Internal Revenue Bulletin 2012-43 (PDF rendition): IRS Announcements

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Bulletin No. 201
2-43
October 22, 2012
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
REG–140668–07, page 501.
Proposed regulations under section 172 of the Code provide
guidance regarding the treatment of corporate equity reduction
transaction (CERTs), particularly the treatment of multiple step
plans for the acquisition of stock and CERTs involving mem-
bers of a consolidated group. The proposed regulations also
provide guidance regarding the carryback of consolidated net
operating losses to separate return years.
EXEMPT ORGANIZATIONS
Announcement 2012–38, page 527.
This announcement provides notice of public hearing on pro-
posed regulations (REG–130266–11, 2012–32 I.R.B. 126)
that provide guidance regarding the requirements for charita-
ble hospital organizations relating to financial assistance and
emergency medical care policies, charges for certain care
provided to individuals eligible for financial assistance, and
billing and collections under section 501 of the Code. A public
hearing is scheduled for October 29, 2012.
Finding Lists begin on page ii.

The IRS Mission
Provide Americ
a’s taxpayers top-quality service by helping
them understa
nd and meet their tax responsibilities and en-
force the law wi
th integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Secre-
tary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
October 22, 20122012–43 I.R.B.

Part IV. Items o
fGeneralInterest
Notice of Prop
osed
Rulemaking
Regulations R
egarding the
Application o
f Section 172(h)
Including Co
nsolidated Groups
REG–140668–07
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains pro-
posed regulations under section 172(h)
andsection1502oftheInternalRevenue
Code. These proposed regulations pro-
vide guidance regarding the treatment
of corporate equity reduction transac-
tions (CERTs), including the treatment
of multiple step plans for the acquisition
of stock and CERTs involving members
of a consolidated group. These proposed
regulations also provide guidance re-
garding certain elections relating to the
carryback of consolidated net operating
losses (CNOLs) to separate return years.
These proposed regulations will affect C
corporations and corporations filing con-
solidated returns.
DATES: Written or electronic comments
and requests for a public hearing must be
received by December 17, 2012.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR(REG–140668–07),
Room 5203, Internal Revenue Service,
P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may
be hand-delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–140668–07),
Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue, NW,
Washington, DC, or sent electronically,
viatheFederaleRulemaking
Portal atwww.regulations.gov(IRS
REG–140668–07).
FOR FUR
THER INFORMATION
CONTAC
T: Concerning the proposed
regul
ations, Amie Colwell Breslow
or Mar
ie C. Milnes-Vasquez at (202)
622–7530; con
cerning submissions
of comments an
d request for public
hearing, Oluw
afunmilayo Taylor at
Oluwafunmila
yo.P.Taylor@irscounsel.treas.gov
or (202) 622–7
180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collecti
on of information contained
in this notic
e of proposed rulemaking has
been submitt
ed to the Office of Manage-
ment and Budg
et for review in accordance
with the Pap
erwork Reduction Act of 1995
(44 U.S.C. 3
507(d)) under control number
1545–2171.
Comments on the collection
of informat
ion should be sent to theOf-
fice of Mana
gement and Budget, Attn:
Desk Offic
er for the Department of the
Treasury,
Office of Information and Reg-
ulatory Af
fairs, Washington, D.C. 20503,
with copie
stotheInternal Revenue Ser-
vice,Att
n: IRS Reports Clearance Officer,
SE:W:CAR
:MP:T:M:S, Washington, D.C.
20224. Co
mments on the collection of in-
formatio
n should be received by Novem-
ber 16, 20
12. Comments are specifically
request
ed concerning:
Whether t
he proposed collection of in-
formati
on is necessary for the proper per-
formanc
e of the functions of theInternal
Revenue
Service, including whether the
informa
tion will have practical utility;
The accu
racy of the estimated burden
associa
ted with the proposed collection of
informa
tion;
How the q
uality, utility and clarity of
the info
rmation to be collected may be en-
hanced
;
How the
burden of complying with the
propos
ed collection of information may be
minimi
zed, including through the appli-
cation
of automated collection techniques
or othe
r forms of information technology;
and
Estima
tes of capital or start-up costs
and co
sts of operation, maintenance, and
purch
ase of service to provide information.
The co
llection of information
in the
se proposed regulations is
in§§1
.1502–21(b)(3)(ii)(B)and
1.150
2–72(e).
The pr
oposed regulations provide guid-
ance r
egarding application of section
172(b
)(1)(E) and (h) and section 1502.
The collectio
n of information is re-
quired in orde
r to obtain a benefit. The
likely respon
dents are corporations that
are members of
consolidated groups.
Estimated tot
al annual reporting bur-
den: 120,000 h
ours.
Estimated ave
rage annual burden hours
per responde
nt: 15 hours.
Estimated num
ber of respondents:
8,000.
Estimated fre
quency of responses:
Once.
An agency may n
ot conduct or sponsor,
and a person i
s not required to respond to, a
collection o
f information unless it displays
a valid contr
ol number assigned by the Of-
fice of Manag
ement and Budget.
Books or reco
rds relating to a collection
of informati
on must be retained as long
as their con
tents may become material in
the adminis
tration of any internal revenue
law. Genera
lly, tax returns and tax return
informatio
n are confidential, as required
by 26 U.S.C
. 6103.
Background
Section 17
2 provides rules relating to
net operat
ing loss (NOL) carrybacks and
carryover
s. Section 172(b)(1)(A) states
that the NO
L for any taxable year gener-
ally is car
ried back to each of the 2 years
precedin
g the taxable year of the loss and
carried o
ver to each of the 20 years follow-
ing the ta
xable year of the loss.
The corpo
rate equity reduction trans-
action ru
les of section 172(b)(1)(E) and
(h) were e
nacted in 1989 in response to
the use of
NOL carrybacks to finance
leverag
ed buyout transactions. Congress
enacted
these rules to limit a corporation’s
ability
to obtain tax refunds as the result
of the ca
rryback of NOLs that were at-
tributa
ble to interest deductions allocable
to such
transactions. See Explanation of
Corpor
ate Tax Refund Restriction Bill,
135 Con
g. Rec. S9936–01, at S9944
(1989)
; 1989 WL 193512.
Sectio
n 172(h)(3)(A) defines acorpo-
rate eq
uity reduction transaction(CERT)
as a “ma
jor stock acquisition” (MSA) or
an “ex
cess distribution” (ED). Section
172(h
)(3)(B) definesmajor stock acqui-
sitio
nas the acquisition by a corporation,
pursu
ant to a plan of suchcorporation (or
any gr
oup of persons acting in concert
2012–43 I.R.B.501October 22, 2012

with such corporation), of stock in another
corporation representing 50 percent or
more (by vote or value) of the stock in such
other corporation. Section 172(h)(3)(C)
definesexcess distributionas the excess (if
any) of the aggregate distributions (includ-
ing redemptions) made during a taxable
year by a corporation with respect to its
stock over the greater of: 150 percent of
the average of such distributions during
the 3 taxable years immediately preceding
such taxable year, or 10 percent of the fair
market value of the stock of the corpora-
tion at the beginning of such taxable year.
Thus, the total of distributions that may be
treated as an ED is limited to the amount
that exceeds the greater of two baselines:
onetiedtoahistorical, three-year average
and the other based on the fair market
value of the distributor.
If an MSA or ED occurs, section
172(b)(1)(E) and (h) limit the carryback
of the portion of an NOL that constitutes a
“corporate equity reduction interest loss”
(CERIL) of an “applicable corporation”
in any “loss limitation year.” See section
172(b)(1)(E)(i). Section 172(b)(1)(E)(iii)
defines anapplicable corporationas a
C corporation that acquires stock, or the
stock of which is acquired, in an MSA; a
C corporation making distributions with
respect to, or redeeming, its stock in con-
nection with an ED; or a C corporation
that is a successor to one of the other
types of applicable corporations. Section
172(b)(1)(E)(ii) definesloss limitation
yearas the taxable year in which a CERT
occurs and each of the two succeeding
taxable years. Section 172(h)(1) defines
corporate equity reduction interest loss
as the excess of (1) the total NOL for a
loss limitation year, over (2) the NOL for
the loss limitation year computed without
regard to the allocable interest deductions
that are otherwise taken into account in
computing the NOL. Section 172(h)(2)(A)
definesallocable interest deductionsas
deductions allowed on the portion of any
indebtedness allocable to a CERT.
Under section 172(h)(2)(B), except
as provided in regulations or section
172(h)(2)(E), indebtedness is allocable to
a CERT in the manner prescribed under
section 263A(f)(2)(A) without regard to
paragraph (i) thereof (relating to traced
debt). Thus, a portion of the taxpayer’s
total interest expense is allocable to the
CERT. See H.R. Rep. No. 101–247,
at 1251 (Conf. Rep.). However, sec-
tion 172(h)(2)(C) limits the amount of
allocable interest deductions for any loss
limitation year to (1) the amount allowable
as a deduction for interest paid or accrued
by the taxpayer during the loss limitation
year, less (2) the average of deductions
allowed for interest paid or accrued by the
taxpayer for the three taxable years pre-
ceding the taxable year in which the CERT
occurred. Therefore, the allocable inter-
est deductions are limited to the increase
in interest deductions over a historical,
three-year baseline.
Section 172(h)(3)(C) and (E) sets forth
specific rules for determining whether
an ED has occurred. For purposes of
determining a corporation’s aggregate
distributions for a taxable year under sec-
tion 172(h)(3)(C)(i) and the average of
such distributions during the three taxable
years preceding the relevant taxable year
under section 172(h)(3)(C)(ii)(I), section
172(h)(3)(E)(ii) provides that the distri-
butions taken into account are reduced
by the aggregate amount of stock issued
by the corporation during the applicable
period in exchange for money or prop-
erty other than stock in the corporation.
However, section 172(h)(3)(E)(i) provides
that stock described in section 1504(a)(4)
(certain preferred stock) and distributions
(including redemptions) with respect to
such stock aredisregarded.
For purposes of applying section
172(b)(1)(E) and (h), an applicable corpo-
ration and all members of its consolidated
group are treated as a single taxpayer. See
section 172(h)(4)(C).
Currently, there are no regulations un-
der section 172(b)(1)(E) and (h). Section
172(h)(5) grants the Secretary the author-
ity to prescribe such regulations as may
be necessary to carry out the purposes of
section 172(h), including regulations: (A)
for applying section 172(h) to successor
corporations and to cases in which a tax-
payer becomes (or ceases to be) a mem-
ber of a consolidatedgroup; (B) to prevent
the avoidance of section 172(h) through
the use of related parties, pass-through en-
tities, and intermediaries; and (C) for ap-
plying section 172(h) when more than one
corporation is involved in a CERT. In addi-
tion, section 172(h)(2)(B) grants the Secre-
tary authority to issue regulations prescrib-
ing a method for allocating indebtedness to
a CERT other than the method contained in
section 263A(f)(2)(A). Section 1502 pro-
vides the Secretary with broad authority
to prescribe rules applicable tocorpora-
tions that file consolidated returns that are
different from the income tax provisions
that would apply if those corporations filed
separate returns.
These proposed regulations provide
general rules addressing whether a CERT
has occurred, the computation of a CERIL,
and the treatment of successors. The
proposed regulations also address is-
sues specific to the application of sec-
tion 172(b)(1)(E) and (h) to consolidated
groups, including: (1) treatment of the
consolidated group as a single taxpayer;
(2) determination of the group’s three-year
average that is relevant to a particular con-
solidated return loss limitation year; (3)
application of these rules if the corporation
participating in a CERT becomes a mem-
ber of a consolidated group; (4) application
of these rules if a group member decon-
solidates after the group has participated
in (or is treated as having participated in) a
CERT; (5) apportionment of a CERIL (and
other special status CNOLs) to members
of a consolidated group for carryback or
carryover to separate return years; and (6)
application of section 172(b)(1)(E) and
(h) to a life-nonlife group. The proposed
regulations also provide rules that would
amend the loss carryback waivers avail-
able to deconsolidating group members.
At this time, the Department of Trea-
sury and the IRS are not providing rules
addressing the application of section
172(h) to related parties, pass-through
entities, or intermediaries. However, the
Department of Treasury and the IRS con-
tinue to study the circumstances under
which these persons should be subject to
section 172(b)(1)(E) and (h). For exam-
ple, the purposes of the statute may be
furthered if section 172(b)(1)(E) and (h)
apply to the acquisition of 100 percent
of the stock of a target by a partnership
in which a corporation (or consolidated
group) holds a controlling interest. On
the other hand, the purposes of the statute
may not be advanced if 100 percent of the
stock of a target is acquired in a single
transaction, but the percentage of target
stock indirectly attributable to corporate
acquirers is relatively small. The De-
partment of Treasury and the IRS request
comments regarding the parameters for
applying section 172(b)(1)(E) and (h) to
October 22, 20125022012–43 I.R.B.

indirect corporate acquirers, and what spe-
cial computational rules, if any, would be
needed to implement its application.
The Department of Treasury and the
IRS considered inclusionofananti-avoid-
ance rule to prevent taxpayers from engag-
ing in section 381 transactions to shorten
loss limitation years. However, the De-
partment of Treasury and the IRS believe
that the detrimental effects of shortening
tax years make it unlikely that taxpayers
will attempt to undertake such transactions
as a planning technique. For example,
shortening a loss limitation year will re-
duce the income in that year, and, accord-
ingly, will limit the ability to carry back
any losses to that year. The Department
of Treasury and the IRS continue to study
whether an anti-abuse rule is needed and
request comments on this issue.
In addition, the Department of Trea-
sury and the IRS are not providing rules
addressing the application of section
172(b)(1)(E) and (h) totransactions occur-
ring before these rules are adopted as final
regulations (transitional issues). However,
the Department of Treasury and the IRS
continue to study, and request comments
on, transitional issues. For example, the
Department of Treasury and the IRS re-
quest comments regarding the application
of section 172(b)(1)(E) and (h) if a taxable
year constitutes a loss limitation year with
regard to more than one CERT, one occur-
ring before and the other occurring after
the adoption of these proposed regulations
as final regulations.
Explanation of Provisions
1.General CERT Rules
A.Determination of existence of a CERT
As discussed, a CERT is either an MSA
or an ED. The statute does not exclude
tax-free transactions from treatment as
an MSA or an ED. In addition, the con-
cerns targeted by Congress in enacting
section 172(b)(1)(E) and (h) can exist in
the context of both taxable and tax-free
transactions. Accordingly, the proposed
regulations provide that a tax-free trans-
action that meets the statutory definition
ofanMSAoranEDmustbetestedasa
CERT under section 172(b)(1)(E) and (h)
and these proposed regulations (collec-
tively, the “CERT rules”). For example,
a section 355 transaction, a corporate or-
ganization under section 351, or a stock
acquisition that qualifies for reorganiza-
tion treatment under section 368(a)(1)(A)
and (a)(2)(E) mustbe tested under the
CERT rules.
These proposed regulations also pro-
vide that an integrated plan of stock ac-
quisition including multiple steps will be
tested as a single potential MSA for pur-
poses of determining the consequences
of the transaction under the CERT rules.
This treatment applies even if a step in the
plan might separatelyconstituteanED,or
might so qualify in conjunction with other
distributions in the same taxable year.
Section 172(h)(3)(C)(ii) limits the
amount of distributions in a taxable year
that may be treated as an ED. Under one
prong of this limitation, the taxpayer’s
distributions are treated as an ED only to
the extent that they exceed 150 percent
of the taxpayer’s average of distributions
(three-year distribution average) made in
the three taxable years preceding the tax-
able year in which a potential ED occurs
(the distribution lookback period). These
proposed regulations provide that, to the
extent that a distribution is part of an inte-
grated plan that is treated as an MSA, the
distribution is excluded from the compu-
tation of the taxpayer’s three-year distri-
bution average that is relevant to any other
potential ED. These proposed regulations
provide additional rules for calculating the
taxpayer’s three-year distribution average
under section 172(h)(3)(C)(ii)(I) relevant
to potential EDs that occur in taxable years
that are not full 12-month years.
B.Loss limitation years
The proposed regulations generally
provide that the taxable year in which a
CERT occurs and each of the two succeed-
ing taxable years constitute loss limitation
years with regard to the CERT. The pro-
posed regulations also provide special
rules addressing loss limitation years of
successors, consolidated groups, and for-
mer members of consolidated groups.
C.Computation of a CERIL
Under section 172(h)(1), the term
CERILmeans, with respect to any loss
limitation year, the excess (if any) of
(1) the NOL for such taxable year, over
(2) the NOL for such taxable year de-
termined without regard to any allocable
interest deductions otherwise taken into
account in computing such loss. Section
172(h)(2)(A) definesallocable interest
deductionsas deductions allowed for in-
terest on any indebtedness allocable to a
CERT. Section 172(h)(2)(B) states that,
except as provided in regulations and
section 172(h)(2)(E), the indebtedness al-
locable to a CERT is determined under
the avoided cost methodology of section
263A(f)(2)(A), with certain adjustments.
Under section 263A(f)(2)(A) and the
regulations thereunder, allocable interest
deductions are computed by multiplying
the “weighted average interest rate” by
“average excess expenditures” as those
terms are defined in §1.263A–9(c)(5)(ii)
and (iii). Because section 263A contem-
plates transactions that are very different
in nature from CERTs, it is often diffi-
cult to identify the costs associated with a
CERT that are analogous to average excess
expenditures. To ameliorate this diffi-
culty, these proposed regulations provide
MSA- and ED-specific rules for comput-
ing costs associated with a CERT (CERT
costs). Further, these proposed regulations
identify additional CERT costs by looking
to the capitalization rules under section
263(a). Specifically, the proposed regula-
tions treat as CERT costs amounts paid or
incurred to facilitate an MSA or ED to the
extent that those amounts are required to
be capitalized under section 263(a) (with
certain modifications), and any amounts
disallowed under section 162(k). Because
most CERTs occur under circumstances
that already require application of sec-
tion 263(a), invoking those rules should
result in greater administrability. Once
the CERT costs are identified, the interest
allocable to those costs is computed under
the principles of section 263A(f)(2)(A)
and the regulations thereunder (with ad-
justments). The avoided cost methodology
of section 263A(f)(2)(A) effectively al-
locates interest to a CERT to the extent
that the taxpayer’s interest costs could
have been reduced if the taxpayer had not
engaged in the CERT. For purposes of
applying the avoided cost rules of section
263A(f)(2)(A), all CERT costs are treated
as if they were cash expenditures.
Under the proposed regulations,CERT
costswith regard to an MSA include the
fair market value of the stock acquired,
2012–43 I.R.B.503October 22, 2012

whether that stock is acquired in exchange
for cash, stock of the acquirer, or other
property. The inclusion of the fair market
value of stock acquired in stock-for-stock
exchanges ensures that such transactions
are treated similarly to an issuance of
acquirer’s stock for cash followed by an
MSA funded with the cash proceeds. Fur-
ther, inclusion of the fair market value
of stock acquired is consistent with the
avoided cost methodology applied un-
der section 172(h)(2) because the CERT
statute rejects tracing and assumes that
debt is used to fund all CERT costs.
In addition, CERT costs of an MSA in-
clude the fair market value of any distribu-
tion that is part of an integrated transaction
constituting the MSA. CERT costs also in-
clude amounts paid or incurred to facilitate
any step of the MSA to the extent that those
amounts are required to be capitalized un-
der section 263(a), and any amounts disal-
lowed under section 162(k).
Under the proposed regulations, CERT
costs associated with an ED include the
fair market value of distributions to share-
holders that are determined to be EDs
during the year in which the CERT oc-
curs. CERT costs also include a portion
of amounts paid or incurred to facilitate
the distributions to the extent that those
amounts are required to be capitalized
under section 263(a), and any amounts
disallowed under section 162(k). How-
ever, if neither section 263(a) nor section
162(k) applies or if only section 162(k)
applies to a distribution included in an ED,
additional CERT costs associated with
the distribution are determined under the
principles of §1.263(a)–4(e) (relating to
the capitalization of costs that facilitate
the acquisition or creation of intangibles),
applied as if the ED were a transaction
within the scope of §1.263(a)–4.
As discussed, the rules of section
263(a) are applied in the CERT context
with certain modifications. For the pur-
pose of identifying CERT costs under
these proposed regulations, modifications
to the operation of §1.263(a)–4 and –5
include treating certain borrowing costs as
facilitative of an MSA or ED. Therefore,
CERT costs will include these borrowing
costs. Congress objected to the carry-
back of NOLs resulting from leveraging
that directly or indirectly enables CERTs;
therefore, the Department of Treasury and
the IRS believe that it is appropriate to in-
clude borrowing costs in total CERT costs.
However, the Department of Treasury and
the IRS request comments regarding the
extent to which borrowing costs should be
included in CERT costs.
The computation of interest alloca-
ble to CERTs under the rules of section
263A(f)(2)(A) involves the time-weighted
average of costs incurred as of various
dates in the taxable year. Therefore, these
proposed regulations set forth rules for
determining when CERT costs should be
taken into account. Under these proposed
regulations, accumulated CERT costs as
of a particular date are the total CERT
costs that have been taken into account as
of that date under the applicable corpo-
ration’s method of accounting. A special
proration rule is provided to determine
accumulated CERT costs related to an ED.
Finally, CERT costs incurred in any year
prior to the year in which the CERT occurs
are included in accumulated CERT costs
beginning on the first day of the year in
which the CERT occurs.
Section 172(h)(2)(E) requires that the
allocation of interest to a CERT be re-
duced if an unforeseeable extraordinary
adverse event occurs during a loss limita-
tion year but after the CERT. The proposed
regulations do not provide guidance with
regard to unforeseeable extraordinary ad-
verse events. However, the Department of
Treasury and the IRS request comments re-
garding whether rules are necessary and,
if so, what type of events should consti-
tute unforeseeable extraordinary adverse
events.
D.Limitation on interest deductions
The CERT rules generally provide that
the portion of an NOL for any loss limi-
tation year that is attributable to the inter-
est deductions allocable to a CERT (that
is, a CERIL) may not be carried back to
any year prior to the year in which the
CERT occurred. As discussed, section
172(h)(2)(C) limits the amount of inter-
est treated as an allocable interest deduc-
tion to the excess of the amount allow-
able as a deduction for interest paid or ac-
crued by the taxpayer during the loss lim-
itation year, over the average of amounts
allowable as a deduction for interest paid
or accrued (the three-year average) during
the three taxable years preceding the tax-
able year in which the CERT occurred (the
lookback period). These proposed regu-
lations provide special rules for comput-
ing the three-year average in special sit-
uations, such as if anapplicablecorpora-
tion is not in existence for the entire look-
back period. Further, the proposed regu-
lations adjust the three-year average if the
relevant loss limitation year is not a full
12-month taxable period. These proposed
regulations also set forth special rules for
any taxable year that constitutes a loss lim-
itation year with regard to multiple CERTs.
The legislative history indicates that
Congress expected the Department of
Treasury and the IRS to write rules that
provide that increases attributable solely to
fluctuations in interest rates would not be
taken into account for purposes of apply-
ing the three-year average. Out of concern
that the additional complexities of such
rules would outweigh the benefit, these
proposed regulations do not include rules
that factor out increases in interest deduc-
tions attributable solely to fluctuations in
interest rates. However, the Department
of Treasury and the IRS are studying a
rule that, for purposes of applying the
three-year average, would factor out in-
terest deductions that are attributable to
increases in a taxpayer’s interest rate that
occur after the date of a CERT. Under the
rule being considered, the measurement
of a baseline interest rate after the CERT
occurs would take into account the fact
that CERT activity will often decrease a
taxpayer’s creditworthiness and increase
its average cost of borrowing, and accord-
ingly that the existence of the CERT, in
and of itself, will increase a taxpayer’s
borrowing expenses. The Department of
Treasury and the IRS request comments on
whether such a baseline would effectively
account for fluctuations in interest rates or
whether an alternative measure would be
more appropriate.
E.Predecessor and successor
As discussed, the CERT rules apply
only to applicable corporations. Under
section 172(b)(1)(E)(iii)(III), an applica-
ble corporation includes any corporation
that is a successor of: a corporation that
acquires stock in an MSA; a corporation
the stock of which is acquired in an MSA;
or a corporation making a distribution with
respect to, or redeeming, its stock in con-
nection with an ED. For purposes of apply-
October 22, 20125042012–43 I.R.B.

