IRS Proposed Rule: Consolidated Net Operating Losses
The proposed rule was issued by
DATES: Written or electronic comments and requests for a public hearing must be received by
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
* * *
This notice of proposed rulemaking contains proposed amendments to the consolidated return regulations under section 1502 of the Internal Revenue Code (Code).
The proposed regulations provide guidance implementing recent statutory amendments to section 172 and withdraw and re-propose certain sections of proposed regulations issued in prior notices of proposed rulemaking relating to the absorption of consolidated net operating loss carryovers and carrybacks.
In addition, the proposed regulations update regulations applicable to consolidated groups that include both life insurance companies and other companies to reflect statutory changes.
These proposed regulations would affect corporations that file consolidated returns.
SUPPLEMENTARY INFORMATION:
In the Rules and Regulations section of this issue of the
Background
These proposed regulations revise the Income Tax Regulations (26 CFR part 1) under section 1502 of the Code. Section 1502 authorizes the Secretary of the
These proposed revisions implement certain statutory amendments made by Public Law 115-97, 131 Stat. 2054 (
I. Net Operating Loss Deductions
Prior to amendment by the TCJA, section 172(a) allowed a taxpayer to use its aggregate NOL carryovers and carrybacks to a taxable year to offset all taxable income in the taxable year, and section 172(b)(1) generally permitted taxpayers to carry back NOLs two years and carry over NOLs 20 years. The TCJA amended section 172 to provide new NOL deduction rules based on (i) the type of entity generating the NOL or using an NOL to offset income, or (ii) the character of the loss giving rise to an NOL. The CARES Act extended the carryback period for NOLs arising in a taxable year beginning after
A. General
As amended by section 13302(a)(1) of the TCJA and section 2303(a)(1) of the CARES Act, section 172(a)(2) of the Code allows an NOL deduction for a taxable year beginning after
Section 13302(b) of the TCJA amended section 172(b) to generally eliminate NOL carrybacks but permit post-2017 NOLs to be carried over indefinitely. Section 2303(b) of the CARES Act further amended section 172(b) to require (unless waived under section 172(b)(3)) a five-year carryback for NOLs arising in taxable years beginning after
B. Special NOL Rules for Nonlife Insurance Companies
Section 13302(d) of the TCJA added sections 172(b)(1)(C) and 172(f), which provide special rules for insurance companies other than life insurance companies, as defined in section 816(a) (nonlife insurance companies, which commonly are referred to as property and casualty insurance companies or P&C companies). Under section 172(f), the 80-percent limitation does not apply to nonlife insurance companies. Therefore, taxable income of nonlife insurance companies may be fully offset by NOL deductions. In addition, under sections 172(b)(1)(C) and (b)(1)(D)(i), losses of nonlife insurance companies arising in taxable years beginning after
C. Special NOL Rules for Farming Losses
Section 13302(c) of the TCJA amended the special rules for farming losses set forth in sections 172(b)(1)(F) and 172(h), as in effect prior to enactment of the TCJA. For purposes of section 172, a "farming loss" is the lesser of (i) the amount that would be the NOL for the taxable year if only income and deductions attributable to farming businesses (as defined in section 263A(e)(4) of the Code) were taken into account, or (ii) the amount of the NOL for that taxable year. See section 172(b)(1)(B)(ii). Under sections 172(b)(1)(B)(i) and (b)(1)(D)(i)(II), any portion of an NOL for a taxable year beginning after
II. Insurance Company Provisions
The TCJA also made several changes to subchapter L (which addresses the taxation of insurance companies) that are relevant to this notice of proposed rulemaking. First, sections 13511(a) and 13511(b) of the TCJA (i) struck section 805(b)(4), which generally denied life insurance companies the NOL deduction provided in section 172, and (ii) made a conforming amendment by striking section 810, which provided a deduction for operations losses for life insurance companies. As a result, effective for taxable years beginning after
Additionally, section 2303(b) of the CARES Act added a special rule for life insurance companies. Section 172(b)(1)(D)(iii) provides that, in the case of a life insurance company, if an NOL is carried back under section 172(b)(1)(D)(i)(I) to a life insurance company taxable year beginning before
Because the repeal of section 810 is effective for losses arising in taxable years beginning after
Final regulations applicable to life-nonlife groups under Section 1.1502-47 were published in the
Explanation of Provisions
I. Overview
These proposed regulations provide guidance for consolidated groups regarding the application of the 80-percent limitation, as originally enacted as part of the TCJA and subsequently amended by the CARES Act. These proposed regulations also provide guidance regarding the application of the NOL carryback provisions following enactment of the TCJA and the CARES Act. In addition, the proposed regulations withdraw and re-propose certain sections of proposed regulations issued under section 1502 in prior notices of proposed rulemaking that relate to the absorption of NOL carrybacks and carryovers. See part II of this Explanation of Provisions for a further discussion.
