Reg. § 1.1502-3 Consolidated tax credits.
(a) Determination of amount of consolidated credit
(1) In general The credit allowed by section for a consolidated return year of a group shall be equal to the consolidated credit earned. The consolidated credit earned is equal to the aggregate of the credit earned (as determined under subparagraph (2) of this paragraph) by all members of the group for the consolidated return year.
(2) Determination of credit earned The credit earned of a member is an amount equal to 7 percent of such member's qualified investment (determined under section ). For purposes of computing a member's qualified investment, the basis of property shall not include any gain or loss realized with respect to such property by another member in an intercompany transaction (as defined in ), whether or not such gain or loss is deferred. Thus, if section property acquired in an intercompany transaction has a basis of $100 to the purchasing member, and if the selling member has a $20 gain with respect to such property, the basis of such property for purposes of computing the purchaser's qualified investment is only $80. Such $80 basis shall also be used for purposes of applying section to such property. See of this section.
(3) Consolidated limitation based on amount of tax
(i) Notwithstanding the amount of the consolidated credit earned for the taxable year, the consolidated credit allowed by section to the group for the consolidated return year is limited to:
(a) So much of the consolidated liability for tax as does not exceed $25,000, plus
(b) For taxable years ending on or before March 9, 1967, 25 percent of the consolidated liability for tax in excess of $25,000, or
(c) For taxable years ending after March 9, 1967, 50 percent of the consolidated liability for tax in excess of $25,000.
The $25,000 amount referred to in the preceding sentence shall be reduced by any part of such $25,000 amount apportioned under to component members of the controlled group (as defined in section ) which do not join in the filing of the consolidated return. For further rules for computing the limitation based on amount of tax with respect to the suspension period (as defined in section ), see section . The amount determined under this subparagraph is referred to in this section as the “consolidated limitation based on amount of tax.”
(ii) If an organization to which section applies or a cooperative organization described in section joins in the filing of the consolidated return, the $25,000 amount referred to in subdivision (i) of this subparagraph (reduced as provided in such subdivision) shall be apportioned equally among the members of the group filing the consolidated return. The amount so apportioned equally to any such organization shall then be decreased in accordance with the provisions of section . Finally, the sum of all such equal portions (as decreased under section ) of each member of the group shall be substituted for the $25,000 amount referred to in subdivision (i) of this subparagraph.
(4) Consolidated liability for tax For purposes of subparagraph (3) of this paragraph, the consolidated liability for tax shall be the income tax imposed for the taxable year upon the group by chapter 1 of the Code, reduced by the consolidated foreign tax credit allowable under . The tax imposed by section (relating to minimum tax for tax preferences), section (relating to accumulated earnings tax), section (relating to personal holding company tax), and any additional tax imposed by section (relating to recoveries of foreign expropriation losses), shall not be considered tax imposed by chapter 1 of the Code. In addition, any increase in tax resulting from the application of section (relating to certain dispositions, etc., of section property) shall not be treated as tax imposed by chapter 1 for purposes of computing the consolidated liability for tax.
(b) Carryback and carryover of unused credits
(1) Allowance of unused credit as consolidated carryback or carryover A group shall be allowed to add to the amount allowable as a credit under of this section for any consolidated return year an amount equal to the aggregate of the consolidated investment credit carryovers and carrybacks to such year. The consolidated investment credit carryovers and carrybacks to the taxable year shall consist of any consolidated unused credits of the group, plus any unused credits of members of the group arising in separate return years of such members, which may be carried over or back to the taxable year under the principles of section . However, such consolidated carryovers and carrybacks shall not include any consolidated unused credits apportioned to a corporation for a separate return year pursuant to and shall be subject to the limitations contained in and of this section. A consolidated unused credit for any consolidated return year is the excess of the consolidated credit earned over the consolidated limitation based on amount of tax for such year.
(2) Absorption rules For purposes of determining the amount, if any, of an unused credit (whether consolidated or separate) which can be carried to a taxable year (consolidated or separate), the amount of such unused credit which is absorbed in a prior consolidated return year under section shall be determined by:
(i) Applying all unused credits which can be carried to such prior year in the order of the taxable years in which such unused credits arose, beginning with the taxable year which ends earliest, and
(ii) Applying all such unused credits which can be carried to such prior year from taxable years ending on the same date on a pro rata basis.