ing the CERT rules, these proposed regu-
lations definesuccessoras a transferee or
distributee in a transaction to which sec-
tion 381(a) applies. Further, if a successor
to a previous applicable corporation with
regard to a CERT itself transfers assets to
a further successor, the further successor
corporation is treatedas an applicable cor-
poration with regard to that CERT. In ad-
dition, these proposed regulations set forth
special rules for computing a successor’s
CERIL.
F.Operating rules
The proposed regulations include spe-
cial rules regarding the prohibition on
carryback of a CERIL. These rules pro-
vide that no CERIL may be carried back
to any taxable year that includes solely
dates that precede the date on which the
CERT at issue occurred. In applying this
rule to multi-step MSAs and to EDs that
include multiple distributions, the date
on which the CERT occurs is the earli-
est date on which the requirements for
CERT status have been satisfied. These
proposed regulations also provide that,
for purposes of determining whether an
ED has occurred, the computation of any
three-year distribution average under sec-
tion 172(h)(3)(C)(ii)(I) will be reduced by
the average of the stock issuances made by
the applicable corporation during the three
years of the distribution lookback period.
The principles of the proposed regula-
tions apply to the computation of the alter-
native minimum tax net operating loss un-
der section 56(d).
2.Special CERT Rules Applicable to
Consolidated Groups
A.Single entity treatment
Section 172(h)(4)(C) states that, except
as provided by regulation, all members
of a consolidated group are treated as a
single taxpayer for purposes of section
172(b)(1)(E) and (h). These proposed
regulations provide further guidance re-
garding the application of single entity
principles. These proposed regulations
affirm that transactions and expenditures
undertaken by a particular member are not
separately tracked; rather, the entire group
is treated as a single applicable corpora-
tion. For example, if multiple members
of a group acquire in total 50 percent or
more (by vote or value) of the stock of an-
other corporation, the group has engaged
in an MSA. Likewise, the computation of
a group’s CERIL under section 172(h)(1)
for any loss limitation year that is a consol-
idated return year includes the debt of all
members and all interest deductions that
are allowed on the group’s consolidated
return.
Intercompany transactions (includ-
ing interest accruals and payments on
intercompany obligations) are generally
disregarded under the proposed regula-
tions. However, these proposed regula-
tions provide that a transaction will not be
disregarded if a party to the transaction
becomes a non-member as a part of the
same plan or arrangement.
The most difficult issues in the CERT
area arise from the application of single en-
tity concepts if different corporations join
and deconsolidate from a group within the
same three-year period. The fungibility of
money and the ease of moving cash and
debt within a consolidated group may pro-
vide a consolidated group with an unwar-
ranted ability to manipulate the applica-
tion of the CERT rules, further complicat-
ing the analysis. After considering differ-
ent approaches, the Department of Trea-
sury and the IRS have determined that ap-
plication of single entity principles, under
which corporations cease to be separately
tracked for CERT purposes after their in-
clusion in a group, will limit complex-
ity and promote administrability. Further-
more, single entity treatment is consistent
with the statutory default of treating the
consolidated group as a single taxpayer.
Consistent with single entity treatment,
these proposed regulations provide that, if
an applicable corporation with regard to a
CERT occurring in a separate return year
(pre-existing CERT member) joins a con-
solidated group, the group is treated as a
single applicable corporation with regard
to that CERT in the consolidated return
year of the acquisition and any relevant
succeeding year. The pre-existing CERT
member will no longer have separate sta-
tus as an applicable corporation. Begin-
ning on the day the pre-existing CERT
member is first included in the group, the
only CERIL computation will be that of
the group.
These proposed regulations also pro-
vide that, in the consolidated return con-
text, both the debt of a new member
acquired in a CERT and the correspond-
ing interest expenses are included in the
group’s CERIL computation, even if the
group would not have been in a position
to pay off the debt of the acquired corpo-
ration if the CERT had not occurred. For
example, if a target corporation acquired
by a consolidated group has debt out-
standing prior to the acquisition, the group
takes into account interest incurred by the
group that is attributable to the target’s
pre-existing debt, despite the fact that the
group would have had no reason to sat-
isfy the target’s debt if the acquisition had
not occurred. If the acquisition had not
occurred, the debt of the target would not
have become a liability of the applicable
corporation (the group), and the associated
interest expense would not have been de-
ducted by the group. As will be discussed,
the historical interest expense of the target
is also included in the group’s computation
of the three-year average applied to limit
the interest allocated to the CERT.
B.Applicable corporation status and
allocation of CERT costs following
deconsolidation from a group
These proposed regulations provide
that, if a member deconsolidates from a
group on or after (1) the date on which the
group engages in a CERT, or (2) the date
on which the group acquires a pre-exist-
ing CERT member, then, following the
deconsolidation, both the deconsolidating
member and the group generally will be
treated as applicable corporations with
regard to the CERT. The deconsolidating
member will be apportioned apro rata
share of the group’s CERT costs incurred
through the date of the deconsolidation.
The proration is based on the relative fair
market values of the deconsolidating cor-
poration (immediately after its deconsoli-
dation) and the entire group (immediately
before the deconsolidation). This rule
applies regardless of whether any partic-
ular corporation would have constituted
an applicable corporation with regard to
the CERT without the application of the
single entity treatment. The Department
of Treasury and the IRS request comments
regarding alternatives for allocating CERT
costs following deconsolidation from a
group.
The CERT costs that are allocated and
apportioned to the deconsolidating mem-
2012–43 I.R.B.505October 22, 2012

ber are subtracted from the group’s CERT
costs and will not attract allocable interest
in any loss limitation year of the group (or
any separate return loss limitation year of
another group member) after the year of
deconsolidation. Therefore, the group may
have less CERIL in the years following the
deconsolidation. Apportionment of CERT
costs to the deconsolidating member may
result in that corporation having a CERIL
in the period following its deconsolidation.
Under these proposed regulations, the
deconsolidating member (or the common
parent of any group that the deconsolidat-
ing member joins immediately after de-
consolidation) may elect out of the general
rule of apportionment. In making this elec-
tion, the member or common parent per-
manently waives all carrybacks of losses
allocable to the deconsolidating member to
years of the former group and any preced-
ing taxable years. If this election is made,
the deconsolidating member will not be
treated as an applicable corporation with
regard to the CERT, and it will not be allo-
cated any CERT costs. Applicable corpo-
ration status and CERT costs will remain
with the former group. This is true even
if the deconsolidating member directly en-
gaged in the CERT. Further, none of the
interest history of the group will be allo-
cated to the deconsolidating member for
CERT purposes, including determining the
CERIL related to any future CERT. The
resulting lack of interest history may in-
crease the amount of a CERIL in future
taxable years associated with other CERTs
of the deconsolidating corporation. This
election is available to any deconsolidating
member, even if the former group is not an
applicable corporation with regard to any
CERT at the time of the deconsolidation.
C.Loss limitation years
Because all members of a consolidated
group are treated as a single taxpayer under
section 172(h)(4)(C),a consolidated group
is treated as the “applicable corporation”
with regard to a CERT. These proposed
regulations provide special rules for de-
termining loss limitation years of consol-
idated groups and former members of con-
solidated groups. Under these proposed
regulations, the taxable year in which a
CERT actually occurs is a loss limitation
year. Any other taxable year (potential loss
limitation year) of any applicable corpora-
tion (including a consolidated group) will
constitute a loss limitation year with re-
gard to the CERT only if, under the car-
ryover rules of sections 172(b)(1)(A)(ii)
and 381(c)(1), the potential loss limita-
tion year would constitute the first or sec-
ond taxable year following the taxable year
of the corporation or consolidated group
that actually engaged in the CERT, which
includes the date of the CERT. For pur-
poses of tracking taxable years, sections
172 and 381 are applied as if the inclu-
sion of any corporation in a consolidated
group or the deconsolidation of any mem-
ber from a group were a transaction de-
scribedinsection381(a).
The proposed regulations provide that
the separate return years of a corporation
that deconsolidates from a consolidated
group may be loss limitation years with
regard to a CERT of the former group.
This may occur only if the consolidated
return year of the deconsolidation is a first
or second loss limitation year with regard
to that CERT. The taxable years of more
than one applicable corporation (including
a consolidated group) may be loss limita-
tion years with regard to the same CERT,
even if those taxable years include the
same dates.
The special rules for determining loss
limitation years can be illustrated as fol-
lows: T corporation maintains a calendar
taxable year and does not join in the filing
of a consolidated return. The X group
holds 60 percent of the only class of T
stock. On July 1, Year 5, T engages in
a CERT. The X group, which includes
member S, maintains a calendar taxable
year. On December 31, Year 5, the X
group acquires all of the remaining T
stock. T is first included in the X group
on January 1, Year 6. On June 30, Year
6, S deconsolidates from the X group, and
thereafter S maintains a calendar taxable
year. The first loss limitation year with
respect to the T CERT is T’s calendar Year
5. Pursuant to these proposed regulations,
as a result of acquiring T, the X group is
treated as an applicable corporation with
respect to the T CERT. The X group’s
loss limitation years with respect to the
T CERT are its calendar Years 6 and 7.
Because no election is made with respect
to the deconsolidation of S, following
the deconsolidation, S is also treated as
an applicable corporation with regard to
the T CERT. Because consolidated return
Year 6 (the year of the deconsolidation)
is a second loss limitation year with
regard to the CERT, S’s short year ending
December 31, Year 6 will be S’s only loss
limitation year with regard to the T CERT.
D.Determining the three-year average of
a group
As discussed in section 1.D. of this pre-
amble, under section 172(h)(2)(C), the in-
terest deductions treated as allocable to
a CERT are limited to the difference be-
tween the interest paid or accrued in the
loss limitation year at issue and the aver-
age of the interest paid or accrued in the
three years preceding the year of the CERT
(three-year average). These proposed reg-
ulations adopt single entity concepts in-
tended, in part, to decrease the complex-
ity of the computation of the three-year av-
erage resulting from the entry of corpora-
tions into, and the deconsolidation of cor-
porations from, a consolidated group. Un-
der these proposed regulations, with regard
to a corporation joining a group, the in-
terest history of that corporation is com-
bined with that of the acquiring group. For
purposes of the CERT rules, this inter-
est is thereafter generally treated as hav-
ing been paid or accrued by the group and
is no longer separately traced to the ac-
quired corporation. Similarly, with regard
to the deconsolidation of a member from a
group, a portion of the group’s entire in-
terest history is generally apportioned to
the deconsolidating member for purposes
of the CERT rules. The apportionment is
based on the relative fair market values of
the deconsolidating corporation (immedi-
ately after its deconsolidation) and the en-
tire group (immediately before the decon-
solidation). Under these proposed regula-
tions, the allocated and apportioned history
is subtracted from the group’s interest his-
tory solely for purposes of the CERT rules
and is unavailable to the group with regard
to any loss limitation year of the group
(or any separate return loss limitation year
of another group member) after the year
of deconsolidation. Consistent with single
entity treatment and rejection of a tracing
regime, the interest allocated to a particu-
lar deconsolidating member is not tied to
that member’s actual interest history.
These proposed regulations also pro-
vide special rules relevant to any loss lim-
itation year during which a corporation
October 22, 20125062012–43 I.R.B.

(partial-year member) becomes a member
of, or ceases to be a member of, a group
(transitional year). For purposes of com-
puting any three-year average of a group
that is relevant to a transitional year, these
rules require proration of the interest his-
tory that is attributable to the partial-year
member so that a group that includes a
particular member foronlyaportionof
a loss limitation year includes only apro
rataportion of that member’s three-year
interest history. These proposed regula-
tions also provide special rules for comput-
ing the three-year average if a group is not
in existence for three taxable years prior to
the consolidated return year in which the
CERT occurs (the lookback period) and for
determining the lookback period if a group
acquires a corporation that previously en-
gagedinaCERT.
E.Excess distributions in groups
These proposed regulations contain
rules pertaining to the computation of EDs
of consolidated groups and of corpora-
tions that have been consolidated group
members. Consistent with single entity
treatment under section 172(h)(4)(C),
the proposed regulations provide that the
distributions relevant for purposes of com-
puting an ED of a consolidated group
generally include only non-intercompany
distributions. However, this general rule
does not apply if a party to the transaction
deconsolidates as part of the same plan or
arrangement. Under those circumstances,
the distribution will be tested on a separate
entity basis as a potential CERT.
Asdiscussedinsection1.A.ofthispre-
amble, section 172(h)(3)(C)(ii) places a
limitation on the amount of distributions
in a taxable year that may be treated as
ED, and the limitation is based in part on
150 percent of the taxpayer’s average of
distributions (three-year distribution aver-
age) made in the three taxable years pre-
ceding the taxable year of the potential ED.
These proposed regulations provide that
single entity principles generally apply to
the computation of the three-year distribu-
tion average of a consolidated group or a
corporation that hasbeen a consolidated
group member. That is, the only distri-
butions taken into account are those made
to non-member shareholders. However, in
computing the three-year distribution aver-
age of a consolidated group that includes
a member for less than the entire consol-
idated return year of a potential ED, the
group takes into account only apro rata
portion of the actual distribution history of
that member. Further, a corporation that
deconsolidates from a group takes into ac-
count its actual history of non-intercom-
pany distributions for purposes of apply-
ing the CERT rules in future separate re-
turn years. The corporation is not appor-
tioned apro ratashare of the total distri-
bution history of the group.
Additional rules apply with regard to
computation of stock issuances and valu-
ation of the group, which are intended to
ensure that the rules in those areas are ap-
plied on a single entity basis. Specifically,
the proposed regulations provide that, in
applying section 172(h)(3)(E)(ii) to deter-
mine the offset of stock issuances against
distributions, only stock that is issued to
non-members is taken into account. Fur-
ther, the proposed regulations provide that
the value of the group, computed pursuant
to section 172(h)(3)(C)(ii)(II), equals the
value of the stock of all members other
than stock that is owned directly or indi-
rectly by another member.
F.Reverse acquisitions
These proposed regulations address the
application of the MSA rules to reverse ac-
quisitions, as defined in §1.1502–75(d)(3).
The proposed regulations provide that, if a
reverse acquisition occurs, the CERT rules
will be applied by treating the acquirer in
form as the target corporation, and treating
the target in form as the acquiring corpo-
ration. They also provide special rules re-
garding the computation of the CERT costs
in a reverse acquisition.
G.Life-nonlife groups
These proposed regulations provide
rules for applying the CERT rules to a
group that elects under section 1504(c)(2)
to file a consolidated return (life-nonlife
group). As with consolidated groups gen-
erally, the fungibility of money and the
ease of moving cash and debt within a
life-nonlife group may provide an unwar-
ranted ability to manipulate the application
of the CERT rules. Accordingly, these
proposed regulations generally apply the
CERT rules and the consolidated return
CERT rules to a life-nonlife group on a
single entity basis, and not on a subgroup
basis. Under the proposed regulations,
a single CERIL is computed with regard
to any loss limitation year of a life-non-
life group, which includes all life-nonlife
group members’ CERT costs, debt, and
interest paid or accrued for that year.
However, for purposes of determining
the CERIL of a life-nonlife group under
section 172(h)(1) for any loss limitation
year, the sum of the nonlife consolidated
net operating loss (nonlife CNOL) (if any)
and the life consolidated loss from opera-
tions (LO) (if any) for that year is treated
as a notional “NOL” of the group. For
this purpose, nonlife consolidated taxable
income does not offset any LO, and con-
solidated partial life insurance company
taxable income (as used in §1.1502–47(g))
does not offset any nonlife CNOL.
If a CERIL exists for a loss limitation
year of a life-nonlife group, that CERIL is
allocated on apro ratabasis between the
nonlife CNOL and the LO of the group,
based on the relative sizes of the two at-
tributes.
3.Specialized CNOL Carryback Rules
These proposed regulations provide
rules regarding the apportionment of
CNOLs that contain a component portion
of special status loss, such as a CERIL
or a specified liability loss. See section
172(h)(1) and (f)(1). Under these rules, a
special status loss is apportioned to each
group member, separately from the re-
mainder of the CNOL, under the method
provided in §1.1502–21(b)(2)(iv). This
apportionment occurs without separate
entity inquiry into whether a particular
member incurred the specific expenses
or engaged in the particular activities re-
quired by the provisions governing the
special status loss.
The proposed regulations also amend
and expand the current election under
§1.1502–21(b)(3)(ii)(B), informally re-
ferred to as the “split-waiver” election.
That election is currently available to any
group that acquires one or more mem-
bers from another group. By making the
election, the acquiring group relinquishes,
with respect to all CNOLs attributable to
the newly-acquired corporation, the por-
tion of the carryback period during which
that corporation was a member of another
group. The current rule does not allow a
2012–43 I.R.B.507October 22, 2012

group to waive the portion of the carry-
back period for which a newly-acquired
corporation was not a member of a con-
solidated group. The current election is a
one-time election and must be made with
the acquiring group’s timely-filed original
return for the year of the acquisition.
The proposed regulations amend the
split waiver election to make the elec-
tion available to any group that acquires
a corporation, regardless of whether such
corporation was acquired from another
group. An election results in the waiver
of the entire carryback period with regard
to CNOLs allocable to the acquired cor-
poration, not only the period during which
the corporation was a member of another
group. Further, any election that is made
with regard to a newly-acquired member
that had been a member of another group
at the time of its acquisition must include
all members acquired from the same group
during the taxable year of the acquiring
group.
In addition, the proposed regulations
give the electing group a choice of mak-
ing the one-time election or making the
split-waiver election on an annual basis
with regard to the CNOL of a particu-
lar consolidated return year. Any annual
split-waiver election must be filed with
the group’s timely filed original return
for the year of the CNOL. The one-time
election and the annual split-waiver elec-
tion that are available under proposed
§1.1502–21(b)(3)(ii)(B) apply generally
with respect to losses attributable to the
acquired corporation. These split-waiver
elections are in addition to the one-time
election available under the CERT rules to
elect out of the general rule of apportion-
ment for CERT costs and interest history
to a deconsolidating member, which also
results in the waiver of all carrybacks of
losses allocable to the deconsolidating
member to any prior taxable years. As a
result, under these proposed regulations,
corporations may have three, mutually
exclusive, irrevocable elections to waive
carryback of CNOLs to separate return
years: an annual election, a one-time elec-
tion, and a special CERT election.
Proposed Effective Date
Sections1.172(h)–1through
1.172(h)–5 and §1.1502–72 (except
§1.1502–72(e)) are effective for CERTs
occurring on or after the date of publi-
cation of the Treasury decision adopting
these rules as final regulations in the
Federal Register, except that they do not
apply to any CERTs occurring pursuant
to a written agreement that is binding
prior to the date of publication of the
Treasury decision adopting these rules as
final regulations in theFederal Register.
The amendments to §1.1502–21(b)(2) are
effective for taxable years for which the
due date of the original return (without
extensions) is on or after the date of pub-
lication of the Treasury decision adopting
these rules as final regulations in the
Federal Register. Section 1.1502–72(e)
and the amendments to §1.1502–21(b)(3)
are effective for acquisitions or decon-
solidations, as appropriate, occurring
on or after the date of publication of
the Treasury decision adopting these
rules as final regulations in theFederal
Register, except that they do not apply
to any acquisition or deconsolidations,
as appropriate, occurringpursuanttoa
written agreement that is binding before
the date of publication of the Treasury
decision adopting these rules as final
regulations in theFederal Register.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866, as supplemented by Exec-
utive Order 13563. Therefore, a regula-
tory assessment is not required. Pursuant
to the Regulatory Flexibility Act (5 U.S.C.
chapter 6), it is hereby certified that these
proposed regulations will not have a sig-
nificant economic impact on a substantial
number of small entities. This certifica-
tion is based on the fact that these proposed
regulations will primarily affect C corpora-
tions and members of consolidated groups,
which tend to be large corporations. Ac-
cordingly, a regulatory flexibility analysis
is not required. Pursuant to section 7805(f)
of the Internal Revenue Code, these reg-
ulations have been submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on their
impact on small business.
Comments and Requests for Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written (a signed origi-
nal and eight (8) copies)orelectroniccom-
ments that are submitted timely to the IRS.
The Department of Treasury and the IRS
request comments on all aspects of the pro-
posed regulations. All comments will be
available for public inspection and copy-
ing. A public hearing will be scheduled
ifrequestedinwritingbyanypersonthat
timely submits written comments. If a
public hearing is scheduled, notice of the
date, time, and place for the public hearing
will be published in theFederal Register.
Drafting Information
The principal authors of these proposed
regulations are Rebecca J. Holtje and
Marie C. Milnes-Vasquez of the Office
of Associate Chief Counsel (Corporate).
However, other personnel from the
Department of Treasury and the IRS
participated in their development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in nu-
merical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Sections 1.172(h)–1 through –5 are also
issued under 26 U.S.C. 172. * * *
Section 1.1502–21(b)(2)(iv)(C) is also
issued under 26 U.S.C. 1502. * * *
Section 1.1502–72 is also issued under
26 U.S.C. 1502. * * *
Par. 2. Sections 1.172(h)–0 through
1.172(h)–5 are added to read as follows:
§1.172(h)–0 Table of Contents.
This section lists the paragraphs
contained in §§1.172(h)–1 through
1.172(h)–5.
October 22, 20125082012–43 I.R.B.

