[Federal Register: December 22, 2006 (Volume 71, Number 246)]
[Rules and Regulations]
[Page 76904-76913]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22de06-6]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 5
[TD 9304]
RIN 1545-BF26
Guidance Necessary To Facilitate Business Electronic Filing Under
Section 1561
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
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SUMMARY: This document contains temporary regulations that affect
component members of controlled groups of corporations and consolidated
groups filing life-nonlife Federal income tax returns. They provide
guidance regarding the apportionment of tax benefit items and the
amount and type of information these members are required to submit
with their returns. The text of the temporary regulations also serves
as the text of the proposed regulations set forth in the notice of
proposed rulemaking on this subject in the Proposed Rules section in
this issue of the Federal Register.
DATES: Effective Date: These regulations are effective on December 22,
2006.
Applicability Date: For dates of applicability, see Sec. Sec.
1.1502-43T(e)(1), 1.1502-47T(t)(1), 1.1561-1T(d)(1), 1.1561-2T(f)(1),
1.1561-3T(d)(1) and 1.1563-1T(e)(1). The applicability of these
regulations will expire on December 21, 2009.
FOR FURTHER INFORMATION CONTACT: Grid Glyer, (202) 622-7930 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Section 1561(a) provides that the component members of a controlled
group of corporations (as those terms are defined in section 1563) are
limited to using the amounts of certain tax benefit items described
therein in the same manner as if they were one corporation. Although
section 1561(a) provides that these amounts shall generally be divided
equally among those members, it also provides that if those members
consent to adopt an apportionment plan, then, except as provided below,
they will be permitted to allocate these amounts among themselves
unequally. Section 1.1561-3(b) provides the procedural format by which
those members may adopt an apportionment plan.
On May 26, 2006, the IRS and Treasury Department released temporary
regulations (TD 9264), which, among other things, eliminated regulatory
impediments to the electronic filing (e-filing) of many statements that
corporate taxpayers were previously required to include on or with
their Federal income tax returns. As noted in section 2.C. of the
preamble to those regulations, Sec. 1.1561-3(b) presents an impediment
to the e-filing of that information which each member of a controlled
group is required to provide with its Federal income tax return when it
makes the consent provided therein. These temporary regulations remove
that impediment and also clarify the amount and type of information
that each member of such group is required to submit with its return,
whether or not the group chooses to apportion unequally the specified
tax benefit items among its members. Thus, these regulations require
each member of such group to provide the requisite information, whether
or not it consents to adopt an apportionment plan, on a form (i.e.,
Schedule O or any successor to that form) to be filed with each
member's Federal income tax return for each taxable year for which it
is a component member of a controlled group.
Explanation of Provisions
1. Revision of the Regulations Under Section 1561
The IRS and Treasury Department are publishing temporary
regulations under section 1561 for several reasons. First, the current
regulations are outdated in that they refer to tax benefit items that
are no longer listed in section 1561(a). Except as provided below, to
minimize this issue in the future, the temporary regulations refer
generically to the tax benefit items listed in section 1561(a) rather
than refer specifically to those items by listing and describing each
one.
Second, the current regulations do not provide guidance to
taxpayers regarding how to allocate the amounts of the section 1561(a)
tax benefit items among the component members of a controlled group of
corporations which have an apportionment plan in effect. As a result,
the IRS often can not determine whether taxpayers have correctly
allocated these items. Thus, the temporary regulations refer to a new
form (i.e., Schedule O or any successor to that form) on which such
members will provide information about these items.
Except as provided below, each component member of a controlled
group must file this form every year with its Federal income tax return
whether or not: (1) An apportionment plan is in effect, or (2) any
change is made to the group's apportionment of its section 1561(a) tax
benefit items from the previous year. However, whenever one or more of
the component members of a controlled group of corporations are also
members of a consolidated group, the parent of such consolidated group
shall file one form on behalf of all of its members. That form shall
contain all the information required for each such member.
Finally, Sec. 1.1561-3(b) presents an impediment to e-filing where
such members have consented to the adoption of an apportionment plan.
That section requires each member of a controlled group to attach to
its return, for each year following the adoption of the plan, a copy of
its signed consent to such plan. As explained in TD 9264,
[[Page 76905]]
that signature requirement presents an impediment to e-filing. These
temporary regulations eliminate this impediment and provide that the
form will be the mechanism by which such member adopts (and also amend
or terminate) such plan. Thus, each member of the group (that is not a
member of a consolidated group) will file this form to consent to adopt
a plan, even if it is a wholly-owned subsidiary of the group. Compare
Sec. 1.1561-3(b)(2)(i) (a wholly-owned subsidiary of a controlled
group was not required to consent to adopt a plan because it was deemed
to consent if all the component members of that group that are not
wholly owned subsidiaries consent). Thus, these temporary regulations
eliminate the deemed consent provision of Sec. 1.1561-3(b)(2)(i).
