us-irs-revenue-rulings-irb-2003-13-pdf•Internal Revenue Bulletin 2003-13 (PDF rendition): IRS Revenue Rulings
Internal Revenue Bulletin 2003-13 (PDF rendition): IRS Revenue Rulings
us-irs-revenue-rulings-irb-2003-13-pdfInternal Revenue Bulletin 2003-13 (PDF rendition): IRS Revenue RulingsGuidance
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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. INCOME TAX Rev. Rul. 2003–25, page 642. Fringe benefits aircraft valuation formula.For purposes of section 1.61–21(g) of the regulations, the Standard Industry Fare Level (SIFL) cents-per-mile rates and terminal charge in effect for the first half of 2003 are set forth for determining the value of non-commercial flights on employer-provided aircraft. Rev. Rul. 2003–30, page 659. Interest rates; underpayments and overpayments.The rate of interest determined under section 6621 of the Code for the calendar quarter beginning April 1, 2003, will be 5 percent for overpayments (4 percent in the case of a corporation), 5 per- cent for underpayments, and 7 percent for large corporate un- derpayments. The rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 2.5 per- cent. Rev. Rul. 2003–31, page 643. Constructive sales, short sales, transition rule.This ruling provides guidance on whether changes made to a margin ac- count through which a short sale was effectuated will (1) cause the short sale to be deemed consummated under section 1.1233–1(a)(4) of the regulations, and (2) cause the short- against-the-box transaction to cease to be covered by the tran- sition rule in the Taxpayer Relief Act of 1997. Rev. Rul. 2003–33, page 642. LIFO; price indexes; department stores.The January 2003 Bureau of Labor Statistics price indexes are accepted for use by department stores employing the retail inventory and last-in, first- out inventory methods for valuing inventories for tax years ended on, or with reference to, January 31, 2003. T.D. 9048, page 644. REG–131478–02, page 669. Final, temporary, and proposed regulations under section 1502 of the Code redetermine the basis of stock of a subsidiary mem- ber of a consolidated group immediately prior to certain trans- fers of such stock and certain deconsolidations of a subsidiary member. In addition, the temporary regulations suspend cer- tain losses recognized on the disposition of stock of a subsid- iary member. A public hearing on the proposed regulations is scheduled for June 20, 2003. Rev. Proc. 2003–26, page 666. Guidance is provided to individuals who fail to meet the eligibil- ity requirements of section 911(d)(1) of the Code because ad- verse conditions in a foreign country preclude the individual from meeting those requirements. A current list of countries and the dates those countries are subject to the section 911(d)(4) waiver is provided. Rev. Proc. 2002–20 supplemented. Rev. Proc. 2003–27, page 667. This procedure provides guidance on the information reporting requirements under section 6050I of the Code for small cash transactions that involve the rental of taxicabs on a daily shift ba- sis. ADMINISTRATIVE Announcement 2003–18, page 675. This document extends the relief from interest and penalties un- der section 7508A of the Code granted by Notice 2002–40, 2002–24 I.R.B. 1152, to certain decedents’ estates that were affected by the September 11, 2001, terrorist attack. Bulletin No. 2003–13 March 31, 2003 Announcements of Disbarments and Suspensions begin on page 671. Finding Lists begin on page ii. The IRS Mission Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all. Introduction The Internal Revenue Bulletin is the authoritative instrument of the Commissioner of Internal Revenue for announcing official rul- ings and procedures of the Internal Revenue Service and for pub- lishing Treasury Decisions, Executive Orders, Tax Conventions, legislation, court decisions, and other items of general inter- est. It is published weekly and may be obtained from the Super- intendent of Documents on a subscription basis. Bulletin contents are consolidated semiannually into Cumulative Bulletins, which are sold on a single-copy basis. It is the policy of the Service to publish in the Bulletin all sub- stantive 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 pub- lished rulings apply retroactively unless otherwise indicated. Pro- cedures relating solely to matters of internal management are not published; however, statements of internal practices and pro- cedures that affect the rights and duties of taxpayers are pub- lished. Revenue rulings represent the conclusions of the Service on the application of the law to the pivotal facts stated in the revenue ruling. In those based on positions taken in rulings to taxpay- ers or technical advice to Service field offices, identifying de- tails and information of a confidential nature are deleted to prevent unwarranted 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 re- lied on, used, or cited as precedents by Service personnel in the disposition of other cases. In applying published rulings and pro- cedures, the effect of subsequent legislation, regulations, court decisions, rulings, and procedures must be considered, and Ser- vice personnel and others concerned are cautioned against reach- ing 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 Other Related Items, and Subpart B, Legisla- tion and Related Committee Reports. Part III.—Administrative, Procedural, and Miscellaneous. To the extent practicable, pertinent cross references to these sub- jects are contained in the other Parts and Subparts. Also in- cluded in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings are issued by the De- partment of the Treasury’s Office of the Assistant Secretary (En- forcement). Part IV.—Items of General Interest. This part includes notices of proposed rulemakings, disbar- ment and suspension lists, and announcements. The first Bulletin for each month includes a cumulative index for the matters published during the preceding months. These monthly indexes are cumulated on a semiannual basis, and are published in the first Bulletin of the succeeding semiannual pe- riod, 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, DC 20402. March 31, 20032003–13 I.R.B. Part I. Rulings and Decisions Under the Internal Revenue Code of 1986 Section 61.—Gross Income Defined 26 CFR 1.61–21: Taxation of fringe benefits. Fringe benefits aircraft valuation for- mula.For purposes of section 61 of the Code, relating to the rule for valuing non- commercial flights on employer-provided aircraft, the Standard Industry Fare Level (SIFL) cents-per-mile rates and terminal charge in effect for the first half of 2003 are set forth. Rev. Rul. 2003–25 For purposes of the taxation of fringe benefits under section 61 of the Internal Revenue Code, section 1.61–21(g) of the Income Tax Regulations provides a rule for valuing noncommercial flights on employer- provided aircraft. Section 1.61–21(g)(5) pro- vides an aircraft valuation formula to determine the value of such flights. The value of a flight is determined under the base aircraft valuation formula (also known as the Standard Industry Fare Level for- mula or SIFL) by multiplying the SIFL cents-per-mile rates applicable for the pe- riod during which the flight was taken by the appropriate aircraft multiple provided in section 1.61–21(g)(7) and then adding the applicable terminal charge. The SIFL cents- per-mile rates in the formula and the ter- minal charge are calculated by the Department of Transportation and are re- viewed semi-annually. The following chart sets forth the ter- minal charges and SIFL mileage rates: Period During Which the Flight Is Taken Terminal Charge SIFL Mileage Rates 1/1/03 – 6/30/03$37.76Up to 500 miles = $.2065 per mile 501–1500 miles = $.1575 per mile Over 1500 miles = $.1514 per mile DRAFTING INFORMATION The principal author of this revenue rul- ing is Kathleen Edmondson of the Office of Division Counsel/Associate Chief Coun- sel (Tax Exempt and Government Enti- ties). For further information regarding this revenue ruling, contact Ms. Edmondson at (202) 622–6040 (not a toll-free call). Section 472.—Last-in, First- out Inventories 26 CFR 1.472–1: Last-in, first-out inventories. LIFO; price indexes; department stores.The January 2003 Bureau of La- bor Statistics price indexes are accepted for use by department stores employing the re- tail inventory and last-in, first-out inven- tory methods for valuing inventories for tax years ended on, or with reference to, Janu- ary 31, 2003. Rev. Rul. 2003–33 The following Department Store Inven- tory Price Indexes for January 2003 were issued by the Bureau of Labor Statistics. The indexes are accepted by the Internal Revenue Service, under § 1.472–1(k) of the Income Tax Regulations and Rev. Proc. 86– 46, 1986–2 C.B. 739, for appropriate ap- plication to inventories of department stores employing the retail inventory and last- in, first-out inventory methods for tax years ended on, or with reference to, January 31, 2003. The Department Store Inventory Price Indexes are prepared on a national basis andinclude (a) 23 major groups of depart- ments, (b) three special combinations of the major groups — soft goods, durable goods, and miscellaneous goods, and (c) a store to- tal, which covers all departments, includ- ing some not listed separately, except for the following: candy, food, liquor, tobacco, and contract departments. 2003–13 I.R.B.642March 31, 2003 BUREAU OF LABOR STATISTICS, DEPARTMENT STORE INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS (January 1941 = 100, unless otherwise noted) GroupsJan. 2002Jan. 2003 Percent Change from Jan. 2002 to Jan. 2003 1 1.Piece Goods ..............................................................................479.8465.2-3.0 2.Domestics and Draperies ..........................................................588.3566.8-3.7 3.Women’s and Children’s Shoes ...............................................607.3648.46.8 4.Men’s Shoes..............................................................................875.0876.70.2 5.Infants’Wear .............................................................................602.2593.8-1.4 6.Women’s Underwear.................................................................556.8524.0-5.9 7.Women’s Hosiery......................................................................350.3339.8-3.0 8.Women’s and Girls’Accessories..............................................559.0549.7-1.7 9.Women’s Outerwear and Girls’Wear ......................................350.2338.3-3.4 10.Men’s Clothing .........................................................................565.6550.9-2.6 11.Men’s Furnishings ....................................................................586.5567.3-3.3 12.Boys’Clothing and Furnishings...............................................467.1427.1-8.6 13.Jewelry ......................................................................................918.2866.4-5.6 14.Notions ......................................................................................770.1782.81.6 15.Toilet Articles and Drugs..........................................................969.1971.10.2 16.Furniture and Bedding ..............................................................625.9626.30.1 17.Floor Coverings ........................................................................630.4593.0-5.9 18.Housewares ...............................................................................757.8736.4-2.8 19.Major Appliances ......................................................................227.0220.0-3.1 20.Radio and Television ................................................................51.947.1-9.2 21.Recreation and Education 2 .......................................................88.184.2-4.4 22.Home Improvements 2 ...............................................................124.6125.50.7 23.Auto Accessories 2 .....................................................................110.5112.01.4 Groups 1–15: Soft Goods .....................................................................566.2552.0-2.5 Groups 16–20: Durable Goods .............................................................417.1403.0-3.4 Groups 21–23: Misc. Goods 2 ...............................................................97.595.3-2.3 Store Total 3 ................................................................................511.5497.8-2.7 1 Absence of a minus sign before the percentage change in this column signifies a price increase. 2 Indexes on a January 1986 = 100 base 3 The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco and contract depart- ments. DRAFTING INFORMATION The principal author of this revenue rul- ing is Michael Burkom of the Office of As- sociate Chief Counsel (Income Tax and Accounting). For further information re- garding this revenue ruling, contact Mr. Burkom at (202) 622–7718 (not a toll- free call). Section 1259.—Constructive Sales Treatment for Appreci- ated Financial Positions (Also§1233; 26 CFR 1.1233–1.) Constructive sales, short sales, tran- sition rule.This ruling provides guidance on whether changes made to a margin ac- count through which a short sale was ef- fectuated will (1) cause the short sale to be deemed consummated under section 1.1233–1(a)(4) of the regulations, and (2) cause the short-against-the-box transac- tion to cease to be covered by the transi- tion rule in the Taxpayer Relief Act of 1997. March 31, 20036432003–13 I.R.B. Rev. Rul. 2003–31 ISSUES (1) Will changes to the terms of a mar- gin account through which a short sale was effectuated cause the short sale to be con- summated for purposes of§1.1233–1(a)(4) of the Income Tax Regulations? (2) If a taxpayer’s pre-June 9, 1997, ap- preciated financial position and short- against-the-box transaction are not taken into account for purposes of applying§1259 of the Internal Revenue Code to post-June 8, 1997, transactions, as provided by the tran- sition rule in§1001(d)(2) of the Taxpayer Relief Act of 1997, 1997–4 (Vol. 1) C.B. 1, 121, will changes to the terms of the mar- gin account through which the short sale was effectuated cause the transition rule to cease to apply? FACTS In January 1997, TaxpayerTPowned 100 shares ofXYZstock (theXYZstock). TPestablished a securities trading account (the Margin Account) with Broker, who charged interest and fees with respect to the Margin Account. In May 1997, at a time when theXYZstock was appreciated,TP effected a short sale (the Short Sale) of 100 shares ofXYZstock through Broker, who borrowed the 100 shares ofXYZstock to make delivery. Before September 4, 1997, TPclearly identified theXYZstock and the Short Sale in its books and records as off- setting positions. In January 2002, Broker andTPnego- tiated changes to the interest rates and fees associated with the Margin Account. TPcontinues to hold theXYZstock and has not delivered any other shares to Bro- ker to close the Short Sale. LAW Section 1.1233–1(a)(1) provides that, for income tax purposes, a short sale is not deemed to be consummated until deliv- ery of property to close the short sale. Pur- suant to§1.1233–1(a)(4), if a taxpayer makes a short sale through a broker and the broker borrows property to make the de- livery on the short sale, the short sale is not deemed to be consummated until the ob- ligation of the selling taxpayer that is cre- ated by the short sale is finally discharged by delivery of property to the broker to re- place the property that the broker borrowed. Section 1259(a)(1) provides that if there is a constructive sale of an appreciated fi- nancial position, the taxpayer shall recog- nize gain as if such position were sold, assigned, or otherwise terminated at its fair market value on the date of such construc- tive sale. Appreciated financial position is defined in§1259(b)(1) as including a po- sition with respect to stock if there would be gain were such position sold, assigned, or otherwise terminated at its fair market value. Pursuant to§1259(c)(1)(A), a tax- payer is treated as having made a construc- tive sale of an appreciated financial position if the taxpayer enters into a short sale of the same or substantially identical prop- erty. Under§1001(d)(2) of the Taxpayer Re- lief Act of 1997 (the transition rule), if“be- fore June 9, 1997, the taxpayer entered into any transaction which is a constructive sale of any appreciated financial position, and . . . before the close of the 30-day period beginning on the date of the enactment of this Act [August 5, 1997] or before such later date as may be specified by the Sec- retary of the Treasury, such transaction and position are clearly identified in the tax- payer’s records as offsetting, such trans- action and position shall not be taken into account in determining whether any other constructive sale after June 8, 1997, has oc- curred.”The transition rule ceases to ap- ply as of the date such transaction is closed or the taxpayer ceases to hold the posi- tion.§1001(d)(2) of the Taxpayer Relief Act of 1997, 1997–4 (Vol. 1) C.B. 1, 121. ANALYSIS (1) Section 1233 At the time of the changes to the Mar- gin Account,TPhad not delivered stock to Broker to close the Short Sale, and no such stock was delivered in connection with the changes. The Short Sale, therefore, is not consummated for purposes of§1.1233– 1(a)(4). (2) Section 1259 Transition Rule In May 1997, when theXYZstock was appreciated,TPentered into the Short Sale. Thus,TPentered into a transaction that is described in§1259(c)(1). Because the Short Sale was entered into before June 9, 1997, however, no gain was recognized under §1259(a)(1). Furthermore, before the close of the 30- day period beginning on August 5, 1997, TPclearly identified theXYZstock and the Short Sale in its books and records as off- setting positions. Thus, theXYZstock and the Short Sale fell within the transition rule, and, untilTPeither ceases to hold theXYZ stock or closes the Short Sale, neither the XYZstock nor the Short Sale is taken into account in determining whether some new transaction has caused a constructive sale under§1259(a)(1). At the time of the changes to the Mar- gin Account,TPcontinued to hold theXYZ stock and the Short Sale had not been con- summated for purposes of§1.1233–1(a)(4). Accordingly, the transition rule continues to apply to the Short Sale and theXYZ stock. HOLDINGS (1) Because the changes made to the terms of the Margin Account do not con- stitute a delivery of theXYZstock, the changes do not cause the Short Sale to be consummated for purposes of§1.1233– 1(a)(4). (2) Because the changes made to the terms of the Margin Account do not con- stitute a delivery of theXYZstock, the changes do not cause the transition rule to cease to apply to either the Short Sale or theXYZstock. DRAFTING INFORMATION The principal author of this revenue rul- ing is Kate Sleeth of the Office of Asso- ciate Chief Counsel (Financial Institutions and Products). For further information re- garding this revenue ruling, contact Ms. Sleeth at (202) 622–3920 (not a toll- free call) Section 1502.—Regulations 26 CFR 1.1502–21: Net operating losses. 2003–13 I.R.B.644March 31, 2003 T.D. 9048 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1 and 602 Guidance Under Section 1502; Suspension of Losses on Certain Stock Dispositions AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final and temporary regulations. SUMMARY: This document contains fi- nal and temporary regulations under sec- tion 1502 that redetermine the basis of stock of a subsidiary member of a consolidated group immediately prior to certain trans- fers of such stock and certain deconsoli- dations of a subsidiary member. In addition, this document contains temporary regula- tions that suspend certain losses recog- nized on the disposition of stock of a subsidiary member. The regulations ap- ply to corporations filing consolidated re- turns. The text of the temporary regulations serves as the text of the proposed regula- tions (REG–131478–02) on page 669 of this issue of the Bulletin. DATES:Effective Date:These regulations are effective March 14, 2003. Applicability Date:For dates of appli- cability, see§§1.1502–21T(h)(7), 1.1502– 32T(h)(6), and 1.1502–35T(j). FORFURTHERINFORMATION CONTACT: Aimee K. Meacham, (202) 622–7530 (not a toll-free number). SUPPLEMENTARY INFORMATION: Paperwork Reduction Act These regulations are being issued with- out prior notice and public procedure pur- suant to the Administrative Procedure Act (5 U.S.C. 553). For this reason, the col- lection of information contained in these temporary regulations has been reviewed and, pending receipt and evaluation of pub- lic comments, approved by the Office of Management and Budget (OMB) under 44 U.S.C. 3507 and assigned control number 1545–1828. Responses to this collection of information are voluntary. An agency may not conduct or spon- sor, and a person is not required to re- spond to, a collection of information unless the collection of information displays a valid OMB control number. For further information concerning this collection of information, and where to sub- mit comments on the collection of infor- mation and the accuracy of the estimated burden, and suggestions for reducing this burden, please refer to the cross-referencing notice of proposed rulemaking published 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 material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103. Background and Explanation of Provisions On October 18, 2002, the IRS and Trea- sury Department issued a notice of pro- posed rulemaking (REG–131478–02, 2002–47 I.R.B. 892 [67 F.R. 65060]) that included proposed regulations reflecting the principle set forth in Notice 2002–18, 2002–12 I.R.B. 644, that a consolidated group should not be able to obtain more than one tax benefit from a single eco- nomic loss. The rules in the proposed regu- lations were intended to address at least two situations in which a group may obtain more than one tax benefit from a single eco- nomic loss. In one situation, a group first recognizes and absorbs a subsidiary mem- ber’s inside loss (e.g., a loss carryforward, a deferred deduction, or a loss inherent in an asset) and a member of the group later recognizes a loss on the subsidiary mem- ber’s stock that is duplicative of the pre- viously recognized and absorbed inside loss. In the second situation, a member of the group recognizes a loss on a non- deconsolidating disposition of the subsid- iary member’s stock, the stock loss duplicates an