§1.172(h)–1 Existence of CERT and loss
limitation years.
(a) In general.
(b) Applicable corporation.
(1) In general.
(2) Predecessor and successor.
(c) CERT defined.
(1) In general.
(2) MSA defined.
(3) ED defined.
(d) Transactions tested as CERTs.
(1) Tax-free transactions.
(2) Multiple step plan of acquisition.
(3) Examples.
(e) Loss limitation years.
(f) Computation of three-year distribu-
tion average relevant to a potential ED.
(1) Integrated plan.
(2) Short taxable year.
(g) Effective/applicability date.
§1.172(h)–2 Computation of a CERIL.
(a) In general.
(1) Scope.
(2) CERIL defined.
(b) Computation of allocable interest
deductions.
(1) In general.
(2) Operating rules.
(3) CERT costs defined.
(i) Major stock acquisition.
(ii) Excess distribution.
(iii) Borrowing costs included in CERT
costs.
(4) Accumulated CERT costs.
(i) Major stock acquisition.
(ii) Excess distribution.
(iii) CERT costs incurred in a year prior
to a CERT.
(iv) Year constitutes loss limitation year
with regard to multiple CERTs.
(5) No netting of interest income and
deductions.
(6) Certain unforeseeable events.
(7) Examples.
(c) Effective/applicability date.
§1.172(h)–3 Limitation on allocable
interest deductions.
(a) General rule.
(b) Three-year averageforashortloss
limitation year.
(1) General rule.
(2) Example.
(c) Computation of interest paid or
accrued by corporation with incomplete
lookback period.
(1) Lookback period for corporation not
in existence.
(2) Interest history of corporation not in
existence.
(3) Example.
(d) Computation of a CERIL if single
year constitutes loss limitation year with
regard to multiple CERTs.
(1) Single CERIL computation.
(2) Limitation on allocable interest de-
ductions.
(3) Computation of three-year average
if CERTs have different lookback periods.
(i) In general.
(ii) Cumulative three-year average.
(4) Allocation of a CERIL among
CERTs.
(5) Examples.
(e) Effective/applicability date.
§1.172(h)–4 Special rules for predecessor
and successors.
(a) Scope.
(b) Loss limitation years.
(1) In general.
(2) Example.
(c) Computation of a CERIL.
(1) CERT costs.
(2) Limitation on allocable interest de-
ductions.
(i) Lookback period.
(A) In general.
(B) Successor not in existence on date
of CERT.
(ii) Computation of three-year average.
(A) In general.
(B) Year of successor transaction.
(3) Examples.
(d) Three-year distribution average.
(e) Effective/applicability date.
§1.172(h)–5 Operating rules.
(a) Date on which CERT occurs in a
multi-step transaction.
(b) Prohibition on carryback.
(1) In general.
(2) Example.
(c) Stock issuances and computation of
three-year distribution average.
(1) In general.
(2) Example.
(d) Computation of the alternative min-
imum tax net operating loss deduction.
(e) Effective/applicability date.
§1.172(h)–1 Existence of CERT and loss
limitation years.
(a)In general. If there is a corpo-
rate equity reduction transaction (CERT)
and an applicable corporation has a
corporate equity reduction interest loss
(CERIL) for any loss limitation year, sec-
tion 172(b)(1)(E) and (h), this section,
§§1.172(h)–2 through 1.172(h)–5, and
§1.1502–72 (collectively, theCERT rules)
limit the amount of net operating loss that
can be carried back to any taxable year
preceding the taxable year in which the
CERT occurs. This section provides rules
regarding the determination of whether a
CERT has occurred and whether a taxable
year constitutes a loss limitation year. See
§1.172(h)–2 for rules regarding the com-
putation of a CERIL.
(b)Applicable corporation—(1)In
general. The CERT rules apply only to
applicable corporations. The termappli-
cable corporationmeans a C corporation
that acquires stock, or the stock of which
is acquired, in a major stock acquisition
(MSA), a C corporation making distribu-
tions with respect to, or redeeming, its
stockinconnectionwithanexcessdis-
tribution (ED), or a C corporation that is
a successor of any corporation described
in this paragraph (b)(1). For special rules
regarding the definition of an applicable
corporation with regard to members that
join and leave a consolidated group, see
§1.1502–72(a) and (b).
(2)Predecessor and successor.For
purposes of the CERT rules, the termpre-
decessormeans a transferoror distributor
of assets to a transferee or distributee (the
successor) in a transaction to which section
381(a) applies. A corporation is a succes-
sor to its predecessor, and to all predeces-
sors of that predecessor. If an applicable
corporation transfers or distributes its as-
sets to a successor, the successor is treated
as an applicable corporation in the succes-
sor’s taxable year during which the transfer
or distribution occurs and any subsequent
years.
(c)CERT defined—(1)In general.A
CERT can be an MSA or an ED.
(2)MSA defined.AnMSAis the acqui-
sition by a corporation pursuant to a plan of
such corporation (or any group of persons
acting in concert with such corporation) of
2012–43 I.R.B.509October 22, 2012

stock in another corporation representing
50 percent or more (by vote or value) of
the stock in such other corporation.
(3)ED defined.AnEDis any excess of
the aggregate distributions made during a
taxable year by a corporation with respect
to its stock, over the greater of—
(i) 150 percent of the average of such
distributions (the three-year distribution
average) during the three taxable years
immediately preceding such taxable year
(the distribution lookback period); or
(ii) 10 percent of the fair market value
of the stock of such corporation as of the
beginning of such taxable year. For pur-
poses of testing a potential ED, distribu-
tions include redemptions.
(d)Transactions tested as CERTs—(1)
Tax-free transactions. A transaction may
constitute a CERT and must be tested un-
der the CERT rules regardless of whether
gain or loss is recognized by any party.
For example, a distribution that qualifies
for tax-free treatment under section 355 is
tested as a potential ED (or part of a po-
tential ED). Likewise, the acquisition by a
corporation of 50 percent or more of the
stock of another corporation in a transac-
tion meeting the requirements of section
351, section 368(a)(1)(A) and (a)(2)(E), or
section 368(a)(1)(B) constitutes an MSA.
(2)Multiple step plan of acquisi-
tion. Solely for purposes of determining
whether an MSA has occurred and de-
termining the consequences of an MSA,
all steps of an integrated plan (including
redemptions and other distributions) are
tested as a single potential MSA. If an
integrated plan qualifies as an MSA and
includes one or more distributions, then,
for purposes of applying the CERT rules,
the distributions are treated solely as a part
of the MSA, regardless of whether such
distributions would otherwise constitute
an ED (or would so qualify in conjunction
with other distributions). Any distribu-
tions during the year that are not part of
the integrated plan qualifying as an MSA
are tested as a potential ED.
(3)Examples. The following exam-
ples illustrate the rules of this paragraph
(d). For purposes of these examples, un-
less otherwise stated, assume that all en-
tities are domestic C corporations that do
notjoininthefilingofaconsolidatedre-
turn and that the entities have no history of
paying dividends or otherwise making dis-
tributions:
Example 1.Spin-off. Distributing corporation (D)
distributes stock of controlled corporation (C) to its
shareholders in a transaction that satisfies the require-
ments of section 355. There is no taxable “boot” as-
sociated with the distribution. Pursuant to paragraph
(d)(1) of this section, D’s distribution of C stock is
tested as a potential ED (in conjunction with any other
distributions by D during the same taxable year). The
same result would obtain if D distributes boot to its
shareholders in addition to C stock.
Example 2.Bootstrap acquisition.(i)Facts.T
is a publicly-traded, widely-held corporation with a
single class of stock outstanding with a fair market
value of $100. The following steps occur as part of
an integrated plan. Corporation A acquires 10 percent
of the outstanding stock of T for $10. A forms a new
corporation, S, with a contribution of $25. S obtains a
loan of $65 from an unrelated lender, and then merges
with and into T, with T surviving. In the merger, all
shareholders of T except A receive cash in exchange
for their shares, and as a consequence, A owns all of
the outstanding stock of T. As a result of the merger, T
becomes liable for S’s $65 loan. Assume that the $90
cash payment from T to the T shareholders should be
treated as a redemption to the extent of the $65 loan
assumed by T, and as a stock acquisition by A to the
extent of the remaining $25.
(ii)Analysis. A’s direct acquisition of 10 percent
of T’s outstanding stock and the steps culminating
with the merger are part of an integrated plan. There-
fore, the multiple steps are tested together as a po-
tential MSA. Because the steps of the integrated plan
resulted in A’s acquisition of 100 percent of T, the
transaction is treated as a single MSA. Furthermore,
because the $65 redemptionispartofanMSA,itis
treated solely as part of the MSA and is not tested as
a potential ED. See paragraph (d)(2) of this section.
(e)Loss limitation years. The taxable
year in which a CERT occurs and each
of the two succeeding taxable years con-
stitute loss limitation years with regard to
the CERT. See §1.172(h)–4(b) (address-
ing loss limitation years of successors) and
§1.1502–72(a)(3) (addressing loss limita-
tion years of consolidated groups and for-
mer members of consolidated groups).
(f)Computation of three-year dis-
tribution average relevant to a poten-
tial ED—(1)Integrated plan. Section
172(h)(3)(C)(ii)(I) and paragraph (c)(3) of
this section treat as an ED the excess of
distributions in a taxable year over the tax-
payer’s average distributions (three-year
distribution average) made in the three
taxable years preceding the taxable year in
which a potential ED occurs (distribution
lookback period). The computation of a
taxpayer’s three-year distribution average
under this paragraph (f) excludes any dis-
tribution during the distribution lookback
period that is treated as part of an inte-
grated plan qualifying as an MSA pursuant
to paragraph (d)(2) of this section. See
§1.1502–72(f)(2) and (3) for rules relating
to distributions (including intercompany
distributions) made during a consolidated
return year.
(2)Short taxable year. For purposes
of computing the three-year distribution
average under this paragraph (f), if the
year of the potential ED is less than a
full 12-month year, the distribution history
with regard to any year of the taxpayer
during a distribution lookback period (dis-
tribution lookback period year) equals the
amount of distributions made during the
distribution lookback period year multi-
plied by a fraction, the numerator of which
equals the number of days in the short tax-
able year of the potential ED, and the de-
nominator of which equals the number of
days in the distribution lookback period
year. The value of the fraction may not
exceed 100 percent. No distributions are
deemed made (in excess of amounts actu-
ally distributed) in a distribution lookback
period year that is shorter than the year of
the potential ED.
(g)Effective/applicability date.This
section is applicable to CERTs occurring
on or after the date of publication of the
Treasury decision adopting these rules as
final regulations in theFederal Register.
This section is also applicable to the de-
consolidation of a member from, or the
acquisition of a corporation by, a consol-
idated group that occurs on or after the
date of publication of the Treasury deci-
sion adopting these rules as final regula-
tions in theFederal Register. However,
in each case, this section does not apply
to any CERT, deconsolidation, or acquisi-
tion occurring pursuant to a written agree-
ment that is binding before the date of pub-
lication of the Treasury decision adopting
these rules as final regulations in theFed-
eral Register.
§1.172(h)–2 Computation of a CERIL.
(a)In general—(1)Scope. The portion
of a net operating loss (NOL) that is treated
as a corporate equity reduction interest loss
(CERIL) (as defined in paragraph (a)(2)
of this section) cannot be carried back to
a taxable year preceding the taxable year
in which the corporate equity reduction
transaction (CERT) occurs. This section
provides rules for computing allocable
interest deductions necessary to compute
a CERIL for purposes of applying sec-
tion 172(b)(1)(E) and (h), §§1.172(h)–1
October 22, 20125102012–43 I.R.B.

through 1.172(h)–5, and §1.1502–72 (the
CERT rules).
(2)CERIL defined.ACERILmeans,
with respect to any loss limitation year, the
excess (if any) of the NOL for such taxable
year over the NOL for such taxable year
determined without regard to any allocable
interest deductions otherwise taken into
account in computing such loss.
(b)Computation of allocable interest
deductions—(1)In general.Allocable in-
terest deductionsare deductions allowed
for interest on the portion of indebted-
ness allocable to a CERT. Except as pro-
vided in section 172(h)(2)(E) (relating
to adjustments for certain unforeseeable
events), indebtedness is allocated to a
CERT in the manner prescribed in section
263A(f)(2)(A), without regard to clause
(i) thereof (relating to traced debt). Gen-
erally, interest deductions are allocable to
a CERT if the interest expense could have
been avoided if the CERT had not been
undertaken (for example, if the amount
of CERT costs (as defined in paragraph
(b)(3)) had instead been used to pay down
debt). See section 263A(f)(2)(A)(ii) and
§1.263A–9(a)(1). For purposes of ap-
plying the avoided cost rules of section
263A(f)(2)(A)(ii), all CERT costs are
treated as if they were cash expenditures.
(2)Operating rules. This section pro-
vides a method for identifying the pool of
costs to be treated as arising from a CERT
(CERT costs). The interest allocable to
those CERT costs is then computed under
the principles of the avoided cost rules un-
der section 263A(f)(2)(A) (without regard
to paragraph (i) thereof) and the regula-
tions thereunder, but substituting “CERT
costs” or “accumulated CERT costs” (as
defined in paragraph (b)(4)) for “produc-
tion expenditures” or “accumulated pro-
duction expenditures,” where those terms
appear. In addition, for purposes of apply-
ing the avoided cost rules to compute in-
terest allocable to a CERT, the “production
period” is treated as beginning on the first
date of the taxable year in which the CERT
occurs (year of the CERT) on which there
are accumulated CERT costs. Because the
principles of section263A(f)(2)(A)(i) are
inapplicable to CERTcomputations, the
principles of §1.263A–9(b) (relating to
traced debt) are also inapplicable. Instead,
accumulated CERT costs are treated in
their entirety as expenditures allocable
to non-traced debt as that term is de-
fined under §1.263A–9(c)(5), and interest
allocable to a CERT is calculated with-
out tracing debt under the provisions of
§1.263A–9(d)(1). Limitations apply to the
amount of interest allocable to a CERT.
See, for example, section 172(h)(2)(C)(ii)
and §1.172(h)–3 (generally relating to
three-year average interest history).
(3)CERT costs defined—(i)Major
stock acquisition.CERTcostswithre-
gard to a major stock acquisition (MSA)
include the fair market value of the stock
acquired, whether that stock is acquired
in exchange for cash, for stock of the
acquirer, or for other property. In addi-
tion, CERT costs include the fair market
value of any distributions to shareholders
that are treated as part of the MSA under
§1.172(h)–1(d)(2). CERT costs also in-
clude the sum of amounts paid or incurred
to facilitate any step of the MSA to the ex-
tent that those amounts are required to be
capitalized under section 263(a), and any
amounts disallowed under section 162(k).
See also §1.1502–72(a)(4) for additional
rules regarding CERT costs in the case of
a reverse acquisition.
(ii)Excess distribution.CERTcosts
with regard to an excess distribution (ED)
include the fair market value of any dis-
tributions to shareholders during the year
of the CERT. CERT costs also include
the sum of amounts paid or incurred
to facilitate the distributions to the ex-
tent that those amounts are required to
be capitalized under section 263(a), and
any amounts disallowed under section
162(k). To the extent that neither sec-
tion 263(a) nor section 162(k) applies or
if only section 162(k) applies to a dis-
tribution included in an ED, additional
CERT costs associated with the distribu-
tion are determined under the principles
of §1.263(a)–4(e) (relating to the capital-
ization of certain costs incurred to acquire
or create intangibles), applied as if the
distribution were a transaction within the
scope of §1.263(a)–4.
(iii)Borrowing costs included in CERT
costs. For purposes of identifying CERT
costs with regard to an MSA or ED under
this paragraph (b)(3), the determination of
whether costs facilitate an MSA or ED is
made without regard to §§1.263(a)–5(c)(1)
and 1.263(a)–4(e)(1)(iv) (excluding bor-
rowing costs). Therefore, certain costs of
debt financing are included in CERT costs.
(4)Accumulated CERT costs—(i)Ma-
jor stock acquisition. Except as otherwise
provided in this paragraph (b)(4), accumu-
lated CERT costs with regard to an MSA
as of a particular date are the total CERT
costs described in paragraph (b)(3) of this
section that have been taken into account
as of that date under the applicable cor-
poration’s method of accounting. For ex-
ample, CERT costs incurred in the tax-
able year after the year of the CERT are
not included in accumulated CERT costs
in the year of the CERT, but are included
in accumulated CERT costs during the tax-
able year in which they are incurred and in
any succeeding loss limitation year. Sim-
ilarly, CERT costs include costs incurred
after the date on which a CERT occurs if
the CERT consists of multiple steps. See
§1.172(h)–5(a).
(ii)Excess distribution. Except as pro-
vided otherwise in this paragraph (b)(4),
accumulated CERT costs as of a particu-
lar date with regard to an ED are the total
CERT costs described in paragraph (b)(3)
of this section that have been taken into
account as of that date under the appli-
cable corporation’s method of accounting,
multiplied by a fraction, the numerator of
which equals the amount of distributions
constituting an ED during the year of the
CERT pursuant to §1.172(h)–1(c)(3), and
the denominator of which equals the to-
tal amount of distributions made during
the year of the CERT. CERT costs include
costs incurred after date on which a CERT
occurs if the CERT consists of multiple
steps. See §1.172(h)–5(a).
(iii)CERT costs incurred in a year prior
toaCERTyear. CERT costs incurred in
a year prior to the year of the CERT are
treated as incurred on the first day of the
year of the CERT.
(iv)Year constitutes loss limitation year
with regard to multiple CERTs.Ifasingle
taxable year constitutes a loss limitation
year with regard to more than one CERT,
the accumulated CERT costs on any par-
ticular date during that year include accu-
mulated CERT costs under this paragraph
(b)(4) with regard to all such CERTs. See
§1.172(h)–3(d) for rules regarding compu-
tation of a CERIL if a year constitutes a
loss limitation year with regard to multiple
CERTs.
(5)No netting of interest income and
deductions. Allocable interest deductions
under paragraph (b)(1) of this section are
2012–43 I.R.B.511October 22, 2012

the deductions allowed for interest on any
indebtedness allocable to a CERT. Allo-
cable interest deductions are not netted
against a taxpayer’s interest income.
(6)Certain unforeseeable events. [Re-
served].
(7)Examples. The following exam-
ples illustrate the rules of this paragraph
(b). Unless otherwise provided, assume
that all entities are domestic C corpora-
tions that do not join in the filing of consol-
idated returns and are accrual method tax-
payers. Assume that all applicable corpo-
rations have substantial NOLs in their loss
limitation years:
Example 1.CERT costs in MSA.(i)Facts.On
February 1, Year 5, Corporation A begins investi-
gating the possible acquisition of Corporation T. On
March 1, Year 5, A enters into an exclusivity agree-
ment with T. On July 1, Year 5, A engages in an MSA
when it acquires all of the stock of T in exchange for
cash. A incurs costs for services rendered by its out-
side counsel and an investment banker. A’s outside
counsel and the investment banker conduct due dili-
gence on T, determine the value of T, negotiate and
structure the transaction with T, draft the purchase
agreement, secureshareholder approval, and prepare
SEC filings. In addition, the investment banker ar-
ranges borrowings to fund both the stock acquisition
and A’s operations. A also pays a bonus to one of its
corporate officers, who negotiated the acquisition of
T. Before and after the acquisition is consummated,
A incurs costs to relocate personnel and equipment,
and to integrate records and information systems.
(ii)Analysis. The CERT costs taken into ac-
count by A in computing interest allocable to the
CERT include the fair market value of the T stock.
See paragraph (b)(3)(i) of this section. The costs
incurred on or after the date of the exclusivity
agreement, March 1, Year 5, (but not before) to
conduct due diligence are also included in A’s CERT
costs. See paragraph (b)(3)(i) of this section and
§1.263(a)–5(e)(1). A’s CERT costs also include
all amounts incurred to determine the value of T,
negotiate and structure the transaction with T, draft
the purchase agreement, secure shareholder approval,
and prepare SEC filings. See §1.263(a)–5(e)(2). In
addition, A’s CERT costs include borrowing costs
that facilitate the CERT. See paragraph (b)(3)(iii)
of this section. A’s CERT costs do not include any
portion of the bonus paid to the corporate officer
or the costs incurred torelocate personnel and
equipment, and to integrate records and information
systems. See §1.263(a)–5(c)(6) and (d).
Example 2.CERT costs in ED.(i)Facts.X
corporation is a calendar-year taxpayer. On July 1,
Year 5, X makes a distribution of $80,000 to its
shareholders, $60,000 of which constitutes an ED.
X makes no other distributions during Year 5.
At previous regular quarterly board of directors
meetings, the directors discussed the July 1, Year 5
distribution. On March 30, Year 5, X incurs $2,500
in borrowing costs that constitute CERT costs under
paragraph (b)(3)(iii) of this section. In addition,
on March 30 and April 15, Year 5, X incurs $500
and $3,000, respectively, for work performed by its
outside counsel which facilitates the ED under the
principles of §1.263(a)–4(e). During Year 5, X pays
its directors for attendance at the regular quarterly
board of directors meetings. No additional CERT
costs are incurred in Years 6 and 7.
(ii)CERT costs. X’s CERT costs include the fair
market value of all distributions made during the
year of the CERT ($80,000), as well as the $2,500
of borrowing costs. See paragraph (b)(3)(ii) and (iii)
of this section. In addition, under the principles of
§1.263(a)–4(e), X’s CERT costs include the costs
incurred for work performed by A’s outside counsel
related to the ED. See paragraph (b)(3)(ii) of this
section and §1.263(a)–4(e)(1)(i). X’s CERT costs do
not include amounts paid to X’s board of directors to
attend the regular board of directors meetings. See
§1.263(a)–4(e)(4)(ii)(B).
(iii)Accumulated CERT costs. Under paragraph
(b)(4)(ii) of this section, X’s accumulated CERT costs
as of a particular date with regard to its ED are the to-
tal CERT costs that have been taken into account as
of that date multiplied by a fraction the numerator of
which equals the amount of distributions constituting
ED during the year of the CERT, and the denomina-
tor of which equals the total amount of distributions
made during the year of the CERT. Here $60,000 is
divided by $80,000, which equals 3/4. The CERT oc-
curs during X’s Year 5, and that year is a loss limita-
tion year with regard to the CERT. X’s accumulated
CERT costs on March 30, Year 5 are $2,250 (3,000 x
3/4). X’s accumulated CERT costs are $4,500 (6,000
x 3/4) on April 15, Year 5 and $64,500 (86,000 x 3/4)
on July 1, Year 5. X’s Years 6 and 7 are also loss lim-
itation years. Because no additional CERT costs are
incurred in Years 6 and 7, throughout those years, X’s
accumulated CERT costs are $64,500.
Example 3.Accumulated CERT costs in an MSA.
(i)All CERT costs incurred in year of CERT. X corpo-
ration is a calendar-year taxpayer. On March 1, Year
5, X acquires all of the stock of unrelated corporation
T in an MSA. X’s loss limitation years are calendar
Years 5, 6, and 7. During Year 5, X incurs the fol-
lowing CERT costs: $4,000 on January 30; $50,000
on March 1; and $9,000 on March 15. During Year 5,
X’s accumulated CERT costs are: $4,000 as of Jan-
uary 30; $54,000 as of March 1; and $63,000 as of
March 15. See paragraph (b)(4)(i) of this section. No
additional CERT costs are incurred in Years 6 and 7.
As a result, throughout Years 6 and 7, X’s accumu-
lated CERT costs are $63,000.
(ii)
Portion of CERT costs incurred prior to year
of CERT. The facts are the same as in paragraph (i)
of thisExample 3, except during Year 4, X incurs
$2,000 of CERT costs. During Year 5, X’s accumu-
lated CERT costs are: $2,000 as of January 1 (reflect-
ing costs incurred during Year 4); $6,000 as of Jan-
uary 30; $56,000 as of March 1; and $65,000 as of
March 15. See paragraph (b)(4)(i) and (iii) of this
section. X is treated as having no accumulated CERT
costs during Year 4.
(c)Effective/applicability date.This
section is applicable to CERTs occurring
on or after the date of publication of the
Treasury decision adopting these rules as
final regulations in theFederal Register.
This section is also applicable to the de-
consolidation of a member from, or the
acquisition of a corporation by, a consol-
idated group that occurs on or after the
date of publication of the Treasury deci-
sion adopting these rules as final regula-
tions in theFederal Register. However,
in each case, this section does not apply
to any CERT, deconsolidation, or acquisi-
tion occurring pursuant to a written agree-
ment that is binding before the date of pub-
lication of the Treasury decision adopting
these rules as final regulations in theFed-
eral Register.
§1.172(h)–3 Limitation on allocable
interest deductions.
(a)General rule. The amount of allo-
cable interest deductions (determined un-
der §1.172(h)–2(b)) for any loss limitation
year is limited to the excess (if any) of the
amount allowable as a deduction for inter-
est paid or accrued by the taxpayer dur-
ing the loss limitation year, over the aver-
age of interest paid or accrued by the tax-
payer (the three-year average) for the three
taxable years preceding the taxable year in
which the corporate equity reduction trans-
action (CERT) occurred (the lookback pe-
riod). This section provides additional
rules for computing the three-year average
relevant to any loss limitation year for pur-
poses of applying section 172(b)(1)(E) and
(h), §§1.172(h)–1 through 1.172(h)–5, and
§1.1502–72 (the CERT rules).
(b)Three-year average for a short loss
limitation year—(1)General rule.For
purposes of computing the three-year av-
erage if the relevant loss limitation year is
less than a full 12-month year, the inter-
est paid or accrued with regard to any year
of the taxpayer during a lookback period
(lookback period year) equals the amount
of interest treated as paid or accrued multi-
plied by a fraction, the numerator of which
equals the number of days in the short
loss limitation year, and the denominator
of which equals the number of days in the
lookback period year. The value of the
fraction may not exceed 100 percent. Zero
interest is deemed paid or accrued (in ex-
cess of amounts actually paid or accrued)
in a lookback period year that is shorter
than the loss limitation year.
(2)Example. The following example
illustrates the short loss limitation year rule
of this paragraph (b):
Example.(i)Facts. T, a domestic C corporation,
was organized on July 1, Year 1. T’s first taxable year
is a short taxable year, which includes July 1 through
October 22, 20125122012–43 I.R.B.