2. Regulation Authorizing the Component Members of a Controlled Group
To Apportion the Accumulated Earnings Credit Unequally if They Have an
Apportionment Plan in Effect
Section 1561(a) provides that the component members of a controlled
group of corporations must divide the amount of the accumulated
earnings credit (the credit) equally unless the Secretary prescribes
regulations permitting an unequal allocation of that amount. However,
Sec. 1.1561-2(c) requires that they divide that amount equally. The
IRS and Treasury Department have concluded that they no longer will
require such members to divide that amount equally. Therefore, these
temporary regulations now provide that the component members of a
controlled group may choose to allocate the amount of that credit
unequally among themselves if they have an apportionment plan in
effect.
3. Revisions to Sec. 1.1563-1
A. Reformatting the Regulation
For the sake of consistency, the IRS and Treasury Department are
reformatting Sec. 1.1563-1 to conform it to current formatting
conventions. It is not intended that any such reformatting constitute a
substantive change. Moreover, the changes described in this paragraph
of the preamble are only limited to formatting. Thus, for example,
except for the changes described below, no examples in Sec. 1.1563-1
have been updated to reflect current law. Such changes are beyond the
scope of this project and will be addressed in a separate regulation
project.
B. Updating the Definition of a Brother-Sister Controlled Group
Section 900 of the American Jobs Creation Act of 2004, Pub. L. 108-
357, 118 Stat. 1418 (the 2004 amendment), revised the definition of a
brother-sister controlled group in section 1563(a)(2). Prior to this
2004 amendment, commonly owned corporations qualified as a brother-
sister controlled group if five or fewer persons who are individuals,
estates, or trusts own (within the meaning of section 1563(d)(2)) stock
possessing: (A) At least 80 percent of the total combined voting power
of all classes of stock entitled to vote or at least 80 percent of the
total value of shares of all classes of stock of each corporation (the
80 percent requirement) and (B) more than 50 percent of the total
combined voting power of all classes of stock entitled to vote or more
than 50 percent of the total value of shares of all classes of stock of
each corporation, taking into account the stock ownership of each such
person only to the extent such stock ownership is identical with
respect to each such corporation (the more-than-50 percent
requirement).
The 2004 amendment eliminated the 80 percent requirement from the
section 1563(a)(2) definition of a brother-sister controlled group. As
a result, for purposes of section 1561, corporations are component
members of a brother-sister controlled group if just the more-than-50
percent requirement is satisfied. However, for all other provisions of
law that incorporate the section 1563(a) definition of a brother-sister
controlled group, both the more-than-50 percent requirement and the 80
percent requirement must be satisfied in order to qualify as a brother-
sister controlled group. See section 1563(f)(5). Therefore, these
temporary regulations reflect this change.
These temporary regulations apply to tax years beginning on or
after the date they are published in the Federal Register. However, the
above described 2004 amendment to section 1563(a)(2) is effective for
tax years beginning after October 22, 2004.
C. Clarifying That an S Corporation Is Treated as an Excluded Member of
a Controlled Group Under Current Law
Section 1.1561-1(c)(1) provides that, for purposes of sections 1561
and 1563, the term corporation includes an electing small business
corporation and refers to Sec. 1.1563-1(b)(2)(ii)(c) for the treatment
of such a corporation as an excluded member of a controlled group of
corporations. Specifically, Sec. 1.1563-1(b)(2)(ii)(c) provides that
only an electing small business corporation which is not subject to the
tax imposed by section 1378 will be treated as an excluded member.
Section 1378, as in effect when Sec. 1.1563-1(b)(2)(ii)(c) was
published (old section 1378), taxed the income of an electing small
business corporation if its income exceeded a certain threshold. That
income was taxed at the lower of the rate determined under section
1201(a) or section 11. Thus, when such corporation was subject to tax
under section 11, it was appropriate to treat such corporation as a
component member of a controlled group for purposes of allocating its
section 11 tax benefit amount.
Old section 1378 was ultimately repealed as part of the Tax Reform
Act of 1986 (Pub. L. 99-514, 100 Stat. 2085). Thus, Sec. 1.1563-
1(b)(2)(ii)(c) became obsolete.
