Example (3). The facts are the same as in example (2) with the following additions for 1983. 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 (h)(2) of this section. Consolidated partial LICTI is $100. Under paragraph (h)(2) of this section, $50 of the nonlife consolidated net operating loss carryover ($170) is used in 1983 and, under paragraph (m)(3) (vi) and (vii) of this section, the portion used in 1982 is attributable to I, the ineligible nonlife member. Accordingly, the offsetable nonlife consolidated net operating loss from 1982 under paragraph (m)(3)(ii) of this section is $70, i.e., the unused loss from 1982. The offsetable nonlife consolidated net operating loss in 1983 is $24.50, i.e., 35 percent of the lesser of the offsetable loss of $70 or consolidated partial LICTI of $100. Accordingly, under paragraph (g) of this section (assuming no amount is withdrawn from L's surplus accounts), consolidated taxable income is $75.50, i.e., consolidated partial LICTI of $100 minus the offsetable loss of $24.50.

Example (4). P owns all of the stock of S and L. For 1982, all corporations are eligible corporations, and the group elects under section 1504(c)(2) to file a consolidated return, the nonlife consolidated net operating loss is $100, and the nonlife consolidated net capital loss is $50. Assume that the losses may not be carried back and the capital losses are not attributable to built-in deductions under paragraph (m)(3)(ix) of this section or under § 1.1502-15. Other facts and the results are set forth in the following table:

ed partial LICTI for 1982 to zero as determined before any setoff for nonlife losses. Under paragraph (m)(3)(xii) of this section, the nonlife consolidated net operating loss of $15 and the nonlife consolidated net capital loss of $50 that were set off in 1982 respectively against consolidated partial LICTI and life consolidated capital gain net income are restored. These restored amounts may consititute part of the nonlife consolidated net operating loss carryover to 1983 under paragraph (h)(2) of this section or part of the nonlife net capital loss carryover to 1983 under paragraph (h)(4) of this section.

Example (6). The facts are the same as in example (5) except that L's LO for 1983 as carried back reduces consolidated partial LICTI in 1982 from $100 to $25. Since consolidated partial LICTI of $100 in 1982 (before the carryback) included life consolidated capital gain net income of $50, under paragraph (m)(3)(iii) of this section, the life consolidated capital gain net income is $25, i.e., $50 but not more than $25. Therefore, under paragraph (m)(3)(ii) of this section, the offsetable nonlife capital loss in 1982 is $25 and, under paragraph (m) (3)(xii) of this section, $25 of the $50 nonlife consolidated net capital loss in 1982 may be carried under paragraph (h)(4) of this section to 1983. No nonlife consolidated net operating loss is used as a setoff against consolidated partial LICTI in 1982 under paragraph (m)(3)(xii) of this section by reason of the carryback of the consolidated LO from 1983 to 1982.

(n) Nonlife consolidated taxable income set off by life subgroup losses(1) In general. The life subgroup losses consist of the consolidated LO and the life consolidated net capital loss (as determined under paragraph (1)(4) of this section). Under paragraph (g)(1) of this section, nonlife consolidated taxable income is set off by the amounts of these two consolidated losses specified in paragraph (n)(2) of this section.

(2) Amount of setoff. The portion of the consolidated LO or life consolidated net capital loss that may be set off against nonlife consolidated taxable income (determined under paragraph (h) of this section) is determined by applying the rules prescribed in paragraphs (m) (2) and (3) of this section in the following manner:

(i) Substitute the term "life" for "nonlife", and vice versa.

(ii) Substitute the term "nonlife consolidated taxable income" for "consolidated partial LICTI”, and vice versa.

(iii) Substitute the term "consolidated LO" for "non-life consolidated net operating loss", "paragraph (1)" or "paragraph (j)” for “paragraph (h)", and "section 812(b)(3)" for "section 172(b)(3)(C)".

(iv) Paragraphs (m)(3)(vi), (vii), (x), and (xi) of this section do not apply to a consolidated LO.

(v) Capital losses may not be deducted more than once. See section 818(e) and also the requirements in section 818(f).

(vi) The setoff of life subgroup losses against nonlife consolidated taxable income does not affect nonlife member deductions that depend in whole or in part on taxable income.

(3) Illustrations. The following examples illustrate this paragraph (n). In the examples, L indicates a life company, another letter indicates a nonlife company, and each corporation uses the calendar year as its taxable year.