(3) Example The provisions of and of this section may be illustrated by the following example:
Example.
(i) Corporation P is incorporated on January 1, 1966. On that same day P incorporates corporation S, a wholly owned subsidiary. P and S file consolidated returns for calendar years 1966 and 1967. P's and S's credit earned, the consolidated credit earned, and the consolidated limitation based on amount of tax for 1966 and 1967 are as follows:
| Credit earned | Consolidated credit earned | Consolidated limitation based on amount of tax | |
|---|---|---|---|
| 1966: | |||
| P | $60,000 | ||
| S | $30,000 | $90,000 | $100,000 |
| 1967: | |||
| P | $40,000 | ||
| S | $25,000 | $65,000 | $50,000 |
(ii) P's and S's credit earned for 1966 are aggregated, and the group's consolidated credit earned, $90,000, is allowable in full to the group as a credit under section for 1966 since such amount is less than the consolidated limitation based on amount of tax for 1966, $100,000.
(iii) Since the consolidated limitation based on amount of tax for 1967 is $50,000, only $50,000 of the $65,000 consolidated credit earned for such year is allowable to the group under section as a credit for 1967. The consolidated unused credit for 1967 of $15,000 ($65,000 less $50,000) is a consolidated investment credit carryback and carryover to the years prescribed in section . In this case the consolidated unused credit is a consolidated investment credit carryback to 1966 (since P and S were not in existence in 1964 and 1965) and a consolidated investment credit carryover to 1968 and subsequent years. The portion of the consolidated unused credit for 1967 which is allowable as a credit for 1966 is $10,000. This amount shall be added to the amount allowable as a credit to the group for 1966. The balance of the consolidated unused credit for 1967 to be carried to 1968 is $5,000. These amounts are computed as follows:
| Consolidated carryback to 1966 | $15,000 | ||
| 1966 consolidated limitation based on tax | $100,000 | ||
| Less: Consolidated credit earned for 1966 | $90,000 | ||
| Consolidated unused credits attributable to years preceding 1967 | 0 | $90,000 | |
| Limit on amount of 1967 consolidated unused credit which may be added as a credit for 1966 | $10,000 | ||
| Balance of 1967 consolidated unused credit to be carried to 1968 | $5,000 |
(c) Limitation on investment credit carryovers and carrybacks from separate return limitation years applicable for consolidated return years for which the due date of the return is on or before March 13, 1998
(1) General rule In the case of an unused credit of a member of the group arising in a separate return limitation year (as defined in ) of such member (and in a separate return limitation year of any predecessor of such member), the amount which may be included under of this section (computed without regard to the limitation contained in of this section) shall not exceed the amount determined under of this section.
(2) Computation of limitation The amount referred to in of this section with respect to a member of the group is the excess, if any, of—
(i) The limitation based on amount of tax of the group, minus such limitation recomputed by excluding the items of income, deduction, and foreign tax credit of such member; over
(ii) The sum of the investment credit earned by such member for such consolidated return year, and the unused credits attributable to such member which may be carried to such consolidated return year arising in unused credit years ending prior to the particular separate return limitation year.
(3) Special effective date This applies to consolidated return years for which the due date of the income tax return (without extensions) is on or before March 13, 1998. See of this section for the rule that limits the group's use of a section credit carryover or carryback from a SRLY for a consolidated return year for which the due date of the income tax return (without extensions) is after March 13, 1998. See also of this section for an optional effective date rule (generally making the rules of this inapplicable to a consolidated return year beginning after December 31, 1996, if the due date of the income tax return (without extensions) for such year is on or before March 13, 1998).
(4) Examples The provisions of this may be illustrated by the following examples:
Example 1.
(i) Assume the same facts as in the example contained in of this section, except that all the stock of corporation T, also a calendar year taxpayer, is acquired by P on January 1, 1968, and that P, S, and T file a consolidated return for 1968. In 1966, T had an unused credit of $10,000 which has not been absorbed and is available as an investment credit carryover to 1968. Such carryover is from a separate return limitation year. P's and S's credit earned for 1968 is $10,000 each, and T's credit earned is $8,000; the consolidated credit earned is therefore $28,000. The group's consolidated limitation based on amount of tax for 1968 is $50,000. Such limitation recomputed by excluding the items of income, deduction, and foreign tax credit of T is $30,000. Thus, the amount determined under of this section is $20,000 ($50,000 minus $30,000). Accordingly, the limitation on the carryover of T's unused credit is $12,000, the excess of $20,000 over $8,000 (the sum of T's credit earned for the taxable year and any carryovers from prior unused credit years (none in this case)). Therefore T's $10,000 unused credit from 1966 may be carried over to the consolidated return year without limitation.
