Internal Revenue Bulletin 1996-31 (PDF rendition): IRS Notices

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INCOME TAX
Rev. Rul. 96–35, page 4.
Low-income housing tax credit.Assistance provided by
the Federal Emergency Management Agency to the owner
of property that is damaged by a disaster will not result in
a reduction of the eligible basis of the property under
section 42(d)(5), or the recharacterization of the property
under section 42(i)(2) as federally subsidized.
T.D. 8678, page 11.
CO–25–96, page 30.
Temporary and proposed regulations under section 1502
of the Code relate to the limitations on net operating loss
carryforwards and certain built-in losses and credits follow-
ing an ownership change. A public hearing on the pro-
posed regulations will be held on October 17, 1996.
T.D. 8679, page 4.
CO–26–96, page 31.
Final, temporary, and proposed regulations under section
382 of the Code relate to limitations on net operating loss
carryforwards and certain built-in losses following an own-
ership change in short taxable years and with respect to
controlled groups. A public hearing on the proposed
regulations will be held on October 17, 1996.
FI–28–96, page 33.
Proposed regulations under section 148 of the Code relate
to the arbitrage restrictions applicable to tax-exempt bonds
issued by state and local governments. A public hearing
will be held on October 24, 1996.
FI–48–95, page 36.
Proposed regulations under section 171 of the Code relate
to the federal tax treatment of bond premium and bond
issuance premium. A public hearing will be held on October
23, 1996.
EMPLOYEE PLANS
Notice 96–38, page 29.
Guidelines are set forth for determining for July 1996 the
weighted average interest rate and the resulting permis-
sible range of interest rates used to calculate current
liability for purposes of the full funding limitation of section
412(c)(7) of the Code as amended by the Omnibus Budget
Reconciliation Act of 1987 and by the Uruguay Round
Agreements Act (GATT).
EXEMPT ORGANIZATIONS
Announcement 96–68, page 45.
A list is given of organizations now classified as private
foundations.
ADMINISTRATIVE
Notice 96–37, page 29.
This notice explains the procedure for claiming a refund
based on
United States v. IBM, 64 U.S.L.W. 4419 (1996).
Finding Lists begin on page 49.
Announcement of Disbarments and Suspensions begins on page 47.
Bulletin No. 1996–31
July 29, 1996
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be relied
upon as authoritative interpretations.

Mission of the Service
The purpose of the Internal Revenue Service is to
collect the proper amount of tax revenue at the least
cost; serve the public by continually improving the
quality of our products and services; and perform in a
manner warranting the highest degree of public
confidence in our integrity, efficiency and fairness.
Statement of Principles
of Internal Revenue
Tax Administration
The function of the Internal Revenue Service is to
administer the Internal Revenue Code. Tax policy
for raising revenue is determined by Congress.
With this in mind, it is the duty of the Service to
carry out that policy by correctly applying the laws
enacted by Congress; to determine the reasonable
meaning of various Code provisions in light of the
Congressional purpose in enacting them; and to
perform this work in a fair and impartial manner,
with neither a government nor a taxpayer point of view.
At the heart of administration is interpretation of the
Code. It is the responsibility of each person in the
Service, charged with the duty of interpreting the
law, to try to find the true meaning of the statutory
provision and not to adopt a strained construction in
the belief that he or she is ‘‘protecting the revenue.’’
The revenue is properly protected only when we as-
certain and apply the true meaning of the statute.
The Service also has the responsibility of applying
and administering the law in a reasonable,
practical manner. Issues should only be raised by
examining officers when they have merit, never
arbitrarily or for trading purposes. At the same
time, the examining officer should never hesitate
to raise a meritorious issue. It is also important
that care be exercised not to raise an issue or to
ask a court to adopt a position inconsistent with
an established Service position.
Administration should be both reasonable and
vigorous. It should be conducted with as little
delay as possible and with great courtesy and
considerateness. It should never try to overreach,
and should be reasonable within the bounds of law
and sound administration. It should, however, be
vigorous in requiring compliance with law and it
should be relentless in its attack on unreal tax
devices and fraud.
2

Introduction
The Internal Revenue Bulletin is the authoritative instru-
ment of the Commissioner of Internal Revenue for
announcing official rulings and procedures of the Inter-
nal Revenue Service and for publishing Treasury Deci-
sions, Executive Orders, Tax Conventions, legislation,
court decisions, and other items of general interest. It is
published weekly and may be obtained from the Superin-
tendent of Documents on a subscription basis. Bulletin
contents of a permanent nature are consolidated semi-
annually into Cumulative Bulletins, which are sold on a
single-copy basis.
It is the policy of the Service to publish in the Bulletin all
substantive rulings necessary to promote a uniform
application of the tax laws, including all rulings that
supersede, revoke, modify, or amend any of those
previously published in the Bulletin. All published rulings
apply retroactively unless otherwise indicated. Proce-
dures relating solely to matters of internal management
are not published; however, statements of internal
practices and procedures that affect the rights and
duties of taxpayers are published.
Revenue rulings represent the conclusions of the Ser-
vice on the application of the law to the pivotal facts
stated in the revenue ruling. In those based on positions
taken in rulings to taxpayers or technical advice to
Service field offices, identifying details and information
of a confidential nature are deleted to prevent unwar-
ranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not
have the force and effect of Treasury Department
Regulations, but they may be used as precedents.
Unpublished rulings will not be relied on, used, or cited
as precedents by Service personnel in the disposition of
other cases. In applying published rulings and proce-
dures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be consid-
ered, and Service personnel and others concerned are
cautioned against reaching the same conclusions in
other cases unless the facts and circumstances are
substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on
provisions of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows:
Subpart A, Tax Conventions, and Subpart B, Legislation
and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and
Subparts. Also included in this part are Bank Secrecy
Act Administrative Rulings. Bank Secrecy Act Administra-
tive Rulings are issued by the Department of the
Treasury’s Office of the Assistant Secretary (Enforce-
ment).
Part IV.—Items of General Interest.
With the exception of the Notice of Proposed Rulemak-
ing and the disbarment and suspension list included in
this part, none of these announcements are consoli-
dated in the Cumulative Bulletins.
The first Bulletin for each month includes an index for
the matters published during the preceding month.
These monthly indexes are cumulated on a quarterly and
semiannual basis, and are published in the first Bulletin
of the succeeding quarterly and semi-annual period,
respectively.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents U.S. Government Printing Office, Washington, D.C. 20402.
3

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 42.—Low-Income Housing
Credit
Low-income housing tax credit.As-
sistance provided by the Federal Emer-
gency Management Agency to the
owner of property that is damaged by a
disaster will not result in a reduction of
the eligible basis of the property under
section 42(d)(5), or the recharacteriza-
tion of the property under section
42(i)(2) as federally subsidized.
Rev. Rul. 96–35
ISSUES
(1)
If a qualified low-income building
is damaged by a disaster and a below-
market loan is provided by the Federal
Emergency Management Agency
(FEMA) to the owner of the building to
repair, reconstruct, or restore the building
to its pre-casualty condition, does the
loan cause the building to be character-
ized as federally subsidized under
§ 42(i)(2) of the Internal Revenue Code?
(2) If a qualified low-income building
is damaged by a disaster and a grant is
provided by FEMA to the owner of the
building to repair, reconstruct, or restore
the building to its pre-casualty condi-
tion, does the grant require the owner to
reduce the building’s eligible basis un-
der § 42(d)(5) to the extent of the
FEMA grant?
FACTS
Taxpayer,T, owns and operates a new
qualified low-income building (as de-
fined in § 42(c)(2)) that qualified for
the 70-percent present value credit under
§ 42(b)(2)(B)(i). The building was par-
tially destroyed by a hurricane during
the building’s 15-year compliance period
(as defined in § 42(i)(1)). The President
declared the area affected by the hurri-
cane a major disaster area, making
available assistance through FEMA.T
received a FEMA below-market loan
and a grant thatTused to restore the
building to its pre-casualty condition.
LAW AND ANALYSIS
Section 42 provides a tax credit for
investment in qualified low-income
buildings placed in service after Decem-
ber 31, 1986. For any taxable year in a
10-year credit period, the amount of
credit is equal to the applicable percent-
age of the qualified basis of each quali-
fied low-income building.
For a qualified low-income building
placed in service after 1987, the term
‘‘applicable percentage’’ means the per-
centage that will yield over a 10-year
period amounts of credit that have a
present value equal to: (i) 70 percent of
the qualified basis of new buildings that
are not federally subsidized for the
taxable year (70-percent present value
credit), and (ii) 30 percent of the quali-
fied basis of existing buildings, and of
new buildings that are federally subsi-
dized for the taxable year (30-percent
present value credit).
Under § 42(i)(2)(A), a new building
is federally subsidized for any taxable
year if, at any time during the taxable
year or any prior taxable year, there is
or was outstanding any below-market
federal loan, the proceeds of which were
used (directly or indirectly) for the
building or its operation.
Under § 42(c), the qualified basis of
any qualified low-income building for
any taxable year is an amount equal to
the applicable fraction (defined in
§ 42(c)(1)(B)) of the eligible basis of the
building. Section 42(d)(5) provides that
if, during any taxable year of the compli-
ance period, a federal grant is used for a
building or its operation, the eligible
basis of the building for the taxable year
and all succeeding taxable years is re-
duced to the extent of the federal grant.
The rules of § 42(i)(2) and § 42(d)(5)
limit the low-income housing credit if
federally subsidized loans or federal
grants are used to finance a building or
meet the operating costs of the building.
If a building is damaged in a federally
declared disaster, however, FEMA assis-
tance does not substitute for funds that
were used to determine the building’s
basis nor is it used to meet operating
costs of the building. Rather, FEMA
funds merely help to restore the status of
the building to its pre-casualty condition.
FEMA funds provide no additional fed-
eral benefit to taxpayers that § 42(i)(2)
and § 42(d)(5) were intended to limit.
Furthermore, reducing the amount of the
credit available under § 42 would place
the owner of a qualified low-income
building at a disadvantage compared with
other building owners using FEMA funds.
Therefore, the amount of credit available
to a building will not be affected under
§ 42(i)(2) and § 42(d)(5) by the building
owner’s use of FEMA assistance.
HOLDING
(1) A below-market loan provided by
FEMA to the owner of a qualified
low-income building damaged by a di-
saster to repair, reconstruct, or restore
the building to its pre-casualty condition
does not result in characterizing the
building as federally subsidized under
§ 42(i)(2).
(2) A grant provided by FEMA to the
owner of a qualified low-income hous-
ing building damaged by a disaster does
not cause a reduction of the building’s
eligible basis under § 42(d)(5) to the
extent that the grant funds are used to
repair, reconstruct, or restore the build-
ing to its pre-casualty condition.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Christopher J. Wilson of the
Office of Assistant Chief Counsel
(Passthroughs and Special Industries).
For further information regarding this
revenue ruling contact Mr. Wilson on
(202) 622–3040 (not a toll-free call).
Section 382.—Limitations on Net
Operating Loss Carryforwards and
Certain Built-In Losses Following
Ownership Change
26 CFR 1.382–8T: Controlled groups (temporary).
T.D. 8679
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Regulations Under Section 382 of
the Internal Revenue Code of 1986;
Application of Section 382 in Short
Taxable Years and With Respect to
Controlled Groups
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains fi-
nal and temporary regulations relating to
limitations on net operating loss car-
ryforwards and certain built-in losses
following an ownership change and
comply with the statutory direction un-
der section 382(m) of the Internal Rev-
enue Code to prescribe regulations con-
cerning short taxable years and
controlled groups. This document also
contains amendments relating to the end
of separate tracking of the stock owner-
ship of loss corporations that cease to
exist following a merger or similar
transaction. The text of these temporary
4

regulations also serves as the text of the
proposed regulations set forth in CO–
26–96, page 31, in this issue of the
Bulletin.
DATES: These regulations are effective
Thursday, June 27, 1996.
For dates of application and special
transition rules, see Effective Dates un-
der SUPPLEMENTARY INFORMA-
TION.
FOR FURTHER INFORMATION
CONTACT: David B. Friedel at (202)
622– 7550 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in these temporary regulations
has been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork Reduc-
tion Act (44 U.S.C. 3507) under the
control number 1545– 1434. Section
1.382–8T(h) requires a response from
certain corporations that are members of
controlled groups. The IRS requires this
information to assure compliance with
section 382(m)(5) so that the value of a
loss corporation that is a member of a
controlled group is not taken into ac-
count more than once in computing a
section 382 limitation. Responses to this
collection of information are required to
obtain a benefit (relating to the restora-
tion of value for section 382 purposes).
An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless the collection of information dis-
plays a valid control number.
For further information concerning
this collection of information, and where
to submit comments on the collection of
information and the accuracy of the
estimated burden, and suggestions for
reducing this burden, please refer to the
preamble to CO–26–96, page 31, in this
issue of the Bulletin.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become ma-
terial in the administration of any Inter-
nal Revenue law. Generally, tax returns
and tax return information are confiden-
tial, as required by 26 U.S.C. 6103.
Background and Explanation of Provi-
sions
On February 4, 1991, the IRS and
Treasury issued three notices of pro-
posed rulemaking, CO–132–87 (56 FR
4194), CO–077–90 (56 FR 4183), and
CO–078–90 (56 FR 4228), setting forth
rules regarding the application of sec-
tions 382 and 383 by consolidated
groups and by controlled groups, and
the carryover and carryback of losses to
consolidated and separate return years.
For reasons explained in the preamble
to TD 8678 (page 11 in this issue of the
Bulletin), the IRS and Treasury are
issuing temporary amendments concern-
ing the limitations on net operating loss
carryforwards and certain built-in losses
and credits following an ownership
change of a consolidated group. The
temporary regulations contained in this
Treasury decision complement those
other temporary regulations. They assure
that the members of a controlled group
cannot duplicate value in computing
their respective section 382 limitations,
a result not permitted to members of a
group filing consolidated returns. See
§ 1.1502–93T.
These temporary regulations are sub-
stantially identical to the rules proposed
on January 29, 1991. One provision
(relating to the effects of successive
ownership changes) was moved from
the consolidated return regulations to the
section 382 regulations to clarify that it
is applicable to all corporations. These
temporary amendments do not address
the numerous comments on the pro-
posed regulations. Many of these com-
ments are still under consideration.
Effective Dates
The temporary amendments are gen-
erally effective as of January 1, 1997.
The final rules relating to the value of
stock added to § 1.382–2(a)(3)(i) and
the temporary rules in § 1.382–
2T(f)(1)(ii) (relating to the end of sepa-
rate tracking of certain loss corpora-
tions) are generally effective as of Janu-
ary 29, 1991. The temporary rules in
§ 1.382–5T (relating generally to short
taxable years and successive ownership
changes) generally apply to loss corpo-
rations that have an ownership change
to which section 382(a), as amended by
the Tax Reform Act of 1986, applies.
Special Analysis
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in EO 12866.
Therefore, a regulatory assessment is not
required. It has also been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) and
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) do not apply to these regula-
tions, and, therefore, a Regulatory Flex-
ibility Analysis is not required. Pursuant
to section 7805(f) of the Internal Rev-
enue Code, the notice of proposed
rulemaking preceding these regulations
were sent to the Small Business Admin-
istration for comment on their impact on
small business.
Drafting Information
The principal author of the temporary
regulations is David B. Friedel of the
Office of Assistant Chief Counsel (Cor-
porate), IRS. Other personnel from the
IRS and Treasury participated in their
development.
Adoption of Amendments to the Regula-
tions
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for Part 1 is amended by removing the
entries for ‘‘1.382–2’’ and ‘‘1.382–2T’’
and adding entries in numerical order to
read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.382–2 also issued under 26
U.S.C. 382(k)(1), (l)(3), (m), and 26
U.S.C. 383.
Section 1.382–2T also issued under
26 U.S.C. 382(g)(4)(C), (i), (k)(1) and
(6), (l)(3), (m), and 26 U.S.C. 383.* * *
Section 1.382–5T also issued under
26 U.S.C. 382(m).* * *
Section 1.382–8T also issued under
26 U.S.C. 382(m).* * *
Par. 2. Section 1.382–1 is amended
by:
a. Adding an entry for § 1.382–2,
paragraph (a)(1)(iv).
b. Revising the entry for § 1.382–2,
paragraph (a)(3)(i).
c. Adding entries for § 1.382–2T,
paragraphs (f)(1)(i) through (f)(1)(iii).
d. Adding entries for §§ 1.382–5T
and 1.382–8T.
§ 1.382–1 Table of contents.
* * * * *
§ 1.382–2 General rules for ownership
change.
(a) * * *
(1) * * *
5

(iv) End of separate accounting for
losses and credits of distributor or
transferor loss corporation.
* * * * *
§ 1.382–2T Definition of ownership
change under section 382, as amended
by the Tax Reform Act of 1986 (tempo-
rary).
* * * * *
(f) * * *
(1) * * *
(i) In general.
(ii) End of separate accounting for
losses and credits of distributor or
transferor loss corporation.
(iii) Application to other successor
corporations.
* * * * *
§ 1.382–5T Section 382 limitation (tem-
porary).
(a) Scope.
(b) Computation of value.
(c) Short taxable year.
(d) Successive ownership changes
and absorption of a section 382 limita-
tion.
(1) In general.
(2) Recognized built-in gains and
losses.
(3) Effective date.
(e) Controlled groups.
(f) Effective date.
* * * * *
§ 1.382–8T Controlled groups (tempo-
rary).
(a) Introduction.
(b) Controlled group loss and con-
trolled group with respect to a con-
trolled group loss.
(c) Computation of value.
(1) Reduction in value.
(2) Restoration of value.
(3) Reduction in value by the amount
restored.
(4) Appropriate adjustments.
(5) Certain reductions in the value of
members of a controlled group.
(d) No double reduction.
(e) Definitions and nomenclature.
(1) Definitions in Section 382 and the
regulations thereunder.
(2) Controlled group.
(3) Component member.
(4) Predecessor and successor corpo-
ration.
(f) Coordination between consoli-
dated groups and controlled groups.
(g) Examples.
(h) Time and manner of filing elec-
tion to restore.
(1) Statement required.
(2) Revocation of election.
(3) Filing by component member.
(i) [Reserved]
(j) Effective date.
(1) In general.
(2) Transition rule.
(i) In general.
(ii) Special transition rules for con-
trolled groups that had ownership
changes before January 29, 1991.
(3) Amended returns.
Par. 3. Section 1.382–2 is amended as
follows:
a The first sentence of paragraph
(a)(1)(iii) is amended by removing the
language ‘‘Pre-change losses’’ and add-
ing ‘‘Except as provided in § 1.382–
2T(f)(1)(ii), pre-change losses’’ in its
place.
b Paragraph (a)(1)(iv) is added.
c The text of § 1.382–2T(f)(18)(i) is
redesignated as the text of § 1.382–
2(a)(3)(i).
d Newly designated paragraph
(a)(3)(i) is amended by adding three
sentences at the end.
The additions read as follows:
§ 1.382–2 General rules for ownership
change.
(a) * * *
(1) * * *
(iv)End of separate accounting for
losses and credits of distributor or
transferor loss corporation.For further
guidance, see § 1.382–2T(f)(1)(ii).
* * * * *
(3) * * * (i) * * * Solely for
purposes of determining the percentage
of stock owned by a person, each share
of all the outstanding shares of stock
that have the same material terms is
treated as having the same value. Thus,
for example, a control premium or
blockage discount is disregarded in de-
termining the percentage of stock owned
by any person. The previous two sen-
tences of this paragraph (a)(3)(i) apply
to any testing date occurring on or after
January 29, 1991.
* * * * *
Par. 4. Section 1.382–2T is amended
as follows:
(a) Paragraph (e)(2)(iv)Example (1)
is amended by removing the last sen-
tence.
(b) Paragraph (e)(2)(iv)Example
(2)(ii)is amended by adding a sentence
at the end.
(c) Paragraph (e)(2)(iv)Example
(2)(iii)is amended by removing the
language ‘‘, but must be separately
accounted for under § 1.382–2(a)(1)(iii)
of this section’’ from the last sentence.
(d) The text following the heading of
paragraph (f)(1) is designated as para-
graph (f)(1)(i) and a heading for newly
designated paragraph (f)(1)(i) is added.
(e) Paragraphs (f)(1)(ii) and (f)(1)(iii)
are added.
(f) Paragraph (f)(4) is amended by
removing the word ‘‘loss’’ and by add-
ing two sentences at the end.
(g) Paragraph (f)(5) is amended by
adding two sentences at the end.
(h) A sentence is added after the
heading of paragraph (f)(18)(i).
(i) Paragraph (h)(2)(i)(A) is amended
by adding the language ‘‘and solely for
the purposes of determining whether a
loss corporation has an ownership
change’’ immediately after ‘‘except as
otherwise provided in this section,’’.
The additions read as follows:
§ 1.382–2T Definitions of ownership
change under section 382, as amended
by the Tax Reform Act of 1986 (tempo-
rary).
* * * * *
(e) * * *
(2) * * *
(iv) * * *
Example (2)* * *
(ii) * * * See paragraph (f)(1)(ii) of
this section for rules that end separate
accounting for L
1
’s pre-change losses on
any testing date occurring on or after
January 29, 1991.
(f) * * *
(1) * * *
(i)In general.* * *
(ii)End of separate accounting for
losses and credits of distributor or
transferor loss corporation.The separate
tracking of owner shifts of the stock of
an acquiring corporation required by
§ 1.382–2(a)(1)(iii) with respect to the
net operating loss carryovers and other
attributes described in § 1.382–
2(a)(1)(ii) ends when a fold-in event
occurs. A fold-in event is either an
ownership change of the distributor or
transferor corporation in connection
with, or after, the transaction to which
section 381(a) applies, or a period of 5
consecutive years following the section
381(a) transaction during which the dis-
tributor or transferor corporation has not
had an ownership change. Starting on
the day after the earlier of the change
date (but not earlier than the day of the
section 381(a) transaction) or the last
day of the 5 consecutive year period, the
losses and other attributes of the dis-
tributor or transferor corporation are
6

treated as losses and attributes of the
acquiring corporation for purposes of
determining whether an ownership
change occurs with respect to such
losses. Also, for purposes of determining
the beginning of the acquiring corpora-
tion’s testing period, such losses are
considered to arise either in a taxable
year that begins not earlier than the later
of the day following the change date or
the day of the section 381(a) transaction,
or in a taxable year that begins 3 years
before the end of the 5 consecutive year
period. Pre-change losses of a distributor
or transferor corporation that are subject
to a limitation under section 382 con-
tinue to be subject to the limitation
notwithstanding the occurrence of a
fold-in event. Any ownership change
that occurs in connection with, or subse-
quent to, the section 381 transaction
may result in an additional, lesser limi-
tation with respect to such pre-change
losses. This paragraph (f)(1)(ii) applies
to any testing date occurring on or after
January 29, 1991.
(iii)Application to other successor
corporations.Section 1.382–2(a)(1) (re-
lating to the definition of loss corpora-
tion) and this paragraph (f)(1) also ap-
ply, as the context may require, to
successor corporations other than suc-
cessors in section 381(a) transactions.
For example, if a corporation receives
assets from the loss corporation that
have basis in excess of value, the recipi-
ent corporation’s basis for the assets is
determined, directly or indirectly, in
whole or in part, by reference to the loss
corporation’s basis, and the amount by
which basis exceeds value is material,
the recipient corporation is a successor
corporation subject to § 1.382–2(a)(1)
and this paragraph (f)(1). This paragraph
(f)(1)(iii) applies to any testing date
occurring on or after January 1, 1997.
* * * * *
(4)Successor corporation.* * * A
successor corporation also includes, as
the context may require, a corporation
which receives an asset or assets from
another corporation if the corporation’s
basis for the asset(s) is determined,
directly or indirectly, in whole or in
part, by reference to the other corpora-
tion’s basis and the amount by which
basis differs from value is, in the aggre-
gate, material. The previous sentence of
this paragraph (f)(4) applies to any
testing date occurring on or after Janu-
ary 1, 1997.
(5)Predecessor corporation.* * * A
predecessor corporation also includes, as
the context may require, a corporation
which transfers an asset or assets to
another corporation if the transferee’s
basis for the asset(s) is determined,
directly or indirectly, in whole or in
part, by reference to the corporation’s
basis and the amount by which basis
differs from value is, in the aggregate,
material. The previous sentence of this
paragraph (f)(5) applies to any testing
date occurring on or after January 1,
1997.
* * * * *
(18) * * * (i) * * * For further
guidance, see § 1.382–2(a)(3)(i).
* * * * *
Par. 5. Sections 1.382–5T and
1.382–8T are added to read as follows:
§ 1.382–5T Section 382 limitation (tem-
porary).
(a)Scope.Following an ownership
change, the section 382 limitation for
any post-change year is an amount equal
to the value of the loss corporation
multiplied by the long-term tax- exempt
rate that applies with respect to the
ownership change, and adjusted as re-
quired by section 382 and the regula-
tions thereunder. See, for example, sec-
tion 382(b)(2) (relating to the
carryforward of unused section 382
limitation), section 382(b)(3)(B) (relat-
ing to the section 382 limitation for the
post-change year that includes the
change date), section 382(m)(2) (relating
to short taxable years), and section
382(h) (relating to recognized built-in
gains and section 338 gains).
(b)Computation of value.[Reserved]
(c)Short taxable year.The section
382 limitation for any post-change year
that is less than 365 days is the amount
that bears the same ratio to the section
382 limitation determined under section
382(b)(1) as the number of days in the
post-change year bears to 365. The
section 382 limitation, as so determined,
is adjusted as required by section 382
and the regulations thereunder. This
paragraph (c) does not apply to a 52–53
week taxable year that is less than 365
days unless a return is required under
section 443 (relating to short periods)
for such year.
(d)Successive ownership changes
and absorption of a section 382 limita-
tion—(1)In general.If a loss corpora-
tion has two (or more) ownership
changes, any losses attributable to the
period preceding the earlier ownership
change are treated as pre-change losses
with respect to both ownership changes.
Thus, the later ownership change may
result in a lesser (but never in a greater)
section 382 limitation with respect to
such losses. In any case, the amount of
taxable income for any post-change year
that can be offset by pre-change losses
may not exceed the section 382 limita-
tion for such ownership change, reduced
by the amount of taxable income offset
by pre-change losses subject to any
earlier ownership change(s).
(2)Recognized built-in gains and
losses.[Reserved]
(3)Effective date.This paragraph (d)
applies to taxable years of a loss corpo-
ration beginning on or after January 1,
1997.
(e)Controlled groups.See § 1.382–
8T for rules for determining the value of
a loss corporation that is a member of a
controlled group.
(f)Effective date.Except as otherwise
provided, this section applies to a loss
corporation that has an ownership
change to which section 382(a), as
amended by the Tax Reform Act of
1986, applies.
§ 1.382–8T Controlled groups (tempo-
rary).
(a)Introduction.This section pro-
vides rules to adjust the value of a loss
corporation that is a member of a con-
trolled group of corporations on a
change date so that the same value is
not included more than once in comput-
ing the limitations under section 382 for
the loss corporations that are members
of the controlled group. In general, the
adjustment is made under paragraph (c)
of this section by reducing the value of
the loss corporation by the value of the
stock of each component member of the
controlled group that the loss corpora-
tion owns immediately after the owner-
ship change. The loss corporation’s
value may, however, be increased under
paragraph (c) of this section by any
amount of value that the other member
elects to restore to the loss corporation.
(b)Controlled group loss and con-
trolled group with respect to a con-
trolled group loss.A controlled group
loss is a pre-change loss (or a net
unrealized built-in loss) of a loss corpo-
ration that is attributable to a taxable
year of the corporation with respect to
which the corporation is a component
member of a controlled group (as de-
fined by paragraphs (e)(2) and (3) of
this section). The controlled group with
respect to each controlled group loss is
composed of the loss corporation and
each other corporation that is a compo-
7

nent member of a controlled group that
includes the loss corporation both—
(1) With respect to the taxable year
to which the controlled group loss is
attributable; and
(2) On the date the loss corporation
has an ownership change.
(c)Computation of value.For pur-
poses of computing the limitation under
section 382 with respect to each con-
trolled group loss, the value of the stock
of each component member of the con-
trolled group with respect to that loss is
determined immediately before the own-
ership change, and is adjusted by apply-
ing the following rules:
(1)Reduction in value.The value of
the stock of each component member is
reduced by the value (immediately be-
fore the ownership change and without
regard to any restoration of value or
other adjustment under this section) of
the stock of any other component mem-
ber directly owned by the component
member immediately after the owner-
ship change.
(2)Restoration of value.After the
value of the stock of each component
member is reduced pursuant to para-
graph (c)(1) of this section, the value of
the stock of each component member is
increased by the amount of value, if
any, restored to the component member
by another component member (the
electing member) pursuant to this para-
graph (c)(2). The electing member may
elect to restore value to another compo-
nent member in an amount that does not
exceed the lesser of—
(i) The sum of—
(A) The value, determined immedi-
ately before the ownership change, of
the electing member’s stock (after ad-
justment under paragraph (c)(1) of this
section and before any restoration of
value under this paragraph (c)(2)); plus
(B) Any amount of value restored to
the electing member by another compo-
nent member under this paragraph
(c)(2); or
(ii) The value, determined immedi-
ately before the ownership change, of
the electing member’s stock (without
regard to any adjustment under this
section) that is directly owned by the
other component member immediately
after the ownership change.
(3)Reduction in value by the amount
restored.The value of the stock of the
electing member is reduced by any
amount of value that the electing mem-
ber elects to restore under paragraph
(c)(2) of this section to another compo-
nent member.
(4)
Appropriate adjustments.Appro-
priate additional adjustments consistent
with paragraphs (c)(1), (2), and (3) of
this section must be made to prevent any
duplication of value. Thus, for example,
adjustments must be made to reflect—
(i) Any indirect ownership interest in
another component member;
(ii) Any cross ownership of stock by
component members of the controlled
group with respect to the controlled
group loss; and
(iii) Any value used to determine a
limitation under section 382 with respect
to controlled group losses from the same
period.
(5)Certain reductions in the value of
members of a controlled group.A loss
corporation that has an ownership
change is required to make adjustments
consistent with this paragraph (c) with
respect to its stock if the stock of
another corporation in which it had a
direct or indirect ownership interest was
disposed of before the ownership
change, and;
(i) Both corporations were component
members of a controlled group—
(A) With respect to a taxable year to
which a controlled group loss of the loss
corporation is attributable; and
(B) At any time during the 2 year
period before the ownership change; and
(ii) Both corporations are component
members of a controlled group at any
time during the 2 year period following
the ownership change.
(d)No double reduction.To the ex-
tent consistent with the purposes of this
section, section 382 and this section
shall not be applied to duplicate a
reduction in the value of a loss corpora-
tion. Thus, for example, if the value of a
loss corporation is reduced under section
382(l)(1) to reflect a capital contribution
of stock of a component member, it is
not again reduced by such amount under
paragraph (c)(1) of this section. If this
paragraph (d) applies to prevent a reduc-
tion in value from being duplicated, the
application of the other rules of this
section, such as those relating to the
restoration of value, is correspondingly
limited in a manner consistent with the
principles of this section.
(e)Definitions and nomenclature—
(1)Definitions in section 382 and the
regulations thereunder.Except as other-
wise provided, the definitions and no-
menclature contained in section 382 and
the regulations thereunder apply to this
section.
(2)Controlled group.Controlled
group has the same meaning as in
section 1563(a), determined by substitut-
ing ‘‘50 percent’’ for ‘‘80 percent’’ each
place that it appears, and without regard
to section 1563(a)(4).
(3)Component member.Component
member has the same meaning as in
section 1563(b), determined by substitut-
ing ‘‘December 31 (or the change date,
if earlier)’’ for ‘‘December 31’’ each
place it appears, and without regard to
section 1563(b)(2), (b)(3)(C), and (b)(4).
(4)Predecessor and successor corpo-
ration.As the context may require, a
reference to a corporation, or component
member includes a reference to a prede-
cessor or successor corporation.
(f)Coordination between consoli-
dated groups and controlled groups.
Some or all of the component members
of a controlled group may also be
members of a consolidated group, and a
controlled group loss may be subject to
a consolidated section 382 limitation or
subgroup section 382 limitation deter-
mined under § 1.1502–93T. Except as
otherwise provided in this paragraph (f)
and §§ 1.1502–91T through 1.1502–
99T, § 1.1502–93T applies instead of
this section when both sections, by their
terms, are otherwise applicable. This
section is applicable and may require an
adjustment to value if a member of a
consolidated group, a loss group, or a
loss subgroup (as those terms are de-
fined in §§ 1.1502–1(h) and 1.1502–
91T) is also a component member of a
controlled group with respect to a con-
trolled group loss. Solely for purposes
of applying this section, a consolidated
group, loss group, or loss subgroup is
treated as a single corporation. Thus to
determine the limitation with respect to
any portion of the pre-change consoli-
dated attributes or pre-change subgroup
attributes of the loss group or loss
subgroup that is a controlled group loss,
the consolidated section 382 limitation
or subgroup section 382 limitation is
computed by treating the loss group or
the loss subgroup as a single corpora-
tion, and adjusting value in accordance
with paragraph (c) of this section. See
paragraph (g) Example 4 of this section.
(g)Examples.For purposes of the
examples in this section, unless other-
wise stated, the nomenclature and as-
sumptions of the examples in § 1.382–
2T(b) apply, all corporations file
separate income tax returns on a calen-
dar year basis, the only 5-percent share-
holder of a corporation is a public
group, and the facts set forth the only
owner shifts with respect to the corpora-
tions during the testing period.
8

