[Code of Federal Regulations]
[Title 26, Volume 12]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.1502-28T]

[Page 369-375]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1502-28T  Consolidated section 108 (temporary).

    (a) In general. This section sets forth rules for the application of 
section 108(a) and the reduction of tax attributes pursuant to section 
108(b) when a member of the group realizes discharge of indebtedness 
income that is excluded from gross income under section 108(a) (excluded 
COD income).
    (1) Application of section 108(a). Section 108(a)(1)(B) is applied 
separately to each member that realizes excluded COD income. Therefore, 
the limitation of section 108(a)(3) on the amount of discharge of 
indebtedness income that is treated as excluded COD income is determined 
based on the assets (including stock and securities of other members) 
and liabilities (including liabilities to other members) of only the 
member that realizes excluded COD income.
    (2) Reduction of tax attributes attributable to the debtor--(i) In 
general. With respect to a member that realizes excluded COD income in a 
taxable year, the tax attributes attributable to that member (and its 
direct and indirect subsidiaries to the extent required by section 
1017(b)(3)(D) and paragraph (a)(3) of this section), including basis of 
assets and losses and credits arising in separate return limitation 
years, shall be reduced as provided in sections 108 and 1017 and this 
section. Basis of subsidiary stock, however, shall not be reduced below 
zero.
    (ii) Consolidated tax attributes attributable to a member. For 
purposes of this section, the amount of a consolidated tax attribute 
that is attributable to a member shall be determined pursuant to the 
principles of Sec. 1.1502-21T(b)(2)(iv). In addition, if the member is 
a member of a separate return limitation year subgroup, the amount of a 
tax attribute that arose in a separate return limitation year that is 
attributable to that member shall also be determined pursuant to the 
principles of Sec. 1.1502-21T(b)(2)(iv).
    (3) Look-through rules--(i) Priority of section 1017(b)(3)(D). If a 
member treats stock of a subsidiary as depreciable property pursuant to 
section 1017(b)(3)(D), the basis of the depreciable property of such 
subsidiary shall be reduced pursuant to section 1017(b)(3)(D) prior to 
the application of paragraph (a)(3)(ii) of this section.
    (ii) Application of additional look-through rule. If the basis of 
stock of a member (the lower-tier member) that is owned by another 
member is reduced pursuant to section 108, section 1017, and paragraph 
(a)(2) of this section (but not as a result of treating subsidiary stock 
as depreciable property pursuant to section 1017(b)(3)(D)), solely for 
purposes of sections 108 and 1017 and this section other than paragraphs 
(a)(4) and (b)(1) of this section, the lower-tier member shall be 
treated as realizing excluded COD income. The amount of such excluded 
COD income shall be the amount of such basis reduction. Accordingly, the 
tax attributes attributable to such lower-tier member shall be reduced 
as provided in sections 108 and 1017 and this section. To the extent 
that the excluded COD income realized by the lower-tier member pursuant 
to this paragraph (a)(3) does not reduce a tax attribute attributable to 
the lower-tier member, such excluded COD income shall not be applied to 
reduce tax attributes attributable to any member under paragraph (a)(4) 
of this section.
    (4) Reduction of certain tax attributes attributable to other 
members. To the extent that, pursuant to paragraph (a)(2) of this 
section, the excluded COD income is not applied to reduce the tax 
attributes attributable to the member that realizes the excluded COD 
income, after the application of paragraph (a)(3) of this section, such 
amount shall be applied to reduce the remaining consolidated tax 
attributes of the group as provided in section 108 and this section. 
Such amount also shall be applied to reduce the tax attributes 
attributable to members that arose (or are treated as arising) in a 
separate return limitation year to the extent that the member that 
realizes excluded COD income