December 31, Year 1 (184 days). T’s next two taxable
years are full calendar years: Calendar Year 2 and
Calendar Year 3. T’s Year 4 ends on September 30 as
a result of a change in accounting period. T engages
in a CERT during its taxable Year 4, which includes
January 1, Year 4, through September 30, Year 4 (273
days). T’s next two taxable periods are full 12-month
fiscal years ending on September 30, Year 5, and
September 30, Year 6.
(ii)Year 4 analysis. T’s taxable Year 4 is a short
loss limitation year. Therefore, in computing its
three-year average applicable to loss limitation Year
4, T multiplies its interest treated as paid or accrued
during each of the three years of the lookback period
by the fraction specified in paragraph (b)(1) of this
section. The pertinent fraction with regard to Year 1
of the lookback period is 273/184 (number of days in
short loss limitation year divided by the number of
days in the lookback period year). However, under
paragraph (b)(1) of this section, the value of the
fraction cannot exceed 100 percent. As a result, T
includes in the computation of its three-year average
its actual interest paid or accrued in Year 1. As to
Years 2 and 3, T includes in the computation of its
three-year average its actual interest paid or accrued
in each of those years, multiplied by a fraction equal
to 273/365.
(iii)Year 5 and 6 analysis. Because T’s taxable
Years 5 and 6 are full 12-month loss limitation years,
T includes in the computation of its three-year aver-
age applicable to those loss limitation years its actual
interest paid or accrued in each year of the lookback
period, without adjustment.
(c)Computation of interest paid or
accrued by corporation with incomplete
lookback period—(1)Lookback period for
corporation not in existence.Ifanappli-
cable corporation wasnot in existence for
three taxable years preceding the taxable
year in which the CERT occurred (the
lookback period), for purposes of deter-
mining the limitation on allocable interest
deductions under section 172(h)(2)(C) and
paragraph (a) of this section, the applicable
corporation’s lookback period is deemed
to have additional 12-month periods that
end on the calendar date that is one day
prior to the date of the corporation’s or-
ganization. See §1.172(h)–4(c)(2)(i)(B)
(regarding determination of lookback pe-
riod for successor applicable corporations
not in existence on date of CERT) and
§1.1502–72(d)(4)(ii) (regarding consoli-
dated groups not in existence during the
entire lookback period).
(2)Interest history of corporation not
in existence. If an applicable corpora-
tion was not in existence for the entire
lookback period, it is treated as having
paid or accrued zero interest during peri-
ods deemed to exist under paragraph (c)(1)
of this section in computing any three-year
average. However, if the applicable cor-
poration is a successor corporation pur-
suant to §1.172(h)–1(b)(2), the computa-
tion of any three-year average for the suc-
cessor includes interest paid or accrued by
any predecessor during the lookback pe-
riod. See §1.172(h)–4(c)(2)(ii)(A).
(3)Example. The following example
illustratestherulesofthisparagraph(c):
Example.Corporation not in existence for entire
lookback period. C is a domestic C corporation that
does not join in the filing of a consolidated return and
maintains a calendar taxable year. C is formed on Oc-
tober 1, Year 3, and engages in a CERT during Year
5. For purposes of computing any CERIL related to
the CERT, paragraph (a) of this section requires that C
must measure its interest deductions for the lookback
period. However, C was not in existence for three
taxable years preceding the year in which the CERT
occurred. Rather, C was in existence for one full cal-
endar taxable year (Year 4) and one short taxable year
(October 1 through December 31, Year 3). Pursuant
to paragraph (c)(1) of this section, C’s lookback pe-
riod is deemed to include an additional taxable pe-
riod (October 1, Year 2, through September 30, Year
3). Further, in computing anythree-year average, C is
treated as having paid or accrued zero interest during
the deemed additional period. See paragraph (c)(2)
of this section.
(d)Computation of a CERIL if single
year constitutes loss limitation year with
regard to multiple CERTs—(1)Single
CERIL computation. This paragraph (d)
applies if a taxable year constitutes a loss
limitation year of the taxpayer with regard
to more than one CERT. In that case, a
single corporate equity reduction interest
loss (CERIL) is computed under section
172(h)(1) and §1.172(h)–2(a)(2) for that
year. This computation takes into account
accumulated CERT costs for every CERT,
determined under §1.172(h)–2(b)(4)(iv)
for the loss limitation year.
(2)Limitation on allocable interest
deductions. In computing the single
CERIL under this paragraph (d), section
172(h)(2)(C) and paragraph (a) of this sec-
tion are applied a single time to limit the
cumulative amount ofinterest allocable
to all of the CERTs to the excess (if any)
of the amount allowable as a deduction
for interest paid or accrued by the tax-
payer during the loss limitation year over
the three-year average for the lookback
period. The limitation is not applied sepa-
rately with respect to interest allocable to
a particular CERT.
(3)Computation of three-year aver-
age if CERTs have different lookback
periods—(i)In general. If the lookback
periods (as defined in paragraph (a) of this
section or in §1.1502–72(d)(4)) relevant
to all of the CERTs pertinent to a loss
limitation year arenot identical, a cumu-
lative three-year average is computed by
applying the rules of paragraph (d)(3)(ii)
of this section. The cumulative three-year
average is treated as the three-year average
relevant to the loss limitation year, and
is applied to determine the limitation on
the amount of interest allocable to all of
the CERTs under section 172(h)(2)(C) and
paragraph (a) of this section.
(ii)Cumulative three-year average.
The cumulative three-year average ap-
plicable to any loss limitation year is
computed under this paragraph (d)(3)(ii).
With regard to each lookback period rele-
vant to a loss limitation year, a modified
three-year average is computed. The mod-
ified three-year average is the three-year
average relevant to a particular look-
back period (determined under section
172(h)(2)(C) and this section) multiplied
by a fraction, the numerator of which
equals the accumulated CERT costs as of
the close of the loss limitation year that
are attributable to the particular CERT
or CERTs to which the three-year aver-
age corresponds, and the denominator of
which equals the total accumulated CERT
costs as of the close of the loss limitation
year that are attributable to all CERTs
relevant to the loss limitation year. See
§1.172(h)–2(b)(4) defining accumulated
CERT costs. The sum of all modified
three-year averagesis the cumulative
three-year average for that year.
(4)Allocation of a CERIL among
CERTS. After the computation of the
single CERIL for a loss limitation year
that is attributable to all CERTs, the total
CERIL is allocated to particular CERTs,
if CERILs attributable to different CERTs
are subject to different limitations on car-
ryback. See section172(b)(1)(E)(i) and
§1.172(h)–5(b) (regarding prohibition on
carrybacks). For purposes of this alloca-
tion, the CERT costs attributable to each
particular CERT are identified. The total
CERIL is then attributed to each CERT by
multiplying the total CERIL by a fraction,
the numerator of which equals the accu-
mulated CERT costs as of the close of the
loss limitation year that are attributable to
a particular CERT, and the denominator of
which equals the total accumulated CERT
costs as of the close of the loss limitation
year that are attributable to all CERTs
relevant to the loss limitation year. See
2012–43 I.R.B.513October 22, 2012

§1.172(h)–2(b)(4) defining accumulated
CERT costs.
(5)Examples. The following examples
illustrate the rules of this paragraph (d).
Unless otherwise provided, assume that all
entities are domestic C corporations that
do not join in the filing of consolidated
returns and that maintain calendar taxable
years. Assume that all applicable corpora-
tions have substantial net operating losses
in their loss limitation years:
Example 1.Multiple CERTs with identical look-
back period.(i)Facts. Corporation A maintains a
calendar taxable year. A engages in two separate
CERTs during its taxable Year 4. The lookback pe-
riod for both CERTs is January 1, Year 1, through
December 31, Year 3. The total amount of interest
deductions allocable to CERT 1 and CERT 2 (before
application of section 172(h)(2)(C) and paragraph (a)
of this section) is $50. A’s total interest expense
during Year 4 was $150, andits three-year average
interest for the lookback period was $120.
(ii)Analysis. Year 4 constitutes a loss limitation
year with regard to both CERT 1 and CERT 2. A
single CERIL is computed with regard to Year 4,
and the limitation on allocable interest under section
172(h)(2)(C) and paragraph (a) of this section is
applied a single time. See paragraphs (d)(1) and
(2) of this section. The limitation under section
172(h)(2)(C) and paragraph (a) of this section is ap-
plied to the cumulative amount of interest allocable
to the two CERTs ($50). See paragraph (d)(2) of this
section. The limitation under section 172(h)(2)(C)
and paragraph (a) of this section equals the excess
of the amount of interest allowable in Year 4 ($150)
over the three-year average ($120), or $30. There-
fore, the CERIL is limited to $30.
Example 2.Multiple CERTs with different look-
back periods.(i)Facts. Corporation A maintains a
calendar taxable year. A engages in CERT 1 during
its taxable Year 4. The lookback period relevant to
CERT 1 is January 1, Year 1, through December 31,
Year 3. A also engages in CERT 2 during its tax-
able Year 5. The lookback period relevant to CERT
2 is January 1, Year 2, through December 31, Year 4.
The total amount of interest deductions allocable to
CERT 1 and CERT 2 (before application of section
172(h)(2)(C) and paragraph (a) of this section) dur-
ing taxable Year 5 is $50. A’s total interest expense
during Year 5 is $126. A’s three-year average interest
that is relevant to loss limitation Year 5 for the CERT
1 lookback period is $100, and its three-year average
interest that is relevant to loss limitation Year 5 for
the CERT 2 lookback period is $110. A’s accumu-
lated CERT costs attributable to CERT 1 are $400.
A’s accumulated CERT costs attributable to CERT 2
are $600.
(ii)Cumulative three-year average. Year5isa
loss limitation year with regard to both CERT 1 and
CERT 2. A single CERIL is computed with regard to
Year 5, and the limitation on allocable interest under
section 172(h)(2)(C) and paragraph (a) of this sec-
tion is applied a single time. See paragraph (d)(1)
and (2) of this section. The limitation under section
172(h)(2)(C) and paragraph (a) of this section is ap-
plied to the cumulative amount of interest allocable
to the two CERTs ($50). See paragraph (d)(2) of this
section. Because Year 5 constitutes a loss limitation
year with regard to CERTs with different lookback
periods, the relevant three-year average applied under
section 172(h)(2)(C) and paragraph (a) of this section
is the cumulative three-yearaverage, which is the sum
of all modified three-yearaverages. See paragraph
(d)(3)(ii) of this section. The modified three-year av-
erage with regard to CERT 1 is the three-year average
for CERT 1 multiplied by $400/$1,000 (accumulated
CERT costs attributable to CERT 1 divided by the to-
tal accumulated CERT costs attributable to CERTs 1
and 2), or 2/5. Therefore, the modified three-year av-
erage with regard to CERT 1 is $40 (100 x 2/5). The
modified three-year average with regard to CERT 2
is the three-year average for CERT 2 multiplied by
$600/$1,000 (accumulated CERT costs attributable to
CERT 2 divided by the total accumulated CERT costs
attributable to CERTs 1 and 2), or 3/5. Therefore, the
modified three-year average with regard to CERT 2
is $66 (110 x 3/5). Thus, the cumulative three-year
average interest for Year 5 is $106 ($40 + $66). See
paragraph (d)(3) of this section. The limitation under
section 172(h)(2)(C) and paragraph (a) of this section
equals the excess of the amount of interest allowable
in Year 5 ($126) over the cumulative three-year aver-
age interest ($106), or $20. Therefore, the CERIL for
Year 5 is limited to $20.
(iii)Allocation of a CERIL to different CERTs.
Because Year 5 constitutes a loss limitation year with
regard to more than one CERT, and a CERIL asso-
ciated with each CERT is subject to different lim-
itations on carryback, the total CERIL must be al-
located between CERT 1 and CERT 2. See para-
graph (d)(4) of this section. The portion of the to-
tal CERIL allocated to CERT 1 is the total CERIL
multiplied by $400/$1,000 (accumulated CERT costs
attributable to CERT 1 divided by the total accumu-
lated CERT costs attributable to CERTs 1 and 2), or
2/5. Therefore, the portion of the total CERIL allo-
cated to CERT 1 is $8 ($20 x 2/5). The portion of the
total CERIL allocated to CERT 2 is the total CERIL
multiplied by $600/$1,000 (accumulated CERT costs
attributable to CERT 2 divided by the total accumu-
lated CERT costs attributable to CERTs 1 and 2), or
3/5. Therefore, the portion of the total CERIL allo-
cated to CERT 2 is $12 ($20 x 3/5). See paragraph
(d)(4) of this section. See also section 172(b)(1)(E)(i)
and §1.172(h)–5(b)(1) for rules regarding the prohi-
bition on carryback of a CERIL.
Example 3.CERTs of multiple corporations with
identical lookback period
.(i)Facts. Corporation T
maintains a taxable year ending on June 30. On Au-
gust 31, Year 5, T engages in CERT 1. Unrelated P
is the parent of a group that maintains a calendar tax-
able year. On October 31, Year 5, P acquires all the
stock of T in an MSA (CERT 2). T is first included
in the P group on November 1, Year 5. For its cal-
endar Year 5, the P group is treated as an applicable
corporation with respect to CERT 1 and CERT 2. See
§1.1502–72(a)(2)(iv)(A). The P group’s lookback pe-
riod for both CERTs is January 1, Year 2, through De-
cember 31, Year 4. The total CERIL of the group
in Year 5 is $80. The P group’s accumulated CERT
costs attributable to CERT 1 are $500. The P group’s
accumulated CERT costs attributable to CERT 2 are
$1,500. The P group has a consolidated net operating
loss (CNOL) in Year 5, a portion of which is alloca-
ble to T under §1.1502–21(b)(2)(iv)(B).
(ii)Allocation of a CERIL to different CERTs.
Year 5 constitutes a loss limitation year with regard
to two CERTs that share a common lookback period.
However, the CERIL associated with the different
CERTs is subject to different limitations on carry-
back under §1.172(h)–5(b)(1) (some CNOL will be
carried back to the group’s consolidated return years
and some will be carried backto T’s separate return
years). Therefore, the total CERIL must be allocated
betweenCERT1andCERT2. Theportionofthe
total CERIL allocated to CERT 1 is the total CERIL
multiplied by $500/$2,000 (accumulated CERT costs
attributable to CERT 1 divided by the total accumu-
lated CERT costs attributable to CERTs 1 and 2), or
1/4. See paragraph (d)(4) of this section. Therefore,
the portion of the total CERIL allocated to CERT 1
is $20 ($80 x 1/4). The portion of the total CERIL
allocated to CERT 2 is the total CERIL multiplied by
$1,500/$2,000 (accumulated CERT costs attributable
to CERT 2 divided by the total accumulated CERT
costs attributable to CERTs 1 and 2), or 3/4. There-
fore, the portion of the total CERIL allocated to CERT
2 is $60 ($80 x 3/4).
(e)Effective/applicability date.This
section is applicable to CERTs occurring
on or after the date of publication of the
Treasury decision adopting these rules as
final regulations in theFederal Register.
This section is also applicable to the de-
consolidation of a member from, or the
acquisition of a corporation by, a consol-
idated group that occurs on or after the
date of publication of the Treasury deci-
sion adopting these rules as final regula-
tions in theFederal Register. However,
in each case, this section does not apply
to any CERT, deconsolidation, or acquisi-
tion occurring pursuant to a written agree-
ment that is binding before the date of pub-
lication of the Treasury decision adopting
these rules as final regulations in theFed-
eral Register.
§1.172(h)–4 Special rules for predecessors
and successors.
(a)Scope. This section provides guid-
ance with regard to the application of sec-
tion 172(b)(1)(E) and (h), §§1.172(h)–1
through 1.172(h)–5, and §1.1502–72 (the
CERT rules) to predecessors and succes-
sors (as defined in §1.172(h)–1(b)(2)).
(b)Loss limitation years—(1)In gen-
eral. This paragraph (b)(1) applies to
identify loss limitation years of a succes-
sor. The taxable year in which a corporate
equity reduction transaction (CERT) actu-
ally occurs is a loss limitation year. See
§1.172(h)–1(e). Any taxable year of a
successor (potential loss limitation year)
of any applicable corporation is a loss
limitation year with regard to the CERT
October 22, 20125142012–43 I.R.B.

if, under the carryover rules of sections
172(b)(1)(A)(ii) and 381(c)(1), the poten-
tial loss limitation year constitutes the first
or second taxable year following the tax-
able year of the corporation that actually
engaged in the CERT which includes the
date on which the CERT occurred. See
§1.172(h)–5(a) (defining date on which
CERT occurs in multiple-step transaction);
but see §1.1502–72(a)(3) (defining loss
limitation years of consolidated groups
and corporations that were previously
members of a consolidated group).
(2)Example. The following example
illustrates the rules of this paragraph (b):
Example.Loss limitation years of successor.T
is a domestic C corporation that maintains a calen-
dar taxable year and does not join in the filing of a
consolidated return. On March 31, Year 6, T engages
in a CERT. On June 30, Year 6, T merges into Cor-
poration A, a calendar-year taxpayer, in a transaction
to which section 381(a) applies. T’s taxable Year 6
ends on the date of the merger, and A succeeds to
T’s tax attributes. See section 381(a) and (b)(1). T’s
only loss limitation year with respect to the Year 6
CERT is its short taxableyear ending June 30, Year
6. See section 172(b)(1)(E)(ii) and §1.172(h)–1(e).
Following the merger, A is the successor to T, and A
is treated as an applicable corporation with regard to
the Year 6 CERT. See §1.172(h)–1(b)(2). A’s calen-
dar Years 6 and 7 are the second and third loss limita-
tion years with regard to the Year 6 CERT. See section
172(b)(1)(E)(ii) and paragraph (b)(1) of this section.
(c)Computation of a CERIL—(1)
CERT costs. For purposes of computing
any corporate equityreduction interest
loss (CERIL) under section 172(h)(1) and
§1.172(h)–2(a)(2), any CERT costs in-
curred (or treated asincurred under this
paragraph (c)) by a predecessor are at-
tributed to the successor. However, such
costs are treated as having been incurred
by the successor only for purposes of ap-
plying the avoided cost rules of section
263A(f)(2)(A) to any measurement date
(as defined in §1.263A–9(f)(2)) after the
date of the section 381(a) transaction.
(2)Limitation on allocable interest de-
ductions—(i)Lookback period—(A)In
general.Thelookback periodwith re-
gard to a CERT is the three taxable years
preceding the taxable year in which the
CERT occurs. See §1.172(h)–3(a). The
lookback period that is relevant to the
calculation of any CERIL of a successor
(successor’s lookback period) is the three
years preceding the taxable year of the
successor that includes the date on which
the CERT occurred. See §1.172(h)–5(a)
(defining the date on which a CERT occurs
if the CERT consists of multiple steps) and
§1.172(h)–3(c) (regarding corporations
with insufficient lookback periods).
(B)Successor not in existence on date
of CERT. If a successor was not in ex-
istence on the date on which the CERT
occurred, for purposes of determining the
lookback period, the successor is deemed
to have additional 12-month periods that
end on the calendar date that is one day
prior to the date of the corporation’s or-
ganization. The successor is deemed to
have a sufficient number of such addi-
tional periods such that the successor is
treated as having a year that includes the
date on which the CERT occurred and as
having three years (the lookback period)
immediately preceding the deemed year
that includes the date of the CERT. See
§1.172(h)–3(c)(1) regarding lookback pe-
riod for corporation lacking three-year his-
tory.
(ii)Computation of three-year aver-
age—(A)In general. Except as otherwise
provided in this paragraph (c)(2)(ii), for
purposes of determining any three-year
average of a successor under section
172(h)(2)(C)(ii) and §1.172(h)–3, the
interest paid or accrued by a successor
includes interest paid or accrued by all
corporations that are its predecessors as of
the end of the successor’s taxable year. If
the dates of any taxable year of a prede-
cessor do not precisely correspond to the
dates of a taxable year of the successor, the
interest paid or accrued by the predecessor
is apportioned equally to each date of the
predecessor’s taxable year. The successor
is treated as having paid or accrued in any
year during the lookback period all prede-
cessor interest that is apportioned to a date
within that lookback period year.
(B)Year of successor transaction.In
computing the three-year average that is
relevant to the taxable year of a successor
that includes the date of the section 381(a)
transaction that resulted in successor sta-
tus, the successor includes only apro rata
portion of the predecessor’s amount of
interest paid or accrued during the suc-
cessor’s lookback period. Thepro rata
amount equals the predecessor’s interest
treated as paid or accrued for the dates of
the successor’s lookback period, multi-
plied by a fraction, the numerator of which
equals the number of days in the loss lim-
itation year of the successor that follow
the date of the transaction that resulted
in successor status, and the denominator
of which equals the number of days in
the successor’s loss limitation year. The
predecessor’s amount of interest treated
as paid or accrued that is subject to pro-
ration under this paragraph (c)(2)(ii)(B) is
the interest history of the predecessor that
would otherwise be fully combined with
the interest history of the successor under
paragraph (c)(2)(ii)(A) of this section.
(3)Examples. The following examples
illustrate the rules of this paragraph (c).
Unless otherwise provided, assume that all
entities are domestic C corporations that
do not join in the filing of consolidated
returns and that maintain calendar taxable
years. Assume that all applicable corpora-
tions have substantial net operating losses
in their loss limitation years:
Example 1.Predecessor corporation engages in
CERT.(i)Facts. Corporation X is a calendar-year
taxpayer. On February 1, Year 5, X engages in a
CERT. On August 1, Year 5, X merges into unrelated
corporation Y in a transaction to which section 381(a)
applies. Y is a calendar-year taxpayer and all of its
taxable years are full calendar years. All of X’s tax-
able years prior to the year of the merger are full cal-
endar years.
(ii)Analysis. X’s only loss limitation year is its
short year ending August 1, Year 5. X’s lookback pe-
riod relevant to the Year 5 CERT includes X’s calen-
dar Years 2, 3, and 4. See paragraph (c)(2)(i)(A) of
this section; see also §1.172(h)–3(b)(1) (computation
of three-year average for a short loss limitation year).
Following the merger, Y is the successor to X, and
Y is treated as an applicablecorporation with regard
to the Year 5 CERT. See §1.172(h)–1(b)(2). Because
Y’s calendar Year 5 follows a single loss limitation
year of X with regard to the same CERT, Y’s calen-
dar Years 5 and 6 are loss limitation years with re-
gard to the Year 5 CERT. See paragraph (b)(1) of this
section and §1.381(c)(1)–1(e)(3). Y’s lookback pe-
riod for the Year 5 CERT is its calendar Years 2, 3,
and 4. See paragraph (c)(2)(i)(A) of this section. The
computations of Y’s three-year averages relevant to
its loss limitation Years 5 and 6 include interest paid
or accrued by Y and by all of Y’s predecessors, in-
cluding X, during the lookback period. See paragraph
(c)(2)(ii)(A) of this section. However, because Year
5 is Y’s taxable year that includes the date of the sec-
tion 381(a) transaction that resulted in Y’s successor
status, for purposes of computing Y’s three-year av-
erage for Y’s loss limitation Year 5, Y includes only a
pro rataportion of X’s amount of interest paid or ac-
crued. In the proration, X’s amount of interest paid or
accrued during the three year lookback period is mul-
tiplied by 151/365 (the number of days in Y’s loss
limitation Year 5 that follow the date of the section
381(a) transaction that resulted in Y’s successor sta-
tus, divided by the number of days in Y’s loss limita-
tion Year 5). See paragraph (c)(2)(ii)(B) of this sec-
tion.
(iii)Predecessor and successor have different tax-
able years. The facts are the same as in paragraph (i)
of thisExample 1, except that X maintained a tax-
able year ending June 30 before its merger into Y.
X’s full taxable year ending June 30, Year 5, and its
2012–43 I.R.B.515October 22, 2012