unrecognized or unabsorbed loss of the subsidiary member, and the group later recognizes and absorbs the sub- sidiary’s inside loss. The proposed regulations consist pri- marily of two rules: a basis redetermina- tion rule and a loss suspension rule. The proposed regulations also include a basis re- duction rule that addresses certain cases of loss duplication that are not within the scope of the loss suspension rule, such as losses arising from the worthlessness of subsid- iary member stock. No public hearing regarding the pro- posed regulations was requested or held. Comments, however, were submitted. The IRS and Treasury Department have studied, and are continuing to study, the comments received. The IRS and Trea- sury Department believe that the com- ments received, as well as the issues more generally raised by Notice 2002–18 and the proposed regulations, require significant fur- ther consideration. Accordingly, the IRS and Treasury Department will continue to study these issues and, as more fully set forth be- low, request comments on, and sugges- tions for possible alternative approaches to, the issues addressed in the regulations. Nonetheless, the IRS and Treasury Depart- ment believe that immediately effective rules are necessary to address the duplica- tion of loss within a consolidated group so as to clearly reflect the income tax liabil- ity of the group. Accordingly, the IRS and Treasury Department are promulgating the proposed regulations as temporary regula- tions in this Treasury decision. The tem- porary regulations are substantially similar to the proposed regulations, but reflect cer- tain revisions that were made based on comments received. The following sec- tions describe these revisions. A.Application of Basis Redetermination Rule Upon Deconsolidation of a Subsidiary Member The proposed regulations require the re- allocation of the basis of subsidiary mem- ber stock held by members of the group upon certain dispositions and deconsolida- tions of subsidiary member stock. The rule applies differently when the subsidiary re- mains a member of the group from when the subsidiary does not remain a member of the group. The IRS and Treasury De- partment received several technical com- ments regarding the basis redetermination rule applicable when a subsidiary mem- ber leaves the group. The temporary regu- lations revise that rule in a manner that addresses these comments and clarifies its application. In particular, under the temporary regu- lations, subject to certain exceptions, the rule applies upon a deconsolidation of a sub- March 31, 20036452003–13 I.R.B. sidiary member when any stock of the sub- sidiary member owned by a member of the group has a basis in excess of value. The revised rule generally applies regardless of whether the subsidiary member is decon- solidated as a result of a transfer of a gain share, a transfer of a loss share, or a stock issuance because, in each case, the effect is the same,i.e., each share of subsidiary member stock owned by group members is deconsolidated. Further, in computing the basis that is reallocated, the revised rule takes into account all loss on members’ shares of the subsidiary’s stock and all prior negative basis adjustments to members’ shares of the subsidiary stock that are not loss shares. The revised rule reflects that, unless all deconsolidations and all decon- solidated shares are treated similarly, op- portunities to duplicate losses will continue to exist. B.Application of Loss Suspension Rule Under the loss suspension rule, if, af- ter application of the basis redetermina- tion rule, a member of a consolidated group recognizes a loss on the disposition of stock of a subsidiary member of the same group, and the subsidiary member is a member of the same group immediately after the dis- position, then the selling member’s stock loss is suspended to the extent of the du- plicated loss with respect to such stock. Be- cause a suspended stock loss reflects the subsidiary member’s unrecognized or un- absorbed deductions and losses, under the proposed regulations, the suspended loss is reduced, with the result that it will not later be allowed, as the subsidiary member’s de- ductions and losses are taken into account (i.e., absorbed) in determining the group’s consolidated taxable income (or loss). One comment received regarding the proposed regulations was that, in certain cases, the loss suspension rule could disallow a tax loss for an economic loss. This result was not intended. Accordingly, these tempo- rary regulations include two changes from the proposed regulations that are intended to prevent this result. First, the temporary regulations pro- vide that the amount by which a suspended stock loss is reduced cannot exceed the ex- cess of the amount of the subsidiary mem- ber’s items of loss and deduction over the amount of such items that are taken into ac- count in determining the basis adjustments made to stock of the subsidiary member (or any successor) owned by members of the group under the investment adjustment rules. Second, they also include a provision stating that the loss suspension rule is not to be applied in a manner that permanently disallows an otherwise allowable deduc- tion for an economic loss. Whether the loss suspension rule has resulted in such a dis- allowance is determined on the earlier of the date of the deconsolidation of the sub- sidiary (or any successor) the stock of which gave rise to the suspended stock loss and the date on which the stock of such sub- sidiary is determined to be worthless. When it is determined that the application of the loss suspension rule has permanently dis- allowed a deduction for an economic loss, the taxpayer will be permitted to treat the suspended stock loss as restored to the ex- tent of such disallowance. The restoration of the suspended loss is deemed to occur immediately prior to the deconsolidation of the subsidiary or the determination of worthlessness. C.Basis Reduction Rule For Worthless Stock and Stock of a Subsidiary With No Separate Return Year The proposed regulations include a ba- sis reduction rule intended to prevent the duplication of unabsorbed losses gener- ated by a subsidiary member and loss with respect to the stock of that member if ei- ther (i) the stock of the subsidiary mem- ber becomes worthless or (ii) the stock of the subsidiary is disposed of and, imme- diately after the disposition, the subsid- iary is no longer a member of the group and does not have a separate return year. Un- der this rule, immediately before a deter- mination of worthlessness, or immediately before a disposition of a subsidiary that is not followed by a separate return year, the basis of the subsidiary’s stock is reduced by the amount of any loss carryforwards that would be treated as attributable to the subsidiary under the principles of§1.1502– 21. This provision was included because neither situation was subject to the loss sus- pension rule and, without such a rule, tax- payers might take the position that a group is entitled to a subsidiary member’s loss car- ryforwards even after the group has en- joyed full basis recovery through a worthless stock or other deduction. Such a result, however, would be in contraven- tion of the principles of Notice 2002–18. The proposed provision raised ques- tions about the operation of the existing rules governing this situation. Commenta- tors contended that the basis reduction rule could deny the group a single tax loss for its economic loss. As stated above, the pro- posed regulations, including the basis re- duction rule, were not intended to disallow a tax loss for an economic loss, but rather were intended only to ensure that a group obtains no more than a single tax loss for an economic loss. The temporary regulations address this situation by providing that the unabsorbed losses generated by the subsidiary do not remain available to the group. Specifi- cally, the temporary regulations provide that, if stock of a subsidiary member is treated as worthless under section 165 (taking into account the provisions of§1.1502–80(c)), or if a member of a group disposes of sub- sidiary member stock and on the follow- ing day the subsidiary is not a member of the group and does not have a separate re- turn year, then all losses treated as attrib- utable to the subsidiary member under the principles of§1.1502–21, after comput- ing the taxable income of the group, the subsidiary member, or a group of which the subsidiary member was previously a mem- ber for the taxable year that includes the de- termination of worthlessness or the disposition and any prior taxable year, shall be treated as expired, but not as absorbed by the group, as of the beginning of the group’s taxable year that follows the tax- able year that includes the determination of worthlessness or the disposition. Under this rule, the stock loss (or reduced stock gain), unreduced by any loss carryforwards at- tributable to the subsidiary member, is al- lowed. Moreover, because the losses are treated as expired, there is no possibility of a later, duplicative use of the loss carry- forwards. This approach is consistent with the nature of a loss realized upon such a de- termination or disposition,i.e., a loss on an investment in the subsidiary member. Because the provisions of the proposed regulations raised questions about the op- eration of the existing rules, the tempo- rary regulations include a special election for determinations of worthlessness and dis- positions that occurred on or after March 7, 2002, and before March 14, 2003. In such cases, as an alternative to the treat- ment described above, the common par- ent of the group may make an irrevocable 2003–13 I.R.B.646March 31, 2003 election to reattribute to itself all or a por- tion of the losses attributable to the sub- sidiary member under the principles of §1.1502–21. For purposes of applying the investment adjustment rules to stock of the subsidiary member owned by the group, the reattributed losses are treated as absorbed by the group immediately prior to the al- lowance of any loss or inclusion of any in- come or gain with respect to the determination of worthlessness or the dis- position. The common parent, however, is treated as succeeding to the subsidiary’s losses in a transaction described in sec- tion 381. The IRS and Treasury Department re- quest comments regarding whether a sub- sidiary member the stock of which is determined to be worthless (under the stan- dards of§1.1502–80(c)) should be treated as a new corporation for purposes of the In- ternal Revenue Code as of the date of the determination of worthlessness. In addi- tion, the IRS and Treasury Department re- quest comments regarding the desirability of further clarification or changes regard- ing the standards that govern determina- tions of worthlessness and the deductibility of losses (or the inclusion of excess loss ac- counts) when stock of a subsidiary mem- ber is determined to be worthless. D.Deferral and Elimination of Gain One comment noted that the basis re- determination rule of the proposed regu- lations could be used to shift the location of gain and loss within a consolidated group and even to eliminate gain in a manner that is unintended and contrary to the purposes underlying section 337(d). The following example illustrates this concern. P, the common parent of a consolidated group, owns all of the stock of S1 and S2. The S2 stock has a basis of $400 and a value of $500. S1 owns 50% of the stock of the S3 common stock with a basis of $150 and value equal to such amount. S2 owns the remaining 50% of the S3 com- mon stock with a basis of $100 and a value of $200 and one share of S3 preferred stock with a basis of $10 and a value of $9. P in- tends to sell all of its S2 stock to an un- related buyer that does not want to acquire S3. P, therefore, engages in the following steps to dispose of S2 without recogniz- ing a substantial portion of the built-in gain in S2. First, P causes a recapitalization of S3 in which S2’s S3 common stock is ex- changed for new S3 preferred shares. P then sells all of its S2 stock. Although the sale does not deconsolidate S3 (because all the S3 common stock is still held by S1), it does deconsolidate the S3 preferred shares held by S2, including the one share with a built-in loss. Accordingly, under the pro- posed regulations, the bases of all shares of S3 stock must be redetermined immedi- ately before P’s sale of S2. Under the ba- sis redetermination rule, the total basis of S3 stock held by members of the P group is allocated first to the S3 preferred shares, up to their value of $209, and then to the remaining shares of S3 common held by S1. S2’s aggregate basis in the S3 preferred stock is increased from $110 to $209. This increase tiers up and increases P’s basis in the S2 stock from $400 to $499. Accord- ingly, P will recognize only $1 of gain on the sale of its S2 stock. Afterwards, P can cause S3 to redeem its preferred stock for $209. S2 will recognize no gain or loss from the redemption. Although the unrec- ognized gain is preserved in P’s basis in S1, and S1’s basis in S3, the group can defer or avoid recognizing that gain. In this case, there is no significant du- plication of loss. Moreover, the steps were structured with a view to avoiding the rec- ognition of gain on a disposition of stock. The IRS and Treasury Department do not intend that the basis redetermination rule be applied to defer or eliminate gain in such cases. The IRS and Treasury Department considered adopting a mechanical test to prevent the application of the basis rede- termination rule in such cases. They con- cluded that such a rule would not provide the flexibility necessary to obtain an ap- propriate balancing of the concerns under- lying this regulation and those underlying section 337(d). Therefore, these tempo- rary regulations include an anti-abuse rule that provides that, if a transaction is struc- tured with a view to, and has the effect of, deferring or avoiding the recognition of gain on a disposition of stock by invoking ap- plication of the basis redetermination rule, and the stock loss attributable to the trans- ferred shares or the duplicated loss of the subsidiary member that is reflected in sub- sidiary member stock owned by members of the group is not significant, the basis re- determination and loss suspension rules will not apply. E.Request For Comments As described above, the IRS and Trea- sury Department are continuing to study the comments received regarding the proposed regulations. In addition, the IRS and Trea- sury Department are considering alterna- tive regimes that would prevent the duplication of loss within the group. In particular, the IRS and Treasury De- partment are studying a comment that sug- gested applying the principles of section 704(c) to allocate negative investment ad- justments arising from loss items at the sub- sidiary member level where there have been transfers of loss property to the subsid- iary member. The comment asserts that this approach would address the case where the recognition and absorption of the inside loss precedes the recognition of the stock loss. The IRS and Treasury Department are con- cerned that this alternative approach ad- dresses only duplicative losses that arise as a result of contributions of loss property, not duplicative losses that arise as a result of a loss incurred by a subsidiary member. In addition, the IRS and Treasury Depart- ment are concerned that the application of the principles of section 704(c) may be complex, especially in cases where there have been issuances of subsidiary mem- ber stock at different times. The IRS and Treasury Department request comments re- garding how the principles of section 704(c) should be applied in the consolidated re- turn context to prevent the duplication of loss. The IRS and Treasury Department are also studying a suggestion that the type of transaction in which the stock loss is rec- ognized prior to the absorption of the in- side loss be addressed by a rule that allows the stock loss but limits the use of the sub- sidiary member’s items of loss and deduc- tion if there have been contributions of loss property with respect to the subsidiary member and there is any loss duplication at the subsidiary member level at the time the stock loss is recognized. That rule would not permit the use of the subsidiary’s items of loss and deduction that are duplicative of the stock loss to offset income of an- March 31, 20036472003–13 I.R.B. other member of the group, but would per- mit such items to offset income of the subsidiary. This rule effectively would permit the acceleration of stock loss. The IRS and Treasury Department request comments re- garding whether permitting such accelera- tion would clearly reflect the income of the group. In addition, because this rule would per- mit the subsidiary’s losses to offset its items of income and gain, it would not prevent the duplication of losses within the group to that extent. The IRS and Treasury De- partment request comments regarding whether this duplication is appropriate given that the benefits associated with the sub- sidiary and its shareholder being mem- bers of the group (e.g., positive basis adjustments to the shareholder member’s stock of the subsidiary member that re- flect income of the subsidiary member and the group’s ability to use the loss recog- nized by another member to offset income of the subsidiary member of the group) have been enjoyed by the group. Finally, this rule would address only cases of duplication where there have been contributions of loss property. As described above, the IRS and Treasury Department are concerned that contributions of loss prop- erty are not the only types of transactions in which a group can obtain more than one tax benefit from a single economic loss. The IRS and Treasury Department are considering a variation of this suggested rule to address the situation where the stock loss is recognized prior to the absorption of the inside loss. This variation would allow the stock loss when recognized, but would dis- allow the inside losses of the subsidiary to the extent that such losses reflect losses that were duplicate losses at the time of the rec- ognition of the stock loss. Such losses may be attributable to contributed property or losses that arose in the subsidiary mem- ber. The IRS and Treasury Department re- quest comments regarding this variation. Finally, the IRS and Treasury Depart- ment continue to request comments regard- ing any other approaches that could be implemented to address the duplication of loss within a consolidated group. Special Analyses InRite Aid Corp. v. United States, 255 F.3d 1357 (Fed. Cir. 2001), the United States Court of Appeals for the Federal Cir- cuit held that the duplicated loss compo- nent of§1.1502–20 was an invalid exercise of regulatory authority. In response to the Rite Aiddecision, the IRS and Treasury De- partment issued Notice 2002–11, 2002–7 I.R.B. 526, stating that the interests of sound tax administration would not be served by the continued litigation of the validity of the duplicated loss component of§1.1502– 20. Notice 2002–11 also announced that be- cause of the interrelationship in the operation of all of the loss disallowance fac- tors, new rules governing loss disallow- ance on sales of subsidiary stock by members of consolidated groups should be implemented. In Notice 2002–18, 2002–12 I.R.B. 644, the IRS and Treasury Department stated that regulations would be promulgated that would defer or otherwise limit the utiliza- tion of a loss on stock (or another asset that reflects the basis of stock) in transactions that facilitate the group’s utilization of a single economic loss more than once. No- tice 2002–18 further stated that such regu- lations would apply to dispositions occurring on or after March 7, 2002. These tempo- rary regulations implement Notice 2002–18 and are necessary to provide taxpayers with immediate guidance regarding stock ba- sis and allowable loss in connection with transfers of subsidiary member stock. Ac- cordingly, good cause is found for dispens- ing with a delayed effective date pursuant to 5 U.S.C. 553(d)(3). It has been determined that this Trea- sury decision is not a significant regula- tory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It is hereby certified that these regulations do not have a signifi- cant impact on a substantial number of small entities. This certification is based on the fact that these regulations will prima- rily affect affiliated groups of corpora- tions, which tend to be larger businesses. Moreover, the number of taxpayers af- fected and the average burden are mini- mal. Therefore, a Regulatory Flexibility Analysis is not required. Pursuant to sec- tion 7805(f) of the Internal Revenue Code, these regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small businesses. Drafting Information The principle author of these regula- tions is Aimee K. Meacham of the Office of Chief Counsel (Corporate). However, other personnel from the IRS and Trea- sury Department participated in their de- velopment. ***** Amendments to the Regulations Accordingly, 26 CFR parts 1 and 602 are amended as follows: PA RT 1—INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by adding entries in nu- merical order to read in part as follows: Authority: 26 U.S.C. 7805*** Section 1.1502–21T(b)(1) and (b)(3)(v) also issued under 26 U.S.C. 1502.*** Section 1.1502–32T(a)(2), (b)(3)(iii)(C), (b)(3)(iii)(D), and (b)(4)(vi) also issued un- der 26 U.S.C. 1502.*** Section 1.1502–35T also issued under 26 U.S.C. 1502.