to which the loss is not allowed by reason of 
the SRLY limitation, and for all other purposes the loss remains a loss 
arising in Year 3. See Sec.  1.1502-21(c)(1)(i)(D). Consequently, under 
paragraph (b) of this section, the built-in loss is absorbed by the P 
group before the net operating loss carryover from Year 1 is absorbed. 
The positive balance of the cumulative register of T for Year 3 equals 
the P group's consolidated taxable income determined by reference to 
only T's items, or $60. Under paragraph (c)(1)(i)(E) of this section, 
after taking into account the 80-percent limitation, the SRLY 
limitation

[[Page 67980]]

for Year 3 is $48 ($60 x 80 percent). Therefore, $48 of the built-in 
loss is absorbed by the P group. None of T's $100 SRLY net operating 
loss carryover from Year 1 is allowed.
    (3) After deduction of T's $48 SRLY built-in loss in Year 4, the 
cumulative register of T is adjusted pursuant to paragraph (c)(1)(i)(E) 
of this section. After taking into account the 80-percent limitation, 
the amount of income necessary to support this deduction is $60 ($60 x 
80 percent = $48). Therefore, the cumulative register of T is decreased 
by $60, and zero remains in the cumulative register ($60-$60).
    (4) Under Sec.  1.1502-15(a), the $52 balance of the built-in loss 
that is not allowed in Year 3 because of the SRLY limitation and the 
80-percent limitation is treated as a $52 net operating loss arising in 
Year 3 that is subject to the SRLY limitation because, under paragraph 
(c)(1)(ii) of this section, Year 3 is treated as a SRLY. The built-in 
loss is carried to other years in accordance with the rules of 
paragraph (b) of this section. The positive balance of the cumulative 
register of T for Year 4 equals $40 (zero from Year 3 + $40). Under 
paragraph (c)(1)(i)(E) of this section, after taking into account the 
80-percent limitation, the SRLY limitation for Year 4 is $32 ($40 x 80 
percent). Therefore, under paragraph (c) of this section, $32 of T's 
$100 net operating loss carryover from Year 1 is included in the CNOL 
deduction under paragraph (a) of this section in Year 4.
    (5) After deduction of T's $32 SRLY net operating loss in Year 4, 
the cumulative register of T is adjusted pursuant to paragraph 
(c)(1)(i)(E) of this section. After taking into account the 80-percent 
limitation, the amount of income necessary to support this deduction is 
$40 ($40 x 80 percent = $32). Therefore, the cumulative register is 
decreased by $40, and zero remains in the cumulative register ($40-
$40).
    (E) * * *
    (2) For Year 2, the P group computes separate SRLY limits for each 
of T's SRLY carryovers from Year 1. The group determines its ability to 
use its capital loss carryover before it determines its ability to use 
its ordinary loss carryover. Under section 1212, because the P group 
has no Year 2 capital gain, it cannot absorb any capital losses in Year 
2. T's Year 1 net capital loss and the P group's Year 2 consolidated 
net capital loss (all of which is attributable to T) are carried over 
to Year 3.
    (3) The P group's ability to deduct net operating losses in Year 2 
is subject to the 80-percent limitation, based on the P group's 
consolidated taxable income for the year. Thus, the group's limitation 
for Year 2 is $72 ($90 x 80 percent). However, use of the Year 1 net 
operating loss also is subject to the SRLY limitation. The positive 
balance of the cumulative register of T applicable to SRLY net 
operating losses for Year 2 equals the P group's consolidated taxable 
income determined by reference to only T's items, or $60. Under 
paragraph (c)(1)(i)(E) of this section, after taking into account the 
80-percent limitation, the SRLY limitation for Year 2 is $48 ($60 x 80 
percent). Therefore, only $48 of T's Year 1 SRLY net operating loss is 
absorbed by the P group in Year 2. T carries over its remaining $52 of 
its Year 1 loss to Year 3.
    (4) After deduction of T's SRLY net operating losses in Year 2, the 
net operating loss cumulative register is adjusted pursuant to 
paragraph (c)(1)(i)(E) of this section. The P group deducted $48 of T's 
SRLY net operating losses in Year 2. After taking into account the 80-
percent limitation, the amount of taxable income necessary to support 
this deduction is $60 ($60 x 80 percent = $48). Therefore, the net 
operating loss cumulative register of T is decreased by $60, and zero 
remains in the net operating loss cumulative register ($60-$60).
    (5) For Year 3, the P group again computes separate SRLY limits for 
each of T's SRLY carryovers from Year 1. The group has consolidated net 
capital gain (without taking into account a net capital loss carryover 
deduction) of $30. Under Sec.  1.1502-22(c), the aggregate amount of 
T's $50 capital loss carryover from Year 1 that is included in 
computing the P group's consolidated net capital gain for all years of 
the group (in this case, Years 2 and 3) may not exceed $30 (the 
aggregate consolidated net capital gain computed by reference only to 
T's items, including losses and deductions actually absorbed (that is, 
$30 of capital gain in Year 3)). Thus, the P group may include $30 of 
T's Year 1 capital loss carryover in its computation of consolidated 
net capital gain for Year 3, which offsets the group's capital gains 
for Year 3. T carries over its remaining $20 of its Year 1 capital loss 
to Year 4. Therefore, the capital loss cumulative register of T is 
decreased by $30, and zero remains in the capital loss cumulative 
register ($30-$30). Further, because the net operating loss cumulative 
register includes all taxable income of T included in the P group, as 
well as all absorbed losses of T (including capital items), a zero net 
increase occurs in the net operating loss cumulative register. The P 
group carries over the Year 2 consolidated net capital loss to Year 4.
    (6) The P group's ability to deduct net operating losses in Year 3 
is subject to the 80-percent limitation, based on the P group's 
consolidated taxable income for the year. Thus, the P group's taxable 
income for Year 3 that can be offset, before use of net operating 
losses, is $40 (80 percent x the sum of zero capital gain, after use of 
the capital loss carryover, plus $50 of ordinary income). However, use 
of the Year 1 net operating loss also is subject to the SRLY 
limitation. The positive balance of the cumulative register of T 
applicable to SRLY net operating losses for Year 3 equals the P group's 
consolidated taxable income determined by reference only to T's items, 
or $40. This amount equals the sum obtained by adding the zero 
carryover from Year 2, a net inclusion of zero from capital items 
implicated in Year 3 ($30-$30), and $40 of taxable income in Year 3. 
Under paragraph (c)(1)(i)(E) of this section, after taking into account 
the 80-percent limitation, the SRLY limitation for Year 3 is $32 ($40 x 
80 percent). Therefore, only $32 of the Year 1 net operating loss is 
absorbed by the P group in Year 3. T carries over its remaining $20 of 
its Year 1 loss to Year 4.
    (F) Example 6: Pre-2018 NOLs and post-2017 NOLs. (1) Individual A 
owns P. On January 1, 2017, A forms T. P and T are calendar-year 
taxpayers. In 2017, T sustains a $100 net operating loss that is 
carried over. During 2018, 2019, and 2020, T deducts a total of $90 of 
its 2017 net operating loss against its taxable income, and T carries 
over the remaining $10 of its 2017 net operating loss. In 2021, T 
sustains a net operating loss of $50. On December 31, 2021, P acquires 
all the stock of T, and T becomes a member of the P group. The P group 
has $300 of consolidated taxable income in 2022 (computed without 
regard to the CNOL deduction). Such consolidated taxable income would 
be $70 if determined by reference to only T's items. The P group has no 
other SRLY net operating loss carryovers or CNOL carryovers.
    (2) T's remaining $10 of net operating loss carryover from 2017 and 
its $50 net operating loss carryover from 2021 are both SRLY losses in 
the P group. See Sec.  1.1502-1(f)(2)(iii). P's acquisition of T was 
not an ownership change as defined by section 382(g). Thus, T's net 
operating loss carryovers are subject to the SRLY limitation in 
paragraph (c)(1) of this section. The SRLY limitation for the P group's 
2022 consolidated return year is consolidated taxable income determined 
by reference to only T's $70 of items.
    (3) Because T's oldest (2017) carryover was sustained in a year

