Section 403(b) applies to contributions made for employees who are performing services for a public school of a State or a local government or for employees of employers that are tax-exempt organizations under § 501(c)(3). Section 403(b) also applies to contributions made for certain ministers. Under § 403(b)(1), (7), and (9), contributions are excluded from gross income only if made to one or more of the following funding arrangements: (1) contracts issued by an insurance company qualified to issue annuities in a State that includes payment in the form of an annuity, (2) custodial accounts that are exclusively invested in stock of a regulated investment company (as defined in § 851(a) relating to mutual funds), or (3) retirement income accounts for employees of a church-related organization (as defined in § 1.403(b)-2) (collectively referred to as § 403(b) contracts). Additionally, under § 403(b)(1)(C), an employee’s rights under the § 403(b) contract must be nonforfeitable.

Final regulations under § 403(b) (TD 9340) were published in the Federal Register (72 FR 41128) on July 26, 2007. Subject to a number of special applicability date rules, § 1.403(b)-11(a) provides that those final regulations generally apply for taxable years beginning after December 31, 2008.

Section 1.403(b)-10(a) provides that an employer may amend its § 403(b) plan to eliminate future contributions for existing participants or to limit participation to existing participants and employees (to the extent consistent with § 1.403(b)-5). A § 403(b) plan also may include provisions that provide for plan termination and that allow accumulated benefits to be distributed on plan termination.

Under § 1.403(b)-10(a), in the case of a § 403(b) contract that is subject to the distribution restrictions in § 1.403(b)-6(c) or (d) (relating to custodial accounts and § 403(b) elective deferrals), termination of a § 403(b) plan and distribution of accumulated benefits is permitted only if the employer (taking into account all entities that are treated as the same employer under § 414(b), (c), (m), or (o) on the date of termination) does not make contributions to any § 403(b) contract that is not part of the plan (these contracts are referred to in this revenue ruling as “another § 403(b) plan”). For rules relating to entities that are treated as the same employer under § 414(c), see § 1.414(c)-5; for controlled group rules relating to governmental entities, see Notice 89-23 (1989-1 CB 654), as modified by Rev. Rul. 2009-18, 2009-2 C.B. 1; and, for special rules applicable to church plans for entities under common control, see § 414(c)(2).

For purposes of the requirement that, after plan termination, the employer make no contributions to any other § 403(b) plan, the employer makes contributions to another § 403(b) plan only if the employer makes contributions to a § 403(b) contract during the period beginning on the date of plan termination and ending 12 months after distribution of all assets from the terminated plan. However, if at all times during the period beginning 12 months before the plan termination and ending 12 months after distribution of all assets from the terminated plan, fewer than two percent of the employees who were eligible under the terminating § 403(b) plan as of the date of plan termination are eligible under another § 403(b) plan, that other § 403(b) plan is disregarded. To the extent a contract fails to satisfy the nonforfeitability requirement of § 1.403(b)-3(a)(2) as of the date of plan termination, the contract is not, and cannot later become, a § 403(b) contract.

For a § 403(b) plan to be terminated under § 1.403(b)-10(a), all accumulated benefits under the plan must be distributed to all participants and beneficiaries as soon as administratively practicable after termination of the plan.³ For this purpose, delivery of a fully paid individual insurance annuity contract is treated as a distribution. The mere provision for, and making of, benefit distributions to participants or beneficiaries upon plan termination does not cause a contract to cease to be a § 403(b) contract. Section 1.403(b)-7 provides rules regarding the tax treatment of benefit distributions, including rules in § 1.403(b)-7(b)(1) under which an eligible rollover distribution is not included in gross income if paid in a direct rollover to an eligible retirement plan or if transferred to an eligible retirement plan within 60 days.

Rev. Rul. 2011-7, 2011-10 I.R.B. 534, provides that a plan may be terminated in accordance with the rules of § 1.403(b)-10(a) by the delivery to participants or beneficiaries of a fully paid individual annuity contract or an individual certificate evidencing fully paid benefits under a group annuity contract. Rev. Rul. 2011-7 further provides that the delivery of a fully paid individual annuity contract to a participant or beneficiary, or of an individual certificate evidencing fully paid benefits under a group annuity contract, is not included in gross income until amounts are actually paid to the participant or beneficiary out of the contract, so long as the contract maintains its status as a § 403(b) contract. Finally, Rev. Rul. 2011-7 provides that any other distribution to a participant or beneficiary to effectuate plan termination is included in gross income, except to the extent the amount is rolled over to an IRA or other eligible retirement plan by a direct rollover or by a transfer made within 60 days.

Section 110 of Division O of the Further Consolidated Appropriations Act, 2020, Pub. L. 116-94, 133 Stat. 2534 (2019) known as the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), provides that the Secretary of the Treasury shall issue guidance providing that, if an employer terminates a plan under which amounts are contributed to a custodial account under § 403(b)(7), the plan administrator or custodian may distribute an ICA in kind to a participant or beneficiary of the plan. It also provides that the distributed custodial account will be maintained by the custodian on a tax-deferred basis as a § 403(b)(7) custodial account, similar to the treatment of fully paid individual annuity contracts under Rev. Rul. 2011-7, until amounts are actually paid to the participant or beneficiary. The legislation further directs that the guidance provide (1) that the § 403(b)(7) status of the distributed custodial account generally is maintained if the custodial account thereafter adheres to the requirements of § 403(b) that are in effect at the time of the distribution of the account, and (2) that a custodial account is not considered distributed to the participant or beneficiary if the employer has any material retained rights under the account (but the employer is not treated as retaining material rights merely because the custodial account was originally opened under a group contract). Finally, the legislation directs that the guidance be retroactively effective for taxable years beginning after December 31, 2008.⁴

This Treasury decision amends the Income Tax Regulations (26 CFR part 1) under section 1502 of the Code. Section 1502 authorizes the Secretary of the Treasury or his delegate (Secretary) to prescribe regulations for an affiliated group of corporations that join in filing (or that are required to join in filing) a consolidated return (consolidated group) to reflect clearly the Federal income tax liability of the consolidated group and to prevent avoidance of such tax liability. See § 1.1502-1(h) (defining the term “consolidated group”). For purposes of carrying out those objectives, section 1502 also permits the Secretary to prescribe rules that may be different from the provisions of chapter 1 of the Code that would apply if the corporations composing the consolidated group filed separate returns. Terms used in the consolidated return regulations generally are defined in § 1.1502-1.

On July 8, 2020, the IRS published a notice of proposed rulemaking (REG-125716-18) in the Federal Register (85 FR 40927) under section 1502 of the Code (proposed regulations). The proposed regulations provided guidance implementing recent statutory amendments to section 172, relating to net operating loss (NOL) deductions, and withdrew and re-proposed certain sections of proposed guidance issued in prior notices of proposed rulemaking relating to the absorption of CNOL carryovers and carrybacks. In addition, the proposed regulations updated regulations applicable to consolidated groups that include both life insurance companies and other companies to reflect statutory changes.

In connection with the proposed regulations, the IRS published on the same date temporary regulations under section 1502 (TD 9900) in the Federal Register (85 FR 40892) (temporary regulations). The temporary regulations permit consolidated groups that acquire new members that were members of another consolidated group to elect to waive all or part of the pre-acquisition portion of an extended carryback period under section 172 for certain losses attributable to the acquired members. The text of the temporary regulations also serves as the text of §1.1502-21(b)(3)(ii)(C) and (D) of the proposed regulations.

The IRS received seven comments in response to the proposed regulations. Copies of the comments received are available for public inspection at http://www.regulations.gov or upon request. No public hearing was requested or held. This Treasury decision adopts the proposed regulations, other than proposed §1.1502-21(b)(3)(ii)(C) and (D), as final regulations with the changes described in the following Summary of Comments and Explanation of Revisions. The Treasury Department and the IRS expect to finalize proposed §1.1502-21(b)(3)(ii)(C) and (D) at a later date and welcome further comments on these provisions.

The final regulations in §§1.1502-1(k), 1.1502-21(a), (b)(1), (b)(2)(iv), and (c)(1)(i)(E), 1.1502-47, and 1.1503(d)-8(b)(8) apply to taxable years beginning after December 31, 2020. However, a taxpayer may choose to apply the rules in §§1.1502-1(k) and 1.1502-47 of these final regulations to taxable years beginning on or before December 31, 2020. If a taxpayer makes the choice described in the previous sentence with regard to the rules in §1.1502-47, the corporation must apply those rules in their entirety and consistently with the provisions of the Internal Revenue Code applicable to the years at issue.

The principal authors of these regulations are Justin O. Kellar, Gregory J. Galvin, and William W. Burhop of the Office of Associate Chief Counsel (Corporate). However, other personnel from the Treasury Department and the IRS participated in their development.

Income taxes, Reporting and recordkeeping requirements.

Accordingly, 26 CFR part 1 is amended as follows:

PART 1—INCOME TAX

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.1502-1 is amended by adding paragraphs (k) and (l) to read as follows:

§1.1502-1 Definitions.

* * * * *

(k) Nonlife insurance company. The term nonlife insurance company means a member that is an insurance company other than a life insurance company, each as defined in section 816(a).

(l) Applicability date. Paragraph (k) of this section applies to taxable years beginning after December 31, 2020. However, a taxpayer may choose to apply paragraph (k) of this section to taxable years beginning on or before December 31, 2020.

Par. 3. Section 1.1502-21 is amended:

1. By revising paragraph (a).

2. By revising paragraph (b)(1).

3. By revising paragraph (b)(2)(iv).

4. By revising paragraph (b)(2)(v) introductory text.

5. In paragraph (b)(2)(v), by designating Examples 1 through 3 as paragraphs (b)(2)(v)(A) through (C), respectively, and removing the period after each example number in the paragraph headings and replacing them with a colon.

6. In newly designated paragraphs (b)(2)(v)(A) through (C), by redesignating paragraphs (b)(2)(v)(A)(i) and (ii) as paragraphs (b)(2)(v)(A)(1) and (2), paragraphs (b)(2)(v)(B)(i) and (ii) as paragraphs (b)(2)(v)(B)(1) and (2), and paragraphs (b)(2)(v)(C)(i) and (ii) as paragraphs (b)(2)(v)(C)(1) and (2).

7. By adding paragraphs (b)(2)(v)(D) through (G).

8. In paragraph (b)(3)(ii)(B), by removing the text “§ 1.1502-21(b)(3)(ii)(B)(2)” and adding in its place “§1.1502-21(b)(3)(ii)(B)”.

9. By revising paragraph (b)(3)(ii)(C).

10. By adding paragraph (b)(3)(ii)(D).

11. By revising paragraph (c)(1)(i) introductory text.

12. In paragraph (c)(1)(i)(C)(2), by removing the word “and”.

13. In paragraph (c)(1)(i)(D), by removing the word “account.” and adding in its place “account; and”.

14. By adding paragraph (c)(1)(i)(E).

15. By revising paragraph (c)(1)(iii) introductory text.

16. In paragraph (c)(1)(iii), by designating Examples 1 through 5 as paragraphs (c)(1)(iii)(A) through (E), respectively, and removing the period after each example number in the paragraph headings and replacing them with a colon.

17. In newly redesignated paragraphs (c)(1)(iii)(A) through (E), by redesignating paragraphs (c)(1)(iii)(A)(i) through (iii) as paragraphs (c)(1)(iii)(A)(1) through (3), paragraphs (c)(1)(iii)(B)(i) through (vi) as paragraphs (c)(1)(iii)(B)(1) through (6), paragraphs (c)(1)(iii)(C)(i) through (iii) as paragraphs (c)(1)(iii)(C)(1) through (3), paragraphs (c)(1)(iii)(D)(i) through (iv) as paragraphs (c)(1)(iii)(D)(1) through (4), and paragraphs (c)(1)(iii)(E)(i) through (v) as paragraphs (c)(1)(iii)(E)(1) through (5).

18. By revising newly redesignated paragraphs (c)(1)(iii)(A)(2) and (c)(1)(iii)(B)(2) through (6).

19. In newly redesignated paragraph (c)(1)(iii)(C)(2), by adding the words “, a taxable year that begins on January 1, 2021” after the words “at the beginning of Year 4”.

20. By revising newly redesignated paragraphs (c)(1)(iii)(D)(2) through (4).

21. By adding paragraph (c)(1)(iii)(D)(5).

22. By revising newly redesignated paragraphs (c)(1)(iii)(E)(2) through (5).

23. By adding paragraphs (c)(1)(iii)(E)(6) and (c)(1)(iii)(F).

24. By revising paragraph (c)(2)(v).

25. By revising paragraph (c)(2)(viii) introductory text,.

26. In paragraph (c)(2)(viii), by designating Examples 1 through 4 as paragraphs (c)(2)(viii)(A) through (D), respectively, and removing the period after each example number in the paragraph headings and replacing them with a colon.

27. In newly designated paragraphs (c)(2)(viii)(A) through (D), by redesignating paragraphs (c)(2)(viii)(A)(i) through (vii) as paragraphs (c)(2)(viii)(A)(1) through (7), paragraphs (c)(2)(viii)(B)(i) through (iv) as paragraphs (c)(2)(viii)(B)(1) through (4), paragraphs (c)(2)(viii)(C)(i) through (iii) as paragraphs (c)(2)(viii)(C)(1) through (3), and paragraphs (c)(2)(viii)(D)(i) and (ii) as paragraphs (c)(2)(viii)(D)(1) and (2).

28. In newly redesignated paragraphs (c)(2)(viii)(A)(3) through (7), the first sentence of each, by adding the words “, including the limitation under paragraph (c)(1)(i)(E) of this section” after the words “under paragraph (c) of this section”.

