Final SRLY Regs.: effective date provision bears watching.

• Position: IRS regulations concerning consolidated returns; separate return limitation year

In an attempt to promote some degree of simplication amid the complexity of consolidated returns, the IRS recently published final separate return limitation year (SRLY) regulations, which replace the previous regime of dual limitations on attributes (Sec. 382 and SRLY) with a single limitation under Sec. 382. (The AICPA Tax Division recommended this policy shift.)

Generally, Regs. Sec. 1.1502-21(h) makes these new regulations applicable to tax returns due (without extensions) after June 25, 1999 (the date the new rules were filed with the Federal Register). Thus, for calendar-year consolidated groups, 1999 will be the first tax year subject to the new regulations. However, this effective date has a retroactive aspect that could prove quite beneficial to certain consolidated groups.

The theory driving the policy shift to a single limit postulates that Sec. 382 is an adequate surrogate for the SRLY rules. Since Sec. 382 was part of the Tax Reform Act of 1986, this provision would extend back to that date and retroactively displace overlapping SRLY limits. Retroactive application would be impracticable; it would permit/require amended returns. Accordingly, the new SRLY rules do the next best thing; they eliminate SRLY limits that would otherwise apply to attributes carried over from pre-effective date tax years.

Example: S joined the P group in 1996 in a transaction in which limits under both Sec...