[Federal Register Volume 77, Number 180 (Monday, September 17, 2012)]
[Proposed Rules]
[Pages 57451-57476]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-22838]



[[Page 57451]]

Vol. 77

Monday,

No. 180

September 17, 2012

Part V





Department of Treasury





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Internal Revenue Service





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26 CFR Part 1





Regulations Regarding the Application of Section 172(h) Including 
Consolidated Groups; Proposed Rule

Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / 
Proposed Rules

[[Page 57452]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-140668-07]
RIN 1545-BH16


Regulations Regarding the Application of Section 172(h) Including 
Consolidated Groups

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations under section 
172(h) and section 1502 of the Internal Revenue Code. These proposed 
regulations provide guidance regarding the treatment of corporate 
equity reduction transactions (CERTs), including the treatment of 
multiple step plans for the acquisition of stock and CERTs involving 
members of a consolidated group. These proposed regulations also 
provide guidance regarding certain elections relating to the carryback 
of consolidated net operating losses (CNOLs) to separate return years. 
These proposed regulations will affect C corporations and corporations 
filing consolidated returns.

DATES: Written or electronic comments and requests for a public hearing 
must be received by December 17, 2012.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-140668-07), Room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
140668-07), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC, or sent electronically, via the Federal 
eRulemaking Portal at www.regulations.gov (IRS REG-140668-07).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Amie Colwell Breslow or Marie C. Milnes-Vasquez at (202) 622-7530; 
concerning submissions of comments and request for public hearing, 
Oluwafunmilayo Taylor at Oluwafunmilayo.P.Taylor@irscounsel.treas.gov 
or (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)) under control number 1545-2171. Comments on the 
collection of information should be sent to the Office of Management 
and Budget, Attn: Desk Officer for the Department of the Treasury, 
Office of Information and Regulatory Affairs, Washington, DC 20503, 
with copies to the Internal Revenue Service, Attn: IRS Reports 
Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Comments 
on the collection of information should be received by November 16, 
2012. Comments are specifically requested concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the Internal Revenue Service, 
including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information;
    How the quality, utility and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of service to provide information.
    The collection of information in these proposed regulations is in 
Sec. Sec.  1.1502-21(b)(3)(ii)(B) and 1.1502-72(e).
    The proposed regulations provide guidance regarding application of 
section 172(b)(1)(E) and (h) and section 1502.
    The collection of information is required in order to obtain a 
benefit. The likely respondents are corporations that are members of 
consolidated groups.
    Estimated total annual reporting burden: 120,000 hours.
    Estimated average annual burden hours per respondent: 15 hours.
    Estimated number of respondents: 8,000.
    Estimated frequency of responses: Once.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    Section 172 provides rules relating to net operating loss (NOL) 
carrybacks and carryovers. Section 172(b)(1)(A) states that the NOL for 
any taxable year generally is carried back to each of the 2 years 
preceding the taxable year of the loss and carried over to each of the 
20 years following the taxable year of the loss.
    The corporate equity reduction transaction rules of section 
172(b)(1)(E) and (h) were enacted in 1989 in response to the use of NOL 
carrybacks to finance leveraged buyout transactions. Congress enacted 
these rules to limit a corporation's ability to obtain tax refunds as 
the result of the carryback of NOLs that were attributable to interest 
deductions allocable to such transactions. See Explanation of Corporate 
Tax Refund Restriction Bill, 135 Cong. Rec. S9936-01, at S9944 (1989); 
1989 WL 193512.
    Section 172(h)(3)(A) defines a corporate equity reduction 
transaction (CERT) as a ``major stock acquisition'' (MSA) or an 
``excess distribution'' (ED). Section 172(h)(3)(B) defines major stock 
acquisition as the acquisition by a corporation, pursuant to a plan of 
such corporation (or any group of persons acting in concert with such 
corporation), of stock in another corporation representing 50 percent 
or more (by vote or value) of the stock in such other corporation. 
Section 172(h)(3)(C) defines excess distribution as the excess (if any) 
of the aggregate distributions (including redemptions) made during a 
taxable year by a corporation with respect to its stock over the 
greater of: 150 percent of the average of such distributions during the 
3 taxable years immediately preceding such taxable year, or 10 percent 
of the fair market value of the stock of the corporation at the 
beginning of such taxable year. Thus, the total of distributions that 
may be treated as an ED is limited to the amount that exceeds the 
greater of two baselines: One tied to a historical, three-year average 
and the other based on the fair market value of the distributor.
    If an MSA or ED occurs, section 172(b)(1)(E) and (h) limit the 
carryback of the portion of an NOL that constitutes a ``corporate 
equity reduction interest loss'' (CERIL) of an ``applicable 
corporation'' in any ``loss limitation year.'' See section 
172(b)(1)(E)(i).

[[Page 57453]]

Section 172(b)(1)(E)(iii) defines an applicable corporation as a C 
corporation that acquires stock, or the stock of which is acquired, in 
an MSA; a C corporation making distributions with respect to, or 
redeeming, its stock in connection with an ED; or a C corporation that 
is a successor to one of the other types of applicable corporations. 
Section 172(b)(1)(E)(ii) defines loss limitation year as the taxable 
year in which a CERT occurs and each of the two succeeding taxable 
years. Section 172(h)(1) defines corporate equity reduction interest 
loss as the excess of (1) the total NOL for a loss limitation year, 
over (2) the NOL for the loss limitation year computed without regard 
to the allocable interest deductions that are otherwise taken into 
account in computing the NOL. Section 172(h)(2)(A) defines allocable 
interest deductions as deductions allowed on the portion of any 
indebtedness allocable to a CERT.
    Under section 172(h)(2)(B), except as provided in regulations or 
section 172(h)(2)(E), indebtedness is allocable to a CERT in the manner 
prescribed under section 263A(f)(2)(A) without regard to paragraph (i) 
thereof (relating to traced debt). Thus, a portion of the taxpayer's 
total interest expense is allocable to the CERT. See H.R. Rep. No. 101-
247, at 1251 (Conf. Rep.). However, section 172(h)(2)(C) limits the 
amount of allocable interest deductions for any loss limitation year to 
(1) the amount allowable as a deduction for interest paid or accrued by 
the taxpayer during the loss limitation year, less (2) the average of 
deductions allowed for interest paid or accrued by the taxpayer for the 
three taxable years preceding the taxable year in which the CERT 
occurred. Therefore, the allocable interest deductions are limited to 
the increase in interest deductions over a historical, three-year 
baseline.
    Section 172(h)(3)(C) and (E) sets forth specific rules for 
determining whether an ED has occurred. For purposes of determining a 
corporation's aggregate distributions for a taxable year under section 
172(h)(3)(C)(i) and the average of such distributions during the three 
taxable years preceding the relevant taxable year under section 
172(h)(3)(C)(ii)(I), section 172(h)(3)(E)(ii) provides that the 
distributions taken into account are reduced by the aggregate amount of 
stock issued by the corporation during the applicable period in 
exchange for money or property other than stock in the corporation. 
However, section 172(h)(3)(E)(i) provides that stock described in 
section 1504(a)(4) (certain preferred stock) and distributions 
(including redemptions) with respect to such stock are disregarded.
    For purposes of applying section 172(b)(1)(E) and (h), an 
applicable corporation and all members of its consolidated group are 
treated as a single taxpayer. See section 172(h)(4)(C).
    Currently, there are no regulations under section 172(b)(1)(E) and 
(h). Section 172(h)(5) grants the Secretary the authority to prescribe 
such regulations as may be necessary to carry out the purposes of 
section 172(h), including regulations: (A) For applying section 172(h) 
to successor corporations and to cases in which a taxpayer becomes (or 
ceases to be) a member of a consolidated group; (B) to prevent the 
avoidance of section 172(h) through the use of related parties, pass-
through entities, and intermediaries; and (C) for applying section 
172(h) when more than one corporation is involved in a CERT. In 
addition, section 172(h)(2)(B) grants the Secretary authority to issue 
regulations prescribing a method for allocating indebtedness to a CERT 
other than the method contained in section 263A(f)(2)(A). Section 1502 
provides the Secretary with broad authority to prescribe rules 
applicable to corporations that file consolidated returns that are 
different from the income tax provisions that would apply if those 
corporations filed separate returns.
    These proposed regulations provide general rules addressing whether 
a CERT has occurred, the computation of a CERIL, and the treatment of 
successors. The proposed regulations also address issues specific to 
the application of section 172(b)(1)(E) and (h) to consolidated groups, 
including: (1) Treatment of the consolidated group as a single 
taxpayer; (2) determination of the group's three-year average that is 
relevant to a particular consolidated return loss limitation year; (3) 
application of these rules if the corporation participating in a CERT 
becomes a member of a consolidated return group; (4) application of 
these rules if a group member deconsolidates after the group has 
participated in (or is treated as having participated in) a CERT; (5) 
apportionment of a CERIL (and other special status CNOLs) to members of 
a consolidated group for carryback or carryover to separate return 
years; and (6) application of section 172(b)(1)(E) and (h) to a life-
nonlife group. The proposed regulations also provide rules that would 
amend the loss carryback waivers available to deconsolidating group 
members.
    At this time, the Department of Treasury and the IRS are not 
providing rules addressing the application of section 172(h) to related 
parties, pass-through entities, or intermediaries. However, the 
Department of Treasury and the IRS continue to study the circumstances 
under which these persons should be subject to section 172(b)(1)(E) and 
(h). For example, the purposes of the statute may be furthered if 
section 172(b)(1)(E) and (h) apply to the acquisition of 100 percent of 
the stock of a target by a partnership in which a corporation (or 
consolidated group) holds a controlling interest. On the other hand, 
the purposes of the statute may not be advanced if 100 percent of the 
stock of a target is acquired in a single transaction, but the 
percentage of target stock indirectly attributable to corporate 
acquirers is relatively small. The Department of Treasury and the IRS 
request comments regarding the parameters for applying section 
172(b)(1)(E) and (h) to indirect corporate acquirers, and what special 
computational rules, if any, would be needed to implement its 
application.
    The Department of Treasury and the IRS considered inclusion of an 
anti-avoidance rule to prevent taxpayers from engaging in section 381 
transactions to shorten loss limitation years. However, the Department 
of Treasury and the IRS believe that the detrimental effects of 
shortening tax years make it unlikely that taxpayers will attempt to 
undertake such transactions as a planning technique. For example, 
shortening a loss limitation year will reduce the income in that year, 
and, accordingly, will limit the ability to carry back any losses to 
that year. The Department of Treasury and the IRS continue to study 
whether an anti-abuse rule is needed and request comments on this 
issue.
    In addition, the Department of Treasury and the IRS are not 
providing rules addressing the application of section 172(b)(1)(E) and 
(h) to transactions occurring before these rules are adopted as final 
regulations (transitional issues). However, the Department of Treasury 
and the IRS continue to study, and request comments on, transitional 
issues. For example, the Department of Treasury and the IRS request 
comments regarding the application of section 172(b)(1)(E) and (h) if a 
taxable year constitutes a loss limitation year with regard to more 
than one CERT, one occurring before and the other occurring after the 
adoption of these proposed regulations as final regulations.

[[Page 57454]]

Explanation of Provisions

1. General CERT Rules

A. Determination of Existence of a CERT
    As discussed, a CERT is either an MSA or an ED. The statute does 
not exclude tax-free transactions from treatment as an MSA or an ED. In 
addition, the concerns targeted by Congress in enacting section 
172(b)(1)(E) and (h) can exist in the context of both taxable and tax-
free transactions. Accordingly, the proposed regulations provide that a 
tax-free transaction that meets the statutory definition of an MSA or 
an ED must be tested as a CERT under section 172(b)(1)(E) and (h) and 
these proposed regulations (collectively, the ``CERT rules''). For 
example, a section 355 transaction, a corporate organization under 
section 351, or a stock acquisition that qualifies for reorganization 
treatment under section 368(a)(1)(A) and (a)(2)(E) must be tested under 
the CERT rules.
    These proposed regulations also provide that an integrated plan of 
stock acquisition including multiple steps will be tested as a single 
potential MSA for purposes of determining the consequences of the 
transaction under the CERT rules. This treatment applies even if a step 
in the plan might separately constitute an ED, or might so qualify in 
conjunction with other distributions in the same taxable year.
    Section 172(h)(3)(C)(ii) limits the amount of distributions in a 
taxable year that may be treated as an ED. Under one prong of this 
limitation, the taxpayer's distributions are treated as an ED only to 
the extent that they exceed 150 percent of the taxpayer's average of 
distributions (three-year distribution average) made in the three 
taxable years preceding the taxable year in which a potential ED occurs 
(the distribution lookback period). These proposed regulations provide 
that, to the extent that a distribution is part of an integrated plan 
that is treated as an MSA, the distribution is excluded from the 
computation of the taxpayer's three-year distribution average that is 
relevant to any other potential ED. These proposed regulations provide 
additional rules for calculating the taxpayer's three-year distribution 
average under section 172(h)(3)(C)(ii)(I) relevant to potential EDs 
that occur in taxable years that are not full 12-month years.
B. Loss Limitation Years
    The proposed regulations generally provide that the taxable year in 
which a CERT occurs and each of the two succeeding taxable years 
constitute loss limitation years with regard to the CERT. The proposed 
regulations also provide special rules addressing loss limitation years 
of successors, consolidated groups, and former members of consolidated 
groups.
C. Computation of a CERIL
    Under section 172(h)(1), the term CERIL means, with respect to any 
loss limitation year, the excess (if any) of (1) the NOL for such 
taxable year, over (2) the NOL for such taxable year determined without 
regard to any allocable interest deductions otherwise taken into 
account in computing such loss. Section 172(h)(2)(A) defines allocable 
interest deductions as deductions allowed for interest on any 
indebtedness allocable to a CERT. Section 172(h)(2)(B) states that, 
except as provided in regulations and section 172(h)(2)(E), the 
indebtedness allocable to a CERT is determined under the avoided cost 
methodology of section 263A(f)(2)(A), with certain adjustments.
    Under section 263A(f)(2)(A) and the regulations thereunder, 
allocable interest deductions are computed by multiplying the 
``weighted average interest rate'' by ``average excess expenditures'' 
as those terms are defined in Sec.  1.263A-9(c)(5)(ii) and (iii). 
Because section 263A contemplates transactions that are very different 
in nature from CERTs, it is often difficult to identify the costs 
associated with a CERT that are analogous to average excess 
expenditures. To ameliorate this difficulty, these proposed regulations 
provide MSA- and ED-specific rules for computing costs associated with 
a CERT (CERT costs). Further, these proposed regulations identify 
additional CERT costs by looking to the capitalization rules under 
section 263(a). Specifically, the proposed regulations treat as CERT 
costs amounts paid or incurred to facilitate an MSA or ED to the extent 
that those amounts are required to be capitalized under section 263(a) 
(with certain modifications), and any amounts disallowed under section 
162(k). Because most CERTs occur under circumstances that already 
require application of section 263(a), invoking those rules should 
result in greater administrability. Once the CERT costs are identified, 
the interest allocable to those costs is computed under the principles 
of section 263A(f)(2)(A) and the regulations thereunder (with 
adjustments). The avoided cost methodology of section 263A(f)(2)(A) 
effectively allocates interest to a CERT to the extent that the 
taxpayer's interest costs could have been reduced if the taxpayer had 
not engaged in the CERT. For purposes of applying the avoided cost 
rules of section 263A(f)(2)(A), all CERT costs are treated as if they 
were cash expenditures.
    Under the proposed regulations, CERT costs with regard to an MSA 
include the fair market value of the stock acquired, whether that stock 
is acquired in exchange for cash, stock of the acquirer, or other 
property. The inclusion of the fair market value of stock acquired in 
stock-for-stock exchanges ensures that such transactions are treated 
similarly to an issuance of acquirer's stock for cash followed by an 
MSA funded with the cash proceeds. Further, inclusion of the fair 
market value of stock acquired is consistent with the avoided cost 
methodology applied under section 172(h)(2) because the CERT statute 
rejects tracing and assumes that debt is used to fund all CERT costs.
    In addition, CERT costs of an MSA include the fair market value of 
any distribution that is part of an integrated transaction constituting 
the MSA. CERT costs also include amounts paid or incurred to facilitate 
any step of the MSA to the extent that those amounts are required to be 
capitalized under section 263(a), and any amounts disallowed under 
section 162(k).
    Under the proposed regulations, CERT costs associated with an ED 
include the fair market value of distributions to shareholders that are 
determined to be EDs during the year in which the CERT occurs. CERT 
costs also include a portion of amounts paid or incurred to facilitate 
the distributions to the extent that those amounts are required to be 
capitalized under section 263(a), and any amounts disallowed under 
section 162(k). However, if neither section 263(a) nor section 162(k) 
applies or if only section 162(k) applies to a distribution included in 
an ED, additional CERT costs associated with the distribution are 
determined under the principles of Sec.  1.263(a)-4(e) (relating to the 
capitalization of costs that facilitate the acquisition or creation of 
intangibles), applied as if the ED were a transaction within the scope 
of Sec.  1.263(a)-4.
    As discussed, the rules of section 263(a) are applied in the CERT 
context with certain modifications. For the purpose of identifying CERT 
costs under these proposed regulations, modifications to the operation 
of Sec.  1.263(a)-4 and -5 include treating certain borrowing costs as 
facilitative of an MSA or ED. Therefore, CERT costs will include these 
borrowing costs. Congress objected to the carryback of NOLs resulting 
from leveraging that directly or indirectly enables CERTs; therefore, 
the Department of Treasury

[[Page 57455]]

and the IRS believe that it is appropriate to include borrowing costs 
in total CERT costs. However, the Department of Treasury and the IRS 
request comments regarding the extent to which borrowing costs should 
be included in CERT costs.
    The computation of interest allocable to CERTs under the rules of 
section 263A(f)(2)(A) involves the time-weighted average of costs 
incurred as of various dates in the taxable year. Therefore, these 
proposed regulations set forth rules for determining when CERT costs 
should be taken into account. Under these proposed regulations, 
accumulated CERT costs as of a particular date are the total CERT costs 
that have been taken into account as of that date under the applicable 
corporation's method of accounting. A special proration rule is 
provided to determine accumulated CERT costs related to an ED. Finally, 
CERT costs incurred in any year prior to the year in which the CERT 
occurs are included in accumulated CERT costs beginning on the first 
day of the year in which the CERT occurs.
    Section 172(h)(2)(E) requires that the allocation of interest to a 
CERT be reduced if an unforeseeable extraordinary adverse event occurs 
during a loss limitation year but after the CERT. The proposed 
regulations do not provide guidance with regard to unforeseeable 
extraordinary adverse events. However, the Department of Treasury and 
the IRS request comments regarding whether rules are necessary and, if 
so, what type of events should constitute unforeseeable extraordinary 
adverse events.
D. Limitation on Interest Deductions
    The CERT rules generally provide that the portion of an NOL for any 
loss limitation year that is attributable to the interest deductions 
allocable to a CERT (that is, a CERIL) may not be carried back to any 
year prior to the year in which the CERT occurred. As discussed, 
section 172(h)(2)(C) limits the amount of interest treated as an 
allocable interest deduction to the excess of the amount allowable as a 
deduction for interest paid or accrued by the taxpayer during the loss 
limitation year, over the average of amounts allowable as a deduction 
for interest paid or accrued (the three-year average) during the three 
taxable years preceding the taxable year in which the CERT occurred 
(the lookback period). These proposed regulations provide special rules 
for computing the three-year average in special situations, such as if 
an applicable corporation is not in existence for the entire lookback 
period. Further, the proposed regulations adjust the three-year average 
if the relevant loss limitation year is not a full 12-month taxable 
period. These proposed regulations also set forth special rules for any 
taxable year that constitutes a loss limitation year with regard to 
multiple CERTs.
    The legislative history indicates that Congress expected the 
Department of Treasury and the IRS to write rules that provide that 
increases attributable solely to fluctuations in interest rates would 
not be taken into account for purposes of applying the three-year 
average. Out of concern that the additional complexities of such rules 
would outweigh the benefit, these proposed regulations do not include 
rules that factor out increases in interest deductions attributable 
solely to fluctuations in interest rates. However, the Department of 
Treasury and the IRS are studying a rule that, for purposes of applying 
the three-year average, would factor out interest deductions that are 
attributable to increases in a taxpayer's interest rate that occur 
after the date of a CERT. Under the rule being considered, the 
measurement of a baseline interest rate after the CERT occurs would 
take into account the fact that CERT activity will often decrease a 
taxpayer's creditworthiness and increase its average cost of borrowing, 
and accordingly that the existence of the CERT, in and of itself, will 
increase a taxpayer's borrowing expenses. The Department of Treasury 
and the IRS request comments on whether such a baseline would 
effectively account for fluctuations in interest rates or whether an 
alternative measure would be more appropriate.
E. Predecessor and Successor
    As discussed, the CERT rules apply only to applicable corporations. 
Under section 172(b)(1)(E)(iii)(III), an applicable corporation 
includes any corporation that is a successor of: a corporation that 
acquires stock in an MSA; a corporation the stock of which is acquired 
in an MSA; or a corporation making a distribution with respect to, or 
redeeming, its stock in connection with an ED. For purposes of applying 
the CERT rules, these proposed regulations define successor as a 
transferee or distributee in a transaction to which section 381(a) 
applies. Further, if a successor to a previous applicable corporation 
with regard to a CERT itself transfers assets to a further successor, 
the further successor corporation is treated as an applicable 
corporation with regard to that CERT. In addition, these proposed 
regulations set forth special rules for computing a successor's CERIL.
F. Operating Rules
    The proposed regulations include special rules regarding the 
prohibition on carryback of a CERIL. These rules provide that no CERIL 
may be carried back to any taxable year that includes solely dates that 
precede the date on which the CERT at issue occurred. In applying this 
rule to multi-step MSAs and to EDs that include multiple distributions, 
the date on which the CERT occurs is the earliest date on which the 
requirements for CERT status have been satisfied. These proposed 
regulations also provide that, for purposes of determining whether an 
ED has occurred, the computation of any three-year distribution average 
under section 172(h)(3)(C)(ii)(I) will be reduced by the average of the 
stock issuances made by the applicable corporation during the three 
years of the distribution lookback period.
    The principles of the proposed regulations apply to the computation 
of the alternative minimum tax net operating loss under section 56(d).