29. In newly redesignated paragraph (c)(2)(viii)(B)(1), the first sentence, by adding the words “, none of which is a nonlife insurance company” after the text “S, T, P and M”.

30. In newly redesignated paragraph (c)(2)(viii)(B)(1), the fourth sentence, by adding the text “(a taxable year beginning after December 31, 2020)” after the language “Year 3”.

31. By revising newly designated paragraph (c)(2)(viii)(B)(3).

32. By redesignating newly redesignated paragraph (c)(2)(viii)(B)(4) as paragraph (c)(2)(viii)(B)(5).

33. By adding a new paragraph (c)(2)(viii)(B)(4).

34. By revising newly redesignated paragraph (c)(2)(viii)(B)(5).

35. By adding paragraph (c)(2)(viii)(B)(6).

36. In paragraph (g)(5), by designating Examples 1 through 9 as paragraphs (g)(5)(i) through (ix), respectively, and removing the period after each example number in the paragraph headings and replacing them with a colon.

37. In newly redesignated paragraphs (g)(5)(i) through (ix), by redesignating paragraphs (g)(5)(i)(i) through (iv) as paragraphs (g)(5)(i)(A) through (D), paragraphs (g)(5)(ii)(i) through (iv) as paragraphs (g)(5)(ii)(A) through (D), paragraphs (g)(5)(iii)(i) through (iii) as paragraphs (g)(5)(iii)(A) through (C), paragraphs (g)(5)(iv)(i) through (iv) as paragraphs (g)(5)(iv)(A) through (D), paragraphs (g)(5)(v)(i) through (iv) as paragraphs (g)(5)(v)(A) through (D), paragraphs (g)(5)(vi)(i) through (iv) as paragraphs (g)(5)(vi)(A) through (D), paragraphs (g)(5)(vii)(i) through (vi) as paragraphs (g)(5)(vii)(A) through (F), paragraphs (g)(5)(viii)(i) through (v) as paragraphs (g)(5)(viii)(A) through (E), and paragraphs (g)(5)(ix)(i) through (vii) as paragraphs (g)(5)(ix)(A) through (G).

38. By revising paragraph (h)(9).

39. By adding paragraph (h)(10).

The revisions and additions read as follows:

§1.1502-21 Net operating losses.

(a) Consolidated net operating loss deduction—(1) In general. Subject to any limitations under the Internal Revenue Code or this chapter (for example, the limitations under section 172(a)(2) and paragraph (a)(2) of this section), the consolidated net operating loss deduction (or CNOL deduction) for any consolidated return year is the aggregate of the net operating loss carryovers and carrybacks to the year. The net operating loss carryovers and carrybacks consist of—

(i) Any CNOLs (as defined in paragraph (e) of this section) of the consolidated group; and

(ii) Any net operating losses (or NOLs) of the members arising in separate return years.

(2) Application of section 172 for computing net operating loss deductions—(i) Overview. For purposes of §1.1502-11(a)(2) (regarding a CNOL deduction), the rules of section 172 regarding the use of net operating losses are taken into account as provided by this paragraph (a)(2) in calculating the consolidated taxable income of a group for a particular consolidated return year. More specifically, in computing taxable income for taxable years beginning after December 31, 2020, section 172(a) generally limits the deductibility of net operating losses arising in taxable years beginning after December 31, 2017 (post-2017 NOLs). However, these limitations do not apply to net operating losses arising in taxable years beginning before January 1, 2018 (pre-2018 NOLs). Therefore, in any particular consolidated return year beginning after December 31, 2020, the group’s CNOL deduction includes CNOLs arising in taxable years beginning before January 1, 2018 (pre-2018 CNOLs), without limitation under section 172(a). Following the deduction of pre-2018 CNOLs, this paragraph (a)(2) applies to compute the maximum amount of CNOLs from taxable years beginning after December 31, 2017 (post-2017 CNOLs), that can be deducted against taxable income in a consolidated return year beginning after December 31, 2020 (post-2017 CNOL deduction limit). See section 172(a)(2)(A) and (B).

(ii) Computation of the 80-percent limitation and special rule for nonlife insurance companies—(A) Determinations based on status of group members. If a portion of a post-2017 CNOL is carried back or carried over to a consolidated return year beginning after December 31, 2020, whether the members of the group include nonlife insurance companies, other types of corporations, or both determines whether section 172(a) (including the limitation described in section 172(a)(2)(B)(ii) (80-percent limitation)), section 172(f) (providing special rules for nonlife insurance companies), or both, apply to the group for the consolidated return year.

(B) Determination of post-2017 CNOL deduction limit. The post-2017 CNOL deduction limit is determined under paragraph (a)(2)(iii) of this section by applying section 172(a)(2)(B)(ii) (that is, the 80-percent limitation), section 172(f) (that is, the special rule for nonlife insurance companies), or both, to the group’s consolidated taxable income for that year.

(C) Inapplicability of 80-percent limitation. The 80-percent limitation does not apply to CNOL deductions taken in taxable years beginning before January 1, 2021, or to CNOLs arising in taxable years beginning before January 1, 2018 (that is, pre-2018 CNOLs). See section 172(a).

(iii) Computations under sections 172(a)(2)(B) and 172(f). This paragraph (a)(2)(iii) provides rules for applying sections 172(f) and 172(a)(2)(B) to consolidated return years beginning after December 31, 2020 (that is, for computing the post-2017 CNOL deduction limit). Section 172(f) applies to income of nonlife insurance company members, whereas section 172(a)(2)(B)(ii) applies to income of members that are not nonlife insurance companies. Thus, this paragraph (a)(2)(iii) provides specific rules for groups with no nonlife insurance company members, only nonlife insurance company members, or a combination of nonlife insurance company members and other members. For groups with both nonlife insurance company members and life insurance company members, see paragraph (b)(2)(iv)(E) of this section.

(A) Groups without nonlife insurance company members. If no member of a group is a nonlife insurance company during a particular consolidated return year beginning after December 31, 2020, section 172(a)(2)(B)(ii) (that is, the 80-percent limitation) applies to all income of the group for that year. Therefore, the post-2017 CNOL deduction limit for the group for that year is the lesser of—

(1) The aggregate amount of post-2017 NOLs carried to that year; or

(2) The amount determined by multiplying—

(i) 80 percent, by

(ii) Consolidated taxable income for the group for that year (determined without regard to any deductions under sections 172, 199A, and 250) less the aggregate amount of pre-2018 NOLs carried to that year.

(B) Groups comprised solely of nonlife insurance companies. If a group is comprised solely of nonlife insurance companies during a particular consolidated return year beginning after December 31, 2020, section 172(f) applies to all income of the group for that year. Therefore, the post-2017 CNOL deduction limit for the group for that year equals the lesser of—

(1) The aggregate amount of post-2017 NOLs carried to that year, or

(2) Consolidated taxable income less the aggregate amount of pre-2018 NOLs carried to that year.

(C) Groups that include both nonlife insurance companies and other corporations—(1) General rule. Except as provided in paragraph (a)(2)(iii)(C)(5) of this section, if a group has at least one member that is a nonlife insurance company and at least one member that is not a nonlife insurance company during a particular consolidated return year beginning after December 31, 2020, the post-2017 CNOL deduction limit for the group for that year equals the lesser of—

(i) The aggregate amount of post-2017 NOLs carried to that year, or

(ii) The sum of the amounts in the income pools determined under paragraphs (a)(2)(iii)(C)(2) and (3) of this section.

(2) Residual income pool. The amount determined under this paragraph (a)(2)(iii)(C)(2) (residual income pool) is eighty percent of the excess of—

(i) The consolidated taxable income of the group for a consolidated return year beginning after December 31, 2020, determined without regard to any income, gain, deduction, or loss of members that are nonlife insurance companies and without regard to any deductions under sections 172, 199A, and 250, over

(ii) The aggregate amount of pre-2018 NOLs carried to that year that are allocated to this income pool under paragraph (a)(2)(iii)(C)(4) of this section (that is, by applying the 80-percent limitation). See section 172(a)(2)(B)(ii).

(3) Nonlife income pool. The amount determined under this paragraph (a)(2)(iii)(C)(3) (nonlife income pool) is the consolidated taxable income of the group for a consolidated return year beginning after December 31, 2020, determined without regard to any income, gain, deduction, or loss of members included in the computation under paragraph (a)(2)(iii)(C)(2) of this section, less the aggregate amount of pre-2018 NOLs carried to that year that are allocated to this income pool under paragraph (a)(2)(iii)(C)(4) of this section. See section 172(f).

(4) Pro rata allocation of pre-2018 NOLs between pools of income. For purposes of paragraphs (a)(2)(iii)(C)(2) and (3) of this section, the aggregate amount of pre-2018 NOLs carried to any particular consolidated return year beginning after December 31, 2020, is prorated between the residual income pool and the nonlife income pool based on the relative amounts of positive income of those two pools. For example, if $30 of pre-2018 NOLs is carried over to a consolidated return year in which the residual income pool contains $75 and the nonlife income pool contains $150, the residual income pool is allocated $10 of the pre-2018 NOLs ($30 x $75/($75 + $150), or $30 x 1/3), and the nonlife income pool is allocated the remaining $20 of pre-2018 NOLs ($30 x $150/($75 + $150), or $30 x 2/3).

(5) Exception. The post-2017 CNOL deduction limit for the group for a consolidated return year is determined under this paragraph (a)(2)(iii)(C)(5) if the amounts computed under paragraphs (a)(2)(iii)(C)(2) and (3) of this section for that year are not both positive.

(i) Positive residual income pool and negative nonlife income pool. This paragraph (a)(2)(iii)(C)(5)(i) applies if the amount computed under paragraph (a)(2)(iii)(C)(2) of this section for the residual income pool is positive and the amount computed under paragraph (a)(2)(iii)(C)(3) of this section for the nonlife income pool is negative. If this paragraph (a)(2)(iii)(C)(5)(i) applies, the post-2017 CNOL deduction limit for the group for a consolidated return year equals the lesser of the aggregate amount of post-2017 NOLs carried to that year, or 80 percent of the consolidated taxable income of the entire group (determined without regard to any deductions under sections 172, 199A, and 250) after subtracting the aggregate amount of pre-2018 NOLs carried to that year (that is, by applying the 80-percent limitation). See section 172(a)(2)(B).

(ii) Positive nonlife income pool and negative residual income pool. If the amount computed under paragraph (a)(2)(iii)(C)(3) of this section for the nonlife income pool is positive and the amount computed under paragraph (a)(2)(iii)(C)(2) of this section for the residual income pool is negative, the post-2017 CNOL deduction limit for the group for a consolidated return year equals the lesser of the aggregate amount of post-2017 NOLs carried to that year, or the consolidated taxable income of the entire group less the aggregate amount of pre-2018 NOLs carried to that year. See section 172(f).

(b) * * *

(1) Carryovers and carrybacks generally. The net operating loss carryovers and carrybacks to a taxable year are determined under the principles of, and are subject to any limitations under, section 172 and this section. Thus, losses permitted to be absorbed in a consolidated return year generally are absorbed in the order of the taxable years in which they arose, and losses carried from taxable years ending on the same date, and which are available to offset consolidated taxable income for the year, generally are absorbed on a pro rata basis. In addition, except as otherwise provided in this section, the amount of any CNOL absorbed by the group in any year is apportioned among members based on the percentage of the CNOL eligible for carryback or carryover that is attributable to each member as of the beginning of the year. The percentage of the CNOL attributable to a member is determined pursuant to paragraph (b)(2)(iv)(B) of this section. Additional rules provided under the Internal Revenue Code or regulations also apply. See, for example, section 382(l)(2)(B) (if losses are carried from the same taxable year, losses subject to limitation under section 382 are absorbed before losses that are not subject to limitation under section 382). See paragraph (c)(1)(iii)(B) of this section, (Example 2), for an illustration of pro rata absorption of losses subject to a SRLY limitation.

(2) * * *

(iv) Operating rules. (A) Amount of CNOL attributable to a member. The amount of a CNOL that is attributable to a member equals the product obtained by multiplying the CNOL and the percentage of the CNOL attributable to the member.

(B) Percentage of CNOL attributable to a member—(1) In general. Except as provided in paragraph (b)(2)(iv)(B)(2) of this section, the percentage of the CNOL for the consolidated return year attributable to a member equals the separate net operating loss of the member for the consolidated return year divided by the sum of the separate net operating losses for that year of all members having such losses for that year. For this purpose, the separate net operating loss of a member is determined by computing the CNOL by reference to only the member’s items of income, gain, deduction, and loss, including the member’s losses and deductions actually absorbed by the group in the consolidated return year (whether or not absorbed by the member).

(2) Recomputed percentage. If, for any reason, a member’s portion of a CNOL is absorbed or reduced on a non-pro rata basis (for example, under §1.1502-11(b) or (c), paragraph (b)(2)(iv)(C) of this section, §1.1502-28, or 1.1502-36(d), or as the result of a carryback to a separate return year), the percentage of the CNOL attributable to each member is recomputed. In addition, if a member with a separate net operating loss ceases to be a member, the percentage of the CNOL attributable to each remaining member is recomputed. The recomputed percentage of the CNOL attributable to each member equals the remaining CNOL attributable to the member at the time of the recomputation divided by the sum of the remaining CNOL attributable to all of the remaining members at the time of the recomputation. For purposes of this paragraph (b)(2)(iv)(B)(2), a CNOL that is permanently disallowed or eliminated is treated as absorbed.

(C) Net operating loss carryovers and carrybacks—(1) General rules. Subject to the rules regarding allocation of special status losses under paragraph (b)(2)(iv)(D) of this section—

(i) Nonlife insurance companies. The portion of a CNOL attributable to any members of the group that are nonlife insurance companies is carried back or carried over under the rules in section 172(b) applicable to nonlife insurance companies.

