Alert for consolidated return filers.

• Author: O'Connell, Frank J., Jr.

A recent Federal Circuit decision (Rite Aid Corp., 7/6/01) may have significant long-term implications for consolidated return filers. One aspect, however, requires immediate attention.

In reversing the Court of Federal Claims (46 Fed. Cl. 500 (2000)), the Federal Circuit held that the consolidated return loss disallowance rule under Regs. Sec. 1.1502-20 was invalid as it applied to Rite Aid. The IRS issued Regs. Sec. 1.1502-20 in 1991 to disallow a taxpayer's loss on the sale of subsidiary stock.

Under Regs. Sec. 1.1502-20, a loss on the sale of the stock of a consolidated subsidiary is disallowed to the extent of the following three factors: (1) extraordinary gain dispositions; (2) positive investment adjustments; and (3) duplicated losses. In Rite Aid, the Federal Circuit's focus was solely on duplicated losses. However, the breadth of the Federal Circuit's opinion is unclear.

Based on this decision, consolidated return taxpayers that had subsidiary stock losses disallowed on their calendar 1997 returns should consider filing amended returns or protective refund...