(ii) The group's consolidated credit earned for 1968, $28,000, is allowable in full as a credit under section since such amount is less than the consolidated limitation based on amount of tax, $50,000.
(iii) The group's consolidated investment credit carryover to 1968 is $15,000, consisting of the consolidated unused credits of the group ($5,000) plus T's separate return year unused credit ($10,000). The entire $15,000 consolidated carryover shall be added to the amount allowable to the group as a credit under section for 1968, since such amount is less than $22,000 (the excess of the consolidated limitation based on tax, $50,000, over the sum of the consolidated credit earned for 1968, $28,000, and unused credits arising in prior unused credit years, zero).
Example 2.
Assume the same facts as in Example 1, except that the amount determined under of this section is $12,000. Therefore, the limitation on the carryover of T's unused credit is $4,000. Accordingly, the consolidated investment credit carryover is only $9,000 since the amount of T's separate return year unused credit which may be added to the group's $ 5,000 consolidated unused credit is $4,000. These amounts are computed as follows:
| T's carryover to 1968 | $10,000 | ||
| Consolidated limitation based on amount of tax minus recomputed limitation | $12,000 | ||
| Less: T's credit earned for 1968 | $8,000 | ||
| Unused credits attributable to T arising in unused credit years preceding 1966 | 0 | $8,000 | |
| Limit on amount of 1966 unused credit of T which may be added to consolidated investment credit carryover | $4,000 | ||
| Balance of 1966 unused credit of T to be carried to 1969 (subject to the limitation contained in paragraph (c) of this section) | $6,000 |
(d) Limitation on tax credit carryovers and carrybacks from separate return limitation years applicable for consolidated return years for which the due date of the return is after March 13, 1998
(1) General rule The aggregate of a member's unused section credits arising in SRLYs that are included in the consolidated section credits for all consolidated return years of the group may not exceed—
(i) The aggregate for all consolidated return years of the member's contributions to the consolidated section limitation for each consolidated return year; reduced by
(ii) The aggregate of the member's section credits arising and absorbed in all consolidated return years (whether or not absorbed by the member).
(2) Computational rules
(i) Member's contribution to the consolidated section 38(c) limitation If the consolidated section limitation for a consolidated return year is determined by reference to the consolidated tentative minimum tax (see section ), then a member's contribution to the consolidated section limitation for such year equals the member's share of the consolidated net income tax minus the member's share of the consolidated tentative minimum tax. If the consolidated section limitation for a consolidated return year is determined by reference to the consolidated net regular tax liability (see section ), then a member's contribution to the consolidated section limitation for such year equals the member's share of the consolidated net income tax minus 25 percent of the quantity which is equal to so much of the member's share of the consolidated net regular tax liability less its portion of the $25,000 amount specified in section . The group computes the member's shares by applying to the respective consolidated amounts the principles of section and the percentage method under , assuming a 100% allocation of any decreased tax liability. The group must make proper adjustments so that taxes and credits not taken into account in computing the limitation under section are not taken into account in computing the member's share of the consolidated net income tax, etc. (See, for example, the taxes described in section that are disregarded in computing regular tax liability.) Also, the group may apportion all or a part of the $25,000 amount (or lesser amount if reduced by section ) for any year to one or more members.
(ii) Years included in computation For purposes of computing the limitation under this , the consolidated return years of the group include only those years, including the year to which a credit is carried, that the member has been continuously included in the group's consolidated return, but exclude—
(A) For carryovers, any years ending after the year to which the credit is carried; and
(B) For carrybacks, any years ending after the year in which the credit arose.
(iii) Subgroups and successors The SRLY subgroup principles under apply for purposes of this . The predecessor and successor principles under also apply for purposes of this .
(iv) Overlap with section 383 The principles under apply for purposes of this . For example, an overlap of of this section and the application of section with respect to a credit carryover occurs if a corporation becomes a member of a consolidated group (the SRLY event) within six months of the change date of an ownership change giving rise to a section credit limitation with respect to that carryover (the section event), with the result that the limitation of this does not apply. See and -1; see also (subgroup rules).
