[Code of Federal Regulations]
[Title 26, Volume 4]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.337(d)-2T]

[Page 81-83]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.337(d)-2T  Loss limitation window period (temporary).

    (a) Loss disallowance--(1) General rule. No deduction is allowed for 
any loss recognized by a member of a consolidated group with respect to 
the disposition of stock of a subsidiary.
    (2) Definitions. For purposes of this section:
    (i) The definitions in Sec. 1.1502-1 apply.
    (ii) Disposition means any event in which gain or loss is 
recognized, in whole or in part.
    (3) Coordination with loss deferral and other disallowance rules. 
For purposes of this section, the rules of Sec. 1.1502-20(a)(3) apply, 
with appropriate adjustments to reflect differences between the approach 
of this section and that of Sec. 1.1502-20.
    (4) Netting. Paragraph (a)(1) of this section does not apply to loss 
with respect to the disposition of stock of a subsidiary, to the extent 
that, as a consequence of the same plan or arrangement, gain is taken 
into account by members with respect to stock of the same subsidiary 
having the same material terms. If the gain to which this paragraph 
applies is less than the amount of the loss with respect to the 
disposition of the subsidiary's stock, the gain is applied to offset 
loss with respect to each share disposed of as a consequence of the same 
plan or arrangement in proportion to the amount of the loss deduction 
that would have been disallowed under paragraph (a)(1) of this section 
with respect to such share before the application of this paragraph 
(a)(4). If the same item of gain could be taken into account more than 
once in limiting the application of paragraphs (a)(1) and (b)(1) of this 
section, the item is taken into account only once.
    (b) Basis reduction on deconsolidation--(1) General rule. If the 
basis of a member of a consolidated group in a share of stock of a 
subsidiary exceeds its value immediately before a deconsolidation of the 
share, the basis of the share is reduced at that time to an amount equal 
to its value. If both a disposition and a deconsolidation occur with 
respect to a share in the same transaction, paragraph (a) of this 
section applies and, to the extent necessary to effectuate the purposes 
of this section, this paragraph (b) applies following the application of 
paragraph (a) of this section.
    (2) Deconsolidation. Deconsolidation means any event that causes a 
share of stock of a subsidiary that remains outstanding to be no longer 
owned by a member of any consolidated group of which the subsidiary is 
also a member.
    (3) Value. Value means fair market value.
    (4) Netting. Paragraph (b)(1) of this section does not apply to 
reduce the basis of stock of a subsidiary, to the extent that, as a 
consequence of the same plan or arrangement, gain is taken into account 
by members with respect to stock of the same subsidiary having the same 
material terms. If the gain to which this paragraph applies is less than 
the amount of basis reduction

[[Page 82]]

with respect to shares of the subsidiary's stock, the gain is applied to 
offset basis reduction with respect to each share deconsolidated as a 
consequence of the same plan or arrangement in proportion to the amount 
of the reduction that would have been required under paragraph (b)(1) of 
this section with respect to such share before the application of this 
paragraph (b)(4).
    (c) Allowable Loss--(1) Application. This paragraph (c) applies with 
respect to stock of a subsidiary only if a separate statement entitled 
``Sec. 1.337(d)-2T(c) statement'' is included with the return in 
accordance with paragraph (c)(3) of this section.
    (2) General rule. Loss is not disallowed under paragraph (a)(1) of 
this section and basis is not reduced under paragraph (b)(1) of this 
section to the extent the taxpayer establishes that the loss or basis is 
not attributable to the recognition of built-in gain, net of directly 
related expenses, on the disposition of an asset (including stock and 
securities). Loss or basis may be attributable to the recognition of 
built-in gain on the disposition of an asset by a prior group. For 
purposes of this section, gain recognized on the disposition of an asset 
is built-in gain to the extent attributable, directly or indirectly, in 
whole or in part, to any excess of value over basis that is reflected, 
before the disposition of the asset, in the basis of the share, directly 
or indirectly, in whole or in part, after applying section 1503(e) and 
other applicable provisions of the Internal Revenue Code and 
regulations. Federal income taxes may be directly related to built-in 
gain recognized on the disposition of an asset only to the extent of the 
excess (if any) of the group's income tax liability actually imposed 
under Subtitle A of the Internal Revenue Code for the taxable year of 
the disposition of the asset over the group's income tax liability for 
the taxable year redetermined by not taking into account the built-in 
gain recognized on the disposition of the asset. For this purpose, the 
group's income tax liability actually imposed and its redetermined 
income tax liability are determined without taking into account the 
foreign tax credit under section 27(a) of the Internal Revenue Code. 
This paragraph (c)(2) applies to dispositions and deconsolidations on or 
after March 18, 2004. Taxpayers, however, may choose to apply this 
paragraph (c)(2) to dispositions and deconsolidations on or after March 
7, 2002; otherwise, paragraph (c)(2) of Sec. 1.337(d)-2T as contained 
in 26 CFR part 1 edition revised as of April 1, 2003, shall apply.
    (3) Contents of statement and time of filing. The statement required 
under paragraph (c)(1) of this section must be included with or as part 
of the taxpayer's return for the year of the disposition or 
deconsolidation and must contain:
    (i) The name and employer identification number (E.I.N.) of the 
subsidiary.
    (ii) The amount of the loss not disallowed under paragraph (a)(1) of 
this section by reason of this paragraph (c) and the amount of basis not 
reduced under paragraph (b)(1) of this section by reason of this 
paragraph (c).
    (4) Example. The principles of paragraphs (a), (b), and (c) of this 
section are illustrated by the examples in Sec. Sec. 1.337(d)-1(a)(5) 
and 1.1502-20(a)(5) (other than Examples 3, 4, and 5) and (b), with 
appropriate adjustments to reflect differences between the approach of 
this section and that of Sec. 1.1502-20, and by the following example. 
For purposes of the examples in this section, unless otherwise stated, 
the group files consolidated returns on a calendar year basis, the facts 
set forth the only corporate activity, and all sales and purchases are 
with unrelated buyers or sellers. The basis of each asset is the same 
for determining earnings and profits adjustments and taxable income. Tax 
liability and its effect on basis, value, and earnings and profits are 
disregarded. Investment adjustment system means the rules of Sec. 
1.1502-32.

