SRLY loss temp. regs. offer significant planning opportunities.

Taxable income of a consolidated group is determined by aggregating the income and losses of each group member, an approach that reflects the single-entity concept. An exception to this approach applies to losses incurred by nongroup members that are carried into a consolidated return year. The separate return limitation year (SRLY) rules limit the group's use of such losses on the theory that net operating losses (NOLs) generated outside of the group should be permitted only to the extent that the loss member contributes income to the group.

In January 1991, the IRS issued proposed regulations(1) (1991 PRs) that would have profoundly changed the treatment of NOLs, built-in deductions and capital losses of consolidated groups, including rules on the carry-over and carryback of losses to consolidated and separate return years. Many of the proposed changes would have been effective for tax years ending after Jan. 28, 1991, or for corporations joining consolidated groups after that date. Because of the extreme delay in finalizing these rules, consolidated groups have been uncertain whether the existing regulations(2) or the 1991 PRs(3) govern the use of SRLY losses on a consolidated return.

To address the uncertainty, the IRS recently issued temporary amendments to the consolidated dated return regulations regarding losses of affiliated group members.(4) These amendments effectively withdrew the 1991 PRs and issued new rules as both temporary and proposed regulations (1996 TRs). The 1996 TRs are substantially identical...

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