Guidance on Filing an Application for a
Tentative Carryback Adjustment in a
Consolidated Return Context

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [TD 8919] RIN 1545-AY57

TITLE: Guidance on Filing an Application for a Tentative Carryback
Adjustment in a Consolidated Return Context

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations....

SUMMARY: This document contains temporary regulations relating to
the filing of an application for a tentative carryback adjustment.
These temporary regulations provide guidance to determine the time
for filing such application by a consolidated group. This document
also contains temporary regulations relating to the filing of an
application for a tentative carryback adjustment by certain
corporations for the separate return year created by their becoming
a member of a consolidated group. These temporary regulations may
affect all consolidated groups. The text of these temporary
regulations also serves as the text of proposed regulations set
forth in the notice of proposed rulemaking on this subject in the
Proposed Rules section of this issue of the Federal Register .

DATES: Effective Date: April 4, 2001. Applicability Date: For dates
of applicability for these regulations, see paragraph (g)(2)(v) of
this section..2

FOR FURTHER INFORMATION CONTACT: Christopher M. Bass or Frances L.
Kelly, (202) 622-7770.

SUPPLEMENTARY INFORMATION:

Background

This document contains temporary amendments to the Income Tax
Regulations (26 CFR Part 1) under section 1502 of the Internal
Revenue Code of 1986 (Code). The amendments provide guidance as to
the time for filing an application for a tentative carryback
adjustment by a consolidated group. The amendments also extend the
time for filing an application for a tentative carryback adjustment
by certain corporations for the separate return year created by
their becoming new members of a consolidated group.

Section 6411(a) requires that an application for a tentative
carryback adjustment be filed on or after the date of filing for the
return for the taxable year of the loss (or unused business credit)
from which the carryback results and within a period of twelve (12)
months after the end of such taxable year. Section 6411(c) provides
that if the corporation seeking a tentative carryback adjustment
made or was required to make a consolidated return for the year in
which the loss or credit arose or for the preceding taxable year
affected by such loss or credit, the provisions of Section 6411(a)
apply only to such extent and subject to such conditions,
limitations and exceptions as the Secretary may by regulations
prescribe. Section 1.6411-4 refers taxpayers to the consolidated
return regulations, specifically §1.1502-78, for further rules
applicable to consolidated groups filing for a tentative carryback
adjustment.

Section 1.1502-78(a) addresses the proper party to file an
application for a tentative carryback adjustment. However, there is
no provision addressing the time for filing such application.
Section 1.1502-78 does not currently alter the statutory rule as to
"when" the end of a taxable year occurs for purposes of determining
whether the twelve-month rule of section 6411 has been satisfied.
Under §1.1502-76, the due date for the separate return of a new
member is generally extended until the due date of the return of the
consolidated group. In certain instances, however, such separate
return cannot be filed before the expiration of the twelve-month
period under section 6411(a). Thus, a new member may be prevented
from filing an application for a tentative carryback adjustment.

Section 1.1502-76(b)(1)(i) provides that the consolidated return
must include the common parent's items of income, gain, deduction,
loss, and credit for the entire consolidated year, and each
subsidiary's items for the portion of the year for which it is a
member. Items of a corporation for the portion of the year not
included in the consolidated return must be included in a separate
return (including the consolidated return of another group). Thus,
the items of a new member of a consolidated group are included in
two returns: first, the consolidated return for the period of time
it is a member of the group; and second, a separate return
(including the consolidated return of another group) for the pre-
affiliation period prior to becoming a member of the consolidated
group. This pre-affiliation period is a separate return year as
defined in §1.1502-1(e).

The tax returns for the periods that end and begin upon a
corporation becoming. (or ceasing to be) a member of a consolidated
group are separate taxable years for all Federal income tax
purposes. Section 1.1502-76(b)(2)(i). Although these periods are
separate taxable years, items of income, gain, deduction, loss, and
credit (other than extraordinary items) may be ratably allocated
between such years if: (1) the corporation is not required to change
its annual accounting period or its method of accounting as a result
of its change in status as a member; and (2) a timely ratable
allocation election is made. Section 1.1502-76(b)(2)(ii)(A). If a
ratable allocation cannot be made (or is not made), the corporation
must close its books at the close of the day on which its status as
a member changes and its items of income, gain, deduction, loss, and
credit for the pre-affiliation period are included in its separate
return. Section 1.1502-76(b)(2)(ii). Section 1.1502-76(c) determines
the time for filing the new member's separate return. The provisions
of this section apply only to a corporation which, immediately prior
to becoming a new member of a group, was the common parent of
another consolidated group, or was not required to join in the
filing of a consolidated return. Under §1.1502-76(c), the due
date of the new member's separate return is dependent upon the
filing of the consolidated group's tax return. If the consolidated
return for the group has been filed by the due date for the new
member's separate return, then the separate return must be filed no
later than the due date of the consolidated group's return,
including extensions. If the consolidated return for the group has
not been filed by the due date for the new member's separate return,
then the separate return must be filed on or before such due date.
In each case, the due date for the new member's separate return is
determined with regard to extensions of time for filing but without.

regard to the member's new affiliated status. The close of the new
member's separate return year is treated as the close of its normal
taxable year. Therefore, §1.1502-76(c) effectively extends the
period of time in which a new member is required to file its
separate return because otherwise, the taxable year would end on the
date it becomes a member. Section 1.1502-76(b)(2).