Example 1.Controlled group with respect to a
controlled group loss. (a) Public L owns all of the
L stock, L and Public L1 own 30 percent and 70
percent, respectively, of the L1 stock, and L1
owns all of the corporation T stock. L1 has a net
operating loss arising in Year 1 that is carried over
to Year 4. L has a net operating loss arising in
Year 2 that is carried over to Year 4. On August 1,
Year 3, L acquires 30 percent of the stock of L1,
thereby increasing its percentage ownership inter-
est in L1 to 60 percent. On December 1, Year 3,
L1 purchases all of the stock of corporation S
from Public S. On November 1, Year 4, P acquires
all of the L stock. The acquisition by P of all of
the L stock on November 1, Year 4, causes
ownership changes of both L and L1 under the
rules of § 1.382–2T. The following is a graphic
illustration of these facts.
(b)(1) Under paragraph (b) of this section, the
Year 1 net operating loss carryover of L1 is a
controlled group loss because L1 is a component
member of a controlled group with respect to Year
1, the year to which the loss is attributable. L1
and T compose a controlled group with respect to
the net operating loss carryover because L1 and T
are component members of a controlled group
both—
(A) With respect to the taxable year to which
L1’s net operating loss carryover is attributable
(i.e., Year 1); and
(B) On November 1, Year 4, L1’s change date.
Although L and S are component members of L1’s
controlled group on L1’s change date, they are not
component members of the controlled group with
respect to the Year 1 net operating loss carryover
because they were not component members with
respect to the year to which the net operating loss
carryover is attributable.
(2) The value of L1’s stock must therefore be
adjusted in accordance with paragraph (c) of this
section to take into account an adjustment with
respect to the T stock (but not the S stock) in
computing L1’s limitation under section 382 with
respect to its net operating loss carryover.
(c) Although L is a member of a controlled
group composed of L, L1, S, and T on November
1, Year 4, L’s change date, it is not a component
member of a controlled group with respect to Year
2, the taxable year to which its net operating loss
carryover is attributable. Therefore, L’s Year 2 net
operating loss carryover is not a controlled group
loss under paragraph (b) of this section and the
value of L’s stock is not adjusted in accordance
with paragraph (c) of this section to compute L’s
limitation under section 382 with respect to the
Year 2 net operating loss carryover.
Example 2. Adjustments to value of the con-
trolled group members.(a) Since Year 1, A has
owned all of the stock of L, L and B have owned
80 percent and 20 percent, respectively, of the
stock of corporation P, and P and C have owned
75 percent and 25 percent, respectively, of the
stock of L1. L and L1 each has a net operating
loss for the Year 6 taxable year that is carried over
to its respective Year 7 taxable year. On December
1, Year 7, A sells all of the L stock to D. The sale
results in ownership changes of both L and L1.
Immediately before the ownership changes, the
total value of the L1 stock is $40, the total value
of the P stock (including the value of its L1 stock)
is $100, and the total value of the L stock
(including the value of the P stock) is $200. The
following is a graphic illustration of these facts.
(b) Under paragraph (b) of this section, the
Year 6 net operating loss carryovers of each of L
and L1 are controlled group losses because each
of L and L1 is a component member of a
controlled group with respect to Year 6, the year
to which the losses are attributable. L, P, and L1
compose controlled groups with respect to both
Year 6 net operating loss carryovers because L, P,
and L1 are component members of a controlled
group both—
(1) With respect to the taxable years to which
the net operating loss carryovers are attributable
(i.e., Year 6); and
(2) On December 1, Year 7, the change date.
(c) The value of the stock of L1 for purposes of
determining its limitation under section 382 with
respect to its net operating loss carryover from
Year 6 is $40. L1 does not elect to restore any
value to P under paragraph (c)(2) of this section.
(d) The value of the stock of P ($100) is
reduced under paragraph (c)(1) of this section by
the value of the stock of L1 that it directly owns,
$30 (75% x $40). Following the adjustment, the
value of the stock of P is $70. P elects to restore
this entire $70 of value to L.
(e) The value of the stock of L, $200, is
reduced under paragraph (c)(1) of this section by
the value of the stock of P it directly owns, i.e.,
$80 (80% x $100), and increased under paragraph
(c)(2) of this section by the amount P elects to
restore to L, i.e., $70. Thus, the value of the L
stock for purposes of determining L’s limitation
under section 382 with respect to its net operating
loss carryover from Year 6 is $190 ($2002$80 +
$70).
Example 3. Limitation on restoration of value.
(a) The facts are the same as inExample 2, except
that L1 elects to restore $20 to P. For purposes of
determining L1’s limitation under section 382 with
respect to the Year 6 net operating loss carryover,
the value of the stock of L1 is $20 ($402$20)
because the value of its stock is reduced under
paragraph (c)(3) of this section by the $20 of
value it elects to restore to P.
(b) The value of the stock of P ($100) is
reduced under paragraph (c)(1) of this section by
the value of the L1 stock it directly owns ($30),
and is increased under paragraph (c)(2) of this
section by the value that L1 elects to restore to P
($20). Thus, the value of the P stock is $90 ($100
2$30 + $20).
(c)(1) P elects to restore to L the maximum
value permitted under this section. The value of
the stock of L, $200, is reduced under paragraph
(c)(1) of this section by the value of the P stock it
directly owns ($80), and is increased by the value
that P elects to restore to L. P may elect to restore
to L the lesser of—
(A) The sum of the value of its stock immedi-
ately after adjustment under paragraph (c)(1) of
this section (i.e., $70) plus the value restored to it
by L1 (i.e., $20) (a total of $90); or
(B) The value of the P stock (without regard to
the adjustment required by paragraphs (c)(1) and
(2) of this section) that is directly owned by L
immediately before the ownership change (i.e.,
$80).
(2) Thus, $80 is the maximum amount that P
may elect to restore to L. Following the restora-
tion of value by P, the value of the L stock for
purposes of determining L’s limitation under sec-
tion 382 is $200 ($2002$80 + $80).
Example 4. Coordination with consolidated re-
turn regulations.(a) P and its wholly owned
subsidiary L file a consolidated return. L owns 79
percent of the outstanding stock of L1. P acquired
the stock of L in Year 1 and L acquired the stock
of L1 in Year 2. The P consolidated group has a
consolidated net operating loss arising in the Year
6 consolidated return year that is carried over to
Year 8. L1 has a net operating loss arising in its
Year 6 taxable year that is also carried over to
Year 8. On January 1, Year 8, the P consolidated
group has an ownership change under § 1.1502–
92T(b)(1)(i) and L1 has an ownership change
under § 1.382–2T.
(b)(1) Under paragraph (b) of this section, the
Year 6 net operating loss carryover of the P group
is a controlled group loss because P, L, and L1 are
component members of a controlled group with
respect to Year 6, the year to which the loss is
9

attributable. P, L, and L1 compose a controlled
group with respect to the Year 6 net operating loss
carryover of the P loss group because they are
component members of a controlled group both—
(A) With respect to the taxable years to which
the net operating loss carryover is attributable (i.e.,
Year 6); and
(B) On January 1, Year 8, the P group’s change
date. (2) Because P and L compose a loss group
(within the meaning of § 1.1502–91T(c)) with
respect to its Year 6 net operating loss carryover,
the P loss group must compute a consolidated
section 382 limitation with respect to its Year 6
net operating loss carryover as a result of the
ownership change.
(c) In computing the consolidated section 382
limitation under § 1.1502–93T with respect to the
Year 6 net operating loss carryover, the value of
the P stock immediately before the ownership
change is reduced under paragraphs (c)(1) and (f)
of this section by the value immediately before the
ownership change of the L1 stock directly owned
by L immediately after the ownership change. L1
may, however, elect to restore such value to the P
consolidated group to the extent permitted under
paragraph (c)(2) of this section.
Example 5. Appropriate adjustments for indirect
ownership interest.(a) Individual A owns all of
the stock of L, L owns an 80 percent interest in
the capital and profits of partnership PS, and PS
owns 75 percent of the stock of L1. Both L and
L1 have net operating losses for the Year 1 taxable
year that are carried over to their respective Year 2
taxable years. On December 19, Year 2, A sells all
of the L stock to an unrelated individual. The sale
results in an ownership change of L and L1.
(b) Under paragraph (b) of this section, the
Year 1 net operating loss carryovers of each of L
and L1 are controlled group losses because each
of L and L1 is a component member of a
controlled group with respect to Year 1, the year
to which the losses are attributable. L and L1
compose controlled groups with respect to each
corporation’s net operating loss carryovers because
L and L1 are component members of a controlled
group both—
(1) With respect to the taxable years to which
the net operating loss carryovers are attributable
(i.e., Year 1); and
(2) On December 19, Year 2, the change date.
(c) L has an indirect ownership interest in L1
which, under paragraph (c)(4) of this section, must
be taken into account in applying this section. As
a result, the value of the L stock for purposes of
determining its limitation under section 382 with
respect to the Year 1 net operating loss carryover
must be reduced by the value of L’s indirect
ownership interest in the L1 stock (60 percent)
that it owns through PS immediately before the
ownership change, and is increased by the amount
(if any) that L1 elects to restore to L under
paragraph (c)(2) of this section. The value of L1 is
reduced under paragraph (c)(3) of this section to
the extent that L1 elects to restore value to L.
(h)Time and manner of filing elec-
tion to restore—(1)Statement required.
The election to restore value described
in paragraph (c)(2) of this section must
be in the form set forth below. It must
be signed on behalf of both the electing
member and the corporation to which
such value is restored by persons autho-
rized to sign their respective income tax
returns. (The common parent of a con-
solidated group must make the election
on behalf of the group.) It must be filed
by the loss corporation with its income
tax return for the taxable year in which
the ownership change occurs (or with an
amended return for such year filed on or
before the due date (including exten-
sions) of the income tax return of any
component member with respect to the
taxable year in which the ownership
change occurs). The statement must pro-
vide that: ‘‘THIS IS AN ELECTION
UNDER § 1.382– 8T OF THE IN-
COME TAX REGULATIONS TO RE-
STORE ALL OR PART OF THE
VALUE OF [insert name and E.I.N. of
the electing member] TO [insert name
and E.I.N. of the corporation to which
value is restored]. The statement must
also—
(i) Identify the change date for the
loss corporation in connection with
which the election is made;
(ii) State the value of the electing
member’s stock (without regard to any
adjustment under paragraph (c) of this
section) immediately before the owner-
ship change;
(iii) State the amount of any reduc-
tion required under paragraph (c)(1) of
this section with respect to stock of the
electing member that is owned directly
or indirectly by the corporation to which
value is restored;
(iv) State the amount of value that
the electing member elects to restore to
the corporation; and
(v) State whether the value of either
component member’s stock was adjusted
pursuant to paragraph (c)(4) of this
section.
(2)Revocation of election.An elec-
tion made under this section is revo-
cable only with the consent of the
Commissioner.
(3)Filing by component member.An
electing member must attach a copy of
the statement described in paragraph
(h)(1) of this section to its income tax
return (or amended return) for the tax-
able year which includes the change
date in connection with which the elec-
tion is made.
(i) [Reserved]
(j)Effective date—(1)In general.
This section applies to a loss corpora-
tion that has an ownership change with
respect to a controlled group loss on or
after January 1, 1997.
(2)Transition rule—(i)In general.
The members of a controlled group on
January 1, 1997, that have had an
ownership change with respect to a
controlled group loss before January 1,
1997, must determine the limitations
under section 382 for any post-change
year with respect to controlled group
losses by using a reasonable method to
preclude the value of stock of a compo-
nent member that was owned directly or
indirectly by another member immedi-
ately after an ownership change from
being taken into account more than once
in determining the limitations under sec-
tion 382 with respect to controlled
group losses. If such a reasonable
method was not used for a post-change
year, subject to the exception in para-
graph (j)(3) of this section, the members
of the controlled group described in the
preceding sentence must reduce their
limitations under section 382 for post-
change years for which the income tax
return is filed after January 1, 1997, to
recapture, as quickly as possible, any
limitation that members took into ac-
count in excess of the amount that
would be allowable under this section.
(ii)Special transition rule for con-
trolled groups that had ownership
changes before January 29, 1991.For
purposes of this section, in the case of
an ownership change occurring before
January 29, 1991, the controlled group
with respect to a controlled group loss
does not include a corporation that is
not a component member of the con-
trolled group on January 29, 1991. Thus,
in the case of an ownership change
occurring before January 29, 1991, para-
graph (c) of this section does not require
that a loss corporation that is a compo-
nent member of a controlled group to
disregard the value of stock of another
corporation directly owned immediately
after the ownership change in determin-
ing the value of its own stock unless the
other corporation is a component mem-
ber of the controlled group on January
29, 1991.
(3)Amended returns.A taxpayer that
has had an ownership change before
January 1, 1997, may file an amended
return for any taxable year to modify
the amount of a limitation under section
382 with respect to a controlled group
loss only if—
(i) The modification complies with
the rules contained in this section for
computing a limitation under section
382;
(ii) Any other component member of
the controlled group with respect to the
controlled group loss who elects to
restore value and whose taxable income
is affected by the election to restore
value also files amended returns that
comply with such rules; and
10

(iii) Corresponding adjustments are
made in amended returns for all taxable
years ending after December 31, 1986.
PART 602—OMB CONTROL NUM-
BERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 6. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 7. In § 602.101, paragraph (c) is
amended by adding an entry in numeri-
cal order to the table to read as follows:
§ 602.101 OMB Control numbers.
* * * * *
(c) * * *
CFR part or section whereCurrent OMB
identified or describedcontrol No.
* * * * *
1.382.8T . . . . . . . . . . . . . . . . . . 1545–1434
* * * * *
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved May 31, 1996.
Leslie Samuels,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on
June 26, 1996, 8:45 a.m., and published in the
issue of the Federal Register for June 27, 1996, 61
F.R. 33313)
Section 1502.—Regulations
26 CFR 1.1502–91T: Application of section 382
with respect to a consolidated group (temporary).
T.D. 8678
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Regulations Under Section 1502 of
the Internal Revenue Code of 1986;
Limitations on Net Operating Loss
Carryforwards and Certain Built-in
Losses and Credits Following an
Ownership Change of a
Consolidated Group
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Temporary regulations.
SUMMARY: This document contains
temporary regulations regarding the op-
eration of sections 382 and 383 of the
Internal Revenue Code of 1986 (relating
to limitations on net operating loss car-
ryforwards and certain built-in losses
and credits following an ownership
change) with respect to consolidated
groups. The regulations include rules for
determining whether a loss group or a
loss subgroup has an ownership change,
for computing a consolidated section
382 limitation or subgroup section 382
limitation, and for applying sections 382
and 383 to corporations that join or
leave a group. The rules are necessary
to provide guidance to such groups on
the use of certain of their tax attributes.
The text of these temporary regulations
also serves as the text of CO–25–96,
page 30, in this issue of the Bulletin.
DATES: These regulations are effective
Thursday, June 27, 1996.
For dates of application and special
transition rules, see Effective Dates un-
der SUPPLEMENTARY INFORMA-
TION.
FOR FURTHER INFORMATION CON-
TACT: David B. Friedel at (202) 622–
7550 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in the temporary regulations has
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork Reduc-
tion Act (44 U.S.C. 3507) under the
control number 1545–1218. The collec-
tion requires a response from certain
consolidated groups. The IRS requires
the information described in § 1.1502–
95T(e) to assure that a section 382
limitation is properly determined in
cases of corporations that cease to be
members of a group. Responses to this
collection of information are required to
obtain a benefit (relating to the section
382 limition applicable to the departing
member(s)).
An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless the collection of information dis-
plays a valid control number.
For further information concerning
this collection of information, and where
to submit comments on the collection of
information and the accuracy of the
estimated burden, and suggestions for
reducing this burden, please refer to the
preamble to CO–25–96, page 30, in of
this issue of the Bulletin.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become ma-
terial in the administration of any Inter-
nal Revenue law. Generally, tax returns
and tax return information are confiden-
tial, as required by 26 U.S.C. 6103.
Background and Explanation of Provi-
sions
On February 4, 1991, the IRS and
Treasury issued three notices of pro-
posed rulemaking, CO–132–87 (56 FR
4194), CO–077–90 (56 FR 4183), and
CO–078–90 (56 FR 4228), setting forth
rules regarding the application of sec-
tions 382 and 383 by consolidated
groups and by controlled groups, and
regarding the use of built-in deductions
and net operating losses and capital
losses, including the carryover and car-
ryback of separate return limitation year
(SRLY) losses of members of consoli-
dated groups. The preambles to the three
proposed regulations explain their rules
in detail. The IRS and Treasury also
published Notice 91–27 (1991–2 C.B.
629) to advise of intended modifications
to the proposed regulations.
For reasons explained in the preamble
to TD 8677 (published in 1996–30
I.R.B. 7), the IRS and Treasury are
issuing temporary amendments concern-
ing the use of built-in deductions and
net operating losses and capital losses of
members of consolidated groups. Some
of the rules in those temporary amend-
ments are closely related to rules regard-
ing the application of section 382 to
members of consolidated groups (for
example, rules relating to built-in deduc-
tions and subgroups). Because of the
close relationship, and in order to give
consolidated groups immediate guidance
on the application of sections 382 and
383, the IRS and Treasury are issuing
these temporary amendments. The tem-
porary amendments are substantially
identical to the rules proposed on Janu-
ary 29, 1991.
These temporary amendments do not
address the comments on the proposed
amendments. Many of these comments
are still under consideration.
As a companion to this Treasury
decision, the IRS and Treasury are also
issuing temporary regulations relating to
the application of sections 382 and 383
by members of controlled groups. See
TD 8679 published on page 4 in this
issue of the Bulletin.
11

Effective Dates.
The temporary regulations are gener-
ally effective for testing dates that occur
on or after January 1, 1997. Transition
rules contained in the proposed amend-
ments are retained and made applicable
to testing dates before January 1, 1997.
SPECIAL ANALYSIS
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in EO 12866.
Therefore, a regulatory assessment is not
required. It is hereby certified that these
regulations do not have a significant
economic impact on a substantial num-
ber of small entities. This certification is
based on the fact that these regulations
will primarily affect affiliated groups of
corporations that have elected to file
consolidated returns, which tend to be
larger businesses. Therefore, a Regula-
tory Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. Pursuant to
section 7805(f) of the Internal Revenue
Code, the notice of proposed rulemaking
preceding these regulations were sent to
the Small Business Administration for
comment on their impact on small busi-
ness.
DRAFTING INFORMATION
The principal author of the temporary
regulations is David B. Friedel of the
Office of Assistant Chief Counsel (Cor-
porate), IRS. Other personnel from the
IRS and Treasury participated in their
development.
Adoption of Amendments to the Regula-
tions
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1502–91T also issued under
26 U.S.C. 382(m) and 26 U.S.C. 1502.
Section 1.1502–92T also issued under
26 U.S.C. 382(m) and 26 U.S.C. 1502.
Section 1.1502–93T also issued under
26 U.S.C. 382(m) and 26 U.S.C. 1502.
Section 1.1502–94T also issued under
26 U.S.C. 382(m) and 26 U.S.C. 1502.
Section 1.1502–95T also issued under
26 U.S.C. 382(m) and 26 U.S.C. 1502.
Section 1.1502–96T also issued under
26 U.S.C. 382(m) and 26 U.S.C. 1502.
Section 1.1502–98T also issued under
26 U.S.C. 382(m) and 26 U.S.C. 1502.
Section 1.1502–99T also issued under
26 U.S.C. 382(m) and 26 U.S.C. 1502.
* * *
Par. 2. Sections 1.1502–90T through
1.1502–99T are added to read as fol-
lows:
§ 1.1502–90T Table of contents (tempo-
rary).The following table contains the
major headings in §§ 1.1502–91T
through 1.1502–99T.
§ 1.1502–91T Application of section
382 with respect to a consolidated group
(temporary).
(a) Determination and effect of an own-
ership change.
(1) In general.
(2) Special rule for post-change year
that includes the change date.
(3) Cross reference.
(b) Definitions and nomenclature.
(c) Loss group.
(1) Defined.
(2) Coordination with rule that ends
separate tracking.
(3) Example.
(d) Loss subgroup.
(1) Net operating loss carryovers.
(2) Net unrealized built-in loss.
(3) Loss subgroup parent.
(4) Principal purpose of avoiding a
limitation.
(5) Special rules.
(6) Examples.
(e) Pre-change consolidated attribute.
(1) Defined.
(2) Example.
(f) Pre-change subgroup attribute.
(1) Defined.
(2) Example.
(g) Net unrealized built-in gain and
loss.
(1) In general.
(2) Members included.
(i) Consolidated group.
(ii) Loss subgroup.
(3) Acquisitions of built-in gain or loss
assets.
(4) Indirect ownership.
(h) Recognized built-in gain or loss.
(1) In general.
(2) Disposition of stock or an intercom-
pany obligation of a member.
(3) Deferred gain or loss.
(4) Exchanged basis property.
(i) [Reserved]
(j) Predecessor and successor corpora-
tions.
§ 1.1502–92T Ownership change of a
loss group or a loss subgroup (tempo-
rary).
(a) Scope.
(b) Determination of an ownership
change.
(1) Parent change method.
(i) Loss group.
(ii) Loss subgroup.
(2) Examples.
(3) Special adjustments.
(i) Common parent succeeded by a new
common parent.
(ii) Newly created loss subgroup parent.
(iii) Examples.
(4) End of separate tracking of certain
losses.
(c) Supplemental rules for determining
ownership change.
(1) Scope.
(2) Cause for applying supplemental
rule.
(3) Operating rules.
(4) Supplemental ownership change
rules.
(i) Additional testing dates for the com-
mon parent (or loss subgroup par-
ent).
(ii) Treatment of subsidiary stock as
stock of the common parent (or loss
subgroup parent).
(iii) 5-percent shareholder of the com-
mon parent (or loss subgroup par-
ent).
(5) Examples.
(d) Testing period following ownership
change under this section.
(e) Information statements.
(1) Common parent of a loss group.
(2) Abbreviated statement with respect
to loss subgroups.
§ 1.1502–93T Consolidated section 382
limitation (or subgroup section 382 limi-
tation) (temporary).
(a) Determination of the consolidated
section 382 limitation (or subgroup
section 382 limitation).
(1) In general.
(2) Coordination with apportionment
rule.
(b) Value of the loss group (or loss
subgroup).
(1) Stock value immediately before
ownership change.
(2) Adjustment to value.
(3) Examples.
(c) Recognized built-in gain of a loss
group or loss subgroup.
(d) Continuity of business.
(1) In general.
(2) Example.
12

(e) Limitations of losses under other
rules.
§ 1.1502–94T Coordination with sec-
tion 382 and the regulations thereunder
when a corporation becomes a member
of a consolidated group (temporary).
(a) Scope.
(1) In general.
(2) Successor corporation as new loss
member.
(3) Coordination in the case of a loss
subgroup.
(4) End of separate tracking of certain
losses.
(5) Cross-reference.
(b) Application of section 382 to a new
loss member.
(1) In general.
(2) Adjustment to value.
(3) Pre-change separate attribute de-
fined.
(4) Examples.
(c) Built-in gains and losses.
(d) Information statements.
§ 1.1502–95T Rules on ceasing to be a
member of a consolidated group (or loss
subgroup) (temporary).
(a) In general.
(1) Consolidated group.
(2) Election by common parent.
(3) Coordination with §§ 1.1502–91T
through 1.1502–93T.
(b) Separate application of section 382
when a member leaves a consoli-
dated group.
(1) In general.
(2) Effect of a prior ownership change
of the group.
(3) Application in the case of a loss
subgroup.
(4) Examples.
(c) Apportionment of a consolidated
section 382 limitation.
(1) In general.
(2) Amount of apportionment.
(3) Effect of apportionment on the con-
solidated section 382 limitation.
(4) Effect on corporations to which the
consolidated section 382 limitation
is apportioned.
(5) Deemed apportionment when loss
group terminates.
(6) Appropriate adjustments when
former member leaves during the
year.
(7) Examples.
(d) Rules pertaining to ceasing to be a
member of a loss subgroup.
(1) In general.
(2) Examples.
(e) Filing the election to apportion.
(1) Form of the election to apportion.
(2) Signing of the election.
(3) Filing of the election.
(4) Revocation of election.
§ 1.1502–96T Miscellaneous rules
(temporary).
(a) End of separate tracking of losses.
(1) Application.
(2) Effect of end of separate tracking.
(3) Continuing effect of end of separate
tracking.
(4) Special rule for testing period.
(5) Limits on effects of end of separate
tracking.
(b) Ownership change of subsidiary.
(1) Ownership change of a subsidiary
because of options or plan or ar-
rangement.
(2) Effect of the ownership change.
(i) In general.
(ii) Pre-change losses.
(3) Coordination with §§ 1.1502–91T,
1.1502–92T, and 1.1502–94T.
(4) Example.
(c) Continuing effect of an ownership
change.
§ 1.1502–97T Special rules under sec-
tion 382 for members under the jurisdic-
tion of a court in a title 11 or similar
case (temporary). [Reserved]
§ 1.1502–98T Coordination with sec-
tion 383 (temporary).
§ 1.1502–99T Effective dates (tempo-
rary).
(a) Effective date.
(b) Testing period may include a period
beginning before January 1, 1997.
(c) Transition rules. (1) Methods per-
mitted. (i) In general.
(ii) Adjustments to offset excess limita-
tion.
(iii) Coordination with effective date.
(2) Permitted methods.
(d) Amended returns.
(e) Section 383.
§ 1.1502–91T Application of section
382 with respect to a consolidated
group (temporary).
(a)Determination and effect of an
ownership change—(1)In general.This
section and §§ 1.1502–92T and 1.1502–
93T set forth the rules for determining
an ownership change under section 382
for members of consolidated groups and
the section 382 limitations with respect
to attributes described in paragraphs (e)
and (f) of this section. These rules
generally provide that an ownership
change and the section 382 limitation
are determined with respect to these
attributes for the group (or loss sub-
group) on a single entity basis and not
for its members separately. Following an
ownership change of a loss group (or a
loss subgroup) under § 1.1502–92T, the
amount of consolidated taxable income
for any post-change year which may be
offset by pre-change consolidated at-
tributes (or pre-change subgroup at-
tributes) shall not exceed the consoli-
dated section 382 limitation (or
subgroup section 382 limitation) for
such year as determined under
§ 1.1502–93T.
(2)Special rule for post-change year
that includes the change date.If the
post-change year includes the change
date, section 382(b)(3)(A) is applied so
that the consolidated section 382 limita-
tion (or subgroup section 382 limitation)
does not apply to the portion of consoli-
dated taxable income that is allocable to
the period in the year on or before the
change date. See generally § 1.382–6
(relating to the allocation of income and
loss). The allocation of consolidated
taxable income for the post-change year
that includes the change date must be
made before taking into account any
consolidated net operating loss deduc-
tion (as defined in § 1.1502–21T(a)).
(3)Cross reference.See §§ 1.1502–
94T and 1.1502–95T for rules that apply
section 382 to a corporation that be-
comes or ceases to be a member of a
group or loss subgroup.
(b)Definitions and nomenclature.For
purposes of this section and §§ 1.1502–
92T through 1.1502–99T, unless other-
wise stated:
(1) The definitions and nomenclature
contained in section 382 and the regula-
tions thereunder (including the nomen-
clature and assumptions relating to the
examples in § 1.382–2T(b)) and this
section and §§ 1.1502–92T through
1.1502–99T apply; and
(2) In all examples, all groups file
consolidated returns, all corporations file
their income tax returns on a calendar
year basis, the only 5-percent share-
holder of a corporation is a public
group, the facts set forth the only owner
shifts during the testing period, and each
asset of a corporation has a value equal
to its adjusted basis.
(c)Loss group—(1)Defined.A loss
group is a consolidated group that:
(i) Is entitled to use a net operating
loss carryover to the taxable year that
did not arise (and is not treated under
§ 1.1502–21T(c) as arising) in a SRLY;
13