short year ending August 1, Year 5, are its loss limita-
tion years with regard to its February 1, Year 5 CERT.
See section 172(b)(1)(E)(ii) and §1.172(h)–1(e). Fol-
lowing the merger of X into Y, Y is a successor to X
and is treated as an applicable corporation with re-
gard to the Year 5 CERT. Y’s calendar Year 5 is the
third loss limitation year with regard to the CERT. See
paragraph (b)(1) of this section. Y’s lookback period
is Y’s three taxable years preceding Y’s taxable year
that includes the date of the CERT, which are Years
2, 3, and 4. Further, because the dates of X’s taxable
years do not precisely correspond to the dates of Y’s
taxable years, X’s interest paid or accrued is appor-
tioned equally to each date within each of X’s tax-
able years. Y is treated as having paid or accrued in
any year during the lookback period all of X’s interest
that is so apportioned. See paragraph (c)(2)(ii)(A) of
this section. However, because Y’s taxable Year 5 in-
cludes the date of the section 381(a) transaction that
resulted in Y’s successor status, for purposes of com-
puting Y’s three-year average for loss limitation Year
5, Y includes only a pro rata portion of X’s interest
history. See paragraphs (c)(2)(ii)(B) of this section.
Example 2.Successor corporation not in exis-
tenceforentirelookbackperiod.(i)Facts. Corpora-
tion A is formed on October 1, Year 3, and thereafter
maintains a calendar taxable year. Immediately after
A is formed in Year 3, a second corporation, T, merges
into A in a transaction that meets the requirements of
section 368(a)(1)(A). During Year 5, A engages in a
CERT.
(ii)Analysis. A’s loss limitation years are its cal-
endar Years 5, 6, and 7. See section 172(b)(1)(E)(ii).
For purposes of computing any CERIL related
to the Year 5 CERT, section 172(h)(2)(C)(ii) and
§1.172(h)–3 require that A measure its interest de-
ductions for the three years preceding the taxable
year of the CERT (three-year average). However,
A is in existence for only two taxable years before
the year in which the CERT occurs. Therefore, pur-
suant to §1.172(h)–3(c)(1), A is deemed to have an
additional taxable period (October 1, Year 2, through
September 30, Year 3). Further, in computing the
three-year average, A is treated as having paid or
accrued zero interest during the deemed year. See
§1.172(h)–3(c)(2). However, because T is the pre-
decessor of A, the computation of A’s three-year
average relevant to its loss limitation Year 5 includes
interest paid or accrued by T during the lookback
period (October 1,Year 2, through December 31,
Year 4). See paragraph (c)(2)(ii)(A) of this section
and §1.172(h)–3(c)(2). Because T merges into A
in a year prior to any loss limitation year, there is
no proration of T’s interest history under paragraph
(c)(2)(ii)(B) of this section.
(d)Three-year distribution aver-
age. For purposes of determining any
three-year distribution average of a suc-
cessor under section 172(h)(3)(C)(ii)(I)
and §1.172(h)–1(c)(3), the distributions
made by a successor include distributions
made by all corporations that are its pre-
decessors as of the end of the successor’s
taxable year. If the dates of any taxable
year of a predecessor do not correspond to
the dates of a taxable year of the successor,
the distributions made by the predecessor
are apportioned equally to each date of the
predecessor’s taxable year. The successor
is treated as having made in its taxable
years all predecessor distributions that are
apportioned to a date within those taxable
years.
(e)Effective/applicability date.This
section is applicable to CERTs occurring
on or after the date of publication of the
Treasury decision adopting these rules as
final regulations in theFederal Register.
This section is also applicable to the de-
consolidation of a member from, or the
acquisition of a corporation by, a consol-
idated group that occurs on or after the
date of publication of the Treasury deci-
sion adopting these rules as final regula-
tions in theFederal Register. However,
in each case, this section does not apply
to any CERT, deconsolidation, or acquisi-
tion occurring pursuant to a written agree-
ment that is binding before the date of pub-
lication of the Treasury decision adopting
these rules as final regulations in theFed-
eral Register.
§1.172(h)–5 Operating rules.
(a)Date on which CERT occurs in a
multi-step transaction. For purposes of
applying section 172(b)(1)(E) and (h),
§§1.172(h)–1 through 1.172(h)–4, and this
section, and §1.1502–72 (the CERT rules),
if a corporate equity reduction transac-
tion (CERT) consists of multiple steps,
the date on which the CERT occurs is the
earliest date on which the requirements
for CERT status are satisfied. For exam-
ple, if multiple distributions are made in
a single year, an excess distribution (ED)
is treated as occurring on the earliest date
on which the amount of distributions sat-
isfies the greater of the two thresholds
contained in section172(h)(3)(C)(ii) and
§1.172(h)–1(c)(3). A major stock ac-
quisition (MSA) is treated as occurring
on the earliest date on which at least 50
percent of the stock of a corporation is ac-
quired, subject to the provisions of section
172(h)(3)(B) and §1.172(h)–1(c)(2).
(b)Prohibition on carryback—(1)In
general. No corporate equity reduction
interest loss (CERIL) attributable to a
CERT may be carried back under sec-
tion 172 or §1.1502–21(b) to any taxable
year (including a consolidated return year)
that includes solely dates that precede
the date on which the CERT occurred.
In addition, if a corporation becomes a
member of a consolidated group as a re-
sult of a CERT, no CERIL allocable to
that CERT may be carried back under
section 172 or §1.1502–21(b) to the tax-
able year of the acquired corporation that
includes the date on which the CERT oc-
curred, or to any preceding taxable year.
See §1.172(h)–3(d)(4) regarding allo-
cation of a CERIL among CERTs, and
§1.1502–21(b)(2)(iv)(C)(1) for the appor-
tionment of a CERIL among consolidated
group members.
(2)Example. The following example
illustrates the rules of this paragraph (b):
Example.Prohibition on carryback.(i)Facts.T
corporation maintains a taxable year ending June 30.
X corporation is the parent of a group that maintains
a calendar taxable year. On March 31, Year 5, the
X group acquires all of the T stock in a CERT,
and T is first included in the X group on April 1,
Year 5. During its consolidated return Year 5,
the X group has a consolidated net operating loss
(CNOL), a portion of which constitutes a CERIL,
pursuant to section 172(h)(1) and §1.172(h)–2(a)(2).
Part of the CERIL is apportioned to T, pursuant to
§1.1502–21(b)(2)(iv)(C)(1).
(ii)Analysis. On the date of the acquisition, both
the X group and T constitute applicable corpora-
tions with regard to the Year 5 CERT. See section
172(b)(1)(E)(iii)(I) and §1.172(h)–1(b). T’s short
taxableyearendingonMarch31,Year5,wasT’s
taxable year in which the CERT occurred. The X
group’s year in which the CERT occurred was its
consolidated return Year 5. Section 172(b)(1)(E)(i)
and paragraph (b) of this section prohibit the carry-
back of a CERIL to years preceding the taxable year
in which the CERT occurs. Pursuant to paragraph
(b)(1) of this section, no portion of a CERIL relating
to the X group CNOL can be carried back to any
taxable year that includes solely dates that precede
thedateonwhichtheCERToccurred. Asaresult,
no portion of the CERIL can be carried back to the
X group’s Year 4, or any preceding year. Moreover,
because T becomes a member of the X group as a
result of the CERT, no portion of the CERIL can
be carried back to T’s short taxable year ending
March 31, Year 5, or any preceding taxable year. See
paragraph (b)(1) of this section.
(c)Stock issuances and computation
of three-year distribution average—(1)
In general. In determining whether an
ED has occurred, aggregate distributions
made during a taxable year are reduced
by the aggregate amount of stock is-
sued by the applicable corporation dur-
ing the year in which the potential ED
occurred in exchange for money or prop-
erty other than stock of the applicable
corporation. Similarly, the computation
of any three-year distribution average
under section 172(h)(3)(C)(ii)(I) and
§1.172(h)–1(f) is reduced by the average
October 22, 20125162012–43 I.R.B.

of the stock issuances described in section
172(h)(3)(E)(ii) and this paragraph (c)(1)
during the three years of the distribution
lookback period (three-year stock issuance
average).
(2)Example. The following example
illustratestherulesofthisparagraph(c):
Example.(i)Facts. C is a corporation that main-
tains a calendar taxable year. During Year 5, C makes
a large distribution to its shareholders. During tax-
able Years 2, 3, and 4, C distributes an average of
$100,000 per year. In addition, during taxable Year
2, C issued stock in exchange for $90,000 cash. Dur-
ing taxable Year 3, C issued stock in exchange for
$15,000 cash. C issued no stock during taxable Year
4.
(ii)Analysis. C must test its Year 5 distribution
as a potential ED. C’s three-year distribution aver-
age without respect to any stock issued during the
distribution lookback period is $100,000. C’s three-
year distribution average is reduced by the average
of the stock issued by the corporation in exchange
for money or property other than stock in C during
the years of the distribution lookback period (three-
year stock issuance average). See paragraph (c)(1) of
this section. C’s three-yearstock issuance average is
$35,000 [($90,000 + $15,000 + 0)/3]. Therefore, T’s
three-year distribution average is $65,000 ($100,000
- $35,000).
(d)Computation of the alternative mini-
mum tax net operating loss deduction.The
CERT rules governing the carryback of net
operating losses following a CERT also
apply to the carryback of an alternative
minimum tax net operating loss.
(e)Effective/applicability date.This
section is applicable to CERTs occurring
on or after the date of publication of the
Treasury decision adopting these rules as
final regulations in theFederal Register.
This section is also applicable to the de-
consolidation of a member from, or the
acquisition of a corporation by, a consol-
idated group that occurs on or after the
date of publication of the Treasury deci-
sion adopting these rules as final regula-
tions in theFederal Register. However,
in each case, this section does not apply
to any CERT, deconsolidation, or acquisi-
tion occurring pursuant to a written agree-
ment that is binding before the date of pub-
lication of the Treasury decision adopting
these rules as final regulations in theFed-
eral Register.
Par. 3. Section 1.1502–21 is amended
by adding paragraphs (b)(2)(iv)(C)
and (h)(1)(iv) and revising paragraphs
(b)(3)(ii)(B) and (h)(5) to read as follows:
§1.1502–21 Net operating losses.
*****
(b) * * *
(2) * * *
(iv) * * *
(C)Apportionment of special status
losses—(1) In general. The amount of
the group’s CNOL that is determined to
constitute a corporate equity reduction in-
terest loss (CERIL) (as defined in section
172(h)(1) and §1.172(h)–2(a)(2)), spec-
ified liability loss (as defined in section
172(f)(1)), or any other net operating loss
(NOL) that is subject to special carryback
or carryover rules (special status loss), is
apportioned to each member separately
from the remainder of the CNOL, based
on the percentage of CNOL attributable
to the member as determined under para-
graph (b)(2)(iv)(B) of this section. This
apportionment is made without regard
to whether a particular member actually
incurred specific expenses or engaged in
specific activities required by the special
status loss provisions. If a consolidated
group must apply §1.172(h)–3(d)(4) to al-
locate its CERIL for a loss limitation year
between multiple corporate equity reduc-
tion transactions (CERTs), then the portion
of the CERIL allocable to each CERT is
treated as a separate CERIL for purposes
of applying this paragraph (b)(2)(iv)(C)
to apportion special status losses among
members of the group.
(2) Example. The following exam-
ple illustrates the rules of this paragraph
(b)(2)(iv)(C):
Example.(i)Facts. P is the parent of a group
that includes S and that maintains a calendar taxable
year. S has been a member of the group for all
relevant years. In Year3, the P group engages in
a CERT. T is included in the P group beginning on
January 1, Year 4, as a result of a transaction that
does not constitute a CERT. In Year 4, the P group
has a CNOL of $1,200. Under the CERT rules (in
section 172(b)(1)(E) and (h), §§1.172(h)–1 through
1.172(h)–5, and §1.1502–72), $300 of the CNOL
(25%) constitutes a CERIL. Assume that, absent
application of this paragraph (b)(2)(iv)(C), under
paragraph (b)(2)(iv)(B) of this section, 2/3 of the
CNOL ($800) is attributable to T and the remaining
1/3 of the CNOL ($400) is attributable to S.
(ii)Analysis. Under this paragraph (b)(2)(iv)(C),
the CNOL is divided into its special status (CERIL)
component, and its non-special status component.
Because T has separate return year carryback years,
each component of the CNOL (the non-special sta-
tus CNOL and the CERIL) is apportioned under
paragraph (b)(2)(iv)(B) of this section. Under that
apportionment rule, 2/3 of each amount is appor-
tioned to T, and the remainder of the CNOL is
attributable to S and can be carried back to prior P
group years, subject to any applicable limitations.
Therefore, $200 of the $300 CERIL is apportioned
to T, and $600 of the $900 non-special status CNOL
is also apportioned to T. The $200 CERIL cannot be
carried back to certain taxable years of T under the
CERT rules. Likewise, $100 of the $300 CERIL is
apportioned to S, and $300 of the $900 non-special
status CNOL is also apportioned to S. Under the
CERT rules, the $100 CERIL cannot be carried back
to certain taxable years.
*****
(3) * * *
(ii) * * *
(B)Election on acquisition to waive
carryback to separate return years—(1)
In general. A corporation may make one
of three mutually exclusive, irrevocable
elections to waive carryback of CNOLs to
separate return years of acquired members.
Any election that is made with regard to an
acquired corporation that was a member
of a consolidated group (the former group)
immediately before becoming a member
of an acquiring group must include all
other corporations that were members
of the former group and that joined the
acquiring group during the same consoli-
dated return year of the acquiring group.
(2) Annual election. If a corporation
becomes a member of an acquiring group,
the acquiring group may make an irrevo-
cable election to relinquish, with respect
to the part of any CNOL attributable to
the member, the portion of the carryback
period for which the member filed a sep-
arate return. This is an annual election,
applicable to the CNOL of a single year.
The election is made in a separate state-
ment entitled, “THIS IS AN ELECTION
UNDER §1.1502–21(b)(3)(ii)(B)(2)TO
WAIVE THE PRE- [insert the first tax-
able year in which the member(s) joined
the group] CARRYBACK PERIOD FOR
THE PORTION OF THE [insert taxable
year] CNOL ATTRIBUTABLE TO [insert
the name(s) and EIN(s) of the corpora-
tion(s)].” The statement must be filed with
the acquiring group’s timely filed original
return for the consolidated return year of
the particular CNOL.
(3) Single election.If a corporation
becomes a member of an acquiring group,
the acquiring group may make an irrevo-
cable election to relinquish, with respect
to all CNOLs attributable to the mem-
ber, the portion of the carryback period
for which the member filed a separate
return. The election is not an annual
election and applies to all losses that
would otherwise be subject to a carry-
2012–43 I.R.B.517October 22, 2012

back to separate return years under sec-
tion 172 or paragraph (b) of this section.
The election is made in a separate state-
ment entitled, “THIS IS AN ELECTION
UNDER §1.1502–21(b)(3)(ii)(B)(3)TO
WAIVE THE PRE- [insert the first tax-
able year in which the member(s) joined
the group] CARRYBACK PERIOD FOR
THE PORTION FOR ALL NOLs (and
ALL CNOLs) ATTRIBUTABLE TO [in-
sert the name(s) and EIN of the corpora-
tion(s)].” The statement must be filed with
the acquiring group’s timely filed original
income tax return for the consolidated re-
turn year the corporation (or corporations)
became a member.
(4) Special one-time election for
deconsolidating member.Section
1.1502–72(e)(1) makes available an elec-
tion by a deconsolidating member (or
its new common parent immediately fol-
lowing deconsolidation) to relinquish in
whole the carryback of all NOLs to tax-
able years of the former group and any
preceding taxable year. An election under
§1.1502–72(e)(1) will control whether the
deconsolidating corporation is treated as
an applicable corporation under section
172(b)(1)(E)(iii) and §1.172(h)–1(b)(1)
following the deconsolidation with re-
gard to a CERT of the former group.
See §1.1502–72(b). Further, an election
under §1.1502–72(e)(1) may affect the
computation of the CERIL under sec-
tion 172(h)(1) and §1.172(h)–2(a)(2) with
regard to any CERT for which the de-
consolidating corporation (or any group
of which the deconsolidating corporation
is a member) is an applicable corpora-
tion under section 172(b)(1)(E)(iii) and
§1.172(h)–1(b)(1) following the decon-
solidation. See §1.1502–72(c)(4) and
(d)(3)(ii).
*****
(h) * * *
(1) * * *
(iv) Paragraph (b)(2)(iv)(C) of this sec-
tion applies to taxable years for which the
due date of the original return (without ex-
tensions)isonorafterthedateofpubli-
cation of the Treasury decision adopting
these rules as final regulations in theFed-
eral Register.
*****
(5)Waiver of carrybacks. Paragraph
(b)(3)(ii)(B) of this section (relating to the
waiver of carrybacks to separate return
years) applies to acquisitions occurring on
or after the date of publication of the Trea-
sury decision adoptingthese rules as final
regulations in theFederal Register,ex-
cept that it does not apply to any acquisi-
tion occurring pursuant to a written agree-
ment that is binding before the date of pub-
lication of the Treasury decision adopting
these rules as final regulations in theFed-
eral Register. For original consolidated
Federal income tax returns due (without
extensions) before the date of the publi-
cation of the Treasury decision adopting
these rules as final regulations in theFed-
eral Register,see paragraph (b)(3)(ii)(B)
of this section as contained in 26 CFR part
1ineffectonApril1,1999.
*****
Par. 4. Section 1.1502–72 is added to
read as follows:
§1.1502–72 Corporate equity reduction
transactions.
(a)In general—(1)Scope. Sec-
tion 172(b)(1)(E) and (h), §§1.172(h)–1
through 1.172(h)–5, and the rules of this
section (the CERT rules) apply to deter-
mine whether a corporate equity reduction
transaction (CERT) has occurred and to
determine the consequences of the CERT,
including rules governing the carryback of
losses following a CERT, with respect to
corporations that become, are, or cease to
be members of a consolidated group.
(2)Single entity treatment—(i)In gen-
eral. All members of a group are treated
as a single taxpayer for purposes of the
CERT rules. For example, if multiple
members of a group acquire in total 50
percent or more (by vote or value) of the
stock of another corporation, the group
has engaged in a major stock acquisition
(MSA) as defined in section 172(h)(3)(B)
and §1.172(h)–1(c)(2). The transactions
and expenditures undertaken by a partic-
ular group member are generally not sepa-
rately tracked; instead, the entire group is
treated as a single applicable corporation.
(ii)Debt and interest of group mem-
bers—(A)In general. The computation of
a group’s corporate equity reduction inter-
est loss (CERIL) under section 172(h)(1)
and §1.172(h)–2(a)(2) for any loss limita-
tion year (as defined in paragraph (a)(3)
of this section) that is a consolidated re-
turn year includes the debt of all mem-
bers and all interest deductions that are
allowed on the group’s consolidated re-
turn for that year. This rule applies re-
gardless of whether any particular debt
or interest expense is directly related to
the CERT, whether any particular member
was included in the group on the date of
the CERT, or whether any particular debt
would not exist in the group if the group
had not engaged in the CERT. But see para-
graph (a)(2)(iii) of this section (providing
that intercompany transactions are gener-
ally disregarded).
(B)Debt of acquired corporation.With
respect to a corporation that joins a con-
solidated group (acquired corporation), in
applying the CERT rules to consolidated
return years that are loss limitation years,
any debt of the acquired corporation is
treated as debt of the acquiring group for
purposes of applying the avoided cost rules
of section 263A(f)(2)(A) on any measure-
ment date after the inclusion of the corpo-
ration in the group. See section 172(h)(2)
and §1.172(h)–2(b) (applying the princi-
ples of section 263A(f)(2)(A)(ii)); see also
§1.263A–9(f)(2) (defining measurement
dates).
(iii)Intercompany transactions.In
applying the CERT rules, intercompany
transactions as defined in §1.1502–13 are
generally disregarded. For example, in-
terest expense attributable to an intercom-
pany obligation is not taken into account
in computing the CERIL or three-year
average of a group. However, a trans-
action between group members is not
disregarded if a party to the transaction
becomes a non-member pursuant to the
same plan or arrangement. In such case,
any transaction between group members,
including a potential excess distribution
(ED) as defined in section 172(h)(3)(C),
§1.172(h)–1(c)(3), and paragraph (f)(1) of
this section, is tested on a separate entity
basis under the CERT rules. It may also be
tested as part of a larger, multi-step MSA.
See §1.172(h)–1(d)(2).
(iv)Applicable corporation status fol-
lowing inclusion of member with pre-ex-
isting CERT—(A)Acquiring group treated
as applicable corporation. If a corporation
that is an applicable corporation (including
by application of paragraph (b) of this sec-
tion) with regard to a CERT occurring in
a separate return year (pre-existing CERT
member) joins a consolidated group, the
group is treated as a single applicable cor-
poration with regard to that CERT in the
October 22, 20125182012–43 I.R.B.

