§ 6.5 I.R.C. SECTION 383: CARRYOVERS OTHER THAN NET OPERATING LOSSES

(a) General Provisions

Paralleling the “section 382 limitation” on the use of NOL carryovers, I.R.C. section 383 limits the amount of pre-change credits (including unused I.R.C. section 39 general business credits and unused I.R.C. section 53 minimum tax credits), net capital loss carryovers, and foreign tax credits that can be used in any post–ownership-change year. Under regulations adopted on June 26, 1991,217 effective for ownership changes occurring after December 31, 1986, capital losses used to offset capital gains reduce the section 382 limitation amount.

In addition, a separate “section 383 limitation” (applicable to credit carryovers) is computed by determining the difference between the corporation’s income tax net of allowable NOL carryovers, and a hypothetical income tax that would be payable if the corporation were entitled to deduct the amount of any unused section 382 limitation.218 This difference is the maximum credit that can be used to offset tax in a given post–ownership-change year.

Finally, the section 383 regulations establish ordering rules for the use of losses and credits and a “section 383 credit reduction amount,” which reduces the unused section 382 limitation amount that can be carried over. Because the section 383 limitation limits credits against tax (as opposed to reductions in taxable income), the section 383 credit reduction amount must be computed by grossing up the tax amounts to arrive at the appropriate taxable income amounts.219

§ 6.6 I.R.C. SECTION 384

(a) Introduction

I.R.C. section 382 limits the amount of post–ownership-change income that can be used against the losses of a loss corporation that experiences an ownership change. I.R.C. section 384 enacted as part of the Omnibus Budget Reconciliation Act of 1987, precludes a loss corporation (whether it experiences any ownership change or not) from offsetting its loss against any built-in gain from a “gain corporation.”220

(b) Overview

I.R.C. section 384 resembles I.R.C. section 382 with respect to its ultimate result: limitation on use of preacquisition losses. I.R.C. section 382 becomes operational when a loss corporation has an ownership change. I.R.C. section 384 is triggered when one corporation acquires control of another corporation or its assets (in certain transactions), and either corporation is a gain corporation.

I.R.C. section 384 limits the use of any built-in gain existing at the time of the acquisition, but not recognized until after the acquisition, against a preacquisition loss other than that of the gain corporation. Thus, a preacquisition loss (from other than the gain corporation) cannot be used to offset the recognition of a built-in gain after the acquisition.

A recognized built-in gain is a gain recognized after the acquisition on the disposition of an asset that was held on the acquisition date, and whose FMV exceeded its adjusted basis on that date, as well as certain items of income that are attributable to periods before the acquisition date.221 For a built-in gain to exist on the acquisition date, the amount of net unrealized built-in gains must exceed 15 percent of the FMV of a corporation’s assets, or $10 million, whichever is lower, immediately before the ownership change.222

The provisions of I.R.C. section 384 apply independently of, and in addition to, the limitations of I.R.C. section 382. The section 384 limitations apply to excess credits and net capital losses in addition to preacquisition NOLs.223

I.R.C. section 384 gives the IRS regulatory authority to issue regulations, but no such regulations have been issued.224 Until the guidance of regulations is received, numerous complex issues will remain unresolved.

(c) Applicable Acquisitions

I.R.C. section 384 applies if two requirements are satisfied: (1) one corporation must acquire control of another corporation (or must acquire the assets of another corporation in a specified transaction), and (2) one of the corporations must be a gain corporation. The acquisition of control of another corporation can occur directly or through one or more corporations.225 Control is defined as the ownership of a corporation’s stock (possessing at least 80 percent of the total voting power of the stock and at least 80 percent of the total value of the stock of the corporation).226 An acquisition of assets qualifies if the assets are acquired in an A, C, or D reorganization.

The limitations of I.R.C. section 384 do not apply to preacquisition losses if the gain and loss corporations were both members of the same controlled group at all times during the five years prior to the acquisition date.227 A controlled group of corporations includes a parent-subsidiary controlled group connected through stock ownership with a common parent that owns 50 percent of the voting power and value of the stock, and a brother-sister controlled group connected through stock ownership by five or fewer persons who own at least 50 percent of the voting power and value of the stock. If the gain corporation has not been in existence for five years, the period of existence is substituted for five years.

TAMRA clarifies that the limitation in I.R.C. section 384 applies to any successor corporation to the same extent the limitation applied to the predecessor corporation.228 Thus, a subsequent merger or liquidation of the two corporations will not avoid the limitation.

(d) Built-In Gains

Pursuant to I.R.C. section 384, preacquisition losses are not allowed to offset built-in gains recognized upon a disposition of an asset during the five-year period after the acquisition.229 For the definition of built-in gain, I.R.C. section 384 references I.R.C. section 382.

A net unrealized built-in gain is the amount by which the FMV of all the assets of a corporation exceeds the aggregate adjusted basis of those assets.230 The net unrealized built-in gain must exceed 15 percent of the FMV of the assets, or $10 million, whichever is lower. If this threshold is not met, the net unrealized built-in gain is considered to be zero.231

The amount of recognized built-in gains that are not allowed to be offset by preacquisition losses is limited to total net unrealized built-in gains reduced by recognized built-in gains previously recognized during the five-year recognition period (overall limitation) as well as by gain that is built in with respect to the specific asset (specific asset limitation).232

After an asset or a stock acquisition, taxpayers will have to maintain records and make difficult valuation decisions regarding the inherent unrealized gain in all assets in the gain corporation on the acquisition date.233 Upon a subsequent sale, taxpayers will have to ascertain how much of the recognized gain is attributable to preacquisition and postacquisition appreciation (only the former is precluded from being offset by the acquiring corporation’s losses). Moreover, after an asset acquisition, taxpayers will have to maintain divisional records to separate subsequent sales of assets at a gain that are attributable to property owned by the old preacquisition gain corporation.

In addition to built-in gain on assets, items of income that are properly attributable to periods before the acquisition date are treated as built-in gain.234 In Notice 2003-65, the IRS requested comments regarding whether different standards should apply to determine built-in items for section 384.

(e) Preacquisition Loss

A preacquisition loss cannot offset recognized built-in gains. A preacquisition loss includes any NOL carryover to the taxable year in which the acquisition date occurs, to the extent such loss is allocable to the period in such year on or before the acquisition date.235 For purposes of allocating the loss for the acquisition year, the loss is generally allocated ratably to each day in the year.236 If a corporation has a net unrealized built-in loss (as defined for purposes of I.R.C. section 382), the preacquisition loss should include any recognized built-in loss, subject to the overall NUBIL amount and built-in loss with respect to the specific asset.237

§ 6.7 I.R.C. SECTION 269: TRANSACTIONS TO EVADE OR AVOID TAX

(a) Introduction

I.R.C. section 269 was designed to prevent the distortion through tax avoidance of the deduction, credit, or allowance provisions of the I.R.C., primarily by corporations with large excess profits that acquire corporations with current, past, or prospective losses.

I.R.C. section 269(a) applies if:

• Any person or persons acquire, directly or indirectly, control of a corporation; or
• Any corporation acquires, directly or indirectly, property of another corporation not controlled, directly or indirectly, immediately before the acquisition by the acquiring corporation or its stockholders; and the acquiring corporation’s basis for the property is determined by reference to the transferor corporation’s basis;238 and
• The principal purpose of the acquisition is evasion or avoidance of federal income tax by securing the benefit of a deduction, credit, or allowance which such person or corporation could not otherwise obtain.

I.R.C. section 269(b) applies if:

• There is a qualified stock purchase239 by a corporation of another corporation;
• An election is not made under I.R.C. section 338 with respect to the qualified stock purchase;
• The acquired corporation is liquidated pursuant to a plan of liquidation adopted not more than two years after the acquisition date; and
• The principal purpose for the liquidation is evasion or avoidance of federal income tax.

(i) Definition of Terms

“Control” is defined in I.R.C. section 269(a) as the ownership of stock possessing at least 50 percent of the total combined voting power of all classes of voting stock, or at least 50 percent of the total value of shares of all classes of the corporation’s stock. Because the code makes no provision for the I.R.C. section 318 attribution rules, they are not applied in determining ownership, although the statute’s use of “indirect” could bring some deemed ownership into play.240 And control could result indirectly from the reduction of ownership by other shareholders as well as directly through stock purchases.241

The scope of benefits that can be precluded by the application of I.R.C. section 269 is broad. Indeed, an “allowance” for the purposes of this section is considered to be anything that diminishes the tax liability of the taxpayer.242 Nevertheless, I.R.C. section 269 will not apply, regardless of the taxpayer’s intent, in three types of situations. The first is if I.R.C. section 269 applies because of an acquisition of control and the taxpayer could have obtained the same tax benefit in an alternative transaction in which control was not acquired. In such a case, the taxpayer has not obtained a benefit it would not otherwise enjoy.243 The second is if I.R.C. section 269 applies because of an acquisition of control and the taxpayer could have obtained the same benefit, only proportionately smaller, if the taxpayer had obtained an amount of stock not constituting control of the acquired corporation.244 The third is if the benefit is one Congress intended taxpayers to have. For example, the IRS has been unsuccessful in attempting to invoke I.R.C. section 269 to deny benefits conferred on S corporations or Western Hemisphere trade corporations.245

“Evasion or avoidance” is not defined in the code, but the regulations state that evasion or avoidance is not limited to cases involving criminal or civil penalties for fraud.246

For the IRS to use I.R.C. section 269, it must demonstrate that the “principal purpose” of the transaction was evasion or avoidance of tax. Because the “principal purpose” is a matter of fact, it has been the focal point of section 269 cases. Generally, the courts have been willing to accept transactions that involve substantial business reasons. Minor business reasons, although acceptable immediately after I.R.C. section 269 became effective, have been subsequently disallowed. The courts have accepted reasonable business purposes and have ruled that consideration of tax factors will not result in disallowance, unless a tax factor is the principal purpose.247

The following factors have been identified as those the IRS will consider in determining whether an acquisition has a valid business purpose:248

• Whether the acquiring parties were aware of challenged tax benefits at the time of the acquisition and considered them249
• Whether the acquired corporation is a mere shell
• Whether acquisition of control or assets is necessary or useful to the acquirer’s business250
• How the relative value of the acquired tax benefit compares to the inherent economic profit of the enterprise251
• Whether the tax benefit flows directly from the acquisition transaction
• If the acquisition was by stock purchase instead of asset purchase, whether this method was the most feasible method of acquiring the business or assets of the acquired corporation252
• If the assets were acquired in a tax-free transaction, whether this method was more feasible than a cash purchase253

(ii) Partial Allowance

I.R.C. section 269(c) provides for (1) a partial allowance, (2) an allocation of gross income and disallowed deduction, credit, or allowance among the corporations or properties involved, or (3) a combination of (1) and (2), provided such allowance or allocation will not result in the evasion or avoidance of federal income tax where this was the purpose of the acquisition.

(iii) Use of I.R.C. Section 269

Most frequently, I.R.C. section 269 has been used to disallow the use of NOL carryovers to offset profits earned after a change in control. It also has been used, however, to disallow foreign tax credits and investment credits; depreciation deductions and rental deductions; capital, ordinary, or section 1231 losses; earnings and profits deficits; returns; losses on sale of assets acquired with “built-in” losses; and other items.254

In a 1993 field service advice, the IRS discussed the application of section 269 to disallow the use of a merged corporation’s NOL carryover.255 Both a privately held company and a publicly held company operated a chain of supermarkets. The private company had enjoyed substantial taxable income for an extended time period, and the public company had operating losses and emerged from chapter 11 with an NOL carryover. Under the plan, the private company would merge into the public company with the private company’s shareholders receiving the public company’s stock for their shares. The public company would divest most of the private company’s assets and devote its resources to the geographic areas where it operated.

The IRS concluded that I.R.C. section 269 applies when the principal purpose for an acquisition is the avoidance of federal income tax. In this case, the sale of the private company’s historical business assets following the merger suggested that the purpose of the merger was to give the surviving company the use of the NOL carryover. However, because determining tax avoidance is purely a factual question, the IRS advised asserting I.R.C. section 269 against a taxpayer only if there is a strong case. Some factors that were presented in this case indicating that the merger was not for tax avoidance purposes were that the proxy statement indicated that the merger advanced the private company’s general plan to gain control of a leading regional supermarket chain, and that the private company’s board found that the merger would provide its shareholders a significant return and greater liquidity.