[[Page 370]]

is a member of the separate return limitation year subgroup with respect 
to such attribute if a SRLY limitation applies to the use of such 
attribute. In addition, such amount shall be applied to reduce the tax 
attributes attributable to members that arose in a separate return year 
or that arose (or are treated as arising) in a separate return 
limitation year if no SRLY limitation applies to the use of such 
attribute. The reduction of each tax attribute pursuant to the three 
preceding sentences shall be made in the order prescribed in section 108 
and pursuant to the principles of Sec. 1.1502-21T(b)(1). Except as 
otherwise provided in this paragraph (a)(4), a tax attribute that arose 
in a separate return year or that arose (or is treated as arising) in a 
separate return limitation year is not subject to reduction pursuant to 
this paragraph (a)(4). Basis in assets is not subject to reduction 
pursuant to this paragraph (a)(4). Finally, to the extent that the 
realization of excluded COD income by a member pursuant to paragraph 
(a)(3) does not reduce a tax attribute attributable to such lower-tier 
member, such excess shall not be applied to reduce tax attributes 
attributable to any member pursuant to this paragraph (a)(4).
    (b) Special rules--(1) Multiple debtor members--(i) Reduction of tax 
attributes attributable to debtor members prior to reduction of 
consolidated tax attributes. If in a single taxable year multiple 
members realize excluded COD income, paragraphs (a)(2) and (3) of this 
section shall apply with respect to the excluded COD income of each such 
member prior to the application of paragraph (a)(4) of this section.
    (ii) Reduction of higher-tier debtor's tax attributes. If in a 
single taxable year multiple members realize excluded COD income and one 
such member is a higher-tier member of another such member, paragraphs 
(a)(2) and (3) of this section shall be applied with respect to the 
excluded COD income of the higher-tier member before such paragraphs are 
applied to the excluded COD income of the other such member. A member 
(the first member) is a higher-tier member of another member (the second 
member) if the first member is the common parent or investment 
adjustments under Sec. 1.1502-32 or Sec. 1.1502-32T with respect to 
the stock of the second member would affect investment adjustments with 
respect to the stock of the first member.
    (iii) Reduction of additional tax attributes. If more than one 
member realizes excluded COD income that has not been applied to reduce 
a tax attribute attributable to such member (the remaining COD amount) 
and the remaining tax attributes available for reduction under paragraph 
(a)(4) of this section are less than the aggregate of the remaining COD 
amounts, after the application of paragraph (a)(2) of this section, each 
such member's remaining COD amount shall be applied on a pro rata basis 
(based on the relative remaining COD amounts), pursuant to paragraph 
(a)(4) of this section, to reduce such remaining available tax 
attributes.
    (2) Election under section 108(b)(5). Any member that realizes 
excluded COD income may make the election described in section 
108(b)(5). The election is made separately for each member. Therefore, 
an election may be made for one member that realizes excluded COD income 
(either actually or pursuant to paragraph (a)(3) of this section) while 
another election, or no election, may be made for another member that 
realizes excluded COD income (either actually or pursuant to paragraph 
(a)(3) of this section). See Sec. 1.108-4 for rules relating to the 
procedure for making an election under section 108(b)(5).
    (3) Limitation of section 1017(b)(2). The limitation of section 
1017(b)(2) on the reduction in basis of property shall be applied by 
reference to the aggregate of the basis of the property held by the 
member that realizes excluded COD income, not the aggregate of the basis 
of the property held by all of the members of the group, and the 
liabilities of such member, not the aggregate liabilities of all of the 
members of the group.
    (4) Application of section 1245. Notwithstanding section 
1017(d)(1)(B), a reduction of the basis of subsidiary stock is treated 
as a deduction allowed for depreciation only to the extent that the 
amount by which the basis of the subsidiary stock is reduced exceeds the

[[Page 371]]

total amount of the attributes attributable to such subsidiary that are 
reduced pursuant to the subsidiary's consent under section 1017(b)(3)(D) 
or as a result of the application of paragraph (a)(3)(ii) of this 
section.
    (5) Reduction of basis of intercompany obligations. See Sec. 
1.1502-13T(g)(3)(ii)(B)(3) and (4) for special rules related to the 
application of the matching and acceleration rules of Sec. 1.1502-13 
when the basis of an intercompany obligation is reduced pursuant to 
sections 108 and 1017 and paragraph (a)(2) or (3) of this section.
    (6) Taking into account of excess loss account--(i) Determination of 
inclusion. [Reserved]
    (ii) Timing of inclusion. To the extent an excess loss account in a 
share of stock of a subsidiary that realizes excluded COD income is 
required to be taken into account as a result of the application of 
Sec. 1.1502-19(c)(1)(iii)(B), such amount shall be included on the 
group's tax return for the taxable year that includes the date on which 
the subsidiary realizes such excluded COD income.
    (c) Examples. The principles of paragraphs (a) and (b) of this 
section are illustrated by the following examples. Unless otherwise 
indicated, no election under section 108(b)(5) has been made. The 
examples are as follows:

    Example 1. (i) Facts. P is the common parent of a consolidated group 
that includes subsidiaries S1 and S2. P owns 80 percent of the stock of 
S1 and 100 percent of the stock of S2. In Year 1, the P group sustained 
a $250 consolidated net operating loss. Under the principles of Sec. 
1.1502-21T(b)(2)(iv), of that amount, $125 was attributable to P and 
$125 was attributable to S1. On Day 1 of Year 2, S2 joined the P group. 
As of the beginning of Year 2, S2 had a $50 net operating loss carryover 
from Year 1, a separate return limitation year. In Year 2, the P group 
sustained a $200 consolidated net operating loss. Under the principles 
of Sec. 1.1502-21T(b)(2)(iv), of that amount, $90 was attributable to 
P, $70 was attributable to S1, and $40 was attributable to S2. In Year 
3, S2 realized $200 of excluded COD income from the discharge of non-
intercompany indebtedness. After the discharge of this indebtedness, S2 
had no liabilities. In that same year, the P group sustained a $50 
consolidated net operating loss, of which $40 was attributable to S1 and 
$10 was attributable to S2 under the principles of Sec. 1.1502-
21T(b)(2)(iv). As of the beginning of Year 4, S2 had Asset A with a 
basis of $40 and a fair market value of $10.
    (ii) Analysis--(A) Reduction of tax attributes attributable to 
debtor. Pursuant to paragraph (a)(2) of this section, the tax attributes 
attributable to S2 must first be reduced to take into account its 
excluded COD income in the amount of $200.
    (1) Reduction of net operating losses. Pursuant to section 
108(b)(2)(A), the net operating loss and the net operating loss 
carryovers of S2 are reduced. Pursuant to section 108(b)(4)(B) and 
paragraph (a) of this section, the net operating loss and the net 
operating loss carryovers attributable to S2 under the principles of 
Sec. 1.1502-21T(b)(2)(iv) are reduced first. Accordingly, the 
consolidated net operating loss for Year 3 is reduced by $10, the 
portion of the consolidated net operating loss attributable to S2, to 
$40. Then, again pursuant to section 108(b)(4)(B), S2's net operating 
loss carryover of $50 from its separate return limitation year is 
reduced to $0. Finally, the consolidated net operating loss carryover 
from Year 2 is reduced by $40, the portion of that consolidated net 
operating loss carryover attributable to S2, to $160.
    (2) Reduction of basis. Following the reduction of the net operating 
loss and the net operating loss carryovers attributable to S2, S2 
reduces its basis in its assets pursuant to section 1017 and Sec. 
1.1017-1. Accordingly, S2 reduces its basis in Asset A by $40, from $40 
to $0.
    (B) Reduction of remaining consolidated tax attributes. The 
remaining $60 of excluded COD income then reduces consolidated tax 
attributes pursuant to paragraph (a)(4) of this section. In particular, 
the remaining $40 consolidated net operating loss for Year 3 is reduced 
to $0. Then, the consolidated net operating loss carryover from Year 1 
is reduced by $20 from $250 to $230. Pursuant to paragraph (a)(4) of 
this section, a pro rata amount of the consolidated net operating loss 
carryover from Year 1 that is attributable to each of P and S1 is 
treated as reduced. Therefore, $10 of the consolidated net operating 
loss carryover from Year 1 that is attributable to each of P and S1 is 
treated as reduced.
    Example 2. (i) Facts. P is the common parent of a consolidated group 
that includes subsidiaries S1 and S2. P owns 100 percent of the stock of 
S1 and S1 owns 100 percent of the stock of S2. None of P, S1, or S2 has 
a separate return limitation year. In Year 1, the P group sustained a 
$50 consolidated net operating loss. Under the principles of Sec. 
1.1502-21T(b)(2)(iv), of that amount, $10 was attributable to P, $20 was 
attributable to S1, and $20 was attributable to S2. In Year 2, the P 
group sustained a $70 consolidated net operating loss. Under the 
principles of Sec. 1.1502-21T(b)(2)(iv), of that amount, $30 was 
attributable to P, $30 was attributable to S1, and

