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Corporate Tax Bulletin (February 2002)

IRS Announces New Position with
Regard to Consolidated Return
Loss Disallowance Rule




By Victor L. Penico, formerly a tax partner in the San Francisco office of Pillsbury Winthrop LLP, now Pillsbury Winthrop Shaw Pittman LLP. Mr. Penico previously served as a Branch Chief in the Corporate Division of the Internal Revenue Service. Prior to joining the firm, he was actively involved in the Rite Aid litigation and is a well-known expert on the consolidated return regulations.

This article is part of the Pillsbury Winthrop Shaw Pittman LLP Tax Page, a World Wide Web demonstration project. Comments are welcome on the design or content of this material. However, this material is not intended and cannot be regarded as legal or tax advice.


On January 31, 2002, the U.S. Treasury Department released Notice 2002-11, announcing its decision to implement new rules governing loss disallowance on sales of stock of a member of a consolidated group. This decision has far-reaching consequences–and benefits–for large corporate groups.

The loss disallowance regulations barred corporations that are members of consolidated groups from taking into account losses on the sale of stock of subsidiaries, except in very limited circumstances. The decision to withdraw the loss disallowance regulations was the result of the government's loss in Rite Aid Corp. v. United States, 255 F3d 1357 (Fed.Cir.2001). In that case, the United States Court of Appeals for the Federal Circuit held that a portion of the loss disallowance regulations was invalid.

The decision announced in Notice 2002-11 presents an extraordinary opportunity for corporations. They should immediately review their prior tax returns for open years to assess the merits of a claim for refund, develop the facts essential to meeting the evidentiary burden under the regulations and, where appropriate, file refund claims.

The IRS will issue regulations with elective retroactive effect permitting corporations to take into account all of the losses on the sale of stock in subsidiaries to the extent they prove such losses do not arise from the realization of built-in gain.


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