Example (1) P, S, L, and L2 constitute a group that elects under section 1504(c)(2) to file a consolidated return for 1982. In 1982, 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 (h) of this section to taxable years (whether consolidated or separate) preceding 1982. The nonlife subgroup has no carryover from years prior to 1982. Consolidated LO is $150 which under paragraph (1) of this section includes life consolidated capital gain net income of $25. The $150 LO is carried back under paragraph (1)(3) of this section to taxable years (whether consolidated or separate) preceding 1982 before it may offset in 1982 nonlife consolidated taxable income. Since life consolidated capital gain net income is zero for 1982, the nonlife capital loss offset is zero.

Example (2). The facts are the same as in example (1). Assume further that no part of the $150 consolidated LO for 1982 can be used by L, and L2 in years prior to 1982. For 1982, $100 of consolidated LO sets off the $100 nonlife consolidated taxable income. The life subgroup carries under paragraph (1)(3) of this section to 1983 $50 of the consolidated LO ($150 minus $100). See paragraph (1)(3)(ii) of this section. The $50 carryover will be used in 1983 against life subgroup income before it may be used in 1983 to setoff nonlife consolidated taxable income.

Example (3). (a) The facts are the same as in example (1), except that for 1982 the nonlife consolidated taxable income is $150

and includes nonlife consolidated capital gain net income of $50, consolidated partial LICTI is $200, and a life consolidated net capital loss is $50. Assume that the $50 life consolidated net capital loss sets off the $50 nonlife consolidated capital gain net income. Consolidated taxable income under paragraph (g) of this section is $300, i.e., nonlife consolidated taxable income ($150) minus the setoff of the life consolidated net capital loss ($50), plus consolidated partial LICTI ($200).

(b) Assume that for 1983 the nonlife consolidated net operating loss is $150. Under paragraph (h)(2) of this section, the loss may be carried back to 1982 against nonlife consolidated taxable income. If P, the common parent, does not elect to relinquish the carryback under section 172(b)(3)(C), the entire $150 must be carried back reducing 1982 nonlife consolidated taxable income to zero and nonlife consolidated capital gain net income to zero. Under paragraph (m)(3)(xii) of this section, the setoff in 1982 of the nonlife consolidated capital gain net income ($50) by the life consolidated net capital loss ($50) is restored. Accordingly, the 1982 life consolidated net capital loss may be carried over by the life subgroup to 1983. Under paragraph (g) of this section, after the carryback consolidated taxable income for 1982 is $200, i.e., nonlife consolidated taxable income ($0) plus consolidated partial LICTI ($200).

Example (4). The facts are the same as in example (3), except that P elects under section 172 (b)(3)(C) to relinquish the carryback of $150 arising in 1983. The setoff in part (a) of example (3) is not restored. However, the offsetable nonlife consolidated net operating loss for 1983 (or that may be carried forward from 1983) is zero. See paragraph (m)(3)(viii) of this section. Nevertheless, the $150 nonlife consolidated net operating loss may be carried forward to be used by the nonlife group.

Example (5). P owns all of the stock of S. and of L1. On January 1, 1978, L1 purchases all of the stock of L. For 1982, the group elects under section 1504(c)(2) to file a consolidated return. For 1982, L, is an eligible corporation under paragraph (d)(12) of this section but L is ineligible. Thus, L, but not L is a member for 1982. For 1982, L2 sustains an LO that cannot be carried back. For 1982, L is treated under paragraph (f)(6) of this section as a member of a controlled group of corporations under section 1563 with P, S, and L,. For 1983, L2 is eligible and is included on the group's consolidated return. La's LO for 1982 that may be carried to 1983 is not treated under paragraph (d)(11) of this section as having been sustained in a separate return limitation year for purposes of computing consolidated partial LICTI of the L-L life subgroup for

1983. Furthermore, the portion of La's LO not used under paragraph (1)(3) of this section against life subgroup income in 1983 may be included in offsetable consolidated operations loss under paragraph (n)(2) and (m)(3)(i) of this section that reduces in 1983 nonlife consolidated taxable income because La's loss in 1982 was not sustained in a separate return limitation year under paragraph (n)(2) and (m)(3)(ix)(A) of this section or in a separate return year (1982) when an election was in effect neither under section 1504(c)(2) nor section 243(b)(2).

(0) Alternative tax-(1) In general. For purposes of the alternative tax under paragraph (f)(7)(ii) of this section, consolidated net capital gain is the sum of the following two amounts:

(i) The nonlife consolidated net capital gain reduced by any setoff of a life consolidated net capital loss.

(ii) The life consolidated net capital gain reduced by any setoff of a nonlife consolidated net capital loss.