(3) Effective date
(i) In general This generally applies to consolidated return years for which the due date of the income tax return (without extensions) is after March 13, 1998.
(A) Contribution years Except as provided in of this section, a group does not take into account a consolidated taxable year for which the due date of the income tax return (without extensions) is on or before March 13, 1998, in determining a member's (or subgroup's) contributions to the consolidated section limitation under this .
(B) Special subgroup rule In the event that the principles of do not apply to a particular credit carryover in the current group, then solely for purposes of applying of this section to determine the limitation with respect to that carryover and with respect to which the SRLY register (the aggregate of the member's or subgroup's contribution to consolidated section limitation reduced by the aggregate of the member's or subgroup's section credits arising and absorbed in all consolidated return years) began in a taxable year for which the due date of the return is on or before May 25, 2000, the principles of shall be applied without regard to the phrase “or for a carryover that was subject to the overlap rule described in of this section or with respect to another group (the former group).”
(ii) Overlap rule of this section (relating to overlap with section ) applies to taxable years for which the due date (without extensions) of the consolidated return is after May 25, 2000. For purposes of of this section, only an ownership change to which section , as amended by the Tax Reform Act of 1986 (100 Stat. 2085), applies and which results in a section credit limitation shall constitute a section event.
(4) Optional effective date of January 1, 1997
(i) For consolidated taxable years beginning on or after January 1, 1997, for which the due date of the income tax return (without extensions) is on or before March 13, 1998, in lieu of and of this section (relating to the general business credit), and (relating to the foreign tax credit), the next to last sentence of , (relating to overall foreign losses), and (relating to the alternative minimum tax credit), a consolidated group may apply the corresponding provisions as they appear in 1998-1 C.B. 655 through 661 (see ) (treating references in such corresponding provisions to , , and as references to , , and ). Also, in the case of a consolidated return change of ownership that occurs on or after January 1, 1997, in a taxable year for which the due date of the income tax return (without extensions) is on or before March 13, 1998, a consolidated group may choose not to apply of this section and to taxable years ending after December 31, 1996. A consolidated group making the choices described in the two preceding sentences generally must apply all such corresponding provisions (including not applying of this section and ) for all relevant years. However, a consolidated group making the election provided in (electing not to apply to years beginning before January 1, 1998) may nevertheless choose to apply all such corresponding provisions referred to in this other than the provision corresponding to for all relevant years.
(ii) If a consolidated group chooses to apply the corresponding provisions referred to in of this section, the consolidated group shall not take into account a consolidated taxable year beginning before January 1, 1997, in determining a member's (or subgroup's) contributions to the consolidated section limitation under this .
(5) Example The following example illustrates the provisions of this :
Example.
(i) Individual A owns all of the stock of P and T. P is the common parent of the P group. P acquires all the stock of T at the beginning of Year 2. T carries over an unused section general business credit from Year 1 of $100,000. The table in paragraph (i) of this Example shows the group's net consolidated income tax, consolidated tentative minimum tax, and consolidated net regular tax liabilities, and T's share of such taxes computed under the principles of section and the percentage method under , assuming a 100% allocation of any decreased tax liability, for Year 2. (The effects of the lower section brackets are ignored, there are no other tax credits affecting a group amount or member's share, and $1,000s are omitted.)
(ii) T's Year 1 is a SRLY with respect to the P group. See . T did not undergo an ownership change giving rise to a section credit limitation within 6 months of joining the P group. Thus, T's $100,000 general business credit arising in Year 1 is subject to a SRLY limitation in the P group. The amount of T's unused section credits from Year 1 that are included in the consolidated section credits for Year 2 may not exceed T's contribution to the consolidated section limitation. For Year 2, the group determines the consolidated section limitation by reference to consolidated tentative minimum tax for Year 2. Therefore, T's contribution to the consolidated section limitation for Year 2 equals its share of consolidated net income tax minus its share of consolidated tentative minimum tax. T's contribution is $280,000 minus $160,000, or $120,000. However, because the group has a consolidated section limitation of zero, it may not include any of T's unused section credits in the consolidated section credits for Year 2.