[[Page 67981]]

beginning before January 1, 2018, its use is not subject to limitation 
under section 172(a)(2)(B). Therefore, all $10 of T's 2017 SRLY net 
operating loss (that is, a pre-2018 NOL) is included under paragraph 
(a) of this section in the P group's CNOL deduction for 2022. After 
deduction of T's $10 SRLY net operating loss from 2017, the cumulative 
register of T is reduced on a dollar-for-dollar basis, pursuant to 
paragraph (c)(1)(i) of this section. Therefore, the cumulative register 
of T is decreased by $10, and $60 remains in the cumulative register 
($70-$10).
    (4) The P group's deduction of T's 2021 net operating loss is 
subject to both a SRLY limitation and the 80-percent limitation under 
section 172(a)(2)(B)(ii). Therefore, the total limitation on the use of 
T's 2021 net operating loss in the P group is $48 (the remaining 
cumulative register of $60 x 80 percent). No losses from equivalent 
years are available, and the P group otherwise has sufficient 
consolidated taxable income to support the CNOL deduction ($290 x 80 
percent = $232). Therefore, $48 of T's 2021 SRLY net operating loss is 
included under paragraph (a) of this section in the P group's CNOL 
deduction for 2022. The remaining $2 of T's 2021 SRLY net operating 
loss ($50-$48) is carried over to the P group's 2023 consolidated 
return year.
    (5) After deduction of T's $48 SRLY NOL in 2022, the cumulative 
register of T is adjusted pursuant to paragraph (c)(1)(i)(E) of this 
section. After taking into account the 80-percent limitation, the 
amount of income necessary to support this deduction is $60 ($60 x 80 
percent = $48). Therefore, the cumulative register of T is decreased by 
$60, and zero remains in the cumulative register ($60-$60).
    (2) * * *
    (v) Coordination with other limitations. This paragraph (c)(2) does 
not allow a net operating loss to offset income to the extent 
inconsistent with other limitations or restrictions on the use of 
losses, such as a limitation based on the nature or activities of 
members. For example, a net operating loss may not offset income in 
excess of any limitations under section 172(a) and paragraph (a)(2) of 
this section. Additionally, any dual consolidated loss may not reduce 
the taxable income to an extent greater than that allowed under section 
1503(d) and Sec. Sec.  1.1503(d)-1 through 1.1503(d)-8. See also Sec.  
1.1502-47(k) (relating to preemption of rules for life-nonlife groups).
* * * * *
    (viii) Examples. For purposes of the examples in this paragraph 
(c)(2)(viii), no corporation is a nonlife insurance company or has any 
farming losses. The principles of this paragraph (c)(2) are illustrated 
by the following examples:
* * * * *
    (B) * * *
    (3) In Year 4, the M group has $10 of consolidated taxable income 
(computed without regard to the CNOL deduction for Year 4). That 
consolidated taxable income would be $45 if determined by reference 
only to the items of P, S, and T, the members included in the SRLY 
subgroup with respect to P's loss carryover. Therefore, the positive 
balance of the cumulative register of the P SRLY subgroup for Year 4 
equals $45 and, due to the application of the 80-percent limitation 
under paragraph (c)(2)(v) of this section, the SRLY subgroup limitation 
under this paragraph (c)(2) is $36 ($45 x 80 percent). However, the M 
group has only $10 of consolidated taxable income in Year 4. Thus, due 
to the 80-percent limitation and the application of paragraph (b)(1) of 
this section, the M group's deduction of all net operating losses in 
Year 4 is limited to $8 ($10 x 80 percent). As a result, the M group 
deducts $8 of P's SRLY net operating loss carryover, and the remaining 
$37 is carried over to Year 5.
    (4) After deduction of $8 of P's SRLY net operating loss in Year 4, 
the cumulative register of the P SRLY subgroup is adjusted pursuant to 
paragraph (c)(1)(i)(E) of this section. After taking into account the 
80-percent limitation, the amount of income necessary to support this 
deduction is $10 ($10 x 80 percent = $8). Therefore, the cumulative 
register of the P SRLY subgroup is decreased by $10, and $35 remains in 
the cumulative register ($45-$10).
    (5) In Year 5, the M group has $100 of consolidated taxable income 
(computed without regard to the CNOL deduction for Year 5). None of P, 
S, or T has any items of income, gain, deduction, or loss in Year 5. 
Although the members of the P SRLY subgroup do not contribute to the 
$100 of consolidated taxable income in Year 5, the positive balance of 
the cumulative register of the P SRLY subgroup for Year 5 is $35 and, 
due to the application of the 80-percent limitation under paragraph 
(c)(2)(v) of this section, the SRLY subgroup limitation under this 
paragraph (c)(2) is $28 ($35 x 80 percent). Because of the 80-percent 
limitation and the application of paragraph (b)(1) of this section, the 
M group's deduction of net operating losses in Year 5 is limited to $80 
($100 x 80 percent). Because the $28 of net operating loss available to 
be absorbed is less than 80 percent of the M group's consolidated 
taxable income, $28 of P's SRLY net operating loss is absorbed in Year 
5, and the remaining $9 ($37-$28) is carried over to Year 6.
    (6) After deduction of $28 of P's SRLY net operating loss in Year 
5, the cumulative register of the P SRLY subgroup is adjusted pursuant 
to paragraph (c)(1)(i)(E) of this section. After taking into account 
the 80-percent limitation, the amount of income necessary to support 
this deduction is $35 ($35 x 80 percent = $28). Therefore, the 
cumulative register of the P SRLY subgroup is decreased by $35, and 
zero remains in the cumulative register ($35-$35).
* * * * *
    (h) * * *
    (9) For the applicability dates of paragraphs (b)(3)(ii)(C) and 
(b)(3)(ii)(D) of this section, see Sec.  1.1502-21T(h)(9).
    (10) The rules of paragraphs (a), (b)(1), (b)(2)(iv), and 
(c)(1)(i)(E) of this section apply to taxable years beginning after 
December 31, 2020.

0
Par. 4. Section 1.1502-47 is amended:
0
1. By revising paragraphs (a)(2)(i) and (ii).
0
2. By removing paragraph (a)(3).
0
3. By redesignating paragraph (a)(4) as paragraph (a)(3).
0
4. By removing paragraphs (b) and (c).
0
5. By redesignating paragraph (d) as paragraph (b).
0
6. By revising newly redesignated paragraphs (b)(1), (2), (3), (4), 
(5), (10), (11), and (13).
0
7. In newly redesignated paragraph (b)(14), by designating Examples 1 
through 14 as paragraphs (b)(14)(i) through (xiv), respectively.
0
8. In newly redesignated paragraph (b)(14)(i), by adding a sentence at 
the end of the paragraph.
0
9. By revising newly redesignated paragraph (b)(14)(ii).
0
10. By removing newly redesignated paragraph (b)(14)(xiv).
0
11. By redesignating paragraph (e) as paragraph (c).
0
12. By removing newly redesignated paragraphs (c)(4) and (5).
0
13. By redesignating paragraph (c)(6) as paragraph (c)(4).
0
14. By redesignating paragraph (f) as paragraph (d).
0
15. By revising newly redesignated paragraph (d)(5).
0
16. By removing the last sentence of newly redesignated paragraph 
(d)(6).
0
17. By removing newly redesignated paragraph (d)(7)(ii).
0
18. By redesignating paragraph (d)(7)(iii) as paragraph (d)(7)(ii).
0
19. By revising newly redesignated paragraph (d)(7)(ii).

