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taxable income is to be determined by taking into account the
separate taxable income of each member of the group and “[a]ny
consolidated net operating loss deduction”. Section 1.1502-21(a),
Income Tax Regs., provides that the consolidated NOL deduction is
equal to the aggregate of the consolidated NOL carryovers and
carrybacks to the taxable year. In pertinent part, section 1.1502-
21(b)(1), Income Tax Regs., provides that the consolidated NOL
carryovers and carrybacks to the taxable year shall consist of any
consolidated NOLs of the group that may be carried back or over to
the taxable year under the provisions of section 172(b). Section
1.1502-21(f), Income Tax Regs., provides rules for determining the
consolidated NOL. In pertinent part, it provides that the
consolidated NOL shall be determined by taking into account the
separate taxable income, “as determined under �1.1502-12”, of each
member of the group. Finally, section 1.1502-12, Income Tax Regs.,
provides that the separate taxable income of a member, “including a
case in which deductions exceed gross income”, is determined, with
certain modifications, as if the member were not a member of the
group.
The dispute between the parties concerns the calculation of
that portion of the consolidated NOL of the UBC affiliated group
for 1987 that is attributable to bank bad debt losses (and, thus,
subject to the special carryback and carryforward rules of section
172(b)(1)(L)). For 1987, the UBC affiliated group consisted of both
bank and nonbank members. The parties have no dispute over how to
determine the bad debt portion of the NOL of any bank member. Their
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