(2) Net capital gain. For purposes of this paragraph (0):

(i) Nonlife consolidated net capital gain is computed under 1.1502-41 except that it may not exceed nonlife consolidated taxable income (computed under paragraph (h) of this section).

(ii) Life consolidated net capital gain is computed under § 1.1502-41, applied in a manner consistent with paragraph (1)(4) of this section, except that it may not exceed consolidated partial LICTI (as determined under paragraph (j) of this section).

(iii) Setoffs. Setoffs are determined under paragraphs (m) or (n) of this section (as the case may be).

(p) Transitional rule for credit carryovers. For limitations on credits arising in taxable years ending before January 1, 1981, that may be carried over to taxable years beginning on or after that date, section 1507(c)(2)(A) of the Tax Reform Act of 1976 and the principles in paragraph (h)(3) of this section (relating to limitations on loss carryovers) apply.

(q) Preemption. The rules in this section preempt any inconsistent rules in other sections (§ 1.1502-1 through 1.1502-80) of the consolidated return regulations. For example, the rules in paragraph (m)(3)(vi) apply notwithstanding § 1.1502-21(b)(3) § 1.1502-79(a)(3).

and

(r) Other consolidation principles. The fact that this section treats the life and nonlife members as separate groups in computing, respectively, consolidated partial LICTI (or LO) and nonlife consolidated taxable income (or loss) does not affect the usual rules in §§ 1.1502-0-1.1502-80 unless this section provides otherwise. Thus, the usual rules in § 1.1502-13 (relating to deferred intercompany transactions) apply to both the life and nonlife members by treating them as members of one affiliated group.

(s) Filing requirements. Nonlife consolidated taxable income or loss under paragraph (h) of this section shall be determined on a separate Form 1120 or 1120 M and consolidated partial LICTI under paragraph (j) of this section shall be determined on a separate Form 1120 L. The consolidated return shall be made on a separate Form 1120, 1120 M, or 1120 L by the common parent (if the group includes a life company), which shows the setoffs under paragraphs (g), (m), and (n) of this section and clearly indicates by notation on the face of the return that it is a life-nonlife consolidated return (if the group includes a life company). See also § 1.1502–75(j), relating to statements and schedules for subsidiaries.

(Secs. 1502 and 7805 of the Internal Revenue Code of 1954 (68A Stat. 637, 917; 26 U.S.C. 1502, 7805))

[T.D. 7877, 48 FR 11441, Mar. 18, 1983, as amended by T.D. 7912, 48 FR 40215, Sept. 6, 1983]

ADMINISTRATIVE PROVISIONS AND OTHER RULES

81.1502-75 Filing of consolidated returns. (a) Privilege of filing consolidated returns-(1) Exercise of privilege for first consolidated return year. A group which did not file a consolidated return for the immediately preceding taxable year may file a consolidated return in lieu of separate returns for the taxable year, provided that each corporation which has been a member during any part of the taxable year for which the consolidated return is to be filed consents (in the manner provided in paragraph (b) of this section) to the regulations under section 1502.

If a group wishes to exercise its privilege of filing a consolidated return, such consolidated return must be filed not later than the last day prescribed by law (including extensions of time) for the filing of the common parent's return. Such consolidated return may not be withdrawn after such last day (but the group may change the basis of its return at any time prior to such last day).

(2) Continued filing requirement. A group which filed (or was required to file) a consolidated return for the immediately preceding taxable year is required to file a consolidated return for the taxable year unless it has an election to discontinue filing consolidated returns under paragraph (c) of this section.

(b) How consent for first consolidated year exercised—(1) General rule. The consent of a corporation referred to in paragraph (a)(1) of this section shall be made by such corporation joining in the making of the consolidated return for such year. A corporation shall be deemed to have joined in the making of such return for such year if it files a Form 1122 in the manner specified in paragraph (h)(2) of this section.

(2) Consent under facts and circumstances. If a member of the group fails to file Form 1122, the Commissioner may under the facts and circumstances determine that such member has joined in the making of a consolidated return by such group. The following circumstances, among others, will be taken into account in making this determination:

(i) Whether or not the income and deductions of the member were included in the consolidated return;

(ii) Whether or not a separate return was filed by the member for that taxable year; and

(iii) Whether or not the member was included in the affiliations schedule, Form 851.

If the Commissioner determines that the member has joined in the making of the consolidated return, such member shall be treated as if it had filed a Form 1122 for such year for purposes of paragraph (h)(2) of this section.