[[Page 372]]

$10 was attributable to S2. In Year 3, S1 realized $170 of excluded COD 
income from the discharge of non-intercompany indebtedness. After the 
discharge of this indebtedness, S1 and S2 had no liabilities. In that 
same year, the P group sustained a $50 consolidated net operating loss, 
of which $10 was attributable to S1 and $40 was attributable to S2 under 
the principles of Sec. 1.1502-21T(b)(2)(iv). As of the beginning of 
Year 4, S1's sole asset was the stock of S2, and S1 had a $80 basis in 
the S2 stock. In addition, at the beginning of Year 4, S2 had an asset 
with a $0 basis and a $10 value.
    (ii) Analysis--(A) Reduction of tax attributes attributable to 
debtor. Pursuant to paragraph (a)(2) of this section, the tax attributes 
attributable to S1 must first be reduced to take into account its 
excluded COD income in the amount of $170.
    (1) Reduction of net operating losses. Pursuant to section 
108(b)(2)(A), the net operating loss and the net operating loss 
carryovers of S1 are reduced. Pursuant to section 108(b)(4)(B) and 
paragraph (a) of this section, the net operating loss and the net 
operating loss carryovers attributable to S1 under the principles of 
Sec. 1.1502-21T(b)(2)(iv) are reduced first. Accordingly, the 
consolidated net operating loss for Year 3 is reduced by $10, the 
portion of the consolidated net operating loss for Year 3 attributable 
to S1, to $40. Then, the consolidated net operating loss carryover from 
Year 1 is reduced by $20, the portion of that consolidated net operating 
loss carryover attributable to S1, to $30, and the consolidated net 
operating loss carryover from Year 2 is reduced by $30, the portion of 
that consolidated net operating loss carryover attributable to S1, to 
$40.
    (2) Reduction of basis. Following the reduction of the net operating 
loss and the net operating loss carryovers attributable to S1, S1 
reduces its basis in its assets pursuant to section 1017 and Sec. 
1.1017-1. Accordingly, S1 reduces its basis in the stock of S2 by $80, 
from $80 to $0.
    (3) Tiering down of stock basis reduction. Pursuant to paragraph 
(a)(3) of this section, for purposes of sections 108 and 1017 and this 
section, S2 is treated as realizing $80 of excluded COD income. 
Accordingly, the consolidated net operating loss for Year 3 is reduced 
by an additional $40, the portion of the consolidated net operating loss 
for Year 3 attributable to S2, to $0. Then, the consolidated net 
operating loss carryover from Year 1 is reduced by $20, the portion of 
that consolidated net operating loss carryover attributable to S2, to 
$10. Then, the consolidated net operating loss carryover from Year 2 is 
reduced by $10, the portion of that consolidated net operating loss 
carryover attributable to S2, to $30. S2's remaining $10 of excluded COD 
income does not reduce consolidated tax attributes attributable to P or 
S1 under paragraph (a)(4) of this section.
    (B) Reduction of remaining consolidated tax attributes. Finally, 
pursuant to paragraph (a)(4) of this section, S1's remaining $30 of 
excluded COD income reduces the remaining consolidated tax attributes. 
In particular, the remaining $10 consolidated net operating loss 
carryover from Year 1 is reduced by $10 to $0, and the remaining $30 
consolidated net operating loss carryover from Year 2 is reduced by $20 
to $10.
    Example 3. (i) Facts. P is the common parent of a consolidated group 
that includes subsidiaries S1, S2, and S3. P owns 100 percent of the 
stock of S1, S1 owns 100 percent of the stock of S2, and S2 owns 100 
percent of the stock of S3. In Year 1, the P group sustained a $150 
consolidated net operating loss. Under the principles of Sec. 1.1502-
21T(b)(2)(iv), of that amount, $50 was attributable to S2, and $100 was 
attributable to S3. In Year 2, the P group sustained a $50 consolidated 
net operating loss. Under the principles of Sec. 1.1502-21T(b)(2)(iv), 
of that amount, $40 was attributable to S1 and $10 was attributable to 
S2. In Year 3, S1 realized $170 of excluded COD income from the 
discharge of non-intercompany indebtedness. After the discharge of this 
indebtedness, S1, S2, and S3 had no liabilities. In that same year, the 
P group sustained a $50 consolidated net operating loss, of which $10 
was attributable to S1, $20 was attributable to S2, and $20 was 
attributable to S3 under the principles of Sec. 1.1502-21T(b)(2)(iv). 
At the beginning of Year 4, S1's only asset was the stock of S2, with a 
basis of $120, and S2's only asset was the stock of S3 with a basis of 
$180 and a value of $10. None of P, S1, or S2 had a separate return 
limitation year.
    (ii) Analysis--Reduction of tax attributes attributable to debtor. 
Pursuant to paragraph (a)(2) of this section, the tax attributes 
attributable to S1 must first be reduced to take into account its 
excluded COD income in the amount of $170.
    (A) Reduction of net operating losses. Pursuant to section 
108(b)(2)(A), the net operating loss and the net operating loss 
carryovers of S1 are reduced. Pursuant to section 108(b)(4)(B) and 
paragraph (a) of this section, the net operating loss and the net 
operating loss carryovers attributable to S1 under the principles of 
Sec. 1.1502-21T(b)(2)(iv) are reduced first. Pursuant to section 
108(b)(4)(B), S1's net operating loss for the taxable year of the 
discharge is reduced first. Accordingly, the consolidated net operating 
loss for Year 3 is reduced by $10, the portion of the consolidated net 
operating loss attributable to S1, to $40. Then, again pursuant to 
section 108(b)(4)(B), the consolidated net operating loss carryover from 
Year 2 is reduced by $40, the portion of that consolidated net operating 
loss carryover attributable to S1, to $10.