(ii) Corporations other than nonlife insurance companies. The portion of a CNOL attributable to any other members of the group is carried back or carried over under the rules in section 172(b) applicable to corporations other than nonlife insurance companies.

(2) Recomputed percentage. For rules governing the recomputation of the percentage of a CNOL attributable to each remaining member if any portion of the CNOL attributable to a member is carried back under section 172(b)(1)(B) or (C) and absorbed on a non-pro rata basis, see paragraph (b)(2)(iv)(B)(2) of this section.

(D) Allocation of special status losses. The amount of the group’s CNOL that is determined to constitute a farming loss (as defined in section 172(b)(1)(B)(ii)) or any other net operating loss that is subject to special carryback or carryover rules (special status loss) is allocated to each member separately from the remainder of the CNOL based on the percentage of the CNOL attributable to the member, as determined under paragraph (b)(2)(iv)(B) of this section. This allocation 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. This paragraph (b)(2)(iv)(D) applies only with regard to losses for which the special carryback or carryover rules are dependent on the type of expense generating the loss, rather than on the special status of the entity to which the loss is allocable. See section 172(b)(1)(C) and paragraph (b)(2)(iv)(C)(1)(i) of this section (applicable to losses of nonlife insurance companies). This paragraph (b)(2)(iv)(D) does not apply to farming losses incurred by a consolidated group in any taxable year beginning after December 31, 2017, and before January 1, 2021.

(E) Coordination with rules for life-nonlife groups under §1.1502-47. For groups that include at least one member that is a life insurance company and for which an election is in effect under section 1504(c)(2), any computation of the 80-percent limitation under paragraph (a)(2)(iii)(C) of this section is computed only with respect to items of income, gain, deduction, and loss of the members of the nonlife subgroup (as defined in §1.1502-47(b)(9)). For rules regarding the use of CNOLs of the nonlife subgroup to offset life insurance company taxable income of the life subgroup (each as defined in §1.1502-47(b)), or the use of CNOLs of the life subgroup to offset consolidated taxable income of the nonlife subgroup, see generally section 1503(c)(1) and §1.1502-47.

(v) Examples. For purposes of the examples in this paragraph (b)(2)(v), unless otherwise stated, all groups file consolidated returns, all corporations have calendar taxable years, all losses are farming losses within the meaning of section 172(b)(1)(B)(ii), all taxable years begin after December 31, 2020, the facts set forth the only corporate activity, value means fair market value and the adjusted basis of each asset equals its value, all transactions are with unrelated persons, and the application of any limitation or threshold under section 382 is disregarded. The principles of this paragraph (b) are illustrated by the following examples:

* * * * *

(D) Example 4: Allocation of a CNOL arising in a consolidated return year beginning after December 31, 2020. (1) P is the common parent of a consolidated group that includes S. Neither P nor S is a nonlife insurance company. The P group also includes nonlife insurance companies PC1, PC2, and PC3. In the P group’s 2021 consolidated return year, all members except S have separate net operating losses, and the P group’s CNOL in that year is $40. No member of the P group engages in farming activities. See section 172(b)(1)(B)(ii).

(2) Under paragraphs (b)(1) and (b)(2)(iv)(B)(1) of this section, for purposes of carrying losses to other taxable years, the P group’s $40 CNOL is allocated pro rata among the group members that have separate net operating losses. Under paragraph (b)(2)(iv)(C) of this section, those respective portions of the CNOL attributable to PC1, PC2, and PC3 (that is, members that are nonlife insurance companies) are carried back to each of the two preceding taxable years and then carried over to each of the 20 subsequent taxable years. See section 172(b)(1)(C). The portion attributable to P (which is not a nonlife insurance company) may not be carried back but is carried over to future years. See section 172(b)(1)(A).

(E) Example 5: Allocation of a CNOL arising in a consolidated return year beginning before January 1, 2021. The facts are the same as in paragraph (b)(2)(v)(D)(1) of this section, except that the P group incurred the CNOL during the P group’s 2020 consolidated return year. The allocation among the P group members of the CNOL described in paragraph (b)(2)(v)(D)(2) of this section would be the same. However, those respective portions of the CNOL attributable to PC1, PC2, and PC3 (that is, members that are nonlife insurance companies) will be carried back to each of the five preceding taxable years and then carried over to each of the 20 subsequent taxable years. See section 172(b)(1)(C) and section 172(b)(1)(D)(i). The portion attributable to P (which is not a nonlife insurance company) will be carried back to each of the five preceding taxable years and then carried over to future years. See section 172(b)(1)(A) and section 172(b)(1)(D)(i).

(F) Example 6: CNOL deduction and application of section 172. (1) P (a type of corporation other than a nonlife insurance company) is the common parent of a consolidated group that includes PC1 (a nonlife insurance company). P and PC1 were both incorporated in Year 1 (a year beginning after December 31, 2020). In Year 1, P and PC1 have separate taxable income of $20 and $25, respectively. As a result, the P group has Year 1 consolidated taxable income of $45. In Year 2, P has separate taxable income of $24, and PC1 has a separate taxable loss of $40, resulting in a P group CNOL of $16. Additionally, in Year 3, P has separate taxable income of $15, and PC1 has a separate taxable loss of $45, resulting in a P group CNOL of $30. No member of the P group engages in farming activities. See section 172(b)(1)(B)(ii).

(2) Under paragraph (b)(2)(iv)(B) of this section, the P group’s Year 2 CNOL and Year 3 CNOL are entirely attributable to PC1, a nonlife insurance company. Therefore, under section 172(b)(1)(C)(i), the entire amount of each of these CNOLs is eligible to be carried back to Year 1.

(3) Under paragraph (a)(2)(ii) of this section, the amount of the Year 2 CNOL that may be used by the P group in Year 1 is determined by taking into account the status (nonlife insurance company or other type of corporation) of the member that has separate taxable income composing in whole or in part the P group’s consolidated taxable income. Because the P group includes both a nonlife insurance company member and a member that is not a nonlife insurance company, paragraph (a)(2)(iii)(C) of this section applies to determine the computation of the post-2017 CNOL deduction limit for the group for Year 1. Therefore, the 80-percent limitation is applied to the residual income pool, which consists of the taxable income of P, a type of corporation other than a nonlife insurance company. Under the 80-percent limitation, the maximum amount of P’s Year 1 income that may be offset by the P group’s post-2017 CNOLs is $16, which equals 80 percent of the excess of P’s taxable income for Year 1 ($20) over the aggregate amount of pre-2018 NOLs allocable to P ($0) (80 percent x ($20 - $0)). See paragraph (a)(2)(iii)(C)(2) and (a)(2)(iii)(C)(4) of this section. PC1 is a nonlife insurance company to which section 172(f), rather than the 80-percent limitation in section 172(a)(2)(B)(ii), applies. Therefore, the maximum amount of PC1’s Year 1 income that may be offset by the P group’s post-2017 CNOLs is $25, which equals the excess of PC1’s taxable income for Year 1 ($25) over the aggregate amount of pre-2018 NOLs allocable to PC1 ($0). See paragraph (a)(2)(iii)(C)(3) and (4) of this section.

(4) Based on paragraph (a)(2)(iii)(C) of this section and the analysis set forth in paragraph (b)(2)(v)(F)(3) of this section, at the end of Year 2, the P group’s post-2017 CNOL deduction limit for Year 1 is the lesser of the aggregate amount of post-2017 NOLs carried to Year 1 ($16), or $41 ($16 + $25). Therefore, the P group can offset $16 of its Year 1 income with its CNOL carryback from Year 2.

(5) When the Year 3 CNOL is carried back to Year 1, the P group’s post-2017 CNOL deduction limit for Year 1 is the lesser of $46 (the aggregate amount of post-2017 NOLs carried to Year 1) or $41 ($16 + $25; see the computation in paragraph (b)(2)(v)(F)(3) of this section). Thus, the total amount of the P group’s Year 1 income that may be offset by the P group’s Year 2 and Year 3 CNOLs is $41 ($16 from Year 2 + $25 from Year 3). As a result, the P group reports $4 of income ($45 - $41) in Year 1 that is ineligible for offset by any other NOLs. The P group carries over its remaining $5 CNOL ($46 - $41) to future years.

(G) Example 7: Pre-2018 and post-2017 CNOLs. (1) P is the common parent of a consolidated group. No member of the P group is a nonlife insurance company or is engaged in a farming business, and no member of the P group has a loss that is subject to a SRLY limitation. The P group had the following consolidated taxable income or CNOL for the following taxable years:

 

(2) Under section 172(a)(1), all $30 of the P group’s 2018 consolidated taxable income is offset by the 2017 CNOL carryover without limitation. The remaining $60 of the P group’s 2017 CNOL is carried over to 2021 under section 172(b)(1)(A)(ii)(I).

(3) Under section 172(b)(1)(D)(i)(I), the P group’s $40 2019 CNOL is carried back to the five taxable years preceding the year of the loss. Thus, the P group’s $40 2019 CNOL is carried back to offset $40 of its 2014 consolidated taxable income.

(4) Under section 172(a)(2) and paragraph (a)(2)(i) of this section, the P group’s CNOL deduction for 2021 equals the aggregate amount of pre-2018 NOLs carried to 2021 plus the group’s post-2017 CNOL deduction limit. The P group has $60 of pre-2018 NOLs carried to 2021 ($90 - $30). Because no member of the P group is a nonlife insurance company, paragraph (a)(2)(iii)(A) of this section applies to determine the computation of the group’s post-2017 CNOL deduction limit for 2021. See also section 172(a)(2)(B). Therefore, the post-2017 CNOL deduction limit of the P group for 2021 is $48, which equals the lesser of the aggregate amount of post-2017 NOLs carried to 2021 ($100), or 80 percent of the excess of the P group’s consolidated taxable income for that year computed without regard to any deductions under sections 172, 199A, and 250 ($120) over the aggregate amount of pre-2018 NOLs carried to 2021 ($60) (that is, 80 percent x $60). Thus, the P group’s CNOL deduction for 2021 equals $108 ($60 pre-2018 NOLs carried to 2021 + $48 post-2017 CNOL deduction limit). See section 172(a)(2) and paragraph (a)(2)(i) of this section. The P group offsets $108 of its $120 of 2021 consolidated taxable income, resulting in $12 of consolidated taxable income in 2021. The remaining $52 of the P group’s 2020 CNOL ($100 - $48) is carried over to future taxable years. See section 172(b)(1)(A)(ii)(II).

(3) * * *

(ii) * * *

(C) Waiver of carryback period for losses in taxable years to which statutorily amended carryback rules apply. For further information, see §1.1502-21T(b)(3)(ii)(C).

(D) Examples. For further information, see §1.1502-21T(b)(3)(ii)(D).

* * * * *

(c) * * *

(1) * * *

(i) General rule. Except as provided in paragraph (g) of this section (relating to an overlap with section 382), the aggregate of the net operating loss carryovers and carrybacks of a member (SRLY member) arising (or treated as arising) in SRLYs (SRLY NOLs) that are included in the CNOL deductions for all consolidated return years of the group under paragraph (a) of this section may not exceed the aggregate consolidated taxable income for all consolidated return years of the group determined by reference to only the member’s items of income, gain, deduction, and loss (cumulative register). For this purpose—

* * * * *

(E) If a limitation on the amount of taxable income that may be offset under section 172(a) (see paragraph (a)(2) of this section) applies in a taxable year to a member whose carryovers or carrybacks are subject to a SRLY limitation (SRLY member), the amount of net operating loss subject to a SRLY limitation that is available for use by the group in that year is limited to the percentage of the balance in the cumulative register that would be available for offset under section 172(a) if the SRLY member filed a separate return and reported as taxable income in that year the amount contained in the cumulative register. For example, assume that a consolidated group has a SRLY member that is a corporation other than a nonlife insurance company, and that the SRLY member has a SRLY NOL that arose in a taxable year beginning after December 31, 2017 (post-2017 NOL). The group’s consolidated taxable income for a consolidated return year beginning after December 31, 2020 is $200, but the cumulative register has a positive balance of only $120 (and no other net operating loss carryovers or carrybacks are available for the year). Because the SRLY limitation would be $96 ($120 x 80 percent), only $96 of SRLY loss may be used, rather than $160 ($200 x 80 percent). In addition, to the extent that this paragraph (c)(1)(i)(E) applies, the cumulative register is decreased by the full amount of income required under section 172(a) to support the amount of SRLY NOL absorption. See, for example, paragraph (c)(1)(iii)(A) and (B) of this section for examples illustrating the application of this rule.

* * * * *

(iii) Examples. For purposes of the examples in this paragraph (c)(1)(iii), no corporation is a nonlife insurance company and, unless otherwise specified, all taxable years begin after December 31, 2020, and all CNOLs arise in taxable years beginning after December 31, 2020. The principles of this paragraph (c)(1) are illustrated by the following examples:

(A) * * *

(2) T’s $100 net operating loss carryover from Year 1 arose in a SRLY. See §1.1502-1(f)(2)(iii). P’s acquisition of T was not an ownership change as defined by section 382(g). Thus, the $100 net operating loss carryover is subject to the SRLY limitation in paragraph (c)(1) of this section. The positive balance of the cumulative register of T for Year 2 equals the consolidated taxable income of the P group determined by reference to only T’s items, or $70. However, due to the 80-percent limitation and the application of paragraph (c)(1)(i)(E) of this section, the SRLY limitation is $56 ($70 x 80 percent). No losses from equivalent years are available, and the P group otherwise has sufficient consolidated taxable income to support the CNOL deduction ($300 x 80 percent = $240). Therefore, $56 of the SRLY net operating loss is included under paragraph (a) of this section in the P group’s CNOL deduction for Year 2. Although only $56 is absorbed, the cumulative register of T is reduced by $70, the full amount of income necessary to support the $56 deduction after taking into account the 80-percent limitation ($70 x 80 percent = $56).