consolidated return year of the acquisition
and any succeeding year. A corporation
is a pre-existing CERT member regardless
of whether the transaction at issue is an
MSA that constitutes a CERT with respect
to both a consolidated return year of the ac-
quiring group and a separate return year of
the acquired corporation.
(B)End of separate tracking of tar-
get. Beginning on the first day on which a
pre-existing CERT member is included in
a consolidated group, the member ceases
to be separately tracked as an applicable
corporation. See paragraph (a)(2)(i) of this
section. The CERT rules thereafter apply
to the group, rather than to the member,
with regard to any CERT for which the
member had been an applicable corpora-
tion, including an MSA in which the mem-
ber was acquired by the group. There-
fore, beginning on the day on which the
pre-existing CERT member is included in
the group, no CERIL is computed with re-
gard to the member, independent of the
CERIL computed for the group. But see
§1.1502–21(b)(2)(iv)(C) (providing for al-
location and apportionment of a group’s
CERIL to specific group members) and
§1.172(h)–5(b)(1) (relating to prohibition
on carryback of a CERIL).
(3)Loss limitation years—(i)In gen-
eral. This paragraph applies to identify
loss limitation years of a consolidated
group and corporations that have been
members of a consolidated group. The
taxable year in which a CERT actually
occurs is a loss limitation year. Any other
taxable year (potential loss limitation year)
of any applicable corporation (including
a consolidated group) constitutes a loss
limitation year with regard to the CERT
only if, under the carryforward rules of
sections 172(b)(1)(A)(ii) and 381(c)(1),
the potential loss limitation year would
constitute the first or second taxable year
following the taxable year of the corpo-
ration or consolidated group that actually
engaged in the CERT that includes the
date on which the CERT occurred. Ex-
cept as otherwise provided in paragraph
(a)(3)(ii) of this section, for purposes of
this paragraph (a)(3), sections 172 and
381 are applied as if the inclusion of any
corporation in a consolidated group or the
deconsolidation of any member from a
group were a transaction listed in section
381(a).
(ii)Corporation joins group in an MSA.
If a corporation joins a group in an MSA,
no separate return year of the acquired cor-
poration ending on or before it joined the
acquiring group is treated as a loss lim-
itation year for the purpose of determin-
ing the loss limitation years of the acquir-
ing group or any corporation that decon-
solidates from that group that relate to the
MSA.
(iii)Deconsolidating members.Under
this paragraph (a)(3)(iii), a corporation that
deconsolidates (deconsolidating member)
from a group (former group) that is an ap-
plicable corporation may have loss limi-
tation years with regard to a CERT of its
former group. See paragraphs (b) (relat-
ing to post-deconsolidation status as appli-
cable corporation) and (e)(1) of this sec-
tion (providing for an irrevocable waiver
of carrybacks such that a deconsolidating
member is not treated as an applicable cor-
poration). If the consolidated return year
during which the deconsolidation occurs
(year of deconsolidation) is a first or sec-
ond loss limitation year with regard to the
CERT, then certain separate return years of
a deconsolidating member that is treated
as an applicable corporation will constitute
loss limitation years. If the year of decon-
solidation is a first loss limitation year with
regard to the CERT, the following two sep-
arate return years will constitute loss limi-
tation years. If the year of deconsolidation
is a second loss limitation year with regard
to the CERT, the separate return year that
immediately follows the year of deconsoli-
dation will constitute a loss limitation year.
If the deconsolidating member joins an-
other consolidated group, the consolidated
return years of that group may also consti-
tute loss limitation years with regard to the
CERT of the former group. See paragraph
(a)(2)(iv) of this section (relating to inclu-
sion of member with pre-existing CERT).
(4)Application of rules to reverse
acquisitions. In the case of any acquisi-
tion to which §1.1502–75(d)(3) applies
(a reverse acquisition), for purposes of
applying the CERT rules, the first corpo-
ration (as defined in §1.1502–75(d)(3)(i))
is treated as the corporation the stock of
which is acquired, and the second corpo-
ration (as defined in §1.1502–75(d)(3)(i))
is treated as the corporation that ac-
quires stock. In addition, for purposes of
§1.172(h)–2(b)(3)(i) (identifying CERT
costsofanMSA)inthecaseofareverse
acquisition, the fair market value of the
stock acquired equals the fair market value
of the stock of the first corporation that
the stockholders (immediately before the
acquisition) of the first corporation own
immediately after the acquisition, rather
than the fair market value of the stock of
the second corporation.
(b)Applicable corporation status fol-
lowing deconsolidation—(1)In general.
If a corporation deconsolidates in a loss
limitation year from a group that is treated
as an applicable corporation with regard
to a CERT, the deconsolidating corpora-
tion and the former group are both treated
as applicable corporations following the
deconsolidation. If the corporation joins
another consolidated group (acquiring
group) following the deconsolidation, the
rules of this section apply to the acquiring
group, and this paragraph (b) applies with
regard to the deconsolidation of any mem-
ber from the acquiring group during a loss
limitation year associated with the CERT.
See paragraph (a)(2)(iv) of this section
regarding treatment of a group as a single
applicable corporation following an acqui-
sition; see also paragraph (a)(3)(ii) of this
section for identification of loss limitation
years following a deconsolidation. This
paragraph (b) applies without regard to
whether any particular corporation would
on a separate entity basis have constituted
an applicable corporation with regard to
the CERT under section 172(b)(1)(E)(iii)
and §1.172(h)–1(b), with or without the
application of section 172(h)(4)(C) and
paragraph (a)(2) of this section, or whether
the CERT occurred in a consolidated re-
turn year. However, under this paragraph
(b), the deconsolidating corporation may
be treated as an applicable corporation
with regard to a CERT of a former group
only if the group engages in the CERT on
or before the date of the deconsolidation,
or if a pre-existing CERT member, as de-
scribed in paragraph (a)(2)(iv)(A) of this
section, joins the group on or before the
date of the deconsolidation.
(2)Exception if waiver filed. In general,
a corporation that deconsolidates from a
group (or the parent of a group acquiring
the deconsolidating member), may, pur-
suant to paragraph (e)(1) of this section,
make an irrevocable election to relinquish
the carryback of all net operating losses
(NOLs) (and attributable portions of con-
solidated net operating losses (CNOLs))
2012–43 I.R.B.519October 22, 2012

to taxable years of the former group and
any preceding years. If such an election is
made, the deconsolidating member is not
treated as an applicable corporation with
regard to any CERT of the former group af-
ter the deconsolidation. Any group that ac-
quires the deconsolidating member is not
treated as an applicable corporation with
regard to any CERT of the former group
solely as a result of the acquisition of that
member. The former group will continue
to be treated as an applicable corporation
with regard to the CERT.
(3)Examples. The following examples
illustrate the rules of paragraph (a) of this
section and this paragraph (b). For pur-
poses of these examples, assume that all
entities are domestic C corporations unless
otherwise stated. Assume that all applica-
ble corporations have substantial NOLs in
their loss limitation years:
Example 1.Single entity treatment of acquisition
indebtedness.(i)Facts. Corporation T is a calen-
dar-year taxpayer that has significant debt outstand-
ing, which was incurred to fund operations. Unre-
lated P is the common parent of a calendar-year con-
solidated group. The following steps occur pursuant
to an integrated plan. On May 1, Year 5, P acquires 10
percent of the T stock for $100. On June 30, Year 5,
T borrows $700 and immediately thereafter uses the
money to redeem some of its shares from its share-
holders. On the same day, the P group acquires all of
the remaining T stock in exchange for $200. Assume
that the $700 cash payment from T to the T sharehold-
ers is treated as a redemption. T is first included in the
P group on July 1, Year 5. Under §1.172(h)–1(d)(2),
the steps of the integrated plan (including the redemp-
tion of the former T shareholders) constitute a single
MSA.
(ii)Analysis. T’s short taxable year ending
June 30, Year 5 is T’s year of the CERT. The P
group’s consolidated return Year 5 is the taxable
year of the CERT for the group. For purposes of
allocating to the single MSA interest paid or accrued
during the P group’s loss limitation years (Years 5,
6, and 7) under §1.172(h)–2(b), the P group takes
into account the debt of all members, including the
$700 loan and all of T’s other debt. See paragraph
(a)(2)(ii)(B) of this section. The allocation of interest
also takes into account all deductions for interest paid
or accrued that are included in the consolidated return
for the relevant loss limitation year. See paragraph
(a)(2)(ii)(A) of this section.
Example 2.Loss limitation years if a corporation
joins group in an MSA. Corporation T maintains a tax-
able year ending June 30. Unrelated X is the com-
mon parent of a calendar-year consolidated group.
On March 31, Year 5, the X group acquires all of the T
stock in a CERT, and T is first included in the X group
on April 1, Year 5. On the date of the acquisition, both
the X group and T constitute applicable corporations
with regard to the Year 5 CERT. See §1.172(h)–1(b)
and paragraph (a)(2) of this section. T’s short tax-
able year ending on March 31, Year 5, was T’s tax-
able year in which the CERT occurred. T’s only loss
limitation year with respect to the Year 5 CERT is
its short taxable year ending on March 31, Year 5.
See §1.172(h)–1(e) and paragraph (a)(3) of this sec-
tion. Beginning on April 1, Year 5, T ceases to be
separately tracked as an applicable corporation. See
paragraph (a)(2)(i) and (iv)(B) of this section. The X
group’s year in which the CERT occurred is its con-
solidated return Year 5. The X group’s loss limita-
tion years with respect to the Year 5 CERT are its
full taxable calendar Years 5, 6, and 7. See paragraph
(a)(3)(i) and (ii) of this section.
Example 3.Loss limitation years of a group and
deconsolidating member.(i)Facts. P is the common
parent of a calendar-year consolidated group that in-
cludes S. On June 30, Year 6, a member of the P group
engages in an acquisition that constitutes a CERT. S is
not a party to the acquisition. On September 30, Year
6, S deconsolidates from the P group. No election
under paragraph (e)(1) of this section is made with
respect to the deconsolidation of S. Following its de-
consolidation, S does not join in the filing of a con-
solidated return with another group, and it maintains
a calendar taxable year.
(ii)Analysis. Because no election is made un-
der paragraph (e)(1) of this section, following the
deconsolidation, both the P group and S are treated
as applicable corporations with regard to the Year
6 CERT. See paragraph (b)(1) of this section. The
P group’s loss limitation years with regard to the
CERT are its consolidated return Years 6, 7, and 8.
See section 172(b)(1)(E)(ii) and paragraph (a)(3)(i)
of this section. S deconsolidates from the P group
during consolidated return Year 6, which is the first
loss limitation year with regard to the CERT. See
paragraph (a)(3)(i) of this section. For purposes of
applying paragraph (a)(3) of this section to identify
loss limitation years, S is treated as deconsolidating
from the P group in a transaction to which section
381(a) applies. Therefore, S’s two taxable years that
follow the deconsolidation, the short year ending
December 31, Year 6, and the full taxable calendar
Year 7, are its additional loss limitation years with
regard to the Year 6 CERT. See paragraph (a)(3)(iii)
of this section. See section 172(b)(1)(E)(i) and
§1.172(h)–5(b)(1) for rules regarding the prohibition
on carryback of a CERIL.
Example 4.Loss limitation years if a pre-existing
CERT member joins the group.(i)Acquiring group
has loss limitation years. Corporation T maintains
a calendar taxable year and does not join in the fil-
ingofaconsolidatedreturn. OnJuly1,Year5,T
engages in a CERT (Year 5 CERT). Unrelated X is
the common parent of a calendar-year consolidated
group that includes S. On December 31, Year 5, the
X group acquires all of the outstanding T stock. T
is first included in the X group on January 1, Year 6.
The first loss limitation year with respect to the Year 5
CERT is T’s calendar Year 5. See §1.172(h)–1(e). As
a result of the X group’s acquisition of T, the X group
is treated as a single applicable corporation with re-
spect to the Year 5 CERT. See paragraph (a)(2)(iv)
of this section. For purposes of applying paragraph
(a)(3) of this section to identify loss limitation years,
T is treated as joining the X group in a transaction to
which section 381(a) applies. Because T has one loss
limitation year with regard to the CERT before it joins
the X group, the X group has two loss limitation years
with respect to the Year 5 CERT: its calendar Years 6
and 7. See paragraph (a)(3)(i) of this section. How-
ever, the X group must test its acquisition of T under
the CERT rules.
(ii)Acquiring group has no loss limitation years.
The facts are the same as in paragraph (i) of thisEx-
ample 4, except that the X group acquires T on Jan-
uary 31, Year 7. Because T has three loss limitation
years before it is included in the X group (calendar
Years 5 and 6, and a short taxable year ending on
January 31, Year 7), none of the X group’s consol-
idated return years are loss limitation years with re-
gard to the Year 5 CERT. See section 172(b)(1)(E)(ii)
and paragraph (a)(3)(i) of this section.
(iii)Member deconsolidates from acquiring
group. The facts are the same as in paragraph (i) of
thisExample 4, except that S deconsolidates from
the X group on June 30, Year 6. No election un-
der paragraph (e)(1) of this section is made on the
deconsolidation of S. Following its deconsolidation
from the X group, S does not join in the filing of
a consolidated return. T and the X group’s loss
limitation years remain the same as in paragraph
(i)ofthisExample 4. Because no election is made
under paragraph (e)(1) of this section with respect to
S’s deconsolidation, following the deconsolidation,
S and the X group are both treated as applicable
corporations with regard to T’s Year 5 CERT. See
paragraph (b)(1) of this section. S deconsolidates
from the P group during consolidated return Year 6,
which is the second loss limitation year with regard
to the CERT. See paragraph (a)(3)(i) of this section.
Therefore, following its deconsolidation, S’s only
loss limitation year with respect to the Year 5 CERT
is its short taxable year July 1, Year 6 through De-
cember 31, Year 6. See paragraph (a)(3)(iii) of this
section.
Example 5.Deconsolidation before group en-
gages in CERT. Corporation T is a member of the P
group, which maintains a calendar taxable year. On
February 28, Year 4, T deconsolidates from the P
group due to T’s acquisition by the X group, which
also maintains a calendar taxable year. T is included
in the X group as of March 1, Year 4. No election
under paragraph (e)(1) of this section is made on the
deconsolidation of T from the P group. On March 31,
Year 4, the P group engages in a CERT. Because the
PgroupengagesintheCERTafterthedateofthede-
consolidation, T is not treated as an applicable corpo-
ration following the deconsolidation. See paragraph
(b)(1) of this section. However, the X group must ap-
ply the CERT rules to the X group’s acquisition of T.
Example 6.Member that engages in CERT de-
consolidates with a waiver election.(i)Facts.Pis
the common parent of a calendar-year consolidated
group. On March 31, Year 4, the P group engages in
an MSA, when member T acquires all of the stock of
T1. On June 30, Year 4, T and its subsidiaries (in-
cluding T1) deconsolidate from the P group due to
the acquisition of T by the X group. T and its sub-
sidiaries are first included in the X group as of July 1,
Year 4. The X group makes an election under para-
graph (e)(1) of this section on the deconsolidation.
(ii)Analysis. Because an election under para-
graph (e)(1) of this section is made on the deconsol-
idation of T and its subsidiaries from the P group,
following the deconsolidation, only the P group is
treated as an applicable corporation with regard to
the March 31, Year 4 CERT. Neither T, T1, nor the
X group is treated as an applicable corporation with
regard to the March 31, Year 4 CERT, even though
October 22, 20125202012–43 I.R.B.

T directly engaged in the MSA, and T1 was the ac-
quired corporation in that MSA. See paragraph (b)(2)
of this section. However, the X group must apply the
CERT rules to the X group’s acquisition of T.
(c)Identification and allocation of
CERT costs—(1)In general. The por-
tion of an NOL that is treated as a
CERIL is subject to limitation on car-
ryback. See section 172(b)(1)(E)(i) and
§1.172(h)–5(b)(1). A CERIL is com-
puted in part by identifying the deduc-
tions allowed for interest allocable to
the CERT. The computation of inter-
est allocable to a CERT under section
172(h)(2) and §1.172(h)–2(b) takes into
account all CERT costs as defined in
§1.172(h)–2(b)(3). This paragraph (c)
contains rules applicable to the identifi-
cation and allocation of CERT costs of a
consolidated group.
(2)Single entity treatment of CERT
costs. The computation of interest allo-
cable to a CERT in any particular loss
limitation year of a consolidated group
includes CERT costs incurred (including
costs deemed incurred under this para-
graph (c)) with regard to the CERT by all
corporations that are members of a group
during the loss limitation year.
(3)CERT costs of acquired corpora-
tion. With respect to a corporation that
joins a consolidated group (acquired cor-
poration), for purposes of applying the
CERT rules, any CERT costs incurred (or
treated as incurred under this paragraph
(c)) by the acquired corporation during
separate return years prior to the acquired
corporation’s inclusion in the group are
attributed to the acquiring group. Such
costs are treated as having been incurred
by the acquiring group for purposes of
applying the avoided cost rules of section
263A(f)(2)(A) to any measurement date
after the acquisition of the corporation.
Those CERT costs are no longer sepa-
rately identified as CERT costs incurred
by the acquired corporation.
(4)Allocation of CERT costs on decon-
solidation—(i)In general. This paragraph
(c)(4) applies to determine the CERT costs
allocable to a corporation that deconsoli-
dates in a loss limitation year from a group
that is treated as an applicable corporation
with regard to a CERT. Under this para-
graph (c)(4), CERT costs may be allocated
to a deconsolidating corporation only if
the group engages in the relevant CERT
on or before the date of the deconsolida-
tion, or if a pre-existing CERT member,
as described in paragraph (a)(2)(iv)(A)
of this section, joins the group on or be-
fore the date of the deconsolidation. This
paragraph (c)(4) applies regardless of
whether any particular corporation would
have constituted an applicable corpora-
tion under section 172(b)(1)(E)(iii) and
§1.172(h)–1(b) without the application
of section 172(h)(4)(C) and paragraph
(a)(2) of this section, whether the CERT
occurred in a consolidated return year, or
whether any particular corporation actu-
ally incurred CERT costs.
(ii)No waiver election made. If no elec-
tion under paragraph (e)(1) of this section
is made with regard to the deconsolida-
tion, CERT costs incurred by the group
(including costs treated as incurred by the
group under this paragraph (c)) are allo-
cated between the deconsolidating corpo-
ration and the former group, solely for pur-
poses of computing allocable interest de-
ductions of the deconsolidating corpora-
tion and the continuing group with regard
to the CERT under section 172(h)(2) and
§1.172(h)–2(b). For purposes of comput-
ing interest allocable to the CERT under
section 172(h)(2) and §1.172(h)–2(b) dur-
ing the loss limitation year of the former
group that is the year of the deconsolida-
tion, the CERT costs allocated to the de-
consolidating member are included in the
group’s accumulated CERT costs on those
measurement dates on which the decon-
solidating corporation was included in the
group. The portion of the group’s total
CERT costs that is allocated to a decon-
solidating member equals the group’s to-
tal CERT costs multiplied by a fraction,
the numerator of which equals the value
of the deconsolidating corporation imme-
diately after its deconsolidation, and the
denominator of which equals the value of
the entire group immediately prior to the
deconsolidation.
(iii)Waiver election made. If an elec-
tion under paragraph (e)(1) of this sec-
tion is made with regardtoadeconsolida-
tion, no CERT costs are allocated to the
deconsolidating corporation. All CERT
costs remain with the former group for
purposes of identifying its allocable inter-
est deductions under section 172(h)(2) and
§1.172(h)–2(b) with regard to the CERT.
(5)Examples. The following examples
illustrate the rules of this paragraph (c).
For purposes of the examples in this para-
graph (c)(5), assume that all entities are
domestic C corporations unless otherwise
stated. Assume that all applicable corpo-
rations have substantial NOLs in their loss
limitation years:
Example 1.Aggregation of CERT costs of consol-
idated group and target.(i)Facts. P is the common
parent of a calendar-year consolidated group that in-
cludes S1 and S2. On June 30, Year 5, S1 acquires
all of the stock of T for $10 million. P incurs CERT
costs of $100,000 and $250,000 for work performed
by its outside counsel and an investment banker, re-
spectively, that facilitates the acquisition. In addition,
T incurs CERT costs of $175,000 for work performed
by its outside counsel that facilitates the acquisition.
All of these costs are incurred on or before the date
of the acquisition. In all relevant years preceding its
acquisition, T does not join in the filing of a consoli-
dated return.
(ii)Analysis. For purposes of computing the P
group’s allocable interest deductions under section
172(h)(2) and §1.172(h)–2(b), the P group’s CERT
costs include CERT costs incurred by all members of
the P group. See paragraph (c)(2) of this section. In
addition, when T joins the P group, the CERT costs
incurred by T prior to its inclusion in the P group are
attributed to the P group and are treated as having
been incurred by the P group for purposes of apply-
ing the avoided cost rules of section 263A(f)(2)(A)
to any measurement date after the acquisition of T.
See paragraph (c)(3) of this section. As a result,
the P group’s accumulated CERT costs on July 1,
Year 5, are $10,525,000 [$10,000,000 + $100,000
+ $250,000 + $175,000]. See §1.172(h)–2(b)(3) for
rules defining CERT costs.
Example 2.Acquiring group treated as incurring
CERT costs associated with unrelated CERT of tar-
get. T is a calendar-year taxpayer that does not join
in the filing of a consolidated return. P is the com-
mon parent of a calendar-year consolidated group. P
also owns 70 percent of the only class of T stock.
During Year 4, T engages in a CERT. On June 30,
Year 5, P acquires the remainder of the stock of T,
and T is first included in the P group on July 1, Year
5. Following the acquisition, the P group is treated
as an applicable corporation with regard to T’s Year
4 CERT. See paragraph (a)(2)(iv) of this section. The
P group’s consolidated return Year 5 is the third and
final loss limitation year with regard to the Year 4
CERT. See paragraph (a)(3)(i) of this section. The
P group is treated as having incurred all of T’s ex-
penses allocable to the CERT for purposes of com-
puting any CERIL for consolidated return Year 5. Be-
cause T was a member of the P group for less than the
entire calendar taxable Year 5, T’s CERT costs are
included in the P group’s accumulated CERT costs
only on those measurement dates on which T is in-
cluded in the group (that is, measurement dates on
orafterJuly1,Year5). Seeparagraph(c)(3)ofthis
section and §1.172(h)–2(b)(4). See also paragraph
(d)(3)(iii) for rules relating to the interest history of
a partial-year member.
Example 3.Allocation of CERT costs to decon-
solidating member.(i)Facts. P is the common par-
ent of a calendar-year consolidated group. P owns 60
percent of the sole class of stock of T, a calendar-year
taxpayer. On January 31, Year 5, the P group engages
in a CERT. On March 31, Year 5, P acquires the re-
2012–43 I.R.B.521October 22, 2012