(iv) Avoiding Tax by Using Operating Losses

The regulations provide some examples of situations in which the IRS would consider it appropriate to use I.R.C. section 269 to prevent a corporation from using its NOL benefits. The IRS suggests that these transactions will fall under I.R.C. section 269, unless there is evidence to the contrary:

• A corporation with large profits acquires control of a corporation with current, past, or prospective credits, deductions, NOLs, or other allowances, and the acquisition is followed by other action as necessary to bring the deduction, credit, or other allowance into conjunction with income.256
• A person or persons with high-earning assets transfers them to a newly organized controlled corporation but retains assets producing NOLs, which are used in an attempt to secure refunds.257
• A corporation acquires property, having in its hands an aggregate carryover basis materially greater than its aggregate FMV at the time of such acquisition, and uses the property to create tax-reducing losses or deductions.258

The regulations state that I.R.C. section 269 and related provisions can be applied to disallow NOL carryovers even though the loss is not disallowed under I.R.C. section 382. The next examples illustrate this position.259

(v) Ownership Changes in Bankruptcy

Treas. Reg. section 1.269-3(d) provides that, in the absence of strong evidence to the contrary, an ownership change in bankruptcy to which I.R.C. section 382(l)(5) applies will be considered to be made for tax avoidance purposes under I.R.C. section 269, unless the bankrupt corporation “carries on more than an insignificant amount of an active trade or business during and subsequent to the title 11 case.” A temporary cessation of activities can be overcome (and the above standard met) if the corporation continues to use a “significant amount of the business assets or work force.” The decision regarding “more than an insignificant amount of an active trade or business” is made without regard to continuity of business enterprise under Treas. Reg. section 1.368-1(d).

§ 6.8 LIBSON SHOPS DOCTRINE

(a) Overview

Another factor to be considered is the extent to which the Libson Shops261 doctrine applies to I.R.C. section 382. In Libson Shops, the Supreme Court introduced a tracing principle, requiring the company that used loss carryovers to be in “substantially the same business” as the company that incurred the loss. This tracing principle survives, in part, in the I.R.C. section 382 continuity of business enterprise requirement.

Before the enactment of current I.R.C. section 382 as part of the Tax Reform Act of 1986, there was some doubt about whether the Libson Shops doctrine might continue to apply in situations not covered by old I.R.C. section 382. The Tax Court held in Clarksdale Rubber Co.262 that the taxpayer was not required to satisfy the Libson Shops doctrine, but the decision was based on the provision in I.R.C. section 382(a)(1)(C). The Ninth Circuit held in Maxwell Hardware Co.263 that the Libson Shops doctrine did not apply to years covered by the 1954 Internal Revenue Code. The Libson Shops case is probably not applicable to I.R.C. sections 381 and 382. It would appear that these I.R.C. provisions superseded the disallowance of the restrictive provisions in Libson Shops. It can be argued that if Libson Shops continues to have any vitality, it should be restricted to tax attributes not specifically addressed in I.R.C. section 381 or other sections. For example, the IRS in Rev. Rul. 80-144264 stated that I.R.C. section 383 preempts the Libson Shops doctrine for the carryover of foreign tax credits.

The legislative history accompanying the enactment of current I.R.C. section 382 clarifies that current I.R.C. section 382 is intended to supplant the principles of Libson Shops, at least with regard to loss carryovers that are subject to limitation by I.R.C. section 382.265 For loss carrybacks, however, at least one court has held that Libson Shops principles continue to apply.266 Early efforts of the IRS to extend the Libson Shops doctrine to other tax attributes have given way to an acknowledgment by the IRS that later legislative action prevents such an extension.267

§ 6.9 CONSOLIDATED RETURN REGULATIONS

(a) Introduction

In addition to the general loss limitation rules already discussed, the use of losses by groups of corporations filing consolidated returns is subject to a number of special limitations. The provisions that address these limitations are extremely complex. The discussion here is brief268 and focuses on four topics: (1) the consolidated NOL (CNOL) rules of Treas. Reg. section 1.1502-21269 (and in particular the separate return limitation year (SRLY) rules of Treas. Reg. section 1.1502-21(c)); (2) the consolidated I.R.C. section 382 rules of Treas. Reg. section 1.1502-90 through 99; (3) the Overlap Rule of Treas. Reg. section 1.1502-21(g); and (4) the rules governing disallowance of losses on the disposition of subsidiary stock of Treas. Reg. sections 1.337(d)-2 and 1.1502-35.

(b) Consolidated Net Operating Loss Rules

Treas. Reg. section 1.1502-21(a) limits a consolidated group’s ability to use loss carryovers and carrybacks to an amount equal to the group’s CNOL270 deduction. The CNOL deduction is composed of (1) the group’s CNOL carried from another consolidated return year and (2) any group member’s NOL that arose in and is carried from a separate return year (SRY).

The second component of the CNOL deduction (i.e., a member’s NOL carryover from a SRY) may be limited by Treas. Reg. section 1.1502-21(c) if the NOL carryover arose in and is carried from a SRLY. This limitation is called the SRLY limitation. Thus, the extent to which a consolidated group may include a loss in its CNOL deduction for a consolidated return year depends on whether the loss arose in a SRY with respect to the group and on whether that SRY is also a SRLY.

Treas. Reg. section 1.1502-1(e) provides that a SRY is a taxable year of a corporation for which the corporation files a separate return (i.e., not as a member of a consolidated group) or for which it joins in the filing of a consolidated return by another group. Under Treas. Reg. section 1.1502-1(f), a SRY is generally treated as a SRLY. The regulations provide three exceptions to this general rule. The three exceptions are: (1) a SRY of the corporation that is the common parent for the consolidated return year to which the tax attribute is to be carried (the lonely parent rule);271 (2) a SRY of any corporation that was a member of the group for each day of such year;272 or (3) a SRY of a predecessor of any member if such predecessor was a member of the group for each day of such year.273

Generally speaking, the SRLY limitation allows the consolidated group to use a member’s loss that arose in a SRLY only to the extent that the member with the loss contributed to the group’s consolidated taxable income. For losses being absorbed in tax years beginning before January 1, 1997, the SRLY limitation was generally determined under Treas. Reg. section 1.1502-21A(c) (the “Old Regulations”). For losses being absorbed in tax years beginning on or after January 1, 1997, the SRLY limitation was generally determined under Treas. Reg. section 1.1502-21T(c) (the “Temporary Regulations”). For tax years having an unextended due date after June 25, 1999, current Treas. Reg. section 1.1502-21(c) applies to determine the SRLY limitation. The current regulations are substantially similar to the Temporary Regulations, apart from their introduction of the Overlap Rule, which is discussed in subsection (d), below.

Under the Old Regulations, the SRLY limitation for a particular year was determined solely by reference to the items generated in that year by the member carrying the loss. Thus, the SRLY limitation was determined on a year-by-year basis.

Under the current regulations, the SRLY limitation is generally determined based on the member’s items of income, gain, deduction, and loss aggregated for the years the corporation is a member of the group (i.e., the “cumulative register”).274 Thus, a positive cumulative register for a member’s contribution to consolidated taxable income allows the member’s loss to be taken into account by the group. Conversely, a negative cumulative register for a member’s contribution to consolidated taxable income prevents the member’s loss from being taken into account by the group, even if the member had income for that year.

In certain cases, the SRLY limitation is based on the contribution made to a group’s consolidated taxable income by several corporations rather than by solely the corporation with the loss carryover.275 This occurs when the multiple corporations constitute a subgroup.276 A subgroup for a loss carryback is generally composed of the corporation carrying back the loss (the loss member) and each other member of the group from which the loss is carried back that has been continuously affiliated with the loss member from the year to which the loss is carried through the year in which the loss arises.277

The importance of the SRLY limitation was reduced by the introduction in the current regulations of the Overlap Rule, which, as discussed in greater detail in subsection (d), below, has the effect of eliminating the SRLY limitation in certain cases in which both SRLY and section 382 would otherwise apply.

(c) Application of I.R.C. Section 382 to Consolidated Groups

(i) Background

The consolidated return regulations often reflect a single-entity approach to the taxation of consolidated groups. Under this approach, members of a consolidated group are treated as divisions of a single corporation. One important example of single-entity treatment is the computation of consolidated taxable income, which generally permits losses earned by one member during the period of consolidation to offset income earned by another member during such time. On June 25, 1999, the IRS issued final regulations addressing the application of I.R.C. section 382 to consolidated and controlled groups.278 Consistent with the approach adopted elsewhere in the consolidated return regulations, these regulations adopt a single-entity rule and treat a consolidated group as one entity for applying I.R.C. section 382.279

The final regulations are generally effective for testing dates after June 25, 1999. Because of the highly technical nature of the regulations, an exhaustive analysis of their content is beyond the scope of this book. The discussion below first provides an overview of the final regulations. It then summarizes and illustrates (with a series of examples) three of the fundamental provisions of the regulations: the determination of whether a consolidated group is a loss group, the determination of whether a loss group has an ownership change, and the determination of the value of the loss group following an ownership change.

(ii) Overview

Treas. Reg. sections 1.1502-90 through 99 provide the tax treatment for NOLs that arise in (and net unrealized built-in losses with respect to) years that are not SRLYs with respect to a consolidated group. In general, these rules adopt the single-entity approach to determine ownership changes and the section 382 limitation with respect to such losses.

Treas. Reg. sections 1.1502-94 and 95 apply to corporations that join or leave a consolidated group. Some of the rules depart from the single-entity approach, because the rules define the section 382 limitation for attributes that are not worthy of single-entity status (e.g., NOLs of a member that arose before the member joined the consolidated group). Other rules address how the single-entity approach “unwinds” when one or more members of a consolidated group that is subject to a section 382 limitation leave the consolidated group. Section 1.1502-96 contains some miscellaneous operating rules. Most notable are the so-called fold-in rules, addressing transactions in which a consolidated group first acquires a loss corporation in a transaction in which the loss corporation has an ownership change and in which the consolidated group subsequently has a change in ownership.

Treatment of the consolidated group as a single entity means that in determining whether the consolidated group is a “loss corporation,” the losses of all members of the consolidated group are taken into account.280 Thus, a consolidated group will be a loss group if any member has an NOL that is not a SRLY loss.281

Treatment of the consolidated group as a single entity also means that in determining whether a consolidated group has an ownership change, only shifts in ownership of the common parent are taken into account.282 Thus, a loss group has an ownership change only if the loss group’s common parent has an ownership change under I.R.C. section 382.

Finally, treatment of the consolidated group as a single entity means that the section 382 limitation is computed based on the value of the stock of the common parent, not of the separate group members.283

(d) Overlap Rule

The 1999 regulations also introduced the Overlap Rule for built-in losses, NOLs, and capital losses. If the Overlap Rule applies, it eliminates the SRLY limitation.293 If the Overlap Rule requirements are not satisfied, the loss remains subject to a SRLY limitation and an I.R.C. section 382 limitation. The Overlap Rule does not apply to carrybacks and does not apply to credits.

The Overlap Rule generally applies and eliminates the SRLY limitation with respect to a corporation’s losses if the corporation with a SRLY becomes a member of a consolidated group within six months of (i.e., either before or after) having an ownership change that gives rise to an I.R.C. section 382 limitation.294

If the Overlap Rule applies, the SRLY limitation does not apply, but for purposes of future ownership changes, attributes continue to be treated as having arisen in a SRLY.

The Overlap Rule also applies to situations in which multiple corporations join the consolidated group. In those situations, however, the Overlap Rule will apply only if the I.R.C. section 382 subgroup and the SRLY subgroup are identical in membership. This additional requirement is designed to ensure that the losses that are no longer subject to the SRLY limitation remain subject to a comparable limitation, based on the same corporations. In most situations, the membership of the two subgroups will be identical, but in limited situations, the two will differ.295 If the membership is not identical, both the SRLY limitation and the I.R.C. section 382 limitation apply to the losses.

(e) Unified Loss Rules297

Even if taxpayers can successfully implement a loss on the disposition of stock of a corporation or a worthless stock loss, some or all of the stock loss will not necessarily be allowed in a consolidated group setting. Instead, a set of consolidated return regulations in Treas. Reg. section 1.1502-36, referred to as the Unified Loss Rule (ULR) must be applied to determine whether all or part of the loss actually will be taken into account. This section of this book serves as a reminder that, before taking a loss on the stock of a member of a consolidated group into account, there is another step in the analysis and presents a high-level discussion of what that step involves.