2. Special CERT Rules Applicable to Consolidated Groups

A. Single Entity Treatment
    Section 172(h)(4)(C) states that, except as provided by regulation, 
all members of a consolidated group are treated as a single taxpayer 
for purposes of section 172(b)(1)(E) and (h). These proposed 
regulations provide further guidance regarding the application of 
single entity principles. These proposed regulations affirm that 
transactions and expenditures undertaken by a particular member are not 
separately tracked; rather, the entire group is treated as a single 
applicable corporation. For example, if multiple members of a group 
acquire in total 50 percent or more (by vote or value) of the stock of 
another corporation, the group has engaged in an MSA. Likewise, the 
computation of a group's CERIL under section 172(h)(1) for any loss 
limitation year that is a consolidated return year includes the debt of 
all members and all interest deductions that are allowed on the group's 
consolidated return.
    Intercompany transactions (including interest accruals and payments 
on intercompany obligations) are generally disregarded under the 
proposed regulations. However, these proposed regulations provide that 
a transaction will not be disregarded if a party to the transaction 
becomes a non-member as a part of the same plan or arrangement.
    The most difficult issues in the CERT area arise from the 
application of single entity concepts if different corporations join 
and deconsolidate from a group

[[Page 57456]]

within the same three-year period. The fungibility of money and the 
ease of moving cash and debt within a consolidated group may provide a 
consolidated group with an unwarranted ability to manipulate the 
application of the CERT rules, further complicating the analysis. After 
considering different approaches, the Department of Treasury and the 
IRS have determined that application of single entity principles, under 
which corporations cease to be separately tracked for CERT purposes 
after their inclusion in a group, will limit complexity and promote 
administrability. Furthermore, single entity treatment is consistent 
with the statutory default of treating the consolidated group as a 
single taxpayer.
    Consistent with single entity treatment, these proposed regulations 
provide that, if an applicable corporation with regard to a CERT 
occurring in a separate return year (pre-existing CERT member) joins a 
consolidated group, the group is treated as a single applicable 
corporation with regard to that CERT in the consolidated return year of 
the acquisition and any relevant succeeding year. The pre-existing CERT 
member will no longer have separate status as an applicable 
corporation. Beginning on the day the pre-existing CERT member is first 
included in the group, the only CERIL computation will be that of the 
group.
    These proposed regulations also provide that, in the consolidated 
return context, both the debt of a new member acquired in a CERT and 
the corresponding interest expenses are included in the group's CERIL 
computation, even if the group would not have been in a position to pay 
off the debt of the acquired corporation if the CERT had not occurred. 
For example, if a target corporation acquired by a consolidated group 
has debt outstanding prior to the acquisition, the group takes into 
account interest incurred by the group that is attributable to the 
target's pre-existing debt, despite the fact that the group would have 
had no reason to satisfy the target's debt if the acquisition had not 
occurred. If the acquisition had not occurred, the debt of the target 
would not have become a liability of the applicable corporation (the 
group), and the associated interest expense would not have been 
deducted by the group. As will be discussed, the historical interest 
expense of the target is also included in the group's computation of 
the three-year average applied to limit the interest allocated to the 
CERT.
B. Applicable Corporation Status and Allocation of CERT Costs Following 
Deconsolidation From a Group
    These proposed regulations provide that, if a member deconsolidates 
from a group on or after (1) the date on which the group engages in a 
CERT, or (2) the date on which the group acquires a pre-existing CERT 
member, then, following the deconsolidation, both the deconsolidating 
member and the group generally will be treated as applicable 
corporations with regard to the CERT. The deconsolidating member will 
be apportioned a pro rata share of the group's CERT costs incurred 
through the date of the deconsolidation. The proration is based on the 
relative fair market values of the deconsolidating corporation 
(immediately after its deconsolidation) and the entire group 
(immediately before the deconsolidation). This rule applies regardless 
of whether any particular corporation would have constituted an 
applicable corporation with regard to the CERT without the application 
of the single entity treatment. The Department of Treasury and the IRS 
request comments regarding alternatives for allocating CERT costs 
following deconsolidation from a group.
    The CERT costs that are allocated and apportioned to the 
deconsolidating member are subtracted from the group's CERT costs and 
will not attract allocable interest in any loss limitation year of the 
group (or any separate return loss limitation year of another group 
member) after the year of deconsolidation. Therefore, the group may 
have less CERIL in the years following the deconsolidation. 
Apportionment of CERT costs to the deconsolidating member may result in 
that corporation having a CERIL in the period following its 
deconsolidation.
    Under these proposed regulations, the deconsolidating member (or 
the common parent of any group that the deconsolidating member joins 
immediately after deconsolidation) may elect out of the general rule of 
apportionment. In making this election, the member or common parent 
permanently waives all carrybacks of losses allocable to the 
deconsolidating member to years of the former group and any preceding 
taxable years. If this election is made, the deconsolidating member 
will not be treated as an applicable corporation with regard to the 
CERT, and it will not be allocated any CERT costs. Applicable 
corporation status and CERT costs will remain with the former group. 
This is true even if the deconsolidating member directly engaged in the 
CERT. Further, none of the interest history of the group will be 
allocated to the deconsolidating member for CERT purposes, including 
determining the CERIL related to any future CERT. The resulting lack of 
interest history may increase the amount of a CERIL in future taxable 
years associated with other CERTs of the deconsolidating corporation. 
This election is available to any deconsolidating member, even if the 
former group is not an applicable corporation with regard to any CERT 
at the time of the deconsolidation.
C. Loss Limitation Years
    Because all members of a consolidated group are treated as a single 
taxpayer under section 172(h)(4)(C), a consolidated group is treated as 
the ``applicable corporation'' with regard to a CERT. These proposed 
regulations provide special rules for determining loss limitation years 
of consolidated groups and former members of consolidated groups. Under 
these proposed regulations, the taxable year in which a CERT actually 
occurs is a loss limitation year. Any other taxable year (potential 
loss limitation year) of any applicable corporation (including a 
consolidated group) will constitute a loss limitation year with regard 
to the CERT only if, under the carryover rules of sections 
172(b)(1)(A)(ii) and 381(c)(1), the potential loss limitation year 
would constitute the first or second taxable year following the taxable 
year of the corporation or consolidated group that actually engaged in 
the CERT, which includes the date of the CERT. For purposes of tracking 
taxable years, section 172 and 381 are applied as if the inclusion of 
any corporation in a consolidated group or the deconsolidation of any 
member from a group were a transaction described in section 381(a).
    The proposed regulations provide that the separate return years of 
a corporation that deconsolidates from a consolidated group may be loss 
limitation years with regard to a CERT of the former group. This may 
occur only if the consolidated return year of the deconsolidation is a 
first or second loss limitation year with regard to that CERT. The 
taxable years of more than one applicable corporation (including a 
consolidated group) may be loss limitation years with regard to the 
same CERT, even if those taxable years include the same dates.
    The special rules for determining loss limitation years can be 
illustrated as follows: T corporation maintains a calendar taxable year 
and does not join in the filing of a consolidated return. The X group 
holds 60 percent of the

[[Page 57457]]

only class of T stock. On July 1, Year 5, T engages in a CERT. The X 
group, which includes member S, maintains a calendar taxable year. On 
December 31, Year 5, the X group acquires all of the remaining T stock. 
T is first included in the X group on January 1, Year 6. On June 30, 
Year 6, S deconsolidates from the X group, and thereafter S maintains a 
calendar taxable year. The first loss limitation year with respect to 
the T CERT is T's calendar Year 5. Pursuant to these proposed 
regulations, as a result of acquiring T, the X group is treated as an 
applicable corporation with respect to the T CERT. The X group's loss 
limitation years with respect to the T CERT are its calendar Years 6 
and 7. Because no election is made with respect to the deconsolidation 
of S, following the deconsolidation, S is also treated as an applicable 
corporation with regard to the T CERT. Because consolidated return Year 
6 (the year of the deconsolidation) is a second loss limitation year 
with regard to the CERT, S's short year ending December 31, Year 6 will 
be S's only loss limitation year with regard to the T CERT.
D. Determining the Three-Year Average of a Group
    As discussed in section 1.D. of this preamble, under section 
172(h)(2)(C), the interest deductions treated as allocable to a CERT 
are limited to the difference between the interest paid or accrued in 
the loss limitation year at issue and the average of the interest paid 
or accrued in the three years preceding the year of the CERT (three-
year average). These proposed regulations adopt single entity concepts 
intended, in part, to decrease the complexity of the computation of the 
three-year average resulting from the entry of corporations into, and 
the deconsolidation of corporations from, a consolidated group. Under 
these proposed regulations, with regard to a corporation joining a 
group, the interest history of that corporation is combined with that 
of the acquiring group. For purposes of the CERT rules, this interest 
is thereafter generally treated as having been paid or accrued by the 
group and is no longer separately traced to the acquired corporation. 
Similarly, with regard to the deconsolidation of a member from a group, 
a portion of the group's entire interest history is generally 
apportioned to the deconsolidating member for purposes of the CERT 
rules. The apportionment is based on the relative fair market values of 
the deconsolidating corporation (immediately after its deconsolidation) 
and the entire group (immediately before the deconsolidation). Under 
these proposed regulations, the allocated and apportioned history is 
subtracted from the group's interest history solely for purposes of the 
CERT rules and is unavailable to the group with regard to any loss 
limitation year of the group (or any separate return loss limitation 
year of another group member) after the year of deconsolidation. 
Consistent with single entity treatment and rejection of a tracing 
regime, the interest allocated to a particular deconsolidating member 
is not tied to that member's actual interest history.
    These proposed regulations also provide special rules relevant to 
any loss limitation year during which a corporation (partial-year 
member) becomes a member of, or ceases to be a member of, a group 
(transitional year). For purposes of computing any three-year average 
of a group that is relevant to a transitional year, these rules require 
proration of the interest history that is attributable to the partial-
year member so that a group that includes a particular member for only 
a portion of a loss limitation year includes only a pro rata portion of 
that member's three-year interest history. These proposed regulations 
also provide special rules for computing the three-year average if a 
group is not in existence for three taxable years prior to the 
consolidated return year in which the CERT occurs (the lookback period) 
and for determining the lookback period if a group acquires a 
corporation that previously engaged in a CERT.
E. Excess Distributions in Groups
    These proposed regulations contain rules pertaining to the 
computation of EDs of consolidated groups and of corporations that have 
been consolidated group members. Consistent with single entity 
treatment under section 172(h)(4)(C), the proposed regulations provide 
that the distributions relevant for purposes of computing an ED of a 
consolidated group generally include only non-intercompany 
distributions. However, this general rule does not apply if a party to 
the transaction deconsolidates as part of the same plan or arrangement. 
Under those circumstances, the distribution will be tested on a 
separate entity basis as a potential CERT.
    As discussed in section 1.A. of this preamble, section 
172(h)(3)(C)(ii) places a limitation on the amount of distributions in 
a taxable year that may be treated as ED, and the limitation is based 
in part on 150 percent of the taxpayer's average of distributions 
(three-year distribution average) made in the three taxable years 
preceding the taxable year of the potential ED. These proposed 
regulations provide that single entity principles generally apply to 
the computation of the three-year distribution average of a 
consolidated group or a corporation that has been a consolidated group 
member. That is, the only distributions taken into account are those 
made to non-member shareholders. However, in computing the three-year 
distribution average of a consolidated group that includes a member for 
less than the entire consolidated return year of a potential ED, the 
group takes into account only a pro rata portion of the actual 
distribution history of that member. Further, a corporation that 
deconsolidates from a group takes into account its actual history of 
non-intercompany distributions for purposes of applying the CERT rules 
in future separate return years. The corporation is not apportioned a 
pro rata share of the total distribution history of the group.
    Additional rules apply with regard to computation of stock 
issuances and valuation of the group, which are intended to ensure that 
the rules in those areas are applied on a single entity basis. 
Specifically, the proposed regulations provide that, in applying 
section 172(h)(3)(E)(ii) to determine the offset of stock issuances 
against distributions, only stock that is issued to non-members is 
taken into account. Further, the proposed regulations provide that the 
value of the group, computed pursuant to section 172(h)(3)(C)(ii)(II), 
equals the value of the stock of all members other than stock that is 
owned directly or indirectly by another member.
F. Reverse Acquisitions
    These proposed regulations address the application of the MSA rules 
to reverse acquisitions, as defined in Sec.  1.1502-75(d)(3). The 
proposed regulations provide that, if a reverse acquisition occurs, the 
CERT rules will be applied by treating the acquirer in form as the 
target corporation, and treating the target in form as the acquiring 
corporation. They also provide special rules regarding the computation 
of the CERT costs in a reverse acquisition.
G. Life-Nonlife Groups
    These proposed regulations provide rules for applying the CERT 
rules to a group that elects under section 1504(c)(2) to file a 
consolidated return (life-nonlife group). As with consolidated groups 
generally, the fungibility of money and the ease of moving cash and 
debt within a life-nonlife group may provide an unwarranted ability to 
manipulate the

[[Page 57458]]

application of the CERT rules. Accordingly, these proposed regulations 
generally apply the CERT rules and the consolidated return CERT rules 
to a life-nonlife group on a single entity basis, and not on a subgroup 
basis. Under the proposed regulations, a single CERIL is computed with 
regard to any loss limitation year of a life-nonlife group, which 
includes all life-nonlife group members' CERT costs, debt, and interest 
paid or accrued for that year. However, for purposes of determining the 
CERIL of a life-nonlife group under section 172(h)(1) for any loss 
limitation year, the sum of the nonlife consolidated net operating loss 
(nonlife CNOL) (if any) and the life consolidated loss from operations 
(LO) (if any) for that year is treated as a notional ``NOL'' of the 
group. For this purpose, nonlife consolidated taxable income does not 
offset any LO, and consolidated partial life insurance company taxable 
income (as used in Sec.  1.1502-47(g)) does not offset any nonlife 
CNOL.
    If a CERIL exists for a loss limitation year of a life-nonlife 
group, that CERIL is allocated on a pro rata basis between the nonlife 
CNOL and the LO of the group, based on the relative sizes of the two 
attributes.

3. Specialized CNOL Carryback Rules

    These proposed regulations provide rules regarding the 
apportionment of CNOLs that contain a component portion of special 
status loss, such as a CERIL or a specified liability loss. See section 
172(h)(1) and (f)(1). Under these rules, a special status loss is 
apportioned to each group member, separately from the remainder of the 
CNOL, under the method provided in Sec.  1.1502-21(b)(2)(iv). This 
apportionment occurs without separate entity inquiry into whether a 
particular member incurred the specific expenses or engaged in the 
particular activities required by the provisions governing the special 
status loss.
    The proposed regulations also amend and expand the current election 
under Sec.  1.1502-21(b)(3)(ii)(B), informally referred to as the 
``split-waiver'' election. That election is currently available to any 
group that acquires one or more members from another group. By making 
the election, the acquiring group relinquishes, with respect to all 
CNOLs attributable to the newly-acquired corporation, the portion of 
the carryback period during which that corporation was a member of 
another group. The current rule does not allow a group to waive the 
portion of the carryback period for which a newly-acquired corporation 
was not a member of a consolidated group. The current election is a 
one-time election and must be made with the acquiring group's timely-
filed original return for the year of the acquisition.
    The proposed regulations amend the split waiver election to make 
the election available to any group that acquires a corporation, 
regardless of whether such corporation was acquired from another group. 
An election results in the waiver of the entire carryback period with 
regard to CNOLs allocable to the acquired corporation, not only the 
period during which the corporation was a member of another group. 
Further, any election that is made with regard to a newly-acquired 
member that had been a member of another group at the time of its 
acquisition must include all members acquired from the same group 
during the taxable year of the acquiring group.
    In addition, the proposed regulations give the electing group a 
choice of making the one-time election or making the split-waiver 
election on an annual basis with regard to the CNOL of a particular 
consolidated return year. Any annual split-waiver election must be 
filed with the group's timely filed original return for the year of the 
CNOL. The one-time election and the annual split-waiver election that 
are available under proposed Sec.  1.1502-21(b)(3)(ii)(B) apply 
generally with respect to losses attributable to the acquired 
corporation. These split-waiver elections are in addition to the one-
time election available under the CERT rules to elect out of the 
general rule of apportionment for CERT costs and interest history to a 
deconsolidating member, which also results in the waiver of all 
carrybacks of losses allocable to the deconsolidating member to any 
prior taxable years. As a result, under these proposed regulations, 
corporations may have three, mutually exclusive, irrevocable elections 
to waive carryback of CNOLs to separate return years: An annual 
election, a one-time election, and a special CERT election.

Proposed Effective Date

    Sections 1.172(h)-1 through 1.172(h)-5 and Sec.  1.1502-72 (except 
Sec.  1.1502-72(e)) are effective for CERTs occurring on or after the 
date of publication of the Treasury decision adopting these rules as 
final regulations in the Federal Register, except that they do not 
apply to any CERTs occurring pursuant to a written agreement that is 
binding prior to the date of publication of the Treasury decision 
adopting these rules as final regulations in the Federal Register. The 
amendments to Sec.  1.1502-21(b)(2) are effective for taxable years for 
which the due date of the original return (without extensions) is on or 
after the date of publication of the Treasury decision adopting these 
rules as final regulations in the Federal Register. Section 1.1502-
72(e) and the amendments to Sec.  1.1502-21(b)(3) are effective for 
acquisitions or deconsolidations, as appropriate, occurring on or after 
the date of publication of the Treasury decision adopting these rules 
as final regulations in the Federal Register, except that they do not 
apply to any acquisition or deconsolidations, as appropriate, occurring 
pursuant to a written agreement that is binding before the date of 
publication of the Treasury decision adopting these rules as final 
regulations in the Federal Register.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866, as supplemented by Executive Order 13563. Therefore, a 
regulatory assessment is not required. Pursuant to the Regulatory 
Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that these 
proposed regulations will not have a significant economic impact on a 
substantial number of small entities. This certification is based on 
the fact that these proposed regulations will primarily affect C 
corporations and members of consolidated groups, which tend to be large 
corporations. Accordingly, a regulatory flexibility analysis is not 
required. Pursuant to section 7805(f) of the Internal Revenue Code, 
these regulations have been submitted to the Chief Counsel for Advocacy 
of the Small Business Administration for comment on their impact on 
small business.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The Department of Treasury and the IRS request comments on all 
aspects of the proposed regulations. All comments will be available for 
public inspection and copying. A public hearing will be scheduled if 
requested in writing by any person that timely submits written 
comments. If a public hearing is scheduled, notice of the date, time, 
and place for the public hearing will be published in the Federal 
Register.

[[Page 57459]]

Drafting Information

    The principal authors of these proposed regulations are Rebecca J. 
Holtje and Marie C. Milnes-Vasquez of the Office of Associate Chief 
Counsel (Corporate). However, other personnel from the Department of 
Treasury and the IRS participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
entries in numerical order to read in part as follows:

    Authority:  26 U.S.C. 7805 * * *
    Sections 1.172(h)-1 through -5 are also issued under 26 U.S.C. 
172. * * *
    Section 1.1502-21(b)(2)(iv)(C) is also issued under 26 U.S.C. 
1502. * * *
    Section 1.1502-72 is also issued under 26 U.S.C. 1502. * * *

    Par. 2. Sections 1.172(h)-0 through 1.172(h)-5 are added to read as 
follows:


Sec.  1.172(h)-0  Table of Contents.

    This section lists the paragraphs contained in Sec. Sec.  1.172(h)-
1 through 1.172(h)-5.


Sec.  1.172(h)-1  Existence of CERT and loss limitation years.

    (a) In general.
    (b) Applicable corporation.
    (1) In general.
    (2) Predecessor and successor.
    (c) CERT defined.
    (1) In general.
    (2) MSA defined.
    (3) ED defined.
    (d) Transactions tested as CERTs.
    (1) Tax-free transactions.
    (2) Multiple step plan of acquisition.
    (3) Examples.
    (e) Loss limitation years.
    (f) Computation of three-year distribution average relevant to a 
potential ED.
    (1) Integrated plan.
    (2) Short taxable year.
    (g) Effective/applicability date.


Sec.  1.172(h)-2  Computation of a CERIL.

    (a) In general.
    (1) Scope.
    (2) CERIL defined.
    (b) Computation of allocable interest deductions.
    (1) In general.
    (2) Operating rules.
    (3) CERT costs defined.
    (i) Major stock acquisition.
    (ii) Excess distribution.
    (iii) Borrowing costs included in CERT costs.
    (4) Accumulated CERT costs.
    (i) Major stock acquisition.
    (ii) Excess distribution.
    (iii) CERT costs incurred in a year prior to a CERT.
    (iv) Year constitutes loss limitation year with regard to multiple 
CERTs.
    (5) No netting of interest income and deductions.
    (6) Certain unforeseeable events.
    (7) Examples.
    (c) Effective/applicability date.


Sec.  1.172(h)-3  Limitation on allocable interest deductions.