[[Page 67982]]

0
20. By redesignating paragraph (g) as paragraph (e).
0
21. In newly redesignated paragraph (e)(2), by removing the language 
``partial'' everywhere it appears.
0
22. By removing newly redesignated paragraph (e)(3).
0
23. By redesignating paragraph (h) as paragraph (f).
0
24. By revising newly redesignated paragraph (f)(2)(iii).
0
25. In newly designated paragraph (f)(2)(v), by removing the word 
``partial'' everywhere it appears.
0
26. In newly redesignated paragraph (f)(2)(v), by adding a sentence at 
the end of the paragraph.
0
27. By revising newly redesignated paragraph (f)(2)(vi) and (vii).
0
28. By removing newly redesignated paragraph (f)(3).
0
29. By redesignating newly redesignated paragraph (f)(4) as paragraph 
(f)(3).
0
30. By revising newly redesignated paragraph (f)(3)(ii).
0
31. By adding a new paragraph (g).
0
32. By removing paragraphs (j), (k), and (l).
0
33. By redesignating paragraph (m) as paragraph (h), and redesignating 
paragraph (n) as paragraph (j).
0
34. In newly redesignated paragraph (h), by removing the language 
``partial'' everywhere it appears.
0
35. In newly redesignated paragraph (h)(2)(ii), by adding a sentence at 
the end of the paragraph.
0
36. In newly redesignated paragraph (h)(3)(iv), by adding a sentence at 
the end of the paragraph.
0
37. In newly redesignated paragraph (h)(3)(viii), by removing the 
language ``common parent's election'' and adding in its place 
``election by the agent for the group (within the meaning of Sec.  
1.1502-77)''.
0
38. In newly redesignated paragraph (h)(3)(ix), by removing the last 
two sentences.
0
39. By removing newly redesignated paragraph (h)(4).
0
40. By redesignating newly redesignated paragraph (h)(5) as paragraph 
(h)(4).
0
41. By revising newly redesignated paragraph (h)(4) introductory text.
0
42. In newly redesignated paragraph (h)(4), by redesignating Examples 1 
through 6 as paragraphs (h)(4)(i) through (vi).
0
43. By revising newly redesignated paragraphs (h)(4)(ii) and (iii).
0
44. By removing newly redesignated paragraphs (h)(4)(v) and (vi).
0
45. By revising redesignated paragraph (j)(2)(iii).
0
46. By removing newly redesignated paragraph (j)(2)(v).
0
47. By redesignating newly redesignated paragraph (j)(2)(vi) as 
paragraph (j)(2)(v).
0
48. By revising newly redesignated paragraph (j)(3).
0
49. By redesignating paragraphs (q), (r), and (s) as paragraphs (k), 
(l), and (m), respectively.
0
50. By adding a new paragraph (n).
0
51. By removing paragraphs (o), (p), and (t).
0
52. In the following table, for each section designated or redesignated 
under these regulations (as indicated in the second column), removing 
the language in the third column and adding the language in the fourth 
column with the frequency indicated in the fifth column:

----------------------------------------------------------------------------------------------------------------
            Paragraph               Redesignations          Remove                Add              Frequency
----------------------------------------------------------------------------------------------------------------
1.1502-47(a)(1).................  N/A...............  section 802 or 821  section 801         Once.
                                                       (relating           (relating to life
                                                       respectively to     insurance
                                                       life insurance      companies).
                                                       companies and to
                                                       certain mutual
                                                       insurance
                                                       companies).
1.1502-47(a)(1).................  N/A...............  life insurance      life insurance      Once.
                                                       companies and       companies may.
                                                       mutual insurance
                                                       companies may.
1.1502-47(a)(1).................  N/A...............  composition and     composition, its    Once.
                                                       its consolidated    consolidated
                                                       tax.                taxable income
                                                                           (or loss), and
                                                                           its consolidated
                                                                           tax.
1.1502-47(a)(4).................  1.1502-47(a)(3)...  Sec.  Sec.          Sec.  Sec.          Once.
                                                       1.1502-1 through    1.1502-0 through
                                                       1.1502-80.          1.1502-100.
1.1502-47(a)(4).................  1.1502-47(a)(3)...  844...............  848...............  Once.
1.1502-47(d)(12)(i)(A),           1.1502-47(b)(12)(i  (d)(12)...........  (b)(12)...........  Each place it
 (d)(12)(i)(C), (d)(12)(i)(D),     )(A),                                                       appears.
 (d)(12)(iii), (d)(12)(iv),        (b)(12)(i)(C),
 (d)(12)(v), (d)(12)(v)(B),        (b)(12)(i)(D),
 (d)(12)(v)(C), (d)(12)(v)(D),     (b)(12)(iii),
 (d)(12)(vi), (d)(12)(vii), and    (b)(12)(iv),
 (d)(12)(viii)(F).                 (b)(12)(v),
                                   (b)(12)(v)(B),
                                   (b)(12)(v)(C),
                                   (b)(12)(v)(D),
                                   (b)(12)(vi),
                                   (b)(12)(vii), and
                                   (b)(12)(viii)(F),
                                   respectively.
1.1502-47(d)(12)(iii)...........  1.1502-47(b)(12)(i  subdivision (iii).  paragraph           Once.
                                   ii).                                    (b)(12)(iii).
1.1502-47(d)(12)(iv)............  1.1502-47(b)(12)(i  subdivision (iv)..  paragraph           Once.
                                   v).                                     (b)(12)(iv).
1.1502-47(d)(12)(v)(B)..........  1.1502-47(b)(12)(v  (i.e., sections     (for example,       Once.
                                   )(B).               11, 802, 821, or    section 11,
                                                       831).               section 801, or
                                                                           section 831).
1.1502-47(d)(12)(vi)............  1.1502-47(b)(12)(v  subdivision (vi)..  paragraph           Once.
                                   i).                                     (b)(12)(vi).
1.1502-47(d)(12)(vii)...........  1.1502-47(b)(12)(v  return year and     return year even..  Once.
                                   ii).                even.
1.1502-47(d)(12)(viii)(A).......  1.1502-47(b)(12)(v  (i.e., total        (that is, total     Once.
                                   iii)(A).            reserves in         reserves in
                                                       section 801(c)).    section 816(c),
                                                                           as modified by
                                                                           section 816(h)).
1.1502-47(d)(12)(viii)(D) and     1.1502-47(b)(12)(v  subdivision (viii)  paragraph           Once.
 (F).                              iii)(D) and (F),                        (b)(12)(viii).
                                   respectively.
1.1502-47(d)(14)................  1.1502-47(b)(14)..  Illustrations.....  Examples..........  Once.
1.1502-47(d)(14)................  1.1502-47(b)(14)..  paragraph (d).....  paragraph (b).....  Once.
1.1502-47(d)(14), Example 1.....  1.1502-47(b)(14)(i  1913..............  2012..............  Once.
                                   ).
1.1502-47(d)(14), Examples 2      1.1502-47(b)(14)(i  1974..............  2012..............  Each place it
 through 4, 8, 10, and 12.         i) through (iv),                                            appears.
                                   (viii), (x), and
                                   (xii),
                                   respectively.
1.1502-47(d)(14), Examples 1      1.1502-47(b)(14)(i  1980..............  2018..............  Each place it
 through 3.                        ) through (iii),                                            appears.
                                   respectively.
1.1502-47(d)(14), Examples 1      1.1502-47(b)(14)(i  1982..............  2020..............  Each place it
 through 5 and 8 through 13.       ) through (v) and                                           appears.
                                   (viii) through
                                   (xiii),
                                   respectively.