On September 17, 2008, the IRS and Treasury Department finalized the ULR.298 The ULR is a comprehensive regime for addressing the ability of a consolidated group member to account for losses with respect to “transfers” of loss shares (i.e., shares that have an adjusted basis in excess of their value) in another member. The principal purposes of the ULR, as stated in the regulation itself, are to (1) prevent the consolidated return regulations from reducing a group’s consolidated taxable income through the creation and recognition of noneconomic loss with respect to a member’s stock (i.e., noneconomic stock loss)299 and (2) prevent members (including former members) of a group from collectively obtaining more than one tax benefit from a single economic loss (i.e., loss duplication).300

This volume provides a high-level discussion of the basic operation of the ULR. A couple of caveats are in order. First, the ULR is very complex and a comprehensive discussion of all aspects of the regulation is beyond the scope of this treatise.301 Instead, the goal of this portion of the treatise is to introduce the basic concepts and framework of the ULR, illustrated by some simple examples. Second, although the ULR is generally applicable to transfers occurring on or after September 17, 2008, tax professionals should be aware that certain former sets of loss disallowance regulations may apply to transactions that occurred prior to September 17, 2008.302

(i) Framework of the Unified Loss Rule

The ULR generally applies when a member of a consolidated group “transfers” a loss share303 in a subsidiary member on or after September 17, 2008.304 For purposes of this section, we refer to “P” as a member of a consolidated group that owns and “transfers” one or more loss shares of member “S,” a corporation with only one class of common stock outstanding. Under the ULR, a “transfer”305 of an S share occurs on the earliest of: (1) the date that P ceases to own the S share in a transaction in which (absent the ULR), P would have recognized income, gain, loss, or deduction with respect to the share (including certain nonrecognition transactions);306 (2) the date that P and S cease to be members of the same group; (3) the date that a nonmember acquires the shares from P; and (4) the relevant date for a worthless stock loss with respect to the S share.307

Three primary provisions in the ULR must be applied, sequentially, on a transfer of a loss share:

The basic operation of each of these provisions is explained next.

(ii) Basis Redetermination

The basis redetermination rule reduces the extent to which there is disparity in members’ basis in the shares of S to help prevent noneconomic loss and facilitate the elimination of duplicated loss. Thus, this rule generally applies if S has multiple classes of stock or if members hold blocks of S stock with disparate bases. If the group disposes of the entire interest in S to a nonmember in one fully taxable transaction or the S shares become worthless, this rule generally does not apply.308 When basis redetermination does apply, it has the effect of eliminating or minimizing the basis disparity among different shares without changing the aggregate basis in all shares held by members of the group (i.e., this rule attempts to level out the basis of all shares in subsidiary).309 Basis disparity is generally eliminated by reducing the basis of a transferred common loss share (but not below its FMV) by the positive investment adjustments that were previously made with respect to the loss share.310 Generally, the adjustments removed from the loss share are reallocated to the nontransferred shares in a manner that, to the greatest extent possible, reduces the disparity among members’ bases in all shares of S stock. If a transferred share is still a loss share after this adjustment, negative investment adjustments are generally reallocated to the loss share from common shares of S that are not transferred loss shares. Again, the reallocation is done in a manner to reduce disparity among members’ bases in all shares of S stock.311

(iii) Basis Reduction

If, after applying the basis redetermination rule, a transferred share is still a loss share, the basis reduction rule must be applied. This rule is aimed at preventing noneconomic losses and at promoting the clear reflection of income. This rule requires that the basis in a transferred share be reduced (but not below its FMV) by the lesser of the share’s (1) net positive adjustment and (2) disconformity amount.315 The “net positive adjustment” is the greater of (1) zero and (2) the sum of all investment adjustments reflected in the basis of the share.316 The “disconformity amount” is the excess, if any, of (1) the transferred share’s basis over (2) the share’s allocable portion of the subsidiary’s net inside attribute amount.317 For this purpose, the “net inside attribute amount” is generally the sum of the subsidiary’s money, basis in assets, NOL and capital-loss carryforwards, and deferred deductions, reduced by the subsidiary’s liabilities.318

(iv) Attribute Reduction

If, after applying the prior two rules, there is still a loss on a transferred share, no further adjustment to the basis of the loss share is required, and the group should be entitled to take the recognized loss into account (subject to the election described below). However, of particular importance to a buyer, the attribute reduction rule will apply.320 This rule may require a reduction in the subsidiary’s attributes.321 The goal of this rule is generally to prevent the group (including former members) from recognizing more than one loss with respect to a single economic loss. The transferred subsidiary’s attributes are reduced by the subsidiary’s “attribute reduction amount,” which is generally the lesser of (1) the net stock loss and (2) the subsidiary’s aggregate inside loss.322 The “net stock loss” is generally the excess, if any, of (1) the aggregate basis of the transferred shares over (2) the aggregate value of those shares.323 The “subsidiary’s aggregate inside loss” is generally the excess, if any, of (1) the subsidiary’s net inside attribute amount (defined generally in the same manner as for the basis reduction rule) over (2) the value of all of the subsidiary’s outstanding stock.324 After the attribute reduction amount is determined, the attribute reduction rule includes a series of rules that specify which attributes of the subsidiary must be reduced and in what order (e.g., capital loss carryovers, NOL carryovers, deferred deductions, and basis in assets (excluding assets described in Treas. Reg. section 1.338-6(b)(1), e.g., cash and certain cash equivalents). The attribute reduction rule also applies special rules when assets include stock in a lower-tier subsidiary.325

An election is available to the extent of the attribute reduction amount to reduce stock basis in the transferred loss shares or to reattribute certain attributes of S to P (or any combination of the two) instead of reducing the subsidiary’s inside attributes by the attribute reduction amount.326 The election can be made with respect to all or any portion of the attribute reduction amount. This election may be beneficial in certain circumstances and thus should generally be considered whenever the attribute reduction rule applies.

(v) Conclusion on Unified Loss Rule

Taxpayers should remember the ULR framework set out in this volume before taking a loss with respect to a consolidated subsidiary’s stock into account. As noted, the examples used to illustrate the ULR are general in nature. Any deviations from the facts in the examples may result in different applications of the various rules or trigger nuances of the ULR that are not addressed herein. Thus, the regulations should always be consulted.

(f) Application of I.R.C. Section 384 to Consolidated Groups

A 2004 technical advice memorandum330 deals with several section 384 issues, including consolidated returns, closing books, ordering losses, and postacquisition segregation of target expenses.

In the technical advice memorandum, the IRS applied a combined group approach when a consolidated group (the historical Acquiring group) acquires another consolidated group (the historical Target group) that qualifies as a “gain corporation” for purposes of I.R.C. section 384, to determine whether there is a loss (of the Acquiring group that includes the Target group, postacquisition) that must be allocated to the preacquisition and postacquisition period. This combined group approach entails calculating items of income, gain, loss, and deduction on a combined group basis, using the general rules for computing consolidated taxable income.

Under the combined group approach, if the taxpayer has consolidated income for the year of the acquisition, there is no loss to allocate. If, however, the taxpayer has a CNOL for the year of the acquisition that must be allocated between the preacquisition and postacquisition periods, the portion allocated to the preacquisition period cannot be used to offset recognized built-in loss. Because no other income remains, the loss must be carried forward. The portion of the loss allocated to the postacquisition period can be used to offset the recognized built-in gain to the maximum extent possible, and any remaining amount of unutilized postacquisition loss can be carried forward.

The IRS next considered how the taxpayer allocates income or loss of the historical Acquiring group. I.R.C. section 384(c)(3) states that, except as provided in regulations, an NOL shall be allocated ratably to each day in the year for purposes of determining a preacquisition loss. Unlike for I.R.C. section 382, no regulations have been issued to date providing for another allocation method. The IRS acknowledged that despite the absence of regulations, it had issued private letter rulings allowing taxpayers to close the books for I.R.C. section 384 purposes. Nevertheless, the IRS concluded that the Acquiring group must ratably allocate its income for I.R.C. section 384 purposes because of the relevant statutory language, lack of regulations, and the fact that it did not receive a private letter ruling on this issue.

The IRS’s application of the combined group approach allowed it to sidestep a decision on the allocation of preacquisition losses. The taxpayer contended that a separate approach should be used for purposes of I.R.C. section 384. Under that approach, a CNOL of the historical Acquiring group for the acquisition year must be allocated between the preacquisition and postacquisition periods of such year, and the order of the absorption of such losses should be (1) preacquisition losses offset nonrecognized built-in gain income, then (2) the postacquisition losses first offset the historical Target group’s recognized built-in gains, before offsetting any remaining nonrecognized built-in gain income. The separate approach would essentially allow maximum usage of losses for the taxpayer. As noted, the IRS disagreed with the taxpayer’s fundamental premise—namely that for I.R.C. section 384 purposes, a separate member approach should be used to determine what income or loss to ratably allocate. Under the combined group approach, any combined group loss allocated to the preacquisition period cannot be used to offset recognized built-in gains and losses allocated to the postacquisition period.

The IRS also determined that the historical Target group’s recognized built-in gains cannot be offset by the historical Target group’s operating expenses for the year in which the recognized built-in gain were recognized.

1 I.R.C. § 172(b)(1)(A). Special rules apply for real estate investment trusts (REITs), specified liability losses, excess interest losses, corporate capital losses, and casualty losses of individual taxpayers. See I.R.C. § 172(b)(1)(B), (C), (E), (F), and I.R.C. § 172(b)(1)(H).

2 I.R.C. § 172(b)(3).

3 In Rev. Proc. 2009-19, 2009-14 I.R.B. 747, the IRS provided procedures for the election to carry back applicable 2008 NOLs for the extended period.

4See Rev. Proc. 2009-52, 2009-49 I.R.B. 744 (procedures for election to carry back losses extended period); Notice 2010-58, 2010-37 I.R.B. 326 (series of questions and answers regarding the WHBAA and the ARRA elections); T.D. 9490 (final and temporary regulations for implementation of the extended carryback rules within a consolidated group). See also David Culp, Robert Liquerman, et al., New Law Provides Five-Year Carryback for 2008 or 2009 NOLs, 126 Tax Notes 467 (Jan. 25, 2010) (comprehensive discussion of WHBAA extended carryback rule and collateral issues).

5 Rev. Rul. 58-600, 1958-2 C.B. 29.

6 An unresolved issue deals with the extent to which the trustee can avoid elections that are otherwise irrevocable. For example, the Eighth Circuit held in 1991 that an irrevocable transfer under the I.R.C. constitutes a transfer for purposes of the Bankruptcy Code. The Eighth Circuit allowed the trustee to avoid a prior election that was made to carry over an NOL under I.R.C. § 172. In re Russell, 927 F.2d 413 (8th Cir. 1991). In a similar decision, a district court held that a chapter 7 bankruptcy trustee may avoid elections that are irrevocable under the I.R.C. These elections concerned the filing of consolidated federal returns and the relinquishment of the carryback period regarding NOLs the debtors incurred and deducted. In re Home American T.V.-Appliance-Audio, Inc., 193 B.R. 929 (D. Ariz. 1995).

7 The use of other means to preserve the net operating loss was limited by the Bankruptcy Tax Act of 1980. Prior to that Act, a Chapter X reorganization was granted special tax treatment under I.R.C. § 371. The basis of the old corporation carried over to the acquiring corporation, and no gain was reported for the debt discharged. The basis reduction provision that was required in bankruptcy cases not qualifying under I.R.C. § 371 did not apply. Because there was no provision in I.R.C. § 371 for the net operating loss carryover, however, it was not clear that NOLs could be carried over. The Bankruptcy Tax Act of 1980 repealed I.R.C. § 371. See Tillinghast and Gardner, Acquisitive Reorganization and Chapters X and XI of the Bankruptcy Act, 26 Tax L. Rev. 663 (1971). Transfers of property to a controlled corporation under I.R.C. § 351 were also used to preserve the net operating loss, before the Bankruptcy Tax Act of 1980.

8 I.R.C. § 334(b)(1). Under former I.R.C. § 334(b)(2), if basis was determined by reference to the cost of the subsidiary’s stock, tax attributes were not carried over. I.R.C. § 334(b)(2) was repealed by I.R.C. § 338, which was added by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). Thus, for transactions occurring after September 1, 1982, the only way to give the acquiring corporation a step-up in basis is to invoke I.R.C. § 338.

9 Treas. Reg. § 1.332-2(b). See also Commissioner v. Spaulding Bakeries Inc., 252 F.2d 693 (2d Cir. 1958); Rev. Rul. 68-359, 1968-2 C.B. 161; Rev. Rul. 59-296, 1959-2 C.B. 59, amplified by Rev. Rul. 2003-125, 2003-2 C.B. 1243; see also Rev. Rul. 70-489, 1970-2 C.B. 53, superseded by Rev. Rul. 2003-125. The inapplicability of I.R.C. § 332 will not only prevent attribute carryover but may also trigger recognition of excess loss accounts in the consolidated group context. But see Treas. Reg. § 1.1502-19(b)(2) (exception to excess loss account recognition for nonrecognition and deferral transactions). In contrast, in Norman Scott, Inc. v. Commissioner, 48 T.C. 598 (1967), the merger of an insolvent brother subsidiary into its sister subsidiary qualified as an I.R.C. § 368(a)(1)(A) reorganization, even though the brother corporation’s shareholders were creditors of the brother corporation and therefore received the merger consideration as creditors rather than as shareholders. See supra § 5.8(a)(iv).

