Price Waterhouse Asks for Change in Consolidated Return Reg's Effective Date

Price Waterhouse LLP has asked the service, on behalf of a client, to change the effective date of temporary reg. section 1.1502-9T(b)(1)(v). At the same time, it also asks permission to testify at the May 7, 1998 hearing on the regs.

According to the firm, the current effective date will result in a retroactive application of the regs. Given that the regs eliminate the SRLY limitation on the recapture of overall foreign losses (OFLs), it says, a retroactive application will affect the economic outcome of transactions that were completed before January 9, 1998 (the date the IRS first indicated the rule would be changed). For that reason, Price Waterhouse says, the old SRLY rules in reg. section 1.1502-9(b)(1)(iii) should apply to OFLs of group members acquired before January 9, 1998.

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April 13, 1998

CC:DOM:CORP:R [REG-104062-97]

Dear Sirs and Madams:

COMMENTS AND REQUEST TO TESTIFY REGARDING TEMP. REG. SECTION

[1] We are submitting this letter on behalf of a client who made business decisions in reasonable reliance upon existing Treasury regulations, and whose economic interests will be adversely affected by recently issued proposed and temporary regulations relating to overall foreign losses ("OFLs") of corporations included in consolidated returns. Our comments will not address the technical and policy issues underlying the new regulations, but will instead be limited to a discussion of the effective date contained within new Temp. Reg. section 1.1502-9T(b)(1)(v). In addition, we respectfully request the opportunity to testify at the public hearing on May 7, 1998.

[2] Under Treas. Reg. section 1.1502-9(b)(1)(iii), originally adopted in 1966, the recapture of an OFL of a member joining a consolidated group was subject to the separate return limitation year ("SRLY") rules. Thus, if a corporation with an OFL account joined a group, the recapture of the OFL under Treas. Reg. section 1.1502-9(d) would be determined by reference to the foreign source income attributable to the acquired corporation. The existence of the SRLY OFL with respect to the new member would not impair the ability of other group members to claim foreign tax credits. However, if the member with the SRLY OFL engaged in intercompany transactions with other members and deferred its gain or loss pursuant to Treas. Reg. section 1.1502-13, then the SRLY limitation on the recapture of the acquired member's OFL was required to be removed pursuant to Treas. Reg. section 1.1502-9(e).

[3] The newly issued proposed and temporary regulations remove the SRLY limitation on the recapture of OFLs for all consolidated groups. The preamble to the temporary regulations indicates that the continued application of the SRLY restriction might enable taxpayers "to adopt structures in an attempt to achieve indefinite postponement of the recapture of SRLY OFLs and SLLs." Thus, it appears that the amendments were adopted in order to prevent perceived taxpayer avoidance. However, unlike former Treas. Reg. section 1.1502-9(e), the elimination of the SRLY restrictions applies without regard to asset transfers within the group, and is not limited to groups that adopted structures to postpone OFL recapture as described in the preamble.

[4] The temporary regulations apply to consolidated return years for which the unextended due date is after March 13, 1998. /1/ This effective date has the practical effect of eliminating the SRLY limitation on the recapture of OFLs of members acquired prior to the date the temporary regulations were adopted. In many instances, this will affect the economic outcome of transactions completed prior to January 9, 1998 (the date of the first public indication that the rule would be changed). Prior to January 9, 1998, acquisitions were made and actions were taken by taxpayers in reliance upon Treas. Reg. section 1.1502-9 as it existed for over three decades.

[5] We believe that fundamental fairness and proper administration of the tax system requires that a detrimental change in legislative regulations such as the consolidated return regulations should not be applied retroactively. Taxpayers must be able to rely upon regulations in evaluating their transactions without fear of retroactive regulations altering the anticipated tax consequences.

[6] Consider the following example: /2/

Public Corporation X acquired public Corporation Y during 1997

[7] A retroactive change in the regulations should not be permitted to increase taxpayers' tax liability on transactions that were completed relying on longstanding legislative regulations. Absent a regulatory amendment to the effective date of Temp. Reg. section 1.1502-9T, taxpayers such as Corporation X in the above example have no recourse to achieve the economic benefit of their negotiated transactions; typically in transactions involving public companies, no provision exists to adjust the acquisition price in the event of an unanticipated, retroactive change in tax laws.

[8] It is likely that other taxpayers will experience similar adverse consequences with respect to closed transactions where the economics of the business deal, at least in part, were based on the application of the existing rules, and where no remedy exists for the harmed parties to recover their loss. Simple fairness and equity should prevail in these cases.

[9] Taxpayers must be provided the opportunity to make decisions in reasonable reliance upon existing tax regulations and rules. To this end, we suggest that OFLs of group members acquired prior to the first notice to taxpayers of this major change in the regulations (i.e., January 9, 1998), still should be governed by the SRLY rules in Treas. Reg. section 1.1502-9(b)(1)(iii). /3/ Treasury could make retroactive application to "pre-notice" transactions available at the taxpayer's election; such an election could provide that the removal of SRLY limitations on the use of foreign tax credits also requires the elimination of SRLY restrictions on OFL recapture for the same taxable years.

[10] Attached is an outline of our oral testimony for the public hearing. Should you require additional information, please call Patricia Pellervo at (202) 414-1630.

Sincerely yours,

Price Waterhouse LLP

Attachment: Outline of Oral Comments

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PUBLIC HEARING ON REG-104062-97

MAY 7,1998

OUTLINE OF ORAL COMMENTS

Speaker: Patricia W. Pellervo

Topic: The effective date of Temp. Reg. section 1.1502-9T(b)(1)(v)

A. Consolidated return regulations are legislative

B. Example of taxpayer situation in which business-motivated

FOOTNOTES TO LETTER

/1/ The temporary regulations, originally issued on January 9, 1998, would apply to consolidated return years beginning on or after January 1, 1997. Revised temporary regulations issued on March 13, 1998, revised the effective date to that cited above, giving taxpayers the alternative to use the effective date in the January 9th regulations. This comment letter addresses only the effective date as contained in the revised temporary regulations issued on March 13th; however, the same effective date concerns are presented under the alternative effective date.

/2/ This example contains a simplified version of a transaction involving our client.

/3/ We are not suggesting any changes to the effective date of other portions of the temporary regulations, such as foreign tax credits. Just as our client evaluated transactions on the basis of the 1966 regulations, since January 9, 1998, other taxpayers may have placed similar reliance on the new temporary regulations and may have reflected the new regulations on tax returns, extensions, and in financial statements.

END OF FOOTNOTES TO LETTER