*** Par. 2. In the list below, for each sec- tion indicated in the left column, remove the wording indicated in the middle col- umn, and add the wording indicated in the right column. Affected SectionRemoveAdd §1.267(f)–1(k)§§1.337(d)–1, 1.337(d)–2, 1.1502–13(f)(6), and1.1502–20 §§1.337(d)–2T, 1.1502–13(f)(6), and 1.1502–35T 2003–13 I.R.B.648March 31, 2003 Affected SectionRemoveAdd §1.597–3(e)Loss disallowance.For purposes of §1.1502–20, FFA and the amount described in§1.597–4(g)(3) are treated as an extraor- dinary gain disposition within the mean- ing of§1.1502–20(c)(2)(i) and a Taxable Transfer is treated as an applicable asset ac- quisition under section 1060(c) within the meaning of§1.1502–20(c)(2)(i)(A)(4). [Reserved]. §1.597–4(g)(2)(v), second sentence(See§§1.337(d)–1 and 1.1502–20 for po- tential limitations on the group’s worth- less stock deduction.) (See§§1.337(d)–2T and 1.1502–35T(f) for rules applicable when a member of a con- solidated group is entitled to a worthless stock deduction with respect to stock of an- other member of the group.) §1.1502–11(b)(3)(ii) Example (c), third sentence. See also§1.1502–20 for rules applicable to losses from the sale of stock of subsidiar- ies. See also§§1.337(d)–2T and 1.1502–35T for rules relating to basis adjustments and al- lowance of stock loss on dispositions of stock of a subsidiary member. §1.1502–12(r)Forrulings relating to loss disallowance or basis reduction on the disposition or de- consolidation of stock of a subsidiary, see §§1.337(d)–1, 1.337(d)–2 and 1.1502–20. See§§1.337(d)–2T and 1.1502–35T(f) for rules relating to basis adjustments and al- lowance of stock loss on dispositions of stock of a subsidiary member. §1.1502–13(f)(7), Example 1(e), sixth sen- tence See also§1.1502–20(b) (additional stock ba- sis reductions applicable to certain decon- solidations). §1.1502–15(b)(2)(iii), first sentence(e.g., under§1.1502–20 or section 267)(e.g., under§§1.337(d)–2T, 1.1502–35T, or section 267) §1.1502–21(b)(2)(i), third sentenceForrules permitting the reattribution of losses of a subsidiary to the common par- ent when loss is disallowed on the dispo- sition of subsidiary stock, see§1.1502– 20(g). §1.1502–32(b)(3)(iii)(B), third sentence§1.1502–20(b), or§1.1502–20(g)§1.1502–35T(b) or (f)(2) §1.1502–32(b)(5)(ii), Example 2(b), last sentence See also§1.1502–20(b) (possible stock ba- sis reduction on the deconsolidation of S). §1.1502–32(e)(2), Example 4(a), fourth sen- tence (Section§1.1502–20(b) does not reduce P’s basis in the S stock as a result of S’s de- consolidation.) §1.1502–80(c), last sentenceSee§1.1502–11(c) and 1.1502–20 for ad- ditional rules relating to stock loss. See§1.1502–11(c) and 1.1502–35T for ad- ditional rules relating to stock loss. §1.1502–91(h)(2), first sentence(unless disallowed under§1.1502–20 or oth- erwise) (unless disallowed under§1.337(d)–2T, 1.1502–35T, or otherwise) Par. 3. Section 1.1502–21 is amended by: 1. Revising paragraph (b)(1). 2. Adding paragraphs (b)(3)(v) and (h)(7). The revisions and addition read as follows: §1.1502–21 Net operating losses. ***** (b)*** (1) [Reserved]. For further guidance, see §1.1502–21T(b)(1). ***** (3)*** (v) [Reserved]. For further guidance, see §1.1502–21T(b)(3)(v). ***** (h)*** (7) [Reserved]. For further guidance, see §1.1502–21T(h)(7). Par. 4. Section 1.1502–21T is revised to read as follows: §1.1502–21T Net operating losses (tem- porary). (a) [Reserved]. For further guidance, see §1.1502–21(a). (b) [Reserved]. For further guidance, see §1.1502–21(b). March 31, 20036492003–13 I.R.B. (1)Carryovers and carrybacks gener- ally.The net operating loss carryovers and carrybacks to a taxable year are determined under the principles of section 172 and this section. Thus, losses permitted to be ab- sorbed in a consolidated return year gen- erally are absorbed in the order of the taxable years in which they arose, and losses carried from taxable years ending on the same date, and which are available to off- set consolidated taxable income for the year, generally are absorbed on apro rataba- sis. Additional rules under the Internal Rev- enue Code or regulations also apply. See, e.g., section 382(l)(2)(B) (if losses are car- ried from the same taxable year, losses sub- ject to limitation under section 382 are absorbed before losses that are not sub- ject to limitation under section 382). See Example 2of paragraph (c)(1)(iii) of this section for an illustration ofpro rataab- sorption of losses subject to a SRLY limi- tation. See paragraph (b)(3)(v) of this section regarding the treatment of any loss that is treated as expired under§1.1502– 35T(f)(1). (b)(2) through (b)(3)(iv) [Reserved]. For further guidance, see§1.1502–21(b)(2) through (b)(3)(iv). (b)(3)(v)Losses treated as expired un- der§1.1502–35T(f)(1).No loss treated as expired by§1.1502–35T(f)(1) may be car- ried over to any consolidated return year of the group. (c) through (h)(6) [Reserved]. For fur- ther guidance, see§1.1502–21(c) through (h)(6). (h)(7)Losses treated as expired under §1.1502–35T(f)(1).Paragraph (b)(3)(v) of this section is effective for losses treated as expired under§1.1502–35T(f)(1) on and af- ter March 7, 2002, and no later than March 11, 2006. Par. 5. Section 1.1502–32 is amended by: 1. Revising paragraph (a)(2). 2. Adding paragraphs (b)(3)(iii)(C), (b)(3)(iii)(D), (b)(4)(vi), and (h)(6). The revision and additions read as follows: §1.1502–32 Investment adjustments. ***** (a)(2) [Reserved]. For further guidance, see§1.1502–32T(a)(2). (b)(3)(iii)(C) and (D) [Reserved]. For furtherguidance,see§1.1502– 32T(b)(3)(iii)(C) and (D). ***** (b)(4)(vi) [Reserved]. For further guid- ance, see§1.1502–32T(b)(4)(vi). ***** (h)(6) [Reserved]. For further guidance, see§1.1502–32T(h)(6). Par. 6. Section 1.1502–32T is revised to read as follows: §1.1502–32T Investment adjustments (temporary). (a) and (a)(1) [Reserved]. For further guidance, see§1.1502–32(a) and (a)(1). (a)(2)Application of other rules of law. The rules of this section are in addition to other rules of law. See,e.g., section 358 (ba- sis determinations for distributees), sec- tion 1016 (adjustments to basis),§1.1502– 11(b) (limitations on the use of losses), §1.1502–19 (treatment of excess loss ac- counts),§1.1502–31 (basis after a group structure change), and§1.1502–35T (ad- ditional rules relating to stock loss, includ- ing losses attributable to worthlessness and certain dispositions not followed by a sepa- rate return year). P’s basis in S’s stock must not be adjusted under this section and other rules of law in a manner that has the ef- fect of duplicating an adjustment. For ex- ample, if pursuant to§1.1502–35T(c)(3) and paragraph (b)(3)(iii)(C) of this section the basis in stock is reduced to take into ac- count a loss suspended under§1.1502– 35T(c)(1), such basis shall not be further reduced to take into account such loss, or a portion of such loss, if any, that is later allowed pursuant to§1.1502–35T(c)(5). See also paragraph (h)(5) of this section for ba- sis reductions applicable to certain former subsidiaries. (b) through (b)(3)(iii)(B) [Reserved]. For further guidance, see§1.1502–32(b) through (b)(3)(iii)(B). (b)(3)(iii)(C)Loss suspended under §1.1502–35T(c).Any loss suspended pur- suant to§1.1502–35T(c) is treated as a non- capital, nondeductible expense incurred during the taxable year that includes the date of the disposition to which such section ap- plies. See§1.1502–35T(c)(3). Consequently, the basis of a higher-tier member’s stock of P is reduced by the suspended loss in the year it is suspended. (D)Loss disallowed under§1.1502– 35T(g)(3)(iii).Any loss or deduction the use ofwhichisdisallowedpursuant to§1.1502–35T(g)(3)(iii) (other than a loss or deduction described in§1.1502– 35T(g)(3)(i)(B)(11)), and with respect to which no waiver described in paragraph (b)(4) of this section is filed, is treated as a noncapital, nondeductible expense in- curred during the taxable year that such loss would otherwise be absorbed. See§1.1502– 35T(g)(3)(iv). (b)(4) through (b)(4)(v) [Reserved]. For further guidance, see§1.1502–32(b)(4) through (b)(4)(v). (b)(4)(vi)Special rules in the case of cer- tain transactions subject to§1.1502–35T. If a member of a consolidated group trans- fers stock of a subsidiary member and such stock has a basis that exceeds its value im- mediately before such transfer or a subsid- iary member is deconsolidated and any stock of such subsidiary member owned by members of the group immediately be- fore such deconsolidation has a basis that exceeds its value, all members of the group are subject to the provisions of§1.1502– 35T(b), which generally require a redeter- mination of members’basis in all shares of subsidiary stock. In addition, if stock of a subsidiary member is treated as worthless under section 165 (taking into account the provisions of§1.1502–80(c)), or if a mem- ber of a group disposes of subsidiary mem- ber stock and on the following day the subsidiary is not a member of the group and does not have a separate return year, and the common parent makes an election un- der§1.1502–35T(f)(2) to reattribute to it- self the losses treated as attributable to such subsidiary member,§1.1502–35T(f)(2) re- quires a reduction of members’basis in shares of subsidiary stock. (c) through (h)(5)(ii) [Reserved]. For fur- ther guidance, see§1.1502–32(c) through (h)(5)(ii). (h)(6)Loss suspended under§1.1502– 35T(c) or disallowed under§1.1502– 35T(g)(3)(iii).Paragraphs(a)(2), (b)(3)(iii)(C), (b)(3)(iii)(D), and (b)(4)(vi) of this section are effective on and after March 7, 2002, and expire on March 11, 2006. Par. 7. Section 1.1502–35T is added to read as follows: §1.1502–35T Transfers of subsidiary member stock and deconsolidations of subsidiary members (temporary). (a)Purpose.The purpose of this sec- tion is to prevent a group from obtaining more than one tax benefit from a single eco- nomic loss. The provisions of this section shall be construed in a manner consistent 2003–13 I.R.B.650March 31, 2003 with that purpose and in a manner that rea- sonably carries out that purpose. (b)Redetermination of basis on cer- tain nondeconsolidating transfers of sub- sidiary member stock and on certain deconsolidations of subsidiary members— (1)Redetermination of basis on certain non- deconsolidating transfers of subsidiary member stock.Except as provided in para- graph (b)(3)(i) of this section, if, immedi- ately after a transfer of stock of a subsidiary member that has a basis that exceeds its value, the subsidiary member remains a member of the group, then the basis in each share of subsidiary member stock owned by each member of the group shall be rede- termined in accordance with the provi- sions of this paragraph (b)(1) immediately before such transfer. All of the members’ bases in the shares of subsidiary member stock immediately before such transfer shall be aggregated. Such aggregated basis shall be allocated first to the shares of the sub- sidiary member’s preferred stock that are owned by the members of the group im- mediately before such transfer, in propor- tion to, but not in excess of, the value of those shares at such time. After alloca- tion of the aggregated basis to all shares of the preferred stock of the subsidiary mem- ber pursuant to the preceding sentence, any remaining basis shall be allocated among all common shares of subsidiary member stock held by members of the group im- mediately before the transfer, in propor- tion to the value of such shares at such time. (2)Redetermination of basis on cer- tain deconsolidations of subsidiary members.—(i)Allocation of reallocable ba- sis amount.Except as provided in para- graph (b)(3)(ii) of this section, if, immediately before a deconsolidation of a subsidiary member, any share of stock of such subsidiary owned by a member of the group has a basis that exceeds its value, then the basis in each share of the subsid- iary member’s stock owned by each mem- ber of the group shall be redetermined in accordance with the provisions of this para- graph (b)(2) immediately before such de- consolidation. The basis in each share of the subsidiary member’s stock held by mem- bers of the group immediately before the deconsolidation that has a basis in excess of value at such time shall be reduced, but not below such share’s value, in a man- ner that, to the greatest extent possible, causes the ratio of the basis to the value of each such share to be the same; provided, however, that the aggregate amount of such reduction shall not exceed the reallocable basis amount (as computed pursuant to paragraph (b)(2)(ii) of this section). Then, to the extent of the reallocable basis amount, the basis of each share of the preferred stock of the subsidiary member that are held by members of the group immediately be- fore the deconsolidation shall be increased, but not above such share’s value, in a man- ner that, to the greatest extent possible, causes the ratio of the basis to the value of each such share to be the same. Then, to the extent that the reallocable basis amount does not increase the basis of shares of pre- ferred stock of the subsidiary member pur- suant to the third sentence of this paragraph (b)(2)(i), such amount shall increase the ba- sis of all common shares of the subsid- iary member’s stock held by members of the group immediately before the decon- solidation in a manner that, to the great- est extent possible, causes the ratio of the basis to the value of each such share to be the same. (ii)Calculation of reallocable basis amount.The reallocable basis amount shall equal the lesser of— (A) The aggregate of all amounts by which, immediately before the deconsoli- dation, the basis exceeds the value of a share of subsidiary member stock owned by any member of the group at such time; and (B) The total of the subsidiary mem- ber’s (and any predecessor’s) items of de- duction and loss, and the subsidiary member’s (and any predecessor’s) allo- cable share of items of deduction and loss of all lower-tier subsidiary members, that were taken into account in computing the adjustment under§1.1502–32 to the bases of shares of stock of the subsidiary mem- ber (and any predecessor) held by mem- bers of the group immediately before the deconsolidation, other than shares that have bases in excess of value immediately be- fore the deconsolidation. (3)Exceptions to application of rede- termination rules.(i) Paragraph (b)(1) of this section shall not apply to a transfer of sub- sidiary member stock if— (A) during the taxable year of such trans- fer, in one or more fully taxable transac- tions, the members of the group dispose of all of the shares of the subsidiary mem- ber stock that they own immediately be- fore the transfer, other than the shares the transfer of which would otherwise trigger the application of paragraph (b)(1) of this section, to a person or persons that are not members of the group; (B) during the taxable year of such trans- fer, the members of the group are allowed a worthless stock loss under section 165(g) (taking into account the provisions of §1.1502–80(c)) with respect to all of the shares of subsidiary member stock that they own immediately before the transfer, other than the shares the transfer of which would otherwise trigger the application of para- graph (b)(1) of this section; or (C) such transfer is to a member of the group and section 332 (provided the stock is transferred to an 80-percent distribu- tee), section 351, or section 361 applies to such transfer. (ii) Paragraph (b)(2) of this section shall not apply to a deconsolidation of a sub- sidiary member if— (A) during the taxable year of such de- consolidation, in one or more fully tax- able transactions, the members of the group dispose of all of the shares of the subsid- iary member stock that they own immedi- ately before the deconsolidation to a person or persons that are not members of the group; (B) such deconsolidation results from a fully taxable disposition, to a person or per- sons that are not members of the group, of some of the shares of the subsidiary mem- ber, and, during the taxable year of such de- consolidation, the members of the group are allowed a worthless stock loss under sec- tion 165(g) with respect to all of the shares of subsidiary member stock that they own immediately after the deconsolidation; or (C) the deconsolidation of the subsid- iary member results from the deconsolida- tion of a higher-tier subsidiary member and, immediately after the deconsolidation of the subsidiary member, none of the stock of the subsidiary member is owned by a group member. (4)Special rule for lower-tier subsid- iaries.If, immediately after a transfer of subsidiary member stock or a deconsoli- dation of a subsidiary member, a lower- tier subsidiary member some of the stock of which is owned by the subsidiary mem- ber is a member of the group, then, for pur- poses of applying paragraph (b) of this section, the subsidiary member shall be treated as having transferred its stock of the lower-tier subsidiary member. This prin- March 31, 20036512003–13 I.R.B. ciple shall apply to stock of subsidiary members that are owned by such lower- tier subsidiary member. (5)Stock basis adjustments for higher- tier stock.The basis adjustments required under this paragraph (b) result in basis ad- justments to higher-tier member stock. The adjustments are applied in the order of the tiers, from the lowest to highest. For ex- ample, if a common parent owns stock of a subsidiary member that owns stock of a lower-tier subsidiary member and the sub- sidiary member recognizes a loss on the dis- position of a portion of its shares of the lower-tier subsidiary member stock, the common parent must adjust its basis in its subsidiary member stock under the prin- ciples of§1.1502–32 to reflect the adjust- ments that the subsidiary member must make to its basis in its stock of the lower- tier subsidiary member. (6)Ordering rules.(i) The rules of this paragraph (b) apply after the rules of §1.1502–32 are applied. (ii) The rules of this paragraph (b) ap- ply before the rules of§1.337(d)–2T and paragraph (c) of this section are applied. (iii) Paragraph (b) of this section (and any resulting basis adjustments to higher- tier member stock made pursuant to para- graph (b)(5) of this section) applies to redetermine the basis of stock of a lower- tier subsidiary member before paragraph (b) of this section applies to a higher-tier mem- ber of such lower-tier subsidiary member. (c)Loss suspension—(1)General rule. Any loss recognized by a member of a con- solidated group with respect to the dispo- sition of a share of subsidiary member stock shall be suspended to the extent of the du- plicated loss with respect to such share of stock if, immediately after the disposi- tion, the subsidiary is a member of the con- solidated group of which it was a member immediately prior to the disposition (or any successor group). (2)Special rule for lower-tier subsid- iaries.This paragraph (c)(2) applies if nei- ther paragraph (c)(1) nor (f) of this section applies to a member’s disposition of a share of stock of a subsidiary member (the de- parting member), a loss is recognized on the disposition of such share, and the depart- ing member owns stock of one or more other subsidiary members (a remaining member) that is a member of such group immediately after the disposition. In that case, such loss shall be suspended to the ex- tent the duplicated loss with respect to the departing member stock disposed of is at- tributable to the remaining member or mem- bers. (3)Treatment of suspended loss.For pur- poses of the rules of§1.1502–32, any loss suspended pursuant to paragraph (c)(1) or (c)(2) of this section is treated as a non- capital, nondeductible expense of the mem- ber that disposes of subsidiary member stock, incurred during the taxable year that includes the date of the disposition of stock to which paragraph (c)(1) or (c)(2) of this section applies. See§1.1502– 32T(b)(3)(iii)(C). Consequently, the basis of a higher-tier member’s stock of the mem- ber that disposes of subsidiary member stock is reduced by the suspended loss in the year it is suspended. (4)Reduction of suspended loss—(i) General rule.The amount of any loss sus- pended pursuant to paragraphs (c)(1) and (c)(2) of this section shall be reduced, but not below zero, by the subsidiary mem- ber’s (and any successor’s) items of de- duction and loss, and the subsidiary member’s (and any successor’s) allocable share of items of deduction and loss of all lower-tier subsidiary members, that are al- locable to the period beginning on the date of the disposition that gave rise to the sus- pended loss and ending on the day before the first date on which the subsidiary mem- ber (or any successor) is not a member of the group of which it was a member im- mediately prior to the disposition (or any successor group), and that are taken into ac- count in determining consolidated tax- able income (or loss) of such group for any taxable year that includes any date on or af- ter the date of the disposition and before the first date on which the subsidiary mem- ber (or any successor) is not a member of such group; provided, however, that such reduction shall not exceed the excess of the amount of such items over the amount of such items that are taken into account in de- termining the basis adjustments made un- der§1.1502–32 to stock of the subsidiary member (or any successor) owned by mem- bers of the group. The preceding sentence shall not apply to items of deduction and loss to the extent that the group can estab- lish that all or a portion of such items was not reflected in the computation of the du- plicated loss with respect to the subsid- iary member on the date of the disposition of stock that gave rise to the suspended loss. (ii)Operating rules—(A)Year in which deduction or loss is taken into account.For purposes of paragraph (c)(4)(i) of this sec- tion, a subsidiary member’s (or any suc- cessor’s) deductions and losses are treated as taken into account when and to the ex- tent they are absorbed by the subsidiary member (or any successor) or any other member. To the extent that the subsidiary member’s (or any successor’s) deduction or loss is absorbed in the year it arises or is carried forward and absorbed in a subse- quent year (e.g., under section 172, 465, or 1212), the deduction is treated as taken into account in the year in which it is absorbed. To the extent that a subsidiary member’s (or any successor’s) deduction or loss is car- ried back and absorbed in a prior year (whether consolidated or separate), the de- duction or loss is treated as taken into ac- count in the year in which it arises and not in the year in which it is absorbed. (B)Determination of items that are al- locable to the post-disposition, pre- deconsolidation period.For purposes of paragraph (c)(4)(i) of this section, the de- termination of whether a subsidiary mem- ber’s (or any successor’s) items of deduction and loss and allocable share of items of de- duction and loss of all lower-tier subsid- iary members are allocable to the period beginning on the date of the disposition of subsidiary stock that gave rise to the sus- pended loss and ending on the day before the first date on which the subsidiary mem- ber (or any successor) is not a member of the consolidated