10H. K. Porter Co. v. Commissioner, 87 T.C. 689 (1986). See also Commissioner v. Spaulding Bakeries Inc., 252 F.2d 693 (2d Cir. 1958).

11 Rev. Rul. 68-602, 1968-2 C.B. 135.

12 Rev. Rul. 59-296, 1959-2 C.B. 59, amplified by Rev. Rul. 2003-125, 2003-2 C.B. 1243. See also Rev. Rul. 70-489, 1970-2 C.B. 53, superseded by Rev. Rul. 2003-125. See also P.L.R. 9425024 (Mar. 25, 1994) (allowing deductions under I.R.C. §s 165(g)(3) and 166). But see Chief Counsel Attorney Memorandum 2011-003, 2011 TNT 168-22 (Aug. 30, 2011) (denying bad debt deduction with respect to debts of an insolvent corporation that made a check-the-box election to be treated as a partnership). The liquidation of an insolvent subsidiary may be affected by I.R.C. § 1271, which provides: “Amounts received by the holder on retirement of any debt instrument shall be considered as amounts received in exchange therefor.” On its face, I.R.C. § 1271 requires capital (as opposed to ordinary) loss treatment. Cases interpreting I.R.C. §§ 166 and 1271 (or their predecessors) suggest that an I.R.C. § 166 deduction is available to a corporate creditor (notwithstanding I.R.C. § 1271), provided the creditor charges off the bad debt before the liquidation and the charge-off was not in contemplation of the liquidation. See, e.g., Mitchell v. Commissioner, 187 F.2d 706 (2d Cir. 1951), rev’g 13 T.C. 368 (1949) (not allowing bad debt deduction if taxpayer first sold debt and then attempted to charge it off and take the deduction; allowing bad debt deduction if the charge-off preceded and was “independent of the sale”). See also Levine v. Commissioner, 31 T.C. 1121 (1959), acq. 1959-2 C.B. 5 (bad debt deduction allowed when loans written off in June 1947 were sold in September 1947); IDI Management, Inc. v. Commissioner, 36 T.C.M. (CCH) 1482 (1977) (“If partial worthlessness is factually established as happening prior to a sale or exchange, two identifiable tax events have occurred. . . . This is true even where both such events occur within the same taxable year.”); cf. Von Hoffman Corp. v. Commissioner, 253 F.2d 828 (8th Cir. 1958) (bad debt deduction not allowed when loans determined to be uncollectible were not written off, and later, sold). See also infra § 6.9(e) regarding the unified loss rule of the consolidated return regulations.

13 I.R.C. § 332(b)(1). The aggregation rules of the consolidated return regulations can be used to combine stock owned by members of a consolidated group. See Treas. Reg. § 1.1502-34. Cf. I.R.C. § 337(c) (providing that the consolidated return rules do not apply to the distributing corporation). This dichotomy was designed to prevent so-called mirror transactions. For a more complete discussion of this issue, see Bittker and Eustice, Federal Income Taxation of Corporations and Shareholders ¶ 10.22[3] (7th ed. 2002).

14 Under I.R.C. § 1504(a)(4), excluded preferred stock is (a) nonvoting, (b) limited and preferred as to dividends and does not participate in growth to a significant extent, (c) has redemption and liquidation rights that do not exceed the issue price of such stock (except for a reasonable liquidation premium), and (d) is not convertible into another class of stock.

15 Rev. Rul. 75-521, 1975-2 C.B. 120.

16 Rev. Rul. 70-106, 1970-1 C.B. 70. Cf. George L. Riggs, Inc. v. Commissioner, 64 T.C 474 (1975), acq. 1976-2 C.B. 2.

17See Granite Trust Co. v. United States, 238 F.2d 670 (1st Cir. 1956) (sale and gift recognized, allowing parent to recognize loss on liquidation); Commissioner v. Day & Zimmerman, Inc., 151 F.2d 517 (3d Cir. 1945) (sale recognized even though it was to the corporate treasurer); Field Service Advice (F.S.A.) 200148004 (July 11, 2001). But see Associated Wholesale Grocers v. United States, 927 F. 2d 1517 (10th Cir. 1991) (applying Step Transaction doctrine to impose § 332 treatment and deny loss on liquidation).

18 I.R.C. § 332(b)(2).

19 I.R.C. § 332(b)(3). See Rev. Rul. 71-326, 1971-2 C.B. 177.

20 These reorganizations are described in detail in Chapter 5.

21 Unless otherwise noted, references to G reorganizations are to acquisitive G reorganizations. Divisive G reorganizations are rare.

22 Of course, the proper characterization of the transaction can be difficult. See, e.g., 1993 F.S.A. LEXIS 93 (Jan. 15, 1993) (released in 1998) (agent originally argued transaction was an E; IRS concluded that the reorganized corporation was the same corporation that generated the NOLs and, therefore, did not restrict the use of the NOLs; IRS also advised the acquired company that the loss could not be disallowed or limited by (1) I.R.C. § 269; (2) Libson Shops Inc. v. Koehler, 353 U.S. 382 (1957); (3) I.R.C. § 382(a); or (4) the separate return limitation year rules). But see Treas. Reg. §§ 1.312-10; 1.312-11 (addressing adjustments and allocation of earnings and profits in divisive D reorganizations, certain 351 transfers, and other transactions).

23 S. Rep. No. 1622, 83d Cong., 2d Sess. 277 (1954). See Treas. Reg. § 1.381(a)-1(b)(3). The IRS presumably relied on these authorities when issuing P.L.R. 200724031 (Feb. 27, 2007). In that ruling, the IRS concluded that the status of certain assets as “the temporary investment of new capital” (as defined in I.R.C. § 856(c)(5)(D)(ii)) carried over in a merger for purposes of determining whether the acquiring corporation qualified as a real estate investment trust. See also P.L.R. 200710004 (Dec. 5, 2006) (concluding that I.R.C. § 165(g)(3) gross receipts carry over to the acquirer in an I.R.C. § 381 transaction). See also Treas. Reg. § 1.367(b)(7) (carryover of E&P and foreign taxes in certain foreign-to- foreign transactions). See generally Bittker and Eustice, Federal Income Taxation of Corporations and Shareholders (7th ed. 2002), ¶14.24.

24 Rev. Rul. 73-552, 1973-2 C.B. 116, obsoleted by Rev. Rul. 95-71, 1995-2 C.B. 323.

25See supra § 5.4(b)(iii) (discussion of liquidation requirement in a C reorganization).

26 Treas. Reg. § 1.381(b)-1(b)(2).

27 Treas. Reg. § 1.381(b)-1(b)(3).

28 Treas. Reg. § 1.381(c)(1)-1(e)(3).

29 I.R.C. § 381(b)(3). Such a carryback was allowed in Bercy Industries v. Commissioner, 640 F.2d 1058 (9th Cir. 1981), but this decision has been criticized by commentators. See, e.g., Brown, Berkowitz, and Lynch, Three Tests Must Be Met before an Acquired Corporation’s NOL Can Be Deducted, 31 Tax’n for Acct. 286, at 287 (1983).

30 Prior to the Bankruptcy Tax Act of 1980, I.R.C. § 351 could be used to give such trade creditors tax-free treatment. This option was eliminated by the 1980 Act. I.R.C. § 351(e)(2).

31Camp Wolter Enterprises v. Commissioner, 22 T.C. 737, 751 (1954), aff’d, 230 F.2d 555 (5th Cir. 1956).

32 Rev. Rul. 59-98, 1959-1 C.B. 76.

33Helvering v. Watts, 296 U.S. 387 (1935).

34Commissioner v. Freund, 98 F.2d 201 (3d Cir. 1938).

35Burnham v. Commissioner, 86 F.2d 776 (7th Cir. 1936).

36Pacific Public Service Co. v. Commissioner, 154 F.2d 713 (9th Cir. 1946) (unsecured demand notes); Neville Coke & Chemical Co. v. Commissioner, 148 F.2d 599 (3d Cir. 1945) (3, 4, and 5 years); L. & E. Stirn, Inc. v. Commissioner, 107 F.2d 390 (2d Cir. 1939) (2½ years); Cortland Specialty Co. v. Commissioner, 60 F.2d 937 (2d Cir. 1932) (14 months).

37 I.R.C. § 382(k)(2) defines “old loss corporation” as any corporation that was a loss corporation before an “ownership change.”

38See, e.g., W.T. Grant Co. v. Duggan, 94 F.2d 859 (2d Cir. 1938); Hazeltine Corp. v. Commissioner, 89 F.2d 513 (3d Cir. 1937). See also T.A.M. 200513027 (Dec. 22, 2004) (to determine the value of a loss corporation, the appropriate methodology is market capitalization on the change date, taking into account exceptional circumstances in the market, if any).

39 517 F.2d 75 (3d Cir. 1975).

40 44 T.C. 745 (1965).

41 (Apr. 30, 1993).

42 In T.A.M. 200513027 (Dec. 22, 2004), the IRS addressed the valuation of a publicly traded loss corporation within the meaning of I.R.C. § 382. When a loss corporation experiences a § 382 ownership change, it must determine, in accordance with I.R.C. § 382(e), its FMV on that date (the “Valuation Date”). The memorandum provided that under established case law, the preferred method for valuing a publicly traded loss corporation is the market capitalization approach (MCA). The MCA is the multiplication of the loss corporation’s outstanding shares just prior to a § 382 ownership change by the FMV of its stock. The FMV of the loss corporation’s stock is “the mean between the highest and lowest selling prices on the Valuation Date.” The technical advice memorandum further discussed certain “exceptional circumstances” in which adjustments to, and deviation from, the MCA may be appropriate. Generally, the FMV of the loss corporation’s stock on the Valuation Date may be adjusted for “unusual conditions in the market or to reflect discounts or premiums that are warranted by the circumstances.” Examples of “unusual conditions” include, but are not limited to: (a) a loss corporation issuing a large block, or several small blocks, of stock to the general public (this may result in temporary depression of the FMV); (b) an acquirer of the loss corporation stock being forced or coerced to acquire the stock; (c) the initial sale of newly issued stock to the general public; (d) the sale of the loss corporation’s stock to a restricted market; or (e) an acquisition of 100 percent of a loss corporation when the true value of the loss corporation may be difficult to determine because of a “control premium.”

43Amerada, 517 F.2d at 83.

44Moore-McCormack, 44 T.C. at 759-60.

45 H.R. Rep. No. 841, 99th Cong., 2d Sess., at II-187 (1986).

46Id.

47See infra § 6.4(e)(vii).

48 I.R.C. § 382(f).

49 Rev. Rul. 2011-2, 2011-2 I.R.B. 256.

50 I.R.C. § 382(b)(3)(A).

51 Notice 87-79, 1987-2 C.B. 387; Treas. Reg. §1.382-6(a), (b)(1). After the issuance of Notice 87-79, but prior to the issuance of proposed and final regulations, a number of private letter rulings allowed a closing of the books and an allocation of income to the prechange portion of the year. See, e.g., P.L.R. 9229020 (Apr. 20, 1992); P.L.R. 8901055 (Oct. 14, 1988). To receive such a ruling, the taxpayer represented the following:

The taxpayer would file the information statement required by Treas. Reg. § 1.382-11, stating that the election is being made to allocate losses before and after the change date, based on an actual closing of the books of the taxpayer and each member of its affiliated group.

The taxpayer and members of its affiliated group did not accelerate income to the prechange period or defer loss to the postchange period for purposes of avoiding the application of the I.R.C. § 382(b) limitation.

All corporations within the taxpayer’s affiliated group would be treated consistently for purposes of allocating income and loss under I.R.C. § 382(b)(3). All companies within the taxpayer’s affiliated group would close their books as of the change date and elect out of ratable allocation.

52 Treas. Reg. §1.382-6; T.D. 8546, 59 Fed. Reg. 32078 (June 22, 1994).

53 Treas. Reg. §1.382-6(b)(2). The election is made no later than the due date of the loss corporation’s income tax return for the change year, unless the IRS grants an extension. See, e.g., P.L.R. 200125056 (Mar. 14, 2001); P.L.R. 9817012 (Jan. 15, 1998); P.L.Rs. 200837017 through 200837021 (Sept. 12, 2008) (each granting an extension to file closing-of-the-books election under Treas. Reg. § 1.382-6(b)).