These proposed regulations also update Section 1.1502-47 to reflect certain changes to the insurance company rules made by the CARES Act, the TCJA, and prior tax legislation. See part III of this Explanation of Provisions for a further discussion.
II. Amendments to Section 1.1502-21
A. In General
Under section 172, as amended by the TCJA and the CARES Act, NOLs generated by certain members of a consolidated group (that is, nonlife insurance companies), as well as NOLs generated by certain business activity within a consolidated group (that is, farming losses), are subject to different rules than other NOLs in taxable years beginning after
B. Application of the 80-Percent Limitation
1. In General
Section 1.1502-21(a) defines the consolidated net operating loss (CNOL) deduction for any consolidated return year as "the aggregate of the net operating loss carryovers and carrybacks to the year." This section specifies that "[t]he net operating loss carryovers and carrybacks consist of (1) [a]ny CNOLs . . . of the consolidated group; and (2) [a]ny net operating losses of the members arising in separate return years." NOL carryovers and carrybacks to a consolidated return year are determined under the principles of section 172 and Section 1.1502-21. See Section 1.1502-21(b)(1). For example, losses permitted to be absorbed in a consolidated return year generally are absorbed in the order of the taxable years in which they arose. See id.
As discussed in part I.A of the Background, the 80-percent limitation on the use of post-2017 NOLs to offset taxable income (other than taxable income of nonlife insurance companies) applies to taxable years beginning after
2. Application of the 80-Percent Limitation to Groups Comprised of Nonlife Insurance Companies, Members Other Than Nonlife Insurance Companies, or Both
Application of the 80-percent limitation depends on the status of the entity whose income is being offset, rather than on the status of the entity whose loss is being absorbed. As noted in part I.B of the Background, section 172(f) provides that the 80-percent limitation does not apply when the taxable income of a nonlife insurance company is offset by an NOL carryback or carryover.
To implement the special rules under section 172 regarding income of nonlife insurance companies, these proposed regulations clarify that application of the 80-percent limitation within a consolidated group to post-2017 NOLs (post-2017 CNOL deduction limit) depends on the status of the entity that generated the income being offset in a consolidated return year beginning after
A two-factor computation is required if a consolidated group is comprised of both nonlife insurance companies and other members in a consolidated return year beginning after
The first amount relates to the income of those members that are not nonlife insurance companies (residual income pool). This amount equals the lesser of (i) the aggregate amount of post-2017 NOLs carried to that year, or (ii) 80 percent of the excess of the group's CTI for that year (determined without regard to income, gain, deduction, or loss of members that are nonlife insurance companies and without regard to any deductions under sections 172, 199A, and 250) over the aggregate amount of pre-2018 NOLs carried to that year that are allocated to the positive net income of members other than nonlife insurance companies.
The second amount relates to the income of those members that are nonlife insurance companies (nonlife income pool). This amount equals 100 percent of the group's CTI for the year (determined without regard to any income, gain, deduction, or loss of members that are not nonlife insurance companies), less the aggregate amount of pre-2018 NOLs carried to that year that are allocated to the positive net income of nonlife insurance company members.
For purposes of computing the foregoing amounts, pre-2018 NOLs are allocated pro rata between the two types of income pools in the group (that is, the income pool for nonlife insurance companies and the income pool for all other members, respectively). This allocation is based on the relative amounts of positive net income in each pool in the particular consolidated return year.