group of which it was a member immediately prior to the disposi- tion (or any successor group) is determined pursuant to the rules of§1.1502–76(b)(2), without regard to§1.1502–76(b)(2)(ii)(D), as if the subsidiary member ceased to be a member of the group at the end of the day before the disposition and filed separate re- turns for the period beginning on the date of the disposition and ending on the day be- fore the first date on which it is not a mem- ber of such group. (5)Allowable loss—(i)General rule.To the extent not reduced under paragraph (c)(4) of this section, any loss suspended pursuant to paragraph (c)(1) or (c)(2) of this section shall be allowed, to the extent oth- erwise allowable under applicable provi- sions of the Internal Revenue Code and regulations thereunder, on a return filed by the group of which the subsidiary was a member on the date of the disposition of 2003–13 I.R.B.652March 31, 2003 subsidiary stock that gave rise to the sus- pended loss (or any successor group) for the taxable year that includes the day before the first date on which the subsidiary (or any successor) is not a member of such group or the date the group is allowed a worth- less stock loss under section 165(g) (tak- ing into account the provisions of§1.1502– 80(c)) with respect to all of the subsidiary member stock owned by members. (ii)No tiering up of certain adjustments. No adjustments shall be made to a mem- ber’s basis of stock of a subsidiary mem- ber (or any successor) for a suspended loss that is taken into account under paragraph (c)(5)(i) of this section. See§1.1502– 32T(a)(2). (iii)Statement of allowed loss.Para- graph (c)(5)(i) of this section applies only if the separate statement required under this paragraph (c)(5)(iii) is filed with, or as part of, the taxpayer’s return for the year in which the loss is allowable. The state- ment must be entitled“ALLOWED LOSS UNDER§1.1502–35T(c)(5)”and must con- tain the name and employer identification number of the subsidiary the stock of which gave rise to the loss. (6)Special rule for dispositions of cer- tain carryover basis assets.If— (i) A member of a group recognizes a loss on the disposition of an asset other than stock of a subsidiary member; (ii) Such member’s basis in the asset dis- posed of was determined, directly or indi- rectly, in whole or in part, by reference to the basis of stock of a subsidiary member and, at the time of the determination of the member’s basis in the asset disposed of, there was a duplicated loss with respect to such stock of the subsidiary member; and (iii) Immediately after the disposition, the subsidiary member is a member of such group, then such loss shall be suspended pursuant to the principles of paragraphs (c)(1) and (c)(2) of this section to the ex- tent of the duplicated loss with respect to such stock at the time of the determina- tion of basis of the asset disposed of. Prin- ciples similar to those set forth in paragraphs (c)(3), (c)(4), and (c)(5) of this section shall apply to a loss suspended pur- suant to this paragraph (c)(6). (7)Coordination with loss deferral, loss disallowance, and other rules—(i)In gen- eral.Loss recognized on the disposition of subsidiary member stock or another asset is subject to redetermination, deferral, or disallowance under other applicable pro- visions of the Internal Revenue Code and regulations thereunder, including sections 267(f) and 482. Paragraphs (c)(1), (c)(2), and (c)(6) of this section do not apply to a loss that is disallowed under any other provision. If loss is deferred under any other provision, paragraphs (c)(1), (c)(2), and (c)(6) of this section apply when the loss would otherwise be taken into account un- der such other provision. However, if an overriding event described in paragraph (c)(7)(ii) of this section occurs before the deferred loss is taken into account, para- graphs (c)(1), (c)(2), and (c)(6) of this sec- tion apply to the loss immediately before the event occurs, even though the loss may not be taken into account until a later time. (ii)Overriding events.For purposes of paragraph (c)(7)(i) of this section, the fol- lowing are overriding events— (A) The stock ceases to be owned by a member of the consolidated group; (B) The stock is canceled or redeemed (regardless of whether it is retired or held as treasury stock); or (C) The stock is treated as disposed of under§1.1502–19(c)(1)(ii)(B) or (c)(1)(iii). (8)Application.This paragraph (c) shall not be applied in a manner that perma- nently disallows a deduction for an eco- nomic loss, provided that such deduction is otherwise allowable. If the application of any provision of this paragraph (c) re- sults in such a disallowance, proper ad- justment may be made to prevent such a disallowance. Whether a provision of this paragraph (c) has resulted in such a disal- lowance is determined on the date on which the subsidiary (or any successor) the dis- position of the stock of which gave rise to a suspended stock loss is not a member of the group or the date the group is allowed a worthless stock loss under section 165(g) (taking into account the provisions of §1.1502–80(c)) with respect to all of such subsidiary member stock owned by mem- bers. Proper adjustment in such cases shall be made by restoring the suspended stock loss immediately before the subsidiary ceases to be a member of the group or the group is allowed a worthless stock loss un- der section 165(g) (taking into account the provisions of§1.1502–80(c)) with respect to all of such subsidiary member stock owned by members, to the extent that its reduction pursuant to paragraph (c)(4) of this section had the result of permanently disallowing a deduction for an economic loss. (9)Ordering rule.The rules of this para- graph (c) apply after the rules of para- graph (b) of this section and§1.337(d)–2T are applied. (d)Definitions—(1)Disposition. Dis- positionmeans any event in which gain or loss is recognized, in whole or in part. (2)Deconsolidation. Deconsolidation means any event that causes a subsidiary member to no longer be a member of the consolidated group. (3)Value. Valuemeans fair market value. (4)Duplicated loss—(i)In general.Du- plicated loss is determined immediately af- ter a disposition and equals the excess, if any, of— (A) The sum of— (1) The aggregate adjusted basis of the subsidiary member’s assets other than any stock that subsidiary member owns in an- other subsidiary member; and (2) Any losses attributable to the sub- sidiary member and carried to the subsid- iary member’s first taxable year following the disposition; and (3) Any deductions of the subsidiary member that have been recognized but are deferred under a provision of the Internal Revenue Code (such as deductions de- ferred under section 469); over (B) The sum of— (1) The value of the subsidiary mem- ber’s stock; and (2) Any liabilities of the subsidiary mem- ber that have been taken account for tax purposes. (ii)Special rules.(A) The amounts de- termined under paragraph (d)(4)(i) (other than amounts described in paragraph (d)(4)(i)(B)(1)) of this section with re- spect to a subsidiary member include its al- locable share of corresponding amounts with respect to all lower-tier subsidiary mem- bers. If 80 percent or more in value of the stock of a subsidiary member is acquired by purchase in a single transaction (or in a series of related transactions during any 12-month period), the value of the subsid- iary member’s stock may not exceed the purchase price of the stock divided by the percentage of the stock (by value) so pur- chased. For this purpose, stock is acquired by purchase if the transferee is not re- lated to the transferor within the meaning of sections 267(b) and 707(b)(1), using the March 31, 20036532003–13 I.R.B. language“‘10 percent’”instead of“‘50 per- cent’”each place that it appears, and the transferee’s basis in the stock is deter- mined wholly by reference to the consid- eration paid for such stock. (B) The amounts determined under para- graph (d)(4)(i) of this section are not ap- plied more than once to suspend a loss under this section. (5)Predecessor and Successor.A pre- decessor is a transferor of assets to a trans- feree (the successor) in a transaction— (i) To which section 381(a) applies; (ii) In which substantially all of the as- sets of the transferor are transferred to mem- bers in a complete liquidation; (iii) In which the successor’s basis in as- sets is determined (directly or indirectly, in whole or in part) by reference to the trans- feror’s basis in such assets, but the trans- feree is a successor only with respect to the assets the basis of which is so determined; or (iv) Which is an intercompany transac- tion, but only with respect to assets that are being accounted for by the transferor in a prior intercompany transaction. (6)Successor group.A surviving group is treated as a successor group of a con- solidated group (the terminating group) that ceases to exist as a result of— (i) The acquisition by a member of an- other consolidated group of either the as- sets of the common parent of the terminating group in a reorganization de- scribed in section 381(a)(2), or the stock of the common parent of the terminating group; or (ii) The application of the principles of §1.1502–75(d)(2) or (3). (7)Preferred stock, common stock. Pre- ferred stockandcommon stockshall have the meanings set forth in§1.1502–32(d)(2) and (3), respectively. (8)Higher-tier.A subsidiary member is higher-tierwith respect to a member if or to the extent investment basis adjustments under§1.1502–32 with respect to the stock of the latter member would affect invest- ment basis adjustments with respect to the stock of the former member. (9)Lower-tier.A subsidiary member is lower-tierwith respect to a member if or to the extent investment basis adjustments under§1.1502–32 with respect to the stock of the former member would affect invest- ment basis adjustments with respect to the stock of the latter member. (e)Examples.For purposes of the ex- amples in this section, all groups file con- solidated returns on a calendar-year basis, the facts set forth the only corporate ac- tivity, all transactions are between unre- lated persons unless otherwise specified, and tax liabilities are disregarded. The prin- ciples of paragraphs (a) through (d) of this section are illustrated by the following examples: Example 1. Nondeconsolidating sale of preferred stock of lower-tier subsidiary member.(i)Facts.P owns 100 percent of the common stock of each of S1 and S2. S1 and S2 each have only one class of stock out- standing. P’s basis in the stock of S1 is $100 and the value of such stock is $130. P’s basis in the stock of S2 is $120 and the value of such stock is $90. P, S1, and S2 are all members of the P group. S1 and S2 form S3. In Year 1, in transfers to which section 351 applies, S1 contributes $100 to S3 in exchange for all of the common stock of S3 and S2 contributes an as- set with a basis of $50 and a value of $20 to S3 in exchange for all of the preferred stock of S3. S3 be- comes a member of the P group. In Year 3, in a trans- action that is not part of the plan that includes the contributions to S3, S2 sells the preferred stock of S3 for $20. Immediately after the sale, S3 is a member of the P group. (ii)Application of basis redetermination rule.Be- cause S2’s basis in the preferred stock of S3 ex- ceeds its value immediately prior to the sale and S3 is a member of the P group immediately after the sale, all of the P group members’bases in the stock of S3 is redetermined pursuant to paragraph (b)(1) of this section. Of the group members’total basis of $150 in the S3 stock, $20 is allocated to the preferred stock, the fair market value of the preferred stock on the date of the sale, and $130 is allocated to the common stock. S2’s sale of the preferred stock results in the recog- nition of $0 of gain/loss. Pursuant to paragraph (b)(5) of this section, the redetermination of S1’s and S2’s bases in the stock of S3 results in adjustments to P’s basis in the stock of S1 and S2. In particular, P’s ba- sis in the stock of S1 is increased by $30 to $130 and its basis in the stock of S2 is decreased by $30 to $90. Example 2. Deconsolidating sale of common stock. (i)Facts.In Year 1, in a transfer to which section 351 applies, P contributes Asset A with a basis of $900 and a value of $200 to S in exchange for one share of S common stock (CS1). In Years 2 and 3, in succes- sive but unrelated transfers to which section 351 ap- plies, P transfers $200 to S in exchange for one share of S common stock (CS2), Asset B with a basis of $300 and a value of $200 in exchange for one share of S common stock (CS3), and Asset C with a basis of $1000 and a value of $200 in exchange for one share of S common stock (CS4). In Year 4, S sells As- set A for $200, recognizing $700 of loss that is used to offset income of P recognized during Year 4. As a result of the sale of Asset A, the basis of each of P’s four shares of S common stock is reduced by $175. Therefore, the basis of CS1 is $725. The basis of CS2 is $25. The basis of CS3 is $125, and the basis of CS4 is $825. In Year 5 in a transaction that is not part of a plan that includes the Year 1 contribution, P sells CS4 for $200. Immediately after the sale of CS4, S is not a member of the P group. (ii)Application of basis redetermination rule.Be- cause P’s basis in each of CS1 and CS4 exceeds its value immediately prior to the deconsolidation of S, P’s basis in its shares of S common stock is redeter- mined pursuant to paragraph (b)(2) of this section. Pur- suant to paragraph (b)(2)(ii) of this section, the reallocable basis amount is $350 (the lesser of $1150, the gross loss inherent in the stock of S owned by P immediately before the sale, and $350, the aggre- gate amount of S’s items of deduction and loss that were previously taken into account in the computa- tion of the adjustment to the basis of the stock of S that P did not hold at a loss immediately before the deconsolidation). Pursuant to paragraph (b)(2)(i) of this section, first, P’s basis in CS1 is reduced from $725 to $600 and P’s basis in CS4 is reduced from $825 to $600. Then, the reallocable basis amount increases P’s basis in CS2 from $25 to $250 and P’s basis in CS3 from $125 to $250. P recognizes $400 of loss on the sale of CS4. The loss suspension rule does not ap- ply because S is no longer a member of the P group. Thus, the loss is allowable at that time. Example 3. Nondeconsolidating sale of common stock.(i)Facts.In Year 1, P forms S with a contri- bution of $80 in exchange for 80 shares of the com- mon stock of S, which at that time represents all of the outstanding stock of S. S becomes a member of the P group. In Year 2, P contributes Asset A with a basis of $50 and a value of $20 in exchange for 20 shares of the common stock of S in a transfer to which section 351 applies. In Year 3, in a transaction that is not part of the plan that includes the Year 2 contri- bution, P sells the 20 shares of the common stock of S that it acquired in Year 2 for $20. Immediately af- ter the Year 3 stock sale, S is a member of the P group. At the time of the Year 3 stock sale, S has $80 and Asset A. In Year 4, S sells Asset A , the basis and value of which have not changed since its contribution to S. On the sale of Asset A for $20, S recognizes a $30 loss. The P group cannot establish that all or a por- tion of the $30 loss was not reflected in the calcula- tion of the duplicated loss of S on the date of the Year 3 stock sale. The $30 loss is used on the P group re- turn to offset income of P. In Year 5, P sells its re- maining S common stock for $80. (ii)Application of basis redetermination and loss suspension rules.Because P’s basis in the common stock sold exceeds its value immediately prior to the sale and S is a member of the P group immediately after the sale, P’s basis in all of the stock of S is re- determined pursuant to paragraph (b)(1) of this sec- tion. Of P’s total basis of $130 in the S common stock, a proportionate amount is allocated to each of the 100 shares of S common stock. Accordingly, $26 is allo- cated to the common stock of S that is sold and $104 is allocated to the common stock of S that is re- tained. On P’s sale of the 20 shares of the common stock of S for $20, P recognizes a loss of $6. Be- cause the sale of the 20 shares of common stock of S does not result in the deconsolidation of S, under paragraph (c)(1) of this section, that loss is sus- pended to the extent of the duplicated loss with re- spect to the shares sold. The duplicated loss with respect to the shares sold is $6. Therefore, the en- tire $6 loss is suspended. (iii)Effect of subsequent asset sale on stock ba- sis.Of the $30 loss recognized on the sale of Asset A, $24 is taken into account in determining the ba- sis adjustments made under§1.1502–32 to the stock 2003–13 I.R.B.654March 31, 2003 of S owned by P. Accordingly, P’s basis in its S stock is reduced by $24 from $104 to $80. (iv)Effect of subsequent asset sale on suspended loss.Because P cannot establish that all or a portion of the loss recognized on the sale of Asset A was not reflected in the calculation of the duplicated loss of S on the date of the Year 3 stock sale and such loss is allocable to the period beginning on the date of the Year 3 disposition of the S stock and ending on the day before the first date on which S is not a mem- ber of the P group and is taken into account in de- termining consolidated taxable income (or loss) of the P group for a taxable year that includes a date on or after the date of the Year 3 disposition and before the first date on which S is not a member of the P group, such asset loss reduces the suspended loss pursuant to paragraph (c)(4) of this section. The amount of such reduction, however, cannot exceed $6, the excess of the amount of such loss, $30, over the amount of such loss that is taken into account in determining the ba- sis adjustment made to the stock of S owned by P, $24. Therefore, the suspended loss is reduced to zero. (v)Effect of subsequent stock sale.P recognizes $0 gain/loss on the Year 5 sale of its remaining S com- mon stock. No amount of suspended loss remains to be allowed under paragraph (c)(5) of this section. Example 4. Nondeconsolidating sale of common stock of lower-tier subsidiary.(i)Facts.In Year 1, P forms S1 with a contribution of $200 in exchange for all of the common stock of S1, which represents all of the outstanding stock of S1. In the same year, S1 forms S2 with a contribution of $80 in exchange for 80 shares of the common stock of S2, which at that time represents all of the outstanding stock of S2. S1 and S2 become members of the P group. In the same year, S2 purchases Asset A for $80. In Year 2, S1 con- tributes Asset B with a basis of $50 and a value of $20 in exchange for 20 shares of the common stock of S2 in a transfer to which section 351 applies. In Year 3, S1 sells the 20 shares of the common stock of S2 that it acquired in Year 2 for $20. Immedi- ately after the Year 3 stock sale, S2 is a member of the P group. At the time of the Year 3 stock sale, the bases and values of Asset A and Asset B are un- changed. In Year 4, S2 sells Asset B for $45, recog- nizing a $5 loss. The P group cannot establish that all or a portion of the $5 loss was not reflected in the cal- culation of the duplicated loss of S2 on the date of the Year 3 stock sale. The $5 loss is used on the P group return to offset income of P. In Year 5, S1 sells its remaining S2 common stock for $100. (ii)Application of basis redetermination and loss suspension rules.Because S1’s basis in the S2 com- mon stock sold exceeds its value immediately prior to the sale and S2 is a member of the P group im- mediately after the sale, S1’s basis in all of the stock of S2 is redetermined pursuant to paragraph (b)(1) of this section. Of S1’s total basis of $130 in the S2 com- mon stock, a proportionate amount is allocated to each of the 100 shares of S2 common stock. Accordingly, a total of $26 is allocated to the common stock of S2 that is sold and $104 is allocated to the common stock of S2 that is retained. On S1’s sale of the 20 shares of the common stock of S2 for $20, S1 recognizes a loss of $6. Because the sale of the 20 shares of com- mon stock of S2 does not result in the deconsolida- tion of S2, under paragraph (c)(1) of this section, that loss is suspended to the extent of the duplicated loss with respect to the shares sold. The duplicated loss with respect to the shares sold is $6. Therefore, the entire $6 loss is suspended. Pursuant to paragraph (c)(3) of this section and§1.1502–32T(b)(3)(iii)(C), the suspended loss is treated as a noncapital, nonde- ductible expense incurred by S1 during the tax year that includes the date of the disposition of stock to which paragraph (c)(1) of this section applies. Ac- cordingly, P’s basis in its S1 stock is reduced from $200 to $194. (iii)Effect of subsequent asset sale on stock ba- sis.Of the $5 loss recognized on the sale of Asset B, $4 is taken into account in determining the basis ad- justments made under§1.1502–32 to the stock of S2 owned by S1. Accordingly, S1’s basis in its S2 stock is reduced by $4 from $104 to $100 and P’s basis in its S1 stock is reduced by $4 from $194 to $190. (iv)Effect of subsequent asset sale on suspended loss.Because P cannot establish that all or a portion of the loss recognized on the sale of Asset B was not reflected in the calculation of the duplicated loss of S2 on the date of the Year 3 stock sale and such loss is allocable to the period beginning on the date of the Year 3 disposition of the S2 stock and ending on the day before the first date on which S2 is not a mem- ber of the P group and is taken into account in de- termining consolidated taxable income (or loss) of the P group for a taxable year that includes a date on or after the date of the Year 3 disposition and before the first date on which S2 is not a member of the P group, such asset loss reduces the suspended loss pursuant to paragraph (c)(4) of this section. The amount of such reduction, however, cannot exceed $1, the excess of the amount of such loss, $5, over the amount of such loss that is taken into account in determining the ba- sis adjustment made to the stock of S2 owned by members of the P group, $4. Therefore, the sus- pended loss is reduced to $5. (v)Effect of subsequent stock sale.In Year 5, when S1 sells its remaining S2 stock for $100, it recog- nizes $0 gain/loss. Pursuant to paragraph (c)(5) of this section, the remaining $5 of the suspended loss is al- lowed on the P group’s return for Year 5 when S1 sells its remaining S2 stock. Example 5. Deconsolidating sale of subsidiary member owning stock of another subsidiary mem- ber that remains in group.