    (a) General rule.
    (b) Three-year average for a short loss limitation year.
    (1) General rule.
    (2) Example.
    (c) Computation of interest paid or accrued by corporation with 
incomplete lookback period.
    (1) Lookback period for corporation not in existence.
    (2) Interest history of corporation not in existence.
    (3) Example.
    (d) Computation of a CERIL if single year constitutes loss 
limitation year with regard to multiple CERTs.
    (1) Single CERIL computation.
    (2) Limitation on allocable interest deductions.
    (3) Computation of three-year average if CERTs have different 
lookback periods.
    (i) In general.
    (ii) Cumulative three-year average.
    (4) Allocation of a CERIL among CERTs.
    (5) Examples.
    (e) Effective/applicability date.


Sec.  1.172(h)-4  Special rules for predecessor and successors.

    (a) Scope.
    (b) Loss limitation years.
    (1) In general.
    (2) Example.
    (c) Computation of a CERIL.
    (1) CERT costs.
    (2) Limitation on allocable interest deductions.
    (i) Lookback period.
    (A) In general.
    (B) Successor not in existence on date of CERT.
    (ii) Computation of three-year average.
    (A) In general.
    (B) Year of successor transaction.
    (3) Examples.
    (d) Three-year distribution average.
    (e) Effective/applicability date.


Sec.  1.172(h)-5  Operating rules.

    (a) Date on which CERT occurs in a multi-step transaction.
    (b) Prohibition on carryback.
    (1) In general.
    (2) Example.
    (c) Stock issuances and computation of three-year distribution 
average.
    (1) In general.
    (2) Example.
    (d) Computation of the alternative minimum tax net operating loss 
deduction.
    (e) Effective/applicability date.


Sec.  1.172(h)-1  Existence of CERT and loss limitation years.

    (a) In general. If there is a corporate equity reduction 
transaction (CERT) and an applicable corporation has a corporate equity 
reduction interest loss (CERIL) for any loss limitation year, section 
172(b)(1)(E) and (h), this section, Sec. Sec.  1.172(h)-2 through 
1.172(h)-5, and Sec.  1.1502-72 (collectively, the CERT rules) limit 
the amount of net operating loss that can be carried back to any 
taxable year preceding the taxable year in which the CERT occurs. This 
section provides rules regarding the determination of whether a CERT 
has occurred and whether a taxable year constitutes a loss limitation 
year. See Sec.  1.172(h)-2 for rules regarding the computation of a 
CERIL.
    (b) Applicable corporation--(1) In general. The CERT rules apply 
only to applicable corporations. The term applicable corporation means 
a C corporation that acquires stock, or the stock of which is acquired, 
in a major stock acquisition (MSA), a C corporation making 
distributions with respect to, or redeeming, its stock in connection 
with an excess distribution (ED), or a C corporation that is a 
successor of any corporation described in this paragraph (b)(1). For 
special rules regarding the definition of an applicable corporation 
with regard to members that join and leave a consolidated group, see 
Sec.  1.1502-72(a) and (b).
    (2) Predecessor and successor. For purposes of the CERT rules, the 
term predecessor means a transferor or distributor of assets to a 
transferee or distributee (the successor) in a transaction to which 
section 381(a) applies. A corporation is a successor to its 
predecessor, and to all predecessors of that predecessor. If an 
applicable corporation transfers or distributes its assets to a 
successor, the successor is treated as an applicable corporation in the 
successor's taxable year during which the transfer or distribution 
occurs and any subsequent years.
    (c) CERT defined--(1) In general. A CERT can be an MSA or an ED.

[[Page 57460]]

    (2) MSA defined. An MSA is the acquisition by a corporation 
pursuant to a plan of such corporation (or any group of persons acting 
in concert with such corporation) of stock in another corporation 
representing 50 percent or more (by vote or value) of the stock in such 
other corporation.
    (3) ED defined. An ED is any excess of the aggregate distributions 
made during a taxable year by a corporation with respect to its stock, 
over the greater of--
    (i) 150 percent of the average of such distributions (the three-
year distribution average) during the three taxable years immediately 
preceding such taxable year (the distribution lookback period); or
    (ii) 10 percent of the fair market value of the stock of such 
corporation as of the beginning of such taxable year. For purposes of 
testing a potential ED, distributions include redemptions.
    (d) Transactions tested as CERTs--(1) Tax-free transactions. A 
transaction may constitute a CERT and must be tested under the CERT 
rules regardless of whether gain or loss is recognized by any party. 
For example, a distribution that qualifies for tax-free treatment under 
section 355 is tested as a potential ED (or part of a potential ED). 
Likewise, the acquisition by a corporation of 50 percent or more of the 
stock of another corporation in a transaction meeting the requirements 
of section 351, section 368(a)(1)(A) and (a)(2)(E), or section 
368(a)(1)(B) constitutes an MSA.
    (2) Multiple step plan of acquisition. Solely for purposes of 
determining whether an MSA has occurred and determining the 
consequences of an MSA, all steps of an integrated plan (including 
redemptions and other distributions) are tested as a single potential 
MSA. If an integrated plan qualifies as an MSA and includes one or more 
distributions, then, for purposes of applying the CERT rules, the 
distributions are treated solely as a part of the MSA, regardless of 
whether such distributions would otherwise constitute an ED (or would 
so qualify in conjunction with other distributions). Any distributions 
during the year that are not part of the integrated plan qualifying as 
an MSA are tested as a potential ED.
    (3) Examples. The following examples illustrate the rules of this 
paragraph (d). For purposes of these examples, unless otherwise stated, 
assume that all entities are domestic C corporations that do not join 
in the filing of a consolidated return and that the entities have no 
history of paying dividends or otherwise making distributions:

    Example 1. Spin-off. Distributing corporation (D) distributes 
stock of controlled corporation (C) to its shareholders in a 
transaction that satisfies the requirements of section 355. There is 
no taxable ``boot'' associated with the distribution. Pursuant to 
paragraph (d)(1) of this section, D's distribution of C stock is 
tested as a potential ED (in conjunction with any other 
distributions by D during the same taxable year). The same result 
would obtain if D distributes boot to its shareholders in addition 
to C stock.
    Example 2. Bootstrap acquisition. (i) Facts. T is a publicly-
traded, widely-held corporation with a single class of stock 
outstanding with a fair market value of $100. The following steps 
occur as part of an integrated plan. Corporation A acquires 10 
percent of the outstanding stock of T for $10. A forms a new 
corporation, S, with a contribution of $25. S obtains a loan of $65 
from an unrelated lender, and then merges with and into T, with T 
surviving. In the merger, all shareholders of T except A receive 
cash in exchange for their shares, and as a consequence, A owns all 
of the outstanding stock of T. As a result of the merger, T becomes 
liable for S's $65 loan. Assume that the $90 cash payment from T to 
the T shareholders should be treated as a redemption to the extent 
of the $65 loan assumed by T, and as a stock acquisition by A to the 
extent of the remaining $25.
    (ii) Analysis. A's direct acquisition of 10 percent of T's 
outstanding stock and the steps culminating with the merger are part 
of an integrated plan. Therefore, the multiple steps are tested 
together as a potential MSA. Because the steps of the integrated 
plan resulted in A's acquisition of 100 percent of T, the 
transaction is treated as a single MSA. Furthermore, because the $65 
redemption is part of an MSA, it is treated solely as part of the 
MSA and is not tested as a potential ED. See paragraph (d)(2) of 
this section.

    (e) Loss limitation years. The taxable year in which a CERT occurs 
and each of the two succeeding taxable years constitute loss limitation 
years with regard to the CERT. See Sec.  1.172(h)-4(b) (addressing loss 
limitation years of successors) and Sec.  1.1502-72(a)(3) (addressing 
loss limitation years of consolidated groups and former members of 
consolidated groups).
    (f) Computation of three-year distribution average relevant to a 
potential ED--(1) Integrated plan. Section 172(h)(3)(C)(ii)(I) and 
paragraph (c)(3) of this section treat as an ED the excess of 
distributions in a taxable year over the taxpayer's average 
distributions (three-year distribution average) made in the three 
taxable years preceding the taxable year in which a potential ED occurs 
(distribution lookback period). The computation of a taxpayer's three-
year distribution average under this paragraph (f) excludes any 
distribution during the distribution lookback period that is treated as 
part of an integrated plan qualifying as an MSA pursuant to paragraph 
(d)(2) of this section. See Sec.  1.1502-72(f)(2) and (3) for rules 
relating to distributions (including intercompany distributions) made 
during a consolidated return year.
    (2) Short taxable year. For purposes of computing the three-year 
distribution average under this paragraph (f), if the year of the 
potential ED is less than a full 12-month year, the distribution 
history with regard to any year of the taxpayer during a distribution 
lookback period (distribution lookback period year) equals the amount 
of distributions made during the distribution lookback period year 
multiplied by a fraction, the numerator of which equals the number of 
days in the short taxable year of the potential ED, and the denominator 
of which equals the number of days in the distribution lookback period 
year. The value of the fraction may not exceed 100 percent. No 
distributions are deemed made (in excess of amounts actually 
distributed) in a distribution lookback period year that is shorter 
than the year of the potential ED.
    (g) Effective/applicability date. This section is applicable to 
CERTs occurring on or after the date of publication of the Treasury 
decision adopting these rules as final regulations in the Federal 
Register. This section is also applicable to the deconsolidation of a 
member from, or the acquisition of a corporation by, a consolidated 
group that occurs on or after the date of publication of the Treasury 
decision adopting these rules as final regulations in the Federal 
Register. However, in each case, this section does not apply to any 
CERT, deconsolidation, or acquisition occurring pursuant to a written 
agreement that is binding before the date of publication of the 
Treasury decision adopting these rules as final regulations in the 
Federal Register.


Sec.  1.172(h)-2  Computation of a CERIL.

    (a) In general--(1) Scope. The portion of a net operating loss 
(NOL) that is treated as a corporate equity reduction interest loss 
(CERIL) (as defined in paragraph (a)(2) of this section) cannot be 
carried back to a taxable year preceding the taxable year in which the 
corporate equity reduction transaction (CERT) occurs. This section 
provides rules for computing allocable interest deductions necessary to 
compute a CERIL for purposes of applying section 172(b)(1)(E) and (h), 
Sec. Sec.  1.172(h)-1 through 1.172(h)-5, and Sec.  1.1502-72 (the CERT 
rules).
    (2) CERIL defined. A CERIL means, with respect to any loss 
limitation year, the excess (if any) of the NOL for such taxable year 
over the NOL for such taxable year determined without regard

[[Page 57461]]

to any allocable interest deductions otherwise taken into account in 
computing such loss.
    (b) Computation of allocable interest deductions--(1) In general. 
Allocable interest deductions are deductions allowed for interest on 
the portion of indebtedness allocable to a CERT. Except as provided in 
section 172(h)(2)(E) (relating to adjustments for certain unforeseeable 
events), indebtedness is allocated to a CERT in the manner prescribed 
in section 263A(f)(2)(A), without regard to clause (i) thereof 
(relating to traced debt). Generally, interest deductions are allocable 
to a CERT if the interest expense could have been avoided if the CERT 
had not been undertaken (for example, if the amount of CERT costs (as 
defined in paragraph (b)(3)) had instead been used to pay down debt). 
See section 263A(f)(2)(A)(ii) and Sec.  1.263A-9(a)(1). For purposes of 
applying the avoided cost rules of section 263A(f)(2)(A)(ii), all CERT 
costs are treated as if they were cash expenditures.
    (2) Operating rules. This section provides a method for identifying 
the pool of costs to be treated as arising from a CERT (CERT costs). 
The interest allocable to those CERT costs is then computed under the 
principles of the avoided cost rules under section 263A(f)(2)(A) 
(without regard to paragraph (i) thereof) and the regulations 
thereunder, but substituting ``CERT costs'' or ``accumulated CERT 
costs'' (as defined in paragraph (b)(4)) for ``production 
expenditures'' or ``accumulated production expenditures,'' where those 
terms appear. In addition, for purposes of applying the avoided cost 
rules to compute interest allocable to a CERT, the ``production 
period'' is treated as beginning on the first date of the taxable year 
in which the CERT occurs (year of the CERT) on which there are 
accumulated CERT costs. Because the principles of section 
263A(f)(2)(A)(i) are inapplicable to CERT computations, the principles 
of Sec.  1.263A-9(b) (relating to traced debt) are also inapplicable. 
Instead, accumulated CERT costs are treated in their entirety as 
expenditures allocable to non-traced debt as that term is defined under 
Sec.  1.263A-9(c)(5), and interest allocable to a CERT is calculated 
without tracing debt under the provisions of Sec.  1.263A-9(d)(1). 
Limitations apply to the amount of interest allocable to a CERT. See, 
for example, section 172(h)(2)(C)(ii) and Sec.  1.172(h)-3 (generally 
relating to three-year average interest history).
    (3) CERT costs defined--(i) Major stock acquisition. CERT costs 
with regard to a major stock acquisition (MSA) include the fair market 
value of the stock acquired, whether that stock is acquired in exchange 
for cash, for stock of the acquirer, or for other property. In 
addition, CERT costs include the fair market value of any distributions 
to shareholders that are treated as part of the MSA under Sec.  
1.172(h)-1(d)(2). CERT costs also include the sum of amounts paid or 
incurred to facilitate any step of the MSA to the extent that those 
amounts are required to be capitalized under section 263(a), and any 
amounts disallowed under section 162(k). See also Sec.  1.1502-72(a)(4) 
for additional rules regarding CERT costs in the case of a reverse 
acquisition.
    (ii) Excess distribution. CERT costs with regard to an excess 
distribution (ED) include the fair market value of any distributions to 
shareholders during the year of the CERT. CERT costs also include the 
sum of amounts paid or incurred to facilitate the distributions to the 
extent that those amounts are required to be capitalized under section 
263(a), and any amounts disallowed under section 162(k). To the extent 
that neither section 263(a) nor section 162(k) applies or if only 
section 162(k) applies to a distribution included in an ED, additional 
CERT costs associated with the distribution are determined under the 
principles of Sec.  1.263(a)-4(e) (relating to the capitalization of 
certain costs incurred to acquire or create intangibles), applied as if 
the distribution were a transaction within the scope of Sec.  1.263(a)-
4.
    (iii) Borrowing costs included in CERT costs. For purposes of 
identifying CERT costs with regard to an MSA or ED under this paragraph 
(b)(3), the determination of whether costs facilitate an MSA or ED is 
made without regard to Sec. Sec.  1.263(a)-5(c)(1) and 1.263(a)-
4(e)(1)(iv) (excluding borrowing costs). Therefore, certain costs of 
debt financing are included in CERT costs.
    (4) Accumulated CERT costs--(i) Major stock acquisition. Except as 
otherwise provided in this paragraph (b)(4), accumulated CERT costs 
with regard to an MSA as of a particular date are the total CERT costs 
described in paragraph (b)(3) of this section that have been taken into 
account as of that date under the applicable corporation's method of 
accounting. For example, CERT costs incurred in the taxable year after 
the year of the CERT are not included in accumulated CERT costs in the 
year of the CERT, but are included in accumulated CERT costs during the 
taxable year in which they are incurred and in any succeeding loss 
limitation year. Similarly, CERT costs include costs incurred after the 
date on which a CERT occurs if the CERT consists of multiple steps. See 
Sec.  1.172(h)-5(a).
    (ii) Excess distribution. Except as provided otherwise in this 
paragraph (b)(4), accumulated CERT costs as of a particular date with 
regard to an ED are the total CERT costs described in paragraph (b)(3) 
of this section that have been taken into account as of that date under 
the applicable corporation's method of accounting, multiplied by a 
fraction, the numerator of which equals the amount of distributions 
constituting an ED during the year of the CERT pursuant to Sec.  
1.172(h)-1(c)(3), and the denominator of which equals the total amount 
of distributions made during the year of the CERT. CERT costs include 
costs incurred after date on which a CERT occurs if the CERT consists 
of multiple steps. See Sec.  1.172(h)-5(a).
    (iii) CERT costs incurred in a year prior to a CERT year. CERT 
costs incurred in a year prior to the year of the CERT are treated as 
incurred on the first day of the year of the CERT.
    (iv) Year constitutes loss limitation year with regard to multiple 
CERTs. If a single taxable year constitutes a loss limitation year with 
regard to more than one CERT, the accumulated CERT costs on any 
particular date during that year include accumulated CERT costs under 
this paragraph (b)(4) with regard to all such CERTs. See Sec.  
1.172(h)-3(d) for rules regarding computation of a CERIL if a year 
constitutes a loss limitation year with regard to multiple CERTs.
    (5) No netting of interest income and deductions. Allocable 
interest deductions under paragraph (b)(1) of this section are the 
deductions allowed for interest on any indebtedness allocable to a 
CERT. Allocable interest deductions are not netted against a taxpayer's 
interest income.
    (6) Certain unforeseeable events. [Reserved].
    (7) Examples. The following examples illustrate the rules of this 
paragraph (b). Unless otherwise provided, assume that all entities are 
domestic C corporations that do not join in the filing of consolidated 
returns and are accrual method taxpayers. Assume that all applicable 
corporations have substantial NOLs in their loss limitation years:

    Example 1. CERT costs in MSA. (i) Facts. On February 1, Year 5, 
Corporation A begins investigating the possible acquisition of 
Corporation T. On March 1, Year 5, A enters into an exclusivity 
agreement with T. On July 1, Year 5, A engages in an MSA when it 
acquires all of the stock of T in exchange for cash. A incurs costs 
for services rendered by its outside counsel and an investment 
banker. A's outside counsel and the investment banker conduct due 
diligence on T, determine the value of T, negotiate and

[[Page 57462]]

structure the transaction with T, draft the purchase agreement, 
secure shareholder approval, and prepare SEC filings. In addition, 
the investment banker arranges borrowings to fund both the stock 
acquisition and A's operations. A also pays a bonus to one of its 
corporate officers, who negotiated the acquisition of T. Before and 
after the acquisition is consummated, A incurs costs to relocate 
personnel and equipment, and to integrate records and information 
systems.
    (ii) Analysis. The CERT costs taken into account by A in 
computing interest allocable to the CERT include the fair market 
value of the T stock. See paragraph (b)(3)(i) of this section. The 
costs incurred on or after the date of the exclusivity agreement, 
March 1, Year 5, (but not before) to conduct due diligence are also 
included in A's CERT costs. See paragraph (b)(3)(i) of this section 
and Sec.  1.263(a)-5(e)(1). A's CERT costs also include all amounts 
incurred to determine the value of T, negotiate and structure the 
transaction with T, draft the purchase agreement, secure shareholder 
approval, and prepare SEC filings. See Sec.  1.263(a)-5(e)(2). In 
addition, A's CERT costs include borrowing costs that facilitate the 
CERT. See paragraph (b)(3)(iii) of this section. A's CERT costs do 
not include any portion of the bonus paid to the corporate officer 
or the costs incurred to relocate personnel and equipment, and to 
integrate records and information systems. See Sec.  1.263(a)-
5(c)(6) and (d).
    Example 2. CERT costs in ED. (i) Facts. X corporation is a 
calendar-year taxpayer. On July 1, Year 5, X makes a distribution of 
$80,000 to its shareholders, $60,000 of which constitutes an ED. X 
makes no other distributions during Year 5. At previous regular 
quarterly board of directors meetings, the directors discussed the 
July 1, Year 5 distribution. On March 30, Year 5, X incurs $2,500 in 
borrowing costs that constitute CERT costs under paragraph 
(b)(3)(iii) of this section. In addition, on March 30 and April 15, 
Year 5, X incurs $500 and $3,000, respectively, for work performed 
by its outside counsel which facilitates the ED under the principles 
of Sec.  1.263(a)-4(e). During Year 5, X pays its directors for 
attendance at the regular quarterly board of directors meetings. No 
additional CERT costs are incurred in Years 6 and 7.
    (ii) CERT costs. X's CERT costs include the fair market value of 
all distributions made during the year of the CERT ($80,000), as 
well as the $2,500 of borrowing costs. See paragraph (b)(3)(ii) and 
(iii) of this section. In addition, under the principles of section 
Sec.  1.263(a)-4(e), X's CERT costs include the costs incurred for 
work performed by A's outside counsel related to the ED. See 
paragraph (b)(3)(ii) of this section and Sec.  1.263(a)-4(e)(1)(i). 
X's CERT costs do not include amounts paid to X's board of directors 
to attend the regular board of directors meetings. See Sec.  
1.263(a)-4(e)(4)(ii)(B).
    (iii) Accumulated CERT costs. Under paragraph (b)(4)(ii) of this 
section, X's accumulated CERT costs as of a particular date with 
regard to its ED are the total CERT costs that have been taken into 
account as of that date multiplied by a fraction the numerator of 
which equals the amount of distributions constituting ED during the 
year of the CERT, and the denominator of which equals the total 
amount of distributions made during the year of the CERT. Here 
$60,000 is divided by $80,000, which equals \3/4\. The CERT occurs 
during X's Year 5, and that year is a loss limitation year with 
regard to the CERT. X's accumulated CERT costs on March 30, Year 5 
are $2,250 (3,000 x \3/4\). X's accumulated CERT costs are $4,500 
(6,000 x \3/4\) on April 15, Year 5 and $64,500 (86,000 x \3/4\) on 
July 1, Year 5. X's Years 6 and 7 are also loss limitation years. 
Because no additional CERT costs are incurred in Years 6 and 7, 
throughout those years, X's accumulated CERT costs are $64,500.
    Example 3. Accumulated CERT costs in an MSA. (i) All CERT costs 
incurred in year of CERT. X corporation is a calendar-year taxpayer. 
On March 1, Year 5, X acquires all of the stock of unrelated 
corporation T in an MSA. X's loss limitation years are calendar 
Years 5, 6, and 7. During Year 5, X incurs the following CERT costs: 
$4,000 on January 30; $50,000 on March 1; and $9,000 on March 15. 
During Year 5, X's accumulated CERT costs are: $4,000 as of January 
30; $54,000 as of March 1; and $63,000 as of March 15. See paragraph 
(b)(4)(i) of this section. No additional CERT costs are incurred in 
Years 6 and 7. As a result, throughout Years 6 and 7, X's 
accumulated CERT costs are $63,000.
    (ii) Portion of CERT costs incurred prior to year of CERT. The 
facts are the same as in paragraph (i) of this Example 3, except 
during Year 4, X incurs $2,000 of CERT costs. During Year 5, X's 
accumulated CERT costs are: $2,000 as of January 1 (reflecting costs 
incurred during Year 4); $6,000 as of January 30; $56,000 as of 
March 1; and $65,000 as of March 15. See paragraph (b)(4)(i) and 
(iii) of this section. X is treated as having no accumulated CERT 
costs during Year 4.