For example, assume that P, PC1, and PC2 are members of a calendar-year consolidated group (
The total amount allowed as a CNOL deduction in the
Under these proposed regulations, the
The second amount reflects the application of section 172(f) to the income of PC1 and PC2 (that is, the nonlife income pool). This amount is
Thus, the
If a group's nonlife insurance company members have net income for a particular consolidated return year beginning after
In formulating these proposed regulations, the
Specifically, this alternative approach would have adopted a threshold computational step under which the principles of Section 1.1502-21(b)(2)(iv)(B) would apply to offset the income and loss items solely among members that are nonlife insurance companies. The remaining members of the group would be subject to a parallel offset. Following this initial offsetting of pooled items, Section 1.1502-21(b)(2)(iv)(B) (or the principles of Section 1.1502-21(b)(2)(iv)(B), in the case of a group with CTI) would apply to allocate a post-2017 CNOL among all group members with taxable income. This approach contrasts with the historical application of Section 1.1502-21(b)(2)(iv)(B), under which a CNOL for a year is attributed pro rata to all members of a group that produce net loss, without first netting among entities of the same type. This historical approach developed before the enactment of the TCJA, and thus before special carryover rules applied to nonlife insurance companies.
3. Losses Arising in a SRLY
Generally, an unaffiliated corporation determines its taxable income by offsetting its NOLs against its income. In contrast, a consolidated group member generally offsets its NOLs against the income of all group members. See Sections 1.1502-11 and 1.1502-21. However, an exception to this general rule for consolidated groups applies to a group's use of NOLs incurred by a member (SRLY member) in a taxable year other than a year of the current group (that is, a separate return limitation year or SRLY). A SRLY member may carry its NOLs that arose in a SRLY into the consolidated group, but those NOLs can be absorbed by the group only to the extent that the SRLY member generates income on a separate-entity basis while a member of the group (that is, to the extent of the amount of net income generated by the SRLY member as a member of the group). See generally Section 1.1502-21(c)(1)(i) (setting forth the general SRLY limitation rule).
The SRLY rules attempt to replicate, to the extent possible, separate-entity usage of the SRLY attributes of the SRLY member. In other words, the SRLY regulations were designed to obtain an absorption result that varies as little as possible from the absorption that would have occurred if the SRLY member had not joined the consolidated group.
To approximate a SRLY member's absorption of NOLs on a separate-entity basis, the SRLY member's net contribution to the CTI of the group is measured cumulatively over the period during which the corporation is a member of the group by using what is commonly referred to as a "cumulative register." The cumulative register tracks the SRLY member's net positive (or negative) contribution to the income of the group. See Section 1.1502-21(c)(1)(i). If the SRLY member has net positive income in a consolidated taxable year, the member's cumulative register increases. See Section 1.1502-21(c)(1)(i)(A) and (C). In turn, if the losses of a SRLY member (including SRLY-limited NOL carryovers) are absorbed by the group, the SRLY member's cumulative register decreases. See Section 1.1502-21(c)(1)(i)(B) and (C).
These proposed regulations would modify the cumulative register rules to reflect the application of the 80-percent limitation under section 172(a)(2)(B). Under the proposed regulations, as in current Section 1.1502-21, the full amount of the SRLY member's current-year income (or current-year absorbed loss) increases (or decreases) the member's cumulative register. However, when the cumulative register is reduced to account for the group's absorption of any SRLY member's NOLs that are subject to the 80-percent limitation (whether or not those losses are subject to the SRLY limitation), the amount of the reduction equals the full amount of income that would be necessary to support the deduction by the SRLY member.
For example, after absorption of any pre-2018 NOLs of a SRLY member, the SRLY member (other than a nonlife insurance company) would need to have
For example, assume that P owns 79 percent of S, and that neither P nor S is a nonlife insurance company. In Year 1 (a taxable year beginning after
Now assume that, instead of S filing a separate return for Year 2, P acquires the remaining stock of S at the end of Year 1, and P and S file a consolidated return for Year 2. The P group has
If S's cumulative register were not reduced by the full amount of income necessary to support the deduction, the P group's ability to use S's loss would exceed S's ability to use the loss if S had not joined the P group. As an illustration, assume further that, in Year 3, the P group has
Therefore, absent an adjustment to S's cumulative register to account for the 80-percent limitation, S would achieve a different result as a member of a consolidated group than if S had remained a stand-alone entity. As explained earlier in this part II.B.3 of this Explanation of Provisions, such a result would be inconsistent with the purpose of the SRLY regime. See the preamble to TD 8823 published in the
C. Recomputation of Amount of CNOL Attributable to Each Member
Section 1.1502-21(b)(2)(i) generally provides that, if a group has a CNOL that is carried to another taxable year, the CNOL is apportioned among the group's members. For this purpose, Section 1.1502-21(b)(2)(iv) provides a fraction, the numerator of which is the separate NOL of each member for the consolidated return year of the loss (determined by taking into account only the member's items of income, gain, deduction, and loss), and the denominator of which is the sum of the separate NOLs of all members for that year.