(i)Facts.In Year 1, P forms S1 with a contribution of Asset A with a basis of $50 and a value of $20 in exchange for 100 shares of com- mon stock of S1 in a transfer to which section 351 applies. Also in Year 1, P and S1 form S2. P contrib- utes $80 to S2 in exchange for 80 shares of com- mon stock of S2. S1 contributes Asset A to S2 in exchange for 20 shares of common stock of S2 in a transfer to which section 351 applies. In Year 3, in a transaction that is not part of a plan that includes the Year 1 contributions, P sells its 100 shares of S1 com- mon stock for $20. Immediately after the Year 3 stock sale, S2 is a member of the P group. At the time of the Year 3 stock sale, S1 owns 20 shares of com- mon stock of S2, and S2 has $80 and Asset A. In Year 4, S2 sells Asset A, the basis and value of which have not changed since its contribution to S2. On the sale of Asset A for $20, S2 recognizes a $30 loss. That $30 loss is used on the P group return to offset income of P. In Year 5, P sells its S2 common stock for $80. (ii)Application of basis redetermination and loss suspension rules.Pursuant to paragraph (b)(4) of this section, because immediately before P’s transfer of S1 stock S1 owns stock of S2 (another subsidiary mem- ber of the same group) that has a basis that exceeds its value, paragraph (b) of this section applies as if S1 had transferred its stock of S2. Because S2 is a mem- ber of the group immediately after the transfer of the S1 stock, the group member’s basis in the S2 stock is redetermined pursuant to paragraph (b)(1) of this section immediately prior to the sale of the S1 stock. Of the group members’total basis of $130 in the S2 stock, $26 is allocated to S1’s 20 shares of S2 com- mon stock and $104 is allocated to P’s 80 shares of S2 common stock. Pursuant to paragraph (b)(5) of this section, the redetermination of S1’s basis in the stock of S2 results in an adjustment to P’s basis in the stock of S1. In particular, P’s basis in the stock of S1 is de- creased by $24 to $26. On P’s sale of its 100 shares of S1 common stock for $20, P recognizes a loss of $6. Because S1 is not a member of the P group im- mediately after P’s sale of the S1 stock, paragraph (c)(1) of this section does not apply to suspend such loss. However, because P recognizes a loss with re- spect to the disposition of the S1 stock and S1 owns stock of S2 (which is a member of the P group im- mediately after the disposition), paragraph (c)(2) of this section does apply to suspend up to $6 of that loss, an amount equal to the amount by which the dupli- cated loss with respect to the stock of S1 sold is at- tributable to S2’s adjusted basis in its assets, loss carryforwards, and deferred deductions. (iii)Effect of subsequent asset sale on stock ba- sis.Of the $30 loss recognized on the sale of Asset A, $24 is taken into account in determining the ba- sis adjustments made under§1.1502–32 to the stock of S2 owned by P. Accordingly, P’s basis in its S2 stock is reduced by $24 from $104 to $80. (iv)Effect of subsequent asset sale on suspended loss.Because P cannot establish that all or a portion of the loss recognized on the sale of Asset A was not reflected in the calculation of the duplicated loss of S2 on the date of the Year 3 stock sale and such loss is allocable to the period beginning on the date of the Year 3 deemed disposition of the S2 stock and end- ing on the day before the first date on which S2 is not a member of the P group and is taken into account in determining consolidated taxable income (or loss) of the P group for a taxable year that includes a date on or after the date of the Year 3 deemed disposi- tion and before the first date on which S2 is not a member of the P group, such asset loss reduces the suspended loss pursuant to paragraph (c)(4) of this sec- tion. The amount of such reduction, however, can- not exceed $6, the excess of the amount of such loss, $30, over the amount of such loss that is taken into account in determining the basis adjustment made to the stock of S2 owned by P, $24. Therefore, the sus- pended loss is reduced to zero. (v)Effect of subsequent stock sale.P recognizes $0 gain/loss on the Year 5 sale of its remaining S2 common stock. No amount of suspended loss re- mains to be allowed under paragraph (c)(5) of this sec- tion. Example 6. Loss recognized on asset with basis determined by reference to stock basis of subsidiary member.(i)Facts.In Year 1, P forms S with a con- tribution of $80 in exchange for 80 shares of com- mon stock of S which at that time represents all of the outstanding stock of S. S becomes a member of the P group. In Year 2, P contributes Asset A with a basis of $50 and a value of $20 in exchange for 20 shares of common stock of S in a transfer to which section 351 applies. In Year 3, in a transaction that is not part of a plan that includes the Year 1 and Year 2 contributions, P contributes the 20 shares of S com- March 31, 20036552003–13 I.R.B. mon stock it acquired in Year 2 to PS, a partner- ship, in exchange for a 20 percent capital and profits interest in a transaction described in section 721. Im- mediately after the contribution to PS, S is a mem- ber of the P group. In Year 4, P sells its interest in PS for $20, recognizing a $30 loss. (ii)Application of basis redetermination rule upon nonrecognition transfer.Because P’s basis in the S common stock contributed to PS exceeds its value im- mediately prior to the transfer and S is a member of the P group immediately after the transfer, P’s basis in all of the S stock is redetermined pursuant to para- graph (b)(1) of this section. Of P’s total basis of $130 in the common stock of S, a proportionate amount is allocated to each share of S common stock. Accord- ingly, $26 is allocated to the S common stock that is contributed to PS and, under section 722, P’s basis in its interest in PS is $26. (iii)Application of loss suspension rule on dis- position of asset with basis determined by reference to stock basis of subsidiary member.P recognizes a $6 loss on its disposition of its interest in PS. Be- cause P’s basis in its interest in PS was determined by reference to the basis of S stock and at the time of the determination of P’s basis in its interest in PS such S stock had a duplicated loss of $6, and, im- mediately after the disposition, S is a member of the P group, such loss is suspended to the extent of such duplicated loss. Principles similar to those of para- graphs (c)(3), (c)(4), and (c)(5) of this section shall apply to such suspended loss. (f)Worthlessness and certain disposi- tions not followed by separate return years—(1)General rule.Notwithstand- ing any other provision in the regulations under section 1502, if stock of a subsid- iary member is treated as worthless under section 165 (taking into account the pro- visions of§1.1502–80(c)), or if a mem- ber of a group disposes of subsidiary member stock and on the following day the subsidiary is not a member of the group and does not have a separate return year, then all losses treated as attributable to the sub- sidiary member under the principles of §1.1502–21(b)(2)(iv), after computing the taxable income of the group, the subsid- iary member, or a group of which the sub- sidiary member was previously a member for the taxable year that includes the de- termination of worthlessness or the dispo- sition and any prior taxable year, shall be treated as expired, but not as absorbed by the group, as of the beginning of the group’s taxable year that follows the tax- able year that includes the determination of worthlessness or the disposition. (2)Election in the case of determina- tions of worthlessness and dispositions not followed by a separate return that occurred prior to March 14, 2003.If stock of a sub- sidiary member is treated as worthless un- der section 165 (taking into account the provisions of§1.1502–80(c)) on or after March 7, 2002, and prior to March 14, 2003, or if a member of a group disposes of subsidiary member stock on or after March 7, 2002, and prior to March 14, 2003, and on the following day the sub- sidiary is not a member of the group and does not have a separate return year, then, notwithstanding paragraph (f)(1) of this sec- tion, the common parent may make an ir- revocable election to reattribute to itself all or any portion of the losses treated as at- tributable to such subsidiary member un- der the principles of§1.1502–21(b)(2)(iv). The election shall be in the form of a state- ment filed with or as part of the group’s re- turn for the taxable year in which the worthlessness is established or the dispo- sition occurs. The statement shall be en- titled“Election under Section 1.1502– 35T(f)(2)”and must state that the common parent is making an irrevocable election un- der this paragraph (f)(2) to reattribute to it- self the losses of the subsidiary member the stock of which is worthless or disposed of. In addition, it must identify the subsid- iary to which the election relates and the portion of losses subject to the election. If the election provided in this paragraph is made, the common parent shall be treated as succeeding to the reattributed losses as if the losses were succeeded to in a trans- action described in section 381(a). For pur- poses of applying the provisions of §1.1502–32, the reattributed losses shall be treated as absorbed by the group immedi- ately prior to the allowance of any loss or inclusion of any income or gain with re- spect to the determination of worthless- ness or the disposition. In the case of an election to reattribute less than all of the losses otherwise treated as attributable to such subsidiary member under the prin- ciples of§1.1502–21(b)(2)(iv), paragraph (f)(1) of this section shall apply to that por- tion of the losses for which an election un- der this paragraph (f)(2) is not made. (g)Anti-avoidance rules—(1)Transfer of share without a loss in avoidance.If a share of subsidiary member stock has a ba- sis that does not exceed its value and the share is transferred with a view to avoid- ing application of the rules of paragraph (b) of this section prior to the transfer of a share of subsidiary member stock that has a ba- sis that does exceed its value or a decon- solidation of a subsidiary member, the rules of paragraph (b) of this section shall ap- ply immediately prior to the transfer of stock that has a basis that does not ex- ceed its value. (2)Transfers of loss property in avoid- ance.If a member of a consolidated group contributes an asset with a basis that ex- ceeds its value to a partnership in a trans- action described in section 721 or a corporation that is not a member of such group in a transfer described in section 351, such partnership or corporation contrib- utes such asset to a subsidiary member in a transfer described in section 351, and such contributions are undertaken with a view to avoiding the rules of paragraph (b) or (c) of this section, adjustments must be made to carry out the purposes of this section. (3)Anti-loss reimportation—(i)Appli- cation.This paragraph (g)(3) applies if— (A) A member of a group recognizes and is allowed a loss on the disposition of a share of stock of a subsidiary member with respect to which there is a duplicated loss; and (B) Within the 10-year period begin- ning on the date the subsidiary member (or any successor) ceases to be a member of such group— (1) The subsidiary member (or any suc- cessor) again becomes a member of such group (or any successor group) when the subsidiary member (or any successor) owns any asset that has a basis in excess of value at such time and that was owned by the subsidiary member (or any successor) on the date of a disposition of stock of such subsidiary member (or any successor) and that had a basis in excess of value on such date; (2) The subsidiary member (or any suc- cessor) again becomes a member of such group (or any successor group) when the subsidiary member (or any successor) owns any asset that has a basis in excess of value at such time and that has a basis that re- flects, directly or indirectly, in whole or in part, the basis of any asset that was owned by the subsidiary member on the date of a disposition of stock of such subsidiary member (or any successor) and that had a basis in excess of value on such date; (3) In a transaction described in sec- tion 381 or section 351, any member of such group (or any successor group) ac- quires any asset of the subsidiary mem- ber (or any successor) that was owned by the subsidiary member (or any successor) on the date of a disposition of stock of such 2003–13 I.R.B.656March 31, 2003 subsidiary member (or any successor) and that had a basis in excess of its value on such date, or any asset that has a basis that reflects, directly or indirectly, in whole or in part, the basis of any asset that was owned by the subsidiary member (or any successor) on the date of a disposition of stock of such subsidiary member (or any successor) and that had a basis in excess of its value on such date, and, immediately af- ter the acquisition of such asset, such as- set has a basis in excess of its value; (4) The subsidiary member (or any suc- cessor) again becomes a member of such group (or any successor group) when the subsidiary member (or any successor) has a liability (within the meaning of section 358(h)(3)) that it had on the date of a dis- position of stock of such subsidiary mem- ber (or any successor) and such liability will give rise to a deduction; (5) In a transaction described in sec- tion 381 or section 351, any member of such group (or any successor group) as- sumes a liability (within the meaning of sec- tion 358(h)(3)) that was a liability of the subsidiary member (or any successor) on the date of a disposition of stock of such subsidiary member (or any successor); (6) The subsidiary member (or any suc- cessor) again becomes a member of such group (or any successor group) when the subsidiary member (or any successor) has any losses or deferred deductions that were losses or deferred deductions of the sub- sidiary member (or any successor) on the date of a disposition of stock of such sub- sidiary member (or any successor); (7) The subsidiary member (or any suc- cessor) again becomes a member of such group (or any successor group) when the subsidiary member (or any successor) has any losses or deferred deductions that are attributable to any asset that was owned by the subsidiary member (or any successor) on the date of a disposition of stock of such subsidiary member (or any successor) and that had a basis in excess of value on such date; (8) The subsidiary member (or any suc- cessor) again becomes a member of such group (or any successor group) when the subsidiary member (or any successor) has any losses or deferred deductions that are attributable to any asset that had a basis that reflected, directly or indirectly, in whole or in part, the basis of any asset that was owned by the subsidiary member (or any successor) on the date of a disposition of stock of such subsidiary member (or any successor) and that had a basis in excess of value on such date; (9) The subsidiary member (or any suc- cessor) again becomes a member of such group (or any successor group) when the subsidiary member (or any successor) has any losses or deferred deductions that are attributable to a liability (within the mean- ing of section 358(h)(3)) that it had on the date of a disposition of stock of such sub- sidiary member (or any successor); (10) Any member of such group (or any successor group) succeeds to any losses or deferred deductions of the subsidiary mem- ber (or any successor) that were losses or deferred deductions of the subsidiary mem- ber (or any successor) on the date of a dis- position of stock of such subsidiary member (or any successor), that are attributable to any asset that was owned by the subsid- iary member (or any successor) on the date of a disposition of stock of such subsid- iary member (or any successor) and that had a basis in excess of value on such date, that are attributable to any asset that had a ba- sis that reflected, directly or indirectly, in whole or in part, the basis of any asset that was owned by the subsidiary member (or any successor) on the date of a disposi- tion of stock of such subsidiary member (or any successor) and that had a basis in ex- cess of value on such date, or that are at- tributable to a liability (within the meaning of section 358(h)(3)) of the subsidiary mem- ber (or any successor) on the date of a dis- position of stock of such subsidiary member (or any successor); or (11) Any losses or deferred deductions of the subsidiary member (or any succes- sor) that were losses or deferred deduc- tions of the subsidiary member (or any successor) on the date of a disposition of stock of such subsidiary member (or any successor), that are attributable to any as- set that was owned by the subsidiary mem- ber (or any successor) on the date of a disposition of stock of such subsidiary member (or any successor) and that had a basis in excess of value on such date, that are attributable to any asset that had a ba- sis that reflected, directly or indirectly, in whole or in part, the basis of any asset that was owned by the subsidiary member (or any successor) on the date of a disposi- tion of stock of such subsidiary member (or any successor) and that had a basis in ex- cess of value on such date, or that are at- tributable to a liability (within the meaning of section 358(h)(3)) of the subsidiary mem- ber (or any successor) on the date of a dis- position of stock of such subsidiary member (or any successor) are carried back to a pre- disposition taxable year of the subsidiary member. (ii)Operating rules.(A) For purposes of paragraph (g)(3)(i)(B) of this section, as- sets shall include stock and securities and the subsidiary member (or any successor) shall be treated as having its allocable share of losses and deferred deductions of all lower-tier subsidiary members and as own- ing its allocable share of each asset of all lower-tier subsidiary members. (B) For purposes of paragraphs (g)(3)(i)(B)(6), (7), (8), and (9)ofthissec- tion, unless the group can establish other- wise, if the subsidiary member (or any successor) again becomes a member of such group (or any successor group) at a time when the subsidiary member (or any suc- cessor) has any losses or deferred deduc- tions, such losses and deferred deductions shall be treated as losses or deferred de- ductions that were losses or deferred de- ductions of the subsidiary member (or any successor) on the date of a disposition of stock of such subsidiary member (or any successor), losses or deferred deductions that are attributable to assets that were owned by the subsidiary member (or any succes- sor) on the date of a disposition of stock of such subsidiary member (or any suc- cessor) and that had bases in excess of value on such date, losses or deferred deduc- tions that are attributable to assets that had bases that reflected, directly or indirectly, in whole or in part, the bases of assets that were owned by the subsidiary member (or any successor) on the date of a disposi- tion of stock of such subsidiary member (or any successor) and that had bases in ex- cess of value on such date, or losses or de- ferred deductions attributable to a liability (within the meaning of section 358(h)(3)) of the subsidiary member (or any succes- sor) on the date of a disposition of stock of such subsidiary member (or any suc- cessor). (C) For purposes of paragraph (g)(3)(i)(B)(10) of this section, unless the group can establish otherwise, if a mem- ber of such group (or any successor group) succeeds to any losses or deferred deduc- tions of the subsidiary member (or any suc- March 31, 20036572003–13 I.R.B. cessor), such losses and deferred deductions shall be treated as losses or deferred de- ductions that were losses or deferred de- ductions of the subsidiary member (or any successor) on the date of a disposition of stock of such subsidiary member (or any successor), losses or deferred deductions that are attributable to assets that were owned by the subsidiary member (or any succes- sor) on the date of a disposition of stock of such subsidiary member (or any suc- cessor) and that had bases in excess of value on such date, losses or deferred deduc- tions that are attributable to assets that had bases that reflected, directly or indirectly, in whole or in part, the bases of assets that were owned by the subsidiary member (or any successor) on the date of a disposi- tion of stock of such subsidiary member (or any successor) and that had bases in ex- cess of value on such date, or losses or de- ferred deductions attributable to a liability (within the meaning of section 358(h)(3)) of the subsidiary member (or any succes- sor) on the date of a disposition of stock of such subsidiary member (or any suc- cessor). (D) For purposes of paragraph (g)(3)(i)(B)(11) of this section, unless the group can establish otherwise, if any losses or deferred deductions of the subsidiary member (or any successor) are carried back to a pre-disposition taxable year of the sub- sidiary member, such losses and deferred deductions shall be treated as losses or de- ferred deductions that were losses or de- ferred deductions of the subsidiary member (or any successor) on the date of a dispo- sition of stock of such subsidiary mem- ber (or any successor), losses or deferred deductions that are attributable to assets that were owned by the subsidiary member (or any successor) on the date of a disposi- tion of stock of such subsidiary member (or any successor) and that had a basis in ex- cess of value on such date, losses or de- ferred deductions that are attributable to assets that had bases that reflected, di- rectly or indirectly, in whole or in part, the bases of assets that were owned by the sub- sidiary member (or any successor) on the date of a disposition of stock of such sub- sidiary member (or any successor) and that had a basis in excess of value on such date, or losses or deferred deductions that are at- tributable to a liability (within the mean- ing of section 358(h)(3)) of the subsidiary member (or any successor) on the date of a disposition of stock of such subsidiary member (or any successor). (iii)Loss disallowance.If this para- graph (g)(3) applies, then, to the extent that the aggregate amount of loss recognized by members of the group (and any successor group) on dispositions of the subsidiary member stock was attributable to a dupli- cated loss of such subsidiary member that was allowed, such group (or any succes- sor group) will be denied the use of— (A) Any loss recognized that is attrib- utable to, directly or indirectly, an asset that was owned by the subsidiary member (or any successor) on the date of a disposi- tion of stock of such subsidiary member (or any successor) and that had a basis in ex- cess of value on such date, to the extent of the lesser of the loss inherent in such as- set on the date of a disposition of the stock of the subsidiary member (or any succes- sor) and the loss inherent in such asset on the date of the event described in para- graph (g)(3)(i)(B) of this section that gives rise to the application of this paragraph (g)(3); (B) Any loss recognized that is attrib- utable to, directly or indirectly, an asset that has a basis that reflects, directly or indi- rectly, in whole or in part, the basis of any asset that was owned by the subsidiary member (or any successor) on the date of a disposition of stock of such subsidiary member (or any successor) and that had a basis in excess of its value on such date, to the extent of the lesser of the loss in- herent in the asset that was owned by the subsidiary member (or any successor) on the date of a disposition of stock of such subsidiary member (or any successor) the basis of which is reflected, directly or in- directly, in whole or in part, in the basis of such asset on the date of the disposition and the loss inherent in such asset on the date of the event described in paragraph (g)(3)(i)(B) of this section that gives rise to the application of this paragraph (g)(3); (C) Any loss or deduction that is attrib- utable to a liability described in paragraph (g)(3)(i)(B)(4)or(5) of this section; and (D) Any loss or deduction described in paragraph (g)(3)(i)(B)(6), (7), (8), (9), (10), or (11) of this section, provided that a loss or deferred deduction described in para- graph (g)(3)(i)(B)(11) of this section shall be allowed to be carried forward to a post- disposition taxable year of the subsidiary member. (iv)Treatment of disallowed loss.For purposes of§1.1502–32(b)(3)(iii), any loss or deduction the use of which is disal- lowed pursuant to paragraph (g)(3)(iii) of this section (other than a loss or deduc- tion described in paragraph (g)(3)(i)(B)(11) of this section), and with respect to which no waiver described in§1.1502–32(b)(4) is filed, is treated as a noncapital, nondeduct- ible expense incurred during the taxable year that such loss would otherwise be ab- sorbed. (4)Avoidance of recognition of gain.