    (c) Effective/applicability date. This section is applicable to 
CERTs occurring on or after the date of publication of the Treasury 
decision adopting these rules as final regulations in the Federal 
Register. This section is also applicable to the deconsolidation of a 
member from, or the acquisition of a corporation by, a consolidated 
group that occurs on or after the date of publication of the Treasury 
decision adopting these rules as final regulations in the Federal 
Register. However, in each case, this section does not apply to any 
CERT, deconsolidation, or acquisition occurring pursuant to a written 
agreement that is binding before the date of publication of the 
Treasury decision adopting these rules as final regulations in the 
Federal Register.


Sec.  1.172(h)-3  Limitation on allocable interest deductions.

    (a) General rule. The amount of allocable interest deductions 
(determined under Sec.  1.172(h)-2(b)) for any loss limitation year is 
limited to the excess (if any) of the amount allowable as a deduction 
for interest paid or accrued by the taxpayer during the loss limitation 
year, over the average of interest paid or accrued by the taxpayer (the 
three-year average) for the three taxable years preceding the taxable 
year in which the corporate equity reduction transaction (CERT) 
occurred (the lookback period). This section provides additional rules 
for computing the three-year average relevant to any loss limitation 
year for purposes of applying section 172(b)(1)(E) and (h), Sec. Sec.  
1.172(h)-1 through 1.172(h)-5, and Sec.  1.1502-72 (the CERT rules).
    (b) Three-year average for a short loss limitation year--(1) 
General rule. For purposes of computing the three-year average if the 
relevant loss limitation year is less than a full 12-month year, the 
interest paid or accrued with regard to any year of the taxpayer during 
a lookback period (lookback period year) equals the amount of interest 
treated as paid or accrued multiplied by a fraction, the numerator of 
which equals the number of days in the short loss limitation year, and 
the denominator of which equals the number of days in the lookback 
period year. The value of the fraction may not exceed 100 percent. Zero 
interest is deemed paid or accrued (in excess of amounts actually paid 
or accrued) in a lookback period year that is shorter than the loss 
limitation year.
    (2) Example. The following example illustrates the short loss 
limitation year rule of this paragraph (b):

    Example. (i) Facts. T, a domestic C corporation, was organized 
on July 1, Year 1. T's first taxable year is a short taxable year, 
which includes July 1 through December 31, Year 1 (184 days). T's 
next two taxable years are full calendar years: Calendar Year 2 and 
Calendar Year 3. T's Year 4 ends on September 30 as a result of a 
change in accounting period. T engages in a CERT during its taxable 
Year 4, which includes January 1, Year 4, through September 30, Year 
4 (273 days). T's next two taxable periods are full 12-month fiscal 
years ending on September 30, Year 5, and September 30, Year 6.
    (ii) Year 4 analysis. T's taxable Year 4 is a short loss 
limitation year. Therefore, in computing its three-year average 
applicable to loss limitation Year 4, T multiplies its interest 
treated as paid or accrued during each of the three years of the 
lookback period by the fraction specified in paragraph (b)(1) of 
this section. The pertinent fraction with regard to Year 1 of the 
lookback period is 273/184 (number of days in short loss limitation 
year divided by the number of days in the lookback period year). 
However, under paragraph (b)(1) of this section, the value of the 
fraction cannot exceed 100 percent. As a result, T includes in the 
computation of its three-year average its actual interest paid or 
accrued in Year 1. As to Years 2 and 3, T includes in the 
computation of its three-year average its actual interest paid or 
accrued in each of

[[Page 57463]]

those years, multiplied by a fraction equal to 273/365.
    (iii) Year 5 and 6 analysis. Because T's taxable Years 5 and 6 
are full 12-month loss limitation years, T includes in the 
computation of its three-year average applicable to those loss 
limitation years its actual interest paid or accrued in each year of 
the lookback period, without adjustment.

    (c) Computation of interest paid or accrued by corporation with 
incomplete lookback period--(1) Lookback period for corporation not in 
existence. If an applicable corporation was not in existence for three 
taxable years preceding the taxable year in which the CERT occurred 
(the lookback period), for purposes of determining the limitation on 
allocable interest deductions under section 172(h)(2)(C) and paragraph 
(a) of this section, the applicable corporation's lookback period is 
deemed to have additional 12-month periods that end on the calendar 
date that is one day prior to the date of the corporation's 
organization. See Sec.  1.172(h)-4(c)(2)(i)(B) (regarding determination 
of lookback period for successor applicable corporations not in 
existence on date of CERT) and Sec.  1.1502-72(d)(4)(ii) (regarding 
consolidated groups not in existence during the entire lookback 
period).
    (2) Interest history of corporation not in existence. If an 
applicable corporation was not in existence for the entire lookback 
period, it is treated as having paid or accrued zero interest during 
periods deemed to exist under paragraph (c)(1) of this section in 
computing any three-year average. However, if the applicable 
corporation is a successor corporation pursuant to Sec.  1.172(h)-
1(b)(2), the computation of any three-year average for the successor 
includes interest paid or accrued by any predecessor during the 
lookback period. See Sec.  1.172(h)-4(c)(2)(ii)(A).
    (3) Example. The following example illustrates the rules of this 
paragraph (c):

    Example. Corporation not in existence for entire lookback 
period. C is a domestic C corporation that does not join in the 
filing of a consolidated return and maintains a calendar taxable 
year. C is formed on October 1, Year 3, and engages in a CERT during 
Year 5. For purposes of computing any CERIL related to the CERT, 
paragraph (a) of this section requires that C must measure its 
interest deductions for the lookback period. However, C was not in 
existence for three taxable years preceding the year in which the 
CERT occurred. Rather, C was in existence for one full calendar 
taxable year (Year 4) and one short taxable year (October 1 through 
December 31, Year 3). Pursuant to paragraph (c)(1) of this section, 
C's lookback period is deemed to include an additional taxable 
period (October 1, Year 2, through September 30, Year 3). Further, 
in computing any three-year average, C is treated as having paid or 
accrued zero interest during the deemed additional period. See 
paragraph (c)(2) of this section.

    (d) Computation of a CERIL if single year constitutes loss 
limitation year with regard to multiple CERTs--(1) Single CERIL 
computation. This paragraph (d) applies if a taxable year constitutes a 
loss limitation year of the taxpayer with regard to more than one CERT. 
In that case, a single corporate equity reduction interest loss (CERIL) 
is computed under section 172(h)(1) and Sec.  1.172(h)-2(a)(2) for that 
year. This computation takes into account accumulated CERT costs for 
every CERT, determined under Sec.  1.172(h)-2(b)(4)(iv) for the loss 
limitation year.
    (2) Limitation on allocable interest deductions. In computing the 
single CERIL under this paragraph (d), section 172(h)(2)(C) and 
paragraph (a) of this section are applied a single time to limit the 
cumulative amount of interest allocable to all of the CERTs to the 
excess (if any) of the amount allowable as a deduction for interest 
paid or accrued by the taxpayer during the loss limitation year over 
the three-year average for the lookback period. The limitation is not 
applied separately with respect to interest allocable to a particular 
CERT.
    (3) Computation of three-year average if CERTs have different 
lookback periods--(i) In general. If the lookback periods (as defined 
in paragraph (a) of this section or in Sec.  1.1502-72(d)(4)) relevant 
to all of the CERTs pertinent to a loss limitation year are not 
identical, a cumulative three-year average is computed by applying the 
rules of paragraph (d)(3)(ii) of this section. The cumulative three-
year average is treated as the three-year average relevant to the loss 
limitation year, and is applied to determine the limitation on the 
amount of interest allocable to all of the CERTs under section 
172(h)(2)(C) and paragraph (a) of this section.
    (ii) Cumulative three-year average. The cumulative three-year 
average applicable to any loss limitation year is computed under this 
paragraph (d)(3)(ii). With regard to each lookback period relevant to a 
loss limitation year, a modified three-year average is computed. The 
modified three-year average is the three-year average relevant to a 
particular lookback period (determined under section 172(h)(2)(C) and 
this section) multiplied by a fraction, the numerator of which equals 
the accumulated CERT costs as of the close of the loss limitation year 
that are attributable to the particular CERT or CERTs to which the 
three-year average corresponds, and the denominator of which equals the 
total accumulated CERT costs as of the close of the loss limitation 
year that are attributable to all CERTs relevant to the loss limitation 
year. See Sec.  1.172(h)-2(b)(4) defining accumulated CERT costs. The 
sum of all modified three-year averages is the cumulative three-year 
average for that year.
    (4) Allocation of a CERIL among CERTS. After the computation of the 
single CERIL for a loss limitation year that is attributable to all 
CERTs, the total CERIL is allocated to particular CERTs, if CERILs 
attributable to different CERTs are subject to different limitations on 
carryback. See section 172(b)(1)(E)(i) and Sec.  1.172(h)-5(b) 
(regarding prohibition on carrybacks). For purposes of this allocation, 
the CERT costs attributable to each particular CERT are identified. The 
total CERIL is then attributed to each CERT by multiplying the total 
CERIL by a fraction, the numerator of which equals the accumulated CERT 
costs as of the close of the loss limitation year that are attributable 
to a particular CERT, and the denominator of which equals the total 
accumulated CERT costs as of the close of the loss limitation year that 
are attributable to all CERTs relevant to the loss limitation year. See 
Sec.  1.172(h)-2(b)(4) defining accumulated CERT costs.
    (5) Examples. The following examples illustrate the rules of this 
paragraph (d). Unless otherwise provided, assume that all entities are 
domestic C corporations that do not join in the filing of consolidated 
returns and that maintain calendar taxable years. Assume that all 
applicable corporations have substantial net operating losses in their 
loss limitation years:

    Example 1. Multiple CERTs with identical lookback period. (i) 
Facts. Corporation A maintains a calendar taxable year. A engages in 
two separate CERTs during its taxable Year 4. The lookback period 
for both CERTs is January 1, Year 1, through December 31, Year 3. 
The total amount of interest deductions allocable to CERT 1 and CERT 
2 (before application of section 172(h)(2)(C) and paragraph (a) of 
this section) is $50. A's total interest expense during Year 4 was 
$150, and its three-year average interest for the lookback period 
was $120.
    (ii) Analysis. Year 4 constitutes a loss limitation year with 
regard to both CERT 1 and CERT 2. A single CERIL is computed with 
regard to Year 4, and the limitation on allocable interest under 
section 172(h)(2)(C) and paragraph (a) of this section is applied a 
single time. See paragraphs (d)(1) and (2) of this section. The 
limitation under section 172(h)(2)(C) and paragraph (a) of this 
section is applied to the cumulative amount of interest allocable to 
the two CERTs ($50). See paragraph (d)(2) of this section. The 
limitation under section 172(h)(2)(C) and paragraph (a) of this 
section equals the excess

[[Page 57464]]

of the amount of interest allowable in Year 4 ($150) over the three-
year average ($120), or $30. Therefore, the CERIL is limited to $30.
    Example 2. Multiple CERTs with different lookback periods. (i) 
Facts. Corporation A maintains a calendar taxable year. A engages in 
CERT 1 during its taxable Year 4. The lookback period relevant to 
CERT 1 is January 1, Year 1, through December 31, Year 3. A also 
engages in CERT 2 during its taxable Year 5. The lookback period 
relevant to CERT 2 is January 1, Year 2, through December 31, Year 
4. The total amount of interest deductions allocable to CERT 1 and 
CERT 2 (before application of section 172(h)(2)(C) and paragraph (a) 
of this section) during taxable Year 5 is $50. A's total interest 
expense during Year 5 is $126. A's three-year average interest that 
is relevant to loss limitation Year 5 for the CERT 1 lookback period 
is $100, and its three-year average interest that is relevant to 
loss limitation Year 5 for the CERT 2 lookback period is $110. A's 
accumulated CERT costs attributable to CERT 1 are $400. A's 
accumulated CERT costs attributable to CERT 2 are $600.
    (ii) Cumulative three-year average. Year 5 is a loss limitation 
year with regard to both CERT 1 and CERT 2. A single CERIL is 
computed with regard to Year 5, and the limitation on allocable 
interest under section 172(h)(2)(C) and paragraph (a) of this 
section is applied a single time. See paragraph (d)(1) and (2) of 
this section. The limitation under section 172(h)(2)(C) and 
paragraph (a) of this section is applied to the cumulative amount of 
interest allocable to the two CERTs ($50). See paragraph (d)(2) of 
this section. Because Year 5 constitutes a loss limitation year with 
regard to CERTs with different lookback periods, the relevant three-
year average applied under section 172(h)(2)(C) and paragraph (a) of 
this section is the cumulative three-year average, which is the sum 
of all modified three-year averages. See paragraph (d)(3)(ii) of 
this section. The modified three-year average with regard to CERT 1 
is the three-year average for CERT 1 multiplied by $400/$1,000 
(accumulated CERT costs attributable to CERT 1 divided by the total 
accumulated CERT costs attributable to CERTs 1 and 2), or \2/5\. 
Therefore, the modified three-year average with regard to CERT 1 is 
$40 (100 x \2/5\). The modified three-year average with regard to 
CERT 2 is the three-year average for CERT 2 multiplied by $600/
$1,000 (accumulated CERT costs attributable to CERT 2 divided by the 
total accumulated CERT costs attributable to CERTs 1 and 2), or \3/
5\. Therefore, the modified three-year average with regard to CERT 2 
is $66 (110 x \3/5\). Thus, the cumulative three-year average 
interest for Year 5 is $106 ($40 + $66). See paragraph (d)(3) of 
this section. The limitation under section 172(h)(2)(C) and 
paragraph (a) of this section equals the excess of the amount of 
interest allowable in Year 5 ($126) over the cumulative three-year 
average interest ($106), or $20. Therefore, the CERIL for Year 5 is 
limited to $20.
    (iii) Allocation of a CERIL to different CERTs. Because Year 5 
constitutes a loss limitation year with regard to more than one 
CERT, and a CERIL associated with each CERT is subject to different 
limitations on carryback, the total CERIL must be allocated between 
CERT 1 and CERT 2. See paragraph (d)(4) of this section. The portion 
of the total CERIL allocated to CERT 1 is the total CERIL multiplied 
by $400/$1,000 (accumulated CERT costs attributable to CERT 1 
divided by the total accumulated CERT costs attributable to CERTs 1 
and 2), or \2/5\. Therefore, the portion of the total CERIL 
allocated to CERT 1 is $8 ($20 x \2/5\). The portion of the total 
CERIL allocated to CERT 2 is the total CERIL multiplied by $600/
$1,000 (accumulated CERT costs attributable to CERT 2 divided by the 
total accumulated CERT costs attributable to CERTs 1 and 2), or \3/
5\. Therefore, the portion of the total CERIL allocated to CERT 2 is 
$12 ($20 x \3/5\). See paragraph (d)(4) of this section. See also 
section 172(b)(1)(E)(i) and Sec.  1.172(h)-5(b)(1) for rules 
regarding the prohibition on carryback of a CERIL.
    Example 3. CERTs of multiple corporations with identical 
lookback period. (i) Facts. Corporation T maintains a taxable year 
ending on June 30. On August 31, Year 5, T engages in CERT 1. 
Unrelated P is the parent of a group that maintains a calendar 
taxable year. On October 31, Year 5, P acquires all the stock of T 
in an MSA (CERT 2). T is first included in the P group on November 
1, Year 5. For its calendar Year 5, the P group is treated as an 
applicable corporation with respect to CERT 1 and CERT 2. See Sec.  
1.1502-72(a)(2)(iv)(A). The P group's lookback period for both CERTs 
is January 1, Year 2, through December 31, Year 4. The total CERIL 
of the group in Year 5 is $80. The P group's accumulated CERT costs 
attributable to CERT 1 are $500. The P group's accumulated CERT 
costs attributable to CERT 2 are $1,500. The P group has a 
consolidated net operating loss (CNOL) in Year 5, a portion of which 
is allocable to T under Sec.  1.1502-21(b)(2)(iv)(B).
    (ii) Allocation of a CERIL to different CERTs. Year 5 
constitutes a loss limitation year with regard to two CERTs that 
share a common lookback period. However, the CERIL associated with 
the different CERTs is subject to different limitations on carryback 
under Sec.  1.172(h)-5(b)(1) (some CNOL will be carried back to the 
group's consolidated return years and some will be carried back to 
T's separate return years). Therefore, the total CERIL must be 
allocated between CERT 1 and CERT 2. The portion of the total CERIL 
allocated to CERT 1 is the total CERIL multiplied by $500/$2,000 
(accumulated CERT costs attributable to CERT 1 divided by the total 
accumulated CERT costs attributable to CERTs 1 and 2), or \1/4\. See 
paragraph (d)(4) of this section. Therefore, the portion of the 
total CERIL allocated to CERT 1 is $20 ($80 x \1/4\). The portion of 
the total CERIL allocated to CERT 2 is the total CERIL multiplied by 
$1,500/$2,000 (accumulated CERT costs attributable to CERT 2 divided 
by the total accumulated CERT costs attributable to CERTs 1 and 2), 
or \3/4\. Therefore, the portion of the total CERIL allocated to 
CERT 2 is $60 ($80 x \3/4\).

    (e) Effective/applicability date. This section is applicable to 
CERTs occurring on or after the date of publication of the Treasury 
decision adopting these rules as final regulations in the Federal 
Register. This section is also applicable to the deconsolidation of a 
member from, or the acquisition of a corporation by, a consolidated 
group that occurs on or after the date of publication of the Treasury 
decision adopting these rules as final regulations in the Federal 
Register. However, in each case, this section does not apply to any 
CERT, deconsolidation, or acquisition occurring pursuant to a written 
agreement that is binding before the date of publication of the 
Treasury decision adopting these rules as final regulations in the 
Federal Register.


Sec.  1.172(h)-4  Special rules for predecessors and successors.

    (a) Scope. This section provides guidance with regard to the 
application of section 172(b)(1)(E) and (h), Sec. Sec.  1.172(h)-1 
through 1.172(h)-5, and Sec.  1.1502-72 (the CERT rules) to 
predecessors and successors (as defined in Sec.  1.172(h)-1(b)(2)).
    (b) Loss limitation years--(1) In general. This paragraph (b)(1) 
applies to identify loss limitation years of a successor. The taxable 
year in which a corporate equity reduction transaction (CERT) actually 
occurs is a loss limitation year. See Sec.  1.172(h)-1(e). Any taxable 
year of a successor (potential loss limitation year) of any applicable 
corporation is a loss limitation year with regard to the CERT if, under 
the carryover rules of sections 172(b)(1)(A)(ii) and 381(c)(1), the 
potential loss limitation year constitutes the first or second taxable 
year following the taxable year of the corporation that actually 
engaged in the CERT which includes the date on which the CERT occurred. 
See Sec.  1.172(h)-5(a) (defining date on which CERT occurs in 
multiple-step transaction); but see Sec.  1.1502-72(a)(3) (defining 
loss limitation years of consolidated groups and corporations that were 
previously members of a consolidated group).
    (2) Example. The following example illustrates the rules of this 
paragraph (b):

    Example. Loss limitation years of successor. T is a domestic C 
corporation that maintains a calendar taxable year and does not join 
in the filing of a consolidated return. On March 31, Year 6, T 
engages in a CERT. On June 30, Year 6, T merges into Corporation A, 
a calendar-year taxpayer, in a transaction to which section 381(a) 
applies. T's taxable Year 6 ends on the date of the merger, and A 
succeeds to T's tax attributes. See section 381(a) and (b)(1). T's 
only loss limitation year with respect to the Year 6 CERT is its 
short taxable year ending June 30, Year 6. See section 
172(b)(1)(E)(ii) and Sec.  1.172(h)-1(e). Following the merger, A is 
the successor to T, and A is treated as an applicable corporation 
with regard to the

[[Page 57465]]

Year 6 CERT. See Sec.  1.172(h)-1(b)(2). A's calendar Years 6 and 7 
are the second and third loss limitation years with regard to the 
Year 6 CERT. See section 172(b)(1)(E)(ii) and paragraph (b)(1) of 
this section.