54 Treas. Reg. §1.382-6(c)(1)(ii)(A).

55 Treas. Reg. §1.382-6(c)(1)(ii)(B).

56 I.R.C. § 382(b)(3)(A).

57 I.R.C. § 382(g), (k). A loss corporation is entitled to rely on the presence or absence of Securities and Exchange Commission (SEC) filings (e.g., Schedules 13D, 13G) to determine the existence of 5 percent shareholders, unless the loss corporation has contrary actual knowledge regarding the ownership of the stock. Treas. Reg. § 1.382-2T(k). See also P.L.R.s 9533024 (May 19, 1995) and 9610012 (Dec. 5, 1995). The following private letter rulings address concepts of economic ownership, treatment of shares held by investment advisors, and ability to rely on SEC Schedules 13D and 13G to identify persons who own five percent or more of the loss corporation’s stock: P.L.R. 200902007 (Oct. 7, 2008); P.L.R. 200822013 (Feb. 12, 2008); P.L.R. 200818020 (Jan. 29, 2008); P.L.R. 200806008 (Nov. 7, 2007); P.L.R. 201024037 (March 11, 2010).

58 I.R.C. § 382(i)(3). Special rules apply for corporations with built-in losses. See also Treas. Reg. § 1.382-2T(d).

59 I.R.C. § 382(g)(4)(A).

60 In Garber Industries, Inc. v. Commissioner, 435 F.3d 555 (5th Cir. 2006), the court held that two brothers, Kenneth and Charles Garber, could not aggregate their shares when applying the limited description of “family” under I.R.C. § 382. For I.R.C. § 382 purposes, family is defined in accordance with I.R.C. § 318 to include spouse, parents, children, and grandchildren. This narrow definition of family limits aggregation. The aggregation of a family’s shares allows actual shifts in ownership of an entity’s shares among a family to occur without affecting the entity’s cumulative § 382 owner shift percentage. In this case, however, when Kenneth sold his interest in Garber Industries to Charles, a greater-than-50-percent shift in ownership occurred, without the aggregation of the brother’s shares; thus, Garber Industries incurred a § 382 ownership change. The dicta of the case stated that if Kenneth and Charles’s parents had been shareholders of the loss corporation, then a “family,” for § 382 purposes, could have been established. Contrary to the ruling in the Garber Industries case, it appears in P.L.R. 9630017 (Apr. 26, 1996) that the IRS ruled that brothers could aggregate their shares when determining a § 382 ownership change. However, the facts are unclear if the brothers’ parents were shareholders of the loss corporation. Generally, the aggregation of a loss corporation’s shares among family members for I.R.C. § 382 purposes would not include solely brothers. This leads to the following questions:

1. Would the IRS build a “family” around a parent that did not directly own any shares in the loss corporation?

2. Would the IRS build a “family” around a parent that was deceased?

3. Or would the IRS continue to rule as it did in Garber Industries under a similar set of facts?

61 I.R.C. § 382(k)(6); Treas. Reg. § 1.382-2(a)(3)(i). Percentages of stock for this purpose are determined by value and all shares of a given class of stock are presumed to have an equal value. See also P.L.R. 200935011 (Aug. 28, 2009) (discussing whether the terms of a class of convertible preferred stock would fail the requirement of I.R.C. §1504(a)(4) and as a result not meet the requirement of Treas. Reg. §1.382-2(a)(3)).

62 I.R.C. § 382(e)(1).

63 Treas. Reg. § 1.382-2T(f)(18). See also F.S.A. 199910009 (Dec. 2, 1998) (regarding whether debt should be treated as stock, and whether stock should be treated as not being stock in determining an ownership change under I.R.C. § 382). See also § 6.4(e)(v), (vi), (vii), (viii) for rules that deem options to be exercised (and thus treated as stock) for purposes of I.R.C. § 382.

64 Treas. Reg. § 1.382-3(a)(1)(iii)(examples). In P.L.R. 200605003 (Oct. 28, 2005), the IRS determined that a group of investment funds with a common manager, which in the aggregate held greater than a 5 percent interest in a loss corporation, was not considered a 5 percent shareholder within the meaning of Treas. Reg. § 1.382-3(a)(1). Generally, for I.R.C. § 382 purposes, a group of persons, or entities, invested in a loss corporation that have “a formal or informal understanding among themselves” is treated as a 5 percent shareholder under the regulations. In this situation, each fund individually did have the same investment objectives, as directed by the common manager. However, the objectives of the funds did not include either acquiring a minimum ownership percentage of the loss corporation or acquiring the loss corporation’s stock for the purpose of changing or influencing control of the company. Therefore, the IRS ruled that the funds would not be treated as an entity within the meaning of Treas. Reg. § 1.382-3(a)(1).

In P.L.R. 200713015 (Dec. 20, 2006), the IRS ruled that an individual or entity that has the right to the dividends and the right to the proceeds from the sale of stock (“Economic Ownership”) is the owner of the stock for purposes of § 382 (“Economic Owner”). In the ruling, two entities had the power on behalf of their

clients to vote and/or dispose of company common stock (“Reporting Ownership”) but did not have Economic Ownership of the stock. Therefore, for § 382 purposes, the IRS ruled that neither entity was the owner of any share of company common stock if that stock did not have the right to dividends or the proceeds of sale. The IRS also noted that unless the loss corporation has actual knowledge to the contrary, it can rely on the existence or absence of Schedule 13D or 13G to identify all persons who directly own 5 percent or more of company common stock. See Treas. Reg. § 1.382-2T(k)(1)(i); P.L.R. 200902007 (Oct. 7, 2008); P.L.R. 200822013 (Feb. 12, 2008); P.L.R. 200818020 (Jan. 29, 2008); P.L.R. 200806008 (Nov. 7, 2007).

The following private letter rulings allow taxpayers to rely on SEC Schedules 13D and 13G to identify whether shareholders should be treated as a group that constitutes an entity, absent actual contrary knowledge:

P.L.R. 200902007 (Oct. 7, 2008); P.L.R. 200843011 (July 9, 2008): P.L.R. 200822013 (Feb. 12, 2008); P.L.R. 200818020 (Jan. 29, 2008); P.L.R. 200806008 (Nov. 7, 2007).

65 See, e.g., P.L.R.s 9725039 (Mar. 26, 1997), 9533024 (May 19, 1995), and 9407025 (Nov. 22, 1993).

66 I.R.C. § 382(k)(7).

67 Temp. Treas. Reg. § 1.382-2T(g)(5).

68 Temp. Treas. Reg. § 1.382-2T(k)(2).

69 Temp. Treas. Reg. § 1.382-2T(a)(2)(i).

70 2010-27 I.R.B. 12.

71 This methodology was described in Mark R. Hoffenberg, Owner Shifts and Fluctuations in Value: A Theory of Relativity, 106 Tax Notes 1446 (Mar. 21, 2005).

72 See P.L.R. 201027030 (March 29, 2010); P.L.R. 201015003 (Oct. 26, 2009); P.L.R. 201010009 (Dec. 4, 2009); P.L.R. 200622011 (Feb. 2, 2006); P.L.R. 200520011 (Feb. 18, 2005); P.L.R. 200511008 (Mar. 18, 2005); P.L.R. 200411012 (Dec. 15, 2003).

73 I.R.C. § 382(l)(3)(B). See also I.R.C. § 382(l)(3)(C), which permits taxpayers to disregard changes in proportionate ownership attributable solely to fluctuations in the relative value of different classes of stock. See also P.L.R. 200411012 (Dec. 5, 2003) (interpreting I.R.C. § 382(l)(3)(C)).

74 See P.L.R. 8949040 (Sept. 11, 1989).

75 I.R.C. § 382(k)(6)(A).

76 Textron, Inc. v. United States, 561 F.2d 1023 (1st Cir. 1977).

77 The shareholder’s stock will be treated as having become worthless if the shareholder takes a worthless stock deduction. In the consolidated group setting, Treas. Reg. § 1.1502-80(c) provides that the stock of a group member is not treated as worthless under I.R.C. § 165 until immediately before the earlier of the time when (1) the subsidiary ceases to be a member of the consolidated group for any reason or (2) the stock is “worthless” (within the meaning of Treas. Reg. § 1.1502-19(c)(1)(iii)).

78 I.R.C. § 382(g)(3)(A) (either a D/355 or a D/355).

79 I.R.C. § 382(g)(1).

80 See P.L.R. 9028065 (Apr. 13, 1990) (determination of which entity undergoes an ownership change in the merger of two mutual banking organizations is made by comparing the deposit base of each entity).

81 P.L.R. 200713015 (Dec. 20, 2006); see also P.L.R. 200934002 (May 19, 2009).

82 This section is drawn from Alla Kashlinskaya and Robert Liquerman, New York University Annual Institute on Federal Taxation, Proceedings of the Sixty-Eighth Institute on Federal Taxation—2010, Chapter 4, § 382.

83 Stock for this purpose includes “plain vanilla preferred stock” described in I.R.C. § 1504(a)(4).

84 For this purpose, a “more-than-50-percent interest” is (1) stock of the loss corporation representing more than 50 percent of the total value of shares of all classes of stock (excluding preferred stock described in I.R.C. § 1504(a)(4)) or more than 50 percent of the total combined voting power of all classes of stock entitled to vote, or (2) an option to acquire such stock.

85 I.R.C. § 382(h).

86 Senator Chuck Grassley’s letter to The Honorable Eric M. Thorson, Inspector General, U.S. Department of Treasury, dated Nov. 14, 2008. A copy of the letter can be found online at http://grassley.senate.gov/news/Article.cfm?customel_dataPageID_1502=18109.

87 Rules A, B, C, most of Rule D as well as Rules F and G closely follow Rules in Notice 2009-38.

88 This used to be Rule E in Notice 2009-38.

89 It appears that Date 2 may not constitute an I.R.C. § 382 testing date if the only event that occurred was a redemption of Treasury shares (i.e., if C, a 5 percent shareholder, did not also sell a share). Rule D provides that “for purposes of measuring shifts in ownership by any 5-percent shareholder on any testing date occurring on or after the date on which an issuing corporation redeems stock held by Treasury . . . , the stock so redeemed shall be treated as if it had never been outstanding.” The “testing date” is a date when one needs to measure whether an ownership change has occurred. A loss corporation is required to determine whether an ownership change has occurred after any owner shift. (Treas. Reg. § 1.382-2(a)(4)). “Owner shift” is “any change in the ownership of the stock . . . that affects the percentage of such stock owned by any 5% shareholder.” (Treas. Reg. § 1.382-2T(e)(1)).

90 We do not address here whether the redemption of shares held by Treasury or, in this case, the additional sale by Treasury to public does or does not create a testing date.

91 For a proposal by the Institute of International Bankers on the extension of the application of Notice 2008-100, see Bankers List Transactions They Would Like Covered Under Proposed Economic Stabilization Relief, 2008 TNT 233-5 (Dec. 3, 2008).

92 Certain related persons are treated as a single person for purposes of § 382(n).

93 See § 6.4(e)(v), below.

94 See Treas. Reg. § 1.382-2T(j)(2).

95 57 Fed. Reg. 52738 (Nov. 5, 1992).

96 57 Fed. Reg. 52743 (Nov. 5, 1992).

97 T.D. 8490, 58 Fed. Reg. 51571 (Oct. 4, 1993).

98 T.D. 8531, 59 Fed. Reg. 12832 (Mar. 18, 1994).

99 There is an exception to this general effective date for the control test. The control test generally will not apply to options issued on or before March 17, 1994, or within 60 days after that date, pursuant to a plan in existence before that date.

100 Old Temp. Treas. Reg. § 1.382-2T(j)(2)(iii)(B).

101 Treas. Reg. § 1.382-3(j)(3). A direct public group is a public group that owns shares in a loss corporation directly (or indirectly through an entity that generally owns less than 5 percent of the loss corporation) rather than through an entity. Subsequent examples assume public groups are direct public groups. See Treas. Reg. §§ 1.382-2T(j)(2)(ii), -2T(j)(1)(iv)(C).

102 Treas. Reg. § 1.382-3(j)(2). The small issuance exception does not apply to issuances pursuant to an “equity structure shift.” I.R.C. § 382(g)(3)(A) defines an equity structure shift by excluding D-355, G-355, and F reorganizations, and Treas. Reg. § 1.382-3(j)(6) excludes E reorganizations from the definition. Thus, only acquisitive reorganizations (A, B, C, and D/G-354s) are excluded from the small issuance exception.