(ii) Has a consolidated net operating
loss for the taxable year in which a
testing date of the common parent oc-
curs (determined by treating the com-
mon parent as a loss corporation); or
(iii) Has a net unrealized built-in loss
(determined under paragraph (g) of this
section by treating the date on which the
determination is made as though it were
a change date).
(2)Coordination with rule that ends
separate tracking.A consolidated group
may be a loss group because a mem-
ber’s losses that arose in (or are treated
as arising in) a SRLY are treated as
described in paragraph (c)(1)(i) of this
section. See § 1.1502–96T(a).
(3)Example.The following example
illustrates the principles of this para-
graph (c).
Example. Loss group.(a) L and L1 file separate
returns and each has a net operating loss carryover
arising in Year 1 that is carried over to Year 2. A
owns 40 shares and L owns 60 shares of the 100
outstanding shares of L1 stock. At the close of
Year 1, L buys the 40 shares of L1 stock from A.
For Year 2, L and L1 file a consolidated return.
The following is a graphic illustration of these
facts:
(b) L and L1 become a loss group at the
beginning of Year 2 because the group is entitled
to use the Year 1 net operating loss carryover of
L, the common parent, which did not arise (and is
not treated under § 1.1502–21T(c) as arising) in a
SRLY. See § 1.1502–94T for rules relating to the
application of section 382 with respect to L1’s net
operating loss carryover from Year 1 which did
arise in a SRLY.
(d)Loss subgroup—(1)Net operating
loss carryovers.Two or more corpora-
tions that become members of a consoli-
dated group (the current group) compose
a loss subgroup if:
(i) They were affiliated with each
other in another group (the former
group), whether or not the group was a
consolidated group;
(ii) They bear the relationship de-
scribed in section 1504(a)(1) to each
other through a loss subgroup parent
immediately after they become members
of the current group; and
(iii) At least one of the members
carries over a net operating loss that did
not arise (and is not treated under
§ 1.1502–21T(c) as arising) in a SRLY
with respect to the former group.
(2)Net unrealized built-in loss.Two
or more corporations that become mem-
bers of a consolidated group compose a
loss subgroup if they:
(i) Have been continuously affiliated
with each other for the 5 consecutive
year period ending immediately before
they become members of the group;
(ii) Bear the relationship described in
section 1504(a)(1) to each other through
a loss subgroup parent immediately after
they become members of the current
group; and
(iii) Have a net unrealized built-in
loss (determined under paragraph (g) of
this section on the day they become
members of the group by treating that
day as though it were a change date).
(3)Loss subgroup parent.A loss sub-
group parent is the corporation that
bears the same relationship to the other
members of the loss subgroup as a
common parent bears to the members of
a group.
(4)Principal purpose of avoiding a
limitation.The corporations described in
paragraph (d)(1) or (2) of this section do
not compose a loss subgroup if any one
of them is formed, acquired, or availed
of with a principal purpose of avoiding
the application of, or increasing any
limitation under, section 382. Instead,
§ 1.1502–94T applies with respect to
the attributes of each such corporation.
This paragraph (d)(4) does not apply
solely because, in connection with be-
coming members of the group, the
members of a group (or loss subgroup)
are rearranged to bear a relationship to
the other members described in section
1504(a)(1).
(5)Special rules.See § 1.1502–
95T(d) for rules concerning when a
corporation ceases to be a member of a
loss subgroup. See also § 1.1502–
96T(a) for a special rule regarding the
end of separate tracking of SRLY losses
of a member that has an ownership
change or that has been a member of a
group for at least 5 consecutive years.
(6)Examples.The following ex-
amples illustrate the principles of this
paragraph (d).
Example 1. Loss subgroup.(a) P owns all the L
stock and L owns all the L1 stock. The P group
has a consolidated net operating loss arising in
Year 1 that is carried to Year 2. On May 2, Year 2,
P sells all the stock of L to A, and L and L1
thereafter file consolidated returns. A portion of
the Year 1 consolidated net operating loss is
apportioned under § 1.1502–21T(b) to each of L
and L1, which they carry over to Year 2. The
following is a graphic illustration of these facts:
(b)(1) L and L1 compose a loss subgroup
within the meaning of paragraph (d)(1) of this
section because—
(i) They were affiliated with each other in the P
group (the former group);
(ii) They bear a relationship described in sec-
tion 1504(a)(1) to each other through a loss
subgroup parent (L) immediately after they be-
came members of the L group; and
(iii) At least one of the members (here, both L
and L1) carries over a net operating loss to the L
group (the current group) that did not arise in a
SRLY with respect to the P group.
(2) Under paragraph (d)(3) of this section, L is
the loss subgroup parent of the L loss subgroup.
Example 2. Loss subgroup—section 1504(a)(1)
relationship.(a) P owns all the stock of L and L1.
L owns all the stock of L2. L1 and L2 own 40
percent and 60 percent of the stock of L3,
respectively. The P group has a consolidated net
operating loss arising in Year 1 that is carried over
to Year 2. On May 22, Year 2, P sells all the stock
14

of L and L1 to P1, the common parent of another
consolidated group. The Year 1 consolidated net
operating loss is apportioned under § 1.1502–
21T(b), and each of L, L1, L2, and L3 carries
over a portion of such loss to the first consolidated
return year of the P1 group ending after the
acquisition. The following is a graphic illustration
of these facts:
(b) L and L2 compose a loss subgroup within
the meaning of paragraph (d)(1) of this section.
Neither L1 nor L3 is included in a loss subgroup
because neither bears a relationship described in
section 1504(a)(1) through a loss subgroup parent
to any other member of the former group immedi-
ately after becoming members of the P1 group.
Example 3. Loss subgroup—section 1504(a)(1)
relationship.The facts are the same as inExample
2, except that the stock of L1 is transferred to L in
connection with the sale of the L stock to P1. L,
L1, L2, and L3 compose a loss subgroup within
the meaning of paragraph (d)(1) of this section
because—
(1) They were affiliated with each other in the
P group (the former group);
(2) They bear a relationship described in sec-
tion 1504(a)(1) to each other through a loss
subgroup parent (L) immediately after they be-
come members of the P1 group; and
(3) At least one of the members (here, each of
L, L1, L2, and L3) carries over to the P1 group
(the current group) a net operating loss that did
not arise in a SRLY with respect to the P group
(the former group).
(e)Pre-change consolidated at-
tribute—(1)Defined.A pre-change con-
solidated attribute of a loss group is—
(i) Any loss described in paragraph
(c)(1)(i) or (ii) of this section (relating
to the definition of loss group) that is
allocable to the period ending on or
before the change date; and
(ii) Any recognized built-in loss of
the loss group.
(2)Example.The following example
illustrates the principle of this paragraph
(e).
Example. Pre-change consolidated attribute.(a)
The L group has a consolidated net operating loss
arising in Year 1 that is carried over to Year 2.
The L loss group has an ownership change at the
beginning of Year 2.
(b) The net operating loss carryover of the L
loss group from Year 1 is a pre-change consoli-
dated attribute because the L group was entitled to
use the loss in Year 2, the loss did not arise in a
SRLY with respect to the L group, and therefore
the loss was described in paragraph (c)(1)(i) of
this section. Under paragraph (a) of this section,
the amount of consolidated taxable income of the
L group for Year 2 that may be offset by this loss
carryover may not exceed the consolidated section
382 limitation of the L group for that year. See
§ 1.1502–93T for rules relating to the computa-
tion of the consolidated section 382 limitation.
(f)Pre-change subgroup attribute—
(1)Defined.A pre-change subgroup at-
tribute of a loss subgroup is—
(i) Any net operating loss carryover
described in paragraph (d)(1)(iii) of this
section (relating to the definition of loss
subgroup); and
(ii) Any recognized built-in loss of
the loss subgroup.
(2) Example.The following example
illustrates the principle of this paragraph
(f).
Example. Pre-change subgroup attribute.(a) P
is the common parent of a consolidated group. P
owns all the stock of L, and L owns all the stock
of L1. L2 is not a member of an affiliated group,
and has a net operating loss arising in Year 1 that
is carried over to Year 2. On December 11, Year 2,
L1 acquires all the stock of L2, causing an
ownership change of L2. During Year 2, the P
group has a consolidated net operating loss that is
carried over to Year 3. On November 2, Year 3, M
acquires all the L stock from P. M, L, L1, and L2
thereafter file consolidated returns. All of the P
group Year 2 consolidated net operating loss is
apportioned under § 1.1502–21T(b) to L and L2,
which they carry over to the M group.
(b)(1) L, L1, and L2 compose a loss subgroup
because—
(i) They were affiliated with each other in the P
group (the former group);
(ii) They bore a relationship described in sec-
tion 1504(a)(1) to each other through a loss
subgroup parent (L) immediately after they be-
came members of the L group; and
(iii) At least one of the members (here, both L
and L2) carries over a net operating loss to the M
group (the current group) that is described in
paragraph (d)(1)(iii) of this section.
(2) For this purpose, L2’s loss from Year 1 that
was a SRLY loss with respect to the P group (the
former group) is treated as described in paragraph
(d)(1)(iii) of this section because of the application
of the principles of § 1.1502–96T(a). See para-
graph (d)(5) of this section. M’s acquisition results
in an ownership change of L, and therefore the L
loss subgroup under § 1.1502–92T(a)(2). See
§ 1.1502–93T for rules governing the computation
of the subgroup section 382 limitation.
(c) In the M group, L2’s Year 1 loss continues
to be subject to a section 382 limitation resulting
from the ownership change that occurred on
December 11, Year 2. See § 1.1502–96T(c).
(g)Net unrealized built-in gain and
loss—(1)In general.The determination
whether a consolidated group (or loss
subgroup) has a net unrealized built-in
gain or loss under section 382(h)(3) is
based on the aggregate amount of the
separately computed net unrealized
built-in gains or losses of each member
that is included in the group (or loss
subgroup) under paragraph (g)(2) of this
section, including items of built-in in-
come and deduction described in section
382(h)(6). Thus, for example, amounts
deferred under section 267, or under
§ 1.1502–13 (other than amounts de-
ferred with respect to the stock of a
member (or an intercompany obligation)
included in the group (or loss subgroup)
under paragraph (g)(2) of this section)
are built-in items. The threshold require-
ment under section 382(h)(3)(B) applies
on an aggregate basis and not on a
member-by-member basis. The sepa-
rately computed amount of a member
included in a group or loss subgroup
does not include any unrealized built-in
gain or loss on stock (including stock
described in section 1504(a)(4) and
§ 1.382–2T(f)(18)(ii) and (iii)) of an-
other member included in the group or
loss subgroup (or on an intercompany
obligation). However, a member of a
group or loss subgroup includes in its
separately computed amount the unreal-
ized built-in gain or loss on stock of
another member (or on an intercompany
obligation) not included in the group or
loss subgroup. If a member is not
included in a group (or loss subgroup)
under paragraph (g)(2) of this section,
the determination of whether the mem-
ber has a net unrealized built-in gain or
loss under section 382(h)(3) is made on
a separate entity basis. See § 1.1502–
94(c) (relating to built-in gain or loss of
a new loss member) and § 1.1502–96(a)
(relating to the end of separate tracking
of certain losses).
(2)Members included—(i)Consoli-
dated group.The members included in
the determination whether a consoli-
dated group has a net unrealized built-in
gain or loss are all members of the
group on the day that the determination
is made other than—
(A) A new loss member with a net
unrealized built-in loss described in
§ 1.1502–94T(a)(1)(ii); and
(B) Members included in a loss sub-
group described in § 1.1502–91T(d)(2).
(ii)Loss subgroup.The members in-
cluded in the determination whether a
15

loss subgroup has a net unrealized
built-in gain or loss are those members
described in paragraphs (d)(2)(i) and (ii)
of this section.
(3)Acquisitions of built-in gain or
loss assets.A member of a consolidated
group (or loss subgroup) may not, in
determining its separately computed net
unrealized built-in gain or loss, include
any gain or loss with respect to assets
acquired with a principal purpose to
affect the amount of its net unrealized
built-in gain or loss. A group (or loss
subgroup) may not, in determining its
net unrealized built-in gain or loss,
include any gain or loss of a member
acquired with a principal purpose to
affect the amount of its net unrealized
built-in gain or loss.
(4)Indirect ownership.A member’s
separately computed net unrealized
built-in gain or loss is adjusted to the
extent necessary to prevent any duplica-
tion of unrealized gain or loss attribut-
able to the member’s indirect ownership
interest in another member through a
nonmember if the member has a
5-percent or greater ownership interest
in the nonmember.
(h)Recognized built-in gain or loss—
(1)In general.[Reserved]
(2)Disposition of stock or an inter-
company obligation of a member.Gain
or loss recognized by a member on the
disposition of stock (including stock
described in section 1504(a)(4) and
§ 1.382–2T(f)(18)(ii) and (iii)) of an-
other member or an intercompany obli-
gation is treated as a recognized built-in
gain or loss under section 382(h)(2)
(unless disallowed under § 1.1502–20
or otherwise), even though gain or loss
on such stock or obligation was not
included in the determination of a net
unrealized built-in gain or loss under
paragraph (g)(1) of this section.
(3)Deferred gain or loss.Gain or
loss that is deferred under provisions
such as section 267 and § 1.1502–13 is
treated as recognized built-in gain or
loss only to the extent taken into ac-
count by the group during the recogni-
tion period.
(4)Exchanged basis property.If the
adjusted basis of any asset is deter-
mined, directly or indirectly, in whole or
in part, by reference to the adjusted
basis of another asset held by the mem-
ber at the beginning of the recognition
period, the asset is treated, with appro-
priate adjustments, as held by the mem-
ber at the beginning of the recognition
period.
(i) [Reserved]
(j)Predecessor and successor corpo-
rations.A reference in this section and
§§ 1.1502–92T through 1.1502–99T to
a corporation, member, common parent,
loss subgroup parent, or subsidiary in-
cludes, as the context may require, a
reference to a predecessor or successor
corporation. For example, the determina-
tion whether a successor satisfies the
continuous affiliation requirement of
paragraph (d)(2)(i) of this section is
made by reference to its predecessor.
§ 1.1502–92T Ownership change of a
loss group or a loss subgroup (tempo-
rary).
(a)Scope.This section provides rules
for determining if there is an ownership
change for purposes of section 382 with
respect to a loss group or a loss sub-
group. See § 1.1502–94T for special
rules for determining if there is an
ownership change with respect to a new
loss member and § 1.1502–96T(b) for
special rules for determining if there is
an ownership change of a subsidiary.
(b)Determination of an ownership
change—(1)Parent change method—(i)
Loss group.A loss group has an owner-
ship change if the loss group’s common
parent has an ownership change under
section 382 and the regulations thereun-
der. Solely for purposes of determining
whether the common parent has an
ownership change—
(A) The losses described in
§ 1.1502–91T(c) are treated as net oper-
ating losses (or a net unrealized built-in
loss) of the common parent; and
(B) The common parent determines
the earliest day that its testing period
can begin by reference to only the
attributes that make the group a loss
group under § 1.1502–91T(c).
(ii)Loss subgroup.A loss subgroup
has an ownership change if the loss
subgroup parent has an ownership
change under section 382 and the regu-
lations thereunder. The principles of
§ 1.1502–95T(b) (relating to ceasing to
be a member of a consolidated group)
apply in determining whether the loss
subgroup parent has an ownership
change. Solely for purposes of determin-
ing whether the loss subgroup parent
has an ownership change—
(A) The losses described in
§ 1.1502–91T(d) are treated as net oper-
ating losses (or a net unrealized built-in
loss) of the loss subgroup parent;
(B) The day that the members of the
loss subgroup become members of the
group (or a loss subgroup) is treated as
a testing date within the meaning of
§ 1.382–2(a)(4); and
(C) The loss subgroup parent deter-
mines the earliest day that its testing
period can begin under § 1.382–
2T(d)(3) by reference to only the at-
tributes that make the members a loss
subgroup under § 1.1502–91T(d).
(2)Examples.The following ex-
amples illustrate the principles of this
paragraph (b).
Example 1. Loss group—ownership change of
the common parent.(a) A owns all the L stock. L
owns 80 percent and B owns 20 percent of the L1
stock. For Year 1, the L group has a consolidated
net operating loss that resulted from the operations
of L1 and that is carried over to Year 2. The value
of the L stock is $1000. The total value of the L1
stock is $600 and the value of the L1 stock held
by B is $120. The L group is a loss group under
§ 1.1502–91T(c)(1) because it is entitled to use its
net operating loss carryover from Year 1. On
August 15, Year 2, A sells 51 percent of the L
stock to C. The following is a graphic illustration
of these facts:
(b) Under paragraph (b)(1)(i) of this section,
section 382 and the regulations thereunder are
applied to L to determine whether it (and therefore
the L loss group) has an ownership change with
respect to its net operating loss carryover from
Year 1 attributable to L1 on August 15, Year 2.
The sale of the L stock to C causes an ownership
change of L under § 1.382–2T and of the L loss
group under paragraph (b)(1)(i) of this section.
The amount of consolidated taxable income of the
L loss group for any post-change taxable year that
may be offset by its pre-change consolidated
attributes (that is, the net operating loss carryover
from Year 1 attributable to L1) may not exceed
the consolidated section 382 limitation for the L
loss group for the taxable year.
Example 2. Loss group—owner shifts of subsid-
iaries disregarded.(a) The facts are the same as in
Example 1, except that on August 15, Year 2, A
sells only 49 percent of the L stock to C and, on
December 12, Year 3, in an unrelated transaction, B
sells the 20 percent of the L1 stock to D. A’s sale
of the L stock to C does not cause an ownership
change of L under § 1.382–2T nor of the L loss
group under paragraph (b)(1)(i) of this section. The
following is a graphic illustration of these facts:
16

(b) B’s subsequent sale of L1 stock is not taken
into account for purposes of determining whether
the L loss group has an ownership change under
paragraph (b)(1)(i) of this section, and, accord-
ingly, there is no ownership change of the L loss
group. See paragraph (c) of this section, however,
for a supplemental ownership change method that
would apply to cause an ownership change if the
purchases by C and D were pursuant to a plan or
arrangement.
Example 3. Loss subgroup—ownership change
of loss subgroup parent controls.(a) P owns all
the L stock. L owns 80 percent and A owns 20
percent of the L1 stock. The P group has a
consolidated net operating loss arising in Year 1
that is carried over to Year 2. On September 9,
Year 2, P sells 51 percent of the L stock to B, and
L1 is apportioned a portion of the Year 1 consoli-
dated net operating loss under § 1.1502–21T(b),
which it carries over to its next taxable year. L
and L1 file a consolidated return for their first
taxable year ending after the sale to B. The
following is a graphic illustration of these facts:
(b) Under § 1.1502–91T(d)(1), L and L1 com-
pose a loss subgroup on September 9, Year 2, the
day that they become members of the L group.
Under paragraph (b)(1)(ii) of this section, section
382 and the regulations thereunder are applied to
L to determine whether it (and therefore the L loss
subgroup) has an ownership change with respect
to the portion of the Year 1 consolidated net
operating loss that is apportioned to L1 on Sep-
tember 9, Year 2. L has an ownership change
resulting from P’s sale of 51 percent of the L
stock to A. Therefore, the L loss subgroup has an
ownership change with respect to that loss.
Example 4. Loss group and loss subgroup—
contemporaneous ownership changes.(a) A owns
all the stock of corporation M, M owns 35 percent
and B owns 65 percent of the L stock, and L owns
all the L1 stock. The L group has a consolidated
net operating loss arising in Year 1 that is carried
over to Year 2. On May 19, Year 2, B sells 45
percent of the L stock to M for cash. M, L, and
L1 thereafter file consolidated returns. L and L1
are each apportioned a portion of the Year 1
consolidated net operating loss, which they carry
over to the M group’s Year 2 and Year 3
consolidated return years. The M group has a
consolidated net operating loss arising in Year 2
that is carried over to Year 3. On June 9, Year 3,
A sells 70 percent of the M stock to C. The
following is a graphic illustration of these facts:
(b) Under § 1.1502–91T(d)(1), L and L1 com-
pose a loss subgroup on May 19, Year 2, the day
they become members of the M group. Under
paragraph (b)(1)(ii) of this section, section 382
and the regulations thereunder are applied to L to
determine whether L (and therefore the L loss
subgroup) has an ownership change with respect
to the loss carryovers from Year 1 on May 19,
Year 2, a testing date because of B’s sale of L
stock to M. The sale of L stock to M results in
only a 45 percentage point increase in A’s owner-
ship of L stock. Thus, there is no ownership
change of L (or the L loss subgroup) with respect
to those loss carryovers under paragraph (b)(1)(ii)
of this section on that day.
(c) June 9, Year 3, is also a testing date with
respect to the L loss subgroup because of A’s sale
of M stock to C. The sale results in a 56
percentage point increase in C’s ownership of L
stock, and L has an ownership change. Therefore,
the L loss subgroup has an ownership change on
that day with respect to the loss carryovers from
Year 1.
(d) Paragraph (b)(1)(i) of this section requires
that section 382 and the regulations thereunder be
applied to M to determine whether M (and
therefore the M loss group) has an ownership
change with respect to the net operating loss
carryover from Year 2 on June 9, Year 3, a testing
date because of A’s sale of M stock to C. The sale
results in a 70 percentage point increase in C’s
ownership of M stock, and M has an ownership
change. Therefore, the M loss group has an
ownership change on that day with respect to that
loss carryover.
(3)Special adjustments—(i)Common
parent succeeded by a new common
parent.For purposes of determining if a
loss group has an ownership change, if
the common parent of a loss group is
succeeded or acquired by a new com-
mon parent and the loss group remains
in existence, the new common parent is
treated as a continuation of the former
common parent with appropriate adjust-
ments to take into account shifts in
ownership of the former common parent
during the testing period (including
shifts that occur incident to the common
parent’s becoming the former common
parent).
(ii)Newly created loss subgroup par-
ent.For purposes of determining if a
loss subgroup has an ownership change,
if the member that is the loss subgroup
parent has not been the loss subgroup
parent for at least 3 years as of a testing
date, appropriate adjustments must be
made to take into account owner shifts
of members of the loss subgroup so that
the structure of the loss subgroup does
not have the effect of avoiding an
ownership change under section 382.
(See paragraph (b)(3)(iii)Example 3of
this section.)
(iii)Examples.The following ex-
amples illustrate the principles of this
paragraph (b)(3).
Example 1. New common parent acquires old
common parent.(a) A, who owns all the L stock,
17

sells 30 percent of the L stock to B on August 26,
Year 1. L owns all the L1 stock. The L group has
a consolidated net operating loss arising in Year 1
that is carried over to Year 3. On July 16, Year 2,
A and B transfer their L stock to a newly created
holding company, HC, in exchange for 70 percent
and 30 percent, respectively, of the HC stock. HC,
L, and L1 thereafter file consolidated returns.
Under the principles of § 1.1502–75(d), the L loss
group is treated as remaining in existence, with
HC taking the place of L as the new common
parent of the loss group. The following is a
graphic illustration of these facts:
(b) On November 11, Year 3, A sells 25 percent
of the HC stock to B. For purposes of determining
if the L loss group has an ownership change under
paragraph (b)(1)(i) of this section on November
11, Year 3, HC is treated as a continuation of L
under paragraph (b)(3)(i) of this section because it
acquired L and became the common parent with-
out terminating the L loss group. Accordingly,
HC’s testing period commences on January 1, Year
1, the first day of the taxable year of the L loss
group in which the consolidated net operating loss
that is carried over to Year 3 arose (see § 1.382–
2T(d)(3)(i)). Immediately after the close of No-
vember 11, Year 3, B’s percentage ownership
interest in the common parent of the loss group
(HC) has increased by 55 percentage points over
its lowest percentage ownership during the testing
period (zero percent). Accordingly, HC and the L
loss group have an ownership change on that day.
Example 2. New common parent in case in
which common parent ceases to exist.(a) A, B,
and C each own one-third of the L stock. L owns
all the L1 stock. The L group has a consolidated
net operating loss arising in Year 2 that is carried
over to Year 3. On November 22, Year 3, L is
merged into P, a corporation owned by D, and L1
thereafter files consolidated returns with P. A, B,
and C, as a result of owning stock of L, own 90
percent of P’s stock after the merger. D owns the
remaining 10 percent of P’s stock. The merger of
L into P qualifies as a reverse acquisition of the L
group under § 1.1502–75(d)(3)(i), and the L loss
group is treated as remaining in existence, with P
taking the place of L as the new common parent
of the L group. The following is a graphic
illustration of these facts:
(b) For purposes of determining if the L loss
group has an ownership change on November 22,
Year 3, the day of the merger, P is treated as a
continuation of L so that the testing period for P
begins on January 1, Year 2, the first day of the
taxable year of the L loss group in which the
consolidated net operating loss that is carried over
to Year 3 arose. Immediately after the close of
November 22, Year 3, D is the only 5-percent
shareholder that has increased his ownership inter-
est in P during the testing period (from zero to 10
percentage points).
(c) The facts are the same as in paragraph (a)
of thisExample 2, except that A has held 23
1
⁄3
shares (23
1
⁄3percent) of L’s stock for five years,
and A purchased an additional 10 shares of L
stock from E two years before the merger. Imme-
diately after the close of the day of the merger (a
testing date), A’s ownership interest in P, the
common parent of the L loss group, has increased
by 6
2
⁄3percentage points over her lowest percent-
age ownership during the testing period (23
1
⁄3
percent to 30 percent).
(d) The facts are the same as in (a) of this
Example 2, except that P has a net operating loss
arising in Year 1 that is carried to the first
consolidated return year ending after the day of
the merger. Solely for purposes of determining
whether the L loss group has an ownership change
under paragraph (b)(1)(i) of this section, the
testing period for P commences on January 1, Year
2. P does not determine the earliest day for its
testing period by reference to its net operating loss
carryover from Year 1, which §§ 1502–1(f)(3) and
1.1502–75(d)(3)(i) treat as arising in a SRLY. See
§ 1.1502–94T to determine the application of
section 382 with respect to P’s net operating loss
carryover.
Example 3. Newly acquired loss subgroup par-
ent.(a) P owns all the L stock and L owns all the
L1 stock. The P group has a consolidated net
operating loss arising in Year 1 that is carried over
to Year 3. On January 19, Year 2, L issues a 20
percent stock interest to B. On February 5, Year 3,
P contributes its L stock to a newly formed
subsidiary, HC, in exchange for all the HC stock,
and distributes the HC stock to its sole shareholder
A. HC, L, and L1 thereafter file consolidated
returns. A portion of the P group’s Year 1
consolidated net operating loss is apportioned to L
and L1 under § 1.1502–21T(b) and is carried over
to the HC group’s year ending after February 5,
Year 3. HC, L, and L1 compose a loss subgroup
within the meaning of § 1.1502–91T(d) with
respect to the net operating loss carryovers from
Year 1. The following is a graphic illustration of
these facts:
18

(b) February 5, Year 3, is a testing date for HC
as the loss subgroup parent with respect to the net
operating loss carryovers of L and L1 from Year 1.
See paragraph (b)(1)(ii)(B) of this section. For
purposes of determining whether HC has an owner-
ship change on the testing date, appropriate adjust-
ments must be made with respect to the changes in
the percentage ownership of the stock of HC
because HC was not the loss subgroup parent for at
least 3 years prior to the day on which it became a
member of the HC loss subgroup (a testing date).
The appropriate adjustments include adjustments so
that HC succeeds to the owner shifts of other
members of the former group. Thus, HC succeeds
to the owner shift of L that resulted from the sale
of the 20 percent interest to B in determining
whether the HC loss subgroup has an ownership
change on February 5, Year 3, and on any subse-
quent testing date that includes January 19, Year 2.
(4)End of separate tracking of certain
losses.If § 1.1502–96T(a) (relating to
the end of separate tracking of attributes)
applies to a loss subgroup, then, while
one or more members that were included
in the loss subgroup remain members of
the consolidated group, there is an owner-
ship change with respect to their at-
tributes described in § 1.1502–96T(a)(2)
only if the consolidated group is a loss
group and has an ownership change un-
der paragraph (b)(1)(i) of this section (or
such a member has an ownership change
under § 1.1502–96T(b) (relating to own-
ership changes of subsidiaries)). If, how-
ever, the loss subgroup has had an owner-
ship change before § 1.1502–96T(a)
applies, see § 1.1502–96T(c) for the con-
tinuing application of the subgroup’s sec-
tion 382 limitation with respect to its
pre-change subgroup attributes.
(c)Supplemental rules for determin-
ing ownership change—(1)Scope.This
paragraph (c) contains a supplemental
rule for determining whether there is an
ownership change of a loss group (or
loss subgroup). It applies in addition to,
and not instead of, the rules of paragraph
(b) of this section. Thus, for example, if
the common parent of the loss group has
an ownership change under paragraph
(b) of this section, the loss group has an
ownership change even if, by applying
this paragraph (c), the common parent
would not have an ownership change.
(2)Cause for applying supplemental
rule.This paragraph (c) applies to a loss
group (or loss subgroup) if—
(i) Any 5-percent shareholder of the
common parent (or loss subgroup par-
ent) increases its percentage ownership
interest in the stock of both—
(A) A subsidiary of the loss group (or
loss subgroup) other than by a direct or
indirect acquisition of stock of the com-
mon parent (or loss subgroup parent); and
(B) The common parent (or loss sub-
group parent); and
(ii)
Those increases occur within a 3
year period ending on any day of a
consolidated return year or, if shorter, the
period beginning on the first day follow-
ing the most recent ownership change of
the loss group (or loss subgroup).
(3)Operating rules.Solely for pur-
poses of this paragraph (c)—
(i) A 5-percent shareholder of the
common parent (or loss subgroup par-
ent) is treated as increasing its percent-
age ownership interest in the common
parent (or loss subgroup parent) or a
subsidiary to the extent, if any, that any
person acting pursuant to a plan or
arrangement with the 5-percent share-
holder increases its percentage owner-
ship interest in the stock of that entity;
(ii) The rules in section 382(l)(3) and
§§ 1.382–2T(h) and 1.382–4(d) (relating
to constructive ownership) apply with
respect to the stock of the subsidiary by
treating such stock as stock of a loss
corporation; and
(iii) In the case of a loss subgroup, a
subsidiary includes any member of the
loss subgroup other than the loss sub-
group parent. (The loss subgroup parent
is, however, a subsidiary of the loss
group of which it is a member.)
(4)Supplemental ownership change
rules.The determination whether the
common parent (or loss subgroup par-
ent) has an ownership change is made
by applying paragraph (b)(1) of this
section as modified by the following
additional rules—
(i)Additional testing dates for the
common parent (or loss subgroup parent).
A testing date for the common parent (or
loss subgroup parent) also includes—
(A) Each day on which there is an
increase in the percentage ownership of
stock of a subsidiary as described in
paragraph (c)(2) of this section; and
(B) The first day of the first consoli-
dated return year for which the group is
a loss group (or the members compose a
loss subgroup);
(ii)Treatment of subsidiary stock as
stock of the common parent (or loss
subgroup parent).The common parent
(or loss subgroup parent) is treated as
though it had issued to the person
acquiring (or deemed to acquire) the
subsidiary stock an amount of its own
stock (by value) that equals the value of
the subsidiary stock represented by the
percentage increase in that person’s
ownership of the subsidiary (determined
on a separate entity basis). A similar
principle applies if the increase in per-
centage ownership interest is effected by
a redemption or similar transaction; and
(iii)
5-percent shareholder of the com-
mon parent (or loss subgroup parent).
Any person described in paragraph
(c)(3)(i) of this section who is acting
pursuant to the plan or arrangement is
treated as a 5-percent shareholder of the
common parent (or loss subgroup parent).
(5)Examples.The following ex-
amples illustrate the principles of this
paragraph (c).
Example 1. Stock of the common parent under
supplemental rules.(a) A owns all the L stock. L
is not a member of an affiliated group and has a
net operating loss carryover arising in Year 1 that
is carried over to Year 6. On September 20, Year
6, L transfers all of its assets and liabilities to a
newly created subsidiary, S, in exchange for S
stock. L and S thereafter file consolidated returns.
On November 23, Year 6, B contributes cash to L
in exchange for a 45 percent ownership interest in
L and contributes cash to S for a 20 percent
ownership interest in S.
(b)
B is a 5-percent shareholder of L who
increases his percentage ownership interest in L and
S during the 3 year period ending on November 23,
Year 6. Under paragraph (c)(4)(ii) of this section,
the determination whether L (the common parent of
a loss group) has an ownership change on November
23, Year 6 (or on any testing date in the testing
period which includes November 23, Year 6), is
made by applying paragraph (b)(1)(i) of this section
and by treating the value of B’s 20 percent owner-
ship interest in S as if it were L stock issued to B.
Example 2. Plan or arrangement—public offering
of subsidiary stock.(a) A owns all the stock of L and
L owns all the stock of L1. The L group has a
consolidated net operating loss arising in Year 1 that
resulted from the operations of L1 and that is carried
over to Year 2. As part of a plan, A sells 49 percent
of the L stock to B on October 7, Year 2, and L1
issues new stock representing a 20 percent ownership
interest in L1 to the public on November 6, Year 2.
The following is a graphic illustration of these facts:
19