[[Page 67983]]

 
1.1502-47(d)(14), Examples 5      1.1502-47(b)(14)(v  1983..............  2021..............  Each place it
 through 7 and 9.                  ) through (vii)                                             appears.
                                   and (ix),
                                   respectively.
1.1502-47(d)(14), Examples 2      1.1502-47(b)(14)(i  (d)(12)...........  (b)(12)...........  Each place it
 through 5 and 8 through 12.       i) through (v)                                              appears.
                                   and (viii)
                                   through (xii),
                                   respectively.
1.1502-47(d)(14), Examples 2, 3,  1.1502-47(b)(14)(i  stock casualty....  nonlife insurance.  Each place it
 and 12.                           i), (iii), and                                              appears.
                                   (xii),
                                   respectively.
1.1502-47(d)(14), Example 3.....  1.1502-47(b)(14)(i  subparagraph        paragraph           Once.
                                   ii).                (d)(12)(v)(B) and   (b)(12)(v)(B) and
                                                       (E).                (D).
1.1502-47(d)(14), Example 3.....  1.1502-47(b)(14)(i  e.g...............  for example.......  Once.
                                   ii).
1.1502-47(d)(14), Example 5.....  1.1502-47(b)(14)(v  i.e...............  in other words....  Once.
                                   ).
1.1502-47(d)(14), Example 12....  1.1502-47(b)(14)(x  casualty..........  nonlife insurance.  Once.
                                   ii).
1.1502-47(e)(1).................  1.1502-47(c)(1)...  life company or an  life company......  Once.
                                                       ineligible mutual
                                                       company.
1.1502-47(e)(3).................  1.1502-47(c)(3)...  Sec.   1.1502-      Sec.   1.1502-      Once.
                                                       75(c) and           75(c).
                                                       paragraph (e)(4)
                                                       of this section.
1.1502-47(f)(3).................  1.1502-47(d)(3)...  1981..............  2019..............  Each place it
                                                                                               appears.
1.1502-47(f)(3).................  1.1502-47(d)(3)...  1982..............  2020..............  Each place it
                                                                                               appears.
1.1502-47(f)(3).................  1.1502-47(d)(3)...  applying Sec.       applying Sec.       Once.
                                                       Sec.   1.1502-13,   Sec.   1.1502-13
                                                       1.1502-18, and      and 1.1502-19.
                                                       1.1502-19.
1.1502-47(f)(7)(i)..............  1.1502-47(d)(7)(i)  paragraph (g).....  paragraph (e).....  Once.
1.1502-47(f)(7)(i)..............  1.1502-47(d)(7)(i)  sections 802(a),    sections 801(a)     Once.
                                                       821(a), and         and 831(a).
                                                       831(a).
1.1502-47(g)....................  1.1502-47(e)......  three.............  two...............  Once.
1.1502-47(g)(1).................  1.1502-47(e)(1)...  paragraph (h).....  paragraph (f).....  Once.
1.1502-47(g)(1).................  1.1502-47(e)(1)...  paragraph (n).....  paragraph (j).....  Once.
1.1502-47(g)(1).................  1.1502-47(e)(1)...  paragraph (g)(1)..  paragraph (e)(1)..  Once.
1.1502-47(g)(2).................  1.1502-47(e)(2)...  paragraph (j).....  paragraph (g)(1)..  Once.
1.1502-47(g)(2).................  1.1502-47(e)(2)...  paragraph (m).....  paragraph (h).....  Once.
1.1502-47(g)(2).................  1.1502-47(e)(2)...  paragraph (g)(2)..  paragraph (e)(2)..  Once.
1.1502-47(h)(1).................  1.1502-47(f)(1)...  paragraph (h).....  paragraph (f).....  Once.
1.1502-47(h)(1).................  1.1502-47(f)(1)...  includes separate   includes insurance  Once.
                                                       mutual insurance    company taxable
                                                       company taxable     income.
                                                       income (as
                                                       defined in
                                                       section 821(b))
                                                       and insurance
                                                       company taxable
                                                       income.
1.1502-47(h)(2)(i)..............  1.1502-47(f)(2)(i)  Sec.  Sec.          Sec.   1.1502-21,   Once.
                                                       1.1502-21 or        the rules in this
                                                       1.1502-21A (as      paragraph (f)(2).
                                                       appropriate), the
                                                       rules in this
                                                       subparagraph (2).
1.1502-47(h)(2)(ii).............  1.1502-47(f)(2)(ii  Sec.  Sec.          Sec.   1.1502-      Once.
                                   ).                  1.1502-21(A)(f)     21(e).
                                                       or 1.1502-21(e)
                                                       (as appropriate).
1.1502-47(h)(2)(iv).............  1.1502-47(f)(2)(iv  year beginning      year, Sec.          Once.
                                   ).                  after December      1.1502-21.
                                                       31, 1981, Sec.
                                                       Sec.   1.1502-21A
                                                       or 1.1502-21 (as
                                                       appropriate).
1.1502-47(h)(2)(iv).............  1.1502-47(f)(2)(iv  nonlife loss......  nonlife subgroup    Once.
                                   ).                                      loss.
1.1502-47(h)(2)(v)..............  1.1502-47(f)(2)(v)  subparagraph (2)..  paragraph (f)(2)..  Once.
1.1502-47(h)(4)(i)..............  1.1502-47(f)(3)(i)  Sec.  Sec.          Sec.   1.1502-22..  Once.
                                                       1.1502-22 or
                                                       1.1502-22A (as
                                                       appropriate).
1.1502-47(h)(4)(i)..............  1.1502-47(f)(3)(i)  subparagraph (4)..  paragraph (f)(3)..  Once.
1.1502-47(h)(4)(i)..............  1.1502-47(f)(3)(i)  Sec.  Sec.          Sec.   1.1502-22..  Once.
                                                       1.1502-22 or
                                                       1.1502-22A(a) (as
                                                       appropriate).
1.1502-47(h)(4)(iii)............  1.1502-47(f)(3)(ii  Sec.  Sec.          Sec.   1.1502-      Once.
                                   i).                 1.1502-22A(b)(1)    22(b).
                                                       or 1.1502-22(b).
1.1502-47(h)(4)(iii)(A).........  1.1502-47(f)(3)(ii  allowed under       allowed under       Once.
                                   i)(A).              section 822(c)(6)   section 832(c)(5).
                                                       or section
                                                       832(c)(5).
1.1502-47(m)....................  1.1502-47(h)......  paragraph (g).....  paragraph (e).....  Each place it
                                                                                               appears.
1.1502-47(m)....................  1.1502-47(h)......  paragraph (h).....  paragraph (f).....  Each place it
                                                                                               appears.
1.1502-47(m)....................  1.1502-47(h)......  paragraph (l).....  paragraph (g).....  Each place it
                                                                                               appears.
1.1502-47(m)....................  1.1502-47(h)......  paragraph (m).....  paragraph (h).....  Each place it
                                                                                               appears.
1.1502-47(m)(2)(ii).............  1.1502-47(h)(2)(ii  Sec.  Sec.   1502-  Sec.   1.1502-21..  Once.
                                   ).                  21 or 1.1502-21A
                                                       (as appropriate).
1.1502-47(m)(2)(ii).............  1.1502-47(h)(2)(ii  Sec.  Sec.          Sec.   1.1502-22..  Once.
                                   ).                  1.1502-22 or
                                                       1.1502-22A (as
                                                       appropriate).
1.1502-47(m)(3)(i)..............  1.1502-47(h)(3)(i)  But see             But see paragraph   Once.
                                                       subdivision (ix)    (h)(3)(ix) of
                                                       of this paragraph   this section.
                                                       (m)(3).
1.1502-47(m)(3)(i)..............  1.1502-47(h)(3)(i)  arising in          arising in          Once.
                                                       separate return     separate return
                                                       years ending        years.
                                                       after December
                                                       31, 1980.
1.1502-47(m)(3)(i)..............  1.1502-47(h)(3)(i)  and 1.1502-22 (or   and 1.1502-22.....  Once.
                                                       Sec.  Sec.
                                                       1.1502-21A and
                                                       1.1502-22A, as
                                                       appropriate).
1.1502-47(m)(3)(iii)............  1.1502-47(h)(3)(ii  consolidated LO...  life consolidated   Once.
                                   i).                                     net operating
                                                                           loss.
1.1502-47(m)(3)(v)..............  1.1502-47(h)(3)(v)  GO or TII.........  taxable income....  Once.
1.1502-47(m)(3)(v)..............  1.1502-47(h)(3)(v)  LICTI (as           LICTI for any.....  Once.
                                                       determined under
                                                       paragraph (j) of
                                                       this section) for
                                                       any.
1.1502-47(m)(3)(vi)(A)..........  1.1502-47(h)(3)(vi  subparagraph (3)..  paragraph (h)(3)..  Once.
                                   )(A).
1.1502-47(m)(3)(vii)(A).........  1.1502-47(h)(3)(vi  notwithstanding     notwithstanding     Once.
                                   i)(A).              Sec.   1.1502-      Sec.   1.1502-
                                                       21A(b)(3)(ii) or    21(b).
                                                       1.1502-21(b).
1.1502-47(m)(3)(vii)(A).........  1.1502-47(h)(3)(vi  taxable income for  taxable income for  Once.
                                   i)(A).              that year.          that year,
                                                                           subject to the
                                                                           limitation in
                                                                           section 172(a).
1.1502-47(m)(3)(vii)(B).........  1.1502-47(h)(3)(vi  (A) of this         paragraph           Once.
                                   i)(B).              subdivision (vii).  (h)(3)(vii)(A) of
                                                                           this section.
1.1502-47(m)(3)(viii)...........  1.1502-47(h)(3)(vi  section             section 172(b)(3).  Once.
                                   ii).                172(b)(3)(C).