(iii) The following table shows similar information for the group for Year 3:
(iv) The amount of T's unused section credits from Year 1 that are included in the consolidated section credits for Year 3 may not exceed T's aggregate contribution to the consolidated section limitation for Years 2 and 3. For Year 3, the group determines the consolidated section limitation by reference to the consolidated tentative minimum tax for Year 3. Therefore, T's contribution to the consolidated section limitation for Year 3 equals its share of consolidated net income tax minus its share of consolidated tentative minimum tax. Applying the principles of section and (taking into account, for example, that T's positive earnings and profits adjustment under reflects its losses actually absorbed by the group), T's contribution is $(105,000) minus $(40,000), or $(65,000). T's aggregate contribution to the consolidated section limitation for Years 2 and 3 is $120,000 + $(65,000), or $55,000. The group may include $55,000 of T's Year 1 unused section credits in its consolidated section tax credit in Year 3.
(e) [Reserved]
(f) Early dispositions, etc., of section 38 property
(1) Dispositions of section 38 property during and after consolidated return year If property is subject to section (1) or (2) with respect to a member during a consolidated return year, any increase in tax shall be added to the tax liability of the group under (regardless of whether the property was placed in service in a consolidated or separate return year). Also, if property is subject to section (1) or (2) with respect to a corporation during a taxable year for which such corporation files on a separate return basis, any increase in tax shall be added to the tax liability of such corporation (regardless of whether such property was placed in service in a consolidated or separate return year).
(2) Exception for transfer to another member
(i) Except as provided in subdivisions (ii) and (iii) of this subparagraph, a transfer of section property from one member of the group to another member of such group during a consolidated return year shall not be treated as a disposition or cessation within the meaning of section . If such section property is disposed of, or otherwise ceases to be section property or becomes public utility property with respect to the transferee, before the close of the estimated useful life which was taken into account in computing qualified investment, then section (1) or (2) shall apply to the transferee with respect to such property (determined by taking into account the period of use, qualified investment, other dispositions, etc., of the transferor). Any increase in tax due to the application of section (1) or (2) shall be added to the tax liability of such transferee (or the tax liability of a group, if the transferee joins in the filing of a consolidated return).
(ii) Except as provided in subdivision (iii) of this subparagraph, if section property is disposed of during a consolidated return year by one member of the group to another member of such group which is an organization to which section applies or a cooperative organization described in section , the tax under chapter 1 of the Code for such consolidated return year shall be increased by an amount equal to the aggregate decrease in the credits allowed under section for all prior taxable years which would result solely from treating such property, for purposes of determining qualified investment, as placed in service by such organization to which section applies or such cooperative organization described in section , as the case may be, but with due regard to the use of the property before such transfer.
(iii) Section shall apply to a transfer of section property by a corporation during a consolidated return year if such corporation is liquidated in a transaction to which section applies.
(3) Examples The provisions of this paragraph may be illustrated by the following examples:
Example 1. P, S, and T file a consolidated return for calendar year 1967. In such year S places in service section property having an estimated useful life of more than 8 years. In 1968, P, S, and T file a consolidated return and in such year S sells such property to T. Such sale will not cause section to apply.
Example 2. Assume the same facts as in example (1), except that P, S, and T filed separate returns for 1967. The sale from S to T will not cause section to apply.
Example 3. Assume the same facts as in example (1), except that P, S, and T continue to file consolidated returns through 1971 and in such year T disposes of the property to individual A. Section will apply to the group and any increase in tax shall be added to the tax liability of the group. For the purposes of determining the actual period of use by T, such period shall include S's period of use.
Example 4. Assume the same facts as in example (3), except that T files a separate return in 1971. Again, the actual periods of use by S and T will be combined in applying section . If the disposition results in an increase in tax under section , such additional tax shall be added to the separate tax liability of T.
Example 5. Assume the same facts as in example (1), except that in 1969, P sells all the stock of T to a third party. Such sale will not cause section to apply.
[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 7246, 38 FR 758, Jan. 4, 1973; T.D. 8597, 60 FR 36679, July 18, 1995; T.D. 8751, 63 FR 1742, Jan. 12, 1998; T.D. 8766, 63 FR 12642, Mar. 16, 1998; T.D. 8884, 65 FR 33754, May 25, 2000; 65 FR 48379, Aug. 8, 2000; 65 FR 50281, Aug. 17, 2000; T.D. 10018, 89 FR 106852, Dec. 30, 2024]