    (c) Computation of a CERIL--(1) CERT costs. For purposes of 
computing any corporate equity reduction interest loss (CERIL) under 
section 172(h)(1) and Sec.  1.172(h)-2(a)(2), any CERT costs incurred 
(or treated as incurred under this paragraph (c)) by a predecessor are 
attributed to the successor. However, such costs are treated as having 
been incurred by the successor only for purposes of applying the 
avoided cost rules of section 263A(f)(2)(A) to any measurement date (as 
defined in Sec.  1.263A-9(f)(2)) after the date of the section 381(a) 
transaction.
    (2) Limitation on allocable interest deductions--(i) Lookback 
period--(A) In general. The lookback period with regard to a CERT is 
the three taxable years preceding the taxable year in which the CERT 
occurs. See Sec.  1.172(h)-3(a). The lookback period that is relevant 
to the calculation of any CERIL of a successor (successor's lookback 
period) is the three years preceding the taxable year of the successor 
that includes the date on which the CERT occurred. See Sec. Sec.  
1.172(h)-5(a) (defining the date on which a CERT occurs if the CERT 
consists of multiple steps) and Sec.  1.172(h)-3(c) (regarding 
corporations with insufficient lookback periods).
    (B) Successor not in existence on date of CERT. If a successor was 
not in existence on the date on which the CERT occurred, for purposes 
of determining the lookback period, the successor is deemed to have 
additional 12-month periods that end on the calendar date that is one 
day prior to the date of the corporation's organization. The successor 
is deemed to have a sufficient number of such additional periods such 
that the successor is treated as having a year that includes the date 
on which the CERT occurred and as having three years (the lookback 
period) immediately preceding the deemed year that includes the date of 
the CERT. See Sec.  1.172(h)-3(c)(1) regarding lookback period for 
corporation lacking three-year history.
    (ii) Computation of three-year average--(A) In general. Except as 
otherwise provided in this paragraph (c)(2)(ii), for purposes of 
determining any three-year average of a successor under section 
172(h)(2)(C)(ii) and Sec.  1.172(h)-3, the interest paid or accrued by 
a successor includes interest paid or accrued by all corporations that 
are its predecessors as of the end of the successor's taxable year. If 
the dates of any taxable year of a predecessor do not precisely 
correspond to the dates of a taxable year of the successor, the 
interest paid or accrued by the predecessor is apportioned equally to 
each date of the predecessor's taxable year. The successor is treated 
as having paid or accrued in any year during the lookback period all 
predecessor interest that is apportioned to a date within that lookback 
period year.
    (B) Year of successor transaction. In computing the three-year 
average that is relevant to the taxable year of a successor that 
includes the date of the section 381(a) transaction that resulted in 
successor status, the successor includes only a pro rata portion of the 
predecessor's amount of interest paid or accrued during the successor's 
lookback period. The pro rata amount equals the predecessor's interest 
treated as paid or accrued for the dates of the successor's lookback 
period, multiplied by a fraction, the numerator of which equals the 
number of days in the loss limitation year of the successor that follow 
the date of the transaction that resulted in successor status, and the 
denominator of which equals the number of days in the successor's loss 
limitation year. The predecessor's amount of interest treated as paid 
or accrued that is subject to proration under this paragraph 
(c)(2)(ii)(B) is the interest history of the predecessor that would 
otherwise be fully combined with the interest history of the successor 
under paragraph (c)(2)(ii)(A) of this section.
    (3) Examples. The following examples illustrate the rules of this 
paragraph (c). Unless otherwise provided, assume that all entities are 
domestic C corporations that do not join in the filing of consolidated 
returns and that maintain calendar taxable years. Assume that all 
applicable corporations have substantial net operating losses in their 
loss limitation years:

    Example 1. Predecessor corporation engages in CERT. (i) Facts. 
Corporation X is a calendar-year taxpayer. On February 1, Year 5, X 
engages in a CERT. On August 1, Year 5, X merges into unrelated 
corporation Y in a transaction to which section 381(a) applies. Y is 
a calendar-year taxpayer and all of its taxable years are full 
calendar years. All of X's taxable years prior to the year of the 
merger are full calendar years.
    (ii) Analysis. X's only loss limitation year is its short year 
ending August 1, Year 5. X's lookback period relevant to the Year 5 
CERT includes X's calendar Years 2, 3, and 4. See paragraph 
(c)(2)(i)(A) of this section; see also Sec.  1.172(h)-3(b)(1) 
(computation of three-year average for a short loss limitation 
year). Following the merger, Y is the successor to X, and Y is 
treated as an applicable corporation with regard to the Year 5 CERT. 
See Sec.  1.172(h)-1(b)(2). Because Y's calendar Year 5 follows a 
single loss limitation year of X with regard to the same CERT, Y's 
calendar Years 5 and 6 are loss limitation years with regard to the 
Year 5 CERT. See paragraph (b)(1) of this section and Sec.  
1.381(c)(1)-1(e)(3). Y's lookback period for the Year 5 CERT is its 
calendar Years 2, 3, and 4. See paragraph (c)(2)(i)(A) of this 
section. The computations of Y's three-year averages relevant to its 
loss limitation Years 5 and 6 include interest paid or accrued by Y 
and by all of Y's predecessors, including X, during the lookback 
period. See paragraph (c)(2)(ii)(A) of this section. However, 
because Year 5 is Y's taxable year that includes the date of the 
section 381(a) transaction that resulted in Y's successor status, 
for purposes of computing Y's three-year average for Y's loss 
limitation Year 5, Y includes only a pro rata portion of X's amount 
of interest paid or accrued. In the proration, X's amount of 
interest paid or accrued during the 3 year lookback period is 
multiplied by 151/365 (the number of days in Y's loss limitation 
Year 5 that follow the date of the section 381(a) transaction that 
resulted in Y's successor status, divided by the number of days in 
Y's loss limitation Year 5). See paragraph (c)(2)(ii)(B) of this 
section.
    (iii) Predecessor and successor have different taxable years. 
The facts are the same as in paragraph (i) of this Example 1, except 
that X maintained a taxable year ending June 30 before its merger 
into Y. X's full taxable year ending June 30, Year 5, and its short 
year ending August 1, Year 5, are its loss limitation years with 
regard to its February 1, Year 5 CERT. See section 172(b)(1)(E)(ii) 
and Sec.  1.172(h)-1(e). Following the merger of X into Y, Y is a 
successor to X and is treated as an applicable corporation with 
regard to the Year 5 CERT. Y's calendar Year 5 is the third loss 
limitation year with regard to the CERT. See paragraph (b)(1) of 
this section. Y's lookback period is Y's three taxable years 
preceding Y's taxable year that includes the date of the CERT, which 
are Years 2, 3, and 4. Further, because the dates of X's taxable 
years do not precisely correspond to the dates of Y's taxable years, 
X's interest paid or accrued is apportioned equally to each date 
within each of X's taxable years. Y is treated as having paid or 
accrued in any year during the lookback period all of X's interest 
that is so apportioned. See paragraph (c)(2)(ii)(A) of this section. 
However, because Y's taxable Year 5 includes the date of the section 
381(a) transaction that resulted in Y's successor status, for 
purposes of computing Y's three-year average for loss limitation 
Year 5, Y includes only a pro rata portion of X's interest history. 
See paragraphs (c)(2)(ii)(B) of this section.
    Example 2. Successor corporation not in existence for entire 
lookback period. (i) Facts. Corporation A is formed on October 1, 
Year 3, and thereafter maintains a calendar taxable year. 
Immediately after A is formed in Year 3, a second corporation, T, 
merges into A in a transaction that meets the requirements of 
section 368(a)(1)(A). During Year 5, A engages in a CERT.
    (ii) Analysis. A's loss limitation years are its calendar Years 
5, 6, and 7. See section 172(b)(1)(E)(ii). For purposes of computing 
any CERIL related to the Year 5 CERT, section 172(h)(2)(C)(ii) and 
Sec.  1.172(h)-3

[[Page 57466]]

require that A measure its interest deductions for the three years 
preceding the taxable year of the CERT (three-year average). 
However, A is in existence for only two taxable years before the 
year in which the CERT occurs. Therefore, pursuant to Sec.  
1.172(h)-3(c)(1), A is deemed to have an additional taxable period 
(October 1, Year 2, through September 30, Year 3). Further, in 
computing the three-year average, A is treated as having paid or 
accrued zero interest during the deemed year. See Sec.  1.172(h)-
3(c)(2). However, because T is the predecessor of A, the computation 
of A's three-year average relevant to its loss limitation Year 5 
includes interest paid or accrued by T during the lookback period 
(October 1,Year 2, through December 31, Year 4). See paragraph 
(c)(2)(ii)(A) of this section and Sec.  1.172(h)-3(c)(2). Because T 
merges into A in a year prior to any loss limitation year, there is 
no proration of T's interest history under paragraph (c)(2)(ii)(B) 
of this section.

    (d) Three-year distribution average. For purposes of determining 
any three-year distribution average of a successor under section 
172(h)(3)(C)(ii)(I) and Sec.  1.172(h)-1(c)(3), the distributions made 
by a successor include distributions made by all corporations that are 
its predecessors as of the end of the successor's taxable year. If the 
dates of any taxable year of a predecessor do not correspond to the 
dates of a taxable year of the successor, the distributions made by the 
predecessor are apportioned equally to each date of the predecessor's 
taxable year. The successor is treated as having made in its taxable 
years all predecessor distributions that are apportioned to a date 
within those taxable years.
    (e) Effective/applicability date. This section is applicable to 
CERTs occurring on or after the date of publication of the Treasury 
decision adopting these rules as final regulations in the Federal 
Register. This section is also applicable to the deconsolidation of a 
member from, or the acquisition of a corporation by, a consolidated 
group that occurs on or after the date of publication of the Treasury 
decision adopting these rules as final regulations in the Federal 
Register. However, in each case, this section does not apply to any 
CERT, deconsolidation, or acquisition occurring pursuant to a written 
agreement that is binding before the date of publication of the 
Treasury decision adopting these rules as final regulations in the 
Federal Register.


Sec.  1.172(h)-5  Operating rules.

    (a) Date on which CERT occurs in a multi-step transaction. For 
purposes of applying section 172(b)(1)(E) and (h), Sec. Sec.  1.172(h)-
1 through 1.172(h)-4, and this section, and Sec.  1.1502-72 (the CERT 
rules), if a corporate equity reduction transaction (CERT) consists of 
multiple steps, the date on which the CERT occurs is the earliest date 
on which the requirements for CERT status are satisfied. For example, 
if multiple distributions are made in a single year, an excess 
distribution (ED) is treated as occurring on the earliest date on which 
the amount of distributions satisfies the greater of the two thresholds 
contained in section 172(h)(3)(C)(ii) and Sec.  1.172(h)-1(c)(3). A 
major stock acquisition (MSA) is treated as occurring on the earliest 
date on which at least 50 percent of the stock of a corporation is 
acquired, subject to the provisions of section 172(h)(3)(B) and Sec.  
1.172(h)-1(c)(2).
    (b) Prohibition on carryback--(1) In general. No corporate equity 
reduction interest loss (CERIL) attributable to a CERT may be carried 
back under section 172 or Sec.  1.1502-21(b) to any taxable year 
(including a consolidated return year) that includes solely dates that 
precede the date on which the CERT occurred. In addition, if a 
corporation becomes a member of a consolidated group as a result of a 
CERT, no CERIL allocable to that CERT may be carried back under section 
172 or Sec.  1.1502-21(b) to the taxable year of the acquired 
corporation that includes the date on which the CERT occurred, or to 
any preceding taxable year. See Sec.  1.172(h)-3(d)(4) regarding 
allocation of a CERIL among CERTs, and Sec.  1.1502-21(b)(2)(iv)(C)(1) 
for the apportionment of a CERIL among consolidated group members.
    (2) Example. The following example illustrates the rules of this 
paragraph (b):

    Example. Prohibition on carryback. (i) Facts. T corporation 
maintains a taxable year ending June 30. X corporation is the parent 
of a group that maintains a calendar taxable year. On March 31, Year 
5, the X group acquires all of the T stock in a CERT, and T is first 
included in the X group on April 1, Year 5. During its consolidated 
return Year 5, the X group has a consolidated net operating loss 
(CNOL), a portion of which constitutes a CERIL, pursuant to section 
172(h)(1) and Sec.  1.172(h)-2(a)(2). Part of the CERIL is 
apportioned to T, pursuant to Sec.  1.1502-21(b)(2)(iv)(C)(1).
    (ii) Analysis. On the date of the acquisition, both the X group 
and T constitute applicable corporations with regard to the Year 5 
CERT. See section 172(b)(1)(E)(iii)(I) and Sec.  1.172(h)-1(b). T's 
short taxable year ending on March 31, Year 5, was T's taxable year 
in which the CERT occurred. The X group's year in which the CERT 
occurred was its consolidated return Year 5. Section 172(b)(1)(E)(i) 
and paragraph (b) of this section prohibit the carryback of a CERIL 
to years preceding the taxable year in which the CERT occurs. 
Pursuant to paragraph (b)(1) of this section, no portion of a CERIL 
relating to the X group CNOL can be carried back to any taxable year 
that includes solely dates that precede the date on which the CERT 
occurred. As a result, no portion of the CERIL can be carried back 
to the X group's Year 4, or any preceding year. Moreover, because T 
becomes a member of the X group as a result of the CERT, no portion 
of the CERIL can be carried back to T's short taxable year ending 
March 31, Year 5, or any preceding taxable year. See paragraph 
(b)(1) of this section.

    (c) Stock issuances and computation of three-year distribution 
average--(1) In general. In determining whether an ED has occurred, 
aggregate distributions made during a taxable year are reduced by the 
aggregate amount of stock issued by the applicable corporation during 
the year in which the potential ED occurred in exchange for money or 
property other than stock of the applicable corporation. Similarly, the 
computation of any three-year distribution average under section 
172(h)(3)(C)(ii)(I) and Sec.  1.172(h)-1(f) is reduced by the average 
of the stock issuances described in section 172(h)(3)(E)(ii) and this 
paragraph (c)(1) during the three years of the distribution lookback 
period (three-year stock issuance average).
    (2) Example. The following example illustrates the rules of this 
paragraph (c):

    Example. (i) Facts. C is a corporation that maintains a calendar 
taxable year. During Year 5, C makes a large distribution to its 
shareholders. During taxable Years 2, 3, and 4, C distributes an 
average of $100,000 per year. In addition, during taxable Year 2, C 
issued stock in exchange for $90,000 cash. During taxable Year 3, C 
issued stock in exchange for $15,000 cash. C issued no stock during 
taxable Year 4.
    (ii) Analysis. C must test its Year 5 distribution as a 
potential ED. C's three-year distribution average without respect to 
any stock issued during the distribution lookback period is 
$100,000. C's three-year distribution average is reduced by the 
average of the stock issued by the corporation in exchange for money 
or property other than stock in C during the years of the 
distribution lookback period (three-year stock issuance average). 
See paragraph (c)(1) of this section. C's three-year stock issuance 
average is $35,000 [($90,000 + $15,000 + 0)/3]. Therefore, T's 
three-year distribution average is $65,000 ($100,000-$35,000).

    (d) Computation of the alternative minimum tax net operating loss 
deduction. The CERT rules governing the carryback of net operating 
losses following a CERT also apply to the carryback of an alternative 
minimum tax net operating loss.
    (e) Effective/applicability date. This section is applicable to 
CERTs occurring on or after the date of publication of the Treasury 
decision adopting these rules as final regulations in the Federal 
Register. This section is also applicable to the deconsolidation of a 
member from, or the acquisition of a corporation by, a consolidated 
group that occurs on

[[Page 57467]]

or after the date of publication of the Treasury decision adopting 
these rules as final regulations in the Federal Register. However, in 
each case, this section does not apply to any CERT, deconsolidation, or 
acquisition occurring pursuant to a written agreement that is binding 
before the date of publication of the Treasury decision adopting these 
rules as final regulations in the Federal Register.
    Par. 3. Section 1.1502-21 is amended by adding paragraphs 
(b)(2)(iv)(C) and (h)(1)(iv) and revising paragraphs (b)(3)(ii)(B) and 
(h)(5) to read as follows:


Sec.  1.1502-21  Net operating losses.

* * * * *
    (b) * * *
    (2) * * *
    (iv) * * *
    (C) Apportionment of special status losses--(1) In general. The 
amount of the group's CNOL that is determined to constitute a corporate 
equity reduction interest loss (CERIL) (as defined in section 172(h)(1) 
and Sec.  1.172(h)-2(a)(2)), specified liability loss (as defined in 
section 172(f)(1)), or any other net operating loss (NOL) that is 
subject to special carryback or carryover rules (special status loss), 
is apportioned to each member separately from the remainder of the 
CNOL, based on the percentage of CNOL attributable to the member as 
determined under paragraph (b)(2)(iv)(B) of this section. This 
apportionment is made without regard to whether a particular member 
actually incurred specific expenses or engaged in specific activities 
required by the special status loss provisions. If a consolidated group 
must apply Sec.  1.172(h)-3(d)(4) to allocate its CERIL for a loss 
limitation year between multiple corporate equity reduction 
transactions (CERTs), then the portion of the CERIL allocable to each 
CERT is treated as a separate CERIL for purposes of applying this 
paragraph (b)(2)(iv)(C) to apportion special status losses among 
members of the group.
    (2) Example. The following example illustrates the rules of this 
paragraph (b)(2)(iv)(C):

    Example.  (i) Facts. P is the parent of a group that includes S 
and that maintains a calendar taxable year. S has been a member of 
the group for all relevant years. In Year 3, the P group engages in 
a CERT. T is included in the P group beginning on January 1, Year 4, 
as a result of a transaction that does not constitute a CERT. In 
Year 4, the P group has a CNOL of $1,200. Under the CERT rules (in 
section 172(b)(1)(E) and (h), Sec. Sec.  1.172(h)-1 through 
1.172(h)-5, and Sec.  1.1502-72), $300 of the CNOL (25%) constitutes 
a CERIL. Assume that, absent application of this paragraph 
(b)(2)(iv)(C), under paragraph (b)(2)(iv)(B) of this section, \2/3\ 
of the CNOL ($800) is attributable to T and the remaining \1/3\ of 
the CNOL ($400) is attributable to S.
    (ii) Analysis. Under this paragraph (b)(2)(iv)(C), the CNOL is 
divided into its special status (CERIL) component, and its non-
special status component. Because T has separate return year 
carryback years, each component of the CNOL (the non-special status 
CNOL and the CERIL) is apportioned under paragraph (b)(2)(iv)(B) of 
this section. Under that apportionment rule, \2/3\ of each amount is 
apportioned to T, and the remainder of the CNOL is attributable to S 
and can be carried back to prior P group years, subject to any 
applicable limitations. Therefore, $200 of the $300 CERIL is 
apportioned to T, and $600 of the $900 non-special status CNOL is 
also apportioned to T. The $200 CERIL cannot be carried back to 
certain taxable years of T under the CERT rules. Likewise, $100 of 
the $300 CERIL is apportioned to S, and $300 of the $900 non-special 
status CNOL is also apportioned to S. Under the CERT rules, the $100 
CERIL cannot be carried back to certain taxable years.
* * * * *
    (3) * * *
    (ii) * * *
    (B) Election on acquisition to waive carryback to separate return 
years--(1) In general. A corporation may make one of three mutually 
exclusive, irrevocable elections to waive carryback of CNOLs to 
separate return years of acquired members. Any election that is made 
with regard to an acquired corporation that was a member of a 
consolidated group (the former group) immediately before becoming a 
member of an acquiring group must include all other corporations that 
were members of the former group and that joined the acquiring group 
during the same consolidated return year of the acquiring group.
    (2) Annual election. If a corporation becomes a member of an 
acquiring group, the acquiring group may make an irrevocable election 
to relinquish, with respect to the part of any CNOL attributable to the 
member, the portion of the carryback period for which the member filed 
a separate return. This is an annual election, applicable to the CNOL 
of a single year. The election is made in a separate statement 
entitled, ``THIS IS AN ELECTION UNDER Sec.  1.1502-21(b)(3)(ii)(B)(2) 
TO WAIVE THE PRE- [insert the first taxable year in which the member(s) 
joined the group] CARRYBACK PERIOD FOR THE PORTION OF THE [insert 
taxable year] CNOL ATTRIBUTABLE TO [insert the name(s) and EIN(s) of 
the corporation(s)].'' The statement must be filed with the acquiring 
group's timely filed original return for the consolidated return year 
of the particular CNOL.
    (3) Single election. If a corporation becomes a member of an 
acquiring group, the acquiring group may make an irrevocable election 
to relinquish, with respect to all CNOLs attributable to the member, 
the portion of the carryback period for which the member filed a 
separate return. The election is not an annual election and applies to 
all losses that would otherwise be subject to a carryback to separate 
return years under section 172 or paragraph (b) of this section. The 
election is made in a separate statement entitled, ``THIS IS AN 
ELECTION UNDER Sec.  1.1502-21(b)(3)(ii)(B)(3) TO WAIVE THE PRE- 
[insert the first taxable year in which the member(s) joined the group] 
CARRYBACK PERIOD FOR THE PORTION FOR ALL NOLs (and ALL CNOLs) 
ATTRIBUTABLE TO [insert the name(s) and EIN of the corporation(s)].'' 
The statement must be filed with the acquiring group's timely filed 
original income tax return for the consolidated return year the 
corporation (or corporations) became a member.
    (4) Special one-time election for deconsolidating member. Section 
1.1502-72(e)(1) makes available an election by a deconsolidating member 
(or its new common parent immediately following deconsolidation) to 
relinquish in whole the carryback of all NOLs to taxable years of the 
former group and any preceding taxable year. An election under Sec.  
1.1502-72(e)(1) will control whether the deconsolidating corporation is 
treated as an applicable corporation under section 172(b)(1)(E)(iii) 
and Sec.  1.172(h)-1(b)(1) following the deconsolidation with regard to 
a CERT of the former group. See Sec.  1.1502-72(b). Further, an 
election under Sec.  1.1502-72(e)(1) may affect the computation of the 
CERIL under section 172(h)(1) and Sec.  1.172(h)-2(a)(2) with regard to 
any CERT for which the deconsolidating corporation (or any group of 
which the deconsolidating corporation is a member) is an applicable 
corporation under section 172(b)(1)(E)(iii) and Sec.  1.172(h)-1(b)(1) 
following the deconsolidation. See Sec.  1.1502-72(c)(4) and 
(d)(3)(ii).
* * * * *
    (h) * * *
    (1) * * *
    (iv) Paragraph (b)(2)(iv)(C) of this section applies to taxable 
years for which the due date of the original return (without 
extensions) is on or after the date of publication of the Treasury 
decision adopting these rules as final regulations in the Federal 
Register.
* * * * *
    (5) Waiver of carrybacks. Paragraph (b)(3)(ii)(B) of this section 
(relating to the waiver of carrybacks to separate return years) applies 
to acquisitions

[[Page 57468]]

occurring on or after the date of publication of the Treasury decision 
adopting these rules as final regulations in the Federal Register, 
except that it does not apply to any acquisition occurring pursuant to 
a written agreement that is binding before the date of publication of 
the Treasury decision adopting these rules as final regulations in the 
Federal Register. For original consolidated Federal income tax returns 
due (without extensions) before the date of the publication of the 
Treasury decision adopting these rules as final regulations in the 
Federal Register, see paragraph (b)(3)(ii)(B) of this section as 
contained in 26 CFR part 1 in effect on April 1, 1999.
* * * * *
    Par. 4. Section 1.1502-72 is added to read as follows:


Sec.  1.1502-72  Corporate equity reduction transactions.