(b) A’s sale of the L stock to B does not cause
an ownership change of the L loss group on
October 7, Year 2, under the rules of § 1.382–2T
and paragraph (b)(1)(i) of this section.
(c) Because the issuance of L1 stock to the
public occurs in connection with B’s acquisition of
L stock pursuant to a plan, paragraph (c)(4) of this
section applies to determine whether the L loss
group has an ownership change on November 6,
Year 2 (or on any testing date for which the
testing period includes November 6, Year 2).
(d)Testing period following owner-
ship change under this section.If a loss
group (or a loss subgroup) has had an
ownership change under this section, the
testing period for determining a subse-
quent ownership change with respect to
pre-change consolidated attributes (or
pre-change subgroup attributes) begins
no earlier than the first day following
the loss group’s (or loss subgroup’s)
most recent change date.
(e)Information statements—(1)Com-
mon parent of a loss group.The com-
mon parent of a loss group must file the
information statement required by
§ 1.382–2T(a)(2)(ii) for a consolidated
return year because of any owner shift,
equity structure shift, or the issuance or
transfer of an option—
(i) With respect to the common par-
ent and with respect to any subsidiary
stock subject to paragraph (c) of this
section; and
(ii) With respect to an ownership
change described in § 1.1502–96T(b)
(relating to ownership changes of sub-
sidiaries).
(2)Abbreviated statement with re-
spect to loss subgroups.The common
parent of a consolidated group that has a
loss subgroup during a consolidated re-
turn year must file the information state-
ment required by § 1.382–2T(a)(2)(ii)
because of any owner shift, equity struc-
ture shift, or issuance or transfer of an
option with respect to the loss subgroup
parent and with respect to any subsid-
iary stock subject to paragraph (c) of
this section. Instead of filing a separate
statement for each loss subgroup parent,
the common parent (which is treated as
a loss corporation) may file the single
statement described in paragraph (e)(1)
of this section. In addition to the infor-
mation concerning stock ownership of
the common parent, the single statement
must identify each loss subgroup parent
and state which loss subgroups, if any,
have had ownership changes during the
consolidated return year. The loss sub-
group parent is, however, still required
to maintain the records necessary to
determine if the loss subgroup has an
ownership change. This paragraph (e)(2)
applies with respect to the attributes of a
loss subgroup until, under § 1.1502–
96T(a), the attributes are no longer
treated as described in § 1.1502–91T(d)
(relating to the definition of loss sub-
group). After that time, the information
statement described in paragraph (e)(1)
of this section must be filed with respect
to those attributes.
§ 1.1502–93T Consolidated section 382
limitation (or subgroup section 382 limi-
tation) (temporary).
(a)Determination of the consolidated
section 382 limitation (or subgroup sec-
tion 382 limitation)—(1)In general.
Following an ownership change, the
consolidated section 382 limitation (or
subgroup section 382 limitation) for any
post-change year is an amount equal to
the value of the loss group (or loss
subgroup), as defined in paragraph (b)
of this section, multiplied by the long-
term tax-exempt rate that applies with
respect to the ownership change, and
adjusted as required by section 382 and
the regulations thereunder. See, for ex-
ample, section 382(b)(2) (relating to the
carryforward of unused section 382
limitation), section 382(b)(3)(B) (relat-
ing to the section 382 limitation for the
post-change year that includes the
change date), section 382(m)(2) (relating
to short taxable years), and section
382(h) (relating to recognized built-in
gains and section 338 gains).
(2)Coordination with apportionment
rule.For special rules relating to appor-
tionment of a consolidated section 382
limitation (or a subgroup section 382
limitation) when one or more corpora-
tions cease to be members of a loss
group (or a loss subgroup) and to aggre-
gation of amounts so apportioned, see
§ 1.1502–95T(c).
(b)Value of the loss group (or loss
subgroup)—(1)Stock value immediately
before ownership change.Subject to any
adjustment under paragraph (b)(2) of
this section, the value of the loss group
(or loss subgroup) is the value, immedi-
ately before the ownership change, of
the stock of each member, other than
stock that is owned directly or indirectly
by another member. For this purpose—
(i) Ownership is determined under
§ 1.382–2T;
(ii) A member is considered to indi-
rectly own stock of another member
through a nonmember only if the mem-
ber has a 5-percent or greater ownership
interest in the nonmember; and
(iii) Stock includes stock described in
section 1504(a)(4) and § 1.382–
2T(f)(18)(ii) and (iii).
(2)Adjustment to value.The value of
the loss group (or loss subgroup), as
determined under paragraph (b)(1) of
this section, is adjusted under any rule
in section 382 or the regulations there-
under requiring an adjustment to such
value for purposes of computing the
amount of the section 382 limitation.
See, for example, section 382(e)(2) (re-
demptions and corporate contractions),
section 382(l)(1) (certain capital contri-
butions) and section 382(l)(4) (owner-
ship of substantial nonbusiness assets).
The value of the loss group (or loss
subgroup) determined under this para-
graph (b) is also adjusted to the extent
necessary to prevent any duplication of
the value of the stock of a member. For
example, the principles of § 1.382–8T
(relating to controlled groups of corpo-
rations) apply in determining the value
of a loss group (or loss subgroup) if,
under § 1.1502–91T(g)(2), members are
not included in the determination
whether the group (or loss subgroup)
has a net unrealized built-in loss.
(3) Examples.The following ex-
amples illustrate the principles of this
paragraph (b).
Example 1. Basic case.(a) L, L1, and L2
compose a loss group. L has outstanding common
stock, the value of which is $100. L1 has
outstanding common stock and preferred stock that
is described in section 1504(a)(4). L owns 90
percent of the L1 common stock, and A owns the
remaining 10 percent of the L1 common stock
plus all the preferred stock. The value of the L1
common stock is $40, and the value of the L1
preferred stock is $30. L2 has outstanding com-
mon stock, 50 percent of which is owned by L
and 50 percent by L1. The L group has an
ownership change. The following is a graphic
illustration of these facts:
(b) Under paragraph (b)(1) of this section, the L
group does not include the value of the stock of
any member that is owned directly or indirectly by
another member in computing its consolidated
section 382 limitation. Accordingly, the value of
the stock of the loss group is $134, the sum of the
value of—
(1) The common stock of L ($100);
(2) the 10 percent of the L1 common stock ($4)
owned by A; and
20

(3) The L1 preferred stock ($30) owned by A.
Example 2. Indirect ownership.(a) L and L1
compose a consolidated group. L’s stock has a
value of $100. L owns 80 shares (worth $80) and
corporation M owns 20 shares (worth $20) of the
L1 stock. L also owns 79 percent of the stock of
corporation M. The L group has an ownership
change. The following is a graphic illustration of
these facts:
(b) Under paragraph (b)(1) of this section,
because of L’s more than 5 percent ownership
interest in M, a nonmember, L is considered to
indirectly own 15.8 shares of the L1 stock held by
M (79% x 20 shares). The value of the L loss
group is $104.20, the sum of the values of—
(1) The L stock ($100); and
(2) The L1 stock not owned directly or indi-
rectly by L (21% x $20, or $4.20).
(c)Recognized built-in gain of a loss
group or loss subgroup.If a loss group
(or loss subgroup) has a net unrealized
built-in gain, any recognized built-in
gain of the loss group (or loss subgroup)
is taken into account under section
382(h) in determining the consolidated
section 382 limitation (or subgroup sec-
tion 382 limitation).
(d)Continuity of business—(1)In
general.A loss group (or a loss sub-
group) is treated as a single entity for
purposes of determining whether it satis-
fies the continuity of business enterprise
requirement of section 382(c)(1).
(2)Example.The following example
illustrates the principle of this paragraph
(d).
Example. Continuity of business enterprise.L
owns all the stock of two subsidiaries, L1 and L2.
The L group has an ownership change. It has
pre-change consolidated attributes attributable to
L2. Each of the members has historically con-
ducted a separate line of business. Each line of
business is approximately equal in value. One year
after the ownership change, L discontinues its
separate business and the business of L2. The
separate business of L1 is continued for the
remainder of the 2 year period following the
ownership change. The continuity of business
enterprise requirement of section 382(c)(1) is met
even though the separate businesses of L and L2
are discontinued.
(e)Limitations of losses under other
rules.If a section 382 limitation for a
post-change year exceeds the consoli-
dated taxable income that may be offset
by pre-change attributes for any reason,
including the application of the limita-
tion of § 1.1502–21T(c), the amount of
the excess is carried forward under
section 382(b)(2) (relating to the car-
ryforward of unused section 382 limita-
tion).
§ 1.1502–94T Coordination with sec-
tion 382 and the regulations thereunder
when a corporation becomes a member
of a consolidated group (temporary).
(a)Scope—(1)In general.This sec-
tion applies section 382 and the regula-
tions thereunder to a corporation that is
a new loss member of a consolidated
group. A corporation is a new loss
member if it—
(i) Carries over a net operating loss
that arose (or is treated under § 1.1502–
21T(c) as arising) in a SRLY with
respect to the current group, and that is
not described in § 1.1502–91T(d)(1); or
(ii) Has a net unrealized built-in loss
(determined under paragraph (c) of this
section on the day it becomes a member
of the current group by treating that day
as a change date) that is not taken into
account under § 1.1502–91T(d)(2) in
determining whether two or more corpo-
rations compose a loss subgroup.
(2)Successor corporation as new
loss member.A new loss member also
includes any successor to a corporation
that has a net operating loss carryover
arising in a SRLY and that is treated as
remaining in existence under § 1.382–
2(a)(1)(ii) following a transaction de-
scribed in section 381(a).
(3)Coordination in the case of a loss
subgroup.For rules regarding the deter-
mination of whether there is an owner-
ship change of a loss subgroup with
respect to a net operating loss or a net
unrealized built-in loss described in
§ 1.1502–91T(d) (relating to the defini-
tion of loss subgroup) and the computa-
tion of a subgroup section 382 limitation
following such an ownership change,
see §§ 1.1502–92T and 1.1502–93T.
(4)End of separate tracking of cer-
tain losses.If § 1.1502–96T(a) (relating
to the end of separate tracking of at-
tributes) applies to a new loss member,
then, while that member remains a
member of the consolidated group, there
is an ownership change with respect to
its attributes described in § 1.1502–
96T(a)(2) only if the consolidated group
is a loss group and has an ownership
change under § 1.1502–92T(b)(1)(i) (or
that member has an ownership change
under § 1.1502–96T(b) (relating to
ownership changes of subsidiaries)). If,
however, the new loss member has had
an ownership change before § 1.1502–
96T(a) applies, see § 1.1502–96T(c) for
the continuing application of the section
382 limitation with respect to the mem-
ber’s pre-change losses.
(5)Cross-reference.See section
382(a) and § 1.1502–96T(c) for the
continuing effect of an ownership
change after a corporation becomes or
ceases to be a member.
(b)Application of section 382 to a
new loss member—(1)In general.Sec-
tion 382 and the regulations thereunder
apply to a new loss member to deter-
mine, on a separate entity basis, whether
and to what extent a section 382 limita-
tion applies to limit the amount of
consolidated taxable income that may be
offset by the new loss member’s pre-
change separate attributes. For example,
if an ownership change with respect to
the new loss member occurs under sec-
tion 382 and the regulations thereunder,
the amount of consolidated taxable in-
come for any post-change year that may
be offset by the new loss member’s
pre-change separate attributes shall not
exceed the section 382 limitation as
determined separately under section
382(b) with respect to that member for
such year. If the post-change year in-
cludes the change date, section
382(b)(3)(A) is applied so that the sec-
tion 382 limitation of the new loss
member does not apply to the portion of
the taxable income for such year that is
allocable to the period in such year on
or before the change date. See generally
§ 1.382–6 (relating to the allocation of
income and loss).
(2)Adjustment to value.The value of
the new loss member is adjusted to the
extent necessary to prevent any duplica-
tion of the value of the stock of a
member. For example, the principles of
§ 1.382–8T (relating to controlled
groups of corporations) apply in deter-
mining the value of a new loss member.
(3)Pre-change separate attribute de-
fined.A pre-change separate attribute of
a new loss member is—
(i) Any net operating loss carryover
of the new loss member described in
paragraph (a)(1) of this section; and
(ii) Any recognized built-in loss of
the new loss member.
(4)Examples.The following ex-
amples illustrate the principles of this
paragraph (b).
Example 1. Basic case.(a) A and P each own 50
percent of the L stock. On December 19, Year 6, P
purchases 30 percent of the L stock from A for cash.
L has net operating losses arising in Year 1 and Year
2 that it carries over to Year 6 and Year 7. The
following is a graphic illustration of these facts:
21

(b) L is a new loss member because it has net
operating loss carryovers that arose in a SRLY
with respect to the P group and L is not a member
of a loss subgroup under § 1.1502–91T(d). Under
section 382 and the regulations thereunder, L is a
loss corporation on December 19, Year 6, that day
is a testing date for L, and the testing period for L
commences on December 20, Year 3.
(c)
P’s purchase of L stock does not cause an
ownership change of L on December 19, Year 6,
with respect to the net operating loss carryovers
from Year 1 and Year 2 under section 382 and
§ 1.382–2T. The use of the loss carryovers, how-
ever, is subject to limitation under § 1.1502–21T(c).
Example 2. Multiple new loss members.(a) The
facts are the same as inExample 1, and, on
December 31, Year 6, L purchases all the stock of
L1 from B for cash. L1 has a net operating loss of
$40 arising in Year 3 that it carries over to Year 7.
The following is a graphic illustration of these facts:
(b) L1 is a new loss member because it has a
net operating loss carryover from Year 3 that arose
in a SRLY with respect to the P group and L1 is
not a member of a loss subgroup under § 1.1502–
91T(d)(1).
(c) L’s purchase of all the stock of L1 causes
an ownership change of L1 on December 31, Year
6, under section 382 and § 1.382–2T. Accordingly,
a section 382 limitation based on the value of the
L1 stock immediately before the ownership change
limits the amount of consolidated taxable income
of the P group for any post-change year that may
be offset by L1’s loss from Year 3.
(d) L1’s ownership change in connection with
its becoming a member of the P group is an
ownership change described in § 1.1502–96T(a).
Thus, starting on January 1, Year 7, the P group
no longer separately tracks owner shifts of the
stock of L1 with respect to L1’s loss from Year 3.
Instead, the P group is a loss group because of
such loss under § 1.1502–91T(c).
Example 3. Ownership changes of new loss
members.(a) The facts are the same as in
Example 2, and, on April 30, Year 7, C purchases
all the stock of P for cash.
(b) L is a new loss member on April 30, Year
7, because its Year 1 and Year 2 losses arose in
SRLYs with respect to the P group and it is not a
member of a loss subgroup under § 1.1502–
91T(d)(1). The testing period for L commences on
May 1, Year 4. C’s purchase of all the P stock
causes an ownership change of L on April 30,
Year 7, under section 382 and § 1.382–2T with
respect to its Year 1 and Year 2 losses. Accord-
ingly, a section 382 limitation based on the value
of the L stock immediately before the ownership
change limits the amount of consolidated taxable
income of the P group for any post-change year
that may be offset by L’s Year 1 and Year 2 losses.
The use of those carryovers is also subject to
limitation under § 1.1502–21T(c).
(c) The P group is a loss group on April 30,
Year 7, because it is entitled to use L1’s loss from
Year 3, and such loss is no longer treated as a loss
of a new loss member starting the day after L1’s
ownership change on December 31, Year 6. See
§§ 1.1502–96T(a) and 1.1502–91T(c)(2). C’s pur-
chase of all the P stock causes an ownership
change of P, and therefore the P loss group, on
April 30, Year 7, with respect to L1’s Year 3 loss.
Accordingly, a consolidated section 382 limitation
based on the value of the P stock immediately
before the ownership change limits the amount of
consolidated taxable income of the P group for
any post-change year that may be offset by L1’s
Year 3 loss.
(c)Built-in gains and losses.As the
context may require, the principles of
§§ 1.1502–91T(g) and (h) and 1.1502–
93T(c) (relating to built-in gains and
losses) apply to a new loss member on a
separate entity basis. See § 1.1502–
91T(g)(3).
(d)Information statements.The com-
mon parent of a consolidated group that
has a new loss member subject to
paragraph (b)(1) of this section during a
consolidated return year must file the
information statement required by
§ 1.382–2T(a)(2)(ii) because of any
owner shift, equity structure shift, or
issuance or transfer of an option with
respect to the new loss member. Instead
of filing a separate statement for each
new loss member the common parent
may file a single statement described in
§ 1.382–2T(a)(2)(ii) with respect to the
stock ownership of the common parent
(which is treated as a loss corporation).
In addition to the information concern-
ing stock ownership of the common
parent, the single statement must iden-
tify each new loss member and state
which new loss members, if any, have
had ownership changes during the con-
solidated return year. The new loss
member is, however, required to main-
tain the records necessary to determine
if it has an ownership change. This
paragraph (d) applies with respect to the
attributes of a new loss member until an
event occurs which ends separate track-
ing under § 1.1502–96T(a). After that
time, the information statement de-
scribed in § 1.1502–92T(e)(1) must be
filed with respect to these attributes.
§ 1.1502–95T Rules on ceasing to be a
member of a consolidated group (or loss
subgroup) (temporary).
(a)In general—(1)Consolidated
group.This section provides rules for
applying section 382 on or after the day
that a member ceases to be a member of
a consolidated group (or loss subgroup).
The rules concern how to determine
whether an ownership change occurs
with respect to losses of the member,
and how a consolidated section 382
limitation (or subgroup section 382 limi-
tation) is apportioned to the member. As
the context requires, a reference in this
section to a loss group, a member, or a
corporation also includes a reference to
a loss subgroup, and a reference to a
consolidated section 382 limitation also
includes a reference to a subgroup sec-
tion 382 limitation.
(2) Election by common parent. Only
the common parent (not the loss sub-
group parent) may make the election
under paragraph (c) of this section to
apportion either a consolidated section
382 limitation or a subgroup section 382
limitation.
(3)Coordination with §§ 1.1502–91T
through 1.1502–93T.For rules regarding
the determination of whether there is an
ownership change of a loss subgroup
and the computation of a subgroup
section 382 limitation following such an
ownership change, see §§ 1.1502–91T
through 1.1502–93T.
(b)Separate application of section
382 when a member leaves a consoli-
dated group—(1)In general.Except as
provided in §§ 1.1502–91T through
22

1.1502–93T (relating to rules applicable
to loss groups and loss subgroups),
section 382 and the regulations thereun-
der apply to a corporation on a separate
entity basis after it ceases to be a
member of a consolidated group (or loss
subgroup). Solely for purposes of deter-
mining whether a corporation has an
ownership change—
(i) Any portion of a consolidated net
operating loss that is apportioned to the
corporation under § 1.1502–21T(b) is
treated as a net operating loss of the
corporation beginning on the first day of
the taxable year in which the loss arose;
(ii) The testing period may include
the period during which (or before
which) the corporation was a member of
the group (or loss subgroup); and
(iii) Except to the extent provided in
§ 1.1502–20(g) (relating to reattributed
losses), the day it ceases to be a mem-
ber of a consolidated group is treated as
a testing date of the corporation within
the meaning of § 1.382–2(a)(4).
(2)Effect of a prior ownership
change of the group.If a loss group has
had an ownership change under
§ 1.1502–92T before a corporation
ceases to be a member of a consolidated
group (the former member)—
(i) Any pre-change consolidated at-
tribute that is subject to a consolidated
section 382 limitation continues to be
treated as a pre-change loss with respect
to the former member after the attribute
is apportioned to the former member;
(ii) The former member’s section 382
limitation with respect to such attribute
is zero except to the extent the common
parent apportions under paragraph (c) of
this section all or a part of the consoli-
dated section 382 limitation to the
former member;
(iii) The testing period for determin-
ing a subsequent ownership change with
respect to such attribute begins no ear-
lier than the first day following the loss
group’s most recent change date; and
(iv) As generally provided under sec-
tion 382, an ownership change of the
former member that occurs on or after
the day it ceases to be a member of a
loss group may result in an additional,
lesser limitation amount with respect to
such loss.
(3)Application in the case of a loss
subgroup.If two or more former mem-
bers are included in the same loss
subgroup immediately after they cease
to be members of a consolidated group,
the principles of paragraphs (b) and (c)
of this section apply to the loss sub-
group. Therefore, for example, an appor-
tionment by the common parent under
paragraph (c) of this section is made to
the loss subgroup rather than separately
to its members.
(4)Examples.The following ex-
amples illustrate the principles of this
paragraph (b).
Example 1. Treatment of departing member as
a separate corporation throughout the testing
period.(a) A owns all the L stock. L owns all the
stock of L1 and L2. The L group has a consoli-
dated net operating loss arising in Year 1 that is
carried over to Year 3. On January 12, Year 2, A
sells 30 percent of the L stock to B. On February
7, Year 3, L sells 40 percent of the L2 stock to C,
and L2 ceases to be a member of the group. A
portion of the Year 1 consolidated net operating
loss is apportioned to L2 under § 1.1502–21T(b)
and is carried to L2’s first separate return year,
which ends December 31, Year 3. The following is
a graphic illustration of these facts:
(b) Under paragraph (b)(1) of this section, L2 is
a loss corporation on February 7, Year 3. Under
paragraph (b)(1)(iii) of this section, February 7,
Year 3, is a testing date. Under paragraph (b)(1)(ii)
of this section, the testing period for L2 with
respect to this testing date commences on January
1, Year 1, the first day of the taxable year in
which the portion of the consolidated net operating
loss apportioned to L2 arose. Therefore, in deter-
mining whether L2 has an ownership change on
February 7, Year 3, B’s purchase of 30 percent of
the L stock and C’s purchase of 40 percent of the
L2 stock are each owner shifts. L2 has an
ownership change under section 382(g) and
§ 1.382–2T because B and C have increased their
ownership interests in L2 by 18 and 40 percentage
points, respectively, during the testing period.
Example 2. Effect of prior ownership change of
loss group.(a) L owns all the L1 stock and L1
owns all the L2 stock. The L loss group had an
ownership change under § 1.1502–92T in Year 2
with respect to a consolidated net operating loss
arising in Year 1 and carried over to Year 2 and
Year 3. The consolidated section 382 limitation
computed solely on the basis of the value of the
stock of L is $100. On December 31, Year 2, L1
sells 25 percent of the stock of L2 to B. L2 is
apportioned a portion of the Year 1 consolidated
net operating loss which it carries over to its first
separate return year ending after December 31,
Year 2. L2’s separate section 382 limitation with
respect to this loss is zero unless L elects to
apportion all or a part of the consolidated section
382 limitation to L2. (See paragraph (c) of this
section for rules regarding the apportionment of a
consolidated section 382 limitation.) L apportions
$50 of the consolidated section 382 limitation to
L2.
(b) On December 31, Year 3, L1 sells its
remaining 75 percent stock interest in L2 to C,
resulting in an ownership change of L2. L2’s
section 382 limitation computed on the change
date with respect to the value of its stock is $30.
Accordingly, L2’s section 382 limitation for post-
change years ending after December 31, Year 3,
with respect to its pre-change losses, including the
consolidated net operating losses apportioned to it
from the L group, is $30, adjusted as required by
section 382 and the regulations thereunder.
(c)Apportionment of a consolidated
section 382 limitation—(1)In general.
The common parent may elect to appor-
tion all or any part of a consolidated
section 382 limitation to a former mem-
ber (or loss subgroup). See paragraph
(e) of this section for the time and
manner of making the election to appor-
tion.
(2)Amount of apportionment.The
common parent may apportion all or
part of each element of the consolidated
section 382 limitation determined under
§ 1.1502–93T. For this purpose, the
consolidated section 382 limitation con-
sists of two elements—
(i) The value element, which is the
element of the limitation determined
under section 382(b)(1) (relating to
value multiplied by the long-term tax-
exempt rate) without regard to such
adjustments as those described in sec-
tion 382(b)(2) (relating to the car-
ryforward of unused section 382 limita-
tion), section 382(b)(3)(B) (relating to
the section 382 limitation for the post-
change year that includes the change
23

date), section 382(h) (relating to built-in
gains and section 338 gains), and sec-
tion 382(m)(2) (relating to short taxable
years); and
(ii) The adjustment element, which is
so much (if any) of the limitation for
the taxable year during which the
former member ceases to be a member
of the consolidated group that is attrib-
utable to a carryover of unused limita-
tion under section 382(b)(2) or to recog-
nized built-in gains under 382(h).
(3) Effect of apportionment on the
consolidated section 382 limitation.The
value element of the consolidated sec-
tion 382 limitation for any post-change
year ending after the day that a former
member (or loss subgroup) ceases to be
a member(s) is reduced to the extent
that it is apportioned under this para-
graph (c). The consolidated section 382
limitation for the post-change year in
which the former member (or loss sub-
group) ceases to be a member(s) is also
reduced to the extent that the adjustment
element for that year is apportioned
under this paragraph (c).
(4)Effect on corporations to which
the consolidated section 382 limitation
is apportioned.The amount of the value
element that is apportioned to a former
member (or loss subgroup) is treated as
the amount determined under section
382(b)(1) for purposes of determining
the amount of that corporation’s (or loss
subgroup’s) section 382 limitation for
any taxable year ending after the former
member (or loss subgroup) ceases to be
a member(s). Appropriate adjustments
must be made to the limitation based on
the value element so apportioned for a
short taxable year, carryforward of un-
used limitation, or any other adjustment
required under section 382. The adjust-
ment element apportioned to a former
member (or loss subgroup) is treated as
an adjustment under section 382(b)(2) or
section 382(h), as appropriate, for the
first taxable year after the member (or
members) ceases to be a member (or
members).
(5)Deemed apportionment when loss
group terminates.If a loss group termi-
nates, to the extent the consolidated
section 382 limitation is not apportioned
under paragraph (c)(1) of this section,
the consolidated section 382 limitation
is deemed to be apportioned to the loss
subgroup that includes the common par-
ent, or, if there is no loss subgroup that
includes the common parent immedi-
ately after the loss group terminates, to
the common parent. A loss group termi-
nates on the first day of the first taxable
year that is a separate return year with
respect to each member of the former
loss group.
(6)Appropriate adjustments when
former member leaves during the year.
Appropriate adjustments are made to the
consolidated section 382 limitation for
the consolidated return year during
which the former member (or loss sub-
group) ceases to be a member(s) to
reflect the inclusion of the former mem-
ber in the loss group for a portion of
that year.
(7)Examples.The following ex-
amples illustrate the principles of this
paragraph (c).
Example 1. Consequence of apportionment.(a)
L owns all the L1 stock and L1 owns all the L2
stock. The L group has a $200 consolidated net
operating loss arising in Year 1 that is carried over
to Year 2. At the close of December 31, Year 1,
the group has an ownership change under
§ 1.1502–92T. The ownership change results in a
consolidated section 382 limitation of $10 based
on the value of the stock of the group. On August
29, Year 2, L1 sells 30 percent of the stock of L2
to A. L2 is apportioned $90 of the group’s $200
consolidated net operating loss under § 1.1502–
21T(b). L, the common parent, elects to apportion
$6 of the consolidated section 382 limitation to
L2. The following is a graphic illustration of these
facts:
(b) For its separate return years ending after
August 29, Year 2 (other than the taxable year
ending December 31, Year 2), L2’s section 382
limitation with respect to the $90 of the group’s
net operating loss apportioned to it is $6, adjusted,
as appropriate, for any short taxable year, unused
section 382 limitation, or other adjustment. For its
consolidated return years ending after August 29,
Year 2, (other than the year ending December 31,
Year 2) the L group’s consolidated section 382
limitation with respect to the remaining $110 of
pre-change consolidated attribute is $4 ($10 minus
the $6 value element apportioned to L2), adjusted,
as appropriate, for any short taxable year, unused
section 382 limitation, or other adjustment.
(c) For the L group’s consolidated return year
ending December 31, Year 2, the value element of
its consolidated section 382 limitation is increased
by $4 (rounded to the nearest dollar), to account
for the period during which L2 was a member of
the L group ($6, the consolidated section 382
limitation apportioned to L2, times 241/365, the
ratio of the number of days during Year 2 that L2
is a member of the group to the number of days in
the group’s consolidated return year). See para-
graph (c)(6) of this section. Therefore, the value
element of the consolidated section 382 limitation
for Year 2 of the L group is $8 (rounded to the
nearest dollar).
(d) The section 382 limitation for L2’s short
taxable year ending December 31, Year 2, is $2
(rounded to the nearest dollar), which is the
amount that bears the same relationship to $6, the
value element of the consolidated section 382
limitation apportioned to L2, as the number of
days during that short taxable year, 124 days,
bears to 365. See § 1.382–4(c).
Example 2. Consequence of no apportionment.
The facts are the same as inExample 1, except
that L does not elect to apportion any portion of
the consolidated section 382 limitation to L2. For
its separate return years ending after August 29,
Year 2, L2’s section 382 limitation with respect to
the $90 of the group’s pre-change consolidated
attribute apportioned to L2 is zero under paragraph
(b)(2)(ii) of this section. Thus, the $90 consoli-
dated net operating loss apportioned to L2 cannot
offset L2’s taxable income in any of its separate
return years ending after August 29, Year 2. For
its consolidated return years ending after August
29, Year 2, the L group’s consolidated section 382
limitation with respect to the remaining $110 of
pre-change consolidated attribute is $10, adjusted,
as appropriate, for any short taxable year, unused
section 382 limitation, or other adjustment.
Example 3. Apportionment of adjustment ele-
ment.The facts are the same as inExample 1,
except that L2 ceases to be a member of the L
group on August 29, Year 3, and the L group has a
$4 carryforward of an unused consolidated section
382 limitation (under section 382(b)(2)) to the
1993 consolidated return year. The carryover of
unused limitation increases the consolidated sec-
tion 382 limitation for the Year 3 consolidated
return year from $10 to $14. L may elect to
apportion all or any portion of the $10 value
element and all or any portion of the $4 adjust-
ment element to L2.
(d)Rules pertaining to ceasing to be
a member of a loss subgroup—(1)In
general.A corporation ceases to be a
member of a loss subgroup—
(i) On the first day of the first tax-
able year for which it files a separate
return; or
(ii) The first day that it ceases to bear
a relationship described in section
1504(a)(1) to the loss subgroup parent
(treating for this purpose the loss sub-
group parent as the common parent
described in section 1504(a)(1)(A)).
(2)Examples.The principles of this
paragraph (d) are illustrated by the fol-
lowing examples.
Example 1. Basic case.(a) P owns all the L
stock, L owns all the L1 stock and L1 owns all
the L2 stock. The P group has a consolidated net
operating loss arising in Year 1 that is carried over
to Year 2. On December 11, Year 2, P sells all the
stock of L to corporation M. Each of L, L1, and
L2 is apportioned a portion of the Year 1 consoli-
dated net operating loss, and thereafter each joins
with M in filing consolidated returns. Under
§ 1.1502–92T, the L loss subgroup has an owner-
ship change on December 11, Year 2. The L loss
subgroup has a subgroup section 382 limitation of
$100. The following is a graphic illustration of
these facts:
24

