Loss on disposition of stock disallowed unless statement is filed.

• Author: Pellervo, Patricia W.
• Position: Statement of allowable loss

Regs. Sees. 1.337(d)-1, 1.337(d)-2 and 1.1502-20 disallow the use of losses from dispositions (including worthlessness)of consolidated subsidiaries except to the extent the loss is an "economic loss." The rules apply to dispositions after Jan. 6, 1987 of subsidiaries acquired after that date, as well as dispositions of subsidiaries after Nov. 18, 1990, regardless of when acquired. However, none of a consolidated group's loss on a subsidiary's disposition will be allowed if it does not timely file a "Statement of Allowable Loss" as required by the regulations, even if the regulations otherwise would allow all or a portion of the loss as an economic loss (Regs. Sees. 1.337(d)-l(a)(2)(ii), 1.337(d)-2(c)(1) and 1.1502-20(c1(3)).

Regs. Sees. 1.337(d)-2(b) and 1.1502-20(b) further provide that if a subsidiary ceases to be a member of a consolidated group after Nov. 18, 1990, the group will be required to permanently reduce its basis in retained stock to its fair market value, subject to certain limitations. A statement must also be filed in this situation to minimize the basis reduction with respect to the retained subsidiary stock.

The required statement generally must be attached to the consolidated return for the year of disposition (or deconsolidation) (Regs. Sees. 1.337(d)-1(a)(2)(ii), 1.337(d)-2(e)(3), 1.1502-20(c)(3) and 1.1502-20(h)(2)(ii)). An exception is provided only if the original return was due (including extensions) or was filed before Jan. 16, 1991, in that situation the statement can be attached to an amended return for the year of disposition (or deconsolidation) or, alternatively, attached to the first subsequent consolidated return for which the due date (including extensions) is after Jan. 15, 1991.

When the return is filed after Jan. 15, 1991, it appears doubtful that the statement can be attached to an amended return. However, unlike certain other reporting requirements which unambiguously provide that the statement must be attached to a return filed by the extended due date of the return land therefore cannot be attached to an amended return), the loss disallowance regulations do not include this restriction. (Cf. Regs. Sees. 1.1502-32(f1(2), 1.1502751a) and 1.1502-33(d)(3).)Therefore, it may be argued that the statement could be included in an amended return. However, Regs. Sec. 1.1502-20(h)(2) provides that the statement required under Regs. Sec. 1.1502-20(c)(3)"ordinarily cannot be made with an amended return."...