* * * * *

(B) * * *

(2) P’s Year 1, Year 2, and Year 3 are not SRLYs with respect to the P group. See §1.1502-1(f)(2)(i). Thus, P’s $40 net operating loss arising in Year 1 and $120 net operating loss arising in Year 3 are not subject to the SRLY limitation under paragraph (c) of this section. Although the P group has $160 of taxable income in Year 4, the 80-percent limitation reduces the P group’s net operating loss deduction in that year to $128 ($160 x 80 percent). Under the principles of section 172, paragraph (b) of this section requires that P’s $40 loss arising in Year 1 be the first loss absorbed by the P group in Year 4. Absorption of this loss leaves $88 ($128 - $40) of the P group’s Year 4 consolidated taxable income available for offset by loss carryovers.

(3) T’s Year 2 and Year 3 are SRLYs with respect to the P group. See §1.1502-1(f)(2)(ii). P’s acquisition of T was not an ownership change as defined by section 382(g). Thus, T’s $50 net operating loss arising in Year 2 and $60 net operating loss arising in Year 3 are subject to the SRLY limitation. The positive balance of the cumulative register of T for Year 4 equals the P group’s consolidated taxable income determined by reference to only T’s items, or $70. Under paragraph (c)(1)(i)(E) of this section, after taking into account the 80-percent limitation, T’s SRLY limitation is $56 ($70 x 80 percent). Therefore, the P group can absorb up to $56 of T’s SRLY net operating losses in Year 4. Under the principles of section 172, T’s $50 SRLY net operating loss from Year 2 is included under paragraph (a) of this section in the P group’s CNOL deduction for Year 4. After absorption of this loss, under paragraph (c)(1)(i) of this section, $6 of SRLY limit remains in Year 4 ($56 - $50). Further, the total amount of Year 4 consolidated taxable income available for offset by other loss carryovers under section 172(a) is $38 ($88 - $50).

(4) P and T each carry over net operating losses to Year 4 from a taxable year ending on the same date (that is, Year 3). The losses carried over from Year 3 total $180. However, the remaining Year 4 SRLY limit is $6. Therefore, the total amount of loss available for absorption is $126 ($120 allocable to P and $6 allocable to T). Under paragraph (b) of this section, the losses available for absorption that are carried over from Year 3 are absorbed on a pro rata basis, even though one loss arises in a SRLY and the other loss does not. Thus, $36.19 of P’s Year 3 loss is absorbed ($120/($120 + $6)) x $38 = $36.19. In addition, $1.81 of T’s Year 3 loss is absorbed ($6/($120 + $6)) x $38 = $1.81.

(5) After deduction of T’s SRLY net operating losses in Year 4, the cumulative register of T is adjusted pursuant to paragraph (c)(1)(i)(E) of this section. A total of $51.81 of SRLY net operating losses were absorbed in Year 4 ($50 + $1.81). After taking into account the 80-percent limitation, the amount of income necessary to support this deduction is $64.76 ($64.76 x 80 percent = $51.81). Therefore, the cumulative register of T is decreased by $64.76, and $5.24 remains in the cumulative register ($70 - $64.76).

(6) P carries its remaining $83.81 ($120 - $36.19) Year 3 net operating loss and T carries its remaining $58.19 ($60 - $1.81) Year 3 net operating loss over to Year 5. Assume that, in Year 5, the P group has $90 of consolidated taxable income (computed without regard to the CNOL deduction). The P group’s consolidated taxable income determined by reference to only T’s items is a CNOL of $4. Therefore, the positive balance of the cumulative register of T in Year 5 equals $1.24 ($5.24 - $4). Under paragraph (c)(1)(i)(E) of this section, after taking into account the 80-percent limitation, T’s SRLY limitation is $0.99 ($1.24 x 80 percent). For Year 5, the total amount of Year 5 consolidated taxable income available for offset by loss carryovers as a result of the 80-percent limitation is $72 ($90 x 80 percent). Under paragraph (b) of this section, the losses carried over from Year 3 are absorbed on a pro rata basis, even though one loss arises in a SRLY and the other loss does not. Therefore, $71.16 of P’s Year 3 loss is absorbed (($83.81/($83.81 + $0.99)) x $72 = $71.16). In addition, $0.84 of T’s Year 3 losses is absorbed (($0.99/($83.81 + $0.99)) x $72 = $0.84).

* * * * *

(D) * * *

(2) Under §1.1502-15(a), T’s $100 of ordinary loss in Year 3 constitutes a built-in loss that is subject to the SRLY limitation under paragraph (c) of this section. The amount of the limitation is determined by treating the deduction as a net operating loss carryover from a SRLY. The built-in loss is therefore subject to both a SRLY limitation and the 80-percent limitation for Year 3. The built-in loss is treated as a net operating loss carryover solely for purposes of determining the extent to which the loss is not allowed by reason of the SRLY limitation, and for all other purposes the loss remains a loss arising in Year 3. See §1.1502-21(c)(1)(i)(D). Consequently, under paragraph (b) of this section, the built-in loss is absorbed by the P group before the net operating loss carryover from Year 1 is absorbed. The positive balance of the cumulative register of T for Year 3 equals the P group’s consolidated taxable income determined by reference to only T’s items, or $60. Under paragraph (c)(1)(i)(E) of this section, after taking into account the 80-percent limitation, the SRLY limitation for Year 3 is $48 ($60 x 80 percent). Therefore, $48 of the built-in loss is absorbed by the P group. None of T’s $100 SRLY net operating loss carryover from Year 1 is allowed.

(3) After deduction of T’s $48 SRLY built-in loss in Year 4, the cumulative register of T is adjusted pursuant to paragraph (c)(1)(i)(E) of this section. After taking into account the 80-percent limitation, the amount of income necessary to support this deduction is $60 ($60 x 80 percent = $48). Therefore, the cumulative register of T is decreased by $60, and zero remains in the cumulative register ($60 - $60).

(4) Under §1.1502-15(a), the $52 balance of the built-in loss that is not allowed in Year 3 because of the SRLY limitation and the 80-percent limitation is treated as a $52 net operating loss arising in Year 3 that is subject to the SRLY limitation because, under paragraph (c)(1)(ii) of this section, Year 3 is treated as a SRLY. The built-in loss is carried to other years in accordance with the rules of paragraph (b) of this section. The positive balance of the cumulative register of T for Year 4 equals $40 (zero from Year 3 + $40). Under paragraph (c)(1)(i)(E) of this section, after taking into account the 80-percent limitation, the SRLY limitation for Year 4 is $32 ($40 x 80 percent). Therefore, under paragraph (c) of this section, $32 of T’s $100 net operating loss carryover from Year 1 is included in the CNOL deduction under paragraph (a) of this section in Year 4.

(5) After deduction of T’s $32 SRLY net operating loss in Year 4, the cumulative register of T is adjusted pursuant to paragraph (c)(1)(i)(E) of this section. After taking into account the 80-percent limitation, the amount of income necessary to support this deduction is $40 ($40 x 80 percent = $32). Therefore, the cumulative register is decreased by $40, and zero remains in the cumulative register ($40 - $40).

(E) * * *

(2) For Year 2, the P group computes separate SRLY limits for each of T’s SRLY carryovers from Year 1. The group determines its ability to use its capital loss carryover before it determines its ability to use its ordinary loss carryover. Under section 1212, because the P group has no Year 2 capital gain, it cannot absorb any capital losses in Year 2. T’s Year 1 net capital loss and the P group’s Year 2 consolidated net capital loss (all of which is attributable to T) are carried over to Year 3.

(3) The P group’s ability to deduct net operating losses in Year 2 is subject to the 80-percent limitation, based on the P group’s consolidated taxable income for the year. Thus, the group’s limitation for Year 2 is $72 ($90 x 80 percent). However, use of the Year 1 net operating loss also is subject to the SRLY limitation. The positive balance of the cumulative register of T applicable to SRLY net operating losses for Year 2 equals the P group’s consolidated taxable income determined by reference to only T’s items, or $60. Under paragraph (c)(1)(i)(E) of this section, after taking into account the 80-percent limitation, the SRLY limitation for Year 2 is $48 ($60 x 80 percent). Therefore, only $48 of T’s Year 1 SRLY net operating loss is absorbed by the P group in Year 2. T carries over its remaining $52 of its Year 1 loss to Year 3.

(4) After deduction of T’s SRLY net operating losses in Year 2, the net operating loss cumulative register is adjusted pursuant to paragraph (c)(1)(i)(E) of this section. The P group deducted $48 of T’s SRLY net operating losses in Year 2. After taking into account the 80-percent limitation, the amount of taxable income necessary to support this deduction is $60 ($60 x 80 percent = $48). Therefore, the net operating loss cumulative register of T is decreased by $60, and zero remains in the net operating loss cumulative register ($60 - $60).

(5) For Year 3, the P group again computes separate SRLY limits for each of T’s SRLY carryovers from Year 1. The group has consolidated net capital gain (without taking into account a net capital loss carryover deduction) of $30. Under §1.1502-22(c), the aggregate amount of T’s $50 capital loss carryover from Year 1 that is included in computing the P group’s consolidated net capital gain for all years of the group (in this case, Years 2 and 3) may not exceed $30 (the aggregate consolidated net capital gain computed by reference only to T’s items, including losses and deductions actually absorbed (that is, $30 of capital gain in Year 3)). Thus, the P group may include $30 of T’s Year 1 capital loss carryover in its computation of consolidated net capital gain for Year 3, which offsets the group’s capital gains for Year 3. T carries over its remaining $20 of its Year 1 capital loss to Year 4. Therefore, the capital loss cumulative register of T is decreased by $30, and zero remains in the capital loss cumulative register ($30 - $30). Further, because the net operating loss cumulative register includes all taxable income of T included in the P group, as well as all absorbed losses of T (including capital items), a zero net increase occurs in the net operating loss cumulative register. The P group carries over the Year 2 consolidated net capital loss to Year 4.

(6) The P group’s ability to deduct net operating losses in Year 3 is subject to the 80-percent limitation, based on the P group’s consolidated taxable income for the year. Thus, the P group’s taxable income for Year 3 that can be offset, before use of net operating losses, is $40 (80 percent x the sum of zero capital gain, after use of the capital loss carryover, plus $50 of ordinary income). However, use of the Year 1 net operating loss also is subject to the SRLY limitation. The positive balance of the cumulative register of T applicable to SRLY net operating losses for Year 3 equals the P group’s consolidated taxable income determined by reference only to T’s items, or $40. This amount equals the sum obtained by adding the zero carryover from Year 2, a net inclusion of zero from capital items implicated in Year 3 ($30 - $30), and $40 of taxable income in Year 3. Under paragraph (c)(1)(i)(E) of this section, after taking into account the 80-percent limitation, the SRLY limitation for Year 3 is $32 ($40 x 80 percent). Therefore, only $32 of the Year 1 net operating loss is absorbed by the P group in Year 3. T carries over its remaining $20 of its Year 1 loss to Year 4.

(F) Example 6: Pre-2018 NOLs and post-2017 NOLs. (1) Individual A owns P. On January 1, 2017, A forms T. P and T are calendar-year taxpayers. In 2017, T sustains a $100 net operating loss that is carried over. During 2018, 2019, and 2020, T deducts a total of $90 of its 2017 net operating loss against its taxable income, and T carries over the remaining $10 of its 2017 net operating loss. In 2021, T sustains a net operating loss of $50. On December 31, 2021, P acquires all the stock of T, and T becomes a member of the P group. The P group has $300 of consolidated taxable income in 2022 (computed without regard to the CNOL deduction). Such consolidated taxable income would be $70 if determined by reference to only T’s items. The P group has no other SRLY net operating loss carryovers or CNOL carryovers.

(2) T’s remaining $10 of net operating loss carryover from 2017 and its $50 net operating loss carryover from 2021 are both SRLY losses in the P group. See §1.1502-1(f)(2)(iii). P’s acquisition of T was not an ownership change as defined by section 382(g). Thus, T’s net operating loss carryovers are subject to the SRLY limitation in paragraph (c)(1) of this section. The SRLY limitation for the P group’s 2022 consolidated return year is consolidated taxable income determined by reference to only T’s $70 of items.

(3) Because T’s oldest (2017) carryover was sustained in a year beginning before January 1, 2018, its use is not subject to limitation under section 172(a)(2)(B). Therefore, all $10 of T’s 2017 SRLY net operating loss (that is, a pre-2018 NOL) is included under paragraph (a) of this section in the P group’s CNOL deduction for 2022. After deduction of T’s $10 SRLY net operating loss from 2017, the cumulative register of T is reduced on a dollar-for-dollar basis, pursuant to paragraph (c)(1)(i) of this section. Therefore, the cumulative register of T is decreased by $10, and $60 remains in the cumulative register ($70 - $10).

(4) The P group’s deduction of T’s 2021 net operating loss is subject to both a SRLY limitation and the 80-percent limitation under section 172(a)(2)(B)(ii). Therefore, the total limitation on the use of T’s 2021 net operating loss in the P group is $48 (the remaining cumulative register of $60 x 80 percent). No losses from equivalent years are available, and the P group otherwise has sufficient consolidated taxable income to support the CNOL deduction ($290 x 80 percent = $232). Therefore, $48 of T’s 2021 SRLY net operating loss is included under paragraph (a) of this section in the P group’s CNOL deduction for 2022. The remaining $2 of T’s 2021 SRLY net operating loss ($50 - $48) is carried over to the P group’s 2023 consolidated return year.