While §1.1502-76(c) extends the due date for filing the new
member's separate return, there is no similar provision that extends
the due date for filing an application for a tentative carryback
adjustment for the separate return year. Neither section 6411(a) nor
§1.1502-78 interprets the close of the new member's separate
return year as the close of its normal taxable year. Therefore, an
application for a tentative carryback adjustment must be filed: (1)
on or after the extended date for filing the return for the taxable
year; and (2) within a period of twelve months after the close of
such taxable year. Since the separate return year is treated as a
separate taxable year for all Federal income tax purposes under
§1.1502-76(b)(2)(i), a new member that chooses to file an
application for a tentative carryback adjustment under section 6411
must do so within twelve (12) months after the close of its separate
return year (not its normal taxable year).

The practical effect of extending the due date for filing the new
member's separate return under §1.1502-76(c) without extending
the time period for filing an application for a tentative carryback
adjustment is that a corporation that becomes a member of a
consolidated group early in its taxable year may effectively be
precluded from filing the application. This results because the
twelve-month period for filing the refund application may expire
prior to the due date (extended or unextended) for the filing of the
new member's separate return.

The problem is illustrated by the following example:

On April 30, 2000, 100% of the stock of Corporation X, a stand-alone
corporation, is acquired by Group Y. Both Corporation X and Group Y
file their returns on a calendar year basis. Under
§1.1502-76(c), Corporation X's separate return for the period,
January 1-April 30, 2000 (the April 2000 Year), is due on or before
September 15, 2001 (with extensions). However, its application for a
tentative carryback adjustment for the April 2000 Year is due no
later than April 30, 2001, twelve months after the end of the April
2000 Year.

As a practical matter, the separate return of some new members
cannot be filed before the group's consolidated return is filed. As
previously noted, §1.1502-76(b)(2) provides, under certain
circumstances, that the new member's items of income, gain,
deduction, loss, and credit may be ratably allocated between the
pre-affiliation and the post-affiliation periods. The new member may
not know whether the common parent will elect to ratably allocate
its items. Such allocation would alter the income or loss of the new
member for its separate return year. The new member also may not
know the proper amount of income and loss to report and thus cannot
file its separate return or its application for a tentative
carryback adjustment until the group's consolidated return has been
filed. Furthermore, Rev. Rul. 75-327 (1975-2 C.B. 481) holds that,
because the IRS must rely on the information provided by the
taxpayer in its application for a tentative carryback adjustment and
much of that information (such as NOLs) is based. on the return for
the loss year, section 6411(a) requires that the return for the loss
year be filed before the application for a tentative refund can be
filed.

This problem is not generally faced by corporations that become
members of a consolidated group in the latter part of their taxable
year. For example, if Corporation X had been acquired on October 15,
2000, rather than April 15, 2000, its application for a tentative
carryback adjustment would be due on or before October 15, 2001, a
month after its separate return is due (with extensions).

Explanation of Provisions

The consolidated return regulations do not address the time for
filing an application for a tentative carryback adjustment. Rather,
the consolidated return regulations rely upon the general provisions
of section 6411 for guidance. The amendments to §1.1502-78
provide a general rule for all consolidated taxpayers stating that
the provisions of section 6411(a) shall apply to determine the time
for filing an application for a tentative carryback adjustment by a
consolidated group.

In addition, the amendments provide a special rule designed to
remedy the problem faced by some corporations that become new
members of a consolidated group. For such members, the amendments
extend the period of time for filing an application for a tentative
carryback adjustment resulting from losses or credits arising in the
new member's last separate return year. For these purposes, the
amendments treat the separate return year as ending on the same date
as the end of the current taxable year of the consolidated group.

The special rule of these temporary regulations will apply only to a
corporation. that, immediately prior to becoming a new member of a
group, was the common parent of another consolidated group, or was
not required to join in the filing of a consolidated return. The
situation not covered involves the acquisition of a member of
another consolidated group. In this case, the corporation's items of
income, gain, deduction, loss and credit for the period prior to
becoming a member of the new consolidated group will be included in
the consolidated return of its former group. The due date for the
former group's consolidated return is not affected by the
acquisition and the due date for its application for a tentative
carryback adjustment relates back to the end of the former group's
taxable year.