[[Page 373]]

    (B) Reduction of basis. Following the reduction of the net operating 
loss and the net operating loss carryovers attributable to S1, S1 
reduces its basis in its assets pursuant to section 1017 and Sec. 
1.1017-1. Accordingly, S1 reduces its basis in the stock of S2 by $120, 
from $120 to $0.
    (C) Tiering down of stock basis reduction to S2. Pursuant to 
paragraph (a)(3) of this section, for purposes of sections 108 and 1017 
and this section, S2 is treated as realizing $120 of excluded COD 
income. Pursuant to section 108(b)(2)(A), therefore, the net operating 
loss and net operating loss carryovers of S2 are reduced. Pursuant to 
section 108(b)(4)(B) and paragraph (a) of this section, the net 
operating loss and the net operating loss carryovers attributable to S2 
under the principles of Sec. 1.1502-21T(b)(2)(iv) are reduced. Pursuant 
to section 108(b)(4)(B), S2's net operating loss for the taxable year of 
the discharge is reduced. Accordingly, the consolidated net operating 
loss for Year 3 is further reduced by $20, the portion of the 
consolidated net operating loss attributable to S2, to $20. Then, again 
pursuant to section 108(b)(4)(B), the consolidated net operating loss 
carryover from Year 1 is reduced by $50, the portion of that 
consolidated net operating loss carryover attributable to S2, to $100. 
Then, again pursuant to section 108(b)(4)(B), the consolidated net 
operating loss carryover from Year 2 is further reduced by $10, the 
portion of that consolidated net operating loss carryover attributable 
to S2, to $0. Following the reduction of the net operating loss and the 
net operating loss carryovers attributable to S2, S2 reduces its basis 
in its assets pursuant to section 1017 and Sec. 1.1017-1. Accordingly, 
S2 reduces its basis in its S3 stock by $40 to $140.
    (D) Tiering down of stock basis reduction to S3. Pursuant to 
paragraph (a)(3) of this section, for purposes of sections 108 and 1017 
and this section, S3 is treated as realizing $40 of excluded COD income. 
Pursuant to section 108(b)(2)(A), therefore, the net operating loss and 
the net operating loss carryovers of S3 are reduced. Pursuant to section 
108(b)(4)(B) and paragraph (a) of this section, the net operating loss 
and the net operating loss carryovers attributable to S3 under the 
principles of Sec. 1.1502-21T(b)(2)(iv) are reduced. Pursuant to 
section 108(b)(4)(B), S3's net operating loss for the taxable year of 
the discharge is reduced. Accordingly, the consolidated net operating 
loss for Year 3 is further reduced by $20, the portion of the 
consolidated net operating loss attributable to S3, to $0. Then, again 
pursuant to section 108(b)(4)(B), the consolidated net operating loss 
carryover from Year 1 is reduced by $20, the lesser of the portion of 
that consolidated net operating loss carryover attributable to S3 and 
the remaining excluded COD income, to $80.
