Rev. Rul. 75-378

Advice has been requested concerning the proper computation of a consolidated net operating loss deduction, under the circumstances described below.

P, a corporation, owns all of the outstanding stock of S and T corporations. Prior to 1973, P and its subsidiaries filed separate returns and elected to claim multiple surtax exemptions under section 1562(a) of the Internal Revenue Code of 1954.

On September 30, 1973, T was liquidated into P in a transaction to which sections 332 and 334(b)(1) of the Code applied. P, S, and T elected to file a consolidated Federal income tax return for the year ended December 31, 1973. The consolidated return included the income of P and S for their entire taxable years plus the income of T for the period January 1, 1973 through September 30, 1973. T sustained a net operating loss in 1972 that was available as a net operating loss carryover to the 1973 consolidated return year in the amount of 100x dollars. Since T was liquidated during 1973 in a transaction to which section 381 applies, the net operating loss carryovers of T are carried over to P in accordance with the provisions of section 381(c)(1).

Since the affiliated group claimed multiple surtax exemptions in 1972, 1972 is a "separate return limitation year" within the meaning of section 1.1502-1(f) of the Income Tax Regulations, and T's net operating loss carryovers are subject to the limitation on net operating loss carryovers and carrybacks from separate return limitation years under section 1.1502-21(c).

The members of the affiliated group had the following separate taxable income in 1973:

                    P           60x dollars

The specific issue is how to apply concurrently sections 381(c)(1) of the Code and 1.1502-21(c) of the regulations to compute the amount of the consolidated net operating loss deduction in the 1973 consolidated return.

Section 381(c)(1)(B) of the Code states that in determining the net operating loss deduction, the portion of the deduction attributable to the net operating loss carryovers of the distributor or transferor corporation to the first taxable year of the acquiring corporation ending after the date of distribution or transfer shall be limited to an amount that bears the same ratio to the taxable income (determined without regard to a net operating loss deduction) of the acquiring corporation in such taxable year as the number of days in the taxable year after the date of distribution or transfer bears to the total number of days in the taxable year (i.e. 92/365).

Section 1.1502-76(b)(1) of the regulations provides, in part, that the consolidated return for the group must include the income of the common parent for that corporation's entire taxable year and the income of each subsidiary for the portion of such taxable year during which it was a member of the group.

Section 1.1502-21(c)(1) of the regulations provides, in general, that in the case of a net operating loss of a member of the group arising in a separate return limitation year (as defined in paragraph (f) of section 1.1502-1) of such member (and in a separate return limitation year of any predecessor of such member), the amount that may be included under paragraph (b) of section 1.1502-21 (computed without regard to the limitation contained in paragraph (d) of section 1.1502-21) in the consolidated net operating loss carryovers and carrybacks to a consolidated return year of the group shall not exceed the amount determined under subparagraph (2) of section 1.1502-21(c).

Section 1.1502-21(c) of the regulations states that the amount of the net operating loss carryover from a separate return limitation year that may be applied to the consolidated return of the group shall be an amount that represents the excess, if any, of:

(i) Consolidated taxable income (computed without regard to the consolidated net operating loss deduction), minus such consolidated taxable income recomputed by excluding the items of income and deduction of such member, over

(ii) The net operating losses attributable to such member which may be carried to the consolidated return year arising in taxable years ending prior to the particular separate return limitation year.

Section 1.1502-1(f) of the regulations provides, in part, with exceptions not here applicable, that the term "separate return limitation year" means any separate return year of a member or of a predecessor of such member. The term "predecessor" means a transferor or distributor of assets to a member in a transaction to which section 381(a) applies.

Since T was liquidated during the consolidated return year and its net operating loss carryovers are carried over to P under the provisions of section 381(c)(1) of the Code, the separate return limitation year rule of section 1.1502-21(c)(2) of the regulations must be computed with respect to T and P in determining the amount of the consolidated net operating loss deduction. The computation is as follows:

          As to T                                           Limitation