[[Page 67984]]

 
1.1502-47(m)(3)(ix).............  1.1502-47(h)(3)(ix  243(b)(2).........  243(b)(3).........  Once.
                                   ).
1.1502-47(m)(3)(ix).............  1.1502-47(h)(3)(ix  return year ending  return year.......  Once.
                                   ).                  after December
                                                       31, 1980.
1.1502-47(m)(3)(x)..............  1.1502-47(h)(3)(x)  LICTI (as defined   LICTI in the        Once.
                                                       in paragraph (j)    particular.
                                                       of this section)
                                                       in the particular.
1.1502-47(m)(3)(xii)............  1.1502-47(h)(3)(xi  carryback of a      carryback of a      Once.
                                   i).                 consolidated LO.    life consolidated
                                                                           net operating
                                                                           loss.
1.1502-47(m)(3)(xii)............  1.1502-47(h)(3)(xi  (2) or (4)........  (2) or (3)........  Once.
                                   i).
1.1502-47(m)(5), Examples 1       1.1502-47(h)(4)(i)  1982..............  2021..............  Each place it
 through 4.                        through (iv),                                               appears.
                                   respectively.
1.1502-47(m)(5), Examples 1       1.1502-47(h)(4)(i)  i.e...............  that is...........  Each place it
 through 4.                        through (iv),                                               appears.
                                   respectively.
1.1502-47(m)(5), Example 1......  1.1502-47(h)(4)(i)  paragraph (d)(13).  paragraph (b)(13).  Once.
1.1502-47(m)(5), Example 1......  1.1502-47(h)(4)(i)  attributable to I   attributable to I   Once.
                                                       (an ineligible      (an ineligible
                                                       member).            member that is
                                                                           not a nonlife
                                                                           insurance
                                                                           company).
1.1502-47(m)(5), Example 1......  1.1502-47(h)(4)(i)  of this section.    of this section     Once.
                                                       The result would    and section
                                                       be.                 172(a). The
                                                                           result would be.
1.1502-47(m)(5), Example 4......  1.1502-47(h)(4)(iv  of this section or  of this section...  Once.
                                   ).                  under Sec.
                                                       1.1502-15A.
1.1502-47(m)(5), Example 4......  1.1502-47(h)(4)(iv  taxable income is   taxable income is   Once.
                                   ).                  $35.                $32.5.
1.1502-47(m)(5), Example 4......  1.1502-47(h)(4)(iv  30%...............  35%...............  Once.
                                   ).
1.1502-47(m)(5), Example 4......  1.1502-47(h)(4)(iv  (15)..............  (17.5)............  Once.
                                   ).
1.1502-47(m)(5), Example 4......  1.1502-47(h)(4)(iv  (65)..............  (67.5)............  Once.
                                   ).
1.1502-47(m)(5), Example 4......  1.1502-47(h)(4)(iv  (85)..............  (82.5)............  Once.
                                   ).
1.1502-47(n)....................  1.1502-47(j)......  consolidated LO...  life consolidated   Each place it
                                                                           net operating       appears.
                                                                           loss and
                                                                           consolidated
                                                                           operations loss
                                                                           carryovers.
1.1502-47(n)(1).................  1.1502-47(j)(1)...  paragraph (g)(1)..  paragraph (e)(1)..  Once.
1.1502-47(n)(1).................  1.1502-47(j)(1)...  paragraph (n)(2)    paragraph (j)(2)    Once.
                                                       of this section.    of this section,
                                                                           subject to the
                                                                           rules and
                                                                           limitations in
                                                                           paragraph (j)(3)
                                                                           of this section.
1.1502-47(n)(1).................  1.1502-47(j)(1)...  consolidated net    consolidated net    Once.
                                                       capital loss (as    capital loss.
                                                       determined under
                                                       paragraph (l)(4)
                                                       of this section).
1.1502-47(n)(2).................  1.1502-47(j)(2)...  paragraph (h).....  paragraph (f).....  Once.
1.1502-47(n)(2).................  1.1502-47(j)(2)...  paragraphs (m)(2)   paragraphs (h)(2)   Once.
                                                       and (3).            and (3).
1.1502-47(n)(2)(ii).............  1.1502-47(j)(2)(ii  consolidated        consolidated LICTI  Once.
                                   ).                  partial LICTI.
1.1502-47(n)(2)(iv).............  1.1502-47(j)(2)(iv  Paragraphs          Paragraphs          Once.
                                   ).                  (m)(3)(vi),         (h)(3)(vi),
                                                       (vii), (x), and     (vii), (x), and
                                                       (xi).               (xi).
1.1502-47(q)....................  1.1502-47(k)......  Sec.   1.1502-1     Sec.  Sec.          Once.
                                                       through 1.1502-80.  1.1502-0 through
                                                                           1.1502-100.
1.1502-47(q)....................  1.1502-47(k)......  paragraph           paragraph           Once.
                                                       (m)(3)(vi).         (h)(3)(vi).
1.1502-47(q)....................  1.1502-47(k)......  Sec.  Sec.          Sec.   1.1502-21..  Once.
                                                       1.1502-21A(b)(3)
                                                       and 1.1502-
                                                       79A(a)(3) (or
                                                       Sec.   1.1502-21,
                                                       as appropriate).
1.1502-47(r)....................  1.1502-47(l)......  partial LICTI (or   LICTI (or life      Once.
                                                       LO).                consolidated net
                                                                           operating loss).
1.1502-47(r)....................  1.1502-47(l)......  Sec.  Sec.          Sec.  Sec.          Once.
                                                       1.1502-0--1.1502-   1.1502-0 through
                                                       80.                 1.1502-100.
1.1502-47(s)(1)(iii)............  1.1502-47(m)(1)(ii  paragraphs (g),     paragraphs (e),     Once.
                                   i).                 (m), and (n).       (h), and (j).
1.1502-47(s)(1)(iv).............  1.1502-47(m)(1)(iv  paragraph (h).....  paragraph (f).....  Once.
                                   ).
1.1502-47(s)(1)(v)..............  1.1502-47(m)(1)(v)  consolidated        consolidated Life.  Once.
                                                       partial Life.
1.1502-47(s)(1)(v)..............  1.1502-47(m)(1)(v)  (as defined by      or life             Once.
                                                       paragraph (d)(3)    consolidated net
                                                       of this section),   operating loss.
                                                       determined under
                                                       paragraph (j) of
                                                       this section
----------------------------------------------------------------------------------------------------------------

    The additions and revisions read as follows:


Sec.  1.1502-47  Consolidated returns by life-nonlife groups.

