(1) For purposes of this rule:

(a) "combined year" means a taxable period in which a corporation filed a unitary combined report as set forth in ARM 42.26.204;

(b) "water's-edge year" means a taxable period in which a corporation filed a valid water's-edge combined report as set forth in ARM 42.26.301; and

(c) "separate company year" means a taxable period in which a corporation filed as a separate and distinct entity, not as part of a unitary group.

(2) A corporation that makes a valid water's-edge election or does not renew a prior election is agreeing that unused net operating loss carryover from a water's-edge year may only be carried to a water's-edge year, and unused net operating loss carryover from a non-water's-edge year may only be carried to a non-water's-edge year. When applying the three-year carry-back, and seven-year carry-forward limitations, provided for in 15-31-119, MCA, all taxable periods are included, even though the loss can only be deducted in those periods in which the filing method is the same.

(3) Except as provided in (2), if a corporation incurs a net operating loss and files a return for the year to which the loss is carried under a different filing method, the net operating loss deduction may be limited. The net operating loss must be recalculated to the filing method of the year in which the loss is being deducted. For example, if a corporation incurs a net operating loss in a prior separate company year, and wishes to carry that loss to a future combined year, the loss must be recalculated as if it were filed on a combined, unitary basis before being carried to the combined year.