(b) On May 22, Year 3, L1 sells 40 percent of
the L2 stock to A. L2 carries over a portion of the
P group’s net operating loss from Year 1 to its
separate return year ending December 31, Year 3.
Under paragraph (d)(1) of this section, L2 ceases
to be a member of the L loss subgroup on May
22, Year 3, which is both (1) the first day of the
first taxable year for which it files a separate
return and (2) the day it ceases to bear a
relationship described in section 1504(a)(1) to the
loss subgroup parent, L. The net operating loss of
L2 that is carried over from the P group is treated
as a pre-change loss of L2 for its separate return
years ending after May 22, Year 3. Under para-
graphs (a)(2) and (b)(2) of this section, the
separate section 382 limitation with respect to this
loss is zero unless M elects to apportion all or a
part of the subgroup section 382 limitation of the
L loss subgroup to L2.
Example 2. Formation of a new loss subgroup.
The facts are the same as inExample 1, except
that A purchases 40 percent of the L1 stock from
L rather than purchasing L2 stock from L1. L1
and L2 file a consolidated return for their first
taxable year ending after May 22, Year 3, and
each of L1 and L2 carries over a part of the net
operating loss of the P group that arose in Year 1.
Under paragraph (d)(1) of this section, L1 and L2
cease to be members of the L loss subgroup on
May 22, Year 3. The net operating losses carried
over from the P group are treated as pre-change
subgroup attributes of the loss subgroup composed
of L1 and L2. The subgroup section 382 limitation
with respect to those losses is zero unless M elects
to apportion all or part of the subgroup section
382 limitation of the L loss subgroup to the L1
loss subgroup. The following is a graphic illustra-
tion of these facts:
Example 3. Ceasing to bear a section
1504(a)(1) relationship to a loss subgroup parent.
(a) A owns all the stock of P, and P owns all the
stock of L1 and L2. The P group has a consoli-
dated net operating loss arising in Year 1 that is
carried over to Year 3 and Year 4. Corporation M
acquires all the stock of P on November 11, Year
3, and P, L1, and L2 thereafter file consolidated
returns with M. M’s acquisition results in an
ownership change of the P loss subgroup under
§ 1.1502–92T(b)(1)(ii). The following is a graphic
illustration of these facts:
(b) P distributes the L2 stock to M on October
7, Year 4. L2 ceases to be a member of the P loss
subgroup on October 7, Year 4, the first day that it
ceases to bear the relationship described in section
1504(a)(1) to P, the P loss subgroup parent. See
paragraph (d)(1)(ii) of this section. Thus, the
section 382 limitation with respect to the pre-
change subgroup attributes attributable to L2 is
zero except to the extent M elects to apportion all
or a part of the subgroup section 382 limitation of
the P loss subgroup to L2.
Example 4. Relationship through a successor.
The facts are the same as inExample 3, except
that, instead of P’s distributing the stock of L2, L2
merges into L1 on October 7, Year 4. L1 (as
successor to L2 in the merger within the meaning
of § 1.382–2T(f)(4)) continues to bear a relation-
ship described in section 1504(a)(1) to P, the loss
subgroup parent. Thus, L2 does not cease to be a
member of the P loss subgroup as a result of the
merger.
(e)Filing the election to apportion—
(1)Form of the election to apportion.
An election under paragraph (c) of this
25

section must be made by the common
parent. The election must be made in
the form of the following statement:
‘‘THIS IS AN ELECTION UNDER
§ 1.1502–95T OF THE INCOME TAX
REGULATIONS TO APPORTION ALL
OR PART OF THE [insert either CON-
SOLIDATED SECTION 382 LIMITA-
TION or SUBGROUP SECTION 382
LIMITATION, as appropriate] TO [in-
sert name and E.I.N. of the corporation
(or the corporations that compose a new
loss subgroup) to which allocation is
made]. The declaration must also in-
clude the following information, as ap-
propriate—
(i) The date of the ownership change
that resulted in the consolidated section
382 limitation (or subgroup section 382
limitation);
(ii) The amount of the consolidated
section 382 limitation (or subgroup sec-
tion 382 limitation) for the taxable year
during which the former member (or
new loss subgroup) ceases to be a
member of the consolidated group (de-
termined without regard to any appor-
tionment under this section;
(iii) The amount of the value element
and adjustment element of the consoli-
dated section 382 limitation (or sub-
group section 382 limitation) that is
apportioned to the former member (or
new loss subgroup) pursuant to para-
graph (c) of this section; and
(iv) The name and E.I.N. of the com-
mon parent making the apportionment.
(2)Signing of the election.The elec-
tion statement must be signed by both
the common parent and the former
member (or, in the case of a loss
subgroup, the common parent and the
loss subgroup parent) by persons autho-
rized to sign their respective income tax
returns.
(3)Filing of the election.The elec-
tion statement must be filed by the
common parent of the group that is
apportioning the consolidated section
382 limitation (or the subgroup section
382 limitation) with its income tax re-
turn for the taxable year in which the
former member (or new loss subgroup)
ceases to be a member. The common
parent must also deliver a copy of the
statement to the former member (or the
members of the new loss subgroup) on
or before the day the group files its
income tax return for the consolidated
return year that the former member (or
new loss subgroup) ceases to be a
member. A copy of the statement must
be attached to the first return of the
former member (or the first return in
which the members of a new loss
subgroup join) that is filed after the
close of the consolidated return year of
the group of which the former member
(or the members of a new loss sub-
group) ceases to be a member.
(4)Revocation of election.An elec-
tion statement made under paragraph (c)
of this section is revocable only with the
consent of the Commissioner.
§ 1.1502–96T Miscellaneous rules
(temporary).
(a)End of separate tracking of
losses—(1)Application.This paragraph
(a) applies to a member (or a loss
subgroup) with a net operating loss
carryover that arose (or is treated under
§ 1.1502–21T(c) as arising) in a SRLY
(or a net unrealized built-in gain or loss
determined at the time that the member
(or loss subgroup) becomes a member
of the consolidated group if there is—
(i) An ownership change of the mem-
ber (or loss subgroup in connection
with, or after, becoming a member of
the group; or
(ii) A period of 5 consecutive years
following the day that the member (or
loss subgroup) becomes a member of a
group during which the member (or loss
subgroup) has not had an ownership
change.
(2)Effect of end of separate tracking.
If this paragraph (a) applies with respect
to a member (or loss subgroup), then,
starting on the day after the earlier of
the change date (but not earlier than the
day the member (or loss subgroup)
becomes a member of the consolidated
group) or the last day of the 5 consecu-
tive year period described in paragraph
(a)(1)(ii) of this section, the member’s
net operating loss carryover that arose
(or is treated under § 1.1502–21T(c) as
arising) in a SRLY, is treated as de-
scribed in § 1.1502–91T( c)(1)(i). Also,
the member’s separately computed net
unrealized built-in gain or loss is in-
cluded in the determination whether the
group has a net unrealized built-in gain
or loss. The preceding sentences also
apply for purposes of determining
whether there is an ownership change
with respect to such attributes following
such change date (or earlier day) or 5
consecutive year period. Thus, for ex-
ample, starting the day after the change
date or the end of the 5 consecutive
year period—
(i) The consolidated group which in-
cludes the new loss member or loss
subgroup is no longer required to sepa-
rately track owner shifts of the stock of
the new loss member or loss subgroup
parent to determine if an ownership
change occurs with respect to the at-
tributes of the new loss member or
members included in the loss subgroup;
(ii) The group includes the member’s
attributes in determining whether it is a
loss group under § 1.1502–91T(c);
(iii) There is an ownership change
with respect to such attributes only if
the group is a loss group and has an
ownership change; and
(iv) If the group has an ownership
change, such attributes are pre-change
consolidated attributes subject to the
loss group’s consolidated section 382
limitation.
(3)Continuing effect of end of sepa-
rate tracking.As the context may re-
quire, a current group determines which
of its members are included in a loss
subgroup on any testing date by taking
into account the application of this sec-
tion in the former group. See the ex-
ample in § 1.1502–91T(f)(2).
(4)Special rule for testing period.
For purposes of determining the begin-
ning of the testing period for a loss
group, the member’s (or loss sub-
group’s) net operating loss carryovers
(or net unrealized built-in gain or loss)
described in paragraph (a)(2) of this
section are considered to arise—
(i) in a case described in paragraph
(a)(1)(i) of this section, in a taxable year
that begins not earlier than the later of
the day following the change date or the
day that the member becomes a member
of the group; and
(ii) in a case described in paragraph
(a)(1)(ii) of this section, in a taxable
year that begins 3 years before the end
of the 5 consecutive year period.
(5)Limits on effects of end of sepa-
rate tracking.The rule contained in this
paragraph (a) applies solely for purposes
of §§ 1.1502–91T through 1.1502–95T
and this section (other than paragraph
(b)(2)(ii)(B) of this section (relating to
the definition of pre-change attributes of
a subsidiary)) and § 1.1502–98T, and
not for purposes of other provisions of
the consolidated return regulations, in-
cluding, for example, §§ 1.1502–15T
and 1.1502–21T (relating to the consoli-
dated net operating loss deduction). See
also paragraph (c) of this section for the
continuing effect of an ownership
change with respect to pre-change at-
tributes.
(b)Ownership change of subsid-
iary—(1)Ownership change of a sub-
sidiary because of options or plan
26

or arrangement.Notwithstanding
§ 1.1502–92T, a subsidiary may have
an ownership change for purposes of
section 382 with respect to its attributes
which a group or loss subgroup includes
in making a determination under
§ 1.1502–91T(c)(1) (relating to the defi-
nition of loss group) or § 1.1502–
91T(d) (relating to the definition of loss
subgroup). The subsidiary has such an
ownership change if it has an ownership
change under the principles of
§ 1.1502–95T(b) and section 382 and
the regulations thereunder (determined
on a separate entity basis by treating the
subsidiary as not being a member of a
consolidated group) in the event of—
(i) The deemed exercise under
§ 1.382–4(d) of an option or options
(other than an option with respect to
stock of the common parent) held by a
person (or persons acting pursuant to a
plan or arrangement) to acquire more
than 20 percent of the stock of the
subsidiary; or
(ii) An increase by 1 or more
5-percent shareholders, acting pursuant
to a plan or arrangement to avoid an
ownership change of a subsidiary, in
their percentage ownership interest in
the subsidiary by more than 50 percent-
age points during the testing period of
the subsidiary through the acquisition
(or deemed acquisition pursuant to
§ 1.382–4(d)) of ownership interests in
the subsidiary and in higher-tier mem-
bers with respect to the subsidiary.
(2)Effect of the ownership change—
(i)In general.If a subsidiary has an
ownership change under paragraph
(b)(1) of this section, the amount of
consolidated taxable income for any
post-change year that may be offset by
the pre-change losses of the subsidiary
shall not exceed the section 382 limita-
tion for the subsidiary. For purposes of
this limitation, the value of the subsid-
iary is determined solely by reference to
the value of the subsidiary’s stock.
(ii)Pre-change losses.The pre-
change losses of a subsidiary are—
(A) Its allocable part of any consoli-
dated net operating loss which is attrib-
utable to it under § 1.1502–21T(b) (de-
termined on the last day of the
consolidated return year that includes
the change date) that is not carried back
and absorbed in a taxable year prior to
the year including the change date;
(B) Its net operating loss carryovers
that arose (or are treated under
§ 1.1502–21T(c) as having arisen) in a
SRLY; and
(C) Its recognized built-in loss with
respect to its separately computed net
unrealized built-in loss, if any, deter-
mined on the change date.
(3)Coordination with §§ 1.1502–
91T, 1.1502–92T, and 1.1502–94T.If an
increase in percentage ownership inter-
est causes an ownership change with
respect to an attribute under this para-
graph (b) and under § 1.1502–92T on
the same day, the ownership change is
considered to occur only under
§ 1.1502–92T and not under this para-
graph (b). See § 1.1502–94T for anti-
duplication rules relating to value.
(4)Example.The following example
illustrates paragraph (b)(1)(ii) of this
section.
Plan to avoid an ownership change of a
subsidiary.(a) L owns all the stock of L1, L1
owns all the stock of L2, L2 owns all the stock of
L3, and L3 owns all the stock of L4. The L group
has a consolidated net operating loss arising in
Year 1 that is carried over to Year 2. L has assets
other than its L1 stock with a value of $900. L1,
L2, and L3 own no assets other than their L2, L3,
and L4 stock. L4 has assets with a value of $100.
During Year 2, A, B, C, and D, acting pursuant to
a plan to avoid an ownership change of L4,
acquire the following ownership interests in the
members of the L loss group: (A) on September
11, Year 2, A acquires 20 percent of the L1 stock
from L and B acquires 20 percent of the L2 stock
from L1; and (B) on September 20, Year 2, C
acquires 20 percent of the stock of L3 from L2
and D acquires 20 percent of the stock of L4 from
L3. The following is a graphic illustration of these
facts:
(b) The acquisitions by A, B, C, and D pursu-
ant to the plan have increased their respective
percentage ownership interests in L4 by approxi-
mately 10, 13, 16, and 20 percentage points, for a
total of approximately 59 percentage points during
the testing period. This more than 50 percentage
point increase in the percentage ownership interest
in L4 causes an ownership change of L4 under
paragraph (b)(2) of this section.
(c)Continuing effect of an ownership
change.A loss corporation (or loss
subgroup) that is subject to a limitation
under section 382 with respect to its
pre-change losses continues to be sub-
ject to the limitation regardless of
whether it becomes a member or ceases
to be a member of a consolidated group.
See § 1.382–5T(d) (relating to succes-
sive ownership changes and absorption
of a section 382 limitation).
§ 1.1502–97T Special rules under sec-
tion 382 for members under the jurisdic-
tion of a court in a title 11 or similar
case (temporary).[Reserved]
§ 1.1502–98T Coordination with sec-
tion 383 (temporary).
The rules contained in §§ 1.1502–
91T through 1.1502–96T also apply for
purposes of section 383, with appropri-
ate adjustments to reflect that section
383 applies to credits and net capital
losses. Similarly, in the case of net
capital losses, general business credits,
and excess foreign taxes that are pre-
change attributes, § 1.383–1 applies the
principles of §§ 1.1502–91T through
1.1502–96T. For example, if a loss
group has an ownership change under
§ 1.1502–92T and has a carryover of
unused general business credits from a
pre-change consolidated return year to a
post-change consolidated return year, the
amount of the group’s regular tax liabil-
ity for the post-change year that can be
offset by the carryover cannot exceed
the consolidated section 383 credit limi-
tation for that post-change year, deter-
mined by applying the principles of
§§ 1.383–1(c)(6) and 1.1502–93T (relat-
ing to the computation of the consoli-
dated section 382 limitation).
§ 1.1502–99T Effective dates (temporary).
(a)Effective date.Sections 1.1502–
91T through 1.1502–96T and 1.1502–
98T apply to any testing date on or after
January 1, 1997. Sections 1.1502–94T
through 1.1502–96T also apply on any
date on or after January 1, 1997, on
which a corporation becomes a member
of a group or on which a corporation
ceases to be a member of a loss group
(or a loss subgroup).
27

(b)Testing period may include a pe-
riod beginning before January 1, 1997.A
testing period for purposes of §§ 1.1502–
91T through 1.1502–96T and 1.1502–98T
may include a period beginning before
January 1, 1997. Thus, for example, in
applying § 1.1502–92T(b)(1)(i) (relating
to the determination of an ownership
change of a loss group), the determina-
tion of the lowest percentage ownership
interest of any 5-percent shareholder of
the common parent during a testing pe-
riod ending on a testing date occurring on
or after January 1, 1997, takes into
account the period beginning before Janu-
ary 1, 1997, except to the extent that the
period is more than 3 years before the
testing date or is otherwise before the
beginning of the testing period. See
§ 1.1502–92T(b)(1).
(c)Transition rules—(1)Methods per-
mitted—(i)In general.For the period
ending before January 1, 1997, a consoli-
dated group is permitted to use any
method described in paragraph (c)(2) of
this section which is consistently applied
to determine if an ownership change
occurred with respect to a consolidated
net operating loss, a net operating loss
carryover (including net operating loss
carryovers arising in SRLYs), or a net
unrealized built-in loss. If an ownership
change occurred during that period, the
group is also permitted to use any
method described in paragraph (c)(2) of
this section which is consistently applied
to compute the amount of the section
382 limitation that applies to limit the
use of taxable income in any post-change
year ending before, on, or after January
1, 1997. The preceding sentence does not
preclude the imposition of an additional,
lesser limitation due to a subsequent
ownership change nor, except as pro-
vided in paragraph (c)(1)(iii) of this
section, does it permit the beginning of a
new testing period for the loss group.
(ii)Adjustments to offset excess limita-
tion.If an ownership change occurred
during the period ending before January
1, 1997, and a method described in
paragraph (c)(2) of this section was not
used for a post-change year, the members
(or group) must reduce the section 382
limitation for post-change years for which
an income tax return is filed after January
1, 1997, to offset, as quickly as possible,
the effects of any section 382 limitation
that members took into account in excess
of the amount that would have been
allowable under §§ 1.1502–91T through
1.1502–96T and 1.1502–98T.
(iii)Coordination with effective date.
Notwithstanding that a group may have
used a method described in paragraph
(c)(2)(ii) or (iii) of this section for the
period before January 1, 1997,
§§ 1.1502–91T through 1.1502–96T and
1.1502–98T apply to any testing date
occurring on or after January 1, 1997,
for purposes of determining whether
there is an ownership change with re-
spect to any losses and, if so, the
collateral consequences. Any ownership
change of a member other than the
common parent pursuant to a method
described in paragraph (c)(2)(ii) or (iii)
of this section does not cause a new
testing period of the loss group to begin
for purposes of applying § 1.1502–92T
on or after January 1, 1997.
(2)Permitted methods.The methods
described in this paragraph (c)(2) are:
(i)
A method that does not materially
differ from the rules in §§ 1.1502–91T
through 1.1502–96T and 1.1502–98T
(other than those in § 1.1502–95T(c) (re-
lating to the apportionment of a section
382 limitation) as they would apply to a
corporation that ceases to be a member of
the group before January 1, 1997). As the
context requires, the method must treat
references to rules in current regulations
as references to rules in regulations gener-
ally effective for taxable years before
January 1, 1997. Thus, for example, the
taxpayer must treat a reference to
§ 1.382–4(d) (relating to options) as a
reference to § 1.382–2T(h)(4) for any
testing date to which § 1.382–2T(h)(4)
applies. Similarly, a reference to
§ 1.1502–21T(c) may be a reference to
§ 1.1502–21A(c), as appropriate. Further-
more, the method must treat all corpora-
tions that were affiliated on January 1,
1987, and continuously thereafter as hav-
ing met the 5 consecutive year require-
ment of § 1.1502–91T(d)(2)(i) on any
day before January 1, 1992, on which the
determination of net unrealized built-in
gain or loss of a loss subgroup is made;
(ii) A reasonable application of the
rules in section 382 and the regulations
thereunder applied to each member on a
separate entity basis, treating each mem-
ber’s allocable part of a consolidated net
operating loss which is attributable to it
under § 1.1502–21T(b) as a net operat-
ing loss of that member and applying
rules similar to § 1.382–8T to avoid
duplication of value in computing the
section 382 limitation for the member
(see § 1.382–8T(h) (relating to the ef-
fective date and transition rules regard-
ing controlled groups)); or
(iii) A method approved by the Com-
missioner upon application by the com-
mon parent.
(d)
Amended returns.A group may file
an amended return in connection with an
ownership change occurring before Janu-
ary 1, 1997, to modify the amount of a
section 382 limitation with respect to a
consolidated net operating loss, a net
operating loss carryover (including net
operating loss carryovers arising in
SRLYs), or a recognized built-in loss (or
gain) only if it files amended returns:
(1) For the earliest taxable year end-
ing after December 31, 1986, in which
it had an ownership change, if any,
under § 1.1502–92T;
(2)
For all subsequent taxable years
for which returns have already been filed
as of the date of the amended return;
(3) The modification with respect to
all members for all taxable years ending
in 1987 and thereafter complies with
§§ 1.1502–91T through 1.1502–96T and
1.1502–98T; and
(4) The amended return(s) permitted
by the applicable statute of limitations
is/are filed before Tuesday, September
24, 1996.
(e)Section 383.This section also
applies for the purposes of section 383,
with appropriate adjustments to reflect
that section 383 applies to credits and
net capital losses.
PART 602—OMB CONTROL NUM-
BERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 3. The authority citation for part
602 continues to read in part as follows:
Authority: 26 U.S.C. 7805.
Par. 4. In § 602.101, paragraph (c) is
amended by adding an entry in numeri-
cal order to the table to read as follows:
§ 602.101 OMB Control numbers.
* * * * *
(c) * * *
CFR part or section
where identified or
described
Current
OMB
control No.
* * * * *
1.1502–95T. . . . . . . . . . . . 1545–1218
* * * * *
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved May 31, 1996.
Leslie Samuels,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on
June 26, 1996, 8:45 a.m., and published in the
issue of the Federal Register for June 27, 1996, 61
F.R. 33335)
28

Part III. Administrative, Procedural, and Miscellaneous
Instructions for Filing Claims for
Refund of Insurance Premium
Excise Tax Based on the U.S.
Supreme Court’s Opinion in
United
States v. IBM
Notice 96–37
PURPOSE
This notice provides instructions for
filing claims for refund of insurance
premium excise tax imposed by section
4371 of the Internal Revenue Code based
on the Supreme Court’s opinion inUnited
States v. International Business Machines
Corp., 64 U.S.L.W. 4419 (June 10, 1996).
BACKGROUND
Section 4371(1) of the Code imposes
a tax on each policy of insurance or
reinsurance issued by any foreign in-
surer or reinsurer with respect to casu-
alty insurance that is issued to or for, or
in the name of, an insured as defined in
section 4372(d) of the Code. The rate of
tax is 4 percent of the premium paid on
the policy.
InU.S. v. IBM, the Supreme Court
held that the tax imposed by section
4371(1) of the Internal Revenue Code of
1986 may not be applied to premiums
paid with respect to insurance covering
risks associated with goods actually in
export transit from the U.S. The Su-
preme Court’s decision was based on
the Export Clause of the U.S. Constitu-
tion, Art. I, sec. 9, cl. 5.
PROCEDURE FOR CLAIMING
REFUND OF INSURANCE PREMIUM
EXCISE TAX
Any taxpayer requesting a refund of
insurance premium excise tax based on
theU.S. v. IBMopinion must file a
Form 8849, Claim for Refund of Excise
Taxes. Refunds relating to insurance
premium excise tax based on theU.S. v.
IBMopinion may not be claimed as a
credit against any other tax liability, and
this notice provides the only procedure
for claiming a refund.
In addition to the information re-
quired by the Form 8849, a claim for
refund must be accompanied by docu-
mentation establishing that the tax for
which a refund is claimed was paid with
respect to insurance covering only goods
actually in export transit from the U.S.
In the case of a policy covering risks in
addition to goods in export transit, the
claim for refund must be accompanied
by documentation establishing the por-
tion of the insurance excise tax attribut-
able to premiums paid only for insuring
goods in actual export transit from the
U.S.
The following statement should be
typed or clearly written at the top of the
Form 8849:
CLAIM FOR REFUND OF
INSURANCE PREMIUM EXCISE
TAX AS A RESULT OFU.S. V. IBM.
Any Form 8849 requesting a refund
of insurance premium excise tax should
be submitted to the following address:
Internal Revenue Service Center
P.O. Box 21086
Philadelphia, PA 19114
DRAFTING INFORMATION
The principal author of this notice is
Ed Williams of the Office of the Associ-
ate Chief Counsel (International). For
further information regarding this notice,
call Mr. Williams at (202) 874–1490
(not a toll-free number).
Weighted Average Interest Rate
Update
Notice 96–38
Notice 88–73 provides guidelines for
determining the weighted average inter-
est rate and the resulting permissible
range of interest rates used to calculate
current liability for the purpose of the
full funding limitation of § 412(c)(7) of
the Internal Revenue Code as amended
by the Omnibus Budget Reconciliation
Act of 1987 and as further amended by
the Uruguay Round Agreements Act,
Pub. L. 103–465 (GATT).
The average yield on the 30-year
Treasury Constant Maturities for June
1996 is 7.06 percent.
The following rates were determined
for the plan years beginning in the
month shown below.
MonthYearWeighted Average
90% to 108%
Permissible Range
90% to 110%
Permissible Range
July19966.926.23 to 7.476.23 to 7.61
Drafting Information
The principal author of this notice is Donna Prestia of the Employee Plans Division. For further information regarding this
notice, call (202) 622–6076 between 2:30 and 4:00 p.m. Eastern time (not a toll-free number). Ms. Prestia’s number is (202)
622–7377 (also not a toll-free number).
29

Part IV. Items of General Interest
Notice of Proposed Rulemaking
and Notice of Public Hearing
Regulations Under Section 1502 of
the Internal Revenue Code of 1986;
Limitations on Net Operating Loss
Carryforwards and Certain Built-in
Losses and Credits Following an
Ownership Change of a
Consolidated Group
CO–25–96
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Withdrawal of prior proposed
rule, notice of proposed rulemaking by
cross-reference to temporary regulations,
and notice of public hearing.
SUMMARY: On February 4, 1991, pro-
posed rules under section 1502 were
published in theFederal Register(CO–
132–87; see 56 FR 4194; 1991–1 C.B.
728). A public hearing was held on
April 8, 1991. The IRS and Treasury
published Notice 91–27 (1991–2 C.B.
629) to advise of intended modifications
to the proposed regulations. The Febru-
ary, 1991, proposed rules are withdrawn
and these proposed regulations are is-
sued in their place.
In TD 8678, page 11 in this issue of
the Bulletin, the IRS is issuing tempo-
rary regulations regarding the operation
of sections 382 and 383 of the Internal
Revenue Code of 1986 (relating to limi-
tations on net operating loss car-
ryforwards and certain built-in losses
and credits following an ownership
change) with respect to consolidated
groups. The text of those temporary
regulations also serves as the text of
these proposed regulations. This docu-
ment also provides a notice of public
hearing on these proposed regulations.
DATES: Written comments must be re-
ceived by Wednesday, September 25,
1996. Outlines of topics to be discussed
at the public hearing scheduled for
Thursday, October 17, 1996, at 10 a.m.
must be received by Thursday, Septem-
ber 26, 1996.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (CO–25–96), room
5228, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. In the alternative, submis-
sions may be hand delivered between
the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (CO–25–96), Couri-
er’s Desk, Internal Revenue Service,
1111 Constitution Avenue NW., Wash-
ington, DC. The public hearing will be
held in the NYU Classroom, Room
2615, Internal Revenue Building, 1111
Constitution Avenue NW., Washington,
DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations,
David B. Friedel, (202) 622–7550; con-
cerning submissions and the hearing,
Evangelista Lee, (202) 622–7190 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in this notice of proposed
rulemaking has been reviewed and ap-
proved by the Office of Management
and Budget in accordance with the Pa-
perwork Reduction Act (44 U.S.C.
3507) under the control number 1545–
1218. The collection requires a response
from certain consolidated groups. The
IRS requires the information described
in Proposed § 1.1502–95(e) to assure
that a section 382 limitation is properly
determined in cases of corporations that
cease to be members of a group.
Comments concerning the collection
of information should be sent to the
Office of Management and Budget,
Attn: Desk Officer for the Department
of the Treasury, Office of Information
and Regulatory Affairs, Washington,
DC, 20503, with copies to the Internal
Revenue Service, Attn: IRS Reports
Clearance Officer, T:FP. Washington,
DC, 20224. Comments on the collection
of information should be received by
Monday, August 26, 1996.
An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless the collection of information dis-
plays a valid control number.
The collection of information is in
Proposed § 1.1502–95(e). That section
permits an election with respect to the
apportionment of a group section 382
limitation to a departing member. A
statement evidencing the apportionment
must be filed by the group and the
departing member indicating relevant in-
formation regarding the apportionment.
The likely respondents and/or
recordkeepers are corporations that are
members of certain consolidated groups.
Responses to this collection of informa-
tion are required to obtain a benefit
(relating to the section 382 limition
applicable to the departing member(s)).
Books or records relating to this col-
lection of information must be retained
as long as their contents may become
material in the administration of any
Internal Revenue law. Generally, tax
returns and tax return information are
confidential, as required by 26 U.S.C.
6103.
Estimated total annual reporting bur-
den: 380 hours. The estimated annual
burden per respondent varies from ten to
thirty minutes, depending on individual
circumstances, with an estimated aver-
age of fifteen minutes. Estimated num-
ber of respondents: 9,125. Estimated
frequency of responses: once every six
years.
Background
Temporary regulations in TD 8678,
page 11 amend the Income Tax Regula-
tions (26 CFR Part 1) under section
1502, relating to limitations on net oper-
ating loss carryforwards and certain
built-in losses and credits following an
ownership change with respect to con-
solidated groups. The final regulations
that are proposed to be based on these
proposed regulations would be added to
part 1 of title 26 of the Code of Federal
Regulations. Those final regulations
would provide rules relating to limita-
tions on net operating loss carryforwards
and certain built-in losses following an
ownership change.
For the text of these new temporary
regulations, see TD 8678. The preamble
to the temporary regulations explains the
regulations.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It is hereby certi-
fied that these regulations do not have a
significant economic impact on a sub-
stantial number of small entities. This
certification is based on the fact that
these regulations will primarily affect
affiliated groups of corporations that
have elected to file consolidated returns,
which tend to be larger businesses.
Therefore, a Regulatory Flexibility
Analysis under the Regulatory Flexibility
Act (5 U.S.C. chapter 6) is not required.
301996–31 I.R.B.

Pursuant to section 7805(f) of the Inter-
nal Revenue Code, this notice of pro-
posed rulemaking will be submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consider-
ation will be given to any written com-
ments (a signed original and eight (8)
copies) that are submitted timely to the
IRS. All comments will be available for
public inspection and copying.
A public hearing has been scheduled
for Thursday, October 17, 1996, at 10
a.m. in the NYU Classroom, Room
2615, Internal Revenue Building, 1111
Constitution Avenue NW., Washington,
DC. Because of access restrictions, visi-
tors will not be admitted beyond the
building lobby more than 15 minutes
before the hearing starts.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons that wish to present oral
comments at the hearing must submit
written comments by Wednesday, Sep-
tember 25, 1996, and submit an outline
of the topics to be discussed and the
time to be devoted to each topic (signed
original and eight (8) copies) by Thurs-
day, September 26, 1996.
A period of 10 minutes will be allotted
to each person for making comments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting information
The principal author of the temporary
regulations is David B. Friedel of the
Office of Assistant Chief Counsel (Cor-
porate), IRS. Other personnel from the
IRS and Treasury participated in their
development.
Withdrawal of Notice of Proposed
Rulemaking
Accordingly, under the authority of 26
U.S.C. 7805, the notice of proposed
rulemaking that was published on Janu-
ary 29, 1991 (56 FR 4194) is with-
drawn.
* * * * *
Proposed Amendments to the Regula-
tions
Accordingly, 26 CFR parts 1 and 602
are proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1502–91 also issued under
26 U.S.C. 382(m) and 26 U.S.C. 1502.
Section 1.1502–92 also issued under
26 U.S.C. 382(m) and 26 U.S.C. 1502.
Section 1.1502–93 also issued under
26 U.S.C. 382(m) and 26 U.S.C. 1502.
Section 1.1502–94 also issued under
26 U.S.C. 382(m) and 26 U.S.C. 1502.
Section 1.1502–95 also issued under
26 U.S.C. 382(m) and 26 U.S.C. 1502.
Section 1.1502–96 also issued under
26 U.S.C. 382(m) and 26 U.S.C. 1502.
Section 1.1502–98 also issued under
26 U.S.C. 382(m) and 26 U.S.C. 1502.
Section 1.1502–99 also issued under
26 U.S.C. 382(m) and 26 U.S.C. 1502.
* * *
Par. 2. Sections 1.1502–90 through
1.1502–99 are added to read as follows:
§ 1.1502–90 Table of contents.
§ 1.1502–91 Application of section 382
with respect to a consolidated group.
§ 1.1502–92 Ownership change of a
loss group or a loss subgroup.
§ 1.1502–93 Consolidated section 382
limitation (or subgroup section 382 limi-
tation.
§ 1.1502–94 Coordination with section
382 and the regulations thereunder when
a corporation becomes a member of a
consolidated group.
§ 1.1502–95 Rules on ceasing to be a
member of a consolidated group (or loss
subgroup).
§ 1.1502–96 Miscellaneous rules.
§ 1.1502–97 Special rules under section
382 for members under the jurisdiction
of a court in a title 11 or similar case.
§ 1.1502–98 Coordination with section
383.
§ 1.1502–99 Effective dates.
[The text of the above proposed sec-
tions is the same as the text of
§ § 1.1502–90T through 1.1502–99T
published elsewhere in this issue of the
Bulletin.]
Margaret Milner Richardson,
Commissioner of Internal Revenue.
(Filed by the Office of the Federal Register on
June 26, 1996, 8:45 a.m., and published in the
issue of the Federal Register for June 27, 1996, 61
F.R. 33395)
Notice of Proposed Rulemaking
and Notice of Public Hearing
Regulations Under Section 382 of
the Internal Revenue Code of 1986;
Application of Section 382 in Short
Taxable Years and With Respect to
Controlled Groups
CO–26–96
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Withdrawal of prior proposed
rule, notice of proposed rulemaking by
cross-reference to temporary regulations,
and notice of public hearing.
SUMMARY: On January 29, 1991, pro-
posed rules under section 382 of the
Internal Revenue Code of 1986 (relating
to limitations on net operating loss car-
ryforwards and certain built-in losses
following an ownership change) were
filed with the Office of theFederal
Register(CO–77–90; see 56 FR 4183;
1991–1 C.B. 749). The January, 1991,
proposed rules are withdrawn and these
proposed rules are issued in their place.
In TD 8679, page 4 in this issue of
the Bulletin, the IRS is issuing tempo-
rary regulations relating to the applica-
tion of section 382 in short taxable
years and with respect to controlled
groups. These regulations comply with
the statutory direction under section
382(m) to prescribe such regulations.
Additional rules amend certain aspects
of § 1.382–2T relating principally to the
separate tracking of the stock ownership
of loss corporations that cease to exist
following a merger or similar transac-
tions.
The text of those temporary regula-
tions also serves as the text of these
proposed regulations. This document
also provides a notice of public hearing
on these proposed regulations.
DATES: Written comments must be re-
ceived by Wednesday, September 25,
1996. Outlines of topics to be discussed
at the public hearing scheduled for
Thursday, October 17, 1996, at 10 a.m.
must be received by Thursday, Septem-
ber 26, 1996.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (CO–26–96), room
5228, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. In the alternative, submis-
sions may be hand delivered between
the hours of 8 a.m. and 5 p.m. to:
311996–31 I.R.B.

