Multinationals Seek Changes Under Proposed CNOL Regs

August 31, 2020

Internal Revenue Service
CC:PA:LPD:PR (REG-125716-18)
Room 5203
P.O. Box 7604, Ben Franklin Station
Washington, DC 20044

Re: Comments on the application of Prop. Reg. § 1.1502-21(c)(1)(i)(E) to Dual Consolidated Losses

Dear Sir or Madam:

On July 8, 2020, the United States (US) Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) published proposed rulemaking (the Proposed Regulations)¹ that contains amendments to the consolidated return regulations under section 1502.² Under the Proposed Regulations, Prop. Reg. § 1.1502-21(c)(1)(i)(E) would modify the separate return limitation year (SRLY) cumulative register rules to reflect the application of the recently enacted 80-percent limitation under section 172(a)(2)(B).³ American International Group, Inc., John Hancock Financial Corporation, MetLife, Inc., Pacific Life Insurance Company, Prudential Financial Inc., and Reinsurance Group of America, Incorporated, each of which is either the common parent or a subsidiary member of a consolidated group⁴ with extensive operations in the US and globally, appreciate the opportunity to collectively submit these comments on Prop. Reg. § 1.1502-21(c)(1)(i)(E).

The focus of this comment is on Prop. Reg. § 1.1502-21(c)(1)(i)(E), and what should be its inapplicability for purposes of how the section 1503(d) limitation is computed with respect to the absorption of dual consolidated losses (DCLs).⁵ The concern addressed in this comment arises because section 1503(d) generally incorporates the mechanics of the SRLY rules under Treas. Reg. §1.1502-21(c)(1) pursuant to Treas. Reg. § 1.1503(d)-4(c)(3) (DCL SRLY limitation), but the DCL limitation should apply the SRLY mechanics without regard to the adjustment reflected in Prop. Reg. § 1.1502-21(c)(1)(i)(E).

In the explanation accompanying the Proposed Regulations (the Preamble), Treasury and the IRS explain that “[t]he SRLY rules attempt to replicate, to the extent possible, separate-entity usage of the SRLY attributes of the SRLY member” and “absent an adjustment to [the SRLY member's] cumulative register to account for the 80-percent limitation, [the SRLY member] would achieve a different result as a member of a consolidated group than if [the SRLY member] had remained a stand-alone entity.”⁶

The SRLY NOLs addressed in this explanation are losses incurred by a member when it was not included in the consolidated group (as well as built-in losses economically incurred when it was not included).⁷ By contrast, a DCL can be incurred in (and economically attributable to) any year, including years when the loss generating member is included in a consolidated group (regardless of the period economically incurred).

As this simple distinction illustrates, the policies underlying the SRLY rules as highlighted in the Preamble are different from the policies underlying section 1503(d) limiting absorption of DCLs, which as described below are to prevent a corporation that is a resident both in the US and in a foreign jurisdiction (a dual resident corporation or DRC) from utilizing losses it generates in both jurisdictions (i.e., a double dip). The IRS and Treasury previously acknowledged the differences in underlying policies in the explanation accompanying earlier finalization of the current DCL regulations, responding to comments received on the proposed DCL regulations.⁸

Thus, the fact that the DCL rules incorporate the SRLY mechanics in Treas. Reg. § 1.1502-21(c)(1) should not be viewed as intended to also incorporate the policies underlying the SRLY rules into the DCL rules. Instead, it should be understood to be simply incorporation of the mechanical aspects of Treas. Reg. § 1.1502-21(c)(1), subject to the modifications specified in the DCL regulations.

Our request is that the Proposed Regulations be modified to prevent Prop. Reg. § 1.1502-21(c)(1)(i)(E) from applying under the DCL rules, because its incorporation would undermine the policies underlying the section 1503(d) limitation on absorption of DCLs (i.e., to prevent a double dip).

I. Executive Summary

We respectfully request that Treasury and the IRS revise the Proposed Regulations to confirm that Prop. Reg. § 1.1502-21(c)(1)(i)(E) does not apply for purposes of Treas. Reg. § 1.1503(d)-4(c)(3) (e.g., Treas. Reg. § 1.1503(d)-4(c)(3) should provide that Treas. Reg. § 1.1502-21(c)(1) applies for purposes of section 1503(d) without regard to Prop. Reg. § 1.1502-21(c)(1)(i)(E)).