(i) If a transaction is structured with a view to, and has the effect of, deferring or avoid- ing the recognition of gain on a disposi- tion of stock by invoking the application of paragraph (b)(1) of this section to redeter- mine the basis of stock of a subsidiary member, and the stock loss that gives rise to the application of paragraph (b)(1) of this section is not significant, paragraphs (b) and (c) of this section shall not apply. (ii) If a transaction is structured with a view to, and has the effect of, deferring or avoiding the recognition of gain on a dis- position of stock by invoking the applica- tion of paragraph (b)(2) of this section to redetermine the basis of stock of a subsid- iary member, and the duplicated loss of the subsidiary member that is reflected in stock of the subsidiary member owned by mem- bers of the group immediately before the deconsolidation is not significant, para- graphs (b) and (c) of this section shall not apply. (5)Examples.The principles of this para- graph (g) are illustrated by the following examples: Example 1. Transfers of property in avoidance of basis redetermination rule.(i)Facts.In Year 1, P forms S with a contribution of $100 in exchange for 100 shares of common stock of S which at that time rep- resents all of the outstanding stock of S. S becomes a member of the P group. In Year 2, P contributes 20 shares of common stock of S to PS, a partnership, in exchange for a 20 percent capital and profits inter- est in a transaction described in section 721. In Year 3, P contributes Asset A with a basis of $50 and a value of $20 to PS in exchange for an additional capi- tal and profits interest in PS in a transaction de- scribed in section 721. Also in Year 3, PS contributes Asset A to S and P contributes an additional $80 to S in transfers to which section 351 applies. In Year 4, S sells Asset A for $20, recognizing a loss of $30. The P group uses that loss to offset income of P. Also in Year 4, P sells its entire interest in PS for $40, rec- ognizing a loss of $30. (ii)Analysis.Pursuant to paragraph (g)(2) of this section, if P’s contributions of S stock and Asset A to PS were undertaken with a view to avoiding the application of the basis redetermination or the loss sus- 2003–13 I.R.B.658March 31, 2003 pension rule, adjustments must be made such that the group does not obtain more than one tax benefit from the $30 loss inherent in Asset A. Example 2. Transfers effecting a reimportation of loss.(i)Facts.In Year 1, P forms S with a contribu- tion of Asset A with a value of $100 and a basis of $120, Asset B with a value of $50 and a basis of $70, Asset C with a value of $90 and a basis of $100 in exchange for all of the common stock of S and S be- comes a member of the P group. In Year 2, in a trans- action that is not part of a plan that includes the contribution, P sells the stock of S for $240, recog- nizing a loss of $50. At such time, the bases and val- ues of Assets A, B, and C have not changed since their contribution to S. In Year 3, S sells Asset A, recog- nizing a $20 loss. In Year 3, S merges into M in a re- organization described in section 368(a)(1)(A). In Year 8, P purchases all of the stock of M for $300. At that time, M has a $10 net operating loss. In addition, M owns Asset D, which was acquired in an exchange de- scribed in section 1031 in connection with the sur- render of Asset B. Asset C has a value of $80 and a basis of $100. Asset D has a value of $60 and a ba- sis of $70. In Year 9, P has operating income of $100 and M recognizes $20 of loss on the sale of Asset C. In Year 10, P has operating income of $50 and M rec- ognizes $50 of loss on the sale of Asset D. (ii)Analysis.P’s $50 loss on the sale of S stock is entirely attributable to duplicated loss. Therefore, pursuant to paragraph (g)(3) of this section, assum- ing the P group cannot establish otherwise, M’s $10 net operating loss is treated as attributable to assets that were owned by S on the date of the disposition and that had bases in excess of value on such date. Without regard to any other limitations on the group’s use of M’s net operating loss, the P group cannot use M’s $10 net operating loss pursuant to paragraph (g)(3)(iii)(D) of this section. Pursuant to paragraph (g)(3)(iv) of this section and§1.1502–32T(b)(3)(iii)(D), such loss is treated as a noncapital, nondeductible ex- pense of M incurred during the taxable year that in- cludes the day after the reorganization. In addition, the P group is denied the use of $10 of the loss recog- nized on the sale of Asset C. Finally, the P group is denied the use of $10 of the loss recognized on the sale of Asset D. Pursuant to paragraph (g)(3)(iv) of this section and§1.1502–32T(b)(3)(iii)(D), each such disallowed loss is treated as a noncapital, nondeduct- ible expense of M incurred during the taxable year that includes the date of the disposition of the asset with respect to which such loss was recognized. Example 3. Transfers to avoid recognition of gain. (i)Facts.P owns all of the stock of S1 and S2. The S2 stock has a basis of $400 and a value of $500. S1 owns 50% of the stock of the S3 common stock with a basis of $150. S2 owns the remaining 50% of the S3 common stock with a basis of $100 and a value of $200 and one share of S3 preferred stock with a basis of $10 and a value of $9. P intends to sell all of its S2 stock to an unrelated buyer. P, therefore, en- gages in the following steps to dispose of S2 with- out recognizing a substantial portion of the built-in gain in S2. First, P causes a recapitalization of S3 in which S2’s S3 common stock is exchanged for new S3 pre- ferred shares. P then sells all of its S2 stock. Imme- diately after the sale of the S2 stock, S3 is a member of the P group. (ii)Analysis.Pursuant to paragraph (b)(4) of this section, because S2 owns stock of S3 (another sub- sidiary member of the same group) and, immedi- ately after the sale of the S2 stock, S3 is a member of the group, then for purposes of applying para- graph (b) of this section, S2 is deemed to have trans- ferred its S3 stock. Because S3 is a member of the group immediately after the transfer of the S2 stock and the S3 stock deemed transferred has a basis in ex- cess of value, the group member’s basis in the S3 stock is redetermined pursuant to paragraph (b)(1) of this section immediately prior to the sale of the S2 stock. Pursuant to paragraph (b)(1) of this section, the to- tal basis of S3 stock held by members of the P group is allocated first to the S3 preferred shares, up to their value of $209, and then to the remaining shares of S3 common held by S1. S2’s aggregate basis in the S3 preferred stock is increased from $110 to $209. This increase tiers up and increases P’s basis in the S2 stock from $400 to $499. Accordingly, P will recognize only $1 of gain on the sale of its S2 stock. However, be- cause the recapitalization of S3 was structured with a view to, and has the effect of, avoiding the recog- nition of gain on a disposition of stock by invoking the application of paragraph (b) of this section, para- graph (g)(4)(i) of this section applies. Accordingly, paragraph (b) of this section does not apply upon P’s disposition of the S2 stock and P recognizes $100 of gain on the disposition of the S2 stock. (h)Application of other anti-abuse rules. The rules of this section do not preclude the application of anti-abuse rules under other provisions of the Internal Revenue Code and regulations thereunder. (i) [Reserved]. (j)Effective date.This section, except for paragraph (g)(3) of this section, applies with respect to stock transfers, deconsolida- tions of subsidiary members, determina- tions of worthlessness, and stock dispositions on or after March 7, 2002, and no later than March 11, 2006, but only if such events occur during a taxable year the original return for which is due (without re- gard to extensions) after March 14, 2003. Paragraph (g)(3) of this section applies to events described in paragraph (g)(3)(iii) of this section occurring on or after October 18, 2002, and no later than March 11, 2006, but only if such events occur during a tax- able year the original return for which is due (without regard to extensions) after March 14, 2003. Par. 8. The authority citation for part 602 continues to read as follows: Authority: 26 U.S.C. 7805*** Par.9.In§602.101, paragraph (b) is amended by adding an entry to the table in numerical order to read as follows: §602.101 OMB Control numbers. ***** (b)*** CFR part or section where identified and described Current OMB control No. ***** 1.1502–35T................................................................................................................................................. 1545–1828 ***** David A. Mader, Assistant Deputy Commissioner of Internal Revenue. Approved March 7, 2003. Pamela F. Olson, Assistant Secretary of the Treasury. (Filed by the Office of the Federal Register on March 11, 2003, 1:04 p.m., and published in the issue of the Federal Regis- ter for March 14, 2003, 68 F.R. 12287) Section 6621.—Determina- tion of Interest Rate 26 CFR 301.6621–1: Interest rate. Interest rates; underpayments and overpayments.The rate of interest deter- mined under section 6621 of the Code for the calendar quarter beginning April 1, 2003, will be 5 percent for overpayments (4 percent in the case of a corporation), 5 percent for underpayments, and 7 percent for large corporate underpayments. The rate of interest paid on the portion of a corpo- rate overpayment exceeding $10,000 will be 2.5 percent. March 31, 20036592003–13 I.R.B. Rev. Rul. 2003–30 Section 6621 of the Internal Revenue Code establishes the rates for interest on tax overpayments and tax underpayments. Un- der§6621(a)(1), the overpayment rate be- ginning April 1, 2003, is the sum of the federal short-term rate plus 3 percentage points (2 percentage points in the case of a corporation), except the rate for the por- tion of a corporate overpayment of tax ex- ceeding $10,000 for a taxable period is the sum of the federal short-term rate plus 0.5 of a percentage point for interest compu- tations made after December 31, 1994. Un- der§6621(a)(2), the underpayment rate is the sum of the federal short-term rate plus 3 percentage points. Section 6621(c) provides that for pur- poses of interest payable under§6601 on any large corporate underpayment, the un- derpayment rate under§6621(a)(2) is de- termined by substituting“5 percentage points”for“3 percentage points.”See §6621(c) and§301.6621–3 of the Regu- lations on Procedure and Administration for the definition of a large corporate under- payment and for the rules for determin- ing the applicable date. Section 6621(c) and §301.6621–3 are generally effective for pe- riods after December 31, 1990. Section 6621(b)(1) provides that the Sec- retary will determine the federal short- term rate for the first month in each calendar quarter. Section 6621(b)(2)(A) provides that the federal short-term rate determined under §6621(b)(1) for any month applies dur- ing the first calendar quarter beginning af- ter such month. Section 6621(b)(2)(B) provides that in determining the addition to tax under§6654 for failure to pay estimated tax for any tax- able year, the federal short-term rate that ap- plies during the third month following such taxable year also applies during the first 15 days of the fourth month following such taxable year. Section 6621(b)(3) provides that the fed- eral short-term rate for any month is the federal short-term rate determined during such month by the Secretary in accordance with§1274(d), rounded to the nearest full percent (or, if a multiple of 1/2 of 1 per- cent, the rate is increased to the next high- est full percent). Notice 88–59, 1988–1 C.B. 546, an- nounced that, in determining the quarterly interest rates to be used for overpayments and underpayments of tax under§6621, the Internal Revenue Service will use the fed- eral short-term rate based on daily com- pounding because that rate is most consistent with§6621 which, pursuant to §6622, is subject to daily compounding. Rounded to the nearest full percent, the federal short-term rate based on daily com- pounding determined during the month of January 2003 is 2 percent. Accordingly, an overpayment rate of 5 percent (4 percent in the case of a corporation) and an under- payment rate of 5 percent are established for the calendar quarter beginning April 1, 2003. The overpayment rate for the por- tion of a corporate overpayment exceed- ing $10,000 for the calendar quarter beginning April 1, 2003, is 2.5 percent. The underpayment rate for large corporate un- derpayments for the calendar quarter be- ginning April 1, 2003, is 7 percent. These rates apply to amounts bearing interest dur- ing that calendar quarter. The 5 percent rate also applies to esti- mated tax underpayments for the first cal- endar quarter in 2003 and for the first 15 days in April 2003. Interest factors for daily compound in- terest for annual rates of 2.5 percent, 4 per- cent, 5 percent, and 7 percent are published in Tables 10, 13, 15, and 19 of Rev. Proc. 95–17, 1995–1 C.B. 556, 564, 567, 569, and 573. Annual interest rates to be compounded daily pursuant to§6622 that apply for prior periods are set forth in the tables accom- panying this revenue ruling. DRAFTING INFORMATION The principal author of this revenue rul- ing is Raymond Bailey of the Office of As- sociate Chief Counsel (Procedure & Administration), Administrative Provi- sions & Judicial Practice Division. For fur- ther information regarding this revenue ruling, contact Mr. Bailey at (202) 622– 6226 (not a toll-free call). TABLE OF INTEREST RATES PERIODS BEFORE JUL. 1, 1975–PERIODS ENDING DEC. 31, 1986 OVERPAYMENTS AND UNDERPAYMENTS PERIODRATE In 1995–1 C.B. DAILY RATE TABLE Before Jul. 1, 19756%Table 2, pg. 557 Jul. 1, 1975—Jan. 31, 19769%Table 4, pg. 559 Feb. 1, 1976—Jan. 31, 19787%Table 3, pg. 558 Feb. 1, 1978—Jan. 31, 19806%Table 2, pg. 557 Feb. 1, 1980—Jan. 31, 198212%Table 5, pg. 560 Feb. 1, 1982—Dec. 31, 198220%Table 6, pg. 560 Jan. 1, 1983—Jun. 30, 198316%Table 37, pg. 591 Jul. 1, 1983—Dec. 31, 198311%Table 27, pg. 581 Jan. 1, 1984—Jun. 30, 198411%Table 75, pg. 629 Jul. 1, 1984—Dec. 31, 198411%Table 75, pg. 629 Jan. 1, 1985—Jun. 30, 198513%Table 31, pg. 585 2003–13 I.R.B.660March 31, 2003 TABLE OF INTEREST RATES PERIODS BEFORE JUL. 1, 1975–PERIODS ENDING DEC. 31, 1986 OVERPAYMENTS AND UNDERPAYMENTS—Continued PERIODRATE In 1995–1 C.B. DAILY RATE TABLE Jul. 1, 1985—Dec. 31, 198511%Table 27, pg. 581 Jan. 1, 1986—Jun. 30, 198610%Table 25, pg. 579 Jul. 1, 1986—Dec. 31, 19869%Table 23, pg. 577 TABLE OF INTEREST RATES FROM JAN. 1, 1987–DEC. 31, 1998 OVERPAYMENTSUNDERPAYMENTS 1995–1 C.B.1995–1 C.B. RATETABLEPGRATETABLEPG Jan. 1, 1987—Mar. 31, 19878%215759%23577 Apr. 1, 1987—Jun. 30, 19878%215759%23577 Jul. 1, 1987—Sep. 30, 19878%215759%23577 Oct. 1, 1987—Dec. 31, 19879%2357710%25579 Jan. 1, 1988—Mar. 31, 198810%7362711%75629 Apr. 1, 1988—Jun. 30, 19889%7162510%73627 Jul. 1, 1988—Sep. 30, 19889%7162510%73627 Oct. 1, 1988—Dec. 31, 198810%7362711%75629 Jan. 1, 1989—Mar. 31, 198910%2557911%27581 Apr. 1, 1989—Jun. 30, 198911%2758112%29583 Jul. 1, 1989—Sep. 30, 198911%2758112%29583 Oct. 1, 1989—Dec. 31, 198910%2557911%27581 Jan. 1, 1990—Mar. 31, 199010%2557911%27581 Apr. 1, 1990—Jun. 30, 199010%2557911%27581 Jul. 1, 1990—Sep. 30, 199010%2557911%27581 Oct. 1, 1990—Dec. 31, 199010%2557911%27581 Jan. 1, 1991—Mar. 31, 199110%2557911%27581 Apr. 1, 1991—Jun. 30, 19919%2357710%25579 Jul. 1, 1991—Sep. 30, 19919%2357710%25579 Oct. 1, 1991—Dec. 31, 19919%2357710%25579 Jan. 1, 1992—Mar. 31, 19928%696239%71625 Apr. 1, 1992—Jun. 30, 19927%676218%69623 Jul. 1, 1992—Sep. 30, 19927%676218%69623 Oct. 1, 1992—Dec. 31, 19926%656197%67621 Jan. 1, 1993—Mar. 31, 19936%175717%19573 Apr. 1, 1993—Jun. 30, 19936%175717%19573 Jul. 1, 1993—Sep. 30, 19936%175717%19573 Oct. 1, 1993—Dec. 31, 19936%175717%19573 Jan. 1, 1994—Mar. 31, 19946%175717%19573 Apr. 1, 1994—Jun. 30, 19946%175717%19573 Jul. 1, 1994—Sep. 30, 19947%195738%21575 Oct. 1, 1994—Dec. 31, 19948%215759%23577 Jan. 1, 1995—Mar. 31, 19958%215759%23577 March 31, 20036612003–13 I.R.B. TABLE OF INTEREST RATES FROM JAN. 1, 1987–DEC. 31, 1998—Continued OVERPAYMENTSUNDERPAYMENTS 1995–1 C.B.1995–1 C.B. RATETABLEPGRATETABLEPG Apr. 1, 1995—Jun. 30, 19959%2357710%25579 Jul. 1, 1995—Sep. 30, 19958%215759%23577 Oct. 1, 1995—Dec. 31, 19958%215759%23577 Jan. 1, 1996—Mar. 31, 19968%696239%71625 Apr. 1, 1996—Jun. 30, 19967%676218%69623 Jul. 1, 1996—Sep. 30, 19968%696239%71625 Oct. 1, 1996—Dec. 31, 19968%696239%71625 Jan. 1, 1997—Mar. 31, 19978%215759%23577 Apr. 1, 1997—Jun. 30, 19978%215759%23577 Jul. 1, 1997—Sep. 30, 19978%215759%23577 Oct. 1, 1997—Dec. 31, 19978%215759%23577 Jan. 1, 1998—Mar. 31, 19988%215759%23577 Apr. 1, 1998—Jun. 30, 19987%195738%21575 Jul. 1, 1998—Sep. 30, 19987%195738%21575 Oct. 1, 1998—Dec. 31, 19987%195738%21575 TABLE OF INTEREST RATES FROM JANUARY 1, 1999–PRESENT NONCORPORATE OVERPAYMENTS AND UNDERPAYMENTS 1995–1 C.B. RATETABLEPAGE Jan. 1, 1999—Mar. 31, 19997%19573 Apr. 1, 1999—Jun. 30, 19998%21575 Jul. 1, 1999—Sep. 30, 19998%21575 Oct. 1, 1999—Dec. 31, 19998%21575 Jan. 1, 2000—Mar. 31, 20008%69623 Apr. 1, 2000—Jun. 30, 20009%71625 Jul. 1, 2000—Sep. 30, 20009%71625 Oct. 1, 2000—Dec. 31, 20009%71625 Jan. 1, 2001—Mar. 31, 20019%23577 Apr. 1, 2001—Jun. 30, 20018%21575 Jul. 1, 2001—Sep. 30, 20017%19573 Oct. 1, 2001—Dec. 31, 20017%19573 Jan. 1, 2002—Mar. 31, 20026%17571 Apr. 1, 2002—Jun. 30, 20026%17571 Jul. 1, 2002—Sep. 30, 20026%17571 Oct. 1, 2002—Dec. 31, 20026%17571 Jan 1, 2003—Mar. 31, 20035%15569 Apr. 1, 2003—Jun. 30, 20035%15569 2003–13 I.R.B.662March 31, 2003 TABLE OF INTEREST RATES FROM JANUARY 1, 1999–PRESENT CORPORATE OVERPAYMENTS AND UNDERPAYMENTS OVERPAYMENTSUNDERPAYMENTS 1995–1 C.B.1995–1 C.B. RATETABLEPGRATETABLEPG Jan. 1, 1999—Mar. 31, 19996%175717%19573 Apr. 1, 1999—Jun. 30, 19997%195738%21575 Jul. 1, 1999—Sep. 30, 19997%195738%21575 Oct. 1, 1999—Dec. 31, 19997%195738%21575 Jan. 1, 2000—Mar. 31, 20007%676218%69623 Apr. 1, 2000—Jun. 30, 20008%696239%71625 Jul. 1, 2000—Sep. 30, 20008%696239%71625 Oct. 1, 2000—Dec. 31, 20008%696239%71625 Jan. 1, 2001—Mar. 31, 20018%215759%23577 Apr. 1, 2001—Jun. 30, 20017%195738%21575 Jul. 1, 2001—Sep. 30, 20016%175717%19573 Oct. 1, 2001—Dec. 31, 20016%175717%19573 Jan. 1, 2002—Mar. 31, 20025%155696%17571 Apr. 1, 2002—Jun. 30, 20025%155696%17571 Jul. 1, 2002—Sep. 30, 20025%155696%17571 Oct. 1, 2002—Dec. 31, 20025%155696%17571 Jan. 1, 2003—Mar. 31, 20034%135675%15569 Apr. 1, 2003—Jun. 30, 20034%135675%15569 TABLE OF INTEREST RATES FOR LARGE CORPORATE UNDERPAYMENTS FROM JANUARY 1, 1991–PRESENT 1995–1 C.B. RATETABLEPG Jan. 1, 1991—Mar. 31, 199113%31585 Apr. 1, 1991—Jun. 30, 199112%29583 Jul. 1, 1991—Sep. 30, 199112%29583 Oct. 1, 1991—Dec. 31, 199112%29583 Jan. 1, 1992—Mar. 31, 199211%75629 Apr. 1, 1992—Jun. 30, 199210%73627 Jul. 1, 1992—Sep. 30, 199210%73627 Oct. 1, 1992—Dec. 31, 19929%71625 Jan. 1, 1993—Mar. 31, 19939%23577 Apr. 1, 1993—Jun. 30, 19939%23577 Jul. 1, 1993—Sep. 30, 19939%23577 Oct. 1, 1993—Dec. 31, 19939%23577 Jan. 1, 1994—Mar. 31, 19949%23577 Apr. 1, 1994—Jun. 30, 19949%23577 Jul. 1, 1994—Sep. 30, 199410%25579 Oct. 1, 1994—Dec. 31, 199411%27581 Jan. 1, 1995—Mar. 31, 199511%27581 Apr. 1, 1995—Jun. 30, 199512%29583 Jul. 1, 1995—Sep. 30, 199511%27581 March 31, 20036632003–13 I.R.B. TABLE OF INTEREST RATES FOR LARGE CORPORATE UNDERPAYMENTS FROM JANUARY 1, 1991–PRESENT—Continued 1995–1 C.B. RATETABLEPG Oct. 1, 1995—Dec. 31, 199511%27581 Jan. 1, 1996—Mar. 31, 199611%75629 Apr. 1, 1996—Jun. 30, 199610%73627 Jul. 1, 