mainder of the stock of T, and T is first included in
the P group on April 1, Year 5. On June 30, Year 6,
T deconsolidates from the P group, with no election
made under paragraph (e)(1) of this section.
(ii)Analysis. T is not a member of the P group
at the time of the CERT. However, following its de-
consolidation, T is treatedas an applicable corpora-
tion with regard to the Year 5 CERT because the P
group engages in the CERT before T deconsolidates,
and no election is made under paragraph (e)(1) of this
section on the deconsolidation. See paragraph (b)(1)
of this section. Further, a portion of the P group’s
CERT costs is allocated to T for purposes of com-
puting any CERIL of T (or of any group of which
T becomes a member following its deconsolidation
from the P group) with regard to the Year 5 CERT. See
paragraphs (b)(1) and (c)(4)(ii) of this section. How-
ever, the CERT costs of the group otherwise allocated
to T are included in the P group’s accumulated CERT
costs on those measurement dates during which T is
included in the group (that is, measurement dates be-
fore July 1, Year 6). See paragraph (c)(4)(ii) of this
section and §1.172(h)–2(b)(4).
(d)Determining the three-year aver-
age of a group—(1)In general. Section
172(h)(2)(C) and §1.172(h)–3(a) limit the
amount of allocable interest deductions to
the excess (if any) of the amount allowable
as a deduction for interest paid or accrued
by the taxpayer during the loss limitation
year, over the average of interest paid or
accrued by the taxpayer (the three-year av-
erage) for the three taxable years preced-
ing the taxable year in which the CERT oc-
curred (the lookback period). The compu-
tation under section 172(h)(2)(C)(ii) and
§1.172(h)–3(b) of a group’s three-year av-
erage for the lookback period that is rel-
evant to any loss limitation year includes
interest paid or accrued (or treated as paid
or accrued under this paragraph (d)) dur-
ing the lookback period by all corporations
that are members of theconsolidated group
during the loss limitation year.
(2)Varying group membership.If
group membership varies from one loss
limitation year to another, a different
three-year average is computed with re-
gard to each loss limitation year of the
group.
(3)Interest history—(i)Combination of
interest history of acquired member with
group history. With respect to a corpo-
ration that joins a consolidated group (ac-
quired corporation), for purposes of apply-
ing the CERT rules, the interest paid or
accrued (or treated as paid or accrued un-
der this paragraph (d)) by the acquired cor-
poration during each separate return year
prior to its inclusion in the group is ap-
portioned equally to each day within each
of its separate return years. The inter-
est apportioned to dates within the look-
back period is then combined with the in-
terest paid or accrued by the acquiring
group and is treated as interest paid or ac-
crued by the acquiring group during the
lookback period for purposes of comput-
ing the three-year average that is relevant
to any loss limitation year beginning with
the consolidated return year during which
the acquired corporation is first included
in the group. For purposes of the CERT
rules, the interest from the separate return
years is no longer separately traced as in-
terest paid or accrued by the acquired cor-
poration. But see paragraph (d)(3)(iii) of
this section for rules requiring proration of
interest history attributable to corporations
that are members of a group for less than
an entire loss limitation year. The interest
paid or accrued by a predecessor (as de-
fined in §1.172(h)-(1)(b)(2)) of a member
of the group is similarly combined with the
interest paid or accrued by the group. See
§1.172(h)–4(c)(2)(ii)(A).
(ii)Interest treated as paid or accrued
by a corporation that deconsolidates—(A)
In general. This paragraph (d)(3)(ii) pro-
vides rules that apply for purposes of
determining any three-year average of a
corporation that deconsolidates from a
group (or a three-year average of any other
group of which it becomes a member)
and any three-year average of the group
from which the corporation deconsolidates
(former group). These rules apply to the
computation of any three-year average
with regard to a CERT of the former group
or any other CERT.
(B)Waiver election made. If an elec-
tion under paragraph (e)(1) of this sec-
tion is made with respect to the decon-
solidation of a corporation from a group,
then, following the deconsolidation, the
deconsolidating member is treated as hav-
ing paid or accrued zero interest during
the period of its inclusion in the former
group and preceding years. The group re-
tains the interest history that would other-
wise be allocated and apportioned to the
deconsolidating member under this para-
graph (d)(3)(ii).
(C)No waiver election made.Ifno
election under paragraph (e)(1) of this
section is made with respect to the decon-
solidation of a corporation, a portion of
the group’s amount of interest treated as
paid or accrued during the period of the
corporation’s consolidation and any pre-
ceding years is allocated and apportioned
to the deconsolidating corporation. The
allocated and apportioned interest is sub-
tracted from the group’s interest history
and is unavailable to the group (or any
other group member) for purposes of com-
puting a three-year average with regard to
any loss limitation year of the group (or
any other group member) after the year
of deconsolidation. But see paragraph
(d)(3)(iii) of this section for rules requiring
proration of interest history attributable to
corporations that are members of a group
for less than an entire loss limitation year.
(D)Method of allocation. If no election
under paragraph (e)(1) of this section is
made when a corporation deconsolidates,
solely for purposes of the CERT rules, the
corporation is treated as having paid or
accrued interest equal to the amount of
interest paid or accrued by the group in
each consolidated return year through the
date of the deconsolidation (including any
combination of interest history pursuant to
paragraph (d)(3)(i) of this section), multi-
plied by a fraction, the numerator of which
equals the value of the deconsolidating
corporation immediately after its decon-
solidation, and the denominator of which
equals the value of the entire group imme-
diately prior to the deconsolidation.
(iii)Proration of lookback period inter-
est for members that are part of a group for
less than the entire loss limitation year.If
any member is included in the group for
less than an entire consolidated return year
that is a loss limitation year (partial-year
member), then the group takes into account
apro rataportion of the partial-year mem-
ber’s amount of interest paid or accrued
during the lookback period for purposes
of determining a group’s three-year aver-
age relevant to that loss limitation year.
The amount of interest treated as paid or
accrued that is subject to proration under
this paragraph (d)(3)(iii) is the interest of
the partial-year member that would oth-
erwise be fully combined with the inter-
est history of the acquiring group under
paragraph (d)(3)(i) of this section (with re-
gard to corporations acquired during the
loss limitation year) or the interest that
is otherwise allocated to a deconsolidat-
ing member under paragraph (d)(3)(ii) of
this section. Thepro rataamount equals
the partial-year member’s interest treated
as paid or accrued for the dates of the
October 22, 20125222012–43 I.R.B.

lookback period, multiplied by a fraction,
the numerator of which equals the num-
ber of days of the loss limitation year dur-
ing which the partial-year member was a
member of the group, and the denomina-
tor of which equals the number of days in
the loss limitation year. This proration ap-
plies to interest paid or accrued during the
entire lookback period, including portions
of the lookback period during which the
partial-year member was a member of the
group.
(4)Lookback period—(i)In general.
The lookback period with regard to a
CERT is the three taxable years preced-
ing the taxable year in which the CERT
occurs. See section 172(h)(2)(C)(ii) and
§1.172(h)–3(a). The lookback period that
is relevant to any CERIL of a consolidated
group is the three taxable years preceding
the taxable year of the group that includes
the date on which the CERT occurred.
See §1.172(h)–5(a) (defining the date on
which a CERT occurs if the CERT con-
sists of multiple steps). This rule applies
whether the group actually engaged in the
CERT or is treated as an applicable cor-
poration with regard to a CERT solely by
application of paragraph (a)(2)(iv) of this
section.
(ii)Group not in existence for entire
lookback period. If a group was not in ex-
istence for three taxable years prior to the
consolidated return year that includes the
date of the CERT, the lookback period in-
cludes the group’s taxable years preceding
the year of the CERT plus the preceding
taxable years of the corporation that was
the common parent of the group on the
first day of the group’s first consolidated
return year (original common parent). If
the group and the original common par-
ent together have fewer than three taxable
years that precede the consolidated return
year that includes the date of the CERT,
the lookback period will be deemed to in-
clude full 12-month periods that end on the
calendar date that is one day prior to the
date of organization of the original com-
mon parent.
(iii)Group not in existence on date of
CERT. If a group was not in existence
on the date on which the CERT occurred,
for purposes of determining the lookback
period, the group’s taxable years will be
deemed to include the taxable years of the
group’s original common parent. If the
original common parent was not in exis-
tence on the date of the CERT, or it does
not have three taxable years that precede
its taxable year that includes the date of
the CERT, the group will be deemed to
have additional 12-month taxable periods
that end on the calendar date that is one
day prior to the date of the original com-
mon parent’s organization. From these
deemed taxable periods, the group will
identify the deemed period that includes
the date on which the CERT occurred and
the three immediately preceding deemed
periods that constitute the lookback pe-
riod. See §1.172(h)–5(a) regarding date on
which CERT occurred in multi-step trans-
action.
(iv)Interest history of corporations not
in existence. If any member of a group
is not in existence for the entire lookback
period, for purposes of the CERT rules,
that member is treated as having paid or
accrued zero interest before its organiza-
tion. But see §1.172(h)–4(c)(2)(ii) (re-
garding interest history of successors).
(5)Examples. The following examples
illustrate the rules of this paragraph (d).
Unless otherwise stated, assume that all
entities are domestic C corporations that
have full, 12-month taxable years. Assume
that all applicable corporations have sub-
stantial NOLs in their loss limitation years:
Example 1.Acquired member’s interest history
combined with interest history of group.(i)Facts.
P is the common parent of a calendar-year consoli-
dated group that includes S on all relevant dates. On
December 31, Year 5, S acquires the stock of T in a
CERT, and T is first included in the P group on Jan-
uary 1, Year 6. Membership in the P group is oth-
erwise stable for all relevant years. Prior to joining
the P group, T does not join in the filing of a consol-
idated return and maintainsa calendar taxable year.
T’s amounts of interest paid or accrued in Years 2, 3,
and 4, respectively, are $600, $200, and $400. The P
group’s amounts of interest paid or accrued in Years 2,
3, and 4, respectively, are $1,400, $1,000, and $1,200.
(ii)Analysis. The P group’s loss limitation years
are calendar Years 5, 6, and 7. See paragraph (a)(3)(i)
of this section. Year 5 is also a loss limitation year
for T. The P group’s lookback period with regard to
the CERT is calendar Years 2, 3, and 4. See para-
graph (d)(4)(i) of this section. For purposes of com-
puting any three-year average of the P group for its
lookback period, on the acquisition of T, the interest
history of T is generally combined with the interest
history of the P group. See paragraph (d)(3)(i) of this
section. However, because T is not a member of the P
group on any date during consolidated return Year 5,
the computation of the P group’s three-year average
relevant to Year 5 will not include any of T’s interest
paid or accrued during the lookback period. See para-
graph (d)(3)(iii) of this section. Thus, the P group’s
three-year average for loss limitation Year 5 is $1,200
([$1,400 + $1,000 + $1,200]/3). Because T is a mem-
ber of the P group during each day of loss limitation
Years6and7,T’shistoryofinterestpaidoraccrued
during the lookback period is fully included in the
P group’s computation of itsthree-year average rel-
evant to loss limitation Years 6 and 7. See paragraph
(d)(3)(i) and (iii) of this section. Thus, the P group’s
three-year average for loss limitation Years 6 and 7 is
$1,600 ([$1,400 + $1,000 + $1,200 + $600 + $200 +
$400]/3).
(iii)Interest combination if acquired member in-
cluded in group for part of loss limitation year.The
facts are the same as in paragraph (i) of thisExample
1, except that S acquires the stock of T on March 31,
Year 5, and T is included in the P group for 275 days.
Because T is a partial-year member of the P group
during loss limitation Year 5, the computation of the
three-year average relevant to loss limitation Year
5 includes the interest of T for the lookback period,
prorated as required under paragraph (d)(3)(iii) of
this section. Because T is in the P group for 275
days during Year 5, the computation of the P group’s
three-year average relevant to Year 5 takes into
account an amount of T’s interest history equal to
T’s actual amount of interest paid or accrued for
each year of the lookback period, multiplied by a
fraction equal to 275/365 (number of days of the loss
limitation year during which T is a member of the
P group divided by the number of days in the loss
limitation year), or $452 ($600 x [275/365]), $151
($200 x [275/365]), and $301 ($400 x [275/365]) for
Years 2, 3, and 4, respectively.
Example 2.Lookback period if corporation with
CERT history joins group.(i)Facts. P is the common
parent of a calendar-year consolidated group. P also
owns 55 percent of the sole class of stock of Corpora-
tion T, which maintains a taxable year ending June 30.
On September 30, Year 4, T engages in a CERT. On
December 31, Year 5, P acquires the remainder of the
stock of T, and T is first included in the P group on
January 1, Year 6.
(ii)Analysis. T’s full taxable year ending June 30,
Year 5, and its short year ending December 31, Year
5 are loss limitation years with regard to the Septem-
ber Year 4 CERT. The lookback period for the CERT
relevant to these two loss limitation years is T’s three
taxable years ending on June 30, Years 2, 3, and 4.
See section 172(h)(2)(C)(ii) and §1.172(h)–3(a). The
P group’s calendar Year 6 is its sole loss limitation
year with regard to T’s September Year 4 CERT. See
paragraph (a)(3)(i) of this section. In determining any
CERIL with regard to the P group’s calendar Year 6,
the lookback period is the three taxable years prior to
the taxable year of the groupthat includes the date on
which the CERT occurred. See paragraph (d)(4)(i) of
this section. Therefore, the lookback period with re-
gard to the P group’s loss limitation Year 6 is calendar
consolidated return Years 1, 2, and 3.
Example 3.Interest history if no waiver election
made on member deconsolidation.(i)Facts.Pis
the common parent of a calendar-year consolidated
group that includes S. The P group engaged in a
CERT on December 27, Year 5. S deconsolidates
from the P group on December 31, Year 5. No elec-
tion under paragraph (e)(1) of this section is made on
the deconsolidation of S. S’s value immediately after
its deconsolidation is $4,000. The P group’s value
immediately before S’s deconsolidation is $10,000.
The P group and its members engaged in no prior
CERTs.
2012–43 I.R.B.523October 22, 2012

(ii)Analysis. Because the CERT occurs during
the P group’s calendar consolidated return Year 5,
Years 5, 6, and 7 are the P group’s loss limitation
years. Because no election is made under paragraph
(e)(1) of this section with regard to the deconsolida-
tion of S, S is treated as an applicable corporation with
regard to the Year 5 CERT under paragraph (b)(1) of
this section and the interest history of the P group dur-
ing the period of S’s consolidation and any preceding
years is allocated to S and the remaining members of
the P group. See paragraph (d)(3)(ii)(C) of this sec-
tion. The amount of the P group’s interest for each
year that is allocated to S is the amount of interest
paid or accrued by the P group in the relevant con-
solidated return year multiplied by a fraction equal to
4,000 divided by 10,000 (the value of the deconsol-
idating corporation immediately after its deconsoli-
dation divided by the value of the entire group im-
mediately prior to the deconsolidation), or 2/5. See
paragraph (d)(3)(ii)(D) of this section. The interest
allocated to S is subtracted from the interest history
of the group and is unavailable to the P group for pur-
poses of computing a three-year average with regard
to any loss limitation year of the P group after the year
of the deconsolidation, including Years 6 and 7. The
interest history allocated to S will be maintained by S
to be used in the computation of any CERIL of S, or
any CERIL of any group of which S is later a mem-
ber. See paragraph (d)(3)(ii)(C) of this section.
(iii)Waiver election filed. The facts are the same
as in paragraph (i) of thisExample 3,exceptthatan
election under paragraph (e)(1) of this section is filed
on the deconsolidation of S. As a result of that elec-
tion, S is not treated as an applicable corporation with
regard to the Year 5 CERT under paragraph (b)(2) of
this section and none of the interest history of the P
group is allocated to S under paragraph (d)(3)(ii)(B)
of this section. Therefore, in any post-deconsolida-
tion year, for purposes of computing a CERIL in con-
nection with any CERT with regard to which S (or of
anygroupofwhichSislateramember)isanapplica-
ble corporation, S is treated as having paid or accrued
zero interest for the period of its inclusion in the P
group and preceding years. The P group will retain
the interest history that would otherwise be allocated
to S. See paragraph (d)(3)(ii)(B) of this section.
Example 4.Interest history if no waiver election
made for member that deconsolidates prior to CERT.
(i)Facts. P is the parent of a calendar-year consoli-
dated group that includes S. On December 31, Year
4, S deconsolidates from the P group. No election is
made under paragraph (e)(1) of this section with re-
gard to the deconsolidation. On July 1, Year 5, the P
group engages in a CERT. The P group and its mem-
bers engaged in no prior CERTs.
(ii)Analysis. Because no election is made under
paragraph (e)(1) of this section with regard to the de-
consolidation of S, the interest history of the P group
is allocated between S and the remaining members of
the P group. See paragraph (d)(3)(ii)(C) of this sec-
tion. This allocation occurs despite the fact that, at
the time of the deconsolidation, the P group has not
engaged in a CERT. Therefore, for purposes of com-
puting any three-year average for the P group relevant
to the Year 5 CERT, the portion of the interest history
allocated to S is unavailable to the P group for pur-
poses of computing a three-year average with regard
to any loss limitation year of the P group after the year
of the deconsolidation. See paragraph (d)(3)(ii)(C) of
this section.
Example 5.Interest history if waiver election
made for member that deconsolidates and then en-
gages in a CERT.(i)Facts. P is the parent of a calen-
dar-year consolidated group that includes X. On De-
cember 31, Year 5, X deconsolidates from the P group
and makes an election under paragraph (e)(1) of this
section. After its deconsolidation, X maintains a cal-
endar taxable year. During Year 7, X engages in a
CERT.
(ii)Analysis. X’s loss limitation years with regard
to the Year 7 CERT are Years 7, 8, and 9. X’s look-
back period with regard to the CERT is comprised of
its Years 4 and 5 in the P consolidated group, and X’s
separate return Year 6. See section 172(h)(2)(C)(ii)
and paragraph (d)(4)(i) of this section. As a result of
the filing of the election under paragraph (e)(1) of this
section, none of the interest history of the P group is
allocated to X. Therefore, for purposes of computing
X’s three-year average for loss limitation Years 7, 8,
and 9, X is treated as having paid or accrued zero in-
terest during Years 4 and 5 of the lookback period.
See paragraph (d)(3)(ii)(B) of this section.
Example 6
.Interest history if member deconsoli-
dates mid-year.(i)Facts. P is the common parent of
a calendar-year consolidated group that includes S. S
deconsolidates from the P group on June 30, Year 5.
No election under paragraph (e)(1) of this section is
made on the deconsolidation of S. During Year 5, but
prior to the deconsolidation, the P group engages in a
CERT. S is not a party to the CERT, and, throughout
its history in the group, S paid or accrued only nomi-
nal interest.
(ii)Analysis. The P group’s lookback period is
calendar Years 2, 3, and 4. Consolidated return Years
5, 6, and 7 are the P group’s loss limitation years.
Because no election is made under paragraph (e)(1)
of this section with regard to the deconsolidation of
S, the interest history of the P group is allocated be-
tween S and the remaining members of the P group.
See paragraph (d)(3)(ii)(C) of this section. This is
true although S played no part in the CERT, and it
actually paid or accrued only nominal interest. In
the consolidated return year of the deconsolidation
(here, the P group’s Year 5), S was a member for 181
days. Therefore, the P group includes in the compu-
tation of its three-year average relevant to Year 5 a
pro rataportion of the interest history allocated to S.
See paragraph (d)(3)(ii)(C) and (iii) of this section.
Thepro rataportion equals the group’s interest his-
tory allocated to S under paragraph (d)(3)(ii)(C) and
(D) of this section, multiplied by a fraction equal to
181/365 (number of days of the loss limitation year
during which S is a member divided by the number
of days in the loss limitation year). See paragraph
(d)(3)(iii) of this section. The portion of the interest
history allocated to S is excluded in its entirety from
the computation of the group’s three-year average rel-
evant to Years 6 and 7. The interest history allocated
to S will be used in the computation of any CERIL of
S, and any CERIL of any group of which S is later a
member. See paragraph (d)(3)(ii)(C) of this section.
Example 7.Group not in existence for the entire
lookback period.(i)Facts. Corporation P is formed
on October 1, Year 3, and maintains a calendar tax-
able year. On January 1, Year 4, P forms S in a trans-
action meeting the requirements of section 351. Be-
ginning in Year 4, P files consolidated returns with S,
its only subsidiary. The P group maintains a calendar
taxable year. During Year 5, the P group engages in
an ED.
(ii)Analysis. For purposes of limiting any
CERIL related to the Year 5 CERT, the P group must
measure its interest deductions for the three years
preceding the taxable year in which the CERT occurs
(three-year average). See section 172(h)(2)(C)(ii)
and §1.172(h)–3(a). However, the P group was not
in existence for three taxable years before the year
that includes the date of the CERT (calendar Year
5). Rather, the P group was in existence for one full
calendar taxable year (Year 4). Because the group
does not have a three-year history, the lookback
period includes the common parent’s (P’s) short tax-
able year (October 1 through December 31, Year 3),
and is also deemed to include an additional taxable
period (October 1, Year 2 through September 30,
Year 3). See paragraph (d)(4)(ii) of this section.
Further, in computing thethree-year average, the
P group members are treated as having paid or
accrued zero interest for dates on which they did
not exist. However, the P group is treated as having
paid any interest paid by P during its short taxable
year (October 1 through December 31, Year 3). See
paragraph (d)(4)(iv) of this section.
Example 8.Group not in existence prior to year
of the CERT but target in existence.(i)Facts. Corpo-
ration P is formed on January 1, Year 4. On the same
day, P organizes wholly-owned, special-purpose cor-
poration S. T is an unrelated, calendar-year corpora-
tion with a significant tax history. On February 1,
Year 4, S merges into T, with T surviving. In the
merger, all of T’s historic shareholders receive cash
in exchange for their shares. Following the merger,
P owns all of the outstanding stock of T, and P is
treated as acquiring all the stock of T in an MSA. The
P group files consolidated returns beginning in Year
4 and maintains a calendar taxable year. T is first in-
cluded in the P group on February 2, Year 4.
(ii)Analysis. Neither P (the original common
parent) nor the P group is in existence before the
year that includes the date of the CERT (calendar
Year 4). Therefore, for purposes of applying the
interest allocation limitation of section 172(h)(2)(C)
and §1.172(h)–3(a), the P group’s lookback period is
deemed to include three additional taxable periods
(January 1 through December 31 for Years 1, 2, and
3). See paragraph (d)(4)(ii) of this section. Further in
computing the three-year average, P is treated as hav-
ing paid or accrued zero interest during the deemed
years (January 1, Year 1 through December 30,
Year 3). See paragraph (d)(4)(iv) of this section.
However, with respect to the group’s acquisition of T,
the interest history of T is combined with the interest
history of the P group. Because T is not a member
of the P group for each day of loss limitation Year 4,
the computation of the three-year average applicable
to loss limitation Year 4 will include only apro rata
portion of the interest of T for the lookback period.
See paragraph (d)(3)(i), (d)(3)(iii), and paragraph
(iii) ofExample 1of paragraph (d)(5) of this section.
(e)Election to waive carryback from
all separate return years—(1)In gen-
eral. In addition to any other elections
available under section 172(b)(3) and
§1.1502–21(b)(3), if a member becomes
a non-member of a group (former group),
October 22, 20125242012–43 I.R.B.

