Interim loss-disallowance regulations.

• Author: Packard, Pamela
• Position: Consolidated tax returns

On Jan. 31, 2002, the Treasury issued Notice 2002-11, stating that it will issue interim guidance that will require consolidated groups to determine the allowable loss on a sale or disposition of subsidiary stock under an amended Regs. Sec. 1.337(d)-2, instead of under Regs. Sec. 1.1502-20 (see "Notice 2002-11: IRS Reversal on Rite Aid," p. 280, this issue).

On March 7, 2002, the Service issued new temporary and proposed regulations under Secs. 337(d) and 1502 as a stopgap measure to provide immediate guidance on calculating the allowable loss and basis reductions for dispositions and deconsolidations of subsidiary stock. For dispositions and deconsolidations before March 7, 2002, a consolidated group can determine the amount of a member's allowable loss or basis reduction under any one of three methods. The first method is essentially the same as the old rules under Regs. Sec. 1.1502-20. It allows a loss to the extent that the loss exceeds the sum of (1) positive investment adjustments, (2) extraordinary gain items and (3) duplicated losses. It does not employ a tracing methodology The second method is an elective provision that uses the old rules under Regs. Sec. 1.1502-20 without regard to duplicated losses. The third method is also an elective provision that uses new Temp. Regs. Sec. 1.337(d)-2T. For dispositions and deconsolidations after March 6, 2002, the use of the third method is mandatory.

Temp. Regs. Sec. 1.337(d)-2T closely follows the approach announced in Notice 2002-11. This regulation allows a taxpayer to realize a loss on the disposition or deconsolidation of a subsidiary member when the taxpayer establishes that the loss or basis is not attributable to the recognition of built-in gain on an asset's disposition. Treasury seems to have instituted a...