1996—Sep. 30, 199611%75629 Oct. 1, 1996—Dec. 31, 199611%75629 Jan 1, 1997—Mar. 31, 199711%27581 Apr. 1, 1997—Jun. 30, 199711%27581 Jul. 1, 1997—Sep. 30, 199711%27581 Oct. 1, 1997—Dec. 31, 199711%27581 Jan. 1, 1998—Mar. 31, 199811%27581 Apr. 1, 1998—Jun. 30, 199810%25579 Jul. 1, 1998—Sep. 30, 199810%25579 Oct. 1, 1998—Dec. 31, 199810%25579 Jan. 1, 1999—Mar. 31, 19999%23577 Apr. 1, 1999—Jun. 30, 199910%25579 Jul. 1, 1999—Sep. 30, 199910%25579 Oct. 1, 1999—Dec. 31, 199910%25579 Jan. 1, 2000—Mar. 31, 200010%73627 Apr. 1, 2000—Jun. 30, 200011%75629 Jul. 1, 2000—Sep. 30, 200011%75629 Oct. 1, 2000—Dec. 31, 200011%75629 Jan. 1, 2001—Mar. 31, 200111%27581 Apr. 1, 2001—Jun. 30, 200110%25579 Jul. 1, 2001—Sep. 30, 20019%23577 Oct. 1, 2001—Dec. 31, 20019%23577 Jan. 1, 2002—Mar. 31, 20028%21575 Apr. 1, 2002—Jun. 30, 20028%21575 Jul. 1, 2002—Sep. 30, 20028%21575 Oct. 1, 2002—Dec. 30, 20028%21575 Jan. 1, 2003—Mar. 31, 20037%19573 Apr. 1, 2003—Jun. 30, 20037%19573 TABLE OF INTEREST RATES FOR CORPORATE OVERPAYMENTS EXCEEDING $10,000 FROM JANUARY 1, 1995–PRESENT 1995–1 C.B. RATETABLEPG Jan. 1, 1995—Mar. 31, 19956.5%18572 Apr. 1, 1995—Jun. 30, 19957.5%20574 Jul. 1, 1995—Sep. 30, 19956.5%18572 Oct. 1, 1995—Dec. 31, 19956.5%18572 Jan. 1, 1996—Mar. 31, 19966.5%66620 Apr. 1, 1996—Jun. 30, 19965.5%64618 Jul. 1, 1996—Sep. 30, 19966.5%66620 2003–13 I.R.B.664March 31, 2003 TABLE OF INTEREST RATES FOR CORPORATE OVERPAYMENTS EXCEEDING $10,000 FROM JANUARY 1, 1995–PRESENT—Continued 1995–1 C.B. RATETABLEPG Oct. 1, 1996—Dec. 31, 19966.5%66620 Jan. 1, 1997—Mar. 31, 19976.5%18572 Apr. 1, 1997—Jun. 30, 19976.5%18572 Jul. 1, 1997—Sep. 30, 19976.5%18572 Oct. 1, 1997—Dec. 31, 19976.5%18572 Jan. 1, 1998—Mar. 31, 19986.5%18572 Apr. 1, 1998—Jun. 30, 19985.5%16570 Jul. 1, 1998—Sep. 30, 19985.5%16570 Oct. 1, 1998—Dec. 31, 19985.5%16570 Jan. 1, 1999—Mar. 31, 19994.5%14568 Apr. 1, 1999—Jun. 30, 19995.5%16570 Jul. 1, 1999—Sep. 30, 19995.5%16570 Oct. 1, 1999—Dec. 31, 19995.5%16570 Jan. 1, 2000—Mar. 31, 20005.5%64618 Apr. 1, 2000—Jun. 30, 20006.5%66620 Jul. 1, 2000—Sep. 30, 20006.5%66620 Oct. 1, 2000—Dec. 31, 20006.5%66620 Jan. 1, 2001—Mar. 31, 20016.5%18572 Apr. 1, 2001—Jun. 30, 20015.5%16570 Jul. 1, 2001—Sep. 30, 20014.5%14568 Oct. 1, 2001—Dec. 31, 20014.5%14568 Jan. 1, 2002—Mar. 31, 20023.5%12566 Apr. 1, 2002—Jun. 30, 20023.5%12566 Jul. 1, 2002—Sep. 30, 20023.5%12566 Oct. 1, 2002—Dec. 31, 20023.5%12566 Jan. 1, 2003—Mar. 31, 20032.5%10564 Apr. 1, 2003—Jun. 30, 20032.5%10564 March 31, 20036652003–13 I.R.B. Part III. Administrative, Procedural, and Miscellaneous 26 CFR 601.105: Examination of returns and claims for refund, credit, or abatement; determina- tion of correct tax liability. (Also Part I,§911, 1.911–1.) Rev. Proc. 2003–26 SECTION 1. PURPOSE .01 This revenue procedure provides in- formation to any individual who failed to meet the eligibility requirements of §911(d)(1) of the Internal Revenue Code because adverse conditions in a foreign country precluded the individual from meet- ing those requirements for taxable year 2002. .02 The Internal Revenue Service has previously listed countries for which the eli- gibility requirements of§911(d)(1) of the Code are waived under§911(d)(4) be- cause of adverse conditions in those coun- tries on and after the date stated. See Rev. Proc. 2002–20, 2002–14 I.R.B. 732, Rev. Proc. 2001–27, 2001–1 C.B. 1155, and Rev. Proc. 2000–14, 2000–1 C.B. 960. This rev- enue procedure lists countries added to the list in 2002, for which the eligibility re- quirements of§911(d)(1) are waived. Rev. Proc. 2002–20, Rev. Proc. 2001–27, and Rev. Proc. 2000–14 remain in full force and effect. SECTION 2. BACKGROUND .01 Section 911(a) of the Code allows a“qualified individual,”as defined in §911(d)(1), to exclude foreign earned in- come and housing cost amounts from gross income. Section 911(c)(3) of the Code al- lows a qualified individual to deduct hous- ing cost amounts from gross income. .02 Section 911(d)(1) of the Code de- fines the term“qualified individual”as an individual whose tax home is in a foreign country and who is (A) a citizen of the United States and establishes to the satis- faction of the Secretary of the Treasury that the individual has been abona fideresi- dent of a foreign country or countries for an uninterrupted period that includes an en- tire taxable year, or (B) a citizen or resi- dent of the United States who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days. .03 Section 911(d)(4) of the Code pro- vides an exception to the eligibility re- quirements of§911(d)(1). An individual will be treated as a qualified individual with respect to a period in which the individual was abona fideresident of, or was present in, a foreign country if the individual left the country during a period for which the Secretary of the Treasury, after consulta- tion with the Secretary of State, deter- mines that individuals were required to leave because of war, civil unrest, or simi- lar adverse conditions that precluded the normal conduct of business. An individual must establish that but for those condi- tions the individual could reasonably have been expected to meet the eligibility re- quirements. .04 For 2002, the Secretary of the Trea- sury in consultation with the Secretary of State has determined that war, civil un- rest, or similar adverse conditions that pre- cluded the normal conduct of business existed in the following countries begin- ning on the specified date: Date of Departure CountryOn or after Central African Republic10/31/02 Côte d’Ivoire10/18/02 Indonesia10/13/02 Madagascar04/13/02 Pakistan03/22/02 Venezuela12/20/02 .05 Accordingly, for purposes of§911 of the Code, an individual who left one of the foregoing countries on or after the speci- fied departure date shall be treated as a qualified individual with respect to the pe- riod during which that individual was present in, or was abona fideresident of, such foreign country, if the individual es- tablishes a reasonable expectation of meet- ing the requirements of§911(d) but for those conditions. .06 To qualify for relief under §911(d)(4) of the Code, an individual must have established residency, or have been physically present, in the foreign country on or prior to the date that the Secretary of the Treasury determines that individuals were required to leave the foreign coun- try. Individuals who establish residency, or are first physically present, in the foreign country after the date that the Secretary pre- scribes shall not be treated as qualified in- dividuals under§911(d)(4) of the Code. For example, individuals who are first physi- cally present in the Central African Re- public after October 31, 2002, are not eligible to qualify for the exception pro- vided in§911(d)(4) of the Code for tax- able year 2002. .07 In order to assist those individuals who are filing prior year or amended tax returns, the Internal Revenue Service is re- publishing the countries listed for tax years 1999, 2000, and 2001, for which the eli- gibility requirements of§911(d)(1) of the Code are waived under§911(d)(4): 2003–13 I.R.B.666March 31, 2003 Tax Year 1999— Date of Departure CountryOn or after EritreaFebruary 12, 1999 EthiopiaFebruary 12, 1999 Serbia-MontenegroMarch 20, 1999 Tax Year 2000— Date of Departure CountryOn or after EritreaMay 19, 2000 Tax Year 2001— Date of Departure CountryOn or after MacedoniaJuly 27, 2001 SECTION 3. INQUIRIES A taxpayer who needs assistance on how to claim this exclusion, or on how to file an amended return, should contact a local IRS Office or, for a taxpayer residing or traveling outside the United States, the near- est overseas IRS office. SECTION 4. EFFECT ON OTHER DOCUMENTS Rev. Proc. 2002–20, 2002–14 I.R.B. 732, is supplemented. DRAFTING INFORMATION The principal author of this revenue pro- cedure is Kate Y. Hwa of the Office of As- sociate Chief Counsel (International). For further information regarding this revenue procedure, contact Ms. Hwa at (202) 622– 3840 (not a toll-free call). 26 CFR 601.105: Examination of returns and claim for refund, credit, or abatement; determina- tion of correct tax liability. (Also§§6050I, 1.605I–1.) Rev. Proc. 2003–27 SECTION 1. PURPOSE This revenue procedure provides guid- ance on the information reporting require- ments under§6050I of the Internal Revenue Code for small cash transactions that involve the rental of taxicabs on a daily shift basis. SECTION 2. BACKGROUND .01 Taxi fleet owners rent their taxi- cabs to taxi drivers under a variety of leas- ing practices. In some cases, taxi fleet owners and taxi drivers enter into formal lease agreements in which the taxi fleet owner grants the taxi driver the right to use a taxicab on a daily shift basis for an agreed payment per daily shift and for a fixed pe- riod of time. In other cases, the rental is based on the business practices and the on- going business relationship between the taxi fleet owner and the taxi driver for the regu- lar use of a taxicab on a daily shift basis. These situations may involve leases with- out a fixed period of time, or an arrange- ment in which there is no formal lease. Under these situations, the taxi fleet owner grants the taxi driver the right to use the taxicab on a recurring, daily shift basis pur- suant to agreed terms that the taxi fleet owner or the taxi driver can alter or ter- minate at the end of each daily shift. Nei- ther the taxi fleet owner nor the taxi driver has an obligation to continue the rental ar- rangement. Taxi fleet owners have ques- tioned whether their leasing practices make the rentals of taxicabs on a daily shift ba- sis“related transactions”within the mean- ing of§6050I and§1.6050I–1(c)(7)(ii) of the Income Tax Regulations. .02 Section 6050I(a) provides that any person who is engaged in a trade or busi- ness, and who, in the course of such trade or business, receives more than $10,000 in cash in one transaction (or two or more re- lated transactions), shall make the return de- scribed in§6050I(b) with respect to such transaction (or related transactions) at such time as the Secretary may by regulations prescribe. .03 Section 1.6050I–1(b) provides that the receipt of multiple cash deposits or cash installment payments (or other similar pay- ments or prepayments) on or after Janu- ary 1, 1990, relating to a single transaction (or two or more related transactions), is re- ported as set forth in§1.6050I–1(b)(1) through (b)(3). .04 Section 1.6050I–1(b)(1) provides that if the initial payment is in excess of $10,000, the recipient must report the ini- tial payment within 15 days of its receipt. .05 Section 1.6050I–1(b)(2) provides that if the initial payment does not exceed $10,000 then the recipient must aggre- gate the initial payment and subsequent pay- ments made within one year of the initial payment until the aggregate amount ex- ceeds $10,000, and report the aggregate amount within 15 days after receiving the payment that causes the aggregate amount to exceed $10,000. .06 Section 1.6050I–1(b)(3) provides that, in addition to any other required re- port, a report must be made each time that previously unreportable payments made within a 12-month period with respect to a single transaction (or two or more re- lated transactions), individually or in the ag- gregate, exceed $10,000. .07 Section 1.6050I–1(c)(7)(i) defines the term“transaction”as the underlying event precipitating the payer’s transfer of cash to the recipient. The term“transaction”in- cludes a rental of real or personal prop- erty. A transaction may not be divided into March 31, 20036672003–13 I.R.B. multiple transactions in order to avoid re- porting under§6050I. .08 Section 1.6050I–1(c)(7)(ii) defines “related transactions”as any transaction conducted between a payer (or its agent) and a recipient of cash in a 24-hour pe- riod. Additionally, transactions conducted between a payer (or its agent) and a cash recipient during a period of more than 24 hours are related if the recipient knows or has reason to know that each transaction is one of a series of connected transactions. SECTION 3. SCOPE This revenue procedure describes how the Internal Revenue Service (Service) will treat certain rentals of taxicabs for a daily shift for purposes of the information re- porting requirements under§6050I of the Code and the regulations. SECTION 4. APPLICATION If a taxi fleet owner rents a taxicab on a daily shift basis to a taxi driver under a formal lease or a daily shift arrangement based on the ongoing business relation- ship between the taxi fleet owner and the taxi driver, the Service will not treat the rental for a daily shift as part of a series of connected transactions under§1.6050I– 1(c)(7)(ii) if— (1) The rent for the shift does not ex- ceed $150 and is not paid during a 24- hour period within which the payments made by, or on behalf of, the driver ex- ceed $150; and (2) Neither the taxi fleet owner nor the taxi driver has an obligation to continue the daily shift rental arrangement. SECTION 5. EFFECTIVE DATE This revenue procedure is effective March 31, 2003. SECTION 6. DRAFTING INFORMA- TION The principal author of this revenue pro- cedure is Tiffany P. Smith of the Office of the Associate Chief Counsel (Procedure and Administration), Administrative Provi- sions and Judicial Practice Division. For fur- ther information regarding this revenue procedure, contact Tiffany P. Smith at (202) 622–4910 (not a toll-free call). 2003–13 I.R.B.668March 31, 2003 Part IV. Items of General Interest Notice of Proposed Rulemak- ing by Cross-Reference to Temporary Regulation; With- drawal of Notice of Proposed Rulemaking; and Notice of Public Hearing Guidance Under Section 1502; Suspension of Losses on Certain Stock Dispositions REG–131478–02 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemak- ing by cross-reference to temporary regu- lations; withdrawal of notice of proposed rulemaking; and notice of public hearing. SUMMARY: In T.D. 9048 on page 644 of this issue of the Bulletin, the IRS is issu- ing temporary regulations under section 1502 that redetermine the basis of stock of a subsidiary member of a consolidated group immediately prior to certain trans- fers of such stock. In addition, temporary regulations suspend certain losses recog- nized on the disposition of such stock. The regulations apply to corporations filing con- solidated returns. The text of the tempo- rary regulations serves as the text of these proposed regulations. This document also provides notice of a public hearing on these proposed regulations. DATES: Written or electronic comments must be received by June 12, 2003. Out- lines of topics to be discussed at the pub- lic hearing scheduled for June 20, 2003, at 10 a.m., must be received by May 30, 2003. ADDRESSES: Send submissions to: CC:PA:RU (REG–131478–02), room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Mon- day through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:RU (REG– 131478–02), Courier’s Desk, Internal Rev- enue Service,1111Constitution Avenue, NW, Washington, DC 20044. Alternatively, taxpayers may submit electronic comments directly to the IRS Internet site at www.irs.gov/regs. The public hearing will be held in the IRS Auditorium, Internal Revenue Service Building,1111Constitu- tion Avenue, NW, Washington, DC. FOR FURTHER INFORMATION CON- TACT: Concerning the proposed regula- tions, Aimee K. Meacham, (202) 622–7530; concerning submissions of comments, the hearing, and/or to be placed on the build- ing access list to attend the hearing, Sonya M. Cruse, (202) 622–7180 (not toll- free numbers). SUPPLEMENTARY INFORMATION: Paperwork Reduction Act The collection of information contained in this notice of proposed rulemaking has been submitted to the Office of Manage- ment and Budget for review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the col- lection 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 Regu- latory Affairs, Washington, DC 20503, with copies to theInternal Revenue Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:T:T:SP, Washington, DC 20224. Comments on the collection of in- formation should be received by May 13, 2003. Comments are specifically requested concerning: Whether the proposed collection of in- formation is necessary for the proper per- formance of the functions of the IRS, including whether the information will have practical utility; The accuracy of the estimated burden as- sociated with the proposed collection of in- formation (see below); How the quality, utility, and clarity of the information to be collected may be en- hanced; How the burden of complying with the proposed collection of information may be minimized, including through the applica- tion of automated collection techniques or other forms of information technology; and Estimates of capital or start-up costs and costs of operation, maintenance, and pur- chase of services to provide information. The collection of information in these proposed regulations is in§§1.1502–35T(c), 1.1502–35T(c)(5)(iii), 1.1502–35T(f)(2) and 1.1502–35T(g)(3). This information is re- quired by the IRS to verify compliance with section 1502. This information will be used to determine whether the amount of tax has been calculated correctly. The collection of information is required to properly deter- mine the amount permitted to be taken into account as a loss. The respondents are cor- porations filing consolidated returns. The collection of information is required to ob- tain a benefit. Estimated total annual reporting and/or recordkeeping burden: 15,000 hours. Estimated average annual burden per re- spondent and/or recordkeeper: 2 hours. Estimated number of respondents and/or recordkeepers: 7,475. Estimated annual frequency of responses: on occasion. An agency may not conduct or spon- sor, and a person is not required to re- spond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Bud- get. Books or records relating to a collec- tion of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103. Background Temporary regulations in this issue of the Bulletin amend the Income Tax Regula- tions (26 CFR part 1) relating to section 1502. The text of those regulations also serves as the text of these proposed regu- lations. The preamble to the temporary regu- lations contains a full explanation of the reasons underlying the issuance of the pro- posed regulations. Special Analyses It has been determined that this notice of proposed rulemaking is not a signifi- cant regulatory action as defined in Ex- ecutive Order 12866. Therefore, a regulatory assessment is not required. It is hereby cer- tified that these regulations do not have a significant 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 corpo- rations, which tend to be larger businesses. March 31, 20036692003–13 I.R.B. Moreover, the number of taxpayers af- fected and the average burden are mini- mal. Therefore, a Regulatory Flexibility Analysis is not required. Pursuant to sec- tion 7805(f) of the Internal Revenue Code, these regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small businesses. Comments and Public Hearing Before these proposed regulations are adopted as final regulations, consideration will be given to any written (a signed origi- nal and eight (8) copies) or electronic com- ments that are submitted timely to the IRS. The IRS and Treasury Department request comments on the clarity of the proposed regulations and how they may be made easier to understand. All comments will be available for public inspection and copy- ing. A public hearing has been scheduled for June 20, 2003, beginning at 10 a.m. in the IRS Auditorium, Internal Revenue Build- ing,1111Constitution Avenue, NW, Wash- ington, DC. Due to building security procedures, visitors must enter at the Con- stitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access re- strictions, visitors will not be admitted be- yond the immediate entrance area more than 30 minutes before the hearing starts. For in- formation about having your name placed on the building access list to attend the hear- ing, see the“FOR FURTHER INFORMA- TION CONTACT”portion of this preamble. The rules of 26 CFR 601.601(a)(3) ap- ply to the hearing. Persons who wish to present oral comments must submit writ- ten or electronic comments and an out- line of the topics to be discussed and the time to be devoted to each topic (a signed original and eight (8) copies) by May 30, 2000. A period of 10 minutes will be al- lotted 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 Aimee K. Meacham of the Office of Associate Chief Counsel (Corporate), IRS. However, other personnel from the IRS and Treasury Department participated in their development. ***** Proposed Amendments to the Regula- tions Accordingly, proposed regulations pub- lished on October 23, 2002 (REG–131478– 02, 2002–47 I.R.B. 892 [67 FR 65066]) are withdrawn, and 26 CFR part 1 is proposed to be amended as follows: PA RT 1—INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read in part as follows: Authority: 26 U.S.C. 7805*** 26 U.S.C. 1502*** Par. 2. Section 1.1502–21 is amended by: 1. Revising paragraph (b)(1). 2. Adding paragraph (b)(3)(v) and (h)(7). The revision and addition read as follows: §1.1502–21 Net operating losses. ***** (b)*** (1) [The text of the proposed amend- ment to§1.1502–21(b)(1) is the same as the text of§1.1502–21T(b)(1) published else- where in this issue of theFederal Regis- ter]. ***** (3)*** (v) [The text of the proposed amend- ment to§1.1502–21(b)(3)(v) is the same as the text of§1.1502–21T(b)(3)(v) published elsewhere in this issue of theFederal Reg- ister]. ***** (h)*** (7) [The text of the proposed amend- ment to§1.1502–21(h)(7) is the same as the text of§1.1502–21T(h)(7) published else- where in this issue of theFederal Regis- ter]. Par. 3. Section 1.1502–32 is amended by: 1. Revising paragraphs (a)(2) and (h). 