As mentioned, the principal policy behind the SRLY rules is to limit a consolidated group's ability to offset SRLY losses of one member against the income of other members of the same group by producing absorption results that vary as little as possible from the absorption of SRLY losses that would have occurred if the SRLY member had remained a stand-alone entity and not joined the consolidated group, and without Prop. Reg. § 1.1502-21(c)(1)(i)(E), the SRLY limitation amount would have been inconsistent with the policies underlying the SRLY rules.

By contrast, the policy behind section 1503(d) limiting the absorption of DCLs is not to replicate the results that would apply to a DRC were it not a member of the consolidated group but instead to prevent a DRC from utilizing its losses twice — once to offset income in the US and second to offset income in such foreign jurisdiction (double dipping).⁹ In order to prevent “double dipping,” Congress enacted section 1503(d) in the Tax Reform Act of 1986 (1986 Act),¹⁰ and instead of prohibiting inclusion of the DRC in a consolidated group, a limitation on absorption of its DCLs was enacted. Under section 1503(d)(1), the DCL for any taxable year of a DRC is limited from reducing the taxable income of any other consolidated group member,¹¹ and regulations have implemented the section 1503(d)(1) limitation through what is referred to as the domestic use limitation rule.¹²

To reduce complexity in applying the domestic use limitation rule, the pre-existing SRLY mechanics of Treas. Reg. § 1.1502-21(c)(1) are incorporated into the section 1503(d) regulations as a formula for measuring the extent to which a DCL can be absorbed, and solely for this purpose a DCL is treated as a loss incurred in a SRLY.¹³ We believe this arrangement merely incorporates the mechanical aspects of Treas. Reg. § 1.1502-21(c)(1), without incorporating the underlying policies of the SRLY limitation. This conclusion is supported by the difference in underlying policies of the DCL rules and the SRLY rules, as evidenced in part by modifications made by the section 1503(d) regulations to the operation of Treas. Reg. § 1.1502-21(c)(1).¹⁴ Consistent with the existing modifications, we believe that the Proposed Regulations should be modified to clarify that the incorporated Treas. Reg. § 1.1502-21(c)(1) mechanics do not include the 80-percent limitation reflected in Prop. Reg. § 1.1502-21(c)(1)(i)(E) because that limitation is necessary in order to replicate the separate entity results with respect to a SRLY member but is unrelated to the policies underlying the DCL rules.

As described below, applying Prop. Reg. § 1.1502-21(c)(1)(i)(E) for purposes of the DCL rules would be inconsistent with the underlying policies of the DCL rules. Instead, the amount of a DCL available for absorption by other consolidated group members should always reflect 100-percent of the DRC's contribution to the consolidated taxable income (CTI) of the group, and we respectfully request that the Proposed Regulations be modified accordingly.

II. Prop. Reg. 1.1502-21(c)(1)(i)(E)

The Preamble provides that “under the proposed regulations, as in current § 1.1502–21, the full amount of the SRLY member's current-year income (or current-year absorbed loss) increases (or decreases) the member's cumulative register. However, when the cumulative register is reduced to account for the group's absorption of any SRLY member's [net operating losses (NOLs)] that are subject to the 80-percent limitation (whether or not those losses are subject to the SRLY limitation), the amount of the reduction equals the full amount of income that would be necessary to support the deduction by the SRLY member.”¹⁵ The Preamble further explains that “absent an adjustment to [the SRLY member's] cumulative register to account for the 80-percent limitation, [the SRLY member] would achieve a different result as a member of a consolidated group than if [the SRLY member] had remained a stand-alone entity . . . such a result would be inconsistent with the purpose of the SRLY regime.”¹⁶

For purposes of this comment letter, we accept the government's explanation of the policies underlying SRLY rules, and the need to adjust these rules to reflect the 80-percent limitation under section 172(a)(2)(B) (which limitation applies on a consolidated basis) in order to limit a member's absorption of SRLY NOLs as if it continued to file a separate return in the year of absorption (i.e., not reflecting the 80-percent limitation would produce inappropriate results under the SRLY rules that diverge from the separate-return results). However, as discussed below, the Prop. Reg. 1.1502-21(c)(1)(i)(E) SRLY adjustment should not apply for purposes of the domestic use limitation rule reflected in Treas. Reg. § 1.1503(d)-4(c)(3) because different tax policies are reflected in this limitation, an issue that is not addressed in the Preamble or the Proposed Regulations.