(5) After deduction of T’s $48 SRLY NOL in 2022, the cumulative register of T is adjusted pursuant to paragraph (c)(1)(i)(E) of this section. After taking into account the 80-percent limitation, the amount of income necessary to support this deduction is $60 ($60 x 80 percent = $48). Therefore, the cumulative register of T is decreased by $60, and zero remains in the cumulative register ($60 - $60).

(2) * * *

(v) Coordination with other limitations. This paragraph (c)(2) does not allow a net operating loss to offset income to the extent inconsistent with other limitations or restrictions on the use of losses, such as a limitation based on the nature or activities of members. For example, a net operating loss may not offset income in excess of any limitations under section 172(a) and paragraph (a)(2) of this section. Additionally, any dual consolidated loss may not reduce the taxable income to an extent greater than that allowed under section 1503(d) and §§ 1.1503(d)-1 through 1.1503(d)-8. See also §1.1502-47(k) (relating to preemption of rules for life-nonlife groups).

* * * * *

(viii) Examples. For purposes of the examples in this paragraph (c)(2)(viii), no corporation is a nonlife insurance company or has any farming losses. The principles of this paragraph (c)(2) are illustrated by the following examples:

* * * * *

(B) * * *

(3) In Year 4, the M group has $10 of consolidated taxable income (computed without regard to the CNOL deduction for Year 4). That consolidated taxable income would be $45 if determined by reference only to the items of P, S, and T, the members included in the SRLY subgroup with respect to P’s loss carryover. Therefore, the positive balance of the cumulative register of the P SRLY subgroup for Year 4 equals $45 and, due to the application of the 80-percent limitation under paragraph (c)(2)(v) of this section, the SRLY subgroup limitation under this paragraph (c)(2) is $36 ($45 x 80 percent). However, the M group has only $10 of consolidated taxable income in Year 4. Thus, due to the 80-percent limitation and the application of paragraph (b)(1) of this section, the M group’s deduction of all net operating losses in Year 4 is limited to $8 ($10 x 80 percent). As a result, the M group deducts $8 of P’s SRLY net operating loss carryover, and the remaining $37 is carried over to Year 5.

(4) After deduction of $8 of P’s SRLY net operating loss in Year 4, the cumulative register of the P SRLY subgroup is adjusted pursuant to paragraph (c)(1)(i)(E) of this section. After taking into account the 80-percent limitation, the amount of income necessary to support this deduction is $10 ($10 x 80 percent = $8). Therefore, the cumulative register of the P SRLY subgroup is decreased by $10, and $35 remains in the cumulative register ($45 - $10).

(5) In Year 5, the M group has $100 of consolidated taxable income (computed without regard to the CNOL deduction for Year 5). None of P, S, or T has any items of income, gain, deduction, or loss in Year 5. Although the members of the P SRLY subgroup do not contribute to the $100 of consolidated taxable income in Year 5, the positive balance of the cumulative register of the P SRLY subgroup for Year 5 is $35 and, due to the application of the 80-percent limitation under paragraph (c)(2)(v) of this section, the SRLY subgroup limitation under this paragraph (c)(2) is $28 ($35 x 80 percent). Because of the 80-percent limitation and the application of paragraph (b)(1) of this section, the M group’s deduction of net operating losses in Year 5 is limited to $80 ($100 x 80 percent). Because the $28 of net operating loss available to be absorbed is less than 80 percent of the M group’s consolidated taxable income, $28 of P’s SRLY net operating loss is absorbed in Year 5, and the remaining $9 ($37 - $28) is carried over to Year 6.

(6) After deduction of $28 of P’s SRLY net operating loss in Year 5, the cumulative register of the P SRLY subgroup is adjusted pursuant to paragraph (c)(1)(i)(E) of this section. After taking into account the 80-percent limitation, the amount of income necessary to support this deduction is $35 ($35 x 80 percent = $28). Therefore, the cumulative register of the P SRLY subgroup is decreased by $35, and zero remains in the cumulative register ($35 - $35).

* * * * *

(h) * * *

(9) For the applicability dates of paragraphs (b)(3)(ii)(C) and (b)(3)(ii)(D) of this section, see §1.1502-21T(h)(9).

(10) The rules of paragraphs (a), (b)(1), (b)(2)(iv), and (c)(1)(i)(E) of this section apply to taxable years beginning after December 31, 2020.

Par. 4. Section 1.1502-47 is amended:

1. By revising paragraphs (a)(2)(i) and (ii).

2. By removing paragraph (a)(3).

3. By redesignating paragraph (a)(4) as paragraph (a)(3).

4. By removing paragraphs (b) and (c).

5. By redesignating paragraph (d) as paragraph (b).

6. By revising newly redesignated paragraphs (b)(1), (2), (3), (4), (5), (10), (11), and (13).

7. In newly redesignated paragraph (b)(14), by designating Examples 1 through 14 as paragraphs (b)(14)(i) through (xiv), respectively.

8. In newly redesignated paragraph (b)(14)(i), by adding a sentence at the end of the paragraph.

9. By revising newly redesignated paragraph (b)(14)(ii).

10. By removing newly redesignated paragraph (b)(14)(xiv).

11. By redesignating paragraph (e) as paragraph (c).

12. By removing newly redesignated paragraphs (c)(4) and (5).

13. By redesignating paragraph (c)(6) as paragraph (c)(4).

14. By redesignating paragraph (f) as paragraph (d).

15. By revising newly redesignated paragraph (d)(5).

16. By removing the last sentence of newly redesignated paragraph (d)(6).

17. By removing newly redesignated paragraph (d)(7)(ii).

18. By redesignating paragraph (d)(7)(iii) as paragraph (d)(7)(ii).

19. By revising newly redesignated paragraph (d)(7)(ii).

20. By redesignating paragraph (g) as paragraph (e).

21. In newly redesignated paragraph (e)(2), by removing the language “partial” everywhere it appears.

22. By removing newly redesignated paragraph (e)(3).

23. By redesignating paragraph (h) as paragraph (f).

24. By revising newly redesignated paragraph (f)(2)(iii).

25. In newly designated paragraph (f)(2)(v), by removing the word “partial” everywhere it appears.

26. In newly redesignated paragraph (f)(2)(v), by adding a sentence at the end of the paragraph.

27. By revising newly redesignated paragraph (f)(2)(vi) and (vii).

28. By removing newly redesignated paragraph (f)(3).

29. By redesignating newly redesignated paragraph (f)(4) as paragraph (f)(3). 30. By revising newly redesignated paragraph (f)(3)(ii).

31. By adding a new paragraph (g).

32. By removing paragraphs (j), (k), and (l).

33. By redesignating paragraph (m) as paragraph (h), and redesignating paragraph (n) as paragraph (j).

34. In newly redesignated paragraph (h), by removing the language “partial” everywhere it appears.

35. In newly redesignated paragraph (h)(2)(ii), by adding a sentence at the end of the paragraph.

36. In newly redesignated paragraph (h)(3)(iv), by adding a sentence at the end of the paragraph.

37. In newly redesignated paragraph (h)(3)(viii), by removing the language “common parent’s election” and adding in its place “election by the agent for the group (within the meaning of §1.1502-77)”.

38. In newly redesignated paragraph (h)(3)(ix), by removing the last two sentences.

39. By removing newly redesignated paragraph (h)(4).

40. By redesignating newly redesignated paragraph (h)(5) as paragraph (h)(4).

41. By revising newly redesignated paragraph (h)(4) introductory text.

42. In newly redesignated paragraph (h)(4), by redesignating Examples 1 through 6 as paragraphs (h)(4)(i) through (vi).

43. By revising newly redesignated paragraphs (h)(4)(ii) and (iii).

44. By removing newly redesignated paragraphs (h)(4)(v) and (vi).

45. By revising redesignated paragraph (j)(2)(iii).

46. By removing newly redesignated paragraph (j)(2)(v).

47. By redesignating newly redesignated paragraph (j)(2)(vi) as paragraph (j)(2)(v).

48. By revising newly redesignated paragraph (j)(3).

49. By redesignating paragraphs (q), (r), and (s) as paragraphs (k), (l), and (m), respectively.

50. By adding a new paragraph (n).

51. By removing paragraphs (o), (p), and (t).

52. In the following table, for each section designated or redesignated under these regulations (as indicated in the second column), removing the language in the third column and adding the language in the fourth column with the frequency indicated in the fifth column:

 

The additions and revisions read as follows:

§1.1502-47 Consolidated returns by life-nonlife groups.

(a) * * *

(2) General method of consolidation—(i) Subgroup method. The regulations adopt a subgroup method to determine consolidated taxable income. One subgroup is the group’s nonlife companies. The other subgroup is the group’s life insurance companies. Initially, the nonlife subgroup computes nonlife consolidated taxable income and the life subgroup computes consolidated LICTI. A subgroup’s income may in effect be reduced by a loss of the other subgroup, subject to the limitations in sections 172 and 1503(c). The life subgroup losses consist of life consolidated net operating loss, consolidated operations loss carryovers from taxable years beginning before January 1, 2018 (consolidated operations loss carryovers), and life consolidated net capital loss. The nonlife subgroup losses consist of nonlife consolidated net operating loss and nonlife consolidated net capital loss. Consolidated taxable income is therefore defined in pertinent part as the sum of nonlife consolidated taxable income and consolidated LICTI, reduced by life subgroup losses and/or nonlife subgroup losses.

(ii) Subgroup loss. A subgroup loss does not actually affect the computation of nonlife consolidated taxable income or consolidated LICTI. It merely constitutes a bottom-line adjustment in reaching consolidated taxable income. Furthermore, the amount of a subgroup’s loss, if any, that is eligible to be carried back to a prior taxable year first must be carried back against income of the same subgroup before it may be used as a setoff against the other subgroup’s income in the taxable year the loss arose. (See sections 172(b)(1) and 1503(c)(1); see also §1.1502-21(b)). The carryback of losses from one subgroup may not be used to offset income of the other subgroup in the year to which the loss is to be carried. This carryback of one subgroup’s loss may “bump” the other subgroup’s loss that, in effect, previously reduced the income of the first subgroup. The subgroup’s loss that is bumped in appropriate cases may, in effect, reduce a succeeding year’s income of either subgroup. This approach gives the group the tax savings of the use of losses, but the bumping rule assures that, insofar as possible, life deductions will be matched against life income and nonlife deductions against nonlife income.

* * * * *

(b) * * *

(1) Life company. The term life company means a life insurance company as defined in section 816 and subject to tax under section 801. Section 816 applies to each company separately.

(2) Nonlife insurance company. The term nonlife insurance company has the meaning provided in §1.1502-1(k).

(3) Life insurance company taxable income. The term life insurance company taxable income or LICTI has the meaning provided in section 801(b).

(4) Group. The term group has the meaning provided in §1.1502-1(a). Unless otherwise indicated in this section, a group’s composition is determined without regard to section 1504(b)(2).

(5) Member. The term member has the meaning provided in §1.1502-1(b). A life company is tentatively treated as a member for any taxable year for purposes of determining if it is an eligible corporation under paragraph (b)(12) of this section and, therefore, if it is an includible corporation under section 1504(c)(2). If such a company is eligible and includible (under section 1504(c)(2)), it will actually be treated as a member of the group.

* * * * *

(10) Separate return year. The term separate return year has the meaning provided in §1.1502-1(e). For purposes of this paragraph (b)(10), the term group is defined with regard to section 1504(b)(2) for years in which an election under section 1504(c)(2) is not in effect. Thus, a separate return year includes a taxable year for which that election is not in effect.

(11) Separate return limitation year. Section 1.1502-1(f)(2) provides exceptions to the definition of the term separate return limitation year. For purposes of applying those exceptions to this section, the term group is defined without regard to section 1504(b)(2), and the definition in this paragraph (b)(11) applies separately to the nonlife subgroup in determining nonlife consolidated taxable income under paragraph (f) of this section and to the life subgroup in determining consolidated LICTI under paragraph (g) of this section. Paragraph (h)(3)(ix) of this section defines the term separate return limitation year for purposes of determining whether the losses of one subgroup may be used against the income of the other subgroup.

* * * * *

(13) Ineligible corporation. A corporation that is not an eligible corporation is ineligible. If a life company is ineligible, it is not treated under section 1504(c)(2) as an includible corporation. Losses of a nonlife member arising in years when it is ineligible may not be used under section 1503(c)(2) and paragraph (g) of this section to set off the income of a life member. If a life company is ineligible and is the common parent of the group (without regard to section 1504(b)(2)), the election under section 1504(c)(2) may not be made.

(14) * * *

(i) * * * S₂ must file its own separate return for 2020.

(ii) Example 2. Since 2012, L1 has been a life company owning all the stock of L2. In 2018, L1 transfers assets to S1, a new nonlife insurance company subject to taxation under section 831(a). For 2020, only L1 and L2 are eligible corporations. The tacking rule in paragraph (b)(12)(v) of this section does not apply in 2020 because the old corporation (L1) and the new corporation (S1) do not have the same tax character.

* * * * *

(d) * * *

(5) Dividends received deduction—(i) Dividends received by an includible insurance company. Dividends received by an includible member insurance company, taxed under either section 801 or section 831, from another includible member of the group are treated for Federal income tax purposes as if the group did not file a consolidated return. See sections 818(e)(2) and 805(a)(4) for rules regarding a member taxed under section 801, and see sections 832(g) and 832(b)(5)(B) through (E) for rules regarding a member taxed under section 831.

(ii) Other dividends. Dividends received from a life company member of the group that are not subject to paragraph (d)(5)(i) of this section are not included in gross income of the distributee member. See section 1504(c)(2)(B)(i). If the distributee corporation is a nonlife insurance company subject to tax under section 831, the rules of section 832(b)(5)(B) through (E) apply.