    (a) * * *
    (2) General method of consolidation--(i) Subgroup method. The 
regulations adopt a subgroup method to determine consolidated taxable 
income. One subgroup is the group's nonlife companies. The other 
subgroup is the group's life insurance companies. Initially, the 
nonlife subgroup computes nonlife consolidated taxable income and the 
life subgroup computes consolidated LICTI. A subgroup's income may in 
effect be reduced by a loss of the other subgroup, subject to the 
limitations in sections 172 and 1503(c). The life subgroup losses 
consist of life consolidated net operating loss, consolidated 
operations loss carryovers from taxable years beginning before January 
1, 2018 (consolidated operations loss carryovers), and life 
consolidated net capital loss. The nonlife subgroup losses consist of 
nonlife consolidated net operating loss and nonlife consolidated net 
capital loss. Consolidated taxable income is therefore defined in 
pertinent part as the sum of nonlife consolidated taxable income and 
consolidated LICTI, reduced by life subgroup losses and/or nonlife 
subgroup losses.
    (ii) Subgroup loss. A subgroup loss does not actually affect the 
computation of nonlife consolidated taxable income or consolidated 
LICTI. It merely constitutes a bottom-line adjustment in reaching 
consolidated taxable income. Furthermore, the amount of a subgroup's 
loss, if any, that is eligible to be carried back to a prior taxable 
year

[[Page 67985]]

first must be carried back against income of the same subgroup before 
it may be used as a setoff against the other subgroup's income in the 
taxable year the loss arose. (See sections 172(b)(1) and 1503(c)(1); 
see also Sec.  1.1502-21(b).) The carryback of losses from one subgroup 
may not be used to offset income of the other subgroup in the year to 
which the loss is to be carried. This carryback of one subgroup's loss 
may ``bump'' the other subgroup's loss that, in effect, previously 
reduced the income of the first subgroup. The subgroup's loss that is 
bumped in appropriate cases may, in effect, reduce a succeeding year's 
income of either subgroup. This approach gives the group the tax 
savings of the use of losses, but the bumping rule assures that, 
insofar as possible, life deductions will be matched against life 
income and nonlife deductions against nonlife income.
* * * * *
    (b) * * *
    (1) Life company. The term life company means a life insurance 
company as defined in section 816 and subject to tax under section 801. 
Section 816 applies to each company separately.
    (2) Nonlife insurance company. The term nonlife insurance company 
has the meaning provided in Sec.  1.1502-1(k).
    (3) Life insurance company taxable income. The term life insurance 
company taxable income or LICTI has the meaning provided in section 
801(b).
    (4) Group. The term group has the meaning provided in Sec.  1.1502-
1(a). Unless otherwise indicated in this section, a group's composition 
is determined without regard to section 1504(b)(2).
    (5) Member. The term member has the meaning provided in Sec.  
1.1502-1(b). A life company is tentatively treated as a member for any 
taxable year for purposes of determining if it is an eligible 
corporation under paragraph (b)(12) of this section and, therefore, if 
it is an includible corporation under section 1504(c)(2). If such a 
company is eligible and includible (under section 1504(c)(2)), it will 
actually be treated as a member of the group.
* * * * *
    (10) Separate return year. The term separate return year has the 
meaning provided in Sec.  1.1502-1(e). For purposes of this paragraph 
(b)(10), the term group is defined with regard to section 1504(b)(2) 
for years in which an election under section 1504(c)(2) is not in 
effect. Thus, a separate return year includes a taxable year for which 
that election is not in effect.
    (11) Separate return limitation year. Section 1.1502-1(f)(2) 
provides exceptions to the definition of the term separate return 
limitation year. For purposes of applying those exceptions to this 
section, the term group is defined without regard to section 
1504(b)(2), and the definition in this paragraph (b)(11) applies 
separately to the nonlife subgroup in determining nonlife consolidated 
taxable income under paragraph (f) of this section and to the life 
subgroup in determining consolidated LICTI under paragraph (g) of this 
section. Paragraph (h)(3)(ix) of this section defines the term separate 
return limitation year for purposes of determining whether the losses 
of one subgroup may be used against the income of the other subgroup.
* * * * *
    (13) Ineligible corporation. A corporation that is not an eligible 
corporation is ineligible. If a life company is ineligible, it is not 
treated under section 1504(c)(2) as an includible corporation. Losses 
of a nonlife member arising in years when it is ineligible may not be 
used under section 1503(c)(2) and paragraph (g) of this section to set 
off the income of a life member. If a life company is ineligible and is 
the common parent of the group (without regard to section 1504(b)(2)), 
the election under section 1504(c)(2) may not be made.
    (14) * * *
    (i) * * * S2 must file its own separate return for 2020.
    (ii) Example 2. Since 2012, L1 has been a life company owning all 
the stock of L2. In 2018, L1 transfers assets to S1, a new nonlife 
insurance company subject to taxation under section 831(a). For 2020, 
only L1 and L2 are eligible corporations. The tacking rule in paragraph 
(b)(12)(v) of this section does not apply in 2020 because the old 
corporation (L1) and the new corporation (S1) do not have the same tax 
character.
* * * * *
    (d) * * *
    (5) Dividends received deduction--(i) Dividends received by an 
includible insurance company. Dividends received by an includible 
member insurance company, taxed under either section 801 or section 
831, from another includible member of the group are treated for 
Federal income tax purposes as if the group did not file a consolidated 
return. See sections 818(e)(2) and 805(a)(4) for rules regarding a 
member taxed under section 801, and see sections 832(g) and 
832(b)(5)(B) through (E) for rules regarding a member taxed under 
section 831.
    (ii) Other dividends. Dividends received from a life company member 
of the group that are not subject to paragraph (d)(5)(i) of this 
section are not included in gross income of the distributee member. See 
section 1504(c)(2)(B)(i). If the distributee corporation is a nonlife 
insurance company subject to tax under section 831, the rules of 
section 832(b)(5)(B) through (E) apply.
* * * * *
    (7) * * *
    (ii) Any taxes described in Sec.  1.1502-2 (other than in Sec.  
1.1502-2(a)(1), (a)(6), and (a)(7)).
* * * * *
    (f) * * *
    (2) * * *
    (iii) Carrybacks. The portion of the nonlife consolidated net 
operating loss for the nonlife subgroup described in paragraph 
(f)(2)(vi) of this section, if any, that is eligible to be carried back 
to prior taxable years under Sec.  1.1502-21 is carried back to the 
appropriate years (whether consolidated or separate) before the nonlife 
consolidated net operating loss may be used as a nonlife subgroup loss 
under paragraphs (e)(2) and (h) of this section to set off consolidated 
LICTI in the year the loss arose. The election under section 172(b)(3) 
to relinquish the entire carryback period for the net operating loss of 
the nonlife subgroup may be made by the agent for the group within the 
meaning of Sec.  1.1502-77.
* * * * *
    (v) * * * For limitations on the use of nonlife carryovers to 
offset nonlife consolidated taxable income or consolidated LICTI, see 
Sec.  1.1502-21.
    (vi) Portion of nonlife consolidated net operating loss that is 
carried back to prior taxable years. The portion of the nonlife 
consolidated net operating loss that (absent an election to waive 
carrybacks) is carried back to the two preceding taxable years is the 
sum of the nonlife subgroup's farming loss (within the meaning of 
section 172(b)(1)(B)(ii)) and the amount of the subgroup's net 
operating loss that is attributable to nonlife insurance companies (as 
determined under Sec.  1.1502-21). For rules governing the absorption 
of net operating loss carrybacks, including limitations on the amount 
of net operating loss carrybacks that may be absorbed in prior taxable 
years, see Sec.  1.1502-21(b).
    (vii) Example. P, a holding company that is not an insurance 
company, owns all of the stock of S, a nonlife insurance company, and 
L1, a life insurance company. L1 owns all of the stock of L2, a life 
insurance company. Both L1 and

[[Page 67986]]