    (a) In general--(1) Scope. Section 172(b)(1)(E) and (h), Sec. Sec.  
1.172(h)-1 through 1.172(h)-5, and the rules of this section (the CERT 
rules) apply to determine whether a corporate equity reduction 
transaction (CERT) has occurred and to determine the consequences of 
the CERT, including rules governing the carryback of losses following a 
CERT, with respect to corporations that become, are, or cease to be 
members of a consolidated group.
    (2) Single entity treatment--(i) In general. All members of a group 
are treated as a single taxpayer for purposes of the CERT rules. For 
example, if multiple members of a group acquire in total 50 percent or 
more (by vote or value) of the stock of another corporation, the group 
has engaged in a major stock acquisition (MSA) as defined in section 
172(h)(3)(B) and Sec.  1.172(h)-1(c)(2). The transactions and 
expenditures undertaken by a particular group member are generally not 
separately tracked; instead, the entire group is treated as a single 
applicable corporation.
    (ii) Debt and interest of group members--(A) In general. The 
computation of a group's corporate equity reduction interest loss 
(CERIL) under section 172(h)(1) and Sec.  1.172(h)-2(a)(2) for any loss 
limitation year (as defined in paragraph (a)(3) of this section) that 
is a consolidated return year includes the debt of all members and all 
interest deductions that are allowed on the group's consolidated return 
for that year. This rule applies regardless of whether any particular 
debt or interest expense is directly related to the CERT, whether any 
particular member was included in the group on the date of the CERT, or 
whether any particular debt would not exist in the group if the group 
had not engaged in the CERT. But see paragraph (a)(2)(iii) of this 
section (providing that intercompany transactions are generally 
disregarded).
    (B) Debt of acquired corporation. With respect to a corporation 
that joins a consolidated group (acquired corporation), in applying the 
CERT rules to consolidated return years that are loss limitation years, 
any debt of the acquired corporation is treated as debt of the 
acquiring group for purposes of applying the avoided cost rules of 
section 263A(f)(2)(A) on any measurement date after the inclusion of 
the corporation in the group. See section 172(h)(2) and Sec.  1.172(h)-
2(b) (applying the principles of section 263A(f)(2)(A)(ii)); see also 
Sec.  1.263A-9(f)(2) (defining measurement dates).
    (iii) Intercompany transactions. In applying the CERT rules, 
intercompany transactions as defined in Sec.  1.1502-13 are generally 
disregarded. For example, interest expense attributable to an 
intercompany obligation is not taken into account in computing the 
CERIL or three-year average of a group. However, a transaction between 
group members is not disregarded if a party to the transaction becomes 
a non-member pursuant to the same plan or arrangement. In such case, 
any transaction between group members, including a potential excess 
distribution (ED) as defined in section 172(h)(3)(C), Sec.  1.172(h)-
1(c)(3), and paragraph (f)(1) of this section, is tested on a separate 
entity basis under the CERT rules. It may also be tested as part of a 
larger, multi-step MSA. See Sec.  1.172(h)-1(d)(2).
    (iv) Applicable corporation status following inclusion of member 
with pre-existing CERT--(A) Acquiring group treated as applicable 
corporation. If a corporation that is an applicable corporation 
(including by application of paragraph (b) of this section) with regard 
to a CERT occurring in a separate return year (pre-existing CERT 
member) joins a consolidated group, the group is treated as a single 
applicable corporation with regard to that CERT in the consolidated 
return year of the acquisition and any succeeding year. A corporation 
is a pre-existing CERT member regardless of whether the transaction at 
issue is an MSA that constitutes a CERT with respect to both a 
consolidated return year of the acquiring group and a separate return 
year of the acquired corporation.
    (B) End of separate tracking of target. Beginning on the first day 
on which a pre-existing CERT member is included in a consolidated 
group, the member ceases to be separately tracked as an applicable 
corporation. See paragraph (a)(2)(i) of this section. The CERT rules 
thereafter apply to the group, rather than to the member, with regard 
to any CERT for which the member had been an applicable corporation, 
including an MSA in which the member was acquired by the group. 
Therefore, beginning on the day on which the pre-existing CERT member 
is included in the group, no CERIL is computed with regard to the 
member, independent of the CERIL computed for the group. But see Sec.  
1.1502-21(b)(2)(iv)(C) (providing for allocation and apportionment of a 
group's CERIL to specific group members) and Sec.  1.172(h)-5(b)(1) 
(relating to prohibition on carryback of a CERIL).
    (3) Loss limitation years--(i) In general. This paragraph applies 
to identify loss limitation years of a consolidated group and 
corporations that have been members of a consolidated group. The 
taxable year in which a CERT actually occurs is a loss limitation year. 
Any other taxable year (potential loss limitation year) of any 
applicable corporation (including a consolidated group) constitutes a 
loss limitation year with regard to the CERT only if, under the 
carryforward rules of sections 172(b)(1)(A)(ii) and 381(c)(1), the 
potential loss limitation year would constitute the first or second 
taxable year following the taxable year of the corporation or 
consolidated group that actually engaged in the CERT that includes the 
date on which the CERT occurred. Except as otherwise provided in 
paragraph (a)(3)(ii) of this section, for purposes of this paragraph 
(a)(3), sections 172 and 381 are applied as if the inclusion of any 
corporation in a consolidated group or the deconsolidation of any 
member from a group were a transaction listed in section 381(a).
    (ii) Corporation joins group in an MSA. If a corporation joins a 
group in an MSA, no separate return year of the acquired corporation 
ending on or before it joined the acquiring group is treated as a loss 
limitation year for the purpose of determining the loss limitation 
years of the acquiring group or any corporation that deconsolidates 
from that group that relate to the MSA.
    (iii) Deconsolidating members. Under this paragraph (a)(3)(iii), a 
corporation that deconsolidates (deconsolidating member) from a group 
(former group) that is an applicable corporation may have loss 
limitation years with regard to a CERT of its former group. See 
paragraphs (b) (relating to post-deconsolidation status as applicable 
corporation) and (e)(1) of this section (providing for an irrevocable 
waiver of

[[Page 57469]]

carrybacks such that a deconsolidating member is not treated as an 
applicable corporation). If the consolidated return year during which 
the deconsolidation occurs (year of deconsolidation) is a first or 
second loss limitation year with regard to the CERT, then certain 
separate return years of a deconsolidating member that is treated as an 
applicable corporation will constitute loss limitation years. If the 
year of deconsolidation is a first loss limitation year with regard to 
the CERT, the following two separate return years will constitute loss 
limitation years. If the year of deconsolidation is a second loss 
limitation year with regard to the CERT, the separate return year that 
immediately follows the year of deconsolidation will constitute a loss 
limitation year. If the deconsolidating member joins another 
consolidated group, the consolidated return years of that group may 
also constitute loss limitation years with regard to the CERT of the 
former group. See paragraph (a)(2)(iv) of this section (relating to 
inclusion of member with pre-existing CERT).
    (4) Application of rules to reverse acquisitions. In the case of 
any acquisition to which Sec.  1.1502-75(d)(3) applies (a reverse 
acquisition), for purposes of applying the CERT rules, the first 
corporation (as defined in Sec.  1.1502-75(d)(3)(i)) is treated as the 
corporation the stock of which is acquired, and the second corporation 
(as defined in Sec.  1.1502-75(d)(3)(i)) is treated as the corporation 
that acquires stock. In addition, for purposes of Sec.  1.172(h)-
2(b)(3)(i) (identifying CERT costs of an MSA) in the case of a reverse 
acquisition, the fair market value of the stock acquired equals the 
fair market value of the stock of the first corporation that the 
stockholders (immediately before the acquisition) of the first 
corporation own immediately after the acquisition, rather than the fair 
market value of the stock of the second corporation.
    (b) Applicable corporation status following deconsolidation--(1) In 
general. If a corporation deconsolidates in a loss limitation year from 
a group that is treated as an applicable corporation with regard to a 
CERT, the deconsolidating corporation and the former group are both 
treated as applicable corporations following the deconsolidation. If 
the corporation joins another consolidated group (acquiring group) 
following the deconsolidation, the rules of this section apply to the 
acquiring group, and this paragraph (b) applies with regard to the 
deconsolidation of any member from the acquiring group during a loss 
limitation year associated with the CERT. See paragraph (a)(2)(iv) of 
this section regarding treatment of a group as a single applicable 
corporation following an acquisition; see also paragraph (a)(3)(ii) of 
this section for identification of loss limitation years following a 
deconsolidation. This paragraph (b) applies without regard to whether 
any particular corporation would on a separate entity basis have 
constituted an applicable corporation with regard to the CERT under 
section 172(b)(1)(E)(iii) and Sec.  1.172(h)-1(b), with or without the 
application of section 172(h)(4)(C) and paragraph (a)(2) of this 
section, or whether the CERT occurred in a consolidated return year. 
However, under this paragraph (b), the deconsolidating corporation may 
be treated as an applicable corporation with regard to a CERT of a 
former group only if the group engages in the CERT on or before the 
date of the deconsolidation, or if a pre-existing CERT member, as 
described in paragraph (a)(2)(iv)(A) of this section, joins the group 
on or before the date of the deconsolidation.
    (2) Exception if waiver filed. In general, a corporation that 
deconsolidates from a group (or the parent of a group acquiring the 
deconsolidating member), may, pursuant to paragraph (e)(1) of this 
section, make an irrevocable election to relinquish the carryback of 
all net operating losses (NOLs) (and attributable portions of 
consolidated net operating losses (CNOLs)) to taxable years of the 
former group and any preceding years. If such an election is made, the 
deconsolidating member is not treated as an applicable corporation with 
regard to any CERT of the former group after the deconsolidation. Any 
group that acquires the deconsolidating member is not treated as an 
applicable corporation with regard to any CERT of the former group 
solely as a result of the acquisition of that member. The former group 
will continue to be treated as an applicable corporation with regard to 
the CERT.
    (3) Examples. The following examples illustrate the rules of 
paragraph (a) of this section and this paragraph (b). For purposes of 
these examples, assume that all entities are domestic C corporations 
unless otherwise stated. Assume that all applicable corporations have 
substantial NOLs in their loss limitation years:

    Example 1. Single entity treatment of acquisition indebtedness. 
(i) Facts. Corporation T is a calendar-year taxpayer that has 
significant debt outstanding, which was incurred to fund operations. 
Unrelated P is the common parent of a calendar-year consolidated 
group. The following steps occur pursuant to an integrated plan. On 
May 1, Year 5, P acquires 10 percent of the T stock for $100. On 
June 30, Year 5, T borrows $700 and immediately thereafter uses the 
money to redeem some of its shares from its shareholders. On the 
same day, the P group acquires all of the remaining T stock in 
exchange for $200. Assume that the $700 cash payment from T to the T 
shareholders is treated as a redemption. T is first included in the 
P group on July 1, Year 5. Under Sec.  1.172(h)-1(d)(2), the steps 
of the integrated plan (including the redemption of the former T 
shareholders) constitute a single MSA.
    (ii) Analysis. T's short taxable year ending June 30, Year 5 is 
T's year of the CERT. The P group's consolidated return Year 5 is 
the taxable year of the CERT for the group. For purposes of 
allocating to the single MSA interest paid or accrued during the P 
group's loss limitation years (Years 5, 6, and 7) under Sec.  
1.172(h)-2(b), the P group takes into account the debt of all 
members, including the $700 loan and all of T's other debt. See 
paragraph (a)(2)(ii)(B) of this section. The allocation of interest 
also takes into account all deductions for interest paid or accrued 
that are included in the consolidated return for the relevant loss 
limitation year. See paragraph (a)(2)(ii)(A) of this section.
    Example 2. Loss limitation years if a corporation joins group in 
an MSA. Corporation T maintains a taxable year ending June 30. 
Unrelated X is the common parent of a calendar-year consolidated 
group. On March 31, Year 5, the X group acquires all of the T stock 
in a CERT, and T is first included in the X group on April 1, Year 
5. On the date of the acquisition, both the X group and T constitute 
applicable corporations with regard to the Year 5 CERT. See Sec.  
1.172(h)-1(b) and paragraph (a)(2) of this section. T's short 
taxable year ending on March 31, Year 5, was T's taxable year in 
which the CERT occurred. T's only loss limitation year with respect 
to the Year 5 CERT is its short taxable year ending on March 31, 
Year 5. See Sec.  1.172(h)-1(e) and paragraph (a)(3) of this 
section. Beginning on April 1, Year 5, T ceases to be separately 
tracked as an applicable corporation. See paragraph (a)(2)(i) and 
(iv)(B) of this section. The X group's year in which the CERT 
occurred is its consolidated return Year 5. The X group's loss 
limitation years with respect to the Year 5 CERT are its full 
taxable calendar Years 5, 6, and 7. See paragraph (a)(3)(i) and (ii) 
of this section.
    Example 3. Loss limitation years of a group and deconsolidating 
member. (i) Facts. P is the common parent of a calendar-year 
consolidated group that includes S. On June 30, Year 6, a member of 
the P group engages in an acquisition that constitutes a CERT. S is 
not a party to the acquisition. On September 30, Year 6, S 
deconsolidates from the P group. No election under paragraph (e)(1) 
of this section is made with respect to the deconsolidation of S. 
Following its deconsolidation, S does not join in the filing of a 
consolidated return with another group, and it maintains a calendar 
taxable year.
    (ii) Analysis. Because no election is made under paragraph 
(e)(1) of this section, following the deconsolidation, both the P 
group and S are treated as applicable

[[Page 57470]]

corporations with regard to the Year 6 CERT. See paragraph (b)(1) of 
this section. The P group's loss limitation years with regard to the 
CERT are its consolidated return Years 6, 7, and 8. See section 
172(b)(1)(E)(ii) and paragraph (a)(3)(i) of this section. S 
deconsolidates from the P group during consolidated return Year 6, 
which is the first loss limitation year with regard to the CERT. See 
paragraph (a)(3)(i) of this section. For purposes of applying 
paragraph (a)(3) of this section to identify loss limitation years, 
S is treated as deconsolidating from the P group in a transaction to 
which section 381(a) applies. Therefore, S's two taxable years that 
follow the deconsolidation, the short year ending December 31, Year 
6, and the full taxable calendar Year 7, are its additional loss 
limitation years with regard to the Year 6 CERT. See paragraph 
(a)(3)(iii) of this section. See section 172(b)(1)(E)(i) and Sec.  
1.172(h)-5(b)(1) for rules regarding the prohibition on carryback of 
a CERIL.
    Example 4. Loss limitation years if a pre-existing CERT member 
joins the group. (i) Acquiring group has loss limitation years. 
Corporation T maintains a calendar taxable year and does not join in 
the filing of a consolidated return. On July 1, Year 5, T engages in 
a CERT (Year 5 CERT). Unrelated X is the common parent of a 
calendar-year consolidated group that includes S. On December 31, 
Year 5, the X group acquires all of the outstanding T stock. T is 
first included in the X group on January 1, Year 6. The first loss 
limitation year with respect to the Year 5 CERT is T's calendar Year 
5. See Sec.  1.172(h)-1(e). As a result of the X group's acquisition 
of T, the X group is treated as a single applicable corporation with 
respect to the Year 5 CERT. See paragraph (a)(2)(iv) of this 
section. For purposes of applying paragraph (a)(3) of this section 
to identify loss limitation years, T is treated as joining the X 
group in a transaction to which section 381(a) applies. Because T 
has one loss limitation year with regard to the CERT before it joins 
the X group, the X group has two loss limitation years with respect 
to the Year 5 CERT: Its calendar Years 6 and 7. See paragraph 
(a)(3)(i) of this section. However, the X group must test its 
acquisition of T under the CERT rules.
    (ii) Acquiring group has no loss limitation years. The facts are 
the same as in paragraph (i) of this Example 4, except that the X 
group acquires T on January 31, Year 7. Because T has three loss 
limitation years before it is included in the X group (calendar 
Years 5 and 6, and a short taxable year ending on January 31, Year 
7), none of the X group's consolidated return years are loss 
limitation years with regard to the Year 5 CERT. See section 
172(b)(1)(E)(ii) and paragraph (a)(3)(i) of this section.
    (iii) Member deconsolidates from acquiring group. The facts are 
the same as in paragraph (i) of this Example 4, except that S 
deconsolidates from the X group on June 30, Year 6. No election 
under paragraph (e)(1) of this section is made on the 
deconsolidation of S. Following its deconsolidation from the X 
group, S does not join in the filing of a consolidated return. T and 
the X group's loss limitation years remain the same as in paragraph 
(i) of this Example 4. Because no election is made under paragraph 
(e)(1) of this section with respect to S's deconsolidation, 
following the deconsolidation, S and the X group are both treated as 
applicable corporations with regard to T's Year 5 CERT. See 
paragraph (b)(1) of this section. S deconsolidates from the P group 
during consolidated return Year 6, which is the second loss 
limitation year with regard to the CERT. See paragraph (a)(3)(i) of 
this section. Therefore, following its deconsolidation, S's only 
loss limitation year with respect to the Year 5 CERT is its short 
taxable year July 1, Year 6 through December 31, Year 6. See 
paragraph (a)(3)(iii) of this section.
    Example 5. Deconsolidation before group engages in CERT. 
Corporation T is a member of the P group, which maintains a calendar 
taxable year. On February 28, Year 4, T deconsolidates from the P 
group due to T's acquisition by the X group, which also maintains a 
calendar taxable year. T is included in the X group as of March 1, 
Year 4. No election under paragraph (e)(1) of this section is made 
on the deconsolidation of T from the P group. On March 31, Year 4, 
the P group engages in a CERT. Because the P group engages in the 
CERT after the date of the deconsolidation, T is not treated as an 
applicable corporation following the deconsolidation. See paragraph 
(b)(1) of this section. However, the X group must apply the CERT 
rules to the X group's acquisition of T.
    Example 6. Member that engages in CERT deconsolidates with a 
waiver election. (i) Facts. P is the common parent of a calendar-
year consolidated group. On March 31, Year 4, the P group engages in 
an MSA, when member T acquires all of the stock of T1. On June 30, 
Year 4, T and its subsidiaries (including T1) deconsolidate from the 
P group due to the acquisition of T by the X group. T and its 
subsidiaries are first included in the X group as of July 1, Year 4. 
The X group makes an election under paragraph (e)(1) of this section 
on the deconsolidation.
    (ii) Analysis. Because an election under paragraph (e)(1) of 
this section is made on the deconsolidation of T and its 
subsidiaries from the P group, following the deconsolidation, only 
the P group is treated as an applicable corporation with regard to 
the March 31, Year 4 CERT. Neither T, T1, nor the X group is treated 
as an applicable corporation with regard to the March 31, Year 4 
CERT, even though T directly engaged in the MSA, and T1 was the 
acquired corporation in that MSA. See paragraph (b)(2) of this 
section. However, the X group must apply the CERT rules to the X 
group's acquisition of T.

