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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.

© 2002, 2005