CC:DOM:CORP:R (CO–26–96), Couri-
er’s Desk, Internal Revenue Service,
1111 Constitution Avenue NW., Wash-
ington, DC. The public hearing will be
held in the NYU Classroom, Room
2615, Internal Revenue Building, 1111
Constitution Avenue NW., Washington,
DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations,
David B. Friedel, (202) 622–7550; con-
cerning submissions and the hearing,
Evangelista Lee, (202) 622–7190 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in this notice of proposed
rulemaking has been reviewed and ap-
proved by the Office of Management
and Budget in accordance with the Pa-
perwork Reduction Act (44 U.S.C.
3507) under the control number 1545–
1434. Proposed § 1.382–8(h) requires a
response from certain corporations that
are members of controlled groups. The
IRS requires this information to assure
compliance with section 382(m)(5) so
that the value of a loss corporation that
is a member of a controlled group is not
taken into account more than once in
computing a section 382 limitation.
Comments concerning the collection
of information should be sent to the
Office of Management and Budget,
Attn: Desk Officer for the Department
of Treasury, Office of Information and
Regulatory Affairs, Washington, DC,
20503, with copies to the Internal Rev-
enue Service, Attn: IRS Reports Clear-
ance Officer, T:FP. Washington, DC,
20224. Comments on the collection of
information should be received by Mon-
day, August 26, 1996.
An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless the collection of information dis-
plays a valid control number.
Proposed § 1.382–8(h) provides that
the loss corporation must file a state-
ment signed by it and any other member
of the controlled group that elects to
restore value to it indicating relevant
information regarding the election. The
likely respondents and/or recordkeepers
are corporations that are members of
certain controlled groups. Responses to
this collection of information are re-
quired to obtain a benefit (relating to the
restoration of value for section 382
purposes).
Books or records relating to this col-
lection of information must be retained
as long as their contents may become
material in the administration of any
Internal Revenue law. Generally, tax
returns and tax return information are
confidential, as required by 26 U.S.C.
6103.
Estimated total annual reporting bur-
den: 875 hours. The estimated annual
burden per respondent varies from ten to
thirty minutes, depending on individual
circumstances, with an estimated aver-
age of fifteen minutes. Estimated num-
ber of respondents: 21,000. Estimated
frequency of responses: once every six
years.
Background
Temporary regulations in TD 8679,
page 4 amend the Income Tax Regula-
tions (26 CFR Part 1) under section 382
of the Internal Revenue Code of 1986.
Among other changes, those regulations
add temporary regulations § § 1.382–
5T and 1.382–8T, and amend § 1.382–
2T(f). The final regulations that are
proposed to be based on these proposed
regulations would be added to part 1 of
title 26 of the Code of Federal Regula-
tions. Those final regulations would pro-
vide rules relating to limitations on net
operating loss carryforwards and certain
built-in losses following an ownership
change under section 382.
For the text of these new temporary
regulations, see TD 8679. The preamble
to the temporary regulations explains the
regulations.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It also has been
determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) and the Regulatory Flexibility
Act (5 U.S.C. chapter 6) do not apply to
these regulations, and, therefore, a
Regulatory Flexibility Analysis is not
required. Pursuant to section 7805(f) of
the Internal Revenue Code, this notice
of proposed rulemaking will be submit-
ted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on its impact on small busi-
ness.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consider-
ation will be given to any written com-
ments (a signed original and eight (8)
copies) that are submitted timely to the
IRS. All comments will be available for
public inspection and copying.
A public hearing has been scheduled
for Thursday, October 17, 1996, at 10
a.m. in the NYU Classroom, Room
2615, Internal Revenue Building, 1111
Constitution Avenue NW., Washington,
DC. Because of access restrictions, visi-
tors will not be admitted beyond the
building lobby more than 15 minutes
before the hearing starts.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons that wish to present oral
comments at the hearing must submit
written comments by Wednesday, Sep-
tember 25, 1996, and submit an outline
of the topics to be discussed and the
time to be devoted to each topic (signed
original and eight (8) copies) by Thurs-
day, September 26, 1996.
A period of 10 minutes will be allot-
ted to each person for making com-
ments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of the temporary
regulations is David B. Friedel of the
Office of Assistant Chief Counsel (Cor-
porate), IRS. Other personnel from the
IRS and Treasury participated in their
development.
Withdrawal of Notice of Proposed
Rulemaking
Accordingly, under the authority of 26
U.S.C. 7805, the notice of proposed
rulemaking that was published on Janu-
ary 29, 1991 (56 FR 4183) is with-
drawn.
* * * * *
Proposed Amendments to the Regula-
tions
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
321996–31 I.R.B.

PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by revising the entry
for § 1.382–2T and adding citations for
§ § 1.382–5 and 1.382–8 in numerical
order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.382–2T also issued under
26 U.S.C. 382(g)(4)(C), (i), (k)(1) and
(6), (l)(3), (m), and 26 U.S.C. 383.* * *
Section 1.382–5 also issued under 26
U.S.C. 382(m).* * *
Section 1.382–8 also issued under 26
U.S.C. 382(m).* * *
Par. 2. Section 1.382–1 is amended by
revising the entries for § 1.382–
2(a)(1)(iv), and adding § § 1.382–5 and
1.382–8 to read as follows:
§ 1.382–1 Table of contents.
* * * * *
§ 1.382–2 General rules for ownership
change.
(a) * * *
(1) * * *
(iv) End of separate accounting for
losses and credits of distributor or
transferor loss corporation.
* * * * *
§ 1.382–5 Section 382 limitation.
(a) Scope.
(b) Computation of value.
(c) Short taxable year.
(d) Successive ownership changes and
absorption of a section 382 limitation.
(1) In general.
(2) Recognized built-in gains and
losses.
(3) Effective date.
(e) Controlled groups.
(f) Effective date.
* * * * *
§ 1.382–8 Controlled groups.
(a) Introduction.
(b) Controlled group loss and con-
trolled group with respect to a con-
trolled group loss.
(c) Computation of value.
(1) Reduction in value.
(2) Restoration of value.
(3) Reduction in value by the amount
restored.
(4) Appropriate adjustments.
(5) Certain reductions in the value of
members of a controlled group.
(d) No double reduction.
(e) Definitions and nomenclature.
(1) Definitions in § 1.382–2T.
(2) Controlled group.
(3) Component member.
(4) Predecessors and successors.
(f) Coordination between consolidated
groups and controlled groups.
(g) Examples.
(h) Time and manner of filing elec-
tion to restore.
(1) Statement required.
(2) Revocation of election.
(3) Filing by component member.
(i) [Reserved]
(j) Effective date.
(1) In general.
(2) Transition rule.
(3) Corporations that are not members
on January 29, 1991.
(4) Amended returns.
Par. 3. Section 1.382–2 is amended as
follows:
§ 1.382–2 General rules for ownership
change.
[The text of the proposed amend-
ments to paragraphs (e)(2)(iv), (f)(1)(i),
(ii) and (iii), (f)(4), (f)(5), and (f)(18)(i)
is the same as the text of the amend-
ments to paragraphs (e)(2)(iv), (f)(1)(i),
(ii) and (iii), (f)(4), (f)(5), and (f)(18)(i)
of § 1.382–2T, published in TD 8679,
page 4, in this issue of the Bulletin.]
Par. 4. Sections 1.382–5 and 1.382–8
are added to read as follows:
[The text of these proposed sections
is the same as the text of § § 1.382–5T
and 1.382–8T published in TD 8679,
page 4, in this issue of the Bulletin.]
Margaret Milner Richardson,
Commissioner of Internal Revenue.
(Filed by the Office of the Federal Register on
June 26, 1996, 8:45 a.m., and published in the
issue of the Federal Register on June 27, 1996, 61
F.R. 33391)
Notice of Proposed Rulemaking
and Notice of Public Hearing
Arbitrage Restrictions on
Tax-Exempt Bonds
FI–28–96
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document contains
proposed regulations on the arbitrage
restrictions applicable to tax-exempt
bonds issued by state and local govern-
ments. Changes to applicable law were
made by the Tax Reform Act of 1986.
These proposed regulations affect issu-
ers of tax-exempt bonds and would
provide guidance for complying with the
arbitrage regulations.
DATES: Written comments must be re-
ceived by September 25, 1996. Requests
to speak (with outlines of oral com-
ments) at a public hearing scheduled for
Thursday, October 24, 1996, at 10 a.m.
must be received by October 3, 1996.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (FI–28–96), room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. In the alternative, submis-
sions may be hand delivered between the
hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (FI–28–96), Courier’s
Desk, Internal Revenue Service, 1111
Constitution Avenue NW., Washington,
DC. The public hearing will be held in
the Commissioner’s Conference Room,
Internal Revenue Building, 1111 Consti-
tution Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-
tions, Loretta J. Finger, (202) 622–3980;
concerning submissions and the hearing,
Michael Slaughter, (202) 622–7190 (not
toll-free numbers).
SUPPLEMENTARY
INFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in this notice of proposed
rulemaking have been submitted to the
Office of Management and Budget for
review in accordance with the Paper-
work Reduction Act of 1995 (44 U.S.C.
3507).
Comments on the collections of infor-
mation should be sent to the Office of
Management and Budget, Attn: Desk
Officer for the Department of the Trea-
sury, Office of Information and Regula-
tory Affairs, Washington, DC 20503,
with copies to the Internal Revenue
Service, Attn: IRS Reports Clearance
Officer, T:FP, Washington, DC 20224.
Comments on the collections of infor-
mation should be received by August
26, 1996.
An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless the collection of information dis-
plays a valid control number.
The collections of information are in
proposed § 1.148–5(d)(6)(v), (vi), and
(vii). This information is required by the
331996–31 I.R.B.

IRS to verify compliance with section
148. This information will be used to
establish a rebuttable presumption that a
Treasury obligation is purchased at fair
market value. The likely respondents
and/or recordkeepers are state or local
governments. Responses to this collec-
tion of information are required to es-
tablish a rebuttable presumption that a
Treasury obligation is purchased at fair
market value.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become ma-
terial in the administration of any inter-
nal revenue law. Generally, tax returns
and tax return information are confiden-
tial, as required by 25 U.S.C. 6103.
Estimated total annual reporting and
recordkeeping burden: 2,400 hours.
The estimated annual burden per
respondent/recordkeeper varies from 2
hours to 30 hours, depending on indi-
vidual circumstances, with an estimated
average of 6 hours.
Estimated number of respondents/
recordkeepers: 400.
Estimated annual frequency of re-
sponses: on occasion.
Background
This document contains proposed
regulations amending the Income Tax
Regulations (26 CFR part 1) under
section 148 of the Internal Revenue
Code to provide guidance on
nonpurpose investments for purposes of
arbitrage yield restrictions under section
148.
Explanation of Provisions
A.Background of proposed regulations
Section 148 provides rules concerning
the use of proceeds of state and local
bonds to acquire higher yielding invest-
ments. Section 148(a) provides that, ex-
cept as otherwise permitted by section
148, interest on a state or local bond
generally is tax-exempt only if the is-
suer invests bond proceeds at a yield not
exceeding the bond yield. Section 148(f)
provides, in general, that interest on a
state or local bond is tax-exempt only if
the issuer rebates to the United States
certain earnings from investing bond
proceeds at a yield exceeding the bond
yield.
Section 1.148–6(c) provides that gross
proceeds of an issue of bonds are not
allocated to a payment for a nonpurpose
investment in an amount greater than
the fair market value of that investment
on the purchase date. For this purpose
only, the fair market value of a
nonpurpose investment is adjusted to
take into account qualified administra-
tive costs allocable to that investment.
Regulations relating to the arbitrage
yield restriction rules are in §§ 1.148–0
through 1.148–11 and in §§ 1.148–1T,
1.148–2T, 1.148–3T, 1.148–4T, 1.148–
5T, 1.148–6T, 1.148–9T, 1.148–10T, and
1.148–11T. The proposed regulations
would clarify and revise certain provi-
sions of these regulations.
B.Bona fide solicitation
Section 1.148–5(d)(6)(iii) provides
that the purchase price of a guaranteed
investment contract is treated as its fair
market value on the purchase date if the
issuer makes a bona fide solicitation for
a guaranteed investment contract that
meets the requirements of that section.
The proposed regulations would clarify
that a solicitation for a guaranteed in-
vestment contract is rebuttably presumed
to be bona fide if the following require-
ments are met: (i) if the issuer uses an
agent to conduct the bidding process,
the agent does not bid to provide the
investment; (ii) all bidders have equal
opportunity to bid so that, for example,
no bidder is given the opportunity to
review other bids (a last look) before
bidding; and (iii) all bidders are reason-
ably competitive providers of invest-
ments of the type purchased.
C.Rebuttable presumption for establish-
ing fair market value
Section 1.148–5(d)(6)(iii) provides a
safe harbor for establishing fair market
value for guaranteed investment con-
tracts. The definition of guaranteed in-
vestment contract generally does not
include the purchase of investments for
an escrow for an advance refunding
transaction.
The proposed regulations would pro-
vide a rebuttable presumption for estab-
lishing fair market value for United
States Treasury obligations purchased
other than directly from the United
States Treasury. The proposed regula-
tions would apply the principles under-
lying the safe harbor in the regulations
for establishing fair market value for
guaranteed investment contracts.
D.Qualified administrative costs
Section 1.148–5(e)(2)(i) provides in
general that, in determining payments
and receipts on nonpurpose investments,
qualified administrative costs are taken
into account. Thus, qualified administra-
tive costs increase the payments for, or
decrease the receipts from, the invest-
ments.
The proposed regulations would pro-
vide a special rule to determine quali-
fied administrative costs for United
States Treasury obligations purchased
other than directly from the United
States Treasury.
Proposed Effective Dates
The regulations are proposed to apply
to bonds sold on or after the date 60
days after the adoption of final regula-
tions. In addition, these regulations are
proposed to apply after that date to
permit an issuer to apply these regula-
tions to bonds to which certain other
regulations under section 148 apply that
were sold prior to that date.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It also has been
determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) and the Regulatory Flexibility
Act (5 U.S.C. chapter 6) do not apply to
these regulations, and, therefore, a
Regulatory Flexibility Analysis is not
required. Pursuant to section 7805(f) of
the Internal Revenue Code, this notice
of proposed rulemaking will be submit-
ted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on its impact on small busi-
ness.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consider-
ation will be given to any written com-
ments (a signed original and eight (8)
copies) that are submitted timely to the
IRS. All comments will be available for
public inspection and copying.
A public hearing has been scheduled
for Thursday, October 24, 1996, at 10
a.m., in the Commissioner’s Conference
Room, Internal Revenue Building, 1111
Constitution Avenue, NW., Washington,
DC. Because of access restrictions, visi-
tors will not be admitted beyond the
Internal Revenue Building lobby more
than 15 minutes before the hearing
starts.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
341996–31 I.R.B.

Persons that wish to present oral
comments at the hearing must submit
written comments by September 25,
1996, and submit an outline of the
topics to be discussed and the time to be
devoted to each topic (signed original
and eight (8) copies) by October 3,
1996.
A period of 10 minutes will be allot-
ted to each person for making com-
ments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of these regula-
tions is Loretta J. Finger, Office of
Assistant Chief Counsel (Financial Insti-
tutions and Products). However, other
personnel from the IRS and Treasury
Department participated in their devel-
opment.
* * * * *
Proposed Amendments to the Regula-
tions
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.148–5 is amended by
adding paragraphs (d)(6)(iv) through
(d)(6)(viii) and (e)(2)(iv) to read as
follows:
§ 1.148–5 Yield and valuation of invest-
ments.
* * * * *
(d) * * *
(6) * * *
(iv)Rebuttable presumption for es-
tablishing that a solicitation for a guar-
anteed investment contract is bona fide.
For purposes of paragraph (d)(6)(iii)(A)
of this section, a solicitation for a
guaranteed investment contract is rebut-
tably presumed to be bona fide if the
other requirements of paragraph
(d)(6)(iii) of this section and the follow-
ing requirements are satisfied:
(A) If the issuer uses an agent to
conduct the bidding process, the agent
does not bid to provide the investment;
(B) All bidders have equal opportu-
nity to bid so that, for example, no
bidder is given the opportunity to re-
view other bids (a last look) before
bidding; and
(C) All bidders are reasonably com-
petitive providers of investments of the
type purchased.
(v)Rebuttable presumption for estab-
lishing fair market value for United
States Treasury obligations purchased
other than directly from the United
States Treasury.The purchase price of
United States Treasury obligations that
are purchased other than directly from
the United States Treasury is rebuttably
presumed to be the fair market value on
the purchase date if all of the following
requirements are satisfied:
(A) The issuer conducts in good faith
a solicitation for the purchase of Trea-
sury obligations that meets the require-
ments of paragraphs (d)(6)(iv)(A)
through (C) of this section, and the
issuer receives at least three bona fide
bids from providers that have no mate-
rial financial interest in the issue. For
this purpose, underwriters and financial
advisors for an issue are considered to
have a material financial interest in the
issue.
(B) The issuer purchases the highest-
yielding Treasury obligations for which
a qualifying bid is made.
(C) The yield on the Treasury obliga-
tions purchased is not significantly less
than the yield then available from the
provider on reasonably comparable
Treasury obligations offered to other
persons for purchase on terms compa-
rable to those offered to the issuer from
a source of funds other than gross
proceeds of tax-exempt bonds. If closely
comparable forward prices are not of-
fered to other persons for purchase from
a source other than gross proceeds of
tax-exempt bonds, a reasonable basis for
this comparison may be by reference to
implied forward prices for Treasury ob-
ligations based on standard financial
formulas. In general, a certificate pro-
vided by an agent conducting the bid-
ding process detailing this comparison
establishes that this comparability stan-
dard is met.
(D) In no event is the yield on any
Treasury obligation purchased less than
the highest yield then available on a
United States Treasury security — State
and Local Government Series from the
United States Department of the Trea-
sury, Bureau of Public Debt, with the
same maturity.
(E) The terms of the agreement to
purchase the Treasury obligations are
reasonable.
(F) The issuer retains the items enu-
merated in paragraphs (d)(vi) and (vii)
of this section with the bond documents.
(vi)Copies.The items described in
this paragraph (d)(vi) are a copy of each
of the following—
(A) The purchase agreement or con-
firmation and a statement detailing any
oral and other terms of the agreement;
(B) The receipt or other record of the
amount actually paid by the issuer for
the Treasury obligations, including a
statement setting out the amount of any
brokerage commission, broker fee, or
bidding fee paid to or by the seller of
the Treasury obligations; and
(C) Each bid that is received with
respect to the solicitation of the Trea-
sury obligations (clearly stamped to
show date and time when the bid was
received) and a description of the bid-
ding procedure used.
(vii)Statement.The item described in
this paragraph (d)(vii) is a statement
from the issuer, dated as of the issue
date of the bonds, certifying, under
penalties of perjury, that—
(A) If the issuer used an agent to
conduct the bidding process, the agent
did not bid to provide the investment;
(B) All bidders had equal opportunity
to bid so that, for example, no bidder
had an opportunity to review other bids
before bidding;
(C) All bidders are reasonably com-
petitive sellers of Treasury obligations;
and
(D) The issuer received at least three
bona fide bids from providers that have
no material financial interest in the
issue. (viii) For purposes of paragraphs
(d)(6)(v) through (vii) of this section,
the termissuermeans only the entity
that actually issues the bonds and not a
conduit borrower of the issuer.
(e) * * *
(2) * * *
(iv)Special rule for United States
Treasury obligations purchased other
than directly from the United States
Treasury.For Treasury obligations pur-
chased other than directly from the
United States Treasury, a fee paid to a
bidding agent is a qualified administra-
tive cost only if the following require-
ments are satisfied:
(A) The fee must be reasonable. In
general, a fee must be separately stated
in order for the issuer to have a basis
for determining that a fee is reasonable.
The fee is presumed to be reasonable if
it does not exceed .02 percent of the
amount invested in Treasury obligations.
351996–31 I.R.B.

(B) The fee must be comparable to a
fee that would be charged for a reason-
ably comparable investment of Treasury
obligations if acquired with a source of
funds other than gross proceeds of tax-
exempt bonds. This comparability stan-
dard must be applied even if no identi-
cal investments are customarily acquired
with a source of funds other than gross
proceeds of tax-exempt bonds. In gen-
eral, reference must be made to the
bidding fees paid by investors that are
not issuers of tax-exempt bonds in those
transactions that are most closely com-
parable to the purchase of investments
by the issuer of tax-exempt bonds. For
example, reference to the bidding fees
generally paid for the purchase of for-
ward contracts for Treasury obligations
is ordinarily a reasonable method of
determining whether bidding fees are
reasonable.
* * * * *
Margaret Milner Richardson,
Commissioner of Internal Revenue.
(Filed by the Office of the Federal Register on
June 26, 1996, 8:45 a.m., and published in the
issue of the Federal Register for June 27, 1996, 61
F.R. 33405)
Notice of Proposed Rulemaking
and Notice of Public Hearing
Amortizable Bond Premium
FI–48–95
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY:
This document contains
proposed regulations relating to the fed-
eral income tax treatment of bond pre-
mium and bond issuance premium. The
proposed regulations reflect changes to
the law made by the Tax Reform Act of
1986 and the Technical and Miscella-
neous Revenue Act of 1988. The pro-
posed regulations in this document would
provide needed guidance to holders and
issuers of debt instruments. This docu-
ment also provides a notice of a public
hearing on the proposed regulations.
DATES: Written comments must be re-
ceived by September 25, 1996. Requests
to appear and outlines of topics to be
discussed at the public hearing sched-
uled for October 23, 1996, at 10 a.m.
must be received by October 2, 1996.
ADDRESSES:
Send submissions to:
CC:DOM:CORP:R (FI–48–95), room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. In the alternative, submis-
sions may be hand delivered between the
hours of 8 a.m. and 5 p.m. to: CC:-
DOM:CORP:R (FI–48–95), Courier’s
Desk, Internal Revenue Service, 1111
Constitution Avenue NW, Washington,
DC. A public hearing will be held in the
Commissioner’s Conference Room, In-
ternal Revenue Building, 1111 Constitu-
tion Avenue NW, Washington, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, Will-
iam P. Cejudo, (202) 622–4016, or Jef-
frey W. Maddrey, (202) 622–3940;
concerning submissions and the hearing,
Christina Vasquez, (202) 622–7190 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in this notice of proposed
rulemaking have been submitted to the
Office of Management and Budget for
review in accordance with the Paper-
work Reduction Act of 1995 (44 U.S.C.
3507).
Comments on the collections of infor-
mation should be sent to the Office of
Management and Budget, Attn: Desk
Officer for the Department of Treasury,
Office of Information and Regulatory
Affairs, Washington, DC 20503, with
copies to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer,
T:FP, Washington, DC 20224. Com-
ments on the collections of information
should be received by August 26, 1996.
An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless the collection of information dis-
plays a valid control number.
The collections of information are in
proposed §§ 1.163–13(h)(3), 1.171–
4(a)(1), and 1.171–5(c)(2)(iii). This in-
formation is required by the IRS to
monitor compliance with the federal tax
rules for amortizing bond premium and
bond issuance premium. The likely re-
spondents are taxpayers who either ac-
quire a bond at a premium or issue a
bond at a premium. Responses to this
collection of information are required to
determine whether a holder of a bond
has elected to amortize bond premium
and to determine whether an issuer or a
holder has changed its method of ac-
counting for premium.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become ma-
terial in the administration of any inter-
nal revenue law. Generally, tax returns
and tax return information are confiden-
tial, as required by 26 U.S.C. 6103.
Estimated total annual reporting bur-
den: 50,000 hours. The estimated annual
burden per respondent varies from 0.25
hours to 0.75 hours, depending on indi-
vidual circumstances, with an estimated
average of 0.5 hours.
Estimated number of respondents:
100,000.
Estimated annual frequency of re-
sponses: One time per respondent.
Background
Sections 1.171–1 through 1.171–4 of
the Income Tax Regulations were pro-
mulgated in 1957 and last amended in
1968. In the Tax Reform Act of 1986,
section 171(b) was amended to require
that bond premium be amortized by
reference to a constant yield. In the
Technical and Miscellaneous Revenue
Act of 1988, section 171(e) was
amended to require that bond premium
be amortized as an offset to interest
income. The proposed regulations would
substantially revise the existing regula-
tions to reflect these amendments. In
addition, the proposed regulations would
revise existing guidance addressing the
issuer’s treatment of bond issuance pre-
mium.
Explanation of Provisions
In general, bond premium arises when
a holder acquires a bond for more than
the principal amount of the bond. Simi-
larly, bond issuance premium arises
when an issuer issues a bond for more
than the principal amount of the bond. A
holder will purchase, and an issuer will
issue, a bond for more than its principal
amount when the stated interest rate on
the bond is higher than the current
market yield for the bond.
The holder’s treatment of bond pre-
mium is addressed in proposed regula-
tions under section 171. The issuer’s
treatment of bond issuance premium is
addressed in proposed regulations under
section 163. In each case, the amortiza-
tion of premium is based on constant
yield principles. For this reason, the
proposed regulations use concepts and
definitions from the original issue dis-
count (OID) regulations (§§ 1.1271–0
through 1.1275–6).
361996–31 I.R.B.

Determination of bond premium
Under the proposed regulations, bond
premium is defined as the excess of a
holder’s basis in a bond over the sum of
the remaining amounts payable on the
bond other than payments of qualified
stated interest. The holder generally de-
termines the amount of bond premium
as of the date the holder acquires the
bond.
The proposed regulations provide spe-
cial rules that limit a holder’s basis
solely for purposes of determining bond
premium. For example, if a bond is
convertible into stock of the issuer at
the holder’s option, for purposes of
determining bond premium, the holder
must reduce its basis in the bond by the
value of the conversion option. This
reduction prevents the holder from inap-
propriately amortizing the cost of the
embedded conversion option.
Amortization of bond premium
Under section 171, the holder of a
taxable bond acquired at a premium
may elect to amortize bond premium.
The holder of a tax-exempt bond ac-
quired at a premium must amortize the
premium. As premium is amortized, the
holder’s basis in the bond is reduced by
a corresponding amount under section
1016(a)(5).
Under the proposed regulations, a
holder amortizes bond premium by off-
setting qualified stated interest income
with bond premium. An offset is calcu-
lated for each accrual period using con-
stant yield principles. However, the off-
set for an accrual period is only taken
into account when the holder takes
qualified stated interest into account
under the holder’s regular method of
accounting. Thus, a holder using the
cash receipts and disbursements method
of accounting does not take bond pre-
mium into account until a qualified
stated interest payment is received.
For certain bonds (e.g., bonds that
pay a variable rate of interest or that
provide for an interest holiday), the
amount of bond premium allocable to an
accrual period could exceed the amount
of qualified stated interest allocable to
that period. The proposed regulations
address this situation by providing that
the excess bond premium is not allowed
as a deduction but is carried forward to
future accrual periods.
Variable rate debt instruments
Because a variable rate debt instru-
ment (VRDI) provides for variable inter-
est payments, the yield and payment
schedule of a VRDI cannot be deter-
mined without making assumptions
about the amount of the variable pay-
ments. Under the OID regulations, OID
on a VRDI is determined and allocated
among accrual periods by reference to
an equivalent fixed rate debt instrument
constructed as of the issue date of the
VRDI. The proposed regulations provide
that bond premium on a VRDI is deter-
mined and allocated in a similar manner.
Under the proposed regulations, bond
premium on a VRDI is determined and
allocated by reference to an equivalent
fixed rate debt instrument. However, the
equivalent fixed rate debt instrument is
constructed as of the date the holder
acquires the VRDI rather than the issue
date.
Bonds subject to certain contingencies
If a bond provides for one or more
alternative payment schedules, the yield
of the bond cannot be determined with-
out making assumptions about the actual
payment schedule. The OID regulations
provide three rules for making these
assumptions. First, if one payment
schedule is significantly more likely
than not to occur, the yield of the debt
instrument is determined by reference to
this payment schedule. Second, if the
debt instrument is subject to a manda-
tory sinking fund provision, the yield is
determined without regard to the manda-
tory sinking fund provision. Third, not-
withstanding the first two rules, if the
debt instrument provides for an uncondi-
tional option or options to alter the
payment schedule, the yield is deter-
mined by assuming that the issuer will
exercise its options in the manner that
minimizes the yield of the debt instru-
ment and that the holder will exercise
its options in the manner that maximizes
the yield of the debt instrument.
The proposed regulations generally
use similar assumptions to determine the
holder’s yield on a bond that provides
for alternative payment schedules. How-
ever, in the case of an issuer’s option on
a taxable bond, the proposed regulations
reverse the assumption by assuming that
the issuer will exercise the option only
if doing so would increase the yield on
the bond. See section 171(b)(1)(B)(ii).
As a result of this rule, a holder gener-
ally must amortize bond premium on a
taxable bond by reference to the stated
maturity date, even if it appears likely
the bond will be called. In this case, if
the bond is actually called, the proposed
regulations provide that the holder may
deduct the unamortized premium. If the
bond is partially called and the partial
call is not a pro-rata prepayment, the
proposed regulations do not allow the
holder to deduct a portion of the
unamortized premium. Instead, the
holder must recompute the yield of the
bond on the date of the partial call and
amortize the remaining premium by ref-
erence to the recomputed yield.
Treasury and IRS request comments
on the application of the alternative
payment schedule rules. Specifically,
comments are requested on whether the
‘‘significantly more likely than not to
occur’’ standard is appropriate for tax-
able bonds, whether ignoring mandatory
sinking fund provisions is appropriate
for tax-exempt bonds, and whether the
distinction between pro-rata and non-
pro-rata calls is appropriate.
Bond issuance premium
Under existing § 1.61–12(c), a corpo-
rate issuer treats premium received upon
issuance of a bond as a separate item of
income. Over the term of the bond, the
premium is taken into income, and the
full amount of the stated interest is
deducted. The proposed regulations
would revise the treatment of bond
issuance premium. Under the proposed
regulations, bond issuance premium is
amortized as an offset to the issuer’s
otherwise allowable interest deduction,
not as a separate item of income. The
amount of bond issuance premium am-
ortized in any period is based on a
constant yield. In addition, the proposed
regulations would apply to all issuers,
not just corporate issuers.
De minimis rules and aggregate rules
The proposed regulations do not pro-
vide rules forde minimisamounts of
premium or for aggregate methods of
accounting for premium. Treasury and
IRS request comments on whether de
minimis rules or aggregate rules are
necessary or appropriate.
Bonds not subject to the proposed regu-
lations
The proposed regulations generally
apply to bonds acquired or issued at a
premium. Certain bonds, however, are
excluded from the application of the
proposed regulations. For example, the
proposed regulations exclude debt in-
struments subject to section 1272(a)(6)
(relating to certain prepayable debt in-
371996–31 I.R.B.

