Rev. Rul. 84-33

1984-1 C.B. 186, 1984-9 I.R.B. 13.

                       Internal Revenue Service
                                 Revenue Ruling

     CONSOLIDATED RETURN CHANGE OF OWNERSHIP;  "OLD MEMBERS" OF AFFILIATED
                                     GROUP

                          Published: February 27, 1984

SECTION 1502. - -REGULATIONS, 26 CFR 1.1502-1: Definitions

(See also 1.1502-21.)

  Consolidated return change of ownership;  "old members" of affiliated group.  Two newly formed subsidiaries of parent affiliated group, to which all of the assets of two former divisions of parent were contributed as a part of a plan of bankruptcy reorganization, are treated as "old members" of the parent affiliated group for the year there was a consolidated return change of ownership as defined in section 1.1502-1(g) of the regulations.

ISSUE

  Are X and Y treated as "old members" of the P affiliated group for purposes of sections 1.1502-1(g)(3) and 1.1502-21(d) of the Income Tax Regulations under the circumstances described below?

FACTS

  P is the common parent corporation of an affiliated group of corporations and files a consolidated federal income tax return on a

calendar-year basis.  Prior to January 19, 1982, P's businesses were divided into three divisions: Division A, Division B and Division C.  On January 19, 1982, P filed a petition for reorganization under chapter 11 of the Bankruptcy Code.  Pursuant to a plan of bankruptcy reorganization, P organized two wholly owned subsidiaries, X and Y, by contributing all the assets of Division A and Division B to X and Y, respectively, subject to all the liabilities incurred by Division A and Division B.  In December 1982 there was a consolidated return change of ownership (CRCO) as defined in section 1.1502-1(g) of the regulations;  that is, in December 1982 there was a more than 50 percentage point change in ownership in P.

  On the consolidated federal income tax return P filed for calendar year 1982, a net operating loss carryover attributable to P for years preceding 1982 was utilized against the profits of X and Y.

LAW AND ANALYSIS

  Section 1.1502-1(g)(1) of the regulations provides that a CRCO occurs during any taxable year (referred to as the "year of change") of the corporation that is the common parent for the taxable year to which the tax attribute is to be carried, if, at the end of the year of change (i) any one or more of the ten persons who own the greatest percentage of the fair market value of the stock of the parent corporation increase such ownership by more than 50 percentage points from what they owned at the beginning of such year or the beginning of the preceding year, and (ii) such increase in ownership is attributable to a purchase of stock from an unrelated person or as the result of the liquidation or redemption of the stock of the parent.

  Section 1.1502-21(d) of the regulations contains limitations on the use of loss carryovers (but not carrybacks) from taxable years ending before a CRCO. Section 1.1502-21(d)(2) provides that, if a CRCO occurs, the net operating loss carryovers of the "old members," which were sustained in consolidated or separate return filing years before the year of change, can be carried to the year of change or later years only to the extent of the consolidated taxable income of the old members in such year.

  Section 1.1502-1(g)(3) of the regulations provides that the term "old members" of a group means those corporations that were members of such group immediately preceding the first day of the taxable year in which the CRCO occurs.

  In Wolter Construction Co., Inc. v. Commissioner, 634 F.2d 1029 (6th Cir., 1980), aff'g 68 T.C. 39 (1977), the United States Court of Appeals for the Sixth Circuit explained the application of the CRCO regulations as follows:

  The carryforward of net operating losses attributable to the common parent is also subject to a similar limitation designed to prevent loss trafficking in the event of a "consolidated return change of ownership" (CRCO).  Reg. 1.1502- 21(d).  A "consolidated return change of ownership" is defined generally in section 1.1502-1(g) of the Treasury Regulations as a more than 50 percentage point change in ownership in the common parent corporation that occurs during a two-year period.  (Citation omitted.)  If a consolidated return change of ownership occurs, then under section 1.1502-21(d) of the Regulations, the net operating losses attributable to the common parent before the change (together with the net operating losses attributable to other corporations, if any, that were members of the group before the change) may be carried over to the consolidated return years ending after the change only to the extent that the common parent (and the other corporations that were members of the group before the change) contribute

to the consolidated taxable income of the group.  This limitation hampers the tax avoidance motive of a party which infuses new capital into the common parent with the intention of having it acquire profitable subsidiaries.

  In the present situation, X and Y do not represent new businesses added to the P affiliated group with funds obtained from a post-acquisition equity infusion.  Instead, both X and Y represent a continuation of businesses previously carried on by P.  With respect to the CRCO that took place in December 1982, P is an "old member" as defined in section 1.1502-1(g)(3) of the regulations, and but for the separate incorporation of its Division A and Division B in January 1982 P would be able to attribute the income of these two businesses to an old member for purposes of computing the limitation on the use of carryovers of the old members.

  X and Y do not literally satisfy the definition of an "old member" with respect to the CRCO that took place in December 1982 because they were not in existence as of the end of 1981;  that is, they were not members of the P affiliated group immediately preceding the first day of the taxable year in which the CRCO occurred.  See section 1.1502-1(g)(3).  Nevertheless, their contribution to consolidated taxable income for 1982 should be treated as attributable to old members because their assets and businesses were derived solely from P, an old member.

HOLDING

  X and Y are treated as "old members" of the P affiliated group for P's taxable year 1982 in which a CRCO with respect to P occurred.  Consequently, net operating losses of P occurring prior to 1982 may be carried forward and applied against the consolidated taxable income of the old members of the group, including X and Y.

Rev. Rul. 84-33, 1984-1 C.B. 186, 1984-9 I.R.B. 13.