* * * * *

(7) * * *

(ii) Any taxes described in §1.1502-2 (other than in §1.1502-2(a)(1), (a)(6), and (a)(7)).

* * * * *

(f) * * *

(2) * * *

(iii) Carrybacks. The portion of the nonlife consolidated net operating loss for the nonlife subgroup described in paragraph (f)(2)(vi) of this section, if any, that is eligible to be carried back to prior taxable years under §1.1502-21 is carried back to the appropriate years (whether consolidated or separate) before the nonlife consolidated net operating loss may be used as a nonlife subgroup loss under paragraphs (e)(2) and (h) of this section to set off consolidated LICTI in the year the loss arose. The election under section 172(b)(3) to relinquish the entire carryback period for the net operating loss of the nonlife subgroup may be made by the agent for the group within the meaning of §1.1502-77.

* * * * *

(v) * * * For limitations on the use of nonlife carryovers to offset nonlife consolidated taxable income or consolidated LICTI, see §1.1502-21.

(vi) Portion of nonlife consolidated net operating loss that is carried back to prior taxable years. The portion of the nonlife consolidated net operating loss that (absent an election to waive carrybacks) is carried back to the two preceding taxable years is the sum of the nonlife subgroup’s farming loss (within the meaning of section 172(b)(1)(B)(ii)) and the amount of the subgroup’s net operating loss that is attributable to nonlife insurance companies (as determined under §1.1502-21). For rules governing the absorption of net operating loss carrybacks, including limitations on the amount of net operating loss carrybacks that may be absorbed in prior taxable years, see §1.1502-21(b).

(vii) Example. P, a holding company that is not an insurance company, owns all of the stock of S, a nonlife insurance company, and L1, a life insurance company. L1 owns all of the stock of L2, a life insurance company. Both L1 and L2 satisfy the eligibility requirements of §1.1502-47(b)(12). Each corporation uses the calendar year as its taxable year, and no corporation has incurred farming losses (within the meaning of section 172(b)(1)(B)(ii)). For 2021, the group first files a consolidated return for which the election under section 1504(c)(2) is effective. P and S filed consolidated returns for 2019 and 2020. In 2021, the P-S group sustains a nonlife consolidated net operating loss that is attributable entirely to S (see §1.1502-21(b)). The election in 2021 under section 1504(c)(2) does not result under paragraph (d)(1) of this section in the creation of a new group or the termination of the P-S group. The loss is carried back to the consolidated return years 2019 and 2020 of P and S. Pursuant to §1.1502-21(b), the loss may be used to offset S’s income in 2019 and 2020 without limitation, and the loss may be used to offset P’s income in those years, subject to the limitation in section 172(a) (see §1.1502-21(b)). The portion of the loss not absorbed in 2019 and 2020 may serve as a nonlife subgroup loss in 2021 that may set off the consolidated LICTI of L1 and L2 under paragraphs (e)(2) and (h) of this section.

(3) * * *

(ii) Additional principles. In applying §1.1502-22 to nonlife consolidated net capital loss carryovers and carrybacks, the principles set forth in paragraph (f)(2)(iii) through (v) of this section for applying §1.1502-21 to nonlife consolidated net operating loss carryovers and carrybacks also apply, without regard to the limitation in paragraph (f)(2)(vi) of this section.

* * * * *

(g) Consolidated LICTI—(1) General rule. Consolidated LICTI is the consolidated taxable income of the life subgroup, computed under §1.1502-11 as modified by this paragraph (g).

(2) Life consolidated net operating loss deduction—(i) In general. In applying §1.1502-21, the rules in this paragraph (g)(2) apply in determining for the life subgroup the life net operating loss and the portion of the life net operating loss carryovers and carrybacks to the taxable year.

(ii) Life CNOL. The life consolidated net operating loss is determined under §1.1502-21(e) by treating the life subgroup as the group.

(iii) Carrybacks—(A) General rule. The portion of the life consolidated net operating loss for the life subgroup, if any, that is eligible to be carried back under §1.1502-21 is carried back to the appropriate years (whether consolidated or separate) before the life consolidated net operating loss may be used as a life subgroup loss under paragraphs (e)(1) and (j) of this section to set off nonlife consolidated taxable income in the year the loss arose. The election under section 172(b)(3) to relinquish the entire carryback period for the consolidated net operating loss of the life subgroup may be made by the agent for the group within the meaning of §1.1502-77.

(B) Special rule for life consolidated net operating losses arising in 2018, 2019, or 2020. If a life consolidated net operating loss arising in a taxable year beginning after December 31, 2017, and before January 1, 2021, is carried back to a life insurance company taxable year beginning before January 1, 2018, then such life consolidated net operating loss is treated as an operations loss carryback (within the meaning of section 810, as in effect prior to its repeal) of such company to such taxable year.

(iv) Subgroup rule. In determining the portion of the life consolidated net operating loss that is absorbed when the loss is carried back to a consolidated return year, §1.1502-21 is applied by treating the life subgroup as the group. Therefore, the absorption is determined without taking into account any nonlife subgroup losses that were previously reported on a consolidated return as setting off life consolidated taxable income for the year to which the life subgroup loss is carried back.

(v) Carryovers. The portion of the life consolidated net operating loss that is not absorbed in a prior year as a carryback, or as a life subgroup loss that set off nonlife consolidated taxable income for the year the loss arose, constitutes a life carryover under this paragraph (g)(2) to reduce consolidated LICTI before that portion may constitute a life subgroup loss that sets off nonlife consolidated taxable income for that particular year. For limitations on the use of life carryovers to offset nonlife consolidated taxable income or consolidated LICTI, see §1.1502-21(b).

(3) Life consolidated capital gain net income or loss—(i) [Reserved].

(ii) Life consolidated net capital loss carryovers and carrybacks. The life consolidated net capital loss carryovers and carrybacks for the life subgroup are determined by applying the principles of §1.1502-22 as modified by the following rules in this paragraph (g)(3)(ii):

(A) Life consolidated net capital loss is first carried back (or apportioned to the life members for separate return years) to be absorbed by life consolidated capital gain net income without regard to any nonlife subgroup capital losses and before the life consolidated net capital loss may serve as a life subgroup capital loss that sets off nonlife consolidated capital gain net income in the year the life consolidated net capital loss arose.

(B) If a life consolidated net capital loss is not carried back or is not a life subgroup loss that sets off nonlife consolidated capital gain net income in the year the life consolidated net capital loss arose, then it is carried over to the particular year under this paragraph (g)(3)(ii) first against life consolidated capital gain net income before it may serve as a life subgroup capital loss that sets off nonlife consolidated capital gain net income in that particular year.

(h) * * *

(2) * * *

(ii) * * * Additionally, the amount of consolidated LICTI that may be offset by nonlife consolidated net operating loss carryovers may be subject to limitation (see section 172 and §1.1502-21).

* * * * *

(3) * * *

(iv) * * * The amount of consolidated LICTI that may be offset by nonlife consolidated net operating loss carryovers may be subject to limitation (see section 172 and §1.1502-21).

* * * * *

(4) Examples. The following examples illustrate the principles of this paragraph (h). In the examples, L indicates a life company, S is a nonlife insurance company, another letter indicates a nonlife company that is not an insurance company, no company has farming losses (within the meaning of section 172(b)(1)(B)(ii)), and each corporation uses the calendar year as its taxable year.

* * * * *

(ii) Example 2. (A) The facts are the same as in paragraph (h)(4)(i) of this section, except that, for 2021, S’s separate net operating loss is $200. Assume further that L’s consolidated LICTI is $200. Under paragraph (h)(3)(vi) of this section, the offsettable nonlife consolidated net operating loss is $100 (the nonlife consolidated net operating loss computed under paragraph (f)(2)(ii) of this section ($200), reduced by the separate net operating loss of I ($100)). The offsettable nonlife consolidated net operating loss that may be set off against consolidated LICTI in 2021 is $35 (35 percent of the lesser of the offsettable $100 or consolidated LICTI of $200). See section 1503(c)(1) and paragraph (h)(3)(x) of this section. S carries over a loss of $65, and I carries over a loss of $100, to 2022 under paragraph (f)(2) of this section to be used against nonlife consolidated taxable income (consolidated net operating loss ($200) less amount used in 2021 ($35)). Under paragraph (h)(2)(ii) of this section, the offsettable nonlife consolidated net operating loss that may be carried to 2022 is $65 ($100 minus $35). The facts and results are summarized in the following table.

 

(B) Accordingly, under paragraph (e) of this section, consolidated taxable income is $165 (line 5(a) minus line 6(c)).

(iii) Example 3. The facts are the same as in paragraph (h)(4)(ii) of this section, with the following additions for 2022. The nonlife subgroup has nonlife consolidated taxable income of $50 (all of which is attributable to I) before the nonlife consolidated net operating loss deduction under paragraph (f)(2) of this section. Consolidated LICTI is $100. Under paragraph (f)(2) of this section, $50 of the nonlife consolidated net operating loss carryover ($165) is used in 2022 and, under paragraph (h)(3)(vi) and (vii) of this section, the portion used in 2022 is attributable to I, the ineligible nonlife member. Accordingly, the offsettable nonlife consolidated net operating loss from 2021 under paragraph (h)(3)(ii) of this section is $65, the unused loss from 2021. The offsettable nonlife consolidated net operating loss in 2022 is $22.75 (35 percent of the lesser of the offsettable loss of $65 or consolidated LICTI of $100). Accordingly, under paragraph (e) of this section, consolidated taxable income is $77.25 (consolidated LICTI of $100 minus the offsettable loss of $22.75).

* * * * *

(j) * * *

(2) * * *

(iii) Substitute the term “life consolidated net operating loss and consolidated operations loss carryovers” for “nonlife consolidated net operating loss”, and “paragraph (g)” for “paragraph (f)”.

(3) Examples. The following examples illustrate the principles of this paragraph (j). In the examples, L indicates a life company, S is a nonlife insurance company, another letter indicates a nonlife company that is not an insurance company, no company has farming losses (within the meaning of section 172(b)(1)(B)(ii)), and each corporation uses the calendar year as its taxable year.

(i) Example 1. P, S, L1 and L2 constitute a group that elects under section 1504(c)(2) to file a consolidated return for 2021. In 2021, the nonlife subgroup consolidated taxable income is $100 and there is $20 of nonlife consolidated net capital loss that cannot be carried back under paragraph (f) of this section to taxable years (whether consolidated or separate) preceding 2021. The nonlife subgroup has no carryover from years prior to 2021. The life consolidated net operating loss is $150, which under paragraph (g) of this section includes life consolidated capital gain net income of $25. Since life consolidated capital gain net income is zero for 2021 (see paragraph (h)(3)(iii) of this section), the nonlife capital loss offset is zero (see paragraph (h)(3)(ii) of this section). However, $100 of life consolidated net operating loss sets off the $100 nonlife consolidated taxable income in 2021. The life subgroup carries under paragraph (g)(2) of this section to 2022 $50 of the life consolidated net operating loss ($150 minus $100). The $50 carryover will be used in 2022 (subject to the limitation in section 172(a)) against life subgroup income before it may be used in 2022 to setoff nonlife consolidated taxable income.

(ii) Example 2. The facts are the same as in paragraph (j)(3)(i) of this section, except that, for 2021, the nonlife consolidated taxable income is $150 (this amount is entirely attributable to S and includes nonlife consolidated capital gain net income of $50), consolidated LICTI is $200, and a life consolidated net capital loss is $50. The $50 life consolidated net capital loss sets off the $50 nonlife consolidated capital gain net income. Consolidated taxable income under paragraph (e) of this section is $300 (nonlife consolidated taxable income ($150) minus the setoff of the life consolidated net capital loss ($50), plus consolidated LICTI ($200)).

(iii) Example 3. The facts are the same as in paragraph (j)(3)(ii) of this section, except that, for 2022, the nonlife consolidated net operating loss is $150. This entire amount is attributable to S; thus, it is eligible to be carried back to 2021 against nonlife consolidated taxable income under paragraph (f)(2) of this section and §1.1502-21(b). If P, the agent for the group within the meaning of §1.1502-77, does not elect to relinquish the carryback under section 172(b)(3), the entire $150 will be carried back, reducing 2021 nonlife consolidated taxable income to zero and nonlife consolidated capital gain net income to zero. Under paragraph (h)(3)(xii) of this section, the setoff in 2021 of the nonlife consolidated capital gain net income ($50) by the life consolidated net capital loss ($50) is restored. Accordingly, the 2021 life consolidated net capital loss may be carried over by the life subgroup to 2022. Under paragraph (e) of this section, after the carryback, consolidated taxable income for 2021 is $200 (nonlife consolidated taxable income ($0) plus consolidated LICTI ($200)).

(iv) Example 4. The facts are the same as in paragraph (j)(3)(iii) of this section, except that P elects under section 172(b)(3) to relinquish the carryback of $150 arising in 2022. The setoff in Example 2 is not restored. However, the offsettable nonlife consolidated net operating loss for 2022 (or that may be carried over from 2022) is zero. See paragraph (h)(3)(viii) of this section. Nevertheless, the $150 nonlife consolidated net operating loss may be carried over to be used by the nonlife group.