the former member may make an irrevo-
cable election to relinquish the carryback
of all NOLs (and attributable portions
of CNOLs) to taxable years of the for-
mer group and any preceding years. If
the former member becomes a member
of another group (acquiring group) im-
mediately after its deconsolidation from
the former group, the election described
in this paragraph (e)(1) is available only
to the common parent of the acquiring
group. The election is not an annual elec-
tion and applies to all losses that would
otherwise be subject to carryback to years
of the former group (or preceding years)
under section 172 or §1.1502–21(b). The
election is binding on the deconsolidating
corporation and any group of which it may
become a member. Further, the election
is available without regard to whether the
former group is treated as an applicable
corporation with regardtoanyCERTatthe
time of the deconsolidation. Any election
under this paragraph (e)(1) by the com-
mon parent of an acquiring group must
include all deconsolidating corporations
that were members of the former group
and that joined the acquiring group during
the same consolidated return year of the
acquiring group. The election is made in a
separate statement entitled, “THIS IS AN
ELECTION UNDER §1.1502–72(e)(1)
TO WAIVE THE PRE- [insert the first
taxable year following the deconsolida-
tion of the former member(s) from the
former group] CARRYBACK PERIOD
FOR ALL NOLs AND ALL CNOLs AT-
TRIBUTABLE TO [insert the name(s)
and EIN(s) of the corporation(s)].” The
statement must be filed with the timely
filed original return of the former member
or the acquiring group for the first tax-
able year following the deconsolidation
of the former member from the former
group. See paragraphs (b)(2), (c)(4)(iii),
and (d)(3)(ii)(B) of this section relating
to treatment of a deconsolidating member
making an election under this paragraph
(e)(1).
(2)Example. The following example
illustratestherulesofthisparagraph(e):
Example. P, a publicly-held corporation, is the
common parent of a calendar-year consolidated
group that includes T. On July 30, Year 5, the P
group engages in a CERT. On December 31, Year 5,
T deconsolidates from the P group, and it continues
to maintain a calendar taxable year. With respect
to its deconsolidation, T makes an election under
paragraph (e)(1) of this section. As a result of such
election, T is not treated as an applicable corporation
with regard to the P group’s Year 5 CERT and none
of the CERT costs or interest history of the P group
are allocated to T. See paragraphs (b)(2), (c)(4)(iii),
and (d)(3)(ii)(B) of this section. On March 30, Year
6, the X group acquires all of the stock of T. The X
group maintains a calendar taxable year. A portion
of the X group’s Year 6 CNOL is attributable to T
under §1.1502–21(b)(2)(iv)(B). Because T filed an
electionunderparagraph(e)(1)ofthissectionwith
respect to its deconsolidation from the P group, no
portion of the X group’s Year 6 CNOL attributable
to T can be carried back to any taxable years of T, of
the P group, or any preceding years.
(f)Excess distribution—(1)De-
fined.Section 172(h)(3)(C) and
§1.172(h)–1(c)(3) provide that an ED
means the excess (if any) of the aggre-
gate distributions (including redemptions)
made during a taxable year by a corpo-
ration with respect to its stock, over the
greater of 150 percent of the average of
such distributions (three-year distribution
average) for the three taxable years im-
mediately preceding such taxable year
(distribution lookback period), or 10 per-
cent of the fair market value of the stock
of such corporation as of the beginning of
such taxable year.
(2)Determination of an ED by a
group—(i)Aggregation of distributions
to non-members. For purposes of deter-
mining whether a group has made an ED
during any consolidated return year (po-
tential ED year), distributions by all mem-
bers of the group to non-members during
the potential ED year are aggregated
and tested under section 172(h)(3)(C),
§1.172(h)–1(c)(3), and paragraph (f)(1) of
this section.
(ii)Distributions between members of
thesamegroup. Distributions between
members of the same group are generally
disregarded for purposes of applying the
CERT rules. However, the preceding sen-
tence does not apply if a party to the trans-
action is deconsolidated pursuant to the
same plan or arrangement. See paragraph
(a)(2)(iii) of this section.
(3)Computation of three-year distribu-
tion average—(i)In general.Thecom-
putation under section 172(h)(3)(C)(ii)(I)
and §1.172(h)–1(f) of the group’s
three-year distribution average includes
distributions made during the distribution
lookback period to non-members by each
corporation that is a member of the con-
solidated group during the potential ED
year. Distributions made during the dis-
tribution lookback period by predecessors
of those members are also included. See
§1.172(h)–4(d). The computation includes
distributions made by corporations during
separate return years, subject to additional
rules of this paragraph (f) and paragraph
(a)(2)(iii) of this section. If a corporation
was a member of a prior group during a
portion of a distribution lookback period,
the distribution history of that corporation
during taxable years of the prior group
includes only distributions made by that
corporation to non-members of the prior
group.
(ii)Corporation deconsolidated from
agroup. If a corporation deconsolidates
from a group (former group), the cor-
poration’s actual distribution history is
subtracted from the group’s distribution
history and is available to the deconsoli-
dating corporation (or any group of which
it becomes a member) for purposes of
computing any three-year distribution
average following the deconsolidation.
The deconsolidating member’s distribu-
tion history will be unavailable to the
former group for purposes of computing
its three-year distribution average with
regard to any potential ED year of the
former group after the year of deconsoli-
dation. See §1.172(h)–1(f)(1) (excluding
from three-year distribution average those
distributions treated as part of an MSA).
(iii)Members included in group for less
than entire loss limitation year.Ifany
member is included in the group for less
than an entire potential ED year (partial-
year member), then apro rataportion of
the partial-year member’s distribution his-
tory is computed under the principles of
paragraph (d)(3)(iii) of this section and is
included for purposes of determining the
group’s three-year distribution average rel-
evant to that potential ED year.
(4)Stock value and stock issuances
of a group—(i)Stock issuances taken
into account in computing distributions.
Stockissuedbyamemberofagroupis
taken into account in applying section
172(h)(3)(E)(ii) and §1.172(h)–5(c)(1)
only if the stock is issued to a non-member.
Intercompany stock issuances are disre-
garded. This rule is applicable whether
the stock issuance occurred in the current
group or a previous group.
(ii)Value of stock of group.
For purposes of applying section
172(h)(3)(C)(ii)(II), §1.172(h)–1(c)(3),
and paragraph (f)(1) of this section (relat-
2012–43 I.R.B.525October 22, 2012

ing to the fair market value of the stock
of a distributing corporation), the value of
the stock of the group is the value of the
stock of all members, other than stock that
is owned directly or indirectly by another
member. But see section 172(h)(3)(E)(i)
for rules regarding the exclusion of certain
preferred stock for purposes of applying
sections 172(h)(3)(C), §1.172(h)–1(c)(3)
and (f), and this paragraph (f). See also
paragraphs (a)(2)(iii) and (f)(2)(ii) of this
section, requiring separate entity analysis
of certain transactions between members
of a consolidated group.
(5)Examples. The following examples
illustrate the rules of this paragraph (f).
For purposes of these examples, assume
that all entities are domestic C corpora-
tions:
Example 1.Corporation deconsolidates from
group.(i)Facts. P is the common parent of a cal-
endar-year consolidated group that includes T. P
owns 90 percent of the outstanding stock of T, and A
(an unrelated party) owns the remaining 10 percent
of the outstanding stock of T. T regularly makes
distributions to its shareholders, P and A. On De-
cember 31, Year 4, X, the common parent of another
calendar-year consolidated group, acquires all of the
outstanding stock of T, and T deconsolidates from
the P group. T is first included in the X group on
January 1, Year 5. On March 31, Year 5, X makes a
large distribution to its non-member shareholders. X
makes no further distributions during its taxable year.
(ii)Analysis. The X group’s distribution to its
non-member shareholders on March 31, Year 5, is
tested as a potential ED under section 172(h)(3)(C),
§1.172(h)–1(c)(3) and (f), and paragraph (f) of this
section. The X group’s distribution lookback period
with regard to the potential ED is January 1 through
December 31, for each of Years 2, 3, and 4. For pur-
poses of computing the X group’s three-year distribu-
tion average, the computation includes any distribu-
tions made by T to A, its former non-member share-
holder, during the distribution lookback period, be-
cause T is a member of the X group during the year
of the potential ED. See paragraph (f)(3) of this sec-
tion. Distributions between members of the X group
and between members of the P group are disregarded.
See paragraph (f)(2)(ii) of this section.
Example 2.Integrated plan to deconsolidate.T
is a wholly-owned subsidiary of P, and is a member
of the P group. As part of a plan that includes the
deconsolidation of T from the P group, T makes a
distribution to P. Because T’s distribution to P is
part of an integrated plan that results in the decon-
solidation of T, T’s distribution to P is tested on a
separate entity basis as a potential ED under section
172(h)(3)(C), §1.172(h)–1(c)(3) and (f), and para-
graph (f) of this section. See paragraphs (a)(2)(iii)
and (f)(2)(ii) of this section. Therefore, the rules of
section 172(h)(3)(C), §1.172(h)–1(c)(3) and (f), and
paragraph (f) of this section are applied based on the
separate entity value and distribution history of T.
See §1.172(h)–1(d)(2) regarding testing of the distri-
bution as part of a plan of major stock acquisition.
(g)Life-nonlife groups—(1)Scope.
This paragraph (g) provides rules for ap-
plying the CERT rules to a group that
elects under section 1504(c)(2) to file a
consolidated return (life-nonlife group).
See §1.1502–47 (rules regarding life-non-
life groups).
(2)Single entity treatment—(i)In gen-
eral. All members of a life-nonlife group
are generally treated as a single taxpayer
for purposes of the CERT rules. Accord-
ingly, the rules of paragraphs (a) through
(f) and (h) of this section and the rules
of §§1.172(h)–1 through 1.172(h)–5 are
applied by treating the life-nonlife group
as a single taxpayer, and are not applied
on a subgroup basis. For example, all
members of a life-nonlife group are treated
as a single entity for purposes of deter-
mining whether a CERT has occurred
under sections 172(h)(3)(B) and (C) and
§1.172(h)–1. See paragraph (a)(2)(i) of
this section. Furthermore, all intercom-
pany transactions between and within
subgroups are generally disregarded. In
addition, if a pre-existing CERT member
becomes a member of alife-nonlife group,
the life-nonlife group is treated as a single
applicable corporation with regard to that
CERT in the consolidated return year of
the acquisition and any succeeding year.
See paragraph (a)(2)(iv) of this section. If
it is determined that a CERT exists, the
amount of the CERIL is determined for
the entire life-nonlife consolidated group
as described in paragraph (g)(2)(ii)(A) of
this section, and the CERIL is allocated to
each subgroup as described in paragraph
(g)(3) of this section.
(ii)CERIL—(A)Single CERIL com-
putation. For any loss limitation year,
a single CERIL is computed under sec-
tion 172(h)(1) and §1.172(h)–2(a)(2) for
the life-nonlife group. The computation
of the life-nonlife group’s CERIL for any
loss limitation year includes all life-nonlife
group members’ CERT costs, debt, and in-
terest paid or accrued for that year.
(B)Net operating loss. For purposes
of determining the CERIL of a life-non-
life group under section 172(h)(1) and
§1.172(h)–2(a)(2), thenet operating loss
of the group in any loss limitation year
is the sum of the nonlife consolidated net
operating loss (nonlife CNOL) (if any)
and the consolidated loss from opera-
tions (consolidated LO) (if any) for that
year. For this purpose, nonlife consoli-
dated taxable income does not offset any
LO, and consolidated partial life insur-
ance company taxable income (as used in
§1.1502–47(g)) does not offset any nonlife
CNOL.
(iii)Carryover to separate return years.
If any nonlife CNOL or consolidated LO
that is attributable to a member of a sub-
group may be carried to a separate return
year (as defined in §1.1502–47(d)(10)),
the CERIL that is associated with the
nonlife CNOL or consolidated LO is
apportioned to each member, as rel-
evant, under the method provided by
§1.1502–21(b)(2)(iv)(C)(1).
(iv)Deconsolidation. If a member
deconsolidates from a life-nonlife group
without an election under paragraph (e)(1)
of this section, then paragraphs (b)(1),
(c)(4)(i) and (ii), and (d)(3)(ii)(A) and (C)
of this section (relating to treatment of a
deconsolidating member) apply to allocate
CERTstatus,CERTcosts,andinterest
history from the entire life-nonlife group
to the deconsolidating member, and not
from a specific subgroup.
(3)Allocation of a CERIL. If a CERIL
exists under paragraph (g)(2)(ii)(A) of this
section, that CERIL is allocated to each
subgroup that has a nonlife CNOL or con-
solidated LO. The amount of the nonlife
CNOL and consolidated LO in a loss lim-
itation year that constitutes a CERIL is
equal to the total amount of the CERIL
for the loss limitation year multiplied by
a fraction, the numerator of which equals
the nonlife CNOL or consolidated LO (as
relevant), and the denominator of which
equals the nonlife CNOL plus the consoli-
dated LO.
(h)Effective/applicability date—(1)In
general. Other than paragraph (e) of this
section, the rules of this section apply to
CERTs occurring on or after the date of
publication of the Treasury decision adopt-
ing these rules as final regulations in the
Federal Register. The rules of this sec-
tion also apply to the deconsolidation of a
member from, or the acquisition of a cor-
poration by, a consolidated group that oc-
curs on or after the date of publication of
the Treasury decision adopting these rules
as final regulations in theFederal Regis-
ter. However, in each case, this section
does not apply to any CERT, deconsolida-
tion, or acquisition occurring pursuant to
a written agreement that is binding before
the date of publication of the Treasury de-
October 22, 20125262012–43 I.R.B.

cision adopting these rules as final regula-
tions in theFederal Register.
(2)Waiver election. Paragraph (e) of
this section applies to the deconsolidation
of a member from a consolidated group
that occurs on or after the date of publi-
cation of Treasury decision adopting these
rulesasfinalregulationsintheFederal
Register,exceptthatitdoesnotapplyto
any deconsolidation occurring pursuant to
a written agreement that is binding before
the date of publication of the Treasury de-
cision adopting these rules as final regula-
tions in theFederal Register.
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on September 13,
2012, 4:15 p.m., and published in the issue of the Federal
Register for September 17, 2012, 77 F.R. 57452)
Additional Requirements for
Charitable Hospitals; Hearing
Announcement 2012–38
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of public hearing on no-
tice proposed rulemaking.
SUMMARY: This document provides
notice of public hearing on proposed regu-
lations (REG–130266–11, 2012–32 I.R.B.
126) that provide guidance regarding the
requirements for charitable hospital orga-
nizations relating to financial assistance
and emergency medical care policies,
charges for certain care provided to indi-
viduals eligible for financial assistance,
and billing and collections.
DATES: The public hearing is being
held on Monday, October 29, 2012, at
10:00 a.m. The IRS must receive outlines
of the topics to be discussed at the public
hearing by Friday, October 12, 2012.
ADDRESSES: The public hearing is be-
ing held in the IRS Auditorium, Internal
Revenue Service Building, 1111 Constitu-
tion Avenue, NW, Washington, DC 20224.
Due to building security procedures, vis-
itors must enter at the Constitution Av-
enue entrance. In addition, all visitors
must present photo identification to enter
the building.
Send Submissions to CC:PA:LPD:PR
(REG–130266–11), room 5205, Internal
Revenue Service, P.O. Box 7604, Ben
Franklin Station, Washington, DC 20044.
Submissions may be hand-delivered Mon-
day through Friday to CC:PA:LPD:PR
(REG–130266–11), Couriers Desk, In-
ternal Revenue Service, 1111 Constitu-
tion Avenue, NW, Washington, DC or
sent electronically via the Federal eRule-
making Portal atwww.regulations.gov
(REG–130266–11).
FOR FURTHER INFORMATION
CONTACT: Concerning the reg-
ulations, Amber L. Mackenzie or
Preston J. Quesenberry at (202) 622–6070;
concerning submissions of comments,
the hearing and/or to be placed on
the building access list to attend the
hearing Oluwafunmilayo Taylor at (202)
622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
The subject of the public hearing
is the notice of proposed rulemaking
(REG–130266–11) that was published in
theFederal Registeron Tuesday, June 26,
2012 (77 FR 38148).
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish
topresentoralcommentsatthehear-
ing that submitted written comments by
September 24, 2012, must submit an
outline of the topics to be addressed and
the amount of time to be denoted to each
topic.
A period of 10 minutes is allotted to
each person for presenting oral comments.
After the deadline for receiving out-
lines has passed, the IRS will prepare an
agenda containing the schedule of speak-
ers. Copies of the agenda will be made
available, free of charge, at the hearing or
in the Freedom of Information Reading
Room (FOIA RR) (Room 1621) which
is located at the 11th and Pennsylvania
Avenue, NW, entrance, 1111 constitution
Avenue, NW, Washington, DC.
Because of access restrictions, the IRS
will not admit visitors beyond the imme-
diateentranceareamorethan30minutes
before the hearing starts. For informa-
tion about having your name placed on
the building access list to attend the hear-
ing, see the “FOR FURTHER INFORMA-
TION CONTACT” section of this docu-
ment.
LaNita VanDyke,
Chief,
Publications and Regulations Branch,
Legal Processing Division,
Associate Chief Counsel
(Procedure and Administration).
(Filed by the Office of the Federal Register on September 28,
2012, 8:45 a.m., and published in the issue of the Federal
Register for October 1, 2012, 77 F.R 59878)
2012–43 I.R.B.527October 22, 2012

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of cases
in litigation, or the outcome of a Service
study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
October 22, 2012i2012–43 I.R.B.

Numerical Finding List
1
Bulletins 2012–27 through 2012–43
Announcements:
2012-26, 2012-27 I.R.B.8
2012-27, 2012-27 I.R.B.10
2012-28, 2012-27 I.R.B.10
2012-29, 2012-42 I.R.B.500
2012-30, 2012-34 I.R.B.314
2012-31, 2012-34 I.R.B.315
2012-32, 2012-35 I.R.B.325
2012-33, 2012-35 I.R.B.325
2012-34, 2012-36 I.R.B.334
2012-35, 2012-38 I.R.B.356
2012-38, 2012-43 I.R.B.527
Notices:
2012-39, 2012-31 I.R.B.95
2012-44, 2012-28 I.R.B.45
2012-45, 2012-29 I.R.B.59
2012-46, 2012-30 I.R.B.86
2012-47, 2012-31 I.R.B.98
2012-48, 2012-31 I.R.B.102
2012-49, 2012-31 I.R.B.119
2012-50, 2012-31 I.R.B.121
2012-51, 2012-33 I.R.B.150
2012-52, 2012-35 I.R.B.317
2012-53, 2012-35 I.R.B.317
2012-55, 2012-36 I.R.B.332
2012-56, 2012-39 I.R.B.370
2012-57, 2012-40 I.R.B.424
2012-58, 2012-41 I.R.B.436
2012-59, 2012-41 I.R.B.443
2012-60, 2012-41 I.R.B.445
2012-61, 2012-42 I.R.B.479
2012-62, 2012-42 I.R.B.489
2012-63, 2012-42 I.R.B.496
Proposed Regulations:
REG-126770-06, 2012-38 I.R.B.347
REG-138367-06, 2012-40 I.R.B.426
REG-101812-07, 2012-34 I.R.B.311
REG-134042-07, 2012-27 I.R.B.5
REG-140668-07, 2012-43 I.R.B.501
REG-153627-08, 2012-29 I.R.B.60
REG-136491-09, 2012-35 I.R.B.321
REG-138489-09, 2012-38 I.R.B.355
REG-125570-11, 2012-30 I.R.B.93
REG-130266-11, 2012-32 I.R.B.126
REG-134935-11, 2012-29 I.R.B.64
REG-141832-11, 2012-28 I.R.B.54
REG-107889-12, 2012-28 I.R.B.53
REG-113738-12, 2012-29 I.R.B.66
Revenue Procedures:
2012-28, 2012-27 I.R.B.4
2012-29, 2012-28 I.R.B.49
2012-30, 2012-33 I.R.B.165
2012-31, 2012-33 I.R.B.256
2012-32, 2012-34 I.R.B.267
2012-33, 2012-34 I.R.B.272
2012-34, 2012-34 I.R.B.280
2012-35, 2012-37 I.R.B.341
2012-36, 2012-39 I.R.B.374
2012-37, 2012-41 I.R.B.449
2012-39, 2012-41 I.R.B.470
2012-40, 2012-40 I.R.B.424
Revenue Rulings:
2012-19, 2012-28 I.R.B.16
2012-20, 2012-27 I.R.B.1
2012-21, 2012-32 I.R.B.123
2012-23, 2012-39 I.R.B.359
2012-24, 2012-36 I.R.B.329
2012-25, 2012-37 I.R.B.337
2012-26, 2012-39 I.R.B.358
2012-27, 2012-41 I.R.B.435
2012-28, 2012-42 I.R.B.476
2012-29, 2012-42 I.R.B.475
Treasury Decisions:
9591, 2012-28 I.R.B.32
9592, 2012-28 I.R.B.41
9593, 2012-28 I.R.B.17
9594, 2012-29 I.R.B.57
9595, 2012-30 I.R.B.71
9596, 2012-30 I.R.B.84
9597, 2012-34 I.R.B.258
9598, 2012-38 I.R.B.343
9599, 2012-40 I.R.B.417
1
A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., publishedin Internal Revenue Bulletins 2012–1 through 2012–26 is in Internal Revenue Bulletin
2012–26, dated June 25, 2012.
2012–43 I.R.B.iiOctober 22, 2012

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2012–27 through 2012–43
Announcements:
83-196
Superseded by
Rev. Proc. 2012-31, 2012-33 I.R.B.256
85-141
Superseded by
Rev. Proc. 2012-31, 2012-33 I.R.B.256
2008-105
Modified and superseded by
Ann. 2012-34, 2012-36 I.R.B.334
Notices:
2009-24
Amplified by
Notice 2012-51, 2012-33 I.R.B.150
2011-81
Superseded by
Notice 2012-63, 2012-42 I.R.B.496
2012-51
Amplified by
Notice 2012-51, 2012-33 I.R.B.150
Proposed Regulations:
REG-100276-97
Withdrawn by
Ann. 2012-27, 2012-27 I.R.B.10
REG-130266-11
Hearing scheduled by
Ann. 2012-38, 2012-43 I.R.B.527
Revenue Procedures:
94-22
Modified and superseded by
Rev. Proc. 2012-35, 2012-37 I.R.B.341
95-15
Superseded by
Rev. Proc. 2012-31, 2012-33 I.R.B.256
97-27
Modified by
Rev. Proc. 2012-39, 2012-41 I.R.B.470
98-32
Modified and superseded by
Rev. Proc. 2012-33, 2012-34 I.R.B.272
2007-38
Modified and superseded by
Rev. Proc. 2012-32, 2012-34 I.R.B.267
2011-14
Clarified and modified by
Rev. Proc. 2012-39, 2012-41 I.R.B.470
Revenue Procedures— Continued:
2011-40
Superseded by
Rev. Proc. 2012-30, 2012-33 I.R.B.165
2011-50
Superseded by
Rev. Proc. 2012-36, 2012-39 I.R.B.374
Treasury Decisions:
9752
Corrected by
Ann. 2012-35, 2012-38 I.R.B.356
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2012–1 through 2012–26 is in Internal Revenue Bulletin 2012–26, dated June 25, 2012.
October 22, 2012iii2012–43 I.R.B.

Internal Revenue Service
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ashington,DC20224
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