III. DCL Tax Policy Considerations

a. Policy under the Section 1503(d) DCL Rules

If DRC is a resident of a foreign country in which the law permits the losses of such corporation to be used to offset the income of other commonly controlled corporate residents (e.g., a foreign consolidated group), the DRC could use a single economic loss to offset two separate items of income: one of which is subject to current tax in a foreign jurisdiction but not in the US, and the other of which is taxed in the US but not in the foreign jurisdiction.¹⁷

Congress was concerned that this double dip of a single economic loss could result in an undue tax advantage to certain foreign investors that made investments in domestic corporations, and could create an undue incentive for certain foreign corporations to acquire domestic corporations and for domestic corporations to acquire foreign rather than domestic assets.¹⁸ Through such double dipping, worldwide economic income could be rendered partially or fully exempt from current taxation. Congress responded to this concern by enacting section 1503(d) as part of the 1986 Act.

Under section 1503(d)(1), a DCL for any taxable year of a DRC may not reduce the taxable income of any other member of the DRC's consolidated group.¹⁹ The conference report to the 1986 Act provides:²⁰

“The conferees adopted a rule preventing use of losses, in lieu of the prohibition of consolidation that the Senate amendment contained, because of their view that the collateral implications of deconsolidation were sometimes undesirable. For example, if a U.S. corporation that is a dual resident corporation wholly owns several U.S. subsidiaries, denial of consolidation to the dual resident corporation would automatically have prevented application of the consolidated return rules to transactions between two of its U.S. subsidiaries under current regulations. The conferees saw no reason to prohibit application of the consolidated return rules in that case, so long as the dual resident corporation's losses do not reduce both the taxable income of a foreign corporation in a foreign country and the U.S. taxable income of some other U.S. corporation.

The agreement's provision applies to dual resident companies whether or not any of the income of any foreign corporation that the dual resident corporation's loss may reduce in the foreign country is or will be subject to U.S. tax. This rule expands that of the Senate amendment, which would not have applied when the income of a foreign corporation whose foreign tax the dual resident corporation's loss could reduce was or would be subject to U.S. tax. The conferees extended the impact of this provision to all foreign corporations that could benefit from a dual resident corporation's net operating loss, whether or not the foreign corporation's earnings are or will be subject to U.S. tax. . . .”

Regulations implementing section 1503(d)(1) have applied the DCL limitation through what is referred to as the domestic use limitation rule.²¹

A DRC's contribution of income to CTI should release the same amount of the DRC's loss from being treated as a DCL, because the full amount of the CTI contribution measures the extent to which the DRC's income is reflected in the US tax system so that, even if the DRC's loss were to also be utilized in a foreign jurisdiction to offset a foreign affiliate income, there is no double dip concern because the DRC has contributed an equal amount of income to the consolidated group's CTI.

See Exhibit A, Example 1, for an illustration of the DCL rules and policy.

b. Policy Underlying the SRLY Rules

One of the most valuable features of US federal consolidated return filing is the right of a group to offset the losses of one member against the income and gain of other members.²² However, case law established very early in the history of consolidated return filing that the right to unlimited offset generally extends only to losses incurred during years of affiliation.²³ Consequently, SRLY NOLs generally are limited in offsetting CTI because, by definition, the loss is not economically incurred by the consolidated group and therefore it should remain subject to separate-return principles.

The SRLY rules implement this early case law concern by limiting a consolidated group's ability to offset SRLY NOLs of one member against the income of other members. The purpose and effect of the SRLY rules are to limit absorption of SRLY NOLs to approximately the same extent that they would have been absorbed by the SRLY member, had the SRLY member not been acquired by the group. As a result, SRLY NOL generally can be absorbed by a consolidated group only to the extent of the positive contribution of the SRLY member to the group's CTI.²⁴ Through this mechanism, the SRLY rules replicate, to the extent possible, separate-entity treatment of SRLY NOLs.²⁵

In the Preamble accompanying the Proposed Regulations, Treasury and the IRS explained the need for Prop. Reg. 1.1502-21(c)(1)(i)(E) to adjust the cumulative SRLY register to reflect the 80-percent limitation under section 172(a)(2)(B). As the Preamble explains, “absent an adjustment to [the SRLY member's] cumulative register to account for the 80-percent limitation, [the SRLY member] would achieve a different result as a member of a consolidated group than if [the SRLY member] had remained a stand-alone entity.”²⁶

See Exhibit A, Example 2, for an illustration of the SRLY rules and policy.