    Example. Loss offsetting built-in gain in a prior group. (i) P buys 
all the stock of T for $50 in Year 1, and T becomes a member of the P 
group. T has 2 assets. Asset 1 has a basis of $50 and a value of $0, and 
asset 2 has a basis of $0 and a value of $50. T sells asset 2 during 
Year 3 for $50 and recognizes a $50 gain. Under the investment 
adjustment system, P's basis in the T stock increased to $100 as a 
result of the recognition of gain. In Year 5, all of the stock of P is 
acquired by

[[Page 83]]

the P1 group, and the former members of the P group become members of 
the P1 group. T then sells asset 1 for $0, and recognizes a $50 loss. 
Under the investment adjustment system, P's basis in the T stock 
decreases to $50 as a result of the loss. T's assets decline in value 
from $50 to $40. P then sells all the stock of T for $40 and recognizes 
a $10 loss.
    (ii) P's basis in the T stock reflects both T's unrecognized gain 
and unrecognized loss with respect to its assets. The gain T recognizes 
on the disposition of asset 2 is built-in gain with respect to both the 
P and P1 groups for purposes of paragraph (c)(2) of this section. In 
addition, the loss T recognizes on the disposition of asset 1 is built-
in loss with respect to the P and P1 groups for purposes of paragraph 
(c)(2) of this section. T's recognition of the built-in loss while a 
member of the P1 group offsets the effect on T's stock basis of T's 
recognition of the built-in gain while a member of the P group. Thus, 
P's $10 loss on the sale of the T stock is not attributable to the 
recognition of built-in gain, and the loss is therefore not disallowed 
under paragraph (c)(2) of this section.
    (iii) The result would be the same if, instead of having a $50 
built-in loss in asset 1 when it becomes a member of the P group, T has 
a $50 net operating loss carryover and the carryover is used by the P 
group.

    (d) Successors. For purposes of this section, the rules and examples 
of Sec. 1.1502-20(d) apply, with appropriate adjustments to reflect 
differences between the approach of this section and that of Sec. 
1.1502-20.
    (e) Anti-avoidance rules. For purposes of this section, the rules 
and examples of Sec. 1.1502-20(e) apply, with appropriate adjustments 
to reflect differences between the approach of this section and that of 
Sec. 1.1502-20.
    (f) Investment adjustments. For purposes of this section, the rules 
and examples of Sec. 1.1502-20(f) apply, with appropriate adjustments 
to reflect differences between the approach of this section and that of 
Sec. 1.1502-20.
    (g) Effective dates. This section applies with respect to 
dispositions and deconsolidations on or after March 7, 2002, unless the 
disposition or deconsolidation was effected pursuant to a binding 
written contract entered into before March 7, 2002, that was in 
continuous effect until the disposition or deconsolidation. In addition, 
this section applies to dispositions and deconsolidations for which an 
election is made under Sec. 1.1502-20T(i)(2) to determine allowable 
loss under this section. If loss is recognized because stock of a 
subsidiary became worthless, the disposition with respect to the stock 
is treated as occurring on the date the stock became worthless. For 
dispositions and deconsolidations prior to March 7, 2002, see Sec. Sec. 
1.337(d)-1 and 1.337(d)-2 as contained in the 26 CFR part 1 edition 
revised as of April 1, 2001.

[T.D. 8984, 67 FR 11036, Mar. 12, 2002, as amended by T.D. 8998, 67 FR 
37999, May 31, 2002; 69 FR 12800, Mar. 18, 2004]