103 Treas. Reg. § 1.382-3(j)(5)(ii).

104 See Treas. Reg. § 1.382-3(j)(4).

105 Treas. Reg. § 1.382-3(j)(13), Example 3.

106 Treas. Reg. § 1.382-3(j)(13), Example 4.

107 Treas. Reg. § 1.382-3(j)(10).

108 Id.

109 Treas. § 1.382-2T(e)(1)(ii).

110 Treas. Reg. § 1.382-3(j)(3)(i).

111 2010-27 I.R.B. 10.

112 Old Temp. Treas. Reg. § 1.382-2T(h)(4).

113 See P.L.R. 8847067 (Aug. 29, 1988); P.L.R. 8903043 (Oct. 14, 1988). But see P.L.R. 9211028 (Dec. 13, 1991) (option created on date of tender offer).

114 See P.L.R. 8917007 (Jan. 6, 1989).

115 Notice 88-67, 1988-1 C.B. 555.

116 Old Temp. Treas. Reg. § 1.382-2T(h)(4)(x)(Z).

117 See I.R.S. Notice 88-7, 1988-1 C.B. 476.

118 Old Temp. Treas. Reg. § 1.382-2T(h)(4)(B).

119 See P.L.R. 8917007 (Jan. 6, 1989).

120 See P.L.R. 8930034 (May 1, 1989).

121 Former Prop. Treas. Reg. § 1.382-4(d)(2)(i) (emphasis added).

122 343 F.2d 713 (9th Cir. 1965).

123 As in the old temporary regulations, preferred stock that meets all the requirements of I.R.C. § 1504(a)(4) will be considered neither stock nor an option.

124 The final regulations are generally effective for testing dates on or after November 5, 1992. Other special effective date rules also apply. See Treas. Reg. § 1.383-4(h).

125 T.D. 8531, 59 Fed. Reg. 12832 (Mar. 18, 1994) (Preamble, Part C).

126 See F.S.A. 199910009 (Dec. 2, 1999) for an application of the option rules under the temporary and final option regulations of I.R.C. § 382.

127 A principal purpose may exist even when it is outweighed by nontax reasons.

128 Treas. Reg. § 1.382-4(d)(3).

129 The preamble to T.D. 8531 states: “The ability of the holder of an option with a fixed exercise price to share in future appreciation of the underlying stock is also a relevant factor, but is not sufficient, by itself, for the option to be treated as exercised.” T.D. 8531, 59 Fed. Reg. 12832 (Mar. 18, 1994) (Preamble, Part C).

130 See Rev., Rul. 82-150, 1982-2 C.B. 110.

131 Treas. Reg. § 1.382-4(d)(4). The final regulations treat convertible stock as stock and provide special rules regarding the treatment of certain convertible stock as an option. Treas. Reg. §§ 1.382-2(a)(3)(ii); 1.382-4(d)(9)(ii).

132 Compare T.D. 8531, 59 Fed. Reg. 12832 (Mar. 18, 1994) (Preamble, Part A, penultimate paragraph), “the control test will apply to a contingent option to acquire more than 50 percent of the stock of a loss corporation even though the option holder has no other relationship to the corporation . . . [providing a prohibited principal purpose exists],” with Treas. Reg. § 1.382-4(d)(6)(iii), “in applying the control test [consider] the economic interests in the loss corporation of the option holder or related persons and the influence of those persons over the management of the loss corporation.”

133 Treas. Reg. § 1.382-4(d)(5).

134 Treas. Reg. § 1.382-4(d)(7).

135 Although contracts to acquire stock within one year are a safe harbor exclusion from the ownership test and the control test, they are not excluded from the income test. Apparently, the payment to the loss corporation of money or property (pursuant to entering into a contract to purchase stock) can be used to accelerate income, and the final regulations police this potential “abuse.”

136 Treas. Reg. § 1.382-4(d)(10).

137 I.R.C. § 382(c).

138 I.R.C. § 382(l)(4).

139 I.R.C. § 382(l)(1).

140 I.R.C. § 382(e)(2).

141 H.R. Rep. No. 841, 99th Cong., 2d Sess., at II-189 (1986).

142 I.R.C. § 382(l)(4)(E).

143 To date, no such regulations have been issued. The I.R.S. has, however, issued a number of private letter rulings in which taxpayers have been allowed to rebut the presumption. See, e.g., P.L.R. 9835027 (May 29, 1998); P.L.R. 9706014 (Nov. 13, 1996); P.L.R. 9541019 (July 10, 1995); P.L.R. 200730003 (July 27, 2007); P.L.R. 9706014 (Feb. 7, 1997); P.L.R. 9630038 (July 26, 1996); P.L.R. 9508035 (Feb. 24, 1995); T.A.M. 9332004 (Aug. 13, 1993). And more recently, see P.L.R. 200814004 (January 2, 2008), in which the IRS did not require an I.R.C. § 382(l)(1) value reduction for loans that were converted into equity or the forgiveness of the remainder of outstanding debt that occurred in a bankruptcy reorganization with regard to a merger that occurred “ff months” after the bankruptcy reorganization that resulted in an ownership change. The bankruptcy reorganization did not result in an ownership change, and the merger (which presumably occurred within two years of the effective date of the bankruptcy reorganization) did result in an ownership change.

See also P.L.R. 200952012 (Dec. 24, 2009). Taxpayer contributed cash to an unrelated Target corporation in exchange for convertible preferred stock. Within two years of such contribution, Target merged into a subsidiary of the taxpayer. The IRS concluded that the contribution should not be excluded under I.R.C. §382(l)(1). In light of these rulings and consistent with some examples in the legislative history, some contributions to capital within two years of an ownership change should be respected.

144 I.R.C. § 382(l)(1)(B).

145 H.R. Rep. No. 841, 99th Cong., 2d Sess., at II-189 (1986).

146 I.R.C. § 382(e)(2). A redemption for this purpose includes a deemed redemption of the sort described in Rev. Rul. 78-250, 1978-1 C.B. 83. See also P.L.R. 200406027 (Oct. 10, 2003) (various transactions not treated as corporate contractions and value not reduced).

147 Description of the Technical Corrections Act of 1987 (H.R. 2636 and S. 1350), Joint Comm. Print at 32 (June 15, 1987).

148 104 T.C. 584 (1995), aff’d, 98-1 U.S. Tax Cas. (CCH) ¶ 50,398 (9th Cir. 1998) (unpublished opinion).

149 Compare United States v. Kroy (Europe) Ltd., 27 F.3d 367 (9th Cir. 1994), with Fort Howard Corp. v. Commissioner, 103 T.C. 345 (1994), modified, 107 T.C. 187 (1996).

150 103 T.C. 345 (1994), modified, 107 T.C. 187 (1996).

151 See Berry, 104 T.C. 584, 651 n. 50.

152 See Treas. Reg. § 1.382-9(m).

153 See Treas. Reg. §§ 1.382-9(k)(2); 1.382-9(l)(2).

154 See Treas. Reg. §§ 1.382-9(k)(5); 1.382-9(l)(5). The stock value test and the asset value test are discussed in § 6.4(g)(iii)(B).

155 See P.L.R. 200949014 (Aug. 21, 2009) (IRS provides 9100 relief to elect to restore value when election not timely made).

156 Treas. Reg. § 1.382-8(f).

157 The transaction resulting in an ownership change must either be ordered by a court or occur pursuant to a plan approved by a court. Treas. Reg. § 1.382-9(a).

158 Note that the bankrupt corporation still undergoes an ownership change. Therefore, if a “net unrealized built-in loss” exists as of the change date, an adjustment for computing adjusted current earnings will still be made under I.R.C. § 56(g)(4)(G) for determining alternative minimum taxable income.

159 Treas. Reg. § 1.382-9(o). The solicitation and the confirmation of a bankruptcy plan that provides for the issuance of stock in cancellation of debt are generally treated as options. Treas. Reg. § 1.382-9(o) requires a taxpayer, in a chapter 11 or similar case, to omit the application of the option attribution rules of Treas. Reg. § 1.382-2T(h)(4)(i) and the exercised option rules under Treas. Reg. § 1.382-4(d) as a result of (1) the solicitation or receipt of acceptances under the plan, (2) confirmation of the plan, or (3) any option created under the plan. Consequently, the omission of these rules often results in an ownership change on the effective date of a bankruptcy reorganization plan.

In P.L.R. 200720012 (May 18, 2007), the IRS ruled that an ownership change occurred on the confirmation date of the taxpayer’s bankruptcy reorganization plan. The reorganization plan provided for the issuance of new stock to prior creditors of the taxpayer. It appears that the IRS treated the issuance of new stock to creditors as an option deemed exercised on the confirmation date. This ruling was inconsistent with the rules of Treas. Reg. § 1.382-9(o). Several months later, the IRS modified this ruling (see P.L.R. 200748015, Nov. 30, 2007) and ruled the ownership change occurred on the effective date of the taxpayer’s bankruptcy reorganization plan, thus conforming the letter ruling to Treas. Reg. § 1.382-9(o).

160 See P.L.R. 9619051 (Feb. 8, 1996) (for purposes of determining whether I.R.C. § 382(l)(5) applies, stock transferred to a trust for the benefit of present and future claimants will be treated as transferred to and held by those claimants on the date the stock is transferred to the trust). See also CCA 200915033 (Apr. 10, 2009), in which the IRS applied the Economic Substance and Step Transaction doctrines to assert that the taxpayer failed the “50 percent test.”

161Treas. Reg. § 1.382-9(e).

162 Treas. Reg. § 1.382-9(e)(2)(ii).

163 See Treas. Reg. § 1.382-9(d). See P.L.R. 200818020 (Jan. 29, 2008) for application of Treas. Reg. § 1.382-9(d).

164 Treas. Reg. § 1.382-9(d)(1).

165 Treas. Reg. § 1.382-9(d)(2).

166 Treas. Reg. § 1.382-9(d)(4).

167 Treas. Reg. § 1.382-9(d)(3).

168 See P.L.R. 8902047 (Oct. 28, 1988).

169 Prior to the Omnibus Reconciliation Act of 1993, which repealed the stock-for-debt exception of I.R.C. § 108(e)(10), prechange losses were reduced by 50 percent of any attribute reduction that would have been required under I.R.C. § 108, if the stock-for-debt exception of § 108(e)(10)(B) had not applied. Old I.R.C. § 382(l)(5)(C). For a discussion of the stock-for-debt exception, see § 2.4(c) of this volume.

170 I.R.C. § 382(l)(5)(B).

171 I.R.C. § 382(l)(5)(D).

172 Cf. Rev. Rul. 92-52, 1992-2 C.B. 34. Alternatively, the proper view could be that only 50 percent of the debt was converted into stock, because only 50 percent of the consideration was stock, and only interest on 50 percent of the debt would reduce the net operating loss.

173 P.L.R. 200751011 (Dec. 21, 2007).

174 Treas. Reg. §1.382-9(i) provides that an election not to apply §382(l)(5) “is irrevocable and must be made by the due date (including any extensions of time) of the loss corporation’s tax return for the taxable year which includes the change date.” However, in P.L.R. 201003008 (Oct. 15, 2009), the IRS granted I.R.C. § 9100 relief to permit a loss corporation to make an election under Treas. Reg. § 1.382-9(i) to not apply I.R.C. § 382(l)(5) to an ownership change.

175 May 2, 2007.

176 I.R.C. § 382(c).

177 Treas. Reg. § 1.382-9(m)(1). But see Treas. Reg. § 1.269-3(d).

178 Treas. Reg. § 1.382-9(i).

179 Treas. Reg. § 1.382-9(j)-(l).

180 Treas. Reg. § 1.382-9(k). The regulations provide that in determining the value of the stock for this purpose, “stock” will include stock described in I.R.C. § 1504(a)(4) and stock not treated as stock under Treas. Reg. § 1.382-2T(f)(18)(ii) but will not include ownership interests treated as stock under Treas. Reg. § 1.382-2T(f)(18)(iii). This latter rule is contrary to the basic I.R.C. § 382 valuation rule, which includes in the stock value computation ownership interests treated as stock. These stock-treated-as-nonstock and nonstock-treated-as-stock rules formed the basis of a 1993 IRS objection to a liquidating bankruptcy plan in a case involving Integrated Resources, Inc. According to the IRS, the plan, as originally proposed, would have resulted in an ownership change even though no new stock would be issued. Following the IRS objection, the plan was withdrawn.