IV. Incorporation of the SRLY Limitation into the DCL Rules

The mechanism by which Treasury implemented the limitation on absorption of DCLs was to adopt Treas. Reg. § 1.1503(d)-4(c)(3), which treats a DCL as a loss incurred in a SRLY, and subjects the DCL to the SRLY limitation, as set forth in Treas. Reg. § 1.1502-21(c)(1). This mechanism effectively provides that the aggregate of the DCLs of a DRC that may be utilized cannot exceed the aggregate CTI for all consolidated return years of the group determined by reference to only the DRC's items of income, gain, deduction, and loss.

Under Treas. Reg. § 1.1503(d)-4(a) and (c), “the dual consolidated loss shall be treated as a loss incurred by the [DRC or separate unit] in a separate return limitation year and shall be subject to all of the limitations of § 1.1502-21(c),” with certain modifications. Under Treas. Reg. § 1.1503(d)-5(b)(1), for purposes of determining whether a DRC has income or a DCL for the taxable year, and except as provided in Treas. Reg. § 1.1503(d)-5(b)(2), the DRC should compute its income or DCL taking into account only those items of income, gain, deduction, and loss from such year. In the case of an affiliated DRC, such calculations should be made in accordance with the rules set forth in the regulations under section 1502 governing the computation of CTI.²⁷

See Exhibit A, Example 3, for an illustration of the appropriate DCL use under Treas. Reg. §§ 1.1503(d)-4(c) and 1.1502-21(c), before taking into account Prop. Reg. § 1.1502-21(c)(1)(i)(E).

V. SRLY Rules versus the DCL Rules

As discussed above, different policies underly the SRLY rules and the DCL rules. In Example 52 of the 2005 proposed DCL regulations,²⁸ while reflecting incorporation of SRLY concepts, the government nevertheless implicitly acknowledged the differences in underlying policies between the SRLY rules and DCL rules, and the principle that the SRLY mechanics are incorporated into the DCL regulations simply to reduce complexity.²⁹

Because of the tax policies underlying the DCL rules, the amount of a DRC's contribution of income to CTI should release the same amount of loss from being treated as a DCL, because such contribution to CTI ensures that even if the DRC's loss were to be utilized in a foreign jurisdiction to offset a foreign affiliate income, there is no double dip concern (i.e., the DCL is released from limitation only to the extent of the DRC's contribution of income to the consolidated group's CTI). All of the existing modifications to the SRLY rules for purposes of computing the DCL limitation are aimed at tailoring Treas. Reg. § 1.1502-21(c)(1) to reflect the DCL policies, and modifying the applicability of Prop. Reg. 1.1502-21(c)(1)(i)(E) for purposes of the DCL rules would be consistent with the structure of the existing modifications.

Application of Prop. Reg. § 1.1502-21(c)(1)(i)(E) in the DCL context would subject losses of a DRC to the DCL rules twice if the release from the DCL taint is not in an amount equivalent to the DRC's contribution to CTI. Unless a DRC's contribution of income to CTI releases an equivalent amount of loss carryforward from its taint as a DCL (i.e., an amount sufficient to prevent the double dip concern), mechanics such as those reflected in Prop. Reg. § 1.1502-21(c)(1)(i)(E) would effectively result in duplicate DCL limitations on a loss, a result that is inconsistent with Congressional intent.

See Exhibit A, Example 4, for an illustration of an inappropriate DCL limitation, if Prop. Reg. § 1.1502-21(c)(1)(i)(E) is taken into account.

Based on the above, we believe that the cross-reference in the DCL rules to Treas. Reg. § 1.1502-21(c) should not include the 80-percent limitation under section 172(a)(2)(B) despite it being appropriate for the SRLY rules, and that it can be excluded from the DCL rules in a manner consistent with the other existing modifications to the SRLY rules for purposes of the DCL rules.

VI. Authority

Section 1502 authorizes the Secretary to prescribe regulations for an affiliated group of corporations that join in filing a consolidated return (consolidated group) to reflect clearly the federal income tax liability of the consolidated group and to prevent avoidance of such tax liability. Furthermore, section 7805(a) authorizes the Secretary to “prescribe all needful rules and regulations for the enforcement of this title, including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.” The different policies underlying the SRLY rules and the DCL rules, which should limit the applicability of the 80-percent limitation under section 172(a)(2)(B) to the SRLY rules, provide the rationale and authority for adopting the requested amendment to Prop. Reg. § 1.1502-21(c)(1)(i)(E) and Treas. Reg. § 1.1503(d)-4(c)(3).