    (c) Identification and allocation of CERT costs--(1) In general. 
The portion of an NOL that is treated as a CERIL is subject to 
limitation on carryback. See section 172(b)(1)(E)(i) and Sec.  
1.172(h)-5(b)(1). A CERIL is computed in part by identifying the 
deductions allowed for interest allocable to the CERT. The computation 
of interest allocable to a CERT under section 172(h)(2) and Sec.  
1.172(h)-2(b) takes into account all CERT costs as defined in Sec.  
1.172(h)-2(b)(3). This paragraph (c) contains rules applicable to the 
identification and allocation of CERT costs of a consolidated group.
    (2) Single entity treatment of CERT costs. The computation of 
interest allocable to a CERT in any particular loss limitation year of 
a consolidated group includes CERT costs incurred (including costs 
deemed incurred under this paragraph (c)) with regard to the CERT by 
all corporations that are members of a group during the loss limitation 
year.
    (3) CERT costs of acquired corporation. With respect to a 
corporation that joins a consolidated group (acquired corporation), for 
purposes of applying the CERT rules, any CERT costs incurred (or 
treated as incurred under this paragraph (c)) by the acquired 
corporation during separate return years prior to the acquired 
corporation's inclusion in the group are attributed to the acquiring 
group. Such costs are treated as having been incurred by the acquiring 
group for purposes of applying the avoided cost rules of section 
263A(f)(2)(A) to any measurement date after the acquisition of the 
corporation. Those CERT costs are no longer separately identified as 
CERT costs incurred by the acquired corporation.
    (4) Allocation of CERT costs on deconsolidation--(i) In general. 
This paragraph (c)(4) applies to determine the CERT costs allocable to 
a corporation that deconsolidates in a loss limitation year from a 
group that is treated as an applicable corporation with regard to a 
CERT. Under this paragraph (c)(4), CERT costs may be allocated to a 
deconsolidating corporation only if the group engages in the relevant 
CERT on or before the date of the deconsolidation, or if a pre-existing 
CERT member, as described in paragraph (a)(2)(iv)(A) of this section, 
joins the group on or before the date of the deconsolidation. This 
paragraph (c)(4) applies regardless of whether any particular 
corporation would have constituted an applicable corporation under 
section 172(b)(1)(E)(iii) and Sec.  1.172(h)-1(b) without the 
application of section 172(h)(4)(C) and paragraph (a)(2) of this 
section, whether the CERT occurred in a consolidated return year, or 
whether any particular corporation actually incurred CERT costs.
    (ii) No waiver election made. If no election under paragraph (e)(1) 
of this section is made with regard to the deconsolidation, CERT costs 
incurred by the group (including costs treated as incurred by the group 
under this paragraph (c)) are allocated between the

[[Page 57471]]

deconsolidating corporation and the former group, solely for purposes 
of computing allocable interest deductions of the deconsolidating 
corporation and the continuing group with regard to the CERT under 
section 172(h)(2) and Sec.  1.172(h)-2(b). For purposes of computing 
interest allocable to the CERT under section 172(h)(2) and Sec.  
1.172(h)-2(b) during the loss limitation year of the former group that 
is the year of the deconsolidation, the CERT costs allocated to the 
deconsolidating member are included in the group's accumulated CERT 
costs on those measurement dates on which the deconsolidating 
corporation was included in the group. The portion of the group's total 
CERT costs that is allocated to a deconsolidating member equals the 
group's total CERT costs multiplied by a fraction, the numerator of 
which equals the value of the deconsolidating corporation immediately 
after its deconsolidation, and the denominator of which equals the 
value of the entire group immediately prior to the deconsolidation.
    (iii) Waiver election made. If an election under paragraph (e)(1) 
of this section is made with regard to a deconsolidation, no CERT costs 
are allocated to the deconsolidating corporation. All CERT costs remain 
with the former group for purposes of identifying its allocable 
interest deductions under section 172(h)(2) and Sec.  1.172(h)-2(b) 
with regard to the CERT.
    (5) Examples. The following examples illustrate the rules of this 
paragraph (c). For purposes of the examples in this paragraph (c)(5), 
assume that all entities are domestic C corporations unless otherwise 
stated. Assume that all applicable corporations have substantial NOLs 
in their loss limitation years:

    Example 1. Aggregation of CERT costs of consolidated group and 
target. (i) Facts. P is the common parent of a calendar-year 
consolidated group that includes S1 and S2. On June 30, Year 5, S1 
acquires all of the stock of T for $10 million. P incurs CERT costs 
of $100,000 and $250,000 for work performed by its outside counsel 
and an investment banker, respectively, that facilitates the 
acquisition. In addition, T incurs CERT costs of $175,000 for work 
performed by its outside counsel that facilitates the acquisition. 
All of these costs are incurred on or before the date of the 
acquisition. In all relevant years preceding its acquisition, T does 
not join in the filing of a consolidated return.
    (ii) Analysis. For purposes of computing the P group's allocable 
interest deductions under section 172(h)(2) and Sec.  1.172(h)-2(b), 
the P group's CERT costs include CERT costs incurred by all members 
of the P group. See paragraph (c)(2) of this section. In addition, 
when T joins the P group, the CERT costs incurred by T prior to its 
inclusion in the P group are attributed to the P group and are 
treated as having been incurred by the P group for purposes of 
applying the avoided cost rules of section 263A(f)(2)(A) to any 
measurement date after the acquisition of T. See paragraph (c)(3) of 
this section. As a result, the P group's accumulated CERT costs on 
July 1, Year 5, are $10,525,000 [$10,000,000 + $100,000 + 250,000 + 
175,000]. See Sec.  1.172(h)-2(b)(3) for rules defining CERT costs.
    Example 2. Acquiring group treated as incurring CERT costs 
associated with unrelated CERT of target. T is a calendar-year 
taxpayer that does not join in the filing of a consolidated return. 
P is the common parent of a calendar-year consolidated group. P also 
owns 70 percent of the only class of T stock. During Year 4, T 
engages in a CERT. On June 30, Year 5, P acquires the remainder of 
the stock of T, and T is first included in the P group on July 1, 
Year 5. Following the acquisition, the P group is treated as an 
applicable corporation with regard to T's Year 4 CERT. See paragraph 
(a)(2)(iv) of this section. The P group's consolidated return Year 5 
is the third and final loss limitation year with regard to the Year 
4 CERT. See paragraph (a)(3)(i) of this section. The P group is 
treated as having incurred all of T's expenses allocable to the CERT 
for purposes of computing any CERIL for consolidated return Year 5. 
Because T was a member of the P group for less than the entire 
calendar taxable Year 5, T's CERT costs are included in the P 
group's accumulated CERT costs only on those measurement dates on 
which T is included in the group (that is, measurement dates on or 
after July 1, Year 5). See paragraph (c)(3) of this section and 
Sec.  1.172(h)-2(b)(4). See also paragraph (d)(3)(iii) for rules 
relating to the interest history of a partial-year member.
    Example 3. Allocation of CERT costs to deconsolidating member. 
(i) Facts. P is the common parent of a calendar-year consolidated 
group. P owns 60 percent of the sole class of stock of T, a 
calendar-year taxpayer. On January 31, Year 5, the P group engages 
in a CERT. On March 31, Year 5, P acquires the remainder of the 
stock of T, and T is first included in the P group on April 1, Year 
5. On June 30, Year 6, T deconsolidates from the P group, with no 
election made under paragraph (e)(1) of this section.
    (ii) Analysis. T is not a member of the P group at the time of 
the CERT. However, following its deconsolidation, T is treated as an 
applicable corporation with regard to the Year 5 CERT because the P 
group engages in the CERT before T deconsolidates, and no election 
is made under paragraph (e)(1) of this section on the 
deconsolidation. See paragraph (b)(1) of this section. Further, a 
portion of the P group's CERT costs is allocated to T for purposes 
of computing any CERIL of T (or of any group of which T becomes a 
member following its deconsolidation from the P group) with regard 
to the Year 5 CERT. See paragraphs (b)(1) and (c)(4)(ii) of this 
section. However, the CERT costs of the group otherwise allocated to 
T are included in the P group's accumulated CERT costs on those 
measurement dates during which T is included in the group (that is, 
measurement dates before July 1, Year 6). See paragraph (c)(4)(ii) 
of this section and Sec.  1.172(h)-2(b)(4).

    (d) Determining the three-year average of a group--(1) In general. 
Section 172(h)(2)(C) and Sec.  1.172(h)-3(a) limit the amount of 
allocable interest deductions to the excess (if any) of the amount 
allowable as a deduction for interest paid or accrued by the taxpayer 
during the loss limitation year, over the average of interest paid or 
accrued by the taxpayer (the three-year average) for the three taxable 
years preceding the taxable year in which the CERT occurred (the 
lookback period). The computation under section 172(h)(2)(C)(ii) and 
Sec.  1.172(h)-3(b) of a group's three-year average for the lookback 
period that is relevant to any loss limitation year includes interest 
paid or accrued (or treated as paid or accrued under this paragraph 
(d)) during the lookback period by all corporations that are members of 
the consolidated group during the loss limitation year.
    (2) Varying group membership. If group membership varies from one 
loss limitation year to another, a different three-year average is 
computed with regard to each loss limitation year of the group.
    (3) Interest history--(i) Combination of interest history of 
acquired member with group history. With respect to a corporation that 
joins a consolidated group (acquired corporation), for purposes of 
applying the CERT rules, the interest paid or accrued (or treated as 
paid or accrued under this paragraph (d)) by the acquired corporation 
during each separate return year prior to its inclusion in the group is 
apportioned equally to each day within each of its separate return 
years. The interest apportioned to dates within the lookback period is 
then combined with the interest paid or accrued by the acquiring group 
and is treated as interest paid or accrued by the acquiring group 
during the lookback period for purposes of computing the three-year 
average that is relevant to any loss limitation year beginning with the 
consolidated return year during which the acquired corporation is first 
included in the group. For purposes of the CERT rules, the interest 
from the separate return years is no longer separately traced as 
interest paid or accrued by the acquired corporation. But see paragraph 
(d)(3)(iii) of this section for rules requiring proration of interest 
history attributable to corporations that are members of a group for 
less than an entire loss

[[Page 57472]]

limitation year. The interest paid or accrued by a predecessor (as 
defined in Sec.  1.172(h)-(1)(b)(2)) of a member of the group is 
similarly combined with the interest paid or accrued by the group. See 
Sec.  1.172(h)-4(c)(2)(ii)(A).
    (ii) Interest treated as paid or accrued by a corporation that 
deconsolidates--(A) In general. This paragraph (d)(3)(ii) provides 
rules that apply for purposes of determining any three-year average of 
a corporation that deconsolidates from a group (or a three-year average 
of any other group of which it becomes a member) and any three-year 
average of the group from which the corporation deconsolidates (former 
group). These rules apply to the computation of any three-year average 
with regard to a CERT of the former group or any other CERT.
    (B) Waiver election made. If an election under paragraph (e)(1) of 
this section is made with respect to the deconsolidation of a 
corporation from a group, then, following the deconsolidation, the 
deconsolidating member is treated as having paid or accrued zero 
interest during the period of its inclusion in the former group and 
preceding years. The group retains the interest history that would 
otherwise be allocated and apportioned to the deconsolidating member 
under this paragraph (d)(3)(ii).
    (C) No waiver election made. If no election under paragraph (e)(1) 
of this section is made with respect to the deconsolidation of a 
corporation, a portion of the group's amount of interest treated as 
paid or accrued during the period of the corporation's consolidation 
and any preceding years is allocated and apportioned to the 
deconsolidating corporation. The allocated and apportioned interest is 
subtracted from the group's interest history and is unavailable to the 
group (or any other group member) for purposes of computing a three-
year average with regard to any loss limitation year of the group (or 
any other group member) after the year of deconsolidation. But see 
paragraph (d)(3)(iii) of this section for rules requiring proration of 
interest history attributable to corporations that are members of a 
group for less than an entire loss limitation year.
    (D) Method of allocation. If no election under paragraph (e)(1) of 
this section is made when a corporation deconsolidates, solely for 
purposes of the CERT rules, the corporation is treated as having paid 
or accrued interest equal to the amount of interest paid or accrued by 
the group in each consolidated return year through the date of the 
deconsolidation (including any combination of interest history pursuant 
to paragraph (d)(3)(i) of this section), multiplied by a fraction, the 
numerator of which equals the value of the deconsolidating corporation 
immediately after its deconsolidation, and the denominator of which 
equals the value of the entire group immediately prior to the 
deconsolidation.
    (iii) Proration of lookback period interest for members that are 
part of a group for less than the entire loss limitation year. If any 
member is included in the group for less than an entire consolidated 
return year that is a loss limitation year (partial-year member), then 
the group takes into account a pro rata portion of the partial-year 
member's amount of interest paid or accrued during the lookback period 
for purposes of determining a group's three-year average relevant to 
that loss limitation year. The amount of interest treated as paid or 
accrued that is subject to proration under this paragraph (d)(3)(iii) 
is the interest of the partial-year member that would otherwise be 
fully combined with the interest history of the acquiring group under 
paragraph (d)(3)(i) of this section (with regard to corporations 
acquired during the loss limitation year) or the interest that is 
otherwise allocated to a deconsolidating member under paragraph 
(d)(3)(ii) of this section. The pro rata amount equals the partial-year 
member's interest treated as paid or accrued for the dates of the 
lookback period, multiplied by a fraction, the numerator of which 
equals the number of days of the loss limitation year during which the 
partial-year member was a member of the group, and the denominator of 
which equals the number of days in the loss limitation year. This 
proration applies to interest paid or accrued during the entire 
lookback period, including portions of the lookback period during which 
the partial-year member was a member of the group.
    (4) Lookback period--(i) In general. The lookback period with 
regard to a CERT is the three taxable years preceding the taxable year 
in which the CERT occurs. See section 172(h)(2)(C)(ii) and Sec.  
1.172(h)-3(a). The lookback period that is relevant to any CERIL of a 
consolidated group is the three taxable years preceding the taxable 
year of the group that includes the date on which the CERT occurred. 
See Sec.  1.172(h)-5(a) (defining the date on which a CERT occurs if 
the CERT consists of multiple steps). This rule applies whether the 
group actually engaged in the CERT or is treated as an applicable 
corporation with regard to a CERT solely by application of paragraph 
(a)(2)(iv) of this section.
    (ii) Group not in existence for entire lookback period. If a group 
was not in existence for three taxable years prior to the consolidated 
return year that includes the date of the CERT, the lookback period 
includes the group's taxable years preceding the year of the CERT plus 
the preceding taxable years of the corporation that was the common 
parent of the group on the first day of the group's first consolidated 
return year (original common parent). If the group and the original 
common parent together have fewer than three taxable years that precede 
the consolidated return year that includes the date of the CERT, the 
lookback period will be deemed to include full 12-month periods that 
end on the calendar date that is one day prior to the date of 
organization of the original common parent.
    (iii) Group not in existence on date of CERT. If a group was not in 
existence on the date on which the CERT occurred, for purposes of 
determining the lookback period, the group's taxable years will be 
deemed to include the taxable years of the group's original common 
parent. If the original common parent was not in existence on the date 
of the CERT, or it does not have three taxable years that precede its 
taxable year that includes the date of the CERT, the group will be 
deemed to have additional 12-month taxable periods that end on the 
calendar date that is one day prior to the date of the original common 
parent's organization. From these deemed taxable periods, the group 
will identify the deemed period that includes the date on which the 
CERT occurred and the three immediately preceding deemed periods that 
constitute the lookback period. See Sec.  1.172(h)-5(a) regarding date 
on which CERT occurred in multi-step transaction.
    (iv) Interest history of corporations not in existence. If any 
member of a group is not in existence for the entire lookback period, 
for purposes of the CERT rules, that member is treated as having paid 
or accrued zero interest before its organization. But see Sec.  
1.172(h)-4(c)(2)(ii) (regarding interest history of successors).
    (5) Examples. The following examples illustrate the rules of this 
paragraph (d). Unless otherwise stated, assume that all entities are 
domestic C corporations that have full, 12-month taxable years. Assume 
that all applicable corporations have substantial NOLs in their loss 
limitation years:


[[Page 57473]]


    Example 1. Acquired member's interest history combined with 
interest history of group. (i) Facts. P is the common parent of a 
calendar-year consolidated group that includes S on all relevant 
dates. On December 31, Year 5, S acquires the stock of T in a CERT, 
and T is first included in the P group on January 1, Year 6. 
Membership in the P group is otherwise stable for all relevant 
years. Prior to joining the P group, T does not join in the filing 
of a consolidated return and maintains a calendar taxable year. T's 
amounts of interest paid or accrued in Years 2, 3, and 4, 
respectively, are $600, $200, and $400. The P group's amounts of 
interest paid or accrued in Years 2, 3, and 4, respectively, are 
$1,400, $1,000, and $1,200.
    (ii) Analysis. The P group's loss limitation years are calendar 
Years 5, 6, and 7. See paragraph (a)(3)(i) of this section. Year 5 
is also a loss limitation year for T. The P group's lookback period 
with regard to the CERT is calendar Years 2, 3, and 4. See paragraph 
(d)(4)(i) of this section. For purposes of computing any three-year 
average of the P group for its lookback period, on the acquisition 
of T, the interest history of T is generally combined with the 
interest history of the P group. See paragraph (d)(3)(i) of this 
section. However, because T is not a member of the P group on any 
date during consolidated return Year 5, the computation of the P 
group's three-year average relevant to Year 5 will not include any 
of T's interest paid or accrued during the lookback period. See 
paragraph (d)(3)(iii) of this section. Thus, the P group's three-
year average for loss limitation Year 5 is $1,200 ([$1,400 + $1,000 
+ 1,200]/3). Because T is a member of the P group during each day of 
loss limitation Years 6 and 7, T's history of interest paid or 
accrued during the lookback period is fully included in the P 
group's computation of its three-year average relevant to loss 
limitation Years 6 and 7. See paragraph (d)(3)(i) and (iii) of this 
section. Thus, the P group's three-year average for loss limitation 
Years 6 and 7 is $1,600 ([$1,400 + $1,000 + 1,200 + $600 + $200 + 
$400]/3).
    (iii) Interest combination if acquired member included in group 
for part of loss limitation year. The facts are the same as in 
paragraph (i) of this Example 1, except that S acquires the stock of 
T on March 31, Year 5, and T is included in the P group for 275 
days. Because T is a partial-year member of the P group during loss 
limitation Year 5, the computation of the three-year average 
relevant to loss limitation Year 5 includes the interest of T for 
the lookback period, prorated as required under paragraph 
(d)(3)(iii) of this section. Because T is in the P group for 275 
days during Year 5, the computation of the P group's three-year 
average relevant to Year 5 takes into account an amount of T's 
interest history equal to T's actual amount of interest paid or 
accrued for each year of the lookback period, multiplied by a 
fraction equal to 275/365 (number of days of the loss limitation 
year during which T is a member of the P group divided by the number 
of days in the loss limitation year), or $452 ($600 x [275/365]), 
$151 ($200 x [275/365]), and $301 ($400 x [275/365]) for Years 2, 3, 
and 4, respectively.
    Example 2. Lookback period if corporation with CERT history 
joins group. (i) Facts. P is the common parent of a calendar-year 
consolidated group. P also owns 55 percent of the sole class of 
stock of Corporation T, which maintains a taxable year ending June 
30. On September 30, Year 4, T engages in a CERT. On December 31, 
Year 5, P acquires the remainder of the stock of T, and T is first 
included in the P group on January 1, Year 6.
    (ii) Analysis. T's full taxable year ending June 30, Year 5, and 
its short year ending December 31, Year 5 are loss limitation years 
with regard to the September Year 4 CERT. The lookback period for 
the CERT relevant to these two loss limitation years is T's three 
taxable years ending on June 30, Years 2, 3, and 4. See section 
172(h)(2)(C)(ii) and Sec.  1.172(h)-3(a). The P group's calendar 
Year 6 is its sole loss limitation year with regard to T's September 
Year 4 CERT. See paragraph (a)(3)(i) of this section. In determining 
any CERIL with regard to the P group's calendar Year 6, the lookback 
period is the three taxable years prior to the taxable year of the 
group that includes the date on which the CERT occurred. See 
paragraph (d)(4)(i) of this section. Therefore, the lookback period 
with regard to the P group's loss limitation Year 6 is calendar 
consolidated return Years 1, 2, and 3.
    Example 3. Interest history if no waiver election made on member 
deconsolidation. (i) Facts. P is the common parent of a calendar-
year consolidated group that includes S. The P group engaged in a 
CERT on December 27, Year 5. S deconsolidates from the P group on 
December 31, Year 5. No election under paragraph (e)(1) of this 
section is made on the deconsolidation of S. S's value immediately 
after its deconsolidation is $4,000. The P group's value immediately 
before S's deconsolidation is $10,000. The P group and its members 
engaged in no prior CERTs.
    (ii) Analysis. Because the CERT occurs during the P group's 
calendar consolidated return Year 5, Years 5, 6, and 7 are the P 
group's loss limitation years. Because no election is made under 
paragraph (e)(1) of this section with regard to the deconsolidation 
of S, S is treated as an applicable corporation with regard to the 
Year 5 CERT under paragraph (b)(1) of this section and the interest 
history of the P group during the period of S's consolidation and 
any preceding years is allocated to S and the remaining members of 
the P group. See paragraph (d)(3)(ii)(C) of this section. The amount 
of the P group's interest for each year that is allocated to S is 
the amount of interest paid or accrued by the P group in the 
relevant consolidated return year multiplied by a fraction equal to 
4,000 divided by 10,000 (the value of the deconsolidating 
corporation immediately after its deconsolidation divided by the 
value of the entire group immediately prior to the deconsolidation), 
or \2/5\. See paragraph (d)(3)(ii)(D) of this section. The interest 
allocated to S is subtracted from the interest history of the group 
and is unavailable to the P group for purposes of computing a three-
year average with regard to any loss limitation year of the P group 
after the year of the deconsolidation, including Years 6 and 7. The 
interest history allocated to S will be maintained by S to be used 
in the computation of any CERIL of S, or any CERIL of any group of 
which S is later a member. See paragraph (d)(3)(ii)(C) of this 
section.
    (iii) Waiver election filed. The facts are the same as in 
paragraph (i) of this Example 3, except that an election under 
paragraph (e)(1) of this section is filed on the deconsolidation of 
S. As a result of that election, S is not treated as an applicable 
corporation with regard to the Year 5 CERT under paragraph (b)(2) of 
this section and none of the interest history of the P group is 
allocated to S under paragraph (d)(3)(ii)(B) of this section. 
Therefore, in any post-deconsolidation year, for purposes of 
computing a CERIL in connection with any CERT with regard to which S 
(or of any group of which S is later a member) is an applicable 
corporation, S is treated as having paid or accrued zero interest 
for the period of its inclusion in the P group and preceding years. 
The P group will retain the interest history that would otherwise be 
allocated to S. See paragraph (d)(3)(ii)(B) of this section.
    Example 4. Interest history if no waiver election made for 
member that deconsolidates prior to CERT. (i) Facts. P is the parent 
of a calendar-year consolidated group that includes S. On December 
31, Year 4, S deconsolidates from the P group. No election is made 
under paragraph (e)(1) of this section with regard to the 
deconsolidation. On July 1, Year 5, the P group engages in a CERT. 
The P group and its members engaged in no prior CERTs.
    (ii) Analysis. Because no election is made under paragraph 
(e)(1) of this section with regard to the deconsolidation of S, the 
interest history of the P group is allocated between S and the 
remaining members of the P group. See paragraph (d)(3)(ii)(C) of 
this section. This allocation occurs despite the fact that, at the 
time of the deconsolidation, the P group has not engaged in a CERT. 
Therefore, for purposes of computing any three-year average for the 
P group relevant to the Year 5 CERT, the portion of the interest 
history allocated to S is unavailable to the P group for purposes of 
computing a three-year average with regard to any loss limitation 
year of the P group after the year of the deconsolidation. See 
paragraph (d)(3)(ii)(C) of this section.
    Example 5. Interest history if waiver election made for member 
that deconsolidates and then engages in a CERT. (i) Facts. P is the 
parent of a calendar-year consolidated group that includes X. On 
December 31, Year 5, X deconsolidates from the P group and makes an 
election under paragraph (e)(1) of this section. After its 
deconsolidation, X maintains a calendar taxable year. During Year 7, 
X engages in a CERT.
    (ii) Analysis. X's loss limitation years with regard to the Year 
7 CERT are Years 7, 8, and 9. X's lookback period with regard to the 
CERT is comprised of its Years 4 and 5 in the P consolidated group, 
and X's separate return Year 6. See section 172(h)(2)(C)(ii) and 
paragraph (d)(4)(i) of this section. As a result of the filing of 
the election under paragraph (e)(1) of this section, none of the 
interest