Under current law, an S corporation (the successor to an electing
small business corporation) is generally subject to tax at the entity
level under only two provisions: (1) Section 1374, which imposes tax on
certain recognized built-in gain, and (2) section 1375, which imposes
tax on passive investment income under certain circumstances. However,
in both cases, the amount of tax imposed on an S corporation is
computed by applying the highest rate of tax specified in section
11(b). See sections 1374(b)(1) and 1375(a). Thus, under either of these
provisions, no portion of any of the lower tax bracket amounts of
section 11(b) could be allocated to such a corporation.
In other instances, an S corporation is partially liable for taxes
that were imposed on the income of its predecessor C corporation that
it must now recapture. See, e.g., sections 167(g), 460(b), 1363(d) and
1371(d)(2). However, these recapture taxes are not being imposed on an
S corporation's own income.
Since an S corporation is not currently subject to any tax to which
either the tax bracket amounts of section 11(b) apply, or any other tax
benefit item to which section 1561(a) applies, it is appropriate to
treat that corporation as an excluded member of a controlled group.
These temporary regulations clarify that only to the extent that a
particular tax (and thus a particular tax benefit item to which section
1561(a)) applies to an S corporation is that type of corporation
treated as a component member of the group. This general reference to a
tax that applies to an S corporation is intended to avoid the issue in
Sec. 1.1563-1(b)(2)(ii)(c) of
[[Page 76906]]
referring to a particular Code section that later became obsolete
(i.e., old section 1378).
D. Clarifying That the Life Insurance Company Provisions Do Not Apply
to the Controlled Group Rules Where That Type of Company Is a Member
(Whether Eligible or Ineligible) of a Life-Nonlife Affiliated Group for
the Consolidated Return Year for Which a Section 1504(c)(2) Election Is
Effective
The current regulations under section 1563 describe the treatment
of life insurance companies under the controlled group rules. Section
1.1563-1(a)(5) provides that two or more life insurance companies that
are members of a controlled group are treated as a distinct controlled
group of corporations composed only of life insurance companies.
Section 1.1563-1(b)(2)(ii)(e) defines a life insurance company as an
excluded member unless that type of company is a member of a separate
life insurance company controlled group described in Sec. 1.1563-
1(a)(5).
Section 1504(c)(2) provides that if an affiliated group includes
any domestic life insurance companies that would otherwise not be
treated as includible members of the group, then, except as provided
therein, the common parent of such group may elect (pursuant to
regulations prescribed by the Secretary) to treat all such companies as
includible corporations. Paragraph (f)(6) of Sec. 1.1502-47 implements
section 1504(c)(2) as it relates to section 1563.
These temporary regulations provide that if one or more life
insurance companies are members (whether eligible or ineligible) of an
affiliated group for the consolidated return year for which a section
1504(c)(2) election is effective, then those members are not treated as
either excluded members of the controlled group or as members of a
separate life insurance controlled group. See Sec. 1.1502-47(f)(6).
Rather, any eligible members are treated as members of the consolidated
group, and any ineligible members are treated, along with the eligible
and includible members of the consolidated group, as members of a life-
nonlife controlled group.
These temporary regulations apply to tax years beginning on or
after the date they are published in the Federal Register. However,
paragraph (f)(6) of Sec. 1.1502-47 applies to tax years of
consolidated groups beginning on or after January 1, 1982. See TD 7877.
4. Revisions to Two Consolidated Return Regulations
A. Sec. 1.1502-43
Section 1.1502-43 provides rules for calculating the consolidated
accumulated earnings tax. Section 1.1502-43(d) is currently reserved.
These temporary regulations clarify that if the consolidated group is
part of a controlled group then section 1561 applies in determining the
amount of that credit.
These temporary regulations apply to consolidated return years for
which a return is due (without extensions) after the date it is
published in the Federal Register. However, pursuant to the Tax Reform
Act of 1969, Pub. L. 91-172, 78 Stat. 116, the accumulated earnings
credit became a full tax benefit item under section 1561(a) for tax
years beginning after December 31, 1974.
B. Sec. 1.1502-47
Section 1.1502-47 provides rules for a life-nonlife consolidated
group to calculate its consolidated taxable income. Paragraph (s) of
Sec. 1.1502-47 requires a consolidated group to provide a notation on
the face of its return identifying it as a life-nonlife return. This
requirement presents an impediment to e-filing. These temporary
regulations remove the impediment by deleting the requirement to
provide that notation.
