[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: 26CFR1.1502-9]

[Page 256-260]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1502-9  Consolidated overall foreign losses and separate 
limitation losses.

    (a) In general. This section provides rules for applying section 
904(f) (including its definitions and nomenclature) to a group and its 
members. Generally, section 904(f) concerns rules relating to overall 
foreign losses (OFLs) and separate limitation losses (SLLs) and the 
consequences of such losses. As provided in section 904(f)(5), losses 
are computed separately in each category of income described in section 
904(d)(1) (basket). Paragraph (b) of this section defines terms and 
provides computational and accounting rules, including rules regarding 
recapture. Paragraph (c) of this section provides rules that apply to 
OFLs and SLLs when a member becomes or ceases to be a member of a group. 
Paragraph (d) of this section provides a predecessor and successor rule. 
Paragraph (e) of this section provides effective dates.
    (b) Consolidated application of section 904(f). A group applies 
section 904(f) for a consolidated return year in accordance with that 
section, subject to the following rules:
    (1) Computation of CSLI or CSLL and consolidated U.S. source income 
or loss. The group computes its consolidated separate limitation income 
(CSLI) or consolidated separate limitation loss (CSLL) for each basket 
under the principles of Sec. 1.1502-11 by aggregating each member's 
foreign-source taxable income or loss in such basket computed under the 
principles of Sec. 1.1502-12, and taking into account the foreign 
portion of the consolidated items described in Sec. 1.1502-11(a)(2) 
through (8) for such basket. The group computes its consolidated U.S.-
source taxable income or loss under similar principles.
    (2) Netting CSLLs, CSLIs, and consolidated U.S. source taxable 
income or loss. The group applies section 904(f)(5) to determine the 
extent to which a CSLL for a basket reduces CSLI for another basket or 
consolidated U.S.-source taxable income.
    (3) CSLL and COFL accounts. To the extent provided in section 
904(f), the amount by which a CSLL for a basket (the loss basket) 
reduces CSLI for another basket (the income basket) shall result in the 
creation of (or addition

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to) a CSLL account for the loss basket with respect to the income 
basket. Likewise, the amount by which a CSLL for a loss basket reduces 
consolidated U.S.-source income will create (or add to) a consolidated 
overall foreign loss account (a COFL account).
    (4) Recapture of COFL and CSLL accounts. In the case of a COFL 
account for a loss basket, section 904(f)(1) and (3) recharacterizes 
some or all of the foreign-source income in the loss basket as U.S.-
source income. In the case of a CSLL account for a loss basket with 
respect to an income basket, section 904(f)(5)(C) and (F) 
recharacterizes some or all of the foreign-source income in the loss 
basket as foreign-source income in the income basket. The COFL account 
or CSLL account is reduced to the extent amounts are recharacterized 
with respect to such account.
    (5) Intercompany transactions--(i) Nonapplication of section 904(f) 
disposition rules. Neither section 904(f)(3) (in the case of a COFL 
account) nor (5)(F) (in the case of a CSLL account) applies at the time 
of a disposition that is an intercompany transaction to which Sec. 
1.1502-13 applies. Instead, section 904(f)(3) and (5)(F) applies only at 
such time and only to the extent that the group is required under Sec. 
1.1502-13 (without regard to section 904(f)(3) and (5)(F)) to take into 
account any intercompany items resulting from the disposition, based on 
the COFL or CSLL account existing at the end of the consolidated return 
year during which the group takes the intercompany items into account.
    (ii) Example. Paragraph (b)(5)(i) of this section is illustrated by 
the following examples. The identity of the parties and the basic 
assumptions set forth in Sec. 1.1502-13(c)(7)(i) apply to the examples. 
Except as otherwise stated, assume further that the consolidated group 
recognizes no foreign-source income other than as a result of the 
transactions described. The examples are as follows:

    Example 1. (i) On June 10, Year 1, S transfers nondepreciable 
property with a basis of $100 and a fair market value of $250 to B in a 
transaction to which section 351 applies. The property was predominantly 
used without the United States in a trade or business, within the 
meaning of section 904(f)(3). B continues to use the property without 
the United States. The group has a COFL account in the relevant loss 
basket of $120 as of December 31, Year 1.
    (ii) Because the contribution from S to B is an intercompany 
transaction, section 904(f)(3) does not apply to result in any gain 
recognition in Year 1. See paragraph (b)(5)(i) of this section.
    (iii) On January 10, Year 4, B ceases to be a member of the group. 
Because S did not recognize gain in Year 1 under section 351, no gain is 
taken into account in Year 4 under Sec. 1.1502-13(d). Thus, no portion 
of the group's COFL account is recaptured in Year 4. For rules requiring 
apportionment of a portion of the COFL account to B, see paragraph 
(c)(2) of this section.
    Example 2. (i) The facts are the same as in paragraph (i) of Example 
1. On January 10, Year 4, B sells the property to X for $300. As of 
December 31, Year 4, the group's COFL account is $40. (The COFL account 
was reduced between Year 1 and Year 4 due to unrelated foreign-source 
income taken into account by the group.)
    (ii) B takes into account gain of $200 in Year 4. The $40 COFL 
account in Year 4 recharacterizes $40 of the gain as U.S. source. See 
section 904(f)(3).
    Example 3. (i) On June 10, Year 1, S sells nondepreciable property 
with a basis of $100 and a fair market value of $250 to B for $250 cash. 
The property was predominantly used without the United States in a trade 
or business, within the meaning of section 904(f)(3). The group has a 
COFL account in the relevant loss basket of $120 as of December 31, Year 
1. B predominately uses the property in a trade or business without the 
United States.
    (ii) Because the sale is an intercompany transaction, section 
904(f)(3) does not require the group to take into account any gain in 
Year 1. Thus, under paragraph (b)(5)(i) of this section, the COFL 
account is not reduced in Year 1.
    (iii) On January 10, Year 4, B sells the property to X for $300. As 
of December 31, Year 4, the group's COFL account is $60. (The COFL 
account was reduced between Year 1 and Year 4 due to unrelated foreign-
source income taken into account by the group.)
    (iv) In Year 4, S's $150 intercompany gain and B's $50 corresponding 
gain are taken into account to produce the same effect on consolidated 
taxable income as if S and B were divisions of a single corporation. See 
Sec. 1.1502-13(c). All of B's $50 corresponding gain is recharacterized 
under section 904(f)(3). If S and B were divisions of a single 
corporation and the intercompany sale were a transfer between the 
divisions, B would succeed to S's $100 basis in the property and would 
have $200 of gain ($60 of which would be recharacterized under section 
904(f)(3)), instead

[[Page 258]]

of a $50 gain. Consequently, S's $150 intercompany gain and B's $50 
corresponding gain are taken into account, and $10 of S's gain is 
recharacterized under section 904(f)(3) as U.S. source to reflect the 
$10 difference between B's $50 recharacterized gain and the $60 
recomputed gain that would have been recharacterized.