(3) Failure to consent due to mistake. If any member has failed to join in the making of a consolidated return under either subparagraph (1) or (2) of this paragraph, then the tax liability of each member of the group shall be determined on the basis of separate returns unless the common parent corporation establishes to the satisfaction of the Commissioner that the failure of such member to join in the making of the consolidated return was due to a mistake of law or fact, or to inadvertence. In such case, such member shall be treated as if it had filed a Form 1122 for such year for purposes of paragraph (h)(2) of this section, and thus joined in the making of the consolidated return for such year.

(c) Election to discontinue filing consolidated returns-(1) Good cause—(i) In general. Notwithstanding that a consolidated return is required for a taxable year, the Commissioner, upon application by the common parent, may for good cause shown grant permission to a group to discontinue filing consolidated returns. Any such application shall be made to the Commissioner of Internal Revenue, Washington, DC 20224, and shall be made not later than the 90th day before the due date for the filing of the consolidated return (including extensions of time). In addition, if an amendment of the Code, or other law affecting the computation of tax liability, is enacted and the enactment is effective for a taxable year ending before or within 90 days after the date of enactment, then application for such a taxable year may be made not later than the 180th day after the date of enactment, and if the application is approved the permission to discontinue filing consolidated returns will apply to such taxable year notwithstanding that a consolidated return has already been filed for such year.

(ii) Substantial adverse change in law affecting tax liability. Ordinarily, the Commissioner will grant a group permission to discontinue filing consolidated returns if the net result of all amendments to the Code or regulations with effective dates commencing within the taxable year has a substantial adverse effect on the consolidated tax liability of the group for such year

relative to what the aggregate tax liability would be if the members of the group filed separate returns for such year. Thus, for example, assume P and S filed a consolidated return for the calendar year 1966 and that the provisions of the Code have been amended by a bill which was enacted by Congress in 1966, but which is first effective for taxable years beginning on or after January 1, 1967. Assume further that P makes a timely application to discontinue filing consolidated returns. In order to determine whether the amendments have a substantial adverse effect on the consolidated tax liability for 1967, relative to what the aggregate tax liability would be if the members of the group filed separate returns for 1967, the difference between the tax liability of the group computed on a consolidated basis and taking into account the changes in the law effective for 1967 and the aggregate tax liability of the members of the group computed as if each such member filed separate returns for such year (also taking into account such changes) shall be compared with the difference between the tax liability of such group for 1967 computed on a consolidated basis without regard to the changes in the law effective in such year and the aggregate tax liability of the members of the group computed as if separate returns had been filed by such members for such year without regard to the changes in the law effective in such year.

(iii) Other factors. In addition, the Commissioner will take into account other factors in determining whether good cause exists for granting permission to discontinue filing consolidated returns beginning with the taxable year, including:

(a) Changes in law or circumstances, including changes which do not affect Federal income tax liability,

(b) Changes in law which are first effective in the taxable year and which result in a substantial reduction in the consolidated net operating loss (or consolidated unused investment credit) for such year relative to what the aggregate net operating losses (or investment credits) would be if the members of the group filed separate returns for such year, and

(c) Changes in the Code or regulations which are effective prior to the taxable year but which first have a substantial adverse effect on the filing of a consolidated return relative to the filing of separate returns by members of the group in such year.

(2) Discretion of Commissioner to grant blanket permission—(i) Permission to all groups. The Commissioner, in his discretion, may grant all groups permission to discontinue filing consolidated returns if any provision of the Code or regulations has been amended and such amendment is of the type which could have a substantial adverse effect on the filing of consolidated returns by substantially all groups, relative to the filing of separate returns. Ordinarily, the permission to discontinue shall apply with respect to the taxable year of each group which includes the effective date of such an amendment.

(ii) Permission to a class of groups. The Commissioner, in his discretion, may grant a particular class of groups permission to discontinue filing consolidated returns if any provision of the Code or regulations has been amended and such amendment is of the type which could have a substantial adverse effect on the filing of consolidated returns by substantially all such groups relative to the filing of separate returns. Ordinarily, the permission to discontinue shall apply with respect to the taxable year of each group within the class which includes the effective date of such an amendment.

(3) Time and manner for exercising election. If, under subparagraph (1) or (2) of this paragraph, a group has an election to discontinue filing consolidated returns for any taxable year and such group wishes to exercise such election, then the common parent must file a separate return for such year on or before the last day prescribed by law (including extensions of time) for the filing of the consolidated return for such year. See section 6081 (relating to extensions of time for filing returns).

(d) When group remains in existence-(1) General rule. A group shall be considered as remaining in existence if the common parent corpora