(v) Example 5. P owns all of the stock of S1 and of L1. On January 1, 2017, L1 purchases all of the stock of L2. For 2021, the group elects under section 1504(c)(2) to file a consolidated return. For 2021, L1 is an eligible corporation under paragraph (b)(12) of this section but L2 is ineligible. Thus, L1 but not L2 is a member for 2021. For 2021, L2 sustains a net operating loss, which cannot be carried back (see section 172(b)). For 2021, L2 is treated under paragraph (d)(6) of this section as a member of a controlled group of corporations under section 1563 with P, S, and L1. For 2022, L2 is eligible and is included on the group’s consolidated return. L2’s net operating loss for 2021 that may be carried to 2022 is not treated under paragraph (b)(11) of this section as having been sustained in a separate return limitation year for purposes of computing consolidated LICTI of the L1-L2 life subgroup for 2022. Furthermore, the portion of L2’s net operating loss not used under paragraph (g)(2) of this section against life subgroup income in 2022 may be included in offsettable life consolidated net operating loss under paragraph (j)(2) and (h)(3)(i) of this section that reduces in 2022 nonlife consolidated taxable income (subject to the limitation in section 172(a)) because L2’s loss in 2021 was not sustained in a separate return limitation year under paragraph (j)(2) and (h)(3)(ix)(A) of this section or in a separate return year (2021) when an election was in effect under neither section 1504(c)(2) nor section 243(b)(3).

* * * * *

(n) Effective/applicability dates. The rules of this section apply to taxable years beginning after December 31, 2020. However, a taxpayer may choose to apply the rules of this section to taxable years beginning on or before December 31, 2020. If a taxpayer makes the choice described in the previous sentence, the taxpayer must apply those rules in their entirety and consistently with the provisions of subchapter L of the Internal Revenue Code applicable to the years at issue.

Par. 5. Section 1.1503(d)-4 is amended by:

1. In paragraph (c)(3)(iii)(B), removing the period and adding in its place a semi-colon.

2. In paragraph (c)(3)(iv), removing the period and adding in its place “; and”.

3. Adding paragraph (c)(3)(v).

The addition reads as follows:

§1.1503(d)-4 Domestic use limitation and related operating rules.

* * * * *

(c) * * *

(3) * * *

(v) The SRLY limitation is applied without regard to §1.1502-21(c)(1)(i)(E) (section 172(a) limitation applicable to a SRLY member).

* * * * *

Par. 6. Section 1.1503(d)-8 is amended by adding paragraph (b)(8) to read as follows:

§1.1503(d)-8 Effective dates.

* * * * *

(b) * * *

(8) Rule providing that SRLY limitation applies without regard to §1.1502-21(c)(1)(i)(E). Section 1.1503(d)-4(c)(3)(v) applies to any period to which §1.1502-21(c)(1)(i)(E) applies.

Sunita Lough,

Deputy Commissioner for Services and Enforcement.

Approved: September 29, 2020.

David J. Kautter,

Assistant Secretary of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on October 23, 2020, 11:15 a.m., and published in the issue of the Federal Register for October 27, 2020, 85 FR 67966)

The Treasury Department and the IRS have determined that a substantial number of employers, insurers, and other providers of minimum essential coverage need additional time beyond the January 31, 2021, due date to gather and analyze the information and prepare the 2020 Forms 1095-B and 1095-C to be furnished to individuals. Accordingly, this notice extends the due date for furnishing the 2020 Forms 1095-B and 1095-C, from January 31, 2021, to March 2, 2021. In view of this automatic extension to March 2, 2021, the provisions under §§ 1.6055-1(g)(4)(i)(B)(1) and 301.6056-1(g)(1)(ii)(A) allowing the IRS to grant an extension of time of up to 30 days to furnish Forms 1095-B and 1095-C will not apply to the extended due date. Because the extension of the due date to furnish information statements to individuals granted in this notice applies automatically and is as generous as the permissive 30-day extension of time to furnish 2020 information statements under sections 6055 and 6056 that may be requested by some reporting entities in submissions to the IRS, the IRS will not formally respond to such requests. Notwithstanding the extension provided in this notice, employers and other coverage providers are encouraged to furnish 2020 information statements as soon as they are able.

This notice does not extend the due date for filing with the IRS the 2020 Forms 1094-B, 1095-B, 1094-C, or 1095-C. However, this notice does not affect the provisions regarding an automatic extension of time for filing information returns; the automatic extension remains available under the normal rules for employers and other coverage providers who submit a Form 8809 on or before the due date. See §§ 1.6081-1 and 1.6081-8. This notice also does not affect the provisions regarding additional extensions of time to file. See id.

Because the individual shared responsibility payment is zero in 2020, an individual does not need the information on Form 1095-B to compute his or her federal tax liability or file an income tax return with the IRS. Nonetheless, reporting entities required to furnish Form 1095-B to individuals must expend resources to do so. At this time, the Treasury Department and the IRS have determined as a matter of enforcement priorities that, for 2020, relief from the penalty under section 6722 for failing to furnish a statement as required under section 6055 is in the interest of sound tax administration in certain cases. In particular, the IRS will not assess a penalty under section 6722 against reporting entities for failing to furnish a Form 1095-B to responsible individuals in cases where the following two conditions are met (the 2020 section 6055 furnishing relief). First, the reporting entity must post a notice prominently on its website stating that responsible individuals may receive a copy of their 2020 Form 1095-B upon request, accompanied by an email address and a physical address to which a request may be sent, as well as a telephone number that responsible individuals can use to contact the reporting entity with any questions. Second, the reporting entity must furnish a 2020 Form 1095-B to any responsible individual upon request within 30 days of the date the request is received. The reporting entity may furnish these statements electronically if it meets the requirements provided in § 1.6055-2.

As noted earlier, ALE members that offer self-insured health plans are generally required to use Form 1095-C, Part III, to meet the section 6055 reporting requirements, instead of Form 1095-B. However, because of the combined reporting under sections 6055 and 6056 on the Form 1095-C for full-time employees of ALE members enrolled in self-insured health plans, the 2020 section 6055 furnishing relief does not extend to the requirement to furnish Forms 1095-C to full-time employees. Accordingly, for full-time employees enrolled in self-insured health plans, penalties will continue to be assessed consistent with prior enforcement policies for any failure by ALE members to furnish Form 1095-C, including Part III, according to the applicable instructions. However, the 2020 section 6055 furnishing relief does extend to penalty assessments in connection with the requirement to furnish Form 1095-C to any employee enrolled in an ALE member’s self-insured health plan who is not a full-time employee for any month of 2020,³ subject to the requirements of the 2020 section 6055 furnishing relief.

The 2020 section 6055 furnishing relief does not affect assessment of penalties associated with the requirement or the deadline to file with the IRS the 2020 Forms 1094-B or 1095-B or the Forms 1094-C or 1095-C, as applicable.

This notice also provides a final extension of relief from penalties under sections 6721 and 6722 to reporting entities that report incorrect or incomplete information on the return or statement when these entities can show they made good-faith efforts to comply with the information-reporting requirements under sections 6055 and 6056 for 2020 (both for furnishing to individuals and for filing with the IRS). This relief applies to missing and inaccurate taxpayer identification numbers and dates of birth, as well as other information required on the return or statement. Reporting entities must make a good-faith effort to comply with the regulations under sections 6055 and 6056 to be eligible for this relief. In determining good faith, the IRS will take into account whether an employer or other coverage provider made reasonable efforts to prepare for reporting the required information to the IRS and furnishing it to employees and covered individuals, such as gathering and transmitting the necessary data to an agent to prepare the data for submission to the IRS or testing its ability to transmit information to the IRS. Reporting entities that fail to file an information return or furnish a statement by the extended due dates, except as otherwise provided in this notice, are not eligible for relief. As this good-faith relief was intended to be transitional relief, this is the last year the Treasury Department and the IRS intend to provide this relief.

In Notice 2019-63, the Treasury Department and the IRS requested comments as to whether an extension of the due date for furnishing statements to individuals under section 6056 would be necessary for future years and, if so, why. Very few comments were submitted, which indicates that this relief may no longer be necessary. In Notice 2019-63, the Treasury Department and the IRS also requested comments as to whether and how the reporting requirements under section 6055 should change, if at all, for future years; only one comment was submitted.

The Treasury Department and the IRS are renewing the request for comments related to furnishing requirements under sections 6055 and 6056. Unless we receive comments that explain why this relief continues to be necessary, no relief related to the furnishing requirements under sections 6055 and 6056 will be granted in future years. Taxpayers and reporting entities are strongly encouraged to submit comments electronically via the Federal eRulemaking Portal at www.regulations.gov (type “IRS- 2020-0037” in the search field on the regulations.gov homepage to find this notice and submit comments).

Alternatively, taxpayers and reporting entities may mail comments to:

Internal Revenue Service

Attn: CC:PA:LPD:PR (Notice 2020-76) Room 5203

P.O. Box 7604

Ben Franklin Station

Washington, D.C. 20044

Comments must be submitted by February 1, 2021. All comments received will be available for public inspection on www.regulations.gov. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The IRS expects to have limited personnel available to process public comments that are submitted on paper through mail. Until further notice, any comments submitted on paper will be considered to the extent practicable.

The proposed regulations update the next available unit provisions in §1.42-15 to reflect the new set-aside based on the average income test and to take into account section 42(g)(2)(D)(iii), (iv) and (v). In situations where multiple units are over-income at the same time in an average-income project that has a mix of low-income and market-rate units, these regulations provide that a taxpayer need not comply with the next available unit rule in a specific order. Instead, renting any available comparable or smaller vacant unit to a qualified tenant maintains the status of all over-income units as low-income units until the next comparable or smaller unit becomes available (or, in the case of a deep rent skewed project, the next low-income unit becomes available). For example, in a 20-unit building with 9 low-income units (3 units at 80 percent of AMGI; 2 units at 70 percent of AMGI; 1 unit at 40 percent of AMGI; and 3 units at 30 percent of AMGI), if there are two over-income units, one a 30 percent income 3-bedroom unit and another a 70 percent 2-bedroom unit, and the next available unit is a vacant 2-bedroom market-rate unit, renting the vacant 2-bedroom unit to occupants at either the 30 or 70 percent income limitation would satisfy both the minimum set-aside of 40 percent and the average test of 60 percent or lower required by section 42(g)(1)(C).

The amendments to the next available unit regulations in §1.42-15 are proposed to apply to occupancy beginning 60 or more days after the date those regulations are published as final regulations in the Federal Register. The average income test regulations in §1.42-19 are proposed to apply to taxable years beginning after the date those regulations are published as final regulations in the Federal Register. Taxpayers, however, may rely on the proposed amendments to §1.42-15 for occupancy beginning after October 30, 2020 and on or before 60 days after the date those regulations are published as final regulations in the Federal Register, provided the taxpayer follows the rules in proposed §1.42-15 in their entirety, and in a consistent manner. Taxpayers may also rely on proposed §1.42-19 for taxable years beginning after October 30, 2020 and on or before the date those regulations are published as final regulations in the Federal Register, provided the taxpayer follows the rules in proposed §1.42-19 in their entirety, and in a consistent manner.

This regulation is not subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Department of the Treasury and the Office of Management and Budget regarding review of tax regulations.

Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that this regulation will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that, prior to the publication of this regulation and before the enactment of the 2018 Act, taxpayers were already required to satisfy either the 20-50 test or the 40-60 test, as elected by the taxpayer, in order to qualify as a low-income housing project. The 2018 Act added a third minimum set-aside test, the average income test, that taxpayers may elect. This regulation sets forth requirements for the average income test, and the costs associated with the average income test are similar to the costs associated with the 20-50 test and 40-60 test. Accordingly, the Secretary certifies that this regulation will not have a significant economic impact on a substantial number of small entities.

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

Before these proposed amendments to the regulations are adopted as final regulations, consideration will be given to comments that are submitted timely to the IRS as prescribed in the preamble under the “ADDRESSES” section. The Treasury Department and the IRS request comments on all aspects of the proposed regulations. Any electronic comments submitted, and to the extent practicable any paper comments submitted, will be made available at www.regulations.gov or upon request.

A public hearing will be scheduled if requested in writing by any person who timely submits electronic or written comments. Requests for a public hearing are also encouraged to be made electronically. If a public hearing is scheduled, notice of the date and time for the public hearing will be published in the Federal Register. Announcement 2020-4, 2020-17 IRB 1, provides that until further notice, public hearings conducted by the IRS will be held telephonically. Any telephonic hearing will be made accessible to people with disabilities.

The principal authors of these regulations are Dillon Taylor and Michael J. Torruella Costa, Office of the Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the Treasury Department and the IRS participated in their development.

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 in numerical order an entry for §1.42-19 to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.42-19 also issued under 26 U.S.C. 42(n).

* * * * *

Par. 2. Section 1.42-0 is amended by:

1. In §1.42-15:

i. Revising the entry for (c).

ii. Adding entries for (c)(1) and (2) and (c)(2)(i) through (iv).

iii. Revising the entry for (i).

iv. Adding entries for (i)(1) and (2).

2. Adding §1.42-19.

The revisions and additions read as follows:

§1.42-0 Table of contents.

* * * * *

§1.42-15 Available unit rule.

* * * * *

(c) Exceptions.

(1) Rental of next available unit in case of the 20–50 test or 40–60 test.

(2) Rental of next available unit in case of the average income test.

(i) Basic rule.

(ii) No requirement to comply with the next available unit rule in a specific order.

(iii) Deep rent skewed projects.

(iv) Limitation.

* * * * *

(i) Applicability dates.

(1) In general.

(2) Applicability dates under the average income test.

* * * * *

§1.42-19 Average income test.

(a) In general.

(b) Designation of imputed income limitations.

(1) 10-percent increments.

(2) Method of designation.

(3) Timing of designation.

(i) No subsequent change to imputed income limitations.

(ii) Converted market-rate units.

(c) Opportunity to take mitigating actions.

(d) Results following an opportunity to take mitigating actions.

(e) Mitigating actions.

(1) Conversion of a market-rate unit.

(2) Removing low-income units from the average income computation.