L2 satisfy the eligibility requirements of Sec.  1.1502-47(b)(12). Each 
corporation uses the calendar year as its taxable year, and no 
corporation has incurred farming losses (within the meaning of section 
172(b)(1)(B)(ii)). For 2021, the group first files a consolidated 
return for which the election under section 1504(c)(2) is effective. P 
and S filed consolidated returns for 2019 and 2020. In 2021, the P-S 
group sustains a nonlife consolidated net operating loss that is 
attributable entirely to S (see Sec.  1.1502-21(b)). The election in 
2021 under section 1504(c)(2) does not result under paragraph (d)(1) of 
this section in the creation of a new group or the termination of the 
P-S group. The loss is carried back to the consolidated return years 
2019 and 2020 of P and S. Pursuant to Sec.  1.1502-21(b), the loss may 
be used to offset S's income in 2019 and 2020 without limitation, and 
the loss may be used to offset P's income in those years, subject to 
the limitation in section 172(a) (see Sec.  1.1502-21(b)). The portion 
of the loss not absorbed in 2019 and 2020 may serve as a nonlife 
subgroup loss in 2021 that may set off the consolidated LICTI of L1 and 
L2 under paragraphs (e)(2) and (h) of this section.
    (3) * * *
    (ii) Additional principles. In applying Sec.  1.1502-22 to nonlife 
consolidated net capital loss carryovers and carrybacks, the principles 
set forth in paragraph (f)(2)(iii) through (v) of this section for 
applying Sec.  1.1502-21 to nonlife consolidated net operating loss 
carryovers and carrybacks also apply, without regard to the limitation 
in paragraph (f)(2)(vi) of this section.
* * * * *
    (g) Consolidated LICTI--(1) General rule. Consolidated LICTI is the 
consolidated taxable income of the life subgroup, computed under Sec.  
1.1502-11 as modified by this paragraph (g).
    (2) Life consolidated net operating loss deduction--(i) In general. 
In applying Sec.  1.1502-21, the rules in this paragraph (g)(2) apply 
in determining for the life subgroup the life net operating loss and 
the portion of the life net operating loss carryovers and carrybacks to 
the taxable year.
    (ii) Life CNOL. The life consolidated net operating loss is 
determined under Sec.  1.1502-21(e) by treating the life subgroup as 
the group.
    (iii) Carrybacks--(A) General rule. The portion of the life 
consolidated net operating loss for the life subgroup, if any, that is 
eligible to be carried back under Sec.  1.1502-21 is carried back to 
the appropriate years (whether consolidated or separate) before the 
life consolidated net operating loss may be used as a life subgroup 
loss under paragraphs (e)(1) and (j) of this section to set off nonlife 
consolidated taxable income in the year the loss arose. The election 
under section 172(b)(3) to relinquish the entire carryback period for 
the consolidated net operating loss of the life subgroup may be made by 
the agent for the group within the meaning of Sec.  1.1502-77.
    (B) Special rule for life consolidated net operating losses arising 
in 2018, 2019, or 2020. If a life consolidated net operating loss 
arising in a taxable year beginning after December 31, 2017, and before 
January 1, 2021, is carried back to a life insurance company taxable 
year beginning before January 1, 2018, then such life consolidated net 
operating loss is treated as an operations loss carryback (within the 
meaning of section 810, as in effect prior to its repeal) of such 
company to such taxable year.
    (iv) Subgroup rule. In determining the portion of the life 
consolidated net operating loss that is absorbed when the loss is 
carried back to a consolidated return year, Sec.  1.1502-21 is applied 
by treating the life subgroup as the group. Therefore, the absorption 
is determined without taking into account any nonlife subgroup losses 
that were previously reported on a consolidated return as setting off 
life consolidated taxable income for the year to which the life 
subgroup loss is carried back.
    (v) Carryovers. The portion of the life consolidated net operating 
loss that is not absorbed in a prior year as a carryback, or as a life 
subgroup loss that set off nonlife consolidated taxable income for the 
year the loss arose, constitutes a life carryover under this paragraph 
(g)(2) to reduce consolidated LICTI before that portion may constitute 
a life subgroup loss that sets off nonlife consolidated taxable income 
for that particular year. For limitations on the use of life carryovers 
to offset nonlife consolidated taxable income or consolidated LICTI, 
see Sec.  1.1502-21(b).
    (3) Life consolidated capital gain net income or loss--(i) 
[Reserved].
    (ii) Life consolidated net capital loss carryovers and carrybacks. 
The life consolidated net capital loss carryovers and carrybacks for 
the life subgroup are determined by applying the principles of Sec.  
1.1502-22 as modified by the following rules in this paragraph 
(g)(3)(ii):
    (A) Life consolidated net capital loss is first carried back (or 
apportioned to the life members for separate return years) to be 
absorbed by life consolidated capital gain net income without regard to 
any nonlife subgroup capital losses and before the life consolidated 
net capital loss may serve as a life subgroup capital loss that sets 
off nonlife consolidated capital gain net income in the year the life 
consolidated net capital loss arose.
    (B) If a life consolidated net capital loss is not carried back or 
is not a life subgroup loss that sets off nonlife consolidated capital 
gain net income in the year the life consolidated net capital loss 
arose, then it is carried over to the particular year under this 
paragraph (g)(3)(ii) first against life consolidated capital gain net 
income before it may serve as a life subgroup capital loss that sets 
off nonlife consolidated capital gain net income in that particular 
year.
    (h) * * *
    (2) * * *
    (ii) * * * Additionally, the amount of consolidated LICTI that may 
be offset by nonlife consolidated net operating loss carryovers may be 
subject to limitation (see section 172 and Sec.  1.1502-21).
* * * * *
    (3) * * *
    (iv) * * * The amount of consolidated LICTI that may be offset by 
nonlife consolidated net operating loss carryovers may be subject to 
limitation (see section 172 and Sec.  1.1502-21).
* * * * *
    (4) Examples. The following examples illustrate the principles of 
this paragraph (h). In the examples, L indicates a life company, S is a 
nonlife insurance company, another letter indicates a nonlife company 
that is not an insurance company, no company has farming losses (within 
the meaning of section 172(b)(1)(B)(ii)), and each corporation uses the 
calendar year as its taxable year.
* * * * *
    (ii) Example 2. (A) The facts are the same as in paragraph 
(h)(4)(i) of this section, except that, for 2021, S's separate net 
operating loss is $200. Assume further that L's consolidated LICTI is 
$200. Under paragraph (h)(3)(vi) of this section, the offsettable 
nonlife consolidated net operating loss is $100 (the nonlife 
consolidated net operating loss computed under paragraph (f)(2)(ii) of 
this section ($200), reduced by the separate net operating loss of I 
($100)). The offsettable nonlife consolidated net operating loss that 
may be set off against consolidated LICTI in 2021 is $35 (35 percent of 
the lesser of the offsettable $100 or consolidated LICTI of $200). See 
section 1503(c)(1) and paragraph (h)(3)(x) of this section. S carries 
over a loss of $65, and I carries over a loss of $100, to 2022 under 
paragraph (f)(2) of this section to be used against nonlife 
consolidated taxable income (consolidated net

[[Page 67987]]

operating loss ($200) less amount used in 2021 ($35)). Under paragraph 
(h)(2)(ii) of this section, the offsettable nonlife consolidated net 
operating loss that may be carried to 2022 is $65 ($100 minus $35). The 
facts and results are summarized in the following table.

                                       Table 1 to Paragraph  (h)(4)(ii)(A)
                                                [Dollars omitted]
----------------------------------------------------------------------------------------------------------------
                                                       Facts        Offsettable        Limit        Unused Loss
                                                             (a)             (b)             (c)             (d)
----------------------------------------------------------------------------------------------------------------
1. P............................................             100  ..............  ..............  ..............
2. S............................................           (200)           (100)  ..............            (65)
3. I............................................           (100)  ..............  ..............           (100)
4. Nonlife Subgroup.............................           (200)           (100)           (100)           (165)
5. L............................................             200  ..............             200  ..............
6. 35% of lower of line 4(c) or 5(c)............  ..............  ..............              35  ..............
7. Unused offsettable loss......................  ..............  ..............  ..............            (65)
----------------------------------------------------------------------------------------------------------------

