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 TREASURY TO ISSUE GUIDANCE ON LOSS DISALLOWANCE RULES


1/31/2002

Today the Treasury Department announced that it intends to issue interim regulations shortly that will replace the loss disallowance rule in the consolidated return regulations. These rules determine the amount of loss allowable on a sale or disposition of subsidiary stock by a consolidated group.

Notice 2002-11 is being issued as a result of the Solicitor General's decision not to file an appeal with the Supreme Court in Rite Aid Corp. v. United States. In Rite Aid, the Federal Circuit Court of Appeals held invalid the duplicated loss factor in section 1.1502-20 of the consolidated return regulations. Section 1.1502-20, commonly known as the loss disallowance rule, disallows certain losses on sales of stock of a member of a consolidated group.

"The Treasury Department and IRS were advised that the Supreme Court was unlikely to grant a petition for certiorari without a split in the circuit courts of appeal regarding the validity of the loss disallowance rule. Without prompt resolution of the issue, continuing to defend the validity of the duplicated loss component of ƒusection 1.1502-20 is not in the interests of sound tax administration. New rules governing the treatment of loss on sales of stock of a member of a consolidated group must be implemented, because the duplicated loss factor is inextricably linked with the other factors in the loss disallowance rule," stated Mark Weinberger, Treasury Assistant Secretary for Tax Policy.

Interim temporary regulations will require consolidated groups to determine the allowable loss on a sale or disposition of subsidiary stock under a regime that does not include a duplicated loss rule. The temporary regulations will apply prospectively. For transactions entered into, or for which there is a binding contract, before the date of issuance of temporary regulations, groups will be allowed certain choices with respect to a disposition of subsidiary stock, including the new interim rule. The Treasury Department and the IRS are undertaking a broader study of the affected regulatory provisions of the consolidated return regulations. Treasury and the IRS intend to request comments in conjunction with the issuance of the interim regulations.

Treasury and the IRS emphasized that the decision in Rite Aid implicates no other provisions of the consolidated return regulations.
The text of Notice 2002-11 follows:
Part III-Administrative, Procedural, and Miscellaneous

IRS Announces New Position With Regard To Consolidated Return Loss Disallowance Rule
Notice 2002-11

Notice 2002-11

This Notice sets forth the Internal Revenue Service's position with respect to the opinion of the U.S. Court of Appeals for the Federal Circuit in Rite Aid Corp. v. United States, 255 F.3d 1357 (Fed. Cir. 2001), and the loss disallowance rules that apply to sales of stock of a member of a consolidated group.

In Rite Aid, the Federal Circuit held that the duplicated loss component of ' 1.1502-20 of the Income Tax Regulations, which disallows certain losses on sales of stock of a member of a consolidated group, was an invalid exercise of regulatory authority. The Internal Revenue Service believes that the court's analysis and holding were incorrect.

Nevertheless, the Service has decided that the interests of sound tax administration will not be served by continuing to litigate the validity of the loss duplication factor of ' 1.1502-20. Moreover, because of the interrelationship in the operation of all of the loss disallowance factors, the Service has decided that new rules governing loss disallowance on sales of stock of a member of a consolidated group should be implemented.

Accordingly, the Service intends to promulgate interim regulations that, prospectively from the date of their issuance, will require consolidated groups to determine the allowable loss on a sale or disposition of subsidiary stock under an amended ' 1.337(d)-2 instead of under ' 1.1502-20. For transactions (including those for which a return has been filed) completed before the date of issuance of interim regulations, or for which there is a binding contract before that date, groups will be allowed certain choices with respect to a disposition of subsidiary stock, including a choice to apply ' 1.337(d)-2 as amended. The Service and Treasury are undertaking a broader study of the regulatory provisions necessary to implement ¡± 337(d) of the Internal Revenue Code in the context of affiliated groups filing consolidated returns and will request comments in conjunction with the issuance of the interim regulations.

It is the Service's position that the Rite Aid opinion implicates only the loss duplication aspect of the loss disallowance regulation and that the authority to prescribe consolidated return regulations conferred on the Secretary is limited only by the requirement that the Secretary, in his discretion, has determined such rules necessary clearly to reflect consolidated tax liability.

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