(f) Tax treatment of removed units.

(1) Status of the project.

(2) Recapture.

(3) Amount of credit.

(4) Long-term commitment.

(g) Examples.

(1) Example 1.

(i) Facts.

(ii) Analysis.

(2) Example 2.

(i) Facts.

(ii) Analysis.

(A) Average income test.

(B) Recapture.

(C) Restoration of habitability and of qualified basis.

(h) Applicability dates.

Par. 3. Section 1.42-15 is amended by:

1. Revising the definition of Over-income unit in paragraph (a).

2. Revising the heading for paragraph (c).

3. Designating the text of paragraph (c) as paragraph (c)(1) and adding a heading for newly designated paragraph (c)(1).

3. Adding paragraph (c)(2).

4. Revising paragraph (i).

The revisions and additions read as follows:

§1.42-15 Available unit rule.

(a)* * *

Over-income unit means, in the case of a project with respect to which the taxpayer elects the requirements of section 42(g)(1)(A) (20-50 test) or section 42(g)(1)(B) (40–60 test), a low-income unit in which the aggregate income of the occupants of the unit increases above 140 percent of the applicable income limitation under section 42(g)(1)(A) and (B), or above 170 percent of the applicable income limitation for deep rent skewed projects described in section 142(d)(4)(B). In the case of a project with respect to which the taxpayer elects the requirements of section 42(g)(1)(C) (average income test), over-income unit means a low-income unit in which the aggregate income of the occupants of the unit increases above 140 percent (170 percent in case of deep rent skewed projects described in section 142(d)(4)(B)) of the greater of 60 percent of area median gross income or the imputed income limitation designated with respect to the unit under §1.42-19(b).

* * * * *

(c) Exceptions—(1) Rental of next available unit in case of the 20–50 test or 40–60 test.* * *

(2) Rental of next available unit in case of the average income test—(i) Basic rule. In the case of a project with respect to which the taxpayer elects the average income test, if a unit becomes an over-income unit within the meaning of paragraph (a) of this section, that unit ceases to be a low-income unit if—

(A) Any residential rental unit (of a size comparable to, or smaller than, the over-income unit) is available, or subsequently becomes available, in the same low-income building; and

(B) That available unit is occupied by a new resident whose income exceeds the limitation described in paragraph (c)(2)(iv) of this section.

(ii) No requirement to comply with the next available unit rule in a specific order. In situations where multiple units in a building are over-income units at the same time, it is not necessary for a taxpayer to comply with the rule in this section (next available unit rule) in a specific order.

(iii) Deep rent skewed projects. In the case of a project described in section 142(d)(4)(B) with respect to which the taxpayer elects the average income test, if a unit becomes an over-income unit within the meaning of paragraph (a) of this section, that unit ceases to be a low-income unit if—

(A) Any low-income unit is available, or subsequently becomes available, in the same low-income building; and

(B) That unit is occupied by a new resident whose income exceeds the lesser of 40 percent of area median gross income or the imputed income limitation designated with respect to that unit.

(iv) Limitation. For purposes of paragraph (c)(2) of this section (basic next available unit rule for the average income test), the limitation described in this paragraph (c)(2)(iv) is—

(A) In the case of a unit that was taken into account as a low-income unit prior to becoming vacant, the imputed income limitation designated with respect to that available unit for the average income test under §1.42-19(b); and

(B) In the case of any other unit, the highest imputed income limitation that could be designated with respect to that available unit under §1.42-19(e)(1), in order for the project to continue to meet the requirements of §1.42-19(a)(3) (60 percent of AMGI or less).

* * * * *

(i) Applicability dates—(1) In general. Except as provided in paragraph (i)(2) of this section, this section applies to leases entered into or renewed on and after September 26, 1997.

(2) Applicability dates under the average income test. The second sentence of the definition of over-income unit in paragraph (a) of this section and paragraph (c)(2) of this section apply to occupancy beginning 60 or more days after [date these regulations are published as final regulations in the Federal Register].

Par. 4. Section 1.42-19 is added to read as follows:

§1.42-19 Average income test.

(a) In general. A project for residential rental property meets the requirements of section 42(g)(1)(C) (average income test) if—

(1) 40 percent or more (25 percent or more in the case of a project described in section 142(d)(6)) of the residential units in the project are both rent-restricted and occupied by individuals whose income does not exceed the imputed income limitation designated by the taxpayer with respect to the respective unit;

(2) The taxpayer designates these imputed income limitations in the manner provided by paragraph (b) of this section; and

(3) The average of the imputed income limitations of the low-income units in the project does not exceed 60 percent of area median gross income (AMGI).

(b) Designation of imputed income limitations—(1) 10-percent increments. The designated imputed income limitation of any unit must be 20 percent, 30 percent, 40 percent, 50 percent, 60 percent, 70 percent, or 80 percent of AMGI.

(2) Method of designation. The taxpayer must designate the imputed income limitation of each unit in accordance with—

(i) Any procedures established by the Internal Revenue Service (IRS) in forms, instructions, or publications or in other guidance published in the Internal Revenue Bulletin pursuant to §601.601(d)(2)(ii)(b) of this chapter; and

(ii) Any procedures established by the State or local housing credit agency (Agency) that has jurisdiction over the low-income housing project that contains the units to be designated, to the extent that those Agency procedures are consistent with the requirements of paragraph (b)(2)(i) of this section.

(3) Timing of designation. Except as provided in paragraph (b)(3)(ii) of this section, not later than the close of the first taxable year of the credit period, the taxpayer must designate the imputed income limitation of each unit taken into account for purposes of paragraph (a) of this section.

(i) No subsequent change to imputed income limitations. No change to the designated imputed income limitations may be made. Even if the taxpayer elects to identify a low-income unit as a removed unit under paragraph (e)(2) of this section, the designated imputed income limitation of the unit is not changed. If a designation is removed, the unit ceases to be a low-income unit.

(ii) Converted market-rate units. If a residential unit that was not a low-income unit is converted to a low-income unit, the designation of the imputed income limitation for that unit must take place on or before the 60th day after the unit is to be treated as a low-income unit. See paragraphs (b)(1) and (2) of this section for rules regarding designation.

(c) Opportunity to take mitigating actions. The taxpayer may take one or more of the mitigating actions described in paragraph (e)(1) or (2) of this section if—

(1) At the close of a taxable year (failing year), one or more low-income units have ceased to qualify as low-income units; and

(2) This cessation causes the project of which they are a part to fail to satisfy the requirement in paragraph (a)(3) of this section (regarding the average of the imputed income limitations of the low-income units).

(d) Results following an opportunity to take mitigating actions. (1) After any mitigating actions, if, prior to the end of the 60th day following the failing year, the project satisfies the requirements to be a low-income housing project (including satisfaction of the requirement in paragraph (a)(3) of this section), then paragraph (a)(3) of this section is treated as having been satisfied at the close of the failing year.

(2) If paragraph (d)(1) of this section does not apply, the project fails to be a qualified low-income project on the close of the failing year.

(e) Mitigating actions—(1) Conversion of a market-rate unit. The taxpayer may convert to low-income status a unit that is not currently a low-income unit. Immediately prior to becoming a low-income unit, the unit must be vacant or occupied by a tenant who qualifies for residence in a low-income unit and whose income is not greater than the imputed income limitation designated by the taxpayer for that unit. This inclusion of conversions as mitigating actions is without prejudice to the permissibility of conversions in other contexts.

(2) Removing low-income units from the average income computation. The taxpayer may identify one or more residential units as removed units. A unit may be a removed unit only if it complies with all requirements of section 42 to be a low-income unit. Status as a removed unit may be ended by the taxpayer at any time. Identification of a removed unit and termination of that identification must be effected as provided by the IRS in forms, publications, and guidance published in the Internal Revenue Bulletin pursuant to §601.601(d)(2)(ii)(b) of this chapter. In the absence of any such IRS requirements, the identification and termination must be made in accordance with any Agency procedures.

(f) Tax treatment of removed units—(1) Status of the project. A removed unit is not taken into account under paragraph (a)(3) of this section in computing the average of the imputed income limitations of the low-income units. If the absence of one or more removed units from the computation causes fewer than 40 percent (or, if applicable, fewer than 25 percent) of the residential units to be taken into account in computing the average, the project fails to be a qualified low-income housing project.

(2) Recapture. For purposes of applying section 42(j), removed units are taken into account in the same manner as low-income units. Thus, during the compliance period, a unit’s status as a removed unit does not reduce the applicable fraction of section 42(c)(1)(B) and thus does not reduce qualified basis for purposes of recapture under section 42(j).

(3) Amount of credit. For purposes of section 42(a), removed units are not taken into account as low-income units. Thus, during the credit period, a unit’s status as a removed unit reduces the applicable fraction—and thus reduces qualified basis—for purposes of calculating the taxpayer’s annual credit amount.

(4) Long-term commitment. For purposes of applying section 42(h)(6)(B)(i) to any taxable year after the credit period, removed units are not taken into account as low-income units.

(g) Examples. The operation of this section is illustrated by the following examples.

(1) Example 1—(i) Facts. (A) A single-building housing project received an allocation of housing credit dollar amount. The taxpayer who owns the project elects the average income test, intending for the 5-unit building to have 100 percent low-income occupancy. The taxpayer properly and timely designates the imputed income limitations for the 5 units as follows: 2 units at 40 percent of AMGI; 1 unit at 60 percent of AGMI; and 2 units at 80 percent of AMGI.

 

(B) In the first taxable year of the credit period (Year 1), the project is fully leased and occupied.

(ii) Analysis. (A) The average of the imputed income limitations of the units is 60 percent of AMGI calculated as follows: (2 x 40% + 1 x 60% + 2 x 80%) / 5 = 60%.

(B) Thus, the income limitations satisfy the requirement in paragraph (a)(3) of this section that the average of the designated imputed income limitations of the low-income units in the project does not exceed 60% of AMGI.

(2) Example 2—(i) Facts. Assume the same facts as in paragraph (g)(1) of this section (Example 1). In Year 2, Unit # 4 becomes uninhabitable. (Unit # 4 has a designated imputed income limitation of 40 percent of AMGI.) Because all of the units in the project are low-income units, converting a market-rate unit to a low-income unit is not an available mitigating action. Within 60 calendar days following the close of Year 2, the taxpayer identifies Unit # 2 as a removed unit. (Unit # 2 has a designated imputed income limitation of 80 percent of AMGI.) Repair work on Unit # 4 is completed in Year 4, and the taxpayer then ends the status of Unit # 2 as a removed unit.

(ii) Analysis. During Year 2, Unit # 4 is not a low-income unit because it is not suitable for occupancy under section 42(i)(3)(B). In the absence of any mitigating action, the average of the imputed income limitations of the units at the close of Year 2 would be 65 percent of AMGI. That average would be calculated as follows: (1 x 40% + 1 x 60% + 2 x 80%) / 4 = 65%. Under paragraph (d)(2) of this section, unless effective mitigating action is taken not later than the 60th calendar day following the close of Year 2, the project fails to be a qualified low-income housing project because it fails to satisfy paragraph (a)(3) of this section. As described in the facts in paragraph (g)(2)(i) of this section, however, the taxpayer takes the mitigating action in paragraph (e)(2) of this section. That action has the following results:

(A) Average income test. Under paragraph (f)(2) of this section, the identification of Unit # 2 as a removed unit causes that unit not to be taken into account in computing the average of the imputed income limitations of the low-income units. Unit # 4 is also not taken into account because it is no longer a low-income unit. Therefore, the calculation under paragraph (a)(3) of this section as of the close of Years 2 and 3 is as follows: (1 x 40% + 1 x 60% + 1 x 80%) / 3 = 60%. Thus, for those years, the project satisfies the average income test because, for purposes of that test, at least 40 percent of the units are taken into account as low-income units and the average of the imputed income limitations of those units does not exceed 60% of AMGI.

(B) Recapture. At the close of Year 2, the amount of the qualified basis is less than the amount of the qualified basis at the close of Year 1, because Unit # 4’s unsuitability for occupancy prohibits it from being a low-income unit. Unit # 4’s failure to be a low-income unit, therefore, reduces the applicable fraction and thus the qualified basis as well. This results in a credit recapture amount for Year 2. Under paragraph (f)(2) of this section, however, for purposes of calculating the recapture amount, Unit # 2’s status as a removed unit does not impair its contribution to the applicable fraction and the qualified basis.

(C) Restoration of habitability and of qualified basis. As described in the facts in paragraph (g)(2)(i) of this section, in Year 4, after repair work is complete, the formerly uninhabitable Unit # 4 is again suitable for occupancy, and the taxpayer ends the status of Unit # 2 as a removed unit. Thus, both units are now low-income units, neither is a removed unit, and so both are included in the computations for the average income test. At the close of Year 4, therefore, the average of the imputed income limitations of all of the low-income units in the project is 60 percent of AMGI, which is calculated as follows: (2 x 40% + 1 x 60% + 2 x 80%) / 5 = 60%. For purposes of computing the credit under section 42(a) for Year 4, both units are included in the applicable fraction and, thus, are included in qualified basis for purposes of that calculation. Prior to the restoration in Year 4, for purposes of a computation of credits under section 42(a), Unit # 4 does not contribute to qualified basis because it is not a low-income unit, and, under paragraph (f)(3) of this section, Unit # 2 does not contribute to qualified basis because it is a removed unit.

(h) Applicability dates. This section applies to taxable years beginning after [date these regulations are published as final regulations in the Federal Register].

Sunita Lough,

Deputy Commissioner for Services and Enforcement.

(Filed by the Office of the Federal Register on October 29, 2020, 8:45 a.m., and published in the issue of the Federal Register for October 30, 2020, 85 F.R. 68816)