181 Treas. Reg. § 1.382-9(m)(2). But see Treas. Reg. § 1.269-3(d).

182 Sniderman, How to Preserve Net Operating Loss (mimeographed) (Deloitte Touche, Pittsburgh, 1990) at 9–10. If there is an ownership change and the special bankruptcy rule of I.R.C. § 382(l)(5) applies, the continuity of business requirement is not applicable. Treas. Reg. § 1.382-9(m). In the absence of strong evidence to the contrary, however, an ownership change in bankruptcy to which I.R.C. § 382(l)(5) applies is considered to be made for tax avoidance under I.R.C. § 269, unless the bankrupt corporation “carries on more than an insignificant amount of an active trade or business during and subsequent to the title 11 case.” Treas. Reg. § 1.269-3(d). A temporary cessation of activities can be overcome (and the above standard met) if the corporation continues to utilize a “significant amount of the historic business assets.” Also, the decision regarding “more than an insignificant amount of an active business” is made without regard to continuity of business enterprise under Treas. Reg. § 1.368-1(d).

183 I.R.C. § 382(d).

184 I.R.C. § 382(h)(4). See also CCA 200926027 (June 26, 2009). But see P.L.R. 200442011 (Oct. 15, 2004), which seems to imply that there are instances in which I.R.C. §382(h)(4) is not applicable to certain losses.

185 See discussion infra § 6.4(h)(ii) regarding I.R.C. § 382(h)(6) and Notice 2003-65. See supra§ 6.4(d)(vii) for a discussion of Notice 2008-83 addressing built-in rules with regard to losses on loans or bad debts to banks and its subsequent statutory repeal.

186 See I.R.C. § 382(h)(3)(B).

187 I.R.C. § 382(h)(3)(A)(ii).

188 I.R.C. § 382(h)(8).

189 Tax Reform Act of 1986, Pub. L. No. 99-514, § 621, 100 Stat. 2085, 2259, 99th Cong., 2d Sess. (1986).

190 Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647, § 1006(d), 102 Stat. 3395, 100th Cong (1988).

191 Id.

192 H. Rep. No. 841, 99th Cong., 2d Sess., at II-191 (1986).

193 H. Rep. No. 795, 100th Cong., 2d Sess., at 46 (1988).

194 2003-2 C.B. 747.

195 July 6, 1999.

196 Rev. Proc. 71-21, 1971-2 C.B. 549.

197 Aug. 5, 1994.

198 1987-2 C.B. 387.

199 Dec. 19, 1992. See also P.L.R. 9616027 (Jan. 19, 1996); P.L.R. 9444035 (Aug. 5, 1994).

200 Taxpayers that otherwise follow the 1374 approach may apply Notice 87-79, 1987-2 C.B. 387, for ownership changes before September 12, 2003. There is also a parallel rule for treating a bad debt deduction under § 166 as recognized built-in loss if the deduction arises from a debt owed to the loss corporation at the beginning of recognition period.

201 As with the § 1374 approach, taxpayers that otherwise follow the § 338 approach may apply Notice 87-79, 1987-2 C.B. 387 (rather than the rules of the 338 approach) to DOI income for ownership changes before September 12, 2003.

202 T.D. 9487, Treas. Reg. § 1.38207.

203 See, for example, I.R.C. § 455 (prepaid subscriptions) and Rev. Proc. 2004-34 (containing examples of other prepaid income).

204 July 6, 1999.

205 This analysis was first published in Liquerman and Jandt, Ownership change Date Issues: What a Difference a Day Makes, 122 Tax Notes 1584 (Mar. 30, 2009).

206 Treas. Reg. § 1.382-6(b).

207 If an affirmative closing-of-the-books election is not made, the general rule is that such items are ratably allocated to the prechange period and postchange period in the change year with certain exceptions. I.R.C. § 382(h)(3); Treas. Reg. §1.382-6(a).

208 I.R.C. § 382(h)(7)(A).

209 I.R.C. § 382(h)(2).

210 I.R.C. § 382(h)(6).

211 Similarly, the deduction could either increase a NUBIL or take a company out of a NUBIG and potentially put it in a NUBIL position. If this application puts the taxpayer into a NUBIL position, at least part of the deduction could arguably not be allocated to the prechange period. See I.R.C. § 382)(h)(5)(A); Treas. Reg. § 1.382(6)(c)(1)(ii).

212 Oct. 15, 2004.

213 In this ruling, the taxpayer and its subsidiaries disaffiliated from their old consolidated group on the change date and the IRS concluded under Treas. Reg. § 1502.76(b)(1)(ii) that the particular deductions related to funding the trust should be included in the consolidated group return of the old group. The IRS’s conclusion to allocate the deductions to the prechange period may have been influenced by the disaffiliation.

Because the change date occurred on the last day of the loss corporation’s taxable year, the private letter ruling did not address whether the taxpayer made a closing-of-the-books election.

214 Dec. 21, 2007.

215 I.R.C. § 382(h)(1).

216 It was the personal view of an IRS official on a panel at the Federal Bar Association Tax Law Conference on March 6, 2009, that the same analysis would be appropriate regardless of the taxpayer’s NUBIL/NUBIG position.

217 T.D. 8352, 1991-2 C.B. 67.

218 See Treas. Reg. § 1.383-1(c)(6)(ii), examples.

219 See Treas. Reg. § 1.383-1(e)(3), (e)(4), and (f), examples.

220 I.R.C. § 384 as enacted by Pub. L. No. 100-203, § 10226, is generally effective for transactions with acquisition dates after December 15, 1987.

221 I.R.C. § 384(c)(1)(A).

222 I.R.C. § 384(c)(8).

223 I.R.C. § 384(d).

224 I.R.C. § 384(f).

225 I.R.C. § 384(a)(1).

226 I.R.C. §§ 384(c)(5), 1504(a)(2). Certain preferred stock is excluded in making this determination. I.R.C. 1504(a)(4).

227 I.R.C. § 384(b).

228 Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647, § 2004(m)(1)(B), 102 Stat. 3606, 100th Cong., 2d Sess. (1988) (adding I.R.C. § 384(c)(7)).

229 I.R.C. § 384(c)(1).

230 I.R.C. § 382(h)(3)(A).

231 I.R.C. § 382(h)(3)(B).

232 I.R.C. §§ 384(c)(1)(A) and (C).

233 Inventory valuations will be important in determining whether the threshold 15 percent appreciation is satisfied. Questions remain about whether inventory should be valued at retail, wholesale, or replacement cost, and with or without taking into account the costs of disposition.

234 I.R.C. § 384(c)(1)(B).

235 I.R.C. § 384(c)(3)(A).

236 But see P.L.R. 200238017 (June 11, 2002) (allowing allocation of the loss based on a closing of the books).

237 See infra, § 6.9(f), Application of I.R.C. § 384 to Consolidated Groups.

238 Note that because I.R.C. § 269(a)(2) applies to a purchase of property from a corporation “not controlled” by the acquiror, the disallowance of I.R.C. § 269 can be avoided if the acquisition is from a corporation that is controlled by the acquiring corporation or its shareholders. This common control exception permits a profitable corporation and a loss corporation owned by the same person or persons to merge without risking an I.R.C. § 269 disallowance of an NOL deduction. Legislative initiatives have included proposals to remove the acquisition of control requirement and the common control exception from I.R.C. §§ 269(a)(1) and 269(a)(2), respectively. See, e.g., § 325 of the Jobs and Growth Tax Relief Act of 2003 (Senate Bill 1054). See also The Jumpstart Our Business Strength Act (S. 1637) (proposing to retain the acquisition of control

requirement for I.R.C. § 269(a)(1) but to eliminate the common control exception for I.R.C. § 269(a)(2)). To date, these proposals have not been enacted, but the effective date of the proposals when enacted could be retroactive to February 13, 2003.

239 The term “qualified stock purchase” generally refers to a taxable purchase of at least 80 percent of voting stock and 80 percent of all other stock (excluding vanilla preferred stock) of a corporation within a 12-month period. The date on which the requisite stock ownership tests are attained is the acquisition date (see §§ 7.5(c) and (d) of this volume).

240 See Rev. Rul. 70-638, 1970-2 C.B. 71 (beneficiaries of a trust, which owns stock of corporation, indirectly control that corporation).

241 Younker Brothers, Inc. v. United States, 318 F. Supp. 202 (S.D. Iowa 1970).

242 Treas. Reg. § 1.269-1(a).

243 Cromwell Corp. v. Commissioner, 43 T.C. 313, 317 (1964), acq. 1965-2 C.B. 4.

244 Commodores Point Terminal Corp. v. Commissioner, 11 T.C. 411, 417 (1948), acq. 1949-1 C.B. 1.

245 Modern Home Fire & Casualty Ins. Co. v. Commissioner, 54 T.C. 839 (1970), acq. 1970-2 C.B. XVIII (S corporations); A.P. Green Export Co. v. United States, 151 Ct. Cl. 628 (1960) (Western Hemisphere trade corporations); Rev. Rul. 76-363, 1976-2 C.B. 90 (S corporations); Rev. Rul. 70-238, 1970-1 C.B. 61 (Western Hemisphere trade corporations). See also Supreme Investment Corp. v. United States, 468 F.2d 370 (1972); Cherry v. United States, 264 F.Supp. 969 (C.D. Cal. 1967); F.S.A. 199926011 (Mar. 26, 1999).

246 Treas. Reg. § 1.269-1(b).

247 See Stange Co. v. Commissioner, 36 T.C.M. (CCH) 31 (1977); VGS Corp. v. Commissioner, 68 T.C. 563 (1977), acq. 1979-2 C.B. 2; D’Arcy-MacManus & Masius, Inc. v. Commissioner, 63 T.C. 440 (1975); see also Fairfield Communities Land Co. v. Commissioner, 47 T.C.M. (CCH) 1194 (1984) (motive for using I.R.C. § 269 was to obtain surplus cash held by the acquired corporation and not a desire to avoid taxes through the acquired corporation’s NOLs).

248 See Brown, Berkowitz, and Lynch, supra note 29.

249 Hawaiian Trust Co. v. United States, 291 F.2d 761 (9th Cir. 1961); John B. Stetson Co. v. Commissioner, 23 T.C.M. (CCH) 876 (1964).

250 John B. Stetson Co. v. Commissioner, 23 T.C.M. (CCH) 876; Superior Garment Co. v. Commissioner, 24 T.C.M. (CCH) 1571 (1965).

251 R. P. Collins & Co. v. Commissioner, 303 F.2d 142 (1st Cir. 1962).

252 Baton Rouge Supply Co. v. Commissioner, 36 T.C. 1 (1961), acq. 1961-2 C.B. 4.

253 D’Arcy-MacManus & Masius, Inc. v. Commissioner, 63 T.C. 440 (1975).

254 Bittker and Eustice, supra note 23, at ¶ 14.41[2][b].

255 F.S.A. 1998-416 (July 9, 1993), 98 TNT 234-65.

256 Treas. Reg. §§ 1.269-3(b)(1), 1.269-6.

257 Treas. Reg. § 1.269-3(b)(3).

258 Treas. Reg. § 1.269-3(c)(1).

259 Treas. Reg. § 1.269-6.

260 Treas. Reg. § 1.269-6, Ex. 3.

261 Libson Shops v. Koehler, 353 U.S. 382 (1957).

262 Clarksdale Rubber Co. v. Commissioner, 45 T.C. 234 (1965).

263 Maxwell Hardware Co. v. Commissioner, 343 F.2d 713 (9th Cir. 1965).

264 1980-1 C.B. 80.

265 H. Rep. No. 841, 99th Cong., 2d Sess., at II-194 (1986).

266 National Tea Co. v. Commissioner, 793 F.2d 864 (7th Cir. 1986).

267 See, e.g., Rev. Rul. 68-350, 1968-2 C.B. 159, obsoleted by Rev. Rul. 80-144, 1980-1 C.B. 80.

268 For a more complete discussion of the use of NOLs by consolidated groups, see Hennessey, Yates, Banks, and Pellervo, The Consolidated Tax Return (6th ed. 2002); and Dubroff, Blanchard, Broadbent, and Duvall, Federal Income Taxation of Corporations Filing Consolidated Returns (2d ed. 2002).

269 Similar rules governing capital losses and built-in losses are set forth in Treas. Reg. §§ 1.1502-22 and 1.1502-15, respectively. Before 1997, the consolidated net operating loss rules were set forth in Treas. Reg. § 1.1502-21 A. These rules also included a set of loss limitation rules—the consolidated return change of ownership rules (CRCO)—that generally no longer apply.

270 A CNOL for any given year is generally the excess of the group’s deductions over the group’s gross income. Treas. Reg. § 1.1502-21(e).

271 Except in the case of a reverse acquisition or as provided in Treas. Reg. § 1.1502-75(d)(2)(ii). Treas. Reg. § 1.1502-1(f)(2)(i).