struments). No inference is intended
regarding the treatment of these debt
instruments.
Proposed effective dates
The proposed regulations relating to
bond premium provide that the final
regulations generally will apply to bonds
acquired on or after the date 60 days
after the date final regulations are pub-
lished in theFederal Register. How-
ever, if a holder makes the election to
amortize bond premium for the taxable
year containing the date 60 days after
the date final regulations are published,
the regulations apply to bonds held on
or after the first day of that taxable year.
The proposed regulations relating to
bond issuance premium provide that the
final regulations will apply to debt in-
struments issued on or after the date 60
days after the date final regulations are
published in theFederal Register.
The proposed regulations also would
provide automatic consent for a taxpayer
to change its method of accounting for
premium in certain circumstances. Be-
cause the change is made on a cut-off
basis, no items of income or deduction
are omitted or duplicated. Therefore, no
adjustment under section 481 is allowed.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It also has been
determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) and the Regulatory Flexibility
Act (5 U.S.C. chapter 6) do not apply to
these regulations, and, therefore, a
Regulatory Flexibility Analysis is not
required. Pursuant to section 7805(f) of
the Internal Revenue Code, this notice
of proposed rulemaking will be submit-
ted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on its impact on small busi-
ness.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consider-
ation will be given to any written com-
ments (a signed original and eight (8)
copies) that are submitted timely to the
IRS. All comments will be available for
public inspection and copying.
A public hearing has been scheduled
for October 23, 1996, at 10 a.m. in the
Commissioner’s Conference Room, In-
ternal Revenue Building, 1111 Constitu-
tion Avenue NW, Washington, DC. Be-
cause of access restrictions, visitors will
not be admitted beyond the building
lobby more than 15 minutes before the
hearing starts.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons that wish to present oral
comments at the hearing must submit
written comments by September 25,
1996, and submit an outline of the
topics to be discussed and the time to be
devoted to each topic (signed original
and eight (8) copies) by October 2,
1996.
A period of 10 minutes will be allot-
ted to each person for making com-
ments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal authors of these regula-
tions are William P. Cejudo and Jeffrey
W. Maddrey of the Office of Assistant
Chief Counsel (Financial Institutions
and Products). However, other personnel
from the IRS and Treasury Department
participated in their development.
* * * * *
Proposed Amendments to the Regula-
tions
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.171–2 also issued under 26
U.S.C. 171(e).
Section 1.171–3 also issued under 26
U.S.C. 171(e).
Section 1.171–4 also issued under 26
U.S.C. 171(c). * * *
Par. 2. Section 1.61–12 is amended by
revising paragraph (c) to read as fol-
lows:
§ 1.61–12 Income from discharge of
indebtedness.
* * * * *
(c)Issuance and repurchase of debt
instruments—(1)Issuance.An issuer
does not realize gain or loss upon the
issuance of a debt instrument (as de-
fined in § 1.1275–1(d)).
(2)Repurchase—(i)In general.An
issuer does not realize gain or loss upon
the repurchase of a debt instrument. For
purposes of this paragraph (c)(2), the
termrepurchaseincludes the retirement
of a debt instrument, the conversion of a
debt instrument into stock of the issuer,
and the exchange (including an ex-
change under section 1001) of a newly
issued debt instrument for an existing
debt instrument.
(ii)Repurchase at a discount.An
issuer realizes income from the dis-
charge of indebtedness upon the repur-
chase of a debt instrument for an
amount less than its adjusted issue price
(as defined in § 1.163–13(d)(5)). The
amount of discharge of indebtedness
income is equal to the excess of the
adjusted issue price over the repurchase
price. To determine the repurchase price
of a debt instrument that is repurchased
through the issuance of a new debt
instrument, see section 108(e)(10). See
§ 1.108–2 for rules relating to the real-
ization of discharge of indebtedness in-
come upon the acquisition of a debt
instrument by a person related to the
issuer.
(iii)Repurchase at a premium.An
issuer may be entitled to a repurchase
premium deduction upon the repurchase
of a debt instrument for an amount
greater than its adjusted issue price (as
defined in § 1.163–13(d)(5)). See
§ 1.163–7(c) for the treatment of repur-
chase premium.
(3)Bond issuance premium.For rules
relating to an issuer’s interest deduction
for a debt instrument issued with bond
issuance premium, see § 1.163–13.
(4)Effective date.This paragraph (c)
applies to debt instruments issued on or
after the date that is 60 days after the
date final regulations are published in
theFederal Register.
* * * * *
Par. 3. Section 1.163–7 is amended by
revising the first sentence of paragraph
(c) to read as follows:
§ 1.163–7 Deduction for OID on cer-
tain debt instruments.
* * * * *
(c)Deduction upon repurchase.Ex-
cept to the extent disallowed by any
other section of the Internal Revenue
Code (e.g., section 249) or this para-
graph (c), if a debt instrument is repur-
chased by the issuer for a price in
excess of its adjusted issue price (as
defined in § 1.163–13(d)(5)), the excess
(repurchase premium) is deductible as
381996–31 I.R.B.

interest for the taxable year in which the
repurchase occurs. * * *
* * * * *
Par. 4. Section 1.163–13 is added to
read as follows:
§ 1.163–13 Treatment of bond issuance
premium.
(a)General rule.If a debt instrument
is issued with bond issuance premium,
this section limits the amount of the
issuer’s interest deduction otherwise al-
lowable under section 163(a). In gen-
eral, the issuer determines its interest
deduction by offsetting the interest al-
locable to an accrual period with the
bond issuance premium allocable to that
period. Bond issuance premium is al-
locable to an accrual period based on a
constant yield. The use of a constant
yield to amortize bond issuance pre-
mium is intended to conform the treat-
ment of debt instruments having bond
issuance premium with those having
original issue discount. Unless otherwise
provided, the terms used in this section
have the same meaning as those terms
in section 163(e), sections 1271 through
1275, and the corresponding regulations.
Moreover, the provisions of this section
apply in a manner consistent with those
of section 163(e), sections 1271 through
1275, and the corresponding regulations.
In addition, the anti- abuse rule in
§ 1.1275–2(g) applies for purposes of
this section. For rules dealing with the
treatment of bond premium by a holder,
see §§ 1.171–1 through 1.171–5.
(b)Exceptions.This section does not
apply to—
(1) A debt instrument to which sec-
tion 1272(a)(6) applies (relating to cer-
tain interests in or mortgages held by a
REMIC, and certain other debt instru-
ments with payments subject to accel-
eration); or
(2) A debt instrument to which
§ 1.1275–4 applies (relating to certain
debt instruments that provide for contin-
gent payments).
(c)Bond issuance premium.Bond
issuance premium is the excess, if any,
of the issue price of a debt instrument
over its stated redemption price at matu-
rity. For purposes of this section, the
issue price of a convertible bond (as
defined in § 1.171–1(e)(1)(iii)(C)) does
not include an amount equal to the
value of the conversion option.
(d)Offsetting qualified stated interest
with bond issuance premium—(1)In
general.An issuer amortizes bond issu-
ance premium by offsetting the qualified
stated interest allocable to an accrual
period with the bond issuance premium
allocable to the accrual period. This
offset occurs when the issuer takes the
qualified stated interest into account
under its regular method of accounting.
(2)Qualified stated interest allocable
to an accrual period.See § 1.446–2(b)
to determine the accrual period to which
qualified stated interest is allocable and
to determine the accrual of qualified
stated interest within an accrual period.
(3)Bond issuance premium allocable
to an accrual period.The bond issuance
premium allocable to an accrual period
is determined under this paragraph
(d)(3). Within an accrual period, the
bond issuance premium allocable to the
period accrues ratably.
(i)Step one: Determine the debt in-
strument’s yield to maturity.The yield to
maturity of a debt instrument is deter-
mined under the rules of § 1.1272–
1(b)(1)(i).
(ii)Step two: Determine the accrual
periods.The accrual periods are deter-
mined under the rules of § 1.1272–
1(b)(1)(ii).
(iii)Step three: Determine the bond
issuance premium allocable to the ac-
crual period.The bond issuance pre-
mium allocable to an accrual period is
the excess of the qualified stated interest
allocable to the accrual period over the
product of the adjusted issue price at the
beginning of the accrual period and the
yield. In performing this calculation, the
yield must be stated appropriately taking
into account the length of the particular
accrual period. Principles similar to
those in § 1.1272–1(b)(4) apply in de-
termining the bond issuance premium
allocable to an accrual period.
(4)Bond issuance premium in excess
of qualified stated interest.If the bond
issuance premium allocable to an ac-
crual period exceeds the qualified stated
interest allocable to the accrual period
for a debt instrument, the excess is
carried forward to the next accrual pe-
riod and offsets qualified stated interest
in that accrual period to the extent of
the disallowed amount. If the amount
carried forward to an accrual period
exceeds the qualified stated interest for
that period, the excess is carried forward
to subsequent accrual periods, beginning
with the next accrual period, and is used
to offset qualified stated interest in those
accrual periods to the extent of the
excess. If an excess amount exists on
the date the debt instrument is retired,
the issuer takes this amount into account
as ordinary income.
(5)Adjusted issue price.In general,
the adjusted issue price of a debt instru-
ment is determined under the rules of
§ 1.1275–1(b). In addition, the adjusted
issue price of the debt instrument is
decreased by the amount of bond issu-
ance premium previously allocable un-
der paragraph (d)(3) of this section.
(e)Special rules—(1)Variable rate
debt instruments issued with bond issu-
ance premium.Bond issuance premium
on a variable rate debt instrument is
determined by reference to the stated
redemption price at maturity of the
equivalent fixed rate debt instrument
constructed as of the issue date. In
addition, the issuer allocates bond issu-
ance premium on a variable rate debt
instrument among the accrual periods by
reference to the equivalent fixed rate
debt instrument. The equivalent fixed
rate debt instrument is determined using
the principles of § 1.1275–5(e).
(2)Remote and incidental contingen-
cies.For purposes of determining and
amortizing bond issuance premium, if a
bond provides for a contingency that is
remote or incidental (within the meaning
of § 1.1275–2(h)), the contingency is
taken into account under the rules for
remote and incidental contingencies in
§ 1.1275–2(h).
(f)Example.The following example
illustrates the rules of this section.
Example—(i)Facts.On February 1, 1999, X
issues for $110,000 a debt instrument maturing on
February 1, 2006, with a stated principal amount
of $100,000, payable at maturity. The debt instru-
ment provides for unconditional payments of inter-
est of $10,000, payable on February 1 of each
year. X uses the calendar year as its taxable year,
X uses the cash receipts and disbursements
method of accounting, and X decides to use
annual accrual periods ending on February 1 of
each year. X’s calculations assume a 30-day month
and 360-day year.
(ii)Amount of bond issuance premium.The
issue price of the debt instrument is $110,000.
Because the interest payments on the debt instru-
ment are qualified stated interest, the stated re-
demption price at maturity of the debt instrument
is $100,000. Therefore, the amount of bond issu-
ance premium is $10,000 ($110,000 – $100,000).
(iii)Bond issuance premium allocable to the
first accrual period.Based on the payment sched-
ule and the issue price of the debt instrument, the
yield of the debt instrument is 8.07 percent,
compounded annually. (Although, for purposes of
simplicity, the yield as stated is rounded to two
decimal places, the computations do not reflect
this rounding convention.) The bond issuance
premium allocable to the accrual period ending on
February 1, 2000, is the excess of the qualified
stated interest allocable to the period ($10,000)
over the product of the adjusted issue price at the
beginning of the period ($110,000) and the yield
(8.07 percent, compounded annually). Therefore,
the bond issuance premium allocable to the ac-
crual period is $1,118.17 ($10,000 – $8,881.83).
391996–31 I.R.B.

(iv)Premium used to offset interest.Although X
makes an interest payment of $10,000 on February
1, 2000, X only deducts interest of $8,881.83, the
qualified stated interest allocable to the period
($10,000) offset with bond issuance premium
allocable to the period ($1,118.17).
(g)Effective date.This section applies
to debt instruments issued on or after
the date that is 60 days after the date
final regulations are published in the
Federal Register.
(h)Consent to change method of
accounting.The Commissioner grants
consent for an issuer to change its
method of accounting for bond issuance
premium on debt instruments issued on
or after the date that is 60 days after the
date final regulations are published in
theFederal Register. However, this
consent is granted only if—
(1) The change is made to comply
with this section;
(2) The change is made for the first
taxable year for which the issuer must
account for a debt instrument under this
section; and
(3) The issuer attaches to its federal
income tax return for the taxable year
containing the change a statement that it
has changed its method of accounting
under this section.
Par. 5. Sections 1.171–1 through
1.171–4 are revised to read as follows:
§ 1.171–1 Bond premium.
(a)Overview—(1)In general.This
section and §§ 1.171–2 through 1.171–5
provide rules for the determination and
amortization of bond premium by a
holder. In general, a holder amortizes
bond premium by offsetting the interest
allocable to an accrual period with the
premium allocable to that period. Bond
premium is allocable to an accrual pe-
riod based on a constant yield. The use
of a constant yield to amortize bond
premium is intended generally to con-
form the treatment of bond premium to
the treatment of original issue discount
under sections 1271 through 1275. Un-
less otherwise provided, the terms used
in this section and §§ 1.171–2 through
1.171–5 have the same meaning as those
terms in sections 1271 through 1275 and
the corresponding regulations. Moreover,
the provisions of this section and
§§ 1.171–2 through 1.171–5 apply in a
manner consistent with those of sections
1271 through 1275 and the correspond-
ing regulations. In addition, the anti-
abuse rule in § 1.1275–2(g) applies for
purposes of this section and §§ 1.171–2
through 1.171–5.
(2)Cross-references.For rules dealing
with the adjustments to a holder’s basis
to reflect the amortization of bond pre-
mium, see § 1.1016–5(b). For rules
dealing with the treatment of bond issu-
ance premium by an issuer, see
§ 1.163–13.
(b)Scope—(1)In general.Except as
provided in paragraph (b)(2) of this
section, this section and §§ 1.171–2
through 1.171–5 apply to any bond that,
upon its acquisition by the holder, is
held with bond premium. For purposes
of this section and §§ 1.171–2 through
1.171–5, the termbondhas the same
meaning as the termdebt instrumentin
§ 1.1275–1(d).
(2)Exceptions.This section and
§§ 1.171–2 through 1.171–5 do not ap-
ply to—
(i) A bond to which section
1272(a)(6) applies (relating to certain
interests in or mortgages held by a
REMIC, and certain other debt instru-
ments with payments subject to accel-
eration);
(ii) A bond to which § 1.1275–4
applies (relating to certain debt instru-
ments that provide for contingent pay-
ments);
(iii) A bond held by a holder that has
made a § 1.1272–3 election with respect
to the bond;
(iv) A bond that is stock in trade of
the holder, a bond of a kind that would
properly be included in the inventory of
the holder if on hand at the close of the
taxable year, or a bond held primarily
for sale to customers in the ordinary
course of the holder’s trade or business;
or
(v) A bond issued before September
28, 1985, unless the bond bears interest
and was issued by a corporation or by a
government or political subdivision
thereof.
(c)General rule—(1)Tax-exempt ob-
ligations.A holder must amortize bond
premium on a bond that is a tax-exempt
obligation. See § 1.171–2(c)Example 4.
(2)Taxable bonds.A holder may elect
to amortize bond premium on a taxable
bond. Except as provided in paragraph
(c)(3) of this section, a taxable bond is
any bond other than a tax-exempt obli-
gation. See § 1.171–4 for rules relating
to the election to amortize bond pre-
mium on a taxable bond.
(3)Bonds the interest on which is
partially excludable.For purposes of
this section and §§ 1.171–2 through
1.171–5, a bond the interest on which is
partially excludable from gross income
(e.g., a securities acquisition loan under
section 133) is treated as two instru-
ments, a tax-exempt obligation and a
taxable bond. The holder’s basis in the
bond and each payment on the bond are
allocated between the two instruments
based on the ratio of the interest exclud-
able to the total interest payable on the
bond.
(d)Determination of bond premium—
(1)In general.A holder acquires a bond
at a premium if the holder’s basis in the
bond immediately after its acquisition
by the holder exceeds the sum of all
amounts payable on the bond after the
acquisition date (other than payments of
qualified stated interest). This excess is
bond premium, which is amortizable
under § 1.171–2.
(2)Additional rules for amounts pay-
able on certain bonds.Additional rules
apply to determine the amounts payable
on a variable rate debt instrument and
on a bond that provides for certain
alternative payment schedules. See
§ 1.171–3.
(e)Basis.A holder determines its
basis in a bond under this paragraph (e).
This determination of basis applies only
for purposes of this section and
§§ 1.171–2 through 1.171–5. Because
of the application of this paragraph (e),
the holder’s basis in the bond for pur-
poses of these sections may differ from
the holder’s basis for determining gain
or loss on the sale or exchange of the
bond.
(1)Determination of basis—(i)In
general.In general, the holder’s basis in
the bond is the holder’s basis for deter-
mining loss on the sale or exchange of
the bond.
(ii)Bonds acquired in certain ex-
changes.If the holder acquired the bond
in exchange for other property (other
than in a reorganization defined in sec-
tion 368) and the holder’s basis in the
bond is determined in whole or in part
by reference to the holder’s basis in the
other property, the holder’s basis in the
bond may not exceed its fair market
value immediately after the exchange.
See paragraph (f)Example 1of this
section. If the bond is acquired in a
reorganization, see section 171(b)(4)(B).
(iii)Convertible bonds—(A)General
rule.If the bond is a convertible bond,
the holder’s basis in the bond is reduced
by an amount equal to the value of the
conversion option. The value of the
conversion option may be determined
under any reasonable method. For ex-
ample, the holder may determine the
value of the conversion option by com-
paring the market price of the convert-
ible bond to the market prices of similar
401996–31 I.R.B.

bonds that do not have conversion op-
tions. See paragraph (f)Example 2of
this section.
(B)Convertible bonds acquired in
certain exchanges.If the bond is a
convertible bond acquired in a transac-
tion described in paragraph (e)(1)(ii) of
this section, the holder’s basis in the
bond may not exceed its fair market
value immediately after the exchange
reduced by the value of the conversion
option.
(C)Definition of convertible bond.A
convertible bond is a bond that provides
the holder with an option to convert the
bond into stock of the issuer, stock or
debt of a related party (within the
meaning of section 267(b) or 707(b)(1)),
or into cash or other property in an
amount equal to the approximate value
of that stock or debt.
(2)Basis in bonds held by certain
transferees.Notwithstanding paragraph
(e)(1) of this section, if the bond is
transferred basis property (as defined in
section 7701(a)(43)) and the transferor
had acquired the bond at a premium, the
holder’s basis in the bond is—
(i) The holder’s basis for determining
loss on the sale or exchange of the
bond; reduced by
(ii) Any amounts that the transferor
could not have amortized under this
paragraph (e) or under § 1.171–4(c).
(f)Examples.The following examples
illustrate the rules of this section.
Example 1. Bond received in liquidation of a
partnership interest—(i)Facts.PR is a partner in
partnership PRS. PRS does not have any unreal-
ized receivables or substantially appreciated inven-
tory items as defined in section 751. On January
1, 1997, PRS distributes to PR a taxable bond,
issued by an unrelated corporation, in liquidation
of PR’s partnership interest. At that time, the fair
market value of PR’s partnership interest is
$40,000 and the basis is $100,000. The fair market
value of the bond is $40,000.
(ii)Determination of basis.Under section
732(b), PR’s basis in the bond is equal to PR’s
basis in the partnership interest. Therefore, PR’s
basis for determining loss on the sale or exchange
of the bond is $100,000. However, under para-
graph (e)(1)(ii) of this section, PR’s basis in the
bond is $40,000 for purposes of this section and
§§ 1.171–2 through 1.171–5.
Example 2. Convertible bond—(i)Facts.On
January 1, 1997, A purchases for $1,100 B
corporation’s bond maturing on January 1, 2000,
with a stated principal amount of $1,000, payable
at maturity. The bond provides for unconditional
payments of interest of $30 on January 1 and July
1 of each year. In addition, the bond is convertible
into 15 shares of B corporation stock at the option
of the holder. On January 1, 1997, B corporation’s
nonconvertible, publicly-traded, three-year debt
with similar credit rating trades at a price that
reflects a yield of 6.75 percent, compounded
semiannually.
(ii)Determination of basis.A’s basis for deter-
mining loss on the sale or exchange of the bond is
$1,100. As of January 1, 1997, discounting the
remaining payments on the bond at the yield at
which B’s similar nonconvertible bonds trade
(6.75 percent, compounded semiannually) results
in a present value of $980. Thus, the value of the
conversion option is $120. Under paragraph
(e)(1)(iii)(A) of this section, A’s basis is $980
($1,100 – $120) for purposes of this section and
§§ 1.171–2 through 1.171–5. The sum of all
amounts payable on the bond other than qualified
stated interest is $1,000. Because A’s basis (as
determined under paragraph (e)(1)(iii)(A) of this
section) does not exceed $1,000, A does not
acquire the bond at a premium.
§ 1.171–2 Amortization of bond pre-
mium.
(a)Offsetting qualified stated interest
with premium—(1)In general.A holder
amortizes bond premium by offsetting
the qualified stated interest allocable to
an accrual period with the bond pre-
mium allocable to the accrual period.
This offset occurs when the holder takes
the qualified stated interest into account
under the holder’s regular method of
accounting.
(2)Qualified stated interest allocable
to an accrual period.See § 1.446–2(b)
to determine the accrual period to which
qualified stated interest is allocable and
to determine the accrual of qualified
stated interest within an accrual period.
(3)Bond premium allocable to an
accrual period.The bond premium al-
locable to an accrual period is deter-
mined under this paragraph (a)(3).
Within an accrual period, the bond pre-
mium allocable to the period accrues
ratably.
(i)Step one: Determine the holder’s
yield.The holder’s yield is the discount
rate that, when used in computing the
present value of all remaining payments
to be made on the bond (including
payments of qualified stated interest),
produces an amount equal to the hold-
er’s basis in the bond as determined
under § 1.171–1(e). For this purpose,
the remaining payments include only
payments to be made after the date the
holder acquires the bond. The yield is
calculated as of the date the holder
acquires the bond, must be constant over
the term of the bond, and must be
calculated to at least two decimal places
when expressed as a percentage.
(ii)Step two: Determine the accrual
periods.A holder determines the accrual
periods for the bond under the rules of
§ 1.1272–1(b)(1)(ii).
(iii)Step three: Determine the bond
premium allocable to the accrual pe-
riod.The bond premium allocable to an
accrual period is the excess of the
qualified stated interest allocable to the
accrual period over the product of the
holder’s adjusted acquisition price (as
defined in paragraph (b) of this section)
at the beginning of the accrual period
and the holder’s yield. In performing
this calculation, the yield must be stated
appropriately taking into account the
length of the particular accrual period.
Principles similar to those in § 1.1272–
1(b)(4) apply in determining the bond
premium allocable to an accrual period.
(4)Bond premium in excess of quali-
fied stated interest.If the bond premium
allocable to an accrual period exceeds
the qualified stated interest allocable to
the accrual period for that bond, the
excess is carried forward to the next
accrual period and offsets qualified
stated interest in that accrual period to
the extent of the disallowed amount. If
the bond premium carried forward to an
accrual period exceeds the qualified
stated interest for that period, the excess
is carried forward to subsequent accrual
periods, beginning with the next accrual
period, and is used to offset qualified
stated interest in those accrual periods to
the extent of the excess.
(5)Additional rules for certain bonds.
Additional rules apply to determine the
amortization of bond premium on a
variable rate debt instrument and on a
bond that provides for certain alternative
payment schedules. See § 1.171–3.
(b)Adjusted acquisition price.The
adjusted acquisition price of a bond at
the beginning of the first accrual period
is the holder’s basis as determined under
§ 1.171–1(e). Thereafter, the adjusted
acquisition price is the holder’s basis in
the bond decreased by—
(1) The amount of bond premium
previously allocable under paragraph
(a)(3) of this section; and
(2) The amount of any payment pre-
viously made on the bond other than a
payment of qualified stated interest.
(c)Examples.The following examples
illustrate the rules of this section. Each
example assumes the holder uses the
calendar year as its taxable year and has
elected to amortize bond premium, ef-
fective for all relevant taxable years. In
addition, each example assumes a 30-
day month and 360-day year. Although,
for purposes of simplicity, the yield as
stated is rounded to two decimal places,
the computations do not reflect this
rounding convention.
Example 1. Taxable bond—(i)Facts.On Febru-
ary 1, 1999, A purchases for $110,000 a taxable
bond maturing on February 1, 2006, with a stated
principal amount of $100,000, payable at maturity.
The bond provides for unconditional payments of
interest of $10,000, payable on February 1 of each
411996–31 I.R.B.

year. A uses the cash receipts and disbursements
method of accounting, and A decides to use annual
accrual periods ending on February 1 of each year.
(ii)Amount of bond premium.The interest
payments on the bond are qualified stated interest.
Therefore, the sum of all amounts payable on the
bond (other than the interest payments) is
$100,000. Under § 1.171–1, the amount of bond
premium is $10,000 ($110,000 – $100,000).
(iii)Bond premium allocable to the first accrual
period.Based on the remaining payment schedule
of the bond and A’s basis in the bond, A’s yield is
8.07 percent, compounded annually. The bond
premium allocable to the accrual period ending on
February 1, 2000, is the excess of the qualified
stated interest allocable to the period ($10,000)
over the product of the adjusted acquisition price
at the beginning of the period ($110,000) and A’s
yield (8.07 percent, compounded annually). There-
fore, the bond premium allocable to the accrual
period is $1,118.17 ($10,000 – $8,881.83).
(iv)Premium used to offset interest.Although A
receives an interest payment of $10,000 on Febru-
ary 1, 2000, A only includes in income $8,881.83,
the qualified stated interest allocable to the period
($10,000) offset with bond premium allocable to
the period ($1,118.17). Under § 1.1016–5(b), A’s
basis in the bond is reduced by $1,118.17 on
February 1, 2000.
Example 2. Alternative accrual periods—(i)
Facts.The facts are the same as inExample 1of
this paragraph (c) except that A decides to use
semiannual accrual periods ending on February 1
and August 1 of each year.
(ii)Bond premium allocable to the first accrual
period.Based on the remaining payment schedule
of the bond and A’s basis in the bond, A’s yield is
7.92 percent, compounded semiannually. The bond
premium allocable to the accrual period ending on
August 1, 1999, is the excess of the qualified
stated interest allocable to the period ($5,000) over
the product of the adjusted acquisition price at the
beginning of the period ($110,000) and A’s yield,
stated appropriately taking into account the length
of the accrual period (7.92 percent/2). Therefore,
the bond premium allocable to the accrual period
is $645.29 ($5,000 – $4,354.71). Although the
accrual period ends on August 1, 1999, the
qualified stated interest of $5,000 is not taken into
income until February 1, 2000, the date it is
received. Likewise, the bond premium of $645.29
is not taken into account until February 1, 2000.
The adjusted acquisition price of the bond on
August 1, 1999, is $109,354.71 (the adjusted
acquisition price at the beginning of the period
($110,000) less the bond premium allocable to the
period ($645.29)).
(iii)Bond premium allocable to the second
accrual period.Because the interval between
payments of qualified stated interest contains more
than one accrual period, the adjusted acquisition
price at the beginning of the second accrual period
must be adjusted for the accrued but unpaid
qualified stated interest. Therefore, the adjusted
acquisition price on August 1, 1999, is
$114,354.71 ($109,354.71 + $5,000). The bond
premium allocable to the accrual period ending on
February 1, 2000, is the excess of the qualified
stated interest allocable to the period ($5,000) over
the product of the adjusted acquisition price at the
beginning of the period ($114,354.71) and A’s
yield, stated appropriately taking into account the
length of the accrual period (7.92 percent/2).
Therefore, the bond premium allocable to the
accrual period is $472.88 ($5,000 – $4,527.12).
(iv)Premium used to offset interest.Although A
receives an interest payment of $10,000 on Febru-
ary 1, 2000, A only includes in income $8,881.83,
the qualified stated interest of $10,000 ($5,000
allocable to the accrual period ending on August
1, 1999, and $5,000 allocable to the accrual period
ending on February 1, 2000) offset with bond
premium of $1,118.17 ($645.29 allocable to the
accrual period ending on August 1, 1999, and
$472.88 allocable to the accrual period ending on
February 1, 2000). As indicated inExample 1of
this paragraph (c), this same amount would be
taken into income at the same time had A used
annual accrual periods.
Example 3. Holder uses accrual method of
accounting—(i)Facts.The facts are the same as
inExample 1of this paragraph (c) except that A
uses the accrual method of accounting. Thus, for
the accrual period ending on February 1, 2000, the
qualified stated interest allocable to the period is
$10,000, and the bond premium allocable to the
period is $1,118.17. Because the accrual period
extends beyond the end of A’s taxable year, A
must allocate these amounts between the two
taxable years.
(ii)Amounts allocable to the first taxable year.
The qualified stated interest allocable to the first
taxable year is $9,166.67 ($10,000 x 11/12). The
bond premium allocable to the first taxable year is
$1,024.99 ($1,118.17 x 11/12).
(iii)Premium used to offset interest.For 1999,
A includes in income $8,141.68, the qualified
stated interest allocable to the period ($9,166.67)
offset with bond premium allocable to the period
($1,024.99). Under § 1.1016–5(b), A’s basis in the
bond is reduced by $1,024.99 in 1999.
(iv)Amounts allocable to the next taxable year.
The remaining amounts of qualified stated interest
and bond premium allocable to the accrual period
ending on February 1, 2000, are taken into
account for the taxable year ending on December
31, 2000.
Example 4. Tax-exempt obligation—(i)Facts.
On January 15, 1999, C purchases for $120,000 a
tax-exempt obligation maturing on January 15,
2006, with a stated principal amount of $100,000,
payable at maturity. The obligation provides for
unconditional payments of interest of $9,000,
payable on January 15 of each year. C uses the
cash receipts and disbursements method of ac-
counting, and C decides to use annual accrual
periods ending on January 15 of each year.
(ii)Amount of bond premium.The interest
payments on the obligation are qualified stated
interest. Therefore, the sum of all amounts payable
on the obligation (other than the interest pay-
ments) is $100,000. Under § 1.171–1, the amount
of bond premium is $20,000 ($120,000 –
$100,000).
(iii)Bond premium allocable to the first accrual
period.Based on the remaining payment schedule
of the obligation and C’s basis in the obligation,
C’s yield is 5.48 percent, compounded annually.
The bond premium allocable to the accrual period
ending on January 15, 2000, is the excess of the
qualified stated interest allocable to the period
($9,000) over the product of the adjusted acquisi-
tion price at the beginning of the period
($120,000) and C’s yield (5.48 percent, com-
pounded annually). Therefore, the bond premium
allocable to the accrual period is $2,420.55
($9,000 – $6,579.45).
(iv)Premium used to offset interest.Although C
receives an interest payment of $9,000 on January
15, 2000, C only receives tax-exempt interest
income of $6,579.45, the qualified stated interest
allocable to the period ($9,000) offset with bond
premium allocable to the period ($2,420.55). Un-
der § 1.1016–5(b), C’s basis in the obligation is
reduced by $2,420.55 on January 15, 2000.
§ 1.171–3 Special rules for certain
bonds.
(a)Variable rate debt instruments.
Bond premium on a variable rate debt
instrument is determined by reference to
the stated redemption price at maturity
of the equivalent fixed rate debt instru-
ment constructed for the variable rate
debt instrument. In addition, a holder
allocates bond premium on a variable
rate debt instrument among the accrual
periods by reference to the equivalent
fixed rate debt instrument. The equiva-
lent fixed rate debt instrument is deter-
mined as of the date the variable rate
debt instrument is acquired by the
holder and is constructed using the
principles of § 1.1275–5(e). See para-
graph (d)Example 1of this section.
(b)Yield and remaining payment
schedule of certain bonds subject to
contingencies—(1)Applicability.This
paragraph (b) provides rules that apply
in determining the yield and remaining
payment schedule of certain bonds that
provide for an alternative payment
schedule (or schedules) applicable upon
the occurrence of a contingency (or
contingencies). This paragraph (b) ap-
plies, however, only if the timing and
amounts of the payments that comprise
each payment schedule are known as of
the date the holder acquires the bond
(theacquisition date) and the bond is
subject to paragraph (b)(2), (3), or (4) of
this section. A bond does not provide for
an alternative payment schedule merely
because there is a possibility of impair-
ment of a payment (or payments) by
insolvency, default, or similar circum-
stances. See § 1.1275–4 for the treat-
ment of a bond that provides for a
contingency that is not described in this
paragraph (b).
(2)Remaining payment schedule that
is significantly more likely than not to
occur.If, based on all the facts and
circumstances as of the acquisition date,
a single remaining payment schedule for
a bond is significantly more likely than
not to occur, this remaining payment
schedule is used to determine and amor-
tize bond premium under §§ 1.171–1
and 1.171–2.
(3)Mandatory sinking fund provision.
Notwithstanding paragraph (b)(2) of this
section, if a bond is subject to a manda-
tory sinking fund provision described in
§ 1.1272–1(c)(3) and the use and terms
of the provision meet reasonable com-
mercial standards, the provision is ig-
nored for purposes of determining and
421996–31 I.R.B.