VII. Summary Conclusion

The incorporation by the DCL rules of the Treas. Reg. § 1.1502-21(c)(1) SRLY mechanics in Treas. Reg. § 1.1503(d)-4(c) should not be viewed to incorporate the policies underlying the SRLY rules into the DCL rules, and instead should be viewed simply as incorporating the mechanical aspects of Treas. Reg. § 1.1502-21(c)(1) subject to appropriate modifications. Accordingly, the requested amendment would add a modification to the existing modifications, to ensure that the need of the SRLY rules to preserve separate-entity treatment through Prop. Reg. § 1.1502-21(c)(1)(i)(E) does not inappropriately apply in the context of the DCL rules, which are not intended to replicate stand-alone treatment.

We respectfully request that Treasury and the IRS revise Prop. Reg. § 1.1502-21(c)(1)(i)(E) to provide that it does not apply for purposes of Treas. Reg. § 1.1503(d)-4(c)(3). Similarly, Treas. Reg. § 1.1503(d)-4(c)(3) should be revised to provide that the SRLY limitation is applied without regard to Prop. Reg. § 1.1502-21(c)(1)(i)(E).

The requested amendment is narrowly tailored to reconcile the difference in underlying tax policies between the SRLY rules (which preserve separate-entity absorption of SRLY attributes of a SRLY member, to the extent possible, as highlighted in the Preamble by Treasury and the IRS) and the DCL rules (which prevent a DRC from utilizing its DCLs twice (i.e., double dip)).

* * * * *

We appreciate the opportunity to comment on the Proposed Regulations and look forward to discussing any questions or comments that the Treasury or IRS may have regarding the contents of this submission. If you have any questions or comments regarding this submission, please contact Chris Ocasal at chris.ocasal@ey.com, (202) 327-6868 or Revital Gallen at revital.gallen@ey.com, (949) 437-0302.

Respectfully submitted,

American International Group, Inc.
John Hancock Financial Corporation
MetLife, Inc.
Pacific Life Insurance Company
Prudential Financial Inc.
Reinsurance Group of America, Incorporated

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Exhibit A — Examples

The below examples illustrate: (1) the DCL rules, (2) the SRLY rules, (3) the appropriate DCL use under Treas. Reg. §§ 1.1503(d)-4(c) and 1.1502-21(c), before taking into account Prop. Reg. § 1.1502-21(c)(1)(i)(E), and lastly (4) the inappropriate DCL limitation if Prop. Reg. § 1.1502-21(c)(1)(i)(E) is taken into account.

For purposes of the examples below, X does not have any pre-2018 NOLs and Year 1 is a taxable year that begins on or after January 1, 2021.

* * * * *

Example 1, illustrating the DCL rules/policy

P is the common parent of a consolidated group. X is a domestic corporation that is also a tax resident in Country A. It is assumed that X is a DRC under section 1503(d) and the regulations thereunder. X is a member of P's consolidated group and is also a member of an affiliated group in Country A. Country A allows for the utilization of losses between members of an affiliated group.

Year 1

X incurred losses of $100. X's losses can be used in Country A to offset $100 of income of members of X's Country A affiliated group and can also be used in the US to offset $100 of income of other members of P's consolidated group.

X's losses offset foreign affiliate income in Country A of $100. Consequently, under section 1503(d), X's losses cannot be used to offset income of other members of P's consolidated group until such time that X contributes income to the CTI of P's consolidated group, and then only up to the amount of such contribution.

At the end of Year 1, X has a DCL of $100 that can be carried forward to future taxable years.

Year 2

X contributes $100 of income to the CTI of P's consolidated group and such income is also included in Country A's affiliated group in Year 2, but X's $100 of income is offset by current losses of other members of the P consolidated group, and therefore none of X's $100 DCL carryforward can be absorbed. At the end of Year 2, X's cumulative DCL SRLY register account is increased from $0 to $100.

As a result of having a $100 register balance, $100 of X's NOL carryforward loses its taint as a DCL and can offset $100 of income of other members of the P consolidated group, in future years. A double dip is prevented by the disallowance of the loss utilization in Year 1 and the requirement to contribute $100 to the CTI of P's consolidated group in Year 2.