272 Treas. Reg. § 1.1502-1(f)(2)(ii).

273 Treas. Reg. § 1.1502-1(f)(2)(iii).

274 Deductions and losses reduce the cumulative register only when such amounts are actually absorbed by the consolidated group. Treas. Reg. § 1.1502-21(c)(1)(i)(B).

275 Treas. Reg. § 1.1502-21(c)(2).

276 Id. There are anti-avoidance rules that prevent the inappropriate use of subgroups.

277 Treas. Reg. § 1.1502-21(c)(2)(ii).

278 T.D. 8825, 64 Fed. Reg. 36175 (July 2, 1999); T.D. 8824, 64 Fed. Reg. 36116 (July 2, 1999).

279 See Treas. Reg. §§ 1.1502-91 through 99.

280 Treas. Reg. § 1.1502-91(c)(1).

281 In certain circumstances, a SRLY loss also may cause a consolidated group to be treated as a loss group. See Treas. Reg. § 1.1502-96.

282 Under an anti-abuse provision, shifts in ownership of members of the consolidated group also are taken into account in a narrow set of circumstances. See Treas. Reg. § 1.1502-92(c).

283 Treas. Reg. § 1.1502-91(a). The value of the stock of the common parent is the value, immediately before the ownership change, of the stock of each member, other than stock that is owned directly or indirectly by another member. Treas. Reg. § 1.1502-93. Net unrealized built-in gain (NUBIG) and other adjustments to the value limitation also are made on a single-entity basis. See Treas. Reg. § 1.1502-93 and 95.

284 L is a “new loss member” of the P group. Treas. Reg. § 1.1502-94(a)(1).

285 Treas. Reg. § 1.1502-94(b)(1).

286 Treas. Reg. §§ 1.1502-94(a)(3), 1.1502-96(c). See also Tax Analysts Highlights & Documents, LEXIS, 91 TNT 57-48 (Mar. 13, 1991) (letter from Mark Silverman and Kevin Keyes confirming results of a conference with IRS officials).

287 In addition to losses generated in the M/P/L group, a SRLY loss that L brought into the group that (1) was subject to an ownership change within six months before, on, or after L entering the group, or (2) ages for five years in the P group without an ownership change, is treated as a consolidated net operating loss. Treas. Reg. § 1.1502-96(a).

288 The apportionment consists of two elements: (1) the value element, related to the value of the loss group multiplied by the long-term tax-exempt bond rate, without regard to any adjustments for short years, unused limitations, or built-in gains; and (2) the adjustment element, relating to unused limitations or built-in gains for the taxable year in which the member leaves the group. Treas. Reg. § 1.1502-95(c)(1).

289 Before: A, 50 percent; C, 50 percent. After: A, 48 percent (60% × 80%); B, 32 percent (40% × 80%); C, 0 percent; D, 20 percent. B and D have increased their ownership by 52 percent.

290 Treas. Reg. § 1.1502-95(b)(1)(iii).

291 New shareholders on January 1, 2004, are: A, 8.4 percent (15% × 80% × 70%); B, 14 percent (20% × 70%); and C, 30 percent, for a total of 52.4 percent.

292 P also may apportion some or all of a NUBIG to L when it leaves the group, such that L’s recognition of a NUBIG also would increase L’s § 382 limitation after L leaves the group. Treas. Reg. § 1.1502-95(c)(2)(ii).

293 Treas. Reg. § 1.1502-21(g). For a detailed discussion of the 1999 regulations, including the Overlap Rule, see Yates, Eisenberg, Madden, Rainey, and Vogel, Final SRLY/Consolidated Section 382 Regs. Remove SRLY Limitation for Most Groups as of 1999, 91 Tax’n 325 (Dec. 1999).

294 The Overlap Rule is generally effective for tax returns having an unextended due date after June 25, 1999. Treas. Reg. § 1.1502-21(h).

295 One reason why the subgroup membership may differ is that the I.R.C. § 382 subgroup requires that the corporations bear an I.R.C. § 1504 relationship, while the SRLY subgroup does not contain a similar requirement.

296 See Treas. Reg. § 1.1502-21(g)(5), Example 5.

297 This section is drawn from Robert Liquerman, Jeffrey Vogel, and Alex Yeadon, Consolidated Group Unified Loss Rule: Unified but Not Simplified, What’s News in Tax (KPMG LLP publication), Aug. 9, 2010.

298 T.D. 9424, 2008-44 I.R.B. 1012 (Sept. 17, 2008). These regulations were first issued in proposed form on January 23, 2007 (72 F.R. 2964).

299 In brief, the noneconomic stock loss concern can be illustrated by this simple example: P is the common parent of a consolidated group. S is an unrelated corporation that owns a capital asset with a basis of $0 and fair market value of $100. P buys the stock of S for $100. S subsequently sells its asset for $100 and recognizes a $100 gain. Under the investment adjustment regulations of Treas. Reg. § 1.1502-32, P’s basis in the stock of S is increased by this gain to $200 (ignoring any investment adjustments for tax on the gain). If P sells the S stock for its $100 fair market value, P would recognize a $100 noneconomic loss that offsets S’s gain.

300 In brief, the loss duplication concern can be illustrated by this simple example: P is the parent of a consolidated group and P forms subsidiary S by contributing $100 to S in exchange for all of its stock. S generates a $70 net operating loss that the P group cannot absorb. The loss becomes part of the consolidated NOL carryover attributable to S. P subsequently sells S for $30. S’s unused $70 loss does not reduce P’s $100 basis in its S stock under the investment adjustment regulations. Thus, P recognizes a $70 loss on the sale of S. P’s $70 loss reflects P’s economic loss on its investment in S (P contributed $100 to S and sold it for $30 without using S’s loss). S’s loss carryover is apportioned to S for use after leaving the P group (subject to any limitations, such as I.R.C. § 382). P’s stock loss is thus duplicated when S uses its NOL carryover after leaving the P group.

301 For instance, the examples in this volume deal with currently taxable transactions involving the stock of a single member that has only a single class of common stock outstanding. When a transaction involves deferred losses on the sale of stock (in either a tax-free non-intercompany transaction or an intercompany transaction under Treas. Reg. § 1.1502-13), multiple tiers of subsidiaries, multiple classes of stock and/or certain other facts, additional aspects of the ULR that are not addressed in this treatise may apply. In addition, there is a broad anti-abuse rule in Treas. Reg. § 1.1502-36(g) that should be considered.

302 The problems of noneconomic stock loss and loss duplication within a consolidated group are not new. Some form of loss disallowance regime with respect to one or both of these problems has been in effect since 1987 (in response to the repeal of the General Utilities doctrine). The ULR represents the culmination of several years of consideration by the IRS and Treasury Department that was initially triggered in 2001 by the Federal Circuit Court of Appeal’s invalidation of one aspect of the then effective loss disallowance regulations. For prior law in this area, see, e.g., Notice 87-14, 1987-1 C.B. 445; former Treas. Reg. § 1.1502-20 (issued in T.D. 8364, 1991-2 C.B. 43 (Sept. 19, 1991)); Rite Aid Corp. v. United States, 255 F.3d 1357 (Fed. Cir. 2001) (invalidating the duplicated loss aspect of former Treas. Reg. § 1.1502-20); Notice 2002-11, 2002-1 C.B. 526 (Feb. 19, 2002); Treas. Reg. § 1.337(d)-2 (issued in temporary form in T.D. 8984, 2002-1 C.B. 668 (Mar. 12, 2002) and finalized in T.D. 9187, 2005-1 C.B. 778 (Mar. 3, 2005)); Notice 2004-58, 2004-2 C.B. 520 (Aug. 25, 2004) (providing a safe harbor for determining loss disallowance under § 1.337(d)-2); § 1.1502-35 (issued in temporary form in T.D. 9048, 2003-1 C.B. 644 (Mar. 14, 2003) and finalized in T.D. 9254, 2006-1 C.B. 662 (Mar. 14, 2006)). As noted, it is important to be aware that certain of the regulations and other authorities cited in this note are still applicable to transactions that occurred prior to the effective date of the ULR.

303 As noted previously, a “loss share” is a share that has an adjusted basis in excess of its fair market value. Treas. Reg. § 1.1502-36(f)(7).

304 The ULR does not apply to a transfer on or after this date if the transfer is made pursuant to a binding agreement that was in effect prior to September 17, 2008. Treas. Reg. § 1.1502-36(h).

305 Treas. Reg. § 1.1502-36(f)(10).

306 If P transfers a share of S stock to another member and gain or loss on the transfer is deferred under Treas. Reg. § 1.1502-13, the ULR will generally not apply until the intercompany item is subsequently taken into account. However, the ULR applies to a non-intercompany transfer of loss shares at the time of the transfer, even if any loss recognized is subject to deferral.

307 The application of the ULR to a worthless stock loss is beyond the scope of this volume, but it is important to be aware that it is necessary to consider the ULR when claiming such a loss.

308 Treas. Reg. § 1.1502-36(b)(1)(ii). There may be situations when a taxpayer would find it beneficial to apply the basis redetermination rule when the rule is inapplicable. Thus, an election is available, in certain circumstances, to apply the basis redetermination rule when it would not otherwise apply.

309 Treas. Reg. § 1.1502-36(b)(1)(i).

310 For purposes of the basis redetermination rule, Treas. Reg. § 1.1502-36(1)(iii) provides a special definition of “investment adjustments” with some modifications from the general investment adjustment regulations in Treas. Reg. § 1.1502-32. One noteworthy point regarding this definition is that, via a cross-reference to Treas. Reg. § 1.1502-32(c)(1)(iii), distributions are excluded as investment adjustments. This definition, with modification, also applies for purposes of the basis reduction rule.

311 There are ordering rules for reallocating the investment adjustments, particularly when S has common and preferred stock outstanding. As noted, this volume assumes that S has only common stock outstanding.

312 I.R.C. § 358.

313 Generally, the investment adjustment regulations in Treas. Reg. § 1.1502-32 provide rules for adjusting the basis of the stock of a consolidated group member that is owned by another member to take into account the former member’s distributions and items of income, gain, deduction, and loss. The above example ignores any investment adjustments for tax on the gain.

314 Note that this example illustrates only the reallocation of positive investment adjustments. In other fact patterns, the basis redetermination rule might also (or instead) require the reallocation of negative investment adjustments made to nontransferred loss shares.

315 Treas. Reg. § 1.1502-36(c)(2).

316 Treas. Reg. § 1.1502-36(c)(3).

317 Treas. Reg. § 1.1502-36(c)(4).

318 Treas. Reg. § 1.1502-36(c)(5).

319 As noted, this example ignores any investment adjustments for tax on the gain.

320 Attribute reduction is generally not required if the attribute reduction amount is less than 5 percent of the aggregate value of the transferred shares. Treas. Reg. § 1.1502-36(d)(2)(ii).

321 Note that the potential attribute reduction means that the ULR may affect not only the selling consolidated group but also the buyer.

322 Treas. Reg. § 1.1502-36(d)(3)(i).

323 Treas. Reg. § 1.1502-36(d)(3)(ii).

324 Treas. Reg. § 1.1502-36(d)(3)(iii).

325 If the attribute reduction amount is less than S’s attributes, the taxpayer may, in certain circumstances, elect which attributes to reduce (absent such election, attributes are reduced by listed category, beginning with capital loss carryovers). If the attribute reduction amount is greater than S’s attributes, the remaining amount is suspended to the extent of any S liabilities that have not been taken into account prior to the transfer and such suspended amount is applied to reduce any amount that would be deductible or capitalizable when the liability is taken into account (if the remaining amount exceeds such liabilities, such excess has no further impact).

326 Treas. Reg. § 1.1502-36(d)(6). The election is generally available only if S becomes a nonmember of the selling group as a result of the transaction.

327 The disconformity amount in this example is also zero because P’s $200 aggregate basis in the S shares does not exceed S’s net inside attribute amount of $220 (comprised of S’s $100 basis in the land and the $120 loss carryover).

328 Note that although all of the S shares are treated as transferred in this example for purposes of applying the ULR, this does not change the transaction for purposes of reporting P’s actual tax consequences (i.e., P will recognize a loss with respect to 30 shares, not 100 shares).

329 P could not elect to reduce the basis of only the shares actually sold because all shares are treated as transferred in this example. An election to reduce stock basis by some or all of the attribution reduction amount must be made with respect to all shares that are treated as transferred (under the ULR) in the transaction in proportion to the loss on each share. Treas. Reg. § 1.1502-36(d)(6)(v)(A).

330 T.A.M. 200447037 (Aug. 24, 2004).