5. Deleting Obsolete Regulations
As part of this Treasury decision, the IRS and Treasury Department
are deleting numerous obsolete regulations. This effort is part of an
ongoing process to remove those types of regulations from the Code of
Federal Regulations (the CFR). Therefore, the following regulations are
deleted from the CFR: Sec. 1.342-1, 1.371-1 through 1.371-2, 1.372-1,
1.374-1 through 1.374-4, 1.1018-1, 1.1562-0 through 1.1562-7, 1.1564-1
and 5.1561-1.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It has also been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations. For the
applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6)
refer to the Special Analyses section of the preamble to the cross-
reference notice of proposed rulemaking published in the Proposed Rules
section in this issue of the Federal Register. Pursuant to section
7805(f) of the Code, these temporary regulations will be submitted to
the Chief Counsel for Advocacy of the Small Business Administration for
comment on their impact on small business.
Drafting Information
The principal author of these regulations is Grid Glyer, Office of
Associate Chief Counsel (Corporate). However, other personnel from the
IRS and Treasury Department participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 5
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
0
Accordingly, 26 CFR parts 1 and 5 are amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding
entries in numerical order to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1502-43T also issued under 26 U.S.C. 1502. * * *
Section 1.1561-2T also issued under 26 U.S.C. 1561. * * *
Sec. 1.108-1 [Removed]
0
Par. 2. Section 1.108-1 is removed and reserved.
Sec. 4.342-1 [Removed]
0
Par. 3. Section 1.342-1 is removed.
Sec. 1.371-1 [Removed]
0
Par. 4. Section 1.371-1 is removed.
Sec. 1.371-2 [Removed]
0
Par. 5. Section 1.371-2 is removed.
Sec. 1.372-1 [Removed]
0
Par. 6. Section 1.372-1 is removed.
Sec. 1.374-1 [Removed]
0
Par. 7. Section 1.374-1 is removed.
Sec. 1.374-2 [Removed]
0
Par. 8. Section 1.374-2 is removed.
Sec. 1.374-3 [Removed]
0
Par. 9. Section 1.374-3 is removed.
Sec. 1.374-4 [Removed]
0
Par. 10. Section 1.374-4 is removed.
[[Page 76907]]
Sec. 1.924(a)-1T [Amended]
0
Par. 10A. For each entry in the ``Location'' column of the following
table, remove the language in the ``Remove'' column and add the
language in the ``Add'' column in its place:
------------------------------------------------------------------------
Location Remove Add
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The fifth sentence of Sec. a statement....... completing the
1.924(a)-1T(j)(2)(i). form (i.e.,
Schedule O or any
successor to that
form).
The fifth sentence of Sec. Sec. 1.1561-3(b) Sec. 1.1561-3T.
1.924(a)-1T(j)(2)(i).
The sixth sentence of Sec. Sec. 1.1561-3(c) Sec. 1.1561-
1.924(a)-1T(j)(2)(i). 3T(a).
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Sec. 1.1018-1 [Removed]
0
Par. 11. Section 1.1018-1 is removed.
0
Par. 12. Section 1.1502-43 is amended by revising paragraph (d) and
adding paragraph (e) to read as follows:
Sec. 1.1502-43 Consolidated accumulated earnings tax.
* * * * *
(d) [Reserved]. For further guidance, see Sec. 1.1502-43T(d).
(e) [Reserved]. For further guidance, see Sec. 1.1502-43T(e)(1).
0
Par. 13. Section 1.1502-43T is added to read as follows:
Sec. 1.1502-43T Consolidated accumulated earnings tax (temporary).
(a) through (c) [Reserved]. For further guidance, see Sec. 1.1502-
43(a) through (c).
(d) Consolidated accumulated earnings credit--(1) In general.
[Reserved]
(2) Special rule if consolidated group part of controlled group. If
a consolidated group is treated as a component member of a controlled
group, or if each member of a consolidated group is treated as a
component member of a controlled group, see section 1561 for
determining the portion of the accumulated earnings credit to be
allocated to such group or to such members.
(e) Effective date--(1) Applicability date. This section applies to
any consolidated Federal income tax return due (without extensions)
after December 22, 2006. However, a consolidated group may apply this
section to any consolidated Federal income tax return filed on or after
December 22, 2006.
(2) Expiration date. The applicability of this section will expire
on December 21, 2009.