    (c) Becoming or ceasing to be a member of a group--(1) Adding 
separate accounts on becoming a member. At the time that a corporation 
becomes a member of a group (a new member), the group adds to the 
balance of its COFL or CSLL account the balance of the new member's 
corresponding OFL account or SLL account. A new member's OFL account 
corresponds to a COFL account if the account is for the same loss 
basket. A new member's SLL account corresponds to a CSLL account if the 
account is for the same loss basket and with respect to the same income 
basket. If the group does not have a COFL or CSLL account corresponding 
to the new member's account, it creates a COFL or CSLL account with a 
balance equal to the balance of the member's account.
    (2) Apportionment of consolidated account to departing member--(i) 
In general. A group apportions to a member that ceases to be a member (a 
departing member) a portion of each COFL and CSLL account as of the end 
of the year during which the member ceases to be a member and after the 
group makes the additions or reductions to such account required under 
paragraphs (b)(3), (b)(4) and (c)(1) of this section (other than an 
addition under paragraph (c)(1) of this section attributable to a member 
becoming a member after the departing member ceases to be a member). The 
group computes such portion under paragraph (c)(2)(ii) of this section, 
as limited by paragraph (c)(2)(iii) of this section. The departing 
member carries such portion to its first separate return year after it 
ceases to be a member. Also, the group reduces each account by such 
portion and carries such reduced amount to its first consolidated return 
year beginning after the year in which the member ceases to be a member. 
If two or more members cease to be members in the same year, the group 
computes the portion allocable to each such member (and reduces its 
accounts by such portion) in the order that the members cease to be 
members.
    (ii) Departing member's portion of group's account. A departing 
member's portion of a group's COFL or CSLL account for a loss basket is 
computed based upon the member's share of the group's assets that 
generate income subject to recapture at the time that the member ceases 
to be a member. Under the characterization principles of Sec. Sec. 
1.861-9T(g)(3) and 1.861-12T, the group identifies the assets of the 
departing member and the remaining members that generate foreign-source 
income (foreign assets) in each basket. The assets are characterized 
based upon the income that the assets are reasonably expected to 
generate after the member ceases to be a member. The member's portion of 
a group's COFL or CSLL account for a loss basket is the group's COFL or 
CSLL account, respectively, multiplied by a fraction, the numerator of 
which is the value of the member's foreign assets for the loss basket 
and the denominator of which is the value of the foreign assets of the 
group (including the departing member) for the loss basket. The value of 
the foreign assets is determined under the asset valuation rules of 
Sec. 1.861-9T(g)(1) and (2) using either tax book value or fair market 
value under the method chosen by the group for purposes of interest 
apportionment as provided in Sec. 1.861-9T(g)(1)(ii). For purposes of 
this paragraph (c)(2)(ii), Sec. 1.861-9T(g)(2)(iv) (assets in 
intercompany transactions) shall apply, but Sec. 1.861-9T(g)(2)(iii) 
(adjustments for directly allocated interest) shall not apply. If the 
group uses the tax book value method, the member's portions of COFL and 
CSLL accounts are limited by paragraph (c)(2)(iii) of this section. In 
addition, for purposes of this paragraph (c)(2)(ii), the tax book value 
of assets transferred in intercompany transactions shall be determined 
without regard to previously deferred gain or loss that is taken into 
account by the group as a result of the transaction in which the member 
ceases to be a member. The assets should be valued at the time the 
member ceases to be a member, but values on other dates may be used 
unless this creates substantial distortions. For example, if a member

[[Page 259]]

ceases to be a member in the middle of the group's consolidated return 
year, an average of the values of assets at the beginning and end of the 
year (as provided in Sec. 1.861-9T(g)(2)) may be used or, if a member 
ceases to be a member in the early part of the group's consolidated 
return year, values at the beginning of the year may be used, unless 
this creates substantial distortions.
    (iii) Limitation on member's portion for groups using tax book value 
method. If a group uses the tax book value method of valuing assets for 
purposes of paragraph (c)(2)(ii) of this section and the aggregate of a 
member's portions of COFL and CSLL accounts for a loss basket (with 
respect to one or more income baskets) determined under paragraph 
(c)(2)(ii) of this section exceeds 150 percent of the actual fair market 
value of the member's foreign assets in the loss basket, the member's 
portion of the COFL or CSLL accounts for the loss basket shall be 
reduced (proportionately, in the case of multiple accounts) by such 
excess. This rule does not apply if the departing member and all other 
members that cease to be members as part of the same transaction own all 
(or substantially all) the foreign assets in the loss basket.
    (iv) Determination of values of foreign assets binding on departing 
member. The group's determination of the value of the member's and the 
group's foreign assets for a loss basket is binding on the member, 
unless the Commissioner concludes that the determination is not 
appropriate. The common parent of the group must attach a statement to 
the return for the taxable year that the departing member ceases to be a 
member of the group that sets forth the name and taxpayer identification 
number of the departing member, the amount of each COFL or CSLL for each 
loss basket that is apportioned to the departing member under this 
paragraph (c)(2), the method used to determine the value of the member's 
and the group's foreign assets in each such loss basket, and the value 
of the member's and the group's foreign assets in each such loss basket. 
The common parent must also furnish a copy of the statement to the 
departing member.
    (v) Anti-abuse rule. If a corporation becomes a member and ceases to 
be a member, and a principal purpose of the corporation becoming and 
ceasing to be a member is to transfer the corporation's OFL account or 
SLL account to the group or to transfer the group's COFL or CSLL account 
to the corporation, appropriate adjustments will be made to eliminate 
the benefit of such a transfer of accounts. Similarly, if any member 
acquires assets or disposes of assets (including a transfer of assets 
between members of the group and the departing member) with a principal 
purpose of affecting the apportionment of accounts under paragraph 
(c)(2)(i) of this section, appropriate adjustments will be made to 
eliminate the benefit of such acquisition or disposition.
    (vi) Examples. The following examples illustrate this paragraph (c):