If a member's portion of a CNOL is absorbed or reduced on a non-pro rata basis, the percentage of the CNOL attributable to each member must be recomputed to reflect the proper allocation of the remaining CNOL. For instance, if a portion of a CNOL allocable to a nonlife insurance company is carried back to and absorbed in a prior taxable year under the special rule for nonlife insurance companies that applies for taxable years beginning after
Accordingly, these proposed regulations provide that, if a member's portion of a CNOL is absorbed or reduced on a non-pro rata basis, the percentage of the CNOL attributable to each member is recomputed. The recomputed percentage of the CNOL attributable to each member equals the remaining CNOL attributable to the member at the time of the recomputation, divided by the sum of the remaining CNOL attributable to all of the remaining members at the time of the recomputation. In other words, if at the time of the recomputation a member's attributable portion of the group's remaining CNOL equals
Proposed regulations (REG-101652-10) published in the
D. Farming Losses
For a taxable year beginning after
Whereas the special nonlife insurance company rules in section 172 apply based on the status of the entity that generated the loss, the special farming loss carryback rules in section 172 apply based on the character of the loss; that is, whether the loss resulted from farming activity. The special rule for farming losses creates a situation similar to that addressed in
In a notice of proposed rulemaking (REG-140668-07) published in the
Consistent with the 2012 proposed regulations, these proposed regulations re-propose, in modified form, a specific rule regarding the apportionment of CNOLs that include farming losses arising in taxable years beginning after
E. Elections To Waive Portions of the Five-Year Carryback Period Under Section 172(b)(1)(D)(i)
Temporary regulations in the Rules and Regulations section of this issue of the
III. Amendments to Section 1.1502-47
A. Overview
1. Legislative Background at the Time the Current Life-Nonlife Regulations Were Promulgated
The Life Insurance Company Income Tax Act of 1959, Public Law 86-69, 73 Stat. 112 (
Prior to the enactment of the Tax Reform Act of 1976, Public Law 94-455, 90 Stat. 1520 (
Section 1507 of the 1976 Act (90 Stat. 1520, 1739-41) permitted life companies to consolidate with nonlife companies, subject to additional restrictions that do not apply to a regular consolidated group. Section 1503(c)(1) (as amended by the 1976 Act and subsequent tax legislation) provides that, if the nonlife company members of a life-nonlife group (nonlife members) have a loss for the taxable year, then under regulations to be issued by the Secretary, the amount of the loss that cannot be carried back and absorbed by the taxable income of the nonlife members can be taken into account in determining the CTI of the group only to the extent of the lesser of 35 percent of such loss or 35 percent of the taxable income of the life company members of the group (life members). Further, section 1503(c)(2) (as so amended) provides that the losses of a recent nonlife affiliate may not be used by a life company before the sixth taxable year the companies have been members of the same affiliated group.
2. Current Life-Nonlife Regulations
The current life-nonlife regulations adopted a subgroup method for computing a life-nonlife group's CTI. Under the subgroup method, the nonlife members and the life members generally are treated as if the members compose two separate consolidated groups, with certain exceptions (including intercompany transactions, as defined in Section 1.1502-13(b)(1)(i)). Thus, each of the life subgroup and the nonlife subgroup separately calculates its taxable income. Subgroup losses that are eligible to be carried back must be carried back to offset subgroup income in prior taxable years before being used to offset income of the other subgroup in the current taxable year, and subgroup losses may not be carried back to offset income of the other subgroup in prior taxable years.
Further, a carryback of a subgroup loss may "bump" the loss of the other subgroup used in the carryback year (that is, the loss that is carried back may supplant a loss of the other subgroup in the carryback year). See Section 1.1502-47(a)(2)(ii). For example, assume that life subgroup losses were used to offset nonlife subgroup income in Year 1. If the nonlife subgroup incurs losses in Year 2 that are eligible to be carried back to Year 1, those Year 2 nonlife subgroup losses (rather than the Year 1 life subgroup losses) would be used to offset the nonlife subgroup's income in Year 1. The "bumped" life subgroup losses from Year 1 then would be carried over to future taxable years.