* * * * *

Example 2, illustrating the SRLY rules

P is the common parent of a consolidated group. X, a domestic corporation, was acquired by P from outside P's consolidated group in Year 2 in a transaction that did not result in a section 382(g) ownership change.

Year 1

X incurred losses of $100. Because X was unaffiliated with P in Year 1, X's $100 NOL is incurred in a SRLY and is subject to the SRLY limitation.

Year 2

X becomes a member of P's consolidated group in Year 2. X contributes $100 of income to the P consolidated group's CTI in Year 2, but X's $100 of income is offset by current losses of other members of the P consolidated group, and therefore none of X's $100 NOL carryforward can be absorbed. At the end of Year 2, X's cumulative SRLY register account is increased from $0 to $100.

Year 3

The P consolidated group has income of $200, none of which is attributable to X, and $160 of NOL carryforward (80 percent of the excess of $200 over $0) can under section 172(a)(2)(B) potentially be used to offset the $200 of income. However, if X were to file a separate return in Year 3, and it had $100 of income (i.e., an amount equal to its cumulative contribution to the CTI of the P consolidated group), it could only use $80 of its SRLY NOL carryforward (80 percent of the excess of $100 over $0) to offset its income.

Without the adjustment in Prop. Reg. § 1.1502-21(c)(1)(i)(E), $100 of X's SRLY NOL would carryforward to offset $100 of the P consolidated group's income (i.e., up to the amount of the cumulative SRLY register of $100), and thus X would achieve a different result as a member of a consolidated group than as a separate-return filing corporation. That difference in result can be viewed as inappropriate under the SRLY rules, and therefore the adjustment under Prop. Reg. § 1.1502-21(c)(1)(i)(E) is required to limit the SRLY NOL utilization to 80 percent of X's $100 cumulative SRLY register amount.

Consequently, upon the group's deduction of $80 of X's SRLY NOL, X's cumulative SRLY register of $100 would need to be reduced to reflect the full $100 of income required to enable the $80 SRLY NOL absorption, not just the $80 amount of NOL absorbed by the P consolidated group.

* * * * *

Example 3, illustrating an appropriate DCL use under Treas. Reg. §§ 1.1503(d)-4(c) and 1.1502-21(c), before taking into account Prop. Reg. § 1.1502-21(c)(1)(i)(E)

Facts are the same as Example 1.

Year 3

At the beginning of Year 3, X has an NOL carryforward of $100 and a cumulative DCL SRLY register of $100. X's $100 NOL carryforward has lost its taint as a DCL because of X's $100 cumulative DCL SRLY register, and the double dip concern under section 1503(d) has been addressed (as illustrated in Example 1). No other member of P's consolidated group has an NOL carryforward.

The P consolidated group has income of $200, and $160 of NOL carryforward (80 percent of the excess of $200 over $0) can under section 172(a)(2)(B) potentially be used to offset the income. Because X's $100 NOL is the only NOL carryforward available, section 1503(d) should permit X to use $100 of its NOL carryforward to offset $100 of the income.

Both X's DCL carryforward amount and X's cumulative DCL SRLY register should be reduced by $100 to $0.

* * * * *

Example 4, illustrating an inappropriate DCL limitation, taking into account Prop. Reg. § 1.1502-21(c)(1)(i)(E)

Facts are the same as Example 3.

The P consolidated group has income of $200, and $160 of NOL carryforward (80 percent of the excess of $200 over $0) can under section 172(a)(2)(B) potentially be used to offset the $200 of income. X's $100 SRLY NOL is the only NOL available, and taking into account Prop. Reg. § 1.1502-21(c)(1)(i)(E), only $80 of the income can be offset (100 percent of the excess of $100 of the cumulative DCL SRLY register over $0, but only 80 percent of the excess of $100 of the cumulative SRLY register over $0).

X's SRLY NOL carryforward amount is reduced from $100 to $20, and X's SRLY cumulative register would be reduced by Prop. Reg. § 1.1502-21(c)(1)(i)(E) from $100 to $0.

Subjecting X's cumulative DCL SRLY register to Prop. Reg. § 1.1502-21(c)(1)(i)(E) would cause X's $20 of remaining SRLY NOL to retain its DCL taint, even though X has contributed $100 to the P consolidated group's CTI and the entire $100 of SRLY NOL should have been released from being treated as DCLs at the end of Year 2 (as illustrated in Example 1).