0
Par. 14. Section 1.1502-47 is amended by revising paragraph (s) and
adding paragraph (t) to read as follows:
Sec. 1.1502-47 Consolidated returns by life-nonlife groups.
* * * * *
(s) [Reserved]. For further guidance, see Sec. 1.1502-47T(s).
(t) [Reserved]. For further guidance, see Sec. 1.1502-47T(t)(1).
0
Par. 15. Section 1.1502-47T is amended by revising paragraph (s) and
adding paragraph (t) to read as follows:
Sec. 1.1502-47T Consolidated returns by life-nonlife groups
(temporary).
* * * * *
(s) Filing requirements. Nonlife consolidated taxable income or
loss under paragraph (h) of Sec. 1.1502-47 shall be determined on a
separate Form 1120 or 1120-PC, and consolidated partial LICTI under
paragraph (j) of Sec. 1.1502-47 shall be determined on a separate Form
1120-L. The consolidated return shall be made on a separate Form 1120,
1120-PC, or 1120-L filed by the common parent (if the group includes a
life company), which shows the set-offs under paragraphs (g), (m), and
(n) of Sec. 1.1502-47 and clearly indicates on the face of the return
that it is a life-nonlife consolidated return (if the group includes a
life company). See also Sec. 1.1502-75(j), relating to statements and
schedules for subsidiaries.
(t) Effective date--(1) Applicability date. Paragraph (s) of this
section applies to any consolidated Federal income tax return due
(without extensions) after December 22, 2006. However, a consolidated
group may apply paragraph (s) of this section to any consolidated
Federal income tax return filed on or after December 22, 2006.
(2) Expiration date. The applicability of paragraph (s) of this
section will expire on December 21, 2009.
0
Par. 16. Section 1.1502-90 is amended by:
0
1. Removing and reserving the entry for Sec. 1.1502-95(e)(8).
0
2. Removing and reserving the entry for Sec. 1.1502-95(f).
0
3. Reserving an entry for Sec. 1.1502-95(g).
0
4. Adding entries for Sec. 1.1502-95T.
The additions read as follows:
Sec. 1.1502-90 Table of contents.
* * * * *
Sec. 1.1502-95 Rules on ceasing to be a member of a consolidated
group (or loss subgroup).
* * * * *
(g) [Reserved].
Sec. 1.1502-95T Rules on ceasing to be a member of a consolidated
group (or loss subgroup) (temporary).
(a) through (e)(7) [Reserved].
(e)(8) Reporting requirements.
(i) Common Parent.
(ii) Former Member.
(iii) Exception.
(f) Filing the election to apportion the section 382 limitation and
net unrealized built-in gain.
(1) Form of the election to apportion.
(i) Statement.
(ii) Agreement.
(2) Signing the agreement.
(3) Filing of the election.
(i) Filing by the common parent.
(ii) Filing by the former member.
(4) Revocation of election.
(g) Effective date.
(1) Applicability date.
(2) Expiration date.
Sec. 1.1561-0 [Removed]
0
Par. 17. Section 1.1561-0 is removed.
Sec. 1.1561-1 [Removed]
0
Par. 18. Section 1.1561-1 is removed.
0
Par. 19. Section 1.1561-1T is added to read as follows:
Sec. 1.1561-1T General rules regarding certain tax benefits available
to the component members of a controlled group of corporations
(temporary).
(a) In general. (1) Part II (section 1561 and following) of
subchapter B of chapter 6 of the Internal Revenue Code (part II)
provides rules to limit the amounts of certain specified tax benefit
items of component members of a controlled group of corporations on a
December 31, for their taxable years which include such December 31.
The component members of such a group shall be limited for purposes of
subtitle A of the Code to the amounts of certain items, set forth in
section 1561(a), as if they were one corporation. Certain other tax
items also set forth in section 1561(a) (e.g., the additional tax
imposed by section 11(b)(1) and the section 55(d)(3) phase out of the
alternative minimum tax exemption amount) will be determined by
combining the taxable income of all such members and then allocating
the amount of such items among such members.
[[Page 76908]]
(2) For certain definitions (including the definition of a
controlled group of corporations and a component member) and special
rules for purposes of this part II see section 1563.
(b) Special rules. (1) For purposes of this part II, the term
corporation includes a small business corporation (as defined in
section 1361). However, for the treatment of such a corporation as an
excluded member of a controlled group of corporations see Sec. 1.1563-
1(b)(2)(ii)(C).
(2) In the case of corporations electing a 52-53-week taxable year
under section 441(f)(1), the provisions of this part II shall be
applied in accordance with the special rule of section 441(f)(2)(A).