3. Legislative Changes Regarding the Taxation of Insurance Companies Since Promulgation of the Current Life-Nonlife Regulations
The Deficit Reduction Act of 1984, Public Law 98-369, 98 Stat. 494 (
In turn, the Tax Reform Act of 1986, Public Law 99-514, 100 Stat. 2085 (
Lastly, the TCJA made significant additional changes to the taxation of life insurance companies, and the CARES Act added a special rule for such companies in section 172(b)(1)(D)(iii). These changes are described in detail in part II of the Background.
B. Summary of Proposed Changes to Section 1.1502-47
As a result of changes in the taxation of insurance companies under the TCJA and prior legislation, various provisions in Section 1.1502-47 currently are outdated. Accordingly, to the extent preempted by statute, the current regulations have no application. These proposed regulations update Section 1.1502-47 by: (1) Removing paragraphs implementing statutory provisions that have been repealed; (2) revising paragraphs implementing statutory provisions that have been substantially revised; (3) updating terminology and statutory references to account for other statutory changes; and (4) removing paragraphs that contain obsolete transition rules or that are no longer applicable because the effective dates in the current life-nonlife regulations have passed.
1. Removal of Paragraphs Due to Repealed Statutory Provisions
Certain paragraphs in Section 1.1502-47 are no longer relevant to the calculation of life-nonlife CTI because of the repeal of the three-phase system by the 1984 Act and later amendments to the Code. Therefore, these proposed regulations remove numerous paragraphs including current Sections 1.1502-47(k) and (l), which provide rules for calculating consolidated TII and the consolidated GO or loss from operations (LO). These proposed regulations also remove (i) Section 1.1502-47(f)(7)(ii), which generally provides that the consolidated tax liability of a life-nonlife group includes the tax described by section 1201, and (ii) Section 1.1502-47(o), which provides rules for calculating the alternative tax imposed by section 1201 on consolidated capital gain. (As noted in part II of the Background, section 1201 was repealed by the TCJA.)
2. Updates Reflecting Substantially Revised Statutory Provisions
These proposed regulations also update Section 1.1502-47 to reflect changes to certain statutory provisions since the current life-nonlife regulations were promulgated. For example, these proposed regulations modify current Section 1.1502-47(f)(5) (relating to the dividends received deduction) to reflect changes by the 1986 Act to sections 805(a)(4) and 818(e)(2) (for life companies) and to reflect changes by the 1986 Act and the Technical and Miscellaneous Revenue Act of 1988, Public Law 100-647, 102 Stat. 3342 (
Additionally, these proposed regulations update the rules relating to consolidated LICTI to reflect the repeal of the three-phase system by the 1984 Act and other changes to the taxation of life companies. These proposed regulations also move certain provisions in current Section 1.1502-47(k) (consolidated TII) and (l) (consolidated GO or LO) that remain applicable following the repeal of the three-phase system to revised paragraph (g), and they implement the special rule for life insurance companies in section 172(b)(1)(D)(iii) under the CARES Act.
3. Revisions to Account for Other Statutory Changes
These proposed regulations also update terminology and citations to the Code to reflect current law. For example, these proposed regulations remove references to section 821 and mutual insurance companies because the statutory provisions regarding mutual insurance companies were repealed by the 1986 Act. Additionally, these proposed regulations replace references to section 802 with references to section 801 because section 802 was repealed by the 1984 Act. Similarly, these proposed regulations replace references to the LO with references to the NOL deduction under section 172 to reflect the repeal of section 810 by the TCJA.
4. Removal of Obsolete Transition Rules and Other Rules That No Longer Are Applicable
These proposed regulations propose the removal of transition rules regarding the implementation of the current life-nonlife regulations, since those transition rules apply to carryovers that either have been absorbed or have expired. For example, the proposed regulations propose the removal of current Section 1.1502-47(h)(3) (setting forth transition rules for NOLs attributable to taxable years ending before
These proposed regulations also would remove cross-references to certain prior-law regulations that are designated with an "A" because those regulations generally are applicable to years ending in 1999 or earlier. Additionally, these proposed regulations would remove cross-references to Section 1.1502-18 (relating to inventory adjustments) because that section does not apply to taxable years beginning after
Acting Deputy Commissioner for Services and Enforcement.
[FR Doc. 2020-14427 Filed 7-2-20;
BILLING CODE 4830-01-P
The document is published in the
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