    Example 4. (i) Facts. P is the common parent of a consolidated group 
that includes subsidiaries S1, S2, and S3. P owns 100 percent of the 
stock of each of S1 and S2. Each of S1 and S2 owns stock of S3 that 
represents 50 percent of the value of the stock of S3. In Year 1, the P 
group sustained a $160 consolidated net operating loss. Under the 
principles of Sec. 1.1502-21T(b)(2)(iv), of that amount, $10 was 
attributable to P, $50 was attributable to S2, and $100 was attributable 
to S3. In Year 2, the P group sustained a $110 consolidated net 
operating loss. Under the principles of Sec. 1.1502-21T(b)(2)(iv), of 
that amount, $40 was attributable to S1 and $70 was attributable to S2. 
In Year 3, S1 realized $200 of excluded COD income from the discharge of 
non-intercompany indebtedness, and S2 realized $270 of excluded COD 
income from the discharge of non-intercompany indebtedness. After the 
discharge of this indebtedness, S1, S2, and S3 had no liabilities. In 
that same year, the P group sustained a $50 consolidated net operating 
loss, of which $10 was attributable to S1, $20 was attributable to S2, 
and $20 was attributable to S3 under the principles of Sec. 1.1502-
21T(b)(2)(iv). At the beginning of Year 4, S1's basis in its S3 stock 
was $60, S2's basis in its S3 stock was $120, and S3 had one asset with 
a basis of $200 and a value of $10. None of P, S1, S2, or S3 had a 
separate return limitation year.
    (ii) Analysis--Reduction of tax attributes attributable to debtors. 
Pursuant to paragraph (b)(1)(i) of this section, the tax attributes 
attributable to each of S1 and S2 are reduced pursuant to paragraph 
(a)(2) of this section, and the tax attributes attributable to S3 are 
reduced pursuant to paragraph (a)(3) of this section so as to reflect a 
reduction of S1's and S2's basis in the stock of S3 prior to the 
application of paragraph (a)(4) to reduce additional tax attributes. 
Pursuant to paragraph (a)(2) of this section, the tax attributes 
attributable to S1 and S2 must be reduced to take into account their 
excluded COD income.
    (A) Reduction of net operating losses generally. Pursuant to section 
108(b)(2)(A), the net operating losses and the net operating loss 
carryovers of S1 and S2 are reduced. Pursuant to section 108(b)(4)(B) 
and paragraph (a) of this section, the net operating losses and the net 
operating loss carryovers attributable to S1 and S2 under the principles 
of Sec. 1.1502-21T(b)(2)(iv) are reduced first.
    (B) Reduction of net operating losses attributable to S1. Pursuant 
to section 108(b)(4)(B), S1's net operating loss for the taxable year of 
the discharge is reduced. Accordingly, the consolidated net operating 
loss for Year 3 is reduced by $10, the portion of the consolidated net 
operating loss attributable to S1, to $40. Then, again pursuant to 
section 108(b)(4)(B), the consolidated net operating loss carryover from 
Year 2 is reduced by $40,

[[Page 374]]