    (B) Accordingly, under paragraph (e) of this section, consolidated 
taxable income is $165 (line 5(a) minus line 6(c)).
    (iii) Example 3. The facts are the same as in paragraph (h)(4)(ii) 
of this section, with the following additions for 2022. The nonlife 
subgroup has nonlife consolidated taxable income of $50 (all of which 
is attributable to I) before the nonlife consolidated net operating 
loss deduction under paragraph (f)(2) of this section. Consolidated 
LICTI is $100. Under paragraph (f)(2) of this section, $50 of the 
nonlife consolidated net operating loss carryover ($165) is used in 
2022 and, under paragraph (h)(3)(vi) and (vii) of this section, the 
portion used in 2022 is attributable to I, the ineligible nonlife 
member. Accordingly, the offsettable nonlife consolidated net operating 
loss from 2021 under paragraph (h)(3)(ii) of this section is $65, the 
unused loss from 2021. The offsettable nonlife consolidated net 
operating loss in 2022 is $22.75 (35 percent of the lesser of the 
offsettable loss of $65 or consolidated LICTI of $100). Accordingly, 
under paragraph (e) of this section, consolidated taxable income is 
$77.25 (consolidated LICTI of $100 minus the offsettable loss of 
$22.75).
* * * * *
    (j) * * *
    (2) * * *
    (iii) Substitute the term ``life consolidated net operating loss 
and consolidated operations loss carryovers'' for ``nonlife 
consolidated net operating loss'', and ``paragraph (g)'' for 
``paragraph (f)''.
    (3) Examples. The following examples illustrate the principles of 
this paragraph (j). In the examples, L indicates a life company, S is a 
nonlife insurance company, another letter indicates a nonlife company 
that is not an insurance company, no company has farming losses (within 
the meaning of section 172(b)(1)(B)(ii)), and each corporation uses the 
calendar year as its taxable year.
    (i) Example 1. P, S, L1 and L2 constitute a group that elects under 
section 1504(c)(2) to file a consolidated return for 2021. In 2021, the 
nonlife subgroup consolidated taxable income is $100 and there is $20 
of nonlife consolidated net capital loss that cannot be carried back 
under paragraph (f) of this section to taxable years (whether 
consolidated or separate) preceding 2021. The nonlife subgroup has no 
carryover from years prior to 2021. The life consolidated net operating 
loss is $150, which under paragraph (g) of this section includes life 
consolidated capital gain net income of $25. Since life consolidated 
capital gain net income is zero for 2021 (see paragraph (h)(3)(iii) of 
this section), the nonlife capital loss offset is zero (see paragraph 
(h)(3)(ii) of this section). However, $100 of life consolidated net 
operating loss sets off the $100 nonlife consolidated taxable income in 
2021. The life subgroup carries under paragraph (g)(2) of this section 
to 2022 $50 of the life consolidated net operating loss ($150 minus 
$100). The $50 carryover will be used in 2022 (subject to the 
limitation in section 172(a)) against life subgroup income before it 
may be used in 2022 to setoff nonlife consolidated taxable income.
    (ii) Example 2. The facts are the same as in paragraph (j)(3)(i) of 
this section, except that, for 2021, the nonlife consolidated taxable 
income is $150 (this amount is entirely attributable to S and includes 
nonlife consolidated capital gain net income of $50), consolidated 
LICTI is $200, and a life consolidated net capital loss is $50. The $50 
life consolidated net capital loss sets off the $50 nonlife 
consolidated capital gain net income. Consolidated taxable income under 
paragraph (e) of this section is $300 (nonlife consolidated taxable 
income ($150) minus the setoff of the life consolidated net capital 
loss ($50), plus consolidated LICTI ($200)).
    (iii) Example 3. The facts are the same as in paragraph (j)(3)(ii) 
of this section, except that, for 2022, the nonlife consolidated net 
operating loss is $150. This entire amount is attributable to S; thus, 
it is eligible to be carried back to 2021 against nonlife consolidated 
taxable income under paragraph (f)(2) of this section and Sec.  1.1502-
21(b). If P, the agent for the group within the meaning of Sec.  
1.1502-77, does not elect to relinquish the carryback under section 
172(b)(3), the entire $150 will be carried back, reducing 2021 nonlife 
consolidated taxable income to zero and nonlife consolidated capital 
gain net income to zero. Under paragraph (h)(3)(xii) of this section, 
the setoff in 2021 of the nonlife consolidated capital gain net income 
($50) by the life consolidated net capital loss ($50) is restored. 
Accordingly, the 2021 life consolidated net capital loss may be carried 
over by the life subgroup to 2022. Under paragraph (e) of this section, 
after the carryback, consolidated taxable income for 2021 is $200 
(nonlife consolidated taxable income ($0) plus consolidated LICTI 
($200)).
    (iv) Example 4. The facts are the same as in paragraph (j)(3)(iii) 
of this section, except that P elects under section 172(b)(3) to 
relinquish the carryback of $150 arising in 2022. The setoff in Example 
2 is not restored. However, the offsettable nonlife consolidated net 
operating loss for 2022 (or that may be carried over from 2022) is 
zero. See paragraph (h)(3)(viii) of this section. Nevertheless, the 
$150 nonlife consolidated net operating loss may be

[[Page 67988]]

carried over to be used by the nonlife group.
    (v) Example 5. P owns all of the stock of S1 and of L1. On January 
1, 2017, L1 purchases all of the stock of L2. For 2021, the group 
elects under section 1504(c)(2) to file a consolidated return. For 
2021, L1 is an eligible corporation under paragraph (b)(12) of this 
section but L2 is ineligible. Thus, L1 but not L2 is a member for 2021. 
For 2021, L2 sustains a net operating loss, which cannot be carried 
back (see section 172(b)). For 2021, L2 is treated under paragraph 
(d)(6) of this section as a member of a controlled group of 
corporations under section 1563 with P, S, and L1. For 2022, L2 is 
eligible and is included on the group's consolidated return. L2's net 
operating loss for 2021 that may be carried to 2022 is not treated 
under paragraph (b)(11) of this section as having been sustained in a 
separate return limitation year for purposes of computing consolidated 
LICTI of the L1-L2 life subgroup for 2022. Furthermore, the portion of 
L2's net operating loss not used under paragraph (g)(2) of this section 
against life subgroup income in 2022 may be included in offsettable 
life consolidated net operating loss under paragraph (j)(2) and 
(h)(3)(i) of this section that reduces in 2022 nonlife consolidated 
taxable income (subject to the limitation in section 172(a)) because 
L2's loss in 2021 was not sustained in a separate return limitation 
year under paragraph (j)(2) and (h)(3)(ix)(A) of this section or in a 
separate return year (2021) when an election was in effect under 
neither section 1504(c)(2) nor section 243(b)(3).
* * * * *
    (n) Effective/applicability dates. The rules of this section apply 
to taxable years beginning after December 31, 2020. However, a taxpayer 
may choose to apply the rules of this section to taxable years 
beginning on or before December 31, 2020. If a taxpayer makes the 
choice described in the previous sentence, the taxpayer must apply 
those rules in their entirety and consistently with the provisions of 
subchapter L of the Internal Revenue Code applicable to the years at 
issue.

0
Par. 5. Section 1.1503(d)-4 is amended by:
0
1. In paragraph (c)(3)(iii)(B), removing the period and adding in its 
place a semi-colon.
0
2. In paragraph (c)(3)(iv), removing the period and adding in its place 
``; and''.
0
3. Adding paragraph (c)(3)(v).
    The addition reads as follows:


Sec.  1.1503(d)-4  Domestic use limitation and related operating rules.

* * * * *
    (c) * * *
    (3) * * *
    (v) The SRLY limitation is applied without regard to Sec.  1.1502-
21(c)(1)(i)(E) (section 172(a) limitation applicable to a SRLY member).
* * * * *

0
Par. 6. Section 1.1503(d)-8 is amended by adding paragraph (b)(8) to 
read as follows:


Sec.  1.1503(d)-8  Effective dates.

* * * * *
    (b) * * *
    (8) Rule providing that SRLY limitation applies without regard to 
Sec.  1.1502-21(c)(1)(i)(E). Section 1.1503(d)-4(c)(3)(v) applies to 
any period to which Sec.  1.1502-21(c)(1)(i)(E) applies.

Sunita Lough,
Deputy Commissioner for Services and Enforcement.
    Approved: September 29, 2020.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2020-22974 Filed 10-23-20; 11:15 am]
BILLING CODE 4830-01-P