Reg. § 1.1502-93 Consolidated section 382 limitation (or subgroup section 382 limitation).
(a) Determination of the consolidated section 382 limitation (or subgroup section 382 limitation)
(1) In general Following an ownership change, the consolidated section limitation (or subgroup section limitation) for any post-change year is an amount equal to the value of the loss group (or loss subgroup), as defined in of this section, multiplied by the long-term tax-exempt rate that applies with respect to the ownership change, and adjusted as required by section and the regulations thereunder. See, for example, section (relating to the carryforward of unused section limitation), section (relating to the section limitation for the post-change year that includes the change date), section (relating to recognized built-in gains and section gains), and section (relating to short taxable years). For special rules relating to the recognized built-in gains of a loss group (or loss subgroup), see of this section.
(2) Coordination with apportionment rule For special rules relating to apportionment of a consolidated section limitation (or a subgroup section limitation) or net unrealized built-in gain when one or more corporations cease to be members of a loss group (or a loss subgroup) and to aggregation of amounts so apportioned, see .
(b) Value of the loss group (or loss subgroup)
(1) Stock value immediately before ownership change Subject to any adjustment under of this section, the value of the loss group (or loss subgroup) is the value, immediately before the ownership change, of the stock of each member, other than stock that is owned directly or indirectly by another member. For this purpose—
(i) Ownership is determined under ;
(ii) A member is considered to indirectly own stock of another member through a nonmember only if the member has a 5-percent or greater ownership interest in the nonmember; and
(iii) Stock includes stock described in section and and .
(2) Adjustment to value
(i) In general The value of the loss group (or loss subgroup), as determined under of this section, is adjusted under any rule in section or the regulations thereunder requiring an adjustment to such value for purposes of computing the amount of the section limitation. See, for example, section (redemptions and corporate contractions), section (certain capital contributions) and section (ownership of substantial nonbusiness assets). For purposes of section , redemptions and corporate contractions that do not effect a transfer of value outside of the loss group (or loss subgroup) are disregarded. For purposes of section , capital contributions between members of the loss group (or loss subgroup) (or a contribution of stock to a member made solely to satisfy the loss subgroup parent requirement of or of this section), are not taken into account. Also, the substantial nonbusiness asset test of section is applied on a group (or subgroup) basis, and is not applied separately to its members.
(ii) Anti-duplication Appropriate adjustments must be made to the extent necessary to prevent any duplication of the value of the stock of a member, even though corporations that do not file consolidated returns may not be required to make such an adjustment. In making these adjustments, the group (or loss subgroup) may apply the principles of (relating to controlled groups of corporations) in determining the value of a loss group (or loss subgroup) even if that section would not apply if separate returns were filed. Also, the principles of (relating to successive ownership changes and absorption of a section limitation) may apply to adjust the consolidated section limitation (or subgroup section limitation) of a loss group (or loss subgroup) to avoid a duplication of value if there are simultaneous (rather than successive) ownership changes.
(3) Examples The following examples illustrate the principles of this :
Example 1. Basic case.
(i) L, L1, and L2 compose a loss group. L has outstanding common stock, the value of which is $100. L1 has outstanding common stock and preferred stock that is described in section . L owns 90 percent of the L1 common stock, and A owns the remaining 10 percent of the L1 common stock plus all the preferred stock. The value of the L1 common stock is $40, and the value of the L1 preferred stock is $30. L2 has outstanding common stock, 50 percent of which is owned by L and 50 percent by L1. The L group has an ownership change. The following is a graphic illustration of these facts:
(ii) Under of this section, the L group does not include the value of the stock of any member that is owned directly or indirectly by another member in computing its consolidated section limitation. Accordingly, the value of the stock of the loss group is $134, the sum of the value of—
(a) The common stock of L ($100);
(b) The 10 percent of the L1 common stock ($4) owned by A; and
(c) The L1 preferred stock ($30) owned by A.
Example 2. Indirect ownership.
(i) L and L1 compose a consolidated group. L's stock has a value of $100. L owns 80 shares (worth $80) and corporation M owns 20 shares (worth $20) of the L1 stock. L also owns 79 percent of the stock of corporation M. The L group has an ownership change. The following is a graphic illustration of these facts:
(ii) Under of this section, because of L's more than 5 percent ownership interest in M, a nonmember, L is considered to indirectly own 15.8 shares of the L1 stock held by M (79% × 20 shares). The value of the L loss group is $104.20, the sum of the values of—
(a) The L stock ($100); and
(b) The L1 stock not owned directly or indirectly by L (21% × $20, or $4.20).
(c) Recognized built-in gain of a loss group or loss subgroup
(1) In general If a loss group (or loss subgroup) has a net unrealized built-in gain, any recognized built-in gain of the loss group (or loss subgroup) is taken into account under section in determining the consolidated section limitation (or subgroup section limitation).
(2) Adjustments Appropriate adjustments must be made so that any recognized built-in gain of a member that increases more than one section limitation (whether consolidated, subgroup, or separate) does not effect a duplication in the amount of consolidated taxable income that can be offset by pre-change net operating losses. For example, a consolidated section limitation that is increased by recognized built-in gains is reduced to the extent that pre-change net operating losses of a loss subgroup absorb additional consolidated taxable income because the same recognized built-in gains caused an increase in that loss subgroup's section limitation. In addition, recognized built-in gain may not increase the amount of consolidated taxable income that can be offset by recognized built-in losses.
(d) Continuity of business
(1) In general A loss group (or a loss subgroup) is treated as a single entity for purposes of determining whether it satisfies the continuity of business enterprise requirement of section .
(2) Example The following example illustrates the principle of this :
Example. Continuity of business enterprise. L owns all the stock of two subsidiaries, L1 and L2. The L group has an ownership change. It has pre-change consolidated attributes attributable to L2. Each of the members has historically conducted a separate line of business. Each line of business is approximately equal in value. One year after the ownership change, L discontinues its separate business and the business of L2. The separate business of L1 is continued for the remainder of the 2 year period following the ownership change. The continuity of business enterprise requirement of section is met even though the separate businesses of L and L2 are discontinued.
(e) Limitations of losses under other rules If a section limitation for a post-change year exceeds the consolidated taxable income that may be offset by pre-change attributes for any reason, including the application of the limitation of , the amount of the excess is carried forward under section (relating to the carryforward of unused section limitation).
[T.D. 8824, 64 FR 36153, July 2, 1999]