the portion of that consolidated net operating loss carryover 
attributable to S1, to $70.
    (C) Reduction of net operating losses attributable to S2. Pursuant 
to section 108(b)(4)(B), S2's net operating loss for the taxable year of 
the discharge is reduced. Accordingly, the consolidated net operating 
loss for Year 3 is further reduced by $20, the portion of the 
consolidated net operating loss attributable to S2, to $20. Then, 
pursuant to section 108(b)(4)(B), the consolidated net operating loss 
carryover from Year 1 is reduced by $50, the portion of that 
consolidated net operating loss carryover attributable to S2, to $110. 
Then, again pursuant to section 108(b)(4)(B), the consolidated net 
operating loss carryover from Year 2 is further reduced by $70, the 
portion of that consolidated net operating loss carryover attributable 
to S2, to $0.
    (D) Reduction of basis. Following the reduction of the net operating 
losses and the net operating loss carryovers attributable to S1 and S2, 
S1 and S2 must reduce their basis in their assets pursuant to section 
1017 and Sec. 1.1017-1. Accordingly, S1 reduces its basis in the stock 
of S3 by $60, from $60 to $0, and S2 reduces its basis in the stock of 
S3 by $120, from $120 to $0.
    (E) Tiering down of basis reduction. Pursuant to paragraph (a)(3) of 
this section, for purposes of sections 108 and 1017 and this section, S3 
is treated as realizing $180 of excluded COD income. Pursuant to section 
108(b)(2)(A), therefore, the net operating loss and the net operating 
loss carryovers of S3 are reduced, in the order indicated by section 
108(b)(4)(B). Pursuant to paragraph (a)(2) of this section the 
consolidated net operating loss and any consolidated net operating loss 
carryovers that are attributable to S3 under the principles of Sec. 
1.1502-21T(b)(2)(iv) are reduced. Accordingly, the consolidated net 
operating loss for Year 3 is further reduced by $20, the portion of the 
consolidated net operating loss attributable to S3, to $0. Then, the 
consolidated net operating loss carryover from Year 1 is reduced by 
$100, the portion of that consolidated net operating loss carryover 
attributable to S3, to $10. Following the reduction of the net operating 
loss and the net operating loss carryover attributable to S3, S3 reduces 
its basis in its asset pursuant to section 1017 and Sec. 1.1017-1. 
Accordingly, S3 reduces its basis in its asset by $60, from $200 to 
$140.
    (F) Reduction of remaining consolidated tax attributes. Finally, 
pursuant to paragraph (a)(4) of this section, the remaining $90 of S1's 
excluded COD income and the remaining $10 of S2's excluded COD income 
reduce the remaining consolidated tax attributes. In particular, the 
remaining $10 consolidated net operating loss carryover from Year 1 is 
reduced by $10 to $0. Because that amount is less than the aggregate 
amount of remaining excluded COD income, such income is applied on a pro 
rata basis to reduce the remaining consolidated tax attributes. 
Accordingly, $9 of S1's remaining excluded COD income and $1 of S2's 
remaining excluded COD income is applied to reduce the remaining 
consolidated net operating loss carryover from Year 1. Consequently, of 
S1's excluded COD income of $200, only $119 is applied to reduce tax 
attributes, and, of S2's excluded COD income of $270, only $261 is 
applied to reduce tax attributes.

    (d) Effective dates. (1) This section, other than paragraphs (a)(4), 
(b)(4), (b)(5), and (b)(6) of this section, applies to discharges of 
indebtedness that occur after August 29, 2003.
    (2) Paragraph (a)(4) of this section applies to discharges of 
indebtedness that occur after August 29, 2003, but only if the discharge 
occurs during a taxable year the original return for which is due 
(without regard to extensions) after December 11, 2003. However, groups 
may apply paragraph (a)(4) of this section to discharges of indebtedness 
that occur after August 29, 2003, and during a taxable year the original 
return for which is due (without regard to extensions) on or before 
December 11, 2003. For discharges of indebtedness that occur after 
August 29, 2003, and during a taxable year the original return for which 
is due (without regard to extensions) on or before December 11, 2003, 
paragraph (a)(4) of this section shall apply as in effect on August 29, 
2003.
    (3) Paragraphs (b)(4), (b)(5), and (b)(6)(ii) of this section apply 
to discharges of indebtedness that occur after August 29, 2003, but only 
if the discharge occurs during a taxable year the original return for 
which is due (without regard to extensions) after March 12, 2004. 
However, groups may apply paragraphs (b)(4), (b)(5), and (b)(6) of this 
section to discharges of indebtedness that occur after August 29, 2003, 
and during a taxable year the original return for which is due (without 
regard to extensions) on or before March 12, 2004.

[T.D. 9089, 68 FR 52492, Sept. 4, 2003, as amended by T.D. 9098, 68 FR 
69025, Dec. 11, 2003; T.D. 9117, 69 FR 12071, Mar. 15, 2004]

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         Basis, Stock Ownership, and Earnings and Profits Rules