2. Adding paragraphs (b)(3)(iii)(C), (b)(3)(iii)(D), (b)(3)(vi), and (h)(6). The revision and additions read as follows: §1.1502–32 Investment adjustments. ***** (a)(2) [The proposed amendment to §1.1502–32(a)(2) is the same as§1.1502– 32T(a)(2) published elsewhere in this is- sue of theFederal Register]. ***** (b)***(1)*** (3)*** (iii)*** (C) and (D) [The proposed amendment to§1.1502–32(b)(3)(iii)(C) and (b)(3)(iii)(D) are the same as§1.1502–32T(b)(3)(iii)(C) and (b)(3)(iii)(D) published elsewhere in this issue of theFederal Register]. ***** (4)(i)*** (vi) [The proposed amendment to §1.1502–32(b)(4)(vi) is the same as §1.1502–32T(b)(4)(vi) published elsewhere in this issue of theFederal Register]. ***** (h)(6) [The proposed amendment to §1.1502–32(h)(6) is the same as§1.1502– 32T(h)(6) published elsewhere in this is- sue of theFederal Register]. Par. 4. Section 1.1502–35 is added to read as follows: §1.1502–35 Transfers and issuances of subsidiary member stock. [The text of proposed§1.1502–35 is the same as the text of§1.1502–35T published elsewhere in this issue of theFederal Reg- ister]. ***** David A. Mader, Assistant Deputy Commissioner of Internal Revenue. (Filed by the Office of the Federal Register on March 11, 2003, 1:04 p.m., and published in the issue of the Federal Regis- ter for March 14, 2003, 68 F.R. 12324) 2003–13 I.R.B.670March 31, 2003 Announcement of Disciplinary Actions Involving Attorneys, Certified Public Accountants, Enrolled Agents, and Enrolled Actuaries—Suspensions, Censures, Disbarments, and Resignations Announcement 2003–15 Under Title 31, Code of Federal Regu- lations, Part 10, attorneys, certified pub- lic accountants, enrolled agents, and enrolled actuaries may not accept assistance from, or assist, any person who is under disbar- ment or suspension from practice before the Internal Revenue Service if the assistance relates to a matter constituting practice be- fore the Internal Revenue Service and may not knowingly aid or abet another person to practice before the Internal Revenue Ser- vice during a period of suspension, disbar- ment, or ineligibility of such other person. To enable attorneys, certified public ac- countants, enrolled agents, and enrolled ac- tuaries to identify persons to whom these restrictions apply, the Director, Office of Professional Responsibility will announce in the Internal Revenue Bulletin their names, their city and state, their profes- sional designation, the effective date of dis- ciplinary action, and the period of suspension. This announcement will ap- pear in the weekly Bulletin at the earliest practicable date after such action and will continue to appear in the weekly Bulle- tins for five successive weeks. Suspensions From Practice Before the Internal Revenue Service After Notice and an Opportunity for a Proceeding Under Title 31, Code of Federal Regu- lations, Part 10, after notice and an oppor- tunity for a proceeding before an administrative law judge, the following in- dividuals have been placed under suspen- sion from practice before the Internal Revenue Service: NameAddressDesignationEffective Date Cramer, GeorgeChicago, ILCPAJanuary 18, 2003 to January 17, 2005 Disbarments From Practice Before the Internal Revenue Service After Notice and an Opportunity for a Proceeding Under Title 31, Code of Federal Regu- lations, Part 10, after notice and an oppor- tunity for a proceeding before an administrative law judge, the following in- dividuals have been disbarred from prac- tice before the Internal Revenue Service: NameAddressDesignationEffective Date Whalley, Christopher J.Ellsworth, MEAttorneyJuly 28, 2002 Chapin, Frank L.Sandpoint, IDEnrolled AgentAugust 13, 2002 Engstrand Jr., Edward E.Minneapolis, MNCPANovember 2, 2002 Fisher, JoannaPortland, OREnrolled AgentNovember 15, 2002 Consent Suspensions From Practice Before the Internal Revenue Service Under Title 31, Code of Federal Regu- lations, Part 10, an attorney, certified pub- lic accountant, enrolled agent, or enrolled actuary, in order to avoid institution or con- clusion of a proceeding for his or her dis- barment or suspension from practice before March 31, 20036712003–13 I.R.B. the Internal Revenue Service, may offer his or her consent to suspension from such practice. The Director, Office of Profes- sional Responsibility, in his discretion, may suspend an attorney, certified public ac- countant, enrolled agent or enrolled actu- ary in accordance with the consent offered. The following individuals have been placed under consent suspension from prac- tice before the Internal Revenue Service: NameAddressDesignationDate of Suspension Kuhajda, BenPlainfield, ILCPAAugust 26, 2002 to August 24, 2005 Vaughn, James A.Albuquerque, NMCPAOctober 1, 2002 to September 29, 2004 McBroom, ByronManteca, CACPAOctober 21, 2002 to October 19, 2006 Jacobs, RobertPhiladelphia, PAAttorneyOctober 21, 2002 to April 20, 2006 Kwak, JongBeverly Hills, CAAttorneyOctober 22, 2002 to October 20, 2003 Smith, Frank L.Brooksville, FLAttorneyNovember 1, 2002 to October 30, 2005 Schwartz, Kenneth J.Woodland Hills, CAAttorneyNovember 1, 2002 to February 27, 2006 Agulnick, Barry W.New York, NYAttorneyNovember 1, 2002 to April 29, 2004 O’Connor, Thomas P.Palos Park, ILCPANovember 1, 2002 to October 20, 2003 Brand, Joe A.Dundee, OHCPANovember 18, 2002 to November 16, 2004 Battino, StevenPlainview, NYCPANovember 25, 2002 to May 23, 2004 Chipman, KenFarmington, NMEnrolled AgentDecember 1, 2002 to November 29, 2003 2003–13 I.R.B.672March 31, 2003 NameAddressDesignationDate of Suspension Kirgis, Grant A.Rochester, MNCPADecember 1, 2002 to May 30, 2003 Welch, FrankStamford, CTCPAIndefinite from January 31, 2003 Pickens, ValerieSeattle, WACPAJanuary 1, 2003 to December 30, 2004 Kidd, Roger F.Philadelphia, PAAttorneyJanuary 20, 2003 to April 18, 2003 Sullivan, RaymondSonoma, CAAttorneyMarch 15, 2003 to November 14, 2003 Expedited Suspensions From Practice Before the Internal Revenue Service Under Title 31, Code of Federal Regu- lations, Part 10, the Director, Office of Pro- fessional Responsibility, is authorized to immediately suspend from practice be- fore the Internal Revenue Service any prac- titioner who, within five years from the date the expedited proceeding is instituted (1) has had a license to practice as an attorney, cer- tified public accountant, or actuary sus- pended or revoked for cause or (2) has been convicted of certain crimes. The following individuals have been placed under suspension from practice be- fore the Internal Revenue Service by vir- tue of the expedited proceeding provisions: NameAddressDesignationDate of Suspension Pirro, Anthony G.South Salem, NYCPAIndefinite from June 26, 2002 Scott, RogerBuffalo, NYAttorneyIndefinite from August 12, 2002 Patrick, GeorgeCheshire, CTCPAIndefinite from September 9, 2002 Rochon, Jason B.Lafayette, LAAttorneyIndefinite from September 9, 2002 Voccola, EdwardHingham, MAAttorneyIndefinite from October 18, 2002 March 31, 20036732003–13 I.R.B. NameAddressDesignationDate of Suspension Linn, Charles B.Croton-on-Hudson, NYAttorneyIndefinite from October 18, 2002 Lum, Eugene K.H.Long Beach, CAAttorneyIndefinite from October 18, 2002 Gwilliam, PeterLynn, MACPAIndefinite from October 28, 2002 Herlehy, Jon L.McHenry, ILCPAIndefinite from October 28, 2002 Herndon, HenryPikeville, NCCPAIndefinite from November 1, 2002 McCurry, ToddDurham, NCAttorneyIndefinite from November 25, 2002 Adams, James L.Breckenridge, COAttorneyIndefinite from November 25, 2002 Cloer, StewartPlano, TXAttorneyIndefinite from December 13, 2002 Caruso, RobertSaddle River, NJCPAIndefinite from December 16, 2002 Duru, Ike E.Atlanta, GAAttorneyIndefinite from January 10, 2003 Pelletier, Richard A.Bolton, CTCPAIndefinite from January 10, 2003 Austin, JackSteamboat Springs, COCPAIndefinite from January 10, 2003 Gibson, Brian M.Monroe, NYAttorneyIndefinite from January 10, 2003 Jackson, RobertMt. Juliet, TNAttorneyIndefinite from January 10, 2003 2003–13 I.R.B.674March 31, 2003 NameAddressDesignationDate of Suspension Tenzer, James L.East Meadow, NYAttorneyIndefinite from February 4, 2003 Resignations of Enrolled Agents Under Title 31, Code of Federal Regu- lations, Part 10, an enrolled agent, in or- der to avoid the institution or conclusion of a proceeding for his or her disbarment or suspension from practice before the Inter- nal Revenue Service, may offer his or her resignation as an enrolled agent. The Di- rector, Office of Professional Responsibil- ity, in his discretion, may accept the offered resignation. The Director, Office of Professional Re- sponsibility, has accepted offers of resig- nation as an enrolled agent from the following individuals: NameAddressDate of Resignation Korman, LindaLas Vegas, NVJanuary 23, 2003 Additional Relief for Certain Estates Affected by the September 11, 2001, Terrorist Attack Announcement 2003–18 This announcement supplements and ex- pands the relief granted under section 7508A of the Internal Revenue Code in No- tice 2001–61, 2001–2 C.B. 305, Notice 2001–68, 2001–2 C.B. 504, and Notice 2002–40, 2002–24 I.R.B. 1152, for cer- tain taxpayers affected by the September 11, 2001, Terrorist Attack. In Notice 2002– 40, the Department of the Treasury and the Internal Revenue Service (IRS) granted re- lief from the running of interest and the fail- ure to pay penalty relating to certain payments for which Notice 2001–61 or No- tice 2001–68 had extended or postponed the due dates. Notice 2002–40 applies only to income taxes and certain excise and em- ployment taxes. The Department of the Treasury and the IRS now extend the re- lief from the running of interest and the fail- ure to pay penalty described in Notice 2002–40 to estate tax payments associ- ated with Form 706, theUnited States Es- tate (and Generation-Skipping Transfer) Tax Return(estate tax return), for which No- tice 2001–61 or Notice 2001–68 extended or postponed the due dates, for the period of the extension or postponement provided in Notice 2001–61 or Notice 2001–68. Relief under this announcement applies to all affected taxpayers described in No- tice 2001–61 who were required to file an estate tax return for which Notice 2001–61 or Notice 2001–68 extended or postponed the due date. This generally will include any such affected taxpayer filing an estate tax return: (i) for which tax records neces- sary to meet the filing or payment dead- line were located in the covered disaster area (as defined in Notice 2001–61); (ii) signed and filed by a person whose prin- cipal residence, was located in the cov- ered disaster area; or (iii) signed and filed by a corporate fiduciary whose place of business from which the corporate fidu- ciary primarily administered estate mat- ters was located in the covered disaster area. The IRS already may have assessed in- terest and penalties eligible for relief un- der this announcement, and the affected taxpayers may have already paid these amounts. The IRS is not able to identify the affected taxpayers who are eligible for re- lief under this announcement. If an af- fected taxpayer believes that the affected taxpayer is eligible for relief under this an- nouncement, that affected taxpayer will need to contact the IRS. Such affected taxpay- ers should call the Estate and Gift Tax De- partment’s toll-free number at (866) 699– 4083, Monday through Friday, 7:00 a.m. to 7:00 p.m., based on the caller’s local time. Alternatively, such affected taxpayers may write to the Cincinnati Compliance Ser- vice Center, Estate and Gift Tax Depart- ment, Attn: Stop 824, 201 W. River Center Blvd., Covington, KY 41011. This announcement was drafted by the Office of Associate Chief Counsel, Proce- dure and Administration (Administrative Provisions and Judicial Practice Division). March 31, 20036752003–13 I.R.B. Definition of Terms Revenue rulings and revenue procedures (hereinafter referred to as“rulings”) that have an effect on previous rulings use the following defined terms to describe the effect: Amplifieddescribes a situation where no change is being made in a prior pub- lished position, but the prior position is being extended to apply to a variation of the fact situation set forth therein. Thus, if an earlier ruling held that a principle applied to A, and the new ruling holds that the same principle also applies to B, the earlier ruling is amplified. (Compare withmodified, below). Clarifiedis used in those instances where the language in a prior ruling is being made clear because the language has caused, or may cause, some confu- sion. It is not used where a position in a prior ruling is being changed. Distinguisheddescribes a situation where a ruling mentions a previously published ruling and points out an essen- tial difference between them. Modifiedis used where the substance of a previously published position is being changed. Thus, if a prior ruling held that a principle applied to A but not to B, and the new ruling holds that it applies to both A and B, the prior ruling is modified because it corrects a pub- lished position. (Compare withamplified andclarified, above). Obsoleteddescribes a previously pub- lished ruling that is not considered deter- minative with respect to future transac- tions. This term is most commonly used in a ruling that lists previously published rulings that are obsoleted because of changes in law or regulations. A ruling may also be obsoleted because the sub- stance has been included in regulations subsequently adopted. Revokeddescribes situations where the position in the previously published rul- ing is not correct and the correct position is being stated in the new ruling. Supersededdescribes a situation where the new ruling does nothing more than restate the substance and situation of a previously published ruling (or rulings). Thus, the term is used to republish under the 1986 Code and regulations the same position published under the 1939 Code and regulations. The term is also used when it is desired to republish in a single ruling a series of situations, names, etc., that were previously published over a period of time in separate rulings. If the new ruling does more than restate the substance of a prior ruling, a combination of terms is used. For example,modified andsupersededdescribes a situation where the substance of a previously pub- lished ruling is being changed in part and is continued without change in part and it is desired to restate the valid portion of the previously published ruling in a new ruling that is self contained. In this case, the previously published ruling is first modified and then, as modified, is super- seded. Supplementedis used in situations in which a list, such as a list of the names of countries, is published in a ruling and that list is expanded by adding further names in subsequent rulings. After the original ruling has been supplemented several times, a new ruling may be published that includes the list in the original ruling and the additions, and supersedes all prior rul- ings in the series. Suspendedis used in rare situations to show that the previous published rulings will not be applied pending some future action such as the issuance of new or amended regulations, the outcome of cases in litigation, or the outcome of a Service study. Abbreviations The following abbreviations in current use and formerly used will appear in material published in the Bulletin. A—Individual. Acq.—Acquiescence. B—Individual. BE—Beneficiary. BK—Bank. B.T.A.—Board of Tax Appeals. C—Individual. C.B.—Cumulative Bulletin. CFR—Code of Federal Regulations. CI—City. COOP—Cooperative. Ct.D.—Court Decision. CY—County. D—Decedent. DC—Dummy Corporation. DE—Donee. Del. Order—Delegation Order. DISC—Domestic International Sales Corporation. DR—Donor. E—Estate. EE—Employee. E.O.—Executive Order. ER—Employer. ERISA—Employee Retirement Income Security Act. EX—Executor. F—Fiduciary. FC—Foreign Country. FICA—Federal Insurance Contributions Act. FISC—Foreign International Sales Company. FPH—Foreign Personal Holding Company. F. R .—Federal Register. FUTA—Federal Unemployment Tax Act. FX—Foreign Corporation. G.C.M.—Chief Counsel’s Memorandum. GE—Grantee. GP—General Partner. GR—Grantor. IC—Insurance Company. I.R.B.—Internal Revenue Bulletin. LE—Lessee. LP—Limited Partner. LR—Lessor. M—Minor. Nonacq.—Nonacquiescence. O—Organization. P—Parent Corporation. PHC—Personal Holding Company. PO—Possession of the U.S. PR—Partner. PRS—Partnership. PTE—Prohibited Transaction Exemption. Pub. L.—Public Law. REIT—Real Estate Investment Trust. Rev. Proc.—Revenue Procedure. Rev. Rul.—Revenue Ruling. S—Subsidiary. S.P.R.—Statements of Procedural Rules. Stat.—Statutes at Large. T—Target Corporation. T.C.—Tax Court. T.D.—Treasury Decision. TFE—Transferee. TFR—Transferor. T.I.R.—Technical Information Release. TP—Taxpayer. TR—Trust. TT—Trustee. U.S.C.—United States Code. X—Corporation. Y—Corporation. Z—Corporation. 2003–13 I.R.B.iMarch 31, 2003 Numerical Finding List 1 Bulletins 2003–1 through 2003–12 Announcements: 2003–1, 2003–2 I.R.B.281 2003–2, 2003–3 I.R.B.301 2003–3, 2003–4 I.R.B.361 2003–4, 2003–5 I.R.B.396 2003–5, 2003–5 I.R.B.397 2003–6, 2003–6 I.R.B.450 2003–7, 2003–6 I.R.B.450 2003–8, 2003–6 I.R.B.451 2003–9, 2003–7 I.R.B.490 2003–10, 2003–7 I.R.B.490 2003–11, 2003–10 I.R.B.585 2003–12, 2003–10 I.R.B.585 2003–13, 2003–11 I.R.B.603 2003–14, 2003–11 I.R.B.603 2003–15, 2003–11 I.R.B.605 2003–16, 2003–12 I.R.B.641 Notices: 2003–1, 2003–2 I.R.B.257 2003–2, 2003–2 I.R.B.257 2003–3, 2003–2 I.R.B.258 2003–4, 2003–3 I.R.B.294 2003–5, 2003–3 I.R.B.294 2003–6, 2003–3 I.R.B.298 2003–7, 2003–4 I.R.B.310 2003–8, 2003–4 I.R.B.310 2003–9, 2003–5 I.R.B.369 2003–10, 2003–5 I.R.B.369 2003–11, 2003–6 I.R.B.422 2003–12, 2003–6 I.R.B.422 2003–13, 2003–8 I.R.B.513 2003–14, 2003–8 I.R.B.515 2003–15, 2003–9 I.R.B.540 2003–16, 2003–10 I.R.B.575 2003–17, 2003–12 I.R.B.633 Proposed Regulations: REG–209500–86, 2003–2 I.R.B.262 REG–104385–01, 2003–12 I.R.B.634 REG–116641–01, 2003–8 I.R.B.518 REG–125638–01, 2003–5 I.R.B.373 REG–126016–01, 2003–7 I.R.B.486 REG–126485–01, 2003–9 I.R.B.542 REG–103580–02, 2003–9 I.R.B.543 REG–124069–02, 2003–7 I.R.B.488 REG–138882–02, 2003–8 I.R.B.522 REG–139768–02, 2003–10 I.R.B.583 REG–151043–02, 2003–3 I.R.B.300 REG–164464–02, 2003–2 I.R.B.262 Revenue Procedures: 2003–1, 2003–1 I.R.B.1 2003–2, 2003–1 I.R.B.76 2003–3, 2003–1 I.R.B.113 2003–4, 2003–1 I.R.B.123 2003–5, 2003–1 I.R.B.163 2003–6, 2003–1 I.R.B.191 2003–7, 2003–1 I.R.B.233 2003–8, 2003–1 I.R.B.236 Revenue Procedures—Continued: 2003–9, 2003–8 I.R.B.516 2003–10, 2003–2 I.R.B.259 2003–11, 2003–4 I.R.B.311 2003–12, 2003–4 I.R.B.316 2003–13, 2003–4 I.R.B.317 2003–14, 2003–4 I.R.B.319 2003–15, 2003–4 I.R.B.321 2003–16, 2003–4 I.R.B.359 2003–17, 2003–6 I.R.B.427 2003–18, 2003–6 I.R.B.439 2003–19, 2003–5 I.R.B.371 2003–20, 2003–6 I.R.B.445 2003–21, 2003–6 I.R.B.448 2003–22, 2003–10 I.R.B.577 2003–23, 2003–11 I.R.B.599 2003–24, 2003–11 I.R.B.599 2003–25, 2003–11 I.R.B.601 Revenue Rulings: 2003–1, 2003–3 I.R.B.291 2003–2, 2003–2 I.R.B.251 2003–3, 2003–2 I.R.B.252 2003–4, 2003–2 I.R.B.253 2003–5, 2003–2 I.R.B.254 2003–6, 2003–3 I.R.B.286 2003–7, 2003–5 I.R.B.363 2003–8, 2003–3 I.R.B.290 2003–9, 2003–4 I.R.B.303 2003–10, 2003–3 I.R.B.288 2003–11, 2003–3 I.R.B.285 2003–12, 2003–3 I.R.B.283 2003–13, 2003–4 I.R.B.305 2003–14, 2003–4 I.R.B.302 2003–15, 2003–4 I.R.B.302 2003–16, 2003–6 I.R.B.401 2003–17, 2003–6 I.R.B.400 2003–18, 2003–7 I.R.B.467 2003–19, 2003–7 I.R.B.468 2003–20, 2003–7 I.R.B.465 2003–21, 2003–8 I.R.B.509 2003–22, 2003–8 I.R.B.494 2003–23, 2003–8 I.R.B.511 2003–24, 2003–10 I.R.B.557 2003–26, 2003–10 I.R.B.563 2003–27, 2003–11 I.R.B.597 2003–28, 2003–11 I.R.B.594 2003–29, 2003–11 I.R.B.587 Treasury Decisions: 9024, 2003–5 I.R.B.365 9025, 2003–5 I.R.B.362 9026, 2003–5 I.R.B.366 9027, 2003–6 I.R.B.413 9028, 2003–6 I.R.B.415 9029, 2003–6 I.R.B.403 9030, 2003–8 I.R.B.495 9031, 2003–8 I.R.B.504 9032, 2003–7 I.R.B.471 9033, 2003–7 I.R.B.483 9034, 2003–7 I.R.B.453 9035, 2003–9 I.R.B.528 9036, 2003–9 I.R.B.533 9037, 2003–9 I.R.B.535 Treasury Decisions—Continued: 9038, 2003–9 I.R.B.524 9039, 2003–10 I.R.B.561 9040, 2003–10 I.R.B.568 9041, 2003–8 I.R.B.510 9042, 2003–10 I.R.B.564 9043, 2003–12 I.R.B.611 9045, 2003–12 I.R.B.610 9046, 2003–12 I.R.B.614 1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2002–26 through 2002–52 is in Internal Revenue Bulletin 2003–1, dated January 6, 2003. March 31, 2003ii2003–13 I.R.B. Finding List of Current Actions on Previously Published Items 2 Bulletins 2003–1 through 2003–12 Notices: 97–19 Modified by Rev. Proc. 2003–1, 2003–1 I.R.B.1 2001–26 Obsoleted by T.D. 9032, 2003–7 I.R.B.471 2001–46 Modified by Notice 2003–6, 2003–3 I.R.B.298 2001–69 Modified and superseded by Notice 2003–1, 2003–2 I.R.B.257 2002–27 Clarified by Notice 2003–3, 2003–2 I.R.B.258 2002–46 Modified by Notice 2003–10, 2003–5 I.R.B.369 Proposed Regulations: REG–209500–86 Corrected by Ann. 2003–6, 2003–6 I.R.B.450 REG–103829–99 Corrected by Ann. 2003–12, 2003–10 I.R.B.585 REG–126485–01 Withdrawn by REG–126485–01, 2003–9 I.R.B.542 REG–143321–02 Corrected by Ann. 2003–12, 2003–10 I.R.B.585 REG–164464–02 Corrected by Ann. 2003–6, 2003–6 I.R.B.450 Revenue Procedures: 83–23 Supplemented by Rev. Proc. 2003–21, 2003–6 I.R.B.448 84–37 Modified by Rev. Proc. 2003–1, 2003–1 I.R.B.1 93–38 Obsoleted by Rev. Proc. 2003–15, 2003–4 I.R.B.321 97–31 Modified by Rev. Proc. 2003–9, 2003–8 I.R.B.516 Revenue Procedures—Continued: 98–13 Obsoleted by T.D. 9032, 2003–7 I.R.B.471 2002–1 Superseded by Rev. Proc. 2003–1, 2003–1 I.R.B.1 2002–2 Superseded by Rev. Proc. 2003–2, 2003–1 I.R.B.76 2002–3 Superseded by Rev. Proc. 2003–3, 2003–1 I.R.B.113 2002–4 Superseded by Rev. Proc. 2003–4, 2003–1 I.R.B.123 2002–5 Superseded by Rev. Proc. 2003–5, 2003–1 I.R.B.163 2002–6 Superseded by Rev. Proc. 2003–6, 2003–1 I.R.B.191 2002–7 Superseded by Rev. Proc. 2003–7, 2003–1 I.R.B.233 2002–8 Superseded by Rev. Proc. 2003–8, 2003–1 I.R.B.236 2002–9 Modified and amplified by Rev. Proc. 2003–20, 2003–6 I.R.B.445 Rev. Rul. 2003–3, 2003–2 I.R.B.252 2002–22 Modified by Rev. Proc. 2003–3, 2003–1 I.R.B.113 2002–29 Modified by Rev. Proc. 2003–10, 2003–2 I.R.B.259 2002–52 Modified by Rev. Proc. 2003–1, 2003–1 I.R.B.1 2002–67 Supplemented by Ann. 2003–3, 2003–4 I.R.B.361 2002–75 Superseded by Rev. Proc. 2003–3, 2003–1 I.R.B.113 2003–3 Amplified by Rev. Proc. 2003–14, 2003–4 I.R.B.319 2003–7 Corrected by Ann. 2003–4, 2003–5 I.R.B396 Revenue Rulings: 53–131 Modified by Rev. Rul. 2003–12, 2003–3 I.R.B.283 57–190 Obsoleted by Rev. Rul. 2003–18, 2003–7 I.R.B.467 65–190 Revoked by Rev. Rul. 2003–3, 2003–2 I.R.B.252 69–372 Revoked by Rev. Rul. 2003–3, 2003–2 I.R.B.252 92–19 Supplemented in part by Rev. Rul. 2003–24, 2003–10 I.R.B.557 2003–2 Revoked by Rev. Rul. 2003–22, 2003–8 I.R.B.494 Treasury Decisions: 9002 Corrected by Ann. 2003–8, 2003–6 I.R.B.451 9021 Corrected by Ann. 2003–16, 2003–12 I.R.B.641 9022 Supplemented by Ann. 2003–7, 2003–6 I.R.B.450 Corrected by Ann. 2003–11, 2003–10 I.R.B.585 2 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2002–26 through 2002–52 is in Internal Revenue Bulletin 2003–1, dated January 6, 2003. 2003–13 I.R.B.iii*U.S. Government Printing Office: 2003—496–919/60076March 31, 2003
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