[[Page 57474]]

history of the P group is allocated to X. Therefore, for purposes of 
computing X's three-year average for loss limitation Years 7, 8, and 
9, X is treated as having paid or accrued zero interest during Years 
4 and 5 of the lookback period. See paragraph (d)(3)(ii)(B) of this 
section.
    Example 6. Interest history if member deconsolidates mid-year. 
(i) Facts. P is the common parent of a calendar-year consolidated 
group that includes S. S deconsolidates from the P group on June 30, 
Year 5. No election under paragraph (e)(1) of this section is made 
on the deconsolidation of S. During Year 5, but prior to the 
deconsolidation, the P group engages in a CERT. S is not a party to 
the CERT, and, throughout its history in the group, S paid or 
accrued only nominal interest.
    (ii) Analysis. The P group's lookback period is calendar Years 
2, 3, and 4. Consolidated return Years 5, 6, and 7 are the P group's 
loss limitation years. Because no election is made under paragraph 
(e)(1) of this section with regard to the deconsolidation of S, the 
interest history of the P group is allocated between S and the 
remaining members of the P group. See paragraph (d)(3)(ii)(C) of 
this section. This is true although S played no part in the CERT, 
and it actually paid or accrued only nominal interest. In the 
consolidated return year of the deconsolidation (here, the P group's 
Year 5), S was a member for 181 days. Therefore, the P group 
includes in the computation of its three-year average relevant to 
Year 5 a pro rata portion of the interest history allocated to S. 
See paragraph (d)(3)(ii)(C) and (iii) of this section. The pro rata 
portion equals the group's interest history allocated to S under 
paragraph (d)(3)(ii)(C) and (D) of this section, multiplied by a 
fraction equal to 181/365 (number of days of the loss limitation 
year during which S is a member divided by the number of days in the 
loss limitation year). See paragraph (d)(3)(iii) of this section. 
The portion of the interest history allocated to S is excluded in 
its entirety from the computation of the group's three-year average 
relevant to Years 6 and 7. The interest history allocated to S will 
be used in the computation of any CERIL of S, and any CERIL of any 
group of which S is later a member. See paragraph (d)(3)(ii)(C) of 
this section.
    Example 7. Group not in existence for the entire lookback 
period. (i) Facts. Corporation P is formed on October 1, Year 3, and 
maintains a calendar taxable year. On January 1, Year 4, P forms S 
in a transaction meeting the requirements of section 351. Beginning 
in Year 4, P files consolidated returns with S, its only subsidiary. 
The P group maintains a calendar taxable year. During Year 5, the P 
group engages in an ED.
    (ii) Analysis. For purposes of limiting any CERIL related to the 
Year 5 CERT, the P group must measure its interest deductions for 
the three years preceding the taxable year in which the CERT occurs 
(three-year average). See section 172(h)(2)(C)(ii) and Sec.  
1.172(h)-3(a). However, the P group was not in existence for three 
taxable years before the year that includes the date of the CERT 
(calendar Year 5). Rather, the P group was in existence for one full 
calendar taxable year (Year 4). Because the group does not have a 
three-year history, the lookback period includes the common parent's 
(P's) short taxable year (October 1 through December 31, Year 3), 
and is also deemed to include an additional taxable period (October 
1, Year 2 through September 30, Year 3). See paragraph (d)(4)(ii) of 
this section. Further, in computing the three-year average, the P 
group members are treated as having paid or accrued zero interest 
for dates on which they did not exist. However, the P group is 
treated as having paid any interest paid by P during its short 
taxable year (October 1 through December 31, Year 3). See paragraph 
(d)(4)(iv) of this section.
    Example 8. Group not in existence prior to year of the CERT but 
target in existence. (i) Facts. Corporation P is formed on January 
1, Year 4. On the same day, P organizes wholly-owned, special-
purpose corporation S. T is an unrelated, calendar-year corporation 
with a significant tax history. On February 1, Year 4, S merges into 
T, with T surviving. In the merger, all of T's historic shareholders 
receive cash in exchange for their shares. Following the merger, P 
owns all of the outstanding stock of T, and P is treated as 
acquiring all the stock of T in an MSA. The P group files 
consolidated returns beginning in Year 4 and maintains a calendar 
taxable year. T is first included in the P group on February 2, Year 
4.
    (ii) Analysis. Neither P (the original common parent) nor the P 
group is in existence before the year that includes the date of the 
CERT (calendar Year 4). Therefore, for purposes of applying the 
interest allocation limitation of section 172(h)(2)(C) and Sec.  
1.172(h)-3(a), the P group's lookback period is deemed to include 
three additional taxable periods (January 1 through December 31 for 
Years 1, 2, and 3). See paragraph (d)(4)(ii) of this section. 
Further in computing the three-year average, P is treated as having 
paid or accrued zero interest during the deemed years (January 1, 
Year 1 through December 30, Year 3). See paragraph (d)(4)(iv) of 
this section. However, with respect to the group's acquisition of T, 
the interest history of T is combined with the interest history of 
the P group. Because T is not a member of the P group for each day 
of loss limitation Year 4, the computation of the three-year average 
applicable to loss limitation Year 4 will include only a pro rata 
portion of the interest of T for the lookback period. See paragraph 
(d)(3)(i), (d)(3)(iii), and paragraph (iii) of Example 1 of 
paragraph (d)(5) of this section.

    (e) Election to waive carryback from all separate return years--(1) 
In general. In addition to any other elections available under section 
172(b)(3) and Sec.  1.1502-21(b)(3), if a member becomes a non-member 
of a group (former group), the former member may make an irrevocable 
election to relinquish the carryback of all NOLs (and attributable 
portions of CNOLs) to taxable years of the former group and any 
preceding years. If the former member becomes a member of another group 
(acquiring group) immediately after its deconsolidation from the former 
group, the election described in this paragraph (e)(1) is available 
only to the common parent of the acquiring group. The election is not 
an annual election and applies to all losses that would otherwise be 
subject to carryback to years of the former group (or preceding years) 
under section 172 or Sec.  1.1502-21(b). The election is binding on the 
deconsolidating corporation and any group of which it may become a 
member. Further, the election is available without regard to whether 
the former group is treated as an applicable corporation with regard to 
any CERT at the time of the deconsolidation. Any election under this 
paragraph (e)(1) by the common parent of an acquiring group must 
include all deconsolidating corporations that were members of the 
former group and that joined the acquiring group during the same 
consolidated return year of the acquiring group. The election is made 
in a separate statement entitled, ``THIS IS AN ELECTION UNDER Sec.  
1.1502-72(e)(1) TO WAIVE THE PRE- [insert the first taxable year 
following the deconsolidation of the former member(s) from the former 
group] CARRYBACK PERIOD FOR ALL NOLs AND ALL CNOLs ATTRIBUTABLE TO 
[insert the name(s) and EIN(s) of the corporation(s)].'' The statement 
must be filed with the timely filed original return of the former 
member or the acquiring group for the first taxable year following the 
deconsolidation of the former member from the former group. See 
paragraphs (b)(2), (c)(4)(iii), and (d)(3)(ii)(B) of this section 
relating to treatment of a deconsolidating member making an election 
under this paragraph (e)(1).
    (2) Example. The following example illustrates the rules of this 
paragraph (e):

    Example. P, a publicly-held corporation, is the common parent of 
a calendar-year consolidated group that includes T. On July 30, Year 
5, the P group engages in a CERT. On December 31, Year 5, T 
deconsolidates from the P group, and it continues to maintain a 
calendar taxable year. With respect to its deconsolidation, T makes 
an election under paragraph (e)(1) of this section. As a result of 
such election, T is not treated as an applicable corporation with 
regard to the P group's Year 5 CERT and none of the CERT costs or 
interest history of the P group are allocated to T. See paragraphs 
(b)(2), (c)(4)(iii), and (d)(3)(ii)(B) of this section. On March 30, 
Year 6, the X group acquires all of the stock of T. The X group 
maintains a calendar taxable year. A portion of the X group's Year 6 
CNOL is attributable to T under Sec.  1.1502-21(b)(2)(iv)(B). 
Because T filed an election under paragraph (e)(1) of this section 
with respect to its deconsolidation from the P group, no portion of 
the X group's Year 6 CNOL attributable to

[[Page 57475]]

T can be carried back to any taxable years of T, of the P group, or 
any preceding years.

    (f) Excess distribution--(1) Defined. Section 172(h)(3)(C) and 
Sec.  1.172(h)-1(c)(3) provide that an ED means the excess (if any) of 
the aggregate distributions (including redemptions) made during a 
taxable year by a corporation with respect to its stock, over the 
greater of 150 percent of the average of such distributions (three-year 
distribution average) for the three taxable years immediately preceding 
such taxable year (distribution lookback period), or 10 percent of the 
fair market value of the stock of such corporation as of the beginning 
of such taxable year.
    (2) Determination of an ED by a group--(i) Aggregation of 
distributions to non-members. For purposes of determining whether a 
group has made an ED during any consolidated return year (potential ED 
year), distributions by all members of the group to non-members during 
the potential ED year are aggregated and tested under section 
172(h)(3)(C), Sec.  1.172(h)-1(c)(3), and paragraph (f)(1) of this 
section.
    (ii) Distributions between members of the same group. Distributions 
between members of the same group are generally disregarded for 
purposes of applying the CERT rules. However, the preceding sentence 
does not apply if a party to the transaction is deconsolidated pursuant 
to the same plan or arrangement. See paragraph (a)(2)(iii) of this 
section.
    (3) Computation of three-year distribution average--(i) In general. 
The computation under section 172(h)(3)(C)(ii)(I) and Sec.  1.172(h)-
1(f) of the group's three-year distribution average includes 
distributions made during the distribution lookback period to non-
members by each corporation that is a member of the consolidated group 
during the potential ED year. Distributions made during the 
distribution lookback period by predecessors of those members are also 
included. See Sec.  1.172(h)-4(d). The computation includes 
distributions made by corporations during separate return years, 
subject to additional rules of this paragraph (f) and paragraph 
(a)(2)(iii) of this section. If a corporation was a member of a prior 
group during a portion of a distribution lookback period, the 
distribution history of that corporation during taxable years of the 
prior group includes only distributions made by that corporation to 
non-members of the prior group.
    (ii) Corporation deconsolidated from a group. If a corporation 
deconsolidates from a group (former group), the corporation's actual 
distribution history is subtracted from the group's distribution 
history and is available to the deconsolidating corporation (or any 
group of which it becomes a member) for purposes of computing any 
three-year distribution average following the deconsolidation. The 
deconsolidating member's distribution history will be unavailable to 
the former group for purposes of computing its three-year distribution 
average with regard to any potential ED year of the former group after 
the year of deconsolidation. See Sec.  1.172(h)-1(f)(1) (excluding from 
three-year distribution average those distributions treated as part of 
an MSA).
    (iii) Members included in group for less than entire loss 
limitation year. If any member is included in the group for less than 
an entire potential ED year (partial-year member), then a pro rata 
portion of the partial-year member's distribution history is computed 
under the principles of paragraph (d)(3)(iii) of this section and is 
included for purposes of determining the group's three-year 
distribution average relevant to that potential ED year.
    (4) Stock value and stock issuances of a group--(i) Stock issuances 
taken into account in computing distributions. Stock issued by a member 
of a group is taken into account in applying section 172(h)(3)(E)(ii) 
and Sec.  1.172(h)-5(c)(1) only if the stock is issued to a non-member. 
Intercompany stock issuances are disregarded. This rule is applicable 
whether the stock issuance occurred in the current group or a previous 
group.
    (ii) Value of stock of group. For purposes of applying section 
172(h)(3)(C)(ii)(II), Sec.  1.172(h)-1(c)(3), and paragraph (f)(1) of 
this section (relating to the fair market value of the stock of a 
distributing corporation), the value of the stock of the group is the 
value of the stock of all members, other than stock that is owned 
directly or indirectly by another member. But see section 
172(h)(3)(E)(i) for rules regarding the exclusion of certain preferred 
stock for purposes of applying sections 172(h)(3)(C), Sec.  1.172(h)-
1(c)(3) and (f), and this paragraph (f). See also paragraphs 
(a)(2)(iii) and (f)(2)(ii) of this section, requiring separate entity 
analysis of certain transactions between members of a consolidated 
group.
    (5) Examples. The following examples illustrate the rules of this 
paragraph (f). For purposes of these examples, assume that all entities 
are domestic C corporations:

    Example 1. Corporation deconsolidates from group. (i) Facts. P 
is the common parent of a calendar-year consolidated group that 
includes T. P owns 90 percent of the outstanding stock of T, and A 
(an unrelated party) owns the remaining 10 percent of the 
outstanding stock of T. T regularly makes distributions to its 
shareholders, P and A. On December 31, Year 4, X, the common parent 
of another calendar-year consolidated group, acquires all of the 
outstanding stock of T, and T deconsolidates from the P group. T is 
first included in the X group on January 1, Year 5. On March 31, 
Year 5, X makes a large distribution to its non-member shareholders. 
X makes no further distributions during its taxable year.
    (ii) Analysis. The X group's distribution to its non-member 
shareholders on March 31, Year 5, is tested as a potential ED under 
section 172(h)(3)(C), Sec.  1.172(h)-1(c)(3) and (f), and paragraph 
(f) of this section. The X group's distribution lookback period with 
regard to the potential ED is January 1 through December 31, for 
each of Years 2, 3, and 4. For purposes of computing the X group's 
three-year distribution average, the computation includes any 
distributions made by T to A, its former non-member shareholder, 
during the distribution lookback period, because T is a member of 
the X group during the year of the potential ED. See paragraph 
(f)(3) of this section. Distributions between members of the X group 
and between members of the P group are disregarded. See paragraph 
(f)(2)(ii) of this section.
    Example 2. Integrated plan to deconsolidate. T is a wholly-owned 
subsidiary of P, and is a member of the P group. As part of a plan 
that includes the deconsolidation of T from the P group, T makes a 
distribution to P. Because T's distribution to P is part of an 
integrated plan that results in the deconsolidation of T, T's 
distribution to P is tested on a separate entity basis as a 
potential ED under section 172(h)(3)(C) Sec.  1.172(h)-1(c)(3) and 
(f), and paragraph (f) of this section. See paragraphs (a)(2)(iii) 
and (f)(2)(ii) of this section. Therefore, the rules of section 
172(h)(3)(C), Sec.  1.172(h)-1(c)(3) and (f), and paragraph (f) of 
this section are applied based on the separate entity value and 
distribution history of T. See Sec.  1.172(h)-1(d)(2) regarding 
testing of the distribution as part of a plan of major stock 
acquisition.

    (g) Life-nonlife groups--(1) Scope. This paragraph (g) provides 
rules for applying the CERT rules to a group that elects under section 
1504(c)(2) to file a consolidated return (life-nonlife group). See 
Sec.  1.1502-47 (rules regarding life-nonlife groups).
    (2) Single entity treatment--(i) In general. All members of a life-
nonlife group are generally treated as a single taxpayer for purposes 
of the CERT rules. Accordingly, the rules of paragraphs (a) through (f) 
and (h) of this section and the rules of Sec. Sec.  1.172(h)-1 through 
1.172(h)-5 are applied by treating the life-nonlife group as a single 
taxpayer, and are not applied on a subgroup basis. For example, all 
members of a life-nonlife group are treated as a single entity for 
purposes of determining whether a CERT has occurred under sections 
172(h)(3)(B) and (C) and

[[Page 57476]]

Sec.  1.172(h)-1. See paragraph (a)(2)(i) of this section. Furthermore, 
all intercompany transactions between and within subgroups are 
generally disregarded. In addition, if a pre-existing CERT member 
becomes a member of a life-nonlife group, the life-nonlife group is 
treated as a single applicable corporation with regard to that CERT in 
the consolidated return year of the acquisition and any succeeding 
year. See paragraph (a)(2)(iv) of this section. If it is determined 
that a CERT exists, the amount of the CERIL is determined for the 
entire life-nonlife consolidated group as described in paragraph 
(g)(2)(ii)(A) of this section, and the CERIL is allocated to each 
subgroup as described in paragraph (g)(3) of this section.
    (ii) CERIL--(A) Single CERIL computation. For any loss limitation 
year, a single CERIL is computed under section 172(h)(1) and Sec.  
1.172(h)-2(a)(2) for the life-nonlife group. The computation of the 
life-nonlife group's CERIL for any loss limitation year includes all 
life-nonlife group members' CERT costs, debt, and interest paid or 
accrued for that year.
    (B) Net operating loss. For purposes of determining the CERIL of a 
life-nonlife group under section 172(h)(1) and Sec.  1.172(h)-2(a)(2), 
the net operating loss of the group in any loss limitation year is the 
sum of the nonlife consolidated net operating loss (nonlife CNOL) (if 
any) and the consolidated loss from operations (consolidated LO) (if 
any) for that year. For this purpose, nonlife consolidated taxable 
income does not offset any LO, and consolidated partial life insurance 
company taxable income (as used in Sec.  1.1502-47(g)) does not offset 
any nonlife CNOL.
    (iii) Carryover to separate return years. If any nonlife CNOL or 
consolidated LO that is attributable to a member of a subgroup may be 
carried to a separate return year (as defined in Sec.  1.1502-
47(d)(10)), the CERIL that is associated with the nonlife CNOL or 
consolidated LO is apportioned to each member, as relevant, under the 
method provided by Sec.  1.1502-21(b)(2)(iv)(C)(1).
    (iv) Deconsolidation. If a member deconsolidates from a life-
nonlife group without an election under paragraph (e)(1) of this 
section, then paragraphs (b)(1), (c)(4)(i) and (ii), and (d)(3)(ii)(A) 
and (C) of this section (relating to treatment of a deconsolidating 
member) apply to allocate CERT status, CERT costs, and interest history 
from the entire life-nonlife group to the deconsolidating member, and 
not from a specific subgroup.
    (3) Allocation of a CERIL. If a CERIL exists under paragraph 
(g)(2)(ii)(A) of this section, that CERIL is allocated to each subgroup 
that has a nonlife CNOL or consolidated LO. The amount of the nonlife 
CNOL and consolidated LO in a loss limitation year that constitutes a 
CERIL is equal to the total amount of the CERIL for the loss limitation 
year multiplied by a fraction, the numerator of which equals the 
nonlife CNOL or consolidated LO (as relevant), and the denominator of 
which equals the nonlife CNOL plus the consolidated LO.
    (h) Effective/applicability date--(1) In general. Other than 
paragraph (e) of this section, the rules of this section apply to CERTs 
occurring on or after the date of publication of the Treasury decision 
adopting these rules as final regulations in the Federal Register. The 
rules of this section also apply to the deconsolidation of a member 
from, or the acquisition of a corporation by, a consolidated group that 
occurs on or after the date of publication of the Treasury decision 
adopting these rules as final regulations in the Federal Register. 
However, in each case, this section does not apply to any CERT, 
deconsolidation, or acquisition occurring pursuant to a written 
agreement that is binding before the date of publication of the 
Treasury decision adopting these rules as final regulations in the 
Federal Register.
    (2) Waiver election. Paragraph (e) of this section applies to the 
deconsolidation of a member from a consolidated group that occurs on or 
after the date of publication of the Treasury decision adopting these 
rules as final regulations in the Federal Register, except that it does 
not apply to any deconsolidation occurring pursuant to a written 
agreement that is binding before the date of publication of the 
Treasury decision adopting these rules as final regulations in the 
Federal Register.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2012-22838 Filed 9-13-12; 4:15 pm]
BILLING CODE 4830-01-P