amortizing bond premium under
§§ 1.171–1 and 1.171–2.
(4)Treatment of certain options—(i)
Applicability.Notwithstanding para-
graphs (b)(2) and (3) of this section, the
rules of this paragraph (b)(4) determine
the remaining payment schedule of a
bond that provides the holder or issuer
with an unconditional option or options,
exercisable on one or more dates during
the remaining term of the bond, to alter
the bond’s remaining payment schedule.
(ii)Operating rules.A holder deter-
mines the remaining payment schedule
of a bond by assuming that each option
will (or will not) be exercised under the
following rules:
(A)Issuer options.The issuer of a
tax-exempt obligation is deemed to ex-
ercise or not exercise an option or
combination of options in the manner
that minimizes the holder’s yield on the
obligation. The issuer of a taxable bond
is deemed to exercise or not exercise an
option or combination of options in the
manner that maximizes the holder’s
yield on the bond.
(B)Holder options.A holder is
deemed to exercise or not exercise an
option or combination of options in the
manner that maximizes the holder’s
yield on the bond.
(C)Multiple options.If both the is-
suer and the holder have options, the
rules of paragraphs (b)(4)(ii)(A) and (B)
of this section are applied to the options
in the order that they may be exercised.
Thus, the deemed exercise of one option
may eliminate other options that are
later in time.
(5)Subsequent adjustments—(i)In
general.Except as provided in para-
graph (b)(5)(ii) of this section, if a
contingency described in this paragraph
(b) (including the exercise of an option
described in paragraph (b)(4) of this
section) actually occurs or does not
occur, contrary to the assumption made
pursuant to this paragraph (b) (achange
in circumstances), then solely for pur-
poses of section 171, the bond is treated
as retired and reacquired by the holder
on the date of the change in circum-
stances for an amount equal to the
adjusted acquisition price of the bond as
of that date. If, however, the change in
circumstances results in a substantially
contemporaneous pro-rata prepayment as
defined in § 1.1275–2(f)(2), the pro-rata
prepayment is treated as a payment in
retirement of a portion of the bond. See
paragraph (d)Example 2of this section.
(ii)Bond premium deduction on the
issuer’s call of a taxable bond.If a
change in circumstances results from an
issuer’s call of a taxable bond or a
partial call that is a pro- rata prepay-
ment, the holder may deduct as bond
premium an amount equal to the excess,
if any, of the adjusted acquisition price
of the bond over the greater of the
amount received on redemption or the
amount payable on maturity.
(c)Remote and incidental contingen-
cies.For purposes of determining and
amortizing bond premium, if a bond
provides for a contingency that is re-
mote or incidental (within the meaning
of § 1.1275–2(h)), the contingency is
taken into account under the rules for
remote and incidental contingencies in
§ 1.1275–2(h).
(d)Examples.The following ex-
amples illustrate the rules of this sec-
tion. Each example assumes the holder
uses the calendar year as its taxable year
and, except as otherwise stated, has
elected to amortize bond premium, ef-
fective for all relevant taxable years. In
addition, each example assumes a 30-
day month and 360-day year. Although,
for purposes of simplicity, the yield as
stated is rounded to two decimal places,
the computations do not reflect this
rounding convention.
Example 1. Variable rate debt instrument—(i)
Facts.On March 1, 1999, E purchases for
$110,000 a taxable bond maturing on March 1,
2007, with a stated principal amount of $100,000,
payable at maturity. The bond provides for uncon-
ditional payments of interest on March 1 of each
year based on the percentage appreciation of a
nationally-known commodity index. On March 1,
1999, it is reasonably expected that the bond will
yield 12 percent, compounded annually. E uses the
cash receipts and disbursements method of ac-
counting, and E decides to use annual accrual
periods ending on March 1 of each year. Assume
that the bond is a variable rate debt instrument
under § 1.1275–5.
(ii)Amount of bond premium.Because the bond
is a variable rate debt instrument, E determines
and amortizes its bond premium by reference to
the equivalent fixed rate debt instrument con-
structed for the bond as of March 1, 1999.
Because the bond provides for interest at a single
objective rate that is reasonably expected to yield
12 percent, compounded annually, the equivalent
fixed rate debt instrument for the bond is an eight-
year bond with a principal amount of $100,000,
payable at maturity. It provides for annual pay-
ments of interest of $12,000. E’s basis in the
equivalent fixed rate debt instrument is $110,000.
The sum of all amounts payable on the equivalent
fixed rate debt instrument (other than payments of
qualified stated interest) is $100,000. Under
§ 1.171–1, the amount of bond premium is
$10,000 ($110,000 – $100,000).
(iii)Bond premium allocable to each accrual
period.E allocates bond premium to the remaining
accrual periods by reference to the payment sched-
ule on the equivalent fixed rate debt instrument.
Based on the payment schedule of the equivalent
fixed rate debt instrument and E’s basis in the
bond, E’s yield is 10.12 percent, compounded
annually. The bond premium allocable to the
accrual period ending on March 1, 2000, is the
excess of the qualified stated interest allocable to
the period for the equivalent fixed rate debt
instrument ($12,000) over the product of the
adjusted acquisition price at the beginning of the
period ($110,000) and E’s yield (10.12 percent,
compounded annually). Therefore, the bond pre-
mium allocable to the accrual period is $870.71
($12,000 – $11,129.29). The bond premium al-
locable to all the accrual periods is listed in the
following schedule:
Accrual
period
ending
Adjusted acquisition
price at beginning of
accrual period
Premium
allocable to
accrual period
3/1/00$110,000.00$870.71
3/1/01109,129.29958.81
3/1/02108,170.481,055.82
3/1/03107,114.661,162.64
3/1/04105,952.021,280.27
3/1/05104,671.751,409.80
3/1/06103,261.951,552.44
3/1/07101,709.511,709.51
$10,000.00
(iv)Qualified stated interest for each accrual
period.Assume the bond actually pays the follow-
ing amounts of qualified stated interest:
Accrual period ending Qualified stated interest
3/1/00$15,000.00
3/1/010.00
3/1/020.00
3/1/0310,000.00
3/1/048,000.00
3/1/0512,000.00
3/1/0615,000.00
3/1/078,500.00
(v)Premium used to offset interest.E’s interest
income for each accrual period is determined by
offsetting the qualified stated interest allocable to
the period with the bond premium allocable to the
period. For the accrual period ending on March 1,
2000, E includes in income $14,129.29, the quali-
fied stated interest allocable to the period
($15,000) offset with the bond premium allocable
to the period ($870.71). For the accrual period
ending on March 1, 2001, the bond premium
allocable to the period ($958.81) exceeds the
qualified stated interest allocable to the period
($0). Therefore, the excess of $958.81 ($958.81 –
$0) is carried forward to the next accrual period.
For the next accrual period, the qualified stated
interest for the period is insufficient to offset the
bond premium allocable to the period ($1,055.82)
and the amount carried forward from the prior
period ($958.81). Thus, $2,014.63 ($1,055.82 +
$958.81) is carried forward to the accrual period
ending on March 1, 2003, and offsets qualified
stated interest allocable to that period. The amount
E includes in income for each accrual period is
shown in the following schedule:
431996–31 I.R.B.

Accrual period endingQualified stated interest
Premium allocable to
accrual periodInterest incomePremium carryforward
3/1/00$15,000.00$870.71$14,129.29
3/1/00.001958.810.00958.81
3/1/020.001,055.820.002,014.63
3/1/0310,000.001,162.646,822.73
3/1/048,000.001,280.276,719.73
3/1/0512,000.001,409.8010,590.20
3/1/0615,000.001,552.4413,447.56
3/1/078,500.001,709.51
6,790.49
$10,000.00
Example 2. Partial call that results in a pro-
rata prepayment—(i)Facts.On April 1, 1999, M
purchases for $110,000 N’s taxable bond maturing
on April 1, 2006, with a stated principal amount of
$100,000, payable at maturity. The bond provides
for unconditional payments of interest of $10,000,
payable on April 1 of each year. N has the option
to call all or part of the bond on April 1, 2001, at
a 5 percent premium over the principal amount. M
uses the cash receipts and disbursements method
of accounting.
(ii)Determination of yield and the remaining
payment schedule.M’s yield determined without
regard to the call option is 8.07 percent, com-
pounded annually. M’s yield determined by assum-
ing N exercises its call option is 6.89 percent,
compounded annually. Under paragraph
(b)(4)(ii)(A) of this section, it is assumed N will
not exercise the call option because exercising the
option would minimize M’s yield. Thus, for
purposes of determining and amortizing bond
premium, the bond is assumed to be a seven-year
bond with a single principal payment at maturity
of $100,000.
(iii)Amount of bond premium.The interest
payments on the bond are qualified stated interest.
Therefore, the sum of all amounts payable on the
bond (other than the interest payments) is
$100,000. Under § 1.171–1, the amount of bond
premium is $10,000 ($110,000 – $100,000).
(iv)Bond premium allocable to the first two
accrual periods.For the accrual period ending on
April 1, 2000, M includes in income $8,881.83,
the qualified stated interest allocable to the period
($10,000) offset with bond premium allocable to
the period ($1,118.17). The adjusted acquisition
price on April 1, 2000, is $108,881.83 ($110,000 –
$1,118.17). For the accrual period ending on April
1, 2001, M includes in income $8,791.54, the
qualified stated interest allocable to the period
($10,000) offset with bond premium allocable to
the period ($1,208.46). The adjusted acquisition
price on April 1, 2001, is $107,673.37
($108,881.83 – $1,208.46).
(v)Partial call.Assume N calls one-half of M’s
bond for $52,500 on April 1, 2001. Because it was
assumed the call would not be exercised, the call
is a change in circumstances. However, the partial
call is also a pro-rata prepayment within the
meaning of § 1.1275–2(f)(2). As a result, the call
is treated as a retirement of one-half of the bond.
Under paragraph (b)(5)(ii) of this section, M may
deduct $1,336.68, the excess of its adjusted acqui-
sition price in the retired portion of the bond
($107,673.37/2, or $53,836.68) over the amount
received on redemption ($52,500). M’s adjusted
basis in the portion of the bond that remains
outstanding is $53,836.68 ($107,673.37 –
$53,836.68).
§ 1.171–4 Election to amortize bond
premium on taxable bonds.
(a)Time and manner of making the
election—(1)In general.A holder
makes the election to amortize bond
premium by offsetting interest income
with bond premium in the holder’s
timely filed federal income tax return
for the first taxable year to which the
holder desires the election to apply. The
holder should attach to the return a
statement that the holder is making the
election under this section.
(2)Coordination with OID election.If
a holder makes an election under
§ 1.1272–3 for a bond with bond pre-
mium, the holder is deemed to have
made the election under this section.
(b)Scope of election.The election
under this section applies to all taxable
bonds held during or after the taxable
year for which the election is made.
(c)Election to amortize made in a
subsequent taxable year—(1)In general.
If a holder elects to amortize bond
premium and holds a taxable bond ac-
quired before the taxable year for which
the election is made, the holder may not
amortize amounts that would have been
amortized in prior taxable years had an
election been in effect for those prior
years.
(2)Example.The following example
illustrates the rule of this paragraph (c).
Example—(i)Facts.On May 1, 1999, C pur-
chases for $130,000 a taxable bond maturing on
May 1, 2006, with a stated principal amount of
$100,000, payable at maturity. The bond provides
for unconditional payments of interest of $15,000,
payable on May 1 of each year. C uses the cash
receipts and disbursements method of accounting
and the calendar year as its taxable year. C has not
previously elected to amortize bond premium, but
does so for 2002.
(ii)Amount to amortize.C’s basis for determin-
ing loss on the sale or exchange of the bond is
$130,000. Thus, under § 1.171–1, the amount of
bond premium is $30,000. Under § 1.171–2, if a
bond premium election were in effect for the prior
taxable years, C would have amortized $3,257.44
of bond premium on May 1, 2000, and $3,551.68
of bond premium on May 1, 2001, based on
annual accrual periods ending on May 1. Thus, for
2002 and future years to which the election
applies, C may amortize only $23,190.88 ($30,000
– $3,257.44 – $3,551.68).
(d)Revocation of election.The elec-
tion under this section may not be
revoked unless approved by the Com-
missioner.
Par. 6. Section 1.171–5 is added to
read as follows:
§ 1.171–5 Effective date and transition
rules.
(a)Effective date—(1)In general.
This section and §§ 1.171–1 through
1.171–4 apply to bonds acquired on or
after the date 60 days after the date final
regulations are published in theFederal
Register.However, if a holder makes
the election under § 1.171–4 for the
taxable year containing the date 60 days
after the date final regulations are pub-
lished in theFederal Register, this
section and §§ 1.171–1 through 1.171–4
apply to bonds held on or after the first
day of that taxable year.
(2)Transition rule for use of constant
yield.Notwithstanding paragraph (a)(1)
of this section, § 1.171–2(a)(3) (provid-
ing that the bond premium allocable to
an accrual period is determined with
reference to a constant yield) does not
apply to a bond issued before September
28, 1985.
(b)Coordination with existing elec-
tion.A holder is deemed to have made
the election under § 1.171–4 if the
holder elected to amortize bond pre-
mium under section 171 and that elec-
tion is effective on the date 60 days
after the date final regulations are pub-
lished in theFederal Register.
(c)Accounting method changes—(1)
Consent to change. A holder required to
change its method of accounting for
bond premium to comply with
§§ 1.171–1 through 1.171–3 must se-
cure the consent of the Commissioner in
accordance with the requirements of
§ 1.446–1(e). Paragraph (c)(2) of this
section provides the Commissioner’s au-
441996–31 I.R.B.

tomatic consent for certain changes. A
holder making the election does not
need the Commissioner’s consent.
(2)Automatic consent. The Commis-
sioner grants consent for a holder to
change its method of accounting for
bond premium with respect to bonds to
which §§ 1.171–1 through 1.171–3 ap-
ply. The consent granted by this para-
graph (c)(2) applies provided—
(i) The holder elected to amortize
bond premium under section 171 for a
taxable year prior to the taxable year
containing the date 60 days after the
date final regulations are published in
theFederal Registerand that election
has not been revoked;
(ii) The change is made for the first
taxable year for which the holder must
account for a bond under §§ 1.171–1
through 1.171–3; and
(iii) The holder attaches to its return
for the taxable year containing the
change a statement that it has changed
its method of accounting under this
section.
Par. 7. Section 1.1016–5 is amended
by revising paragraph (b) to read as
follows:
§ 1.1016–5 Miscellaneous adjustments
to basis.
* * * * *
(b)Amortizable bond premium.A
holder’s basis in a bond is reduced by
the amount of bond premium used to
offset qualified stated interest income
under § 1.171–2. This reduction occurs
when the holder takes the qualified
stated interest into account under the
holder’s regular method of accounting.
In addition, a holder’s basis in a taxable
bond is reduced by the amount of bond
premium allowed as a deduction under
§ 1.171–3(b)(5)(ii) (relating to the issu-
er’s call of a taxable bond).
* * * * *
§ 1.1016–9 [Removed]
Par. 8. Section 1.1016–9 is removed.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
(Filed by the Office of the Federal Reigster on
June 26, 1996, 8:45 a.m., and published in the
issue of the Federal Register for June 27, 1996, 61
F.R. 33396)
Foundations Status of Certain
Organizations
Announcement 96–68
The following organizations have
failed to establish or have been unable
to maintain their status as public chari-
ties or as operating foundations. Accord-
ingly, grantors and contributors may not,
after this date, rely on previous rulings
or designations in the Cumulative List
of Organizations (Publication 78), or on
the presumption arising from the filing
of notices under section 508(b) of the
Code. This listing doesnotindicate that
the organizations have lost their status
as organizations described in section
501(c)( 3), eligible to receive deductible
contributions.
Former Public Charities.The follow-
ing organizations (which have been
treated as organizations that are not
private foundations described in section
509(a) of the Code) are now classified
as private foundations:
Aata-Harry Roswell Foundation,
Washington, DC
Act III Inc., Loudon, TN
Adullam Christian Center Inc., Tampa,
FL
Aerie East Environmental Foundation,
Farmington, ME
African American Atelier Inc.,
Greensboro, NC
Africa Relief Program Inc., Camden, NJ
Amazon Outreach Inc., West Palm
Beach, FL
American Association of Parents and
Children Inc., Herndon, VA
American Cultural Exchange,
Manchester, MO
American Friends of Talmud Torah
Kiryat Herzog, Chicago, IL
Americas Prayer Network Inc.,
Bethesda, MD
Andrew J. Rendos III Memorial,
Monessen, PA
Anita K. Weber Memorial Scholarship
Fund, Maplewood, NJ
Annie Malone Childrens Home Expan-
sion Fund Poro Inc., St. Louis, MO
Antique and Garden Show of Nashville
Inc., Nashville, TN
Apollo Players Inc., Sterling, IL
Arkansas Scottish Rite Dyslexia Train-
ing Center Inc., Little Rock, AR
Arkansas Spinal Cord Injury Assoc. Inc.,
Little Rock, AR
Army of the Lord Rehabilitation Center
Inc., Dania, FL
Arts Council of Cookeville Inc.,
Cookeville, TN
Asheville Trolley Development Com-
pany Inc., Asheville, NC
Bag Pipes and Drums Emerald Society
Chicago Police Dept., Chicago, IL
Berkmar High School Band Booster
Club, Lilburn, GA
Bible Believers Press Inc., Pensacola,
FL
Burlington County Council on Alcohol
and Drug Abuse, Mt. Holly, NJ
Camp WE-LO-LON-NAN-NAI,
Springville, UT
Center for Human Development Inc.,
Nashville, TN
Central Area Job Placement Center Inc.,
Atlanta, GA
Charity Research Services, Raleigh, NC
Chicago Cardiology Group, Wheaton, IL
Chicago Association of Musicians and
Songwriters, Maywood, IL
Chicagoland Blind Athletic Association
Inc., Chicago, IL
Childrens Fund Inc., Alton, IL
Childrens Neuroblastoma Cancer Fund
Inc., Tequesta, FL
Childrens Pathfinder Fund Inc., Grand
Rapids, MN
China Crisis Institute, Chicago, IL
Christs Way Bible Church and Minis-
tries, Chicago, IL
Citizens Chamber Foundation, Lufkin,
TX
Coalition of Southern Black Youth Inc.,
Brunswick, GA
Companionship at Home Foundation,
Glenwood, IA
Czecho-Slovak Civic Forum Foundation
Inc., Washington, DC
Daniel Boone Baseball Association,
St. Charles, MO
Educational Endowment for Health Ser-
vices Inc., Kansas City, MO
Educational Resources Inc., Overland
Park, KS
Edward Morris Theatre Company,
Hendersonville, TN
Elk River Rails-To-Trails Foundation
Inc., Charleston, WV
Freedom Foundation of North Dakota
Inc., Bismarck, ND
Friends of The Netherlands Inc., Miami,
FL
Greater Cedar Rapids Junior Golf Asso-
ciation, Cedar Rapids, IA
Greater Roseland Area Planning Com-
mission Inc., Chicago, IL
HELP Homeless Elimination Project,
Kansas City, MO
HOW Incorporated, Toledo, OH
Illinois Caucus for Foster Children Inc.,
Chicago, IL
Independence Animal Activists Network,
Sioux Falls, SD
International Tax Forum, Chicago, IL
Jazz in Joplin Inc., Joplin, MO
John J. Lamm Ministries, Inc., Euless,
TX
Johnson County Area Council on Child
Abuse & Neglect, Iowa City, IA
Kent Foundation for Environmental Re-
search and Education, Kent, OH
Kids Sake, West Des Moines, IA
451996–31 I.R.B.

LIHI Group, Watertown, SD
Love of Life Foundation, Greyslake, IL
Masters Management Corp., San
Antonio, TX
Maternal Child Care Consortium, St.
Louis, MO
Midwest Guide Dogs, Inc., Duluth, MN
Mille Lacs Coalition Against Abuse,
Onamia, MN
Missouri Legends Productions Inc.,
Kansas City, MO
New Democratic Perspective, Silver
Spring, MD
New Legends, Philadelphia, PA
Operation Earth Inc., Orlando, FL
Operation Unite-Save the Youth,
Chicago, IL
Partners in Placement Inc., Memphis,
TN
Partnership for a Drug Free Iowa Inc.,
Des Moines, IA
Piecemaker Quilt Guild of Brandon,
Tampa, FL
Plus Charities, Cedar Rapids, IA
Porsche Youth Action Group Inc.,
Shawnee Mission, MO
Prince Hall African Lodge Urban Re-
newal Corp., Newark, NJ
Project Now Inc., Trenton, NJ
Pulse of Louisiana, Baton Rouge, LA
Ralph and Della Haskett Memorial,
Jasper, AL
Reach Out for Help Inc., Chicago, IL
Recovery Housing, Inc., Knoxville, TN
Recycling Our Human Resources,
Omaha, NE
Redeeming Grace Ministries, Inc.,
Wakinsonville, GA
Religious Adventures Inc., Kreethville,
LA
Rick Harvey Ministries Inc., Greenbriar,
AR
Romanian-American Foundation Inc.,
Upper Montclair, NJ
RVDA Education Foundation, Fairfax,
VA
Saint Charles County Golden Games
Association, St. Peters, MO
Southern Indiana Center for the Arts
Inc., Seymour, IN
Southwest Georgia Arts Council, Inc.,
Americus, GA
Tabb High Tiger Band Parents Associa-
tion Inc., Tabb, VA
Texas Knights Templar Educational
Foundation, Fort Worth, TX
Thema Literary Society, Metairie, LA
Twins Ranch Non-Profit Corporation,
New York, NY
Unity United Methodist Church Housing
Corporation, Baltimore, MD
Wesser Institute of Ecology Ltd.,
Almond, NC
Where Golden Eagles Fly Ministries,
Inc., Indianapolis, IN
Yellow Bluff Shelter Home, Pine Hill,
AL
Youth Education Strategies, Inc.,
Columbus, GA
If an organization listed above sub-
mits information that warrants the re-
newal of its classification as a public
charity or as a private operating founda-
tion, the Internal Revenue Service will
issue a ruling or determination letter
with the revised classification as to
foundation status. Grantors and contribu-
tors may thereafter rely upon such rul-
ing or determination letter as provided
in section 1.509(a)–7 of the Income Tax
Regulations. It is not the practice of the
Service to announce such revised classi-
fication of foundation status in the Inter-
nal Revenue Bulletin.
461996–31 I.R.B.

Announcement of the Disbarment, Suspension, and Consent to Voluntary
Suspension of Attorneys, Certified Public Accountants, Enrolled Agents and
Enrolled Actuaries From Practice Before the Internal Revenue Service
Under 31 Code of Federal Regula-
tions, Part 10, an attorney, certified pub-
lic accountant, enrolled agent or enrolled
actuary, in order to avoid the institution
or conclusion of a proceeding for his
disbarment or suspension from practice
before the Internal Revenue Service,
may offer his consent to suspension
from such practice. The Director of
Practice, in his discretion, may suspend
an attorney, certified public accountant,
enrolled agent or enrolled actuary in
accordance with the consent offered.
Attorneys, certified public accoun-
tants, enrolled agents and enrolled actu-
aries are prohibited in any Internal Rev-
enue Service matter from directly or
indirectly employing, accepting assis-
tance from, being employed by, or shar-
ing fees with, any practitioner disbarred
or suspended from practice before the
Internal Revenue Service.
To enable attorneys, certified public
accountants, enrolled agents and en-
rolled actuaries to identify practitioners
under consent suspension from practice
before the Internal Revenue Service, the
Director of Practice will announce in the
Internal Revenue Bulletin the names and
addresses of practitioners who have
been suspended from such practice, their
designation as attorney, certified public
accountant, enrolled agent or enrolled
actuary and date or period of suspen-
sion. This announcement will appear in
the weekly Bulletin at the earliest practi-
cable date after such action and will
continue to appear in the weekly Bulle-
tins for five successive weeks or for as
many weeks as is practicable for each
attorney, certified public accountant, en-
rolled agent or enrolled actuary so sus-
pended and will be consolidated and
published in the Cumulative Bulletin.
The following individuals have been
placed under consent suspension from
practice before the Internal Revenue
Service:
NameAddressDesignationDate of Suspension
Bruender, LawrenceLesueur, MNAttorneyIndefinite from April 18, 1996
Pallman, James J.New Haven, CTCPAApril 19, 1996 to October 18, 1996
Pribble Jr., William C.Minneapolis, MNAttorneyIndefinite from May 1, 1996
Pyburn, Richard E.Downers Grove, ILCPAMay 1, 1996 to October 31, 1997
Scalise, James J.New Britain, CTAttorneyMay 1, 1996 to July 31, 1996
Kieldaisch, Dale W.Manteno, IlCPAMay 1, 1996 to October 31, 1996
Ogorek, Charolotte F.Park Ridge, ILCPAMay 3, 1996 to July 2, 1996
Korman, Steven B.Mulford, CTCPAMay 3, 1996 to February 2, 1997
Myers, Donald L.Olney, MDCPAMay 7, 1996 to May 6, 1998
Sharrett, William R.Paradise, CAEnrolled AgentMay 8, 1996 to November 7, 1996
Cornwell, Douglas S.Norwalk, CTCPAMay 10, 1996 to November 9, 1996
Chang, Sun KunMcLean, VAEnrolled AgentMay 13, 1996 to July 12, 1996
Cariveau, StewartMinneapolis, MNCPAMay 30, 1996 to August 29, 1996
Carter, Gary E.Ashdown, ARCPAJune 1, 1996 to August 31, 1996
Underwood, Wendell L.Sedalia, MOCPAJune 1, 1996 to July 31, 1996
Candiloro, James A.Glastonbury, CTCPAJune 1, 1996 to November 30, 1996
Schwartz, Leonard J.Danbury, CTEnrolled AgentJune 1, 1996 to February 28, 1997
Forrester, Donald F.Fairfield, OHCPAIndefinite from June 4, 1996
Shade, Stephen E.Clearwater, FLEnrolled AgentJune 8, 1996 to May 7, 1997
Woods, James G.Huntington, CTCPAJuly 1, 1996 to June 30, 1997
Grove, Michael J.Alliance, OhCPAJuly 1, 1996 to June 30, 1997
Jenkins, FrankMontgomery, ALCPAJuly 1, 1996 to December 31, 1996
Brewton III, George W.Greenville, MSCPAJuly 1, 1996 to September 30, 1996
Fischer, Randall E.Lombard, ILCPAJuly 1, 1996 to September 30, 1996
Rhoney, BrianWheaton, ILCPAJuly 1, 1996 to Decemer 31, 1996
Devereux, Michael J.Florissant, MOCPAJuly 1, 1996 to March 31, 1997
Cranston, Robert S.Saugerties, NYCPAJuly 1, 1996 to December 31, 1996
Miller, Dwight W.Overland Pk, KSCPAJuly 1, 1996 to June 30, 1997
Beck, Clyde E.Salina, KSCPAJuly 1, 1996 to October 31, 1996
Seal, Ernest E.Cleveland, MSCPAAugust 1, 1996 to July 31, 1998
Dicker, Joseph W.Minneapolis, MNAttorneyAugust 1, 1996 to October 31, 1996
47

Under Section 330, Title 31 of the
United States Code, the Secretary of the
Treasury, after due notice and opportu-
nity for hearing, is authorized to sus-
pend or disbar from practice before the
Internal Revenue Service any person
who has violated the rules and regula-
tions governing the recognition of attor-
neys, certified public accountants, en-
rolled agents or enrolled actuaries to
practice before the Internal Revenue
Service.
Attorneys, certified public accoun-
tants, enrolled agents, and enrolled actu-
aries are prohibited in any Internal Rev-
enue Service matter from directly or
indirectly employing, accepting assis-
tance from, being employed by or shar-
ing fees with, any practitioner disbarred
or under suspension from practice be-
fore the Internal Revenue Service.
To enable attorneys, certified public
accountants, enrolled agents and en-
rolled actuaries to identify such dis-
barred or suspended practitioners, the
Director of Practice will announce in the
Internal Revenue Bulletin the names and
addresses of practitioners who have
been suspended from such practice, their
designation as attorney, certified public
accountant, enrolled agent or enrolled
actuary, and the date of disbarment or
period of suspension. This announce-
ment will appear in the weekly Bulletin
for five successive weeks or as long as
it is practicable for each attorney, certi-
fied public accountant, enrolled agent or
enrolled actuary so suspended or dis-
barred and will be consolidated and
published in the Cumulative Bulletin.
After due notice and opportunity for
hearing before an administrative law
judge, the following individuals have
been disbarred from further practice be-
fore the Internal Revenue Service:
NameAddressDesignationEffective Date
Bushta, Patrick C.Sacramento, CACPAApril 18, 1996
Hart, Joel S.Beaumont, TXCPAApril 19, 1996
Riggs, Patricia A.Stockton, CAEnrolled AgentApril 19, 1996
Hammontree, Richard F.Ogunquit, MECPAApril 27, 1996
Otto, Judith M.Tucson, AZEnrolled AgentMay 18, 1996
48

Numerical Finding List
1
Bulletins 1996–27 through 1996–30
Announcements:
96–61, 1996–27 I.R.B.72
96–62, 1996–28 I.R.B.55
96–63, 1996–29 I.R.B.18
96–64, 1996–29 I.R.B.18
96–65, 1996–29 I.R.B.18
96–66, 1996–29 I.R.B.19
96–67, 1996–30 I.R.B.26
Notices:
96–36, 1996–27 I.R.B.11
Proposed Regulations:
CO–24–96, 1996–30 I.R.B.22
FI–59–94, 1996–30 I.R.B.23
IA–26–94, 1996–30 I.R.B.24
IA-292-84, 1996–28 I.R.B.38
Railroad Retirement Quarterly Rate
1996–29 I.R.B.14
Revenue Procedures:
96–36, 1996–27 I.R.B.11
96–37, 1996–29 I.R.B.16
Revenue Rulings:
96–33, 1996–27 I.R.B.4
96–34, 1996–28 I.R.B.4
96–36, 1996–30 I.R.B.6
Tax Conventions:
1996–28 I.R.B. 36
Treasury Decisions:
8673, 1996–27 I.R.B.4
8674, 1996–28 I.R.B.7
8675, 1996–29 I.R.B.5
8676, 1996–30 I.R.B.4
8677, 1996–30 I.R.B.7
1
A cumulative list of all Revenue Rulings, Rev-
enue Procedures, Treasury Decisions, etc., pub-
lished in Internal Revenue Bulletins 1996–1
through 1996–26 will be found in Internal Rev-
enue Bulletin 1996–27, dated July 1, 1996.
49

Finding List of Current Action on
Previously Published Items
1
Bulletins 1996–27 through 1996–30
*Denotes entry since last publication
Revenue Procedures:
95–29
Superseded by
96–36, 1996–27 I.R.B.11
95–29A
Superseded by
96–36, 1996–27 I.R.B.11
1
A cumulative finding list for previously published
items mentioned in Internal Revenue Bulletins
1996–1 through 1996–26 will be found in Internal
Revenue Bulletin 1996–27, dated July 1, 1996.
50