    Example 1. (i) On November 6, Year 1, S, a member of the P group, a 
consolidated group with a calendar consolidated return year, ceases to 
be a member of the group. On December 31, Year 1, the P group has a $40 
COFL account for the general limitation basket, a $20 CSLL account for 
the general limitation basket (i.e., the loss basket) with respect to 
the passive basket (i.e., the income basket), and a $10 CSLL account for 
the shipping income basket (i.e., the loss basket) with respect to the 
passive basket (i.e., the income basket). No member of the group has 
foreign-source income or loss in Year 1. The group apportions its 
interest expense according to the tax book value method.
    (ii) On November 6, Year 1, the group identifies S's assets and its 
own assets (including S's assets) expected to produce foreign general 
limitation income. Use of end-of-the-year values will not create 
substantial distortions in determining the relative values of S's and 
the group's relevant assets on November 6, Year 1. The group determines 
that S's relevant assets have a tax book value of $2,000 and a fair 
market value of $2,200. Also, the group's relevant assets (including S's 
assets) have a tax book value of $8,000. On November 6, Year 1, S has no 
assets expected to produce foreign shipping income.
    (iii) Under paragraph (c)(2)(ii) of this section, S takes a $10 COFL 
account for the general limitation basket ($40 x $2000/$8000) and a $5 
CSLL account for the general limitation basket with respect to the 
passive basket ($20 x $2000/$8000). S does not take any portion of the 
shipping income basket CSLL account. The limitation described in 
paragraph (c)(2)(iii) of this section does not apply because the 
aggregate of the COFL and CSLL accounts for the general limitation 
basket that are apportioned to S ($15) is less than 150 percent of the 
actual fair market value of

[[Page 260]]

S's general limitation foreign assets ($2,200 x 150%).

    Example 2. (i) Assume the same facts as in Example 1, except that 
the fair market value of S's general limitation foreign assets is $4 as 
of November 6, Year 1.

    (ii) Under paragraph (c)(2)(iii) of this section, S's COFL and CSLL 
accounts for the general limitation basket must be reduced by $9, which 
is the excess of $15 (the aggregate amount of the accounts apportioned 
under paragraph (c)(2)(ii) of this section) over $6 (150 percent of the 
$4 actual fair market value of S's general limitation foreign assets). S 
thus takes a $4 COFL account for the general limitation basket ($10-($9 
x $10/$15)) and a $2 CSLL account for the general limitation basket with 
respect to the passive basket ($5-($9 x $5/$15)).

    (d) Predecessor and successor. A reference to a member includes, as 
the context may require, a reference to a predecessor or successor of 
the member. See Sec. 1.1502-1(f).

    (e) Effective dates. This section applies to consolidated return 
years for which the due date of the income tax return (without 
extensions) is after August 11, 1999. However, paragraph (b)(5) of this 
section (intercompany transactions) is not applicable for intercompany 
transactions that occur before January 28, 1999. A group applies the 
principles of Sec. 1.1502-9A(e) to a disposition which is an 
intercompany transaction to which Sec. 1.1502-13 applies and that 
occurs before January 28, 1999. Also, paragraph (c)(2) of this section 
(apportionment of consolidated account to departing member) is not 
applicable for members ceasing to be members of a group before January 
28, 1999. A group applies the principles of Sec. 1.1502-9A (rather than 
paragraph (c)(2) of this section) to determine the amount of a 
consolidated account that is apportioned to a member that ceases to be a 
member of the group before January 28, 1999 (and reduces its 
consolidated account by such apportioned amount) before applying 
paragraph (c)(2) of this section to members that cease to be members on 
or after January 28, 1999.


[T.D. 8833, 64 FR 43616, Aug. 11, 1999]

               Computation of Consolidated Taxable Income