The approach taken attempts to provide consistency between
§1.1502-76(c) and §1.1502-78. In addition, this approach
provides certainty to taxpayers and allows for simplicity of
administration by the IRS.

Special Analyses

It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required.

This Treasury decision ensures that all new members of consolidated
groups have the opportunity to file an application for a tentative
carryback adjustment, a benefit currently unavailable to some new
members. Issuing this regulation in proposed form would continue the
difficulty of filing an application for a tentative carryback
adjustment for affected new members. Based on these considerations,
it is determined that this temporary regulation will provide
taxpayers with the necessary. guidance and authority to ensure
equitable administration of the tax laws. Therefore, it would be
contrary to the public interest to issue this Treasury decision with
prior notice under section 553(b) or subject to the effective date
limitation of section 553(d) of title 5 of the United States Code.

Pursuant to section 7805(f) of the Code, these regulations will be
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on their impact on small business.

Drafting Information

The principal authors of these temporary regulations are Christopher
M. Bass and Frances L. Kelly, Office of the Associate Chief Counsel
(Corporate). However, other personnel from the IRS and Treasury
Department participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations Accordingly, 26 CFR part 1
is amended as follows:

PART 1 -- INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding
an entry in numerical order to read in part as follows: Authority:
26 U.S.C. 7805 * * *

Section 1.1502-78T also issued under 26 U.S.C. 1502 and 6411(c). 

Par. 2. Section 1.1502-78T is added to read as follows:.10
§1.1502-78T Rules for filing applications for tentative
carryback adjustments.

(a) through (f) [Reserved]. For further guidance, see
§1.1502-78(a) through (f).

(g) Time for filing application--(1) General rule. The provisions of
section 6411(a) apply to the filing of an application for a
tentative carryback adjustment by a consolidated group.

(2) Special rule for new members--(i) New member. A new member is a
corporation that, in the preceding taxable year, did not qualify as
a member, as defined in §1.1502-1(b), of the consolidated group
that it now joins.

(ii) End of taxable year. Solely for the purpose of complying with
the twelve-month requirement for making an application for a
tentative carryback adjustment under section 6411(a), the separate
return year of a qualified new member shall be treated as ending on
the same date as the end of the current taxable year of the
consolidated group that the qualified new member joins.

(iii) Qualified new member. A new member of a consolidated group
qualifies for purposes of the provisions of this paragraph (g)(2),
if immediately prior to becoming a new member, either--

(A) It was the common parent of a consolidated group; or

(B) It was not required to join in the filing of a consolidated
return.

(iv) Examples. The provisions of this paragraph (g)(2) may be
illustrated by the following examples:

Example 1. Individual A owns 100 percent of the stock of X, a
corporation filing returns on a calendar year basis. On January 31
of year 1, X becomes a member of the Y consolidated group, which
also files returns on a calendar year basis. X is a.11 qualified new
member as defined in paragraph (g)(2)(iii)(B) of this section
because, immediately prior to becoming a new member of the Y
consolidated group, X was not required to join in the filing of a
consolidated return. As a result of its becoming a new member of
Group Y, X's separate return for the short taxable year (January 1
of year 1 through January 31 of year 1) is due September 15 of year
2 (with extensions). Section 1.1502-76(c). Group Y's consolidated
return is also due September 15 of year 2 (with extensions). Section
1.1502-76(c). Solely for the purpose of complying with the twelve-
month requirement for making an application for a tentative
carryback adjustment under Section 6411(a), X's taxable year for the
separate return year is treated as ending on December 31 of year 1.
X's application for a tentative carryback adjustment is therefore
due on or before December 31 of year 2.

Example 2. Assume the same facts as in Example 1 except that
immediately prior to becoming a new member of Group Y, X was a
member of the Z consolidated group. Because X was required to join
in the filing of the consolidated return for Group Z, X is not a
qualified new member as defined in paragraph (g)(2)(iii) of this
section. X's items for the one-month period will be included in the
consolidated return for Group Z. Group Z's application for a
tentative carryback adjustment, if any, continues to be due within
12 months of the end of its taxable year, which is not affected by
X's change in status as a new member of Group Y.

(v) Effective date. The provisions of this paragraph (g)(2) apply
for applications by new members of consolidated groups for tentative
carryback adjustments resulting from net operating losses, net
capital losses, or unused business credits arising in separate
return years of new members that begin on or after January 1, 2001.

Robert E. Wenzel
Deputy Commissioner of Internal Revenue

Approved:

Jonathan Talisman
Acting Assistant Secretary of the Treasury

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