Comments on revised loss disallowance regulations (T.D. 8294 and CO-93-90) January 23 1991.

Comments on Revised Loss Disallowance Regulations (T.D. 8294 and CO-93-90)

ONovember 19, 1990, the Internal Revenue Service Took several actions in respect of the temporary consolidated return loss disallowance regulations (T.D. 8294) that were filed with the Federal Register on March 9, 1990. Specifically, the IRS withdrew Temp. Reg. [section] 1.1502-20T and issued Prop. Reg. [section] 1.1502-20 in its place; the IRS also issued Prop. Reg. [section] 1.337(d)-1 as final regulations and promulgated new Temp. Reg. [section] 1.337(d)-2T.

The proposed regulations (CO-93-90) were publised in the Federal Register on November 26, 1990 (55 Fed. Reg. 49075) and reprinted in the December 17, 1990, issue of the Internal Revenue Bulletin (1990-51 I.R.B. 20); the temporary and final regulations (T.D. 8319 were published in the Federal Register on November 26, 1990 (55 Fed. Reg. 49029) and reprinted in the December 17, 1990, issue of the Internal Revenue Bulletin (1990-51 I.R.B.4). (1)

Tax Executives Institute submitted written comments on the initial loss disallowance regulations on June 19, 1990; testified at the IRS's June 26, 1990, public hearing on the regulations; and filed follow-up comments with the IRS on August 10, 1990. Although the revised regulations represent an improvement over the IRS's initial regulations, TEI remains convinced that the modified rules do not go far enough in responding to both the tenor and the substance of the comments that were filed with the IRS. In this letter, we set forth our concerns.

Overview and Concerns

about the process

The revised regulations provide a somewhat more reasonable transition period and a slightly milder ongoing loss disallowance rule than the initial regulations. In a very real sense, therefore, they represent a step in the right direction --both in terms of the process by which they were promulgated and the substantive rules they contain. They do not, however, sufficiently ameliorate the scope, or otherwise temper the basic unfairness and overreaching nature, of the initial loss disallowance regulations. Further revisions are clearly necessary.

The primary effect of the revised loss disallowance regulations may be to cure the Administrative Procedure Act (APA) problems of the initial regulations. The initial rules -- which were issued as immediately effective temporary regulations -- flouted the APA's notice-and-comment and public hearing requirements. In contrast, the revised section 1.1502-20 regulations were issued in proposed form with a prospective effective date (February 1, 1991). TEI questions, however, whether the revised regulations, while abiding by the letter of the APA, nevertheless mock its spirit.

Specifically, we are concerned that the exceptionally short time period between the deadline for comments (January 15, 1991), the scheduled public hearing (January 25, 1991), and the effective date of the revised regulations (February 1, 1991) signals an IRS intent not to make further changes. We respectfully submit that such an approach to the loss disallowance comment and hearing process is contrary to the total quality management and customer service principles the IRS has in recent years espoused. They deprive the hearing process of its intended remedial effect.

TEI continues to believe that the loss disallowance regulations exceed what Congress contemplated in repealing the General Utilities doctrine. We also believe that the IRS have over-stepped its regulatory mandate in promulagating a broard loss duplication rule and conjuring up an entirely new, exceedingly complicating concept -- the consumption of "wasting assets."

The modified loss disallowance rule remains an example of regulatory overkill and, if adopted in its current form, will operate to disallow economic losses in many cases. The IRS has suggested that Prop. Reg. [section] 1.1502-20(c) provides taxpayers substantial relief from loss disallowance (at leat compared with that permitted under the initial regulations) because it allows taxpayers to claim the benefit of losses to the extent that they exceed --

(1) earnings and profits derived from extraordinary gain dispositions,

(2) earnings and profit resulting in annual net positive adjustments, and

(3) the amount of any "duplicated loss."

We recommend, however, that the rules go much further. Specifically, the reach of the loss disallowance rule should be limited to the recognition - or the presumed recognition - of the net built-in gain in assets held by the subsidiary at the time the subsidiary joined the consolidated return group.

Effective Date

As promulgated, the revised regulations are effective in respect of dispositions and deconsolidations after January 31, 1991. Thus, taxpayers that had felt constrained by the initial regulations from selling loss subsidiaries were provided a two-and-a-half month window (from the issuance of the revised regulations on November 19, 1990, until February 1, 1991) within which to dispose of such subsidiaries and secure the benefit of the transitional...