See Sec. 1.441-2.
(c) Tax avoidance. The provisions of this part II do not delimit or
abrogate any principle of law established by judicial decision, or any
existing provisions of the Code, such as sections 269, 482, and 1551,
which have the effect of preventing the avoidance or evasion of income
taxes.
(d) Effective date--(1) Applicability date. This section applies to
any taxable year beginning on or after December 22, 2006. However,
taxpayers may apply this section to any Federal income tax return filed
on or after December 22, 2006.
(2) Expiration date. The applicability of this section will expire
on December 21, 2009.
0
Par. 20. Section 1.1561-2 is amended by removing and reserving
paragraphs (a) and (b), revising paragraph (c), removing and reserving
paragraph(d), and adding paragraph (f) to read as follows:
Sec. 1.1561-2 Determination of amount of tax benefits.
* * * * *
(c) [Reserved]. For further guidance, see Sec. 1.1561-2T(c).
* * * * *
(f) [Reserved]. For further guidance, see Sec. 1.1561-2T(f)(1).
0
Par. 21. Section 1.1561-2T is added to read as follows:
Sec. 1.1561-2T Determination of amount of tax benefits (temporary).
(a) through (b) [Reserved].
(c) Accumulated earnings credit. The component members of a
controlled group of corporations may allocate the amount of the
accumulated earnings credit unequally if they have an apportionment
plan in effect.
(d) [Reserved].
(e) [Reserved]. For further guidance, see Sec. 1.1561-2(e).
(f) Effective date--(1) Applicability date. This section applies to
any taxable year beginning on or after December 22, 2006. However,
taxpayers may apply this section to any Federal income tax return filed
on or after December 22, 2006.
(2) Expiration date. The applicability of this section will expire
on December 21, 2009.
Sec. 1.1561-3 [Removed]
0
Par. 22. Section 1.1561-3 is removed.
0
Par. 23. Section 1.1561-3T is added to read as follows:
Sec. 1.1561-3T Allocation of the section 1561(a) tax items
(temporary).
(a) Filing of form--(1) In general. For each taxable year that a
corporation is a component member of the same controlled group of
corporations on a December 31, for its taxable year that includes such
December 31, such corporation and all other component members of such
group must each file the required form (i.e., Schedule O or any
successor to that form) with each Federal income tax return. Each such
corporation must file that form with its return whether or not--
(i) An apportionment plan is in effect; or
(ii) Any change is made in the group's apportionment of its section
1561(a) tax benefit items from the previous year.
(2) Exception for component members that are members of a
consolidated group. If one or more of the component members of a
controlled group of corporations are also members of a consolidated
group, the parent of such consolidated group shall file only one form
on behalf of all of such members. Such form shall contain the
information required for each such member.
(b) No apportionment plan in effect. If the component members of a
controlled group of corporations do not have an apportionment plan in
effect, the amounts of the section 1561(a) items must be divided
equally among all such members. For purposes of the preceding sentence,
if any component members of a controlled group of corporations are also
members of a consolidated group, such members will each be treated as a
separate component member of the controlled group.
(c) Apportionment plan in effect--(1) Adoption of plan. The
component members of a controlled group of corporations consent to the
adoption (or amendment) of an apportionment plan by checking the box to
that effect on such form. For purposes of this paragraph (c)--
(i) An apportionment plan that is adopted (including a plan that
has been amended) continues in effect until it is terminated;
(ii) A consolidated group is treated as one component member of
such group; and
(iii) The members must allocate the amounts of the section 1561(a)
items between or among themselves as described in the plan.
(2) Limitation on adopting a plan--(i) Sufficient statute of
limitations period. The members may only adopt or amend such a plan if
there is at least one year remaining in the statutory period (including
any extensions thereof) for the assessment of a deficiency against
every member the tax liability of which would be increased by the
adoption of such a plan.
(ii) Insufficient statute of limitations period. If any member
cannot satisfy the requirement of paragraph (c)(2)(i) of this section,
the members may not adopt or amend such a plan unless the member not
satisfying such requirement has entered into an agreement with the
Internal Revenue Service to extend the statute of limitations for the
limited purpose of assessing any deficiency against such member
attributable to the adoption of such a plan.
(3) Termination of plan. An apportionment plan that is in effect
for the component members of a controlled group with respect to a
particular December 31 is terminated with respect to a succeeding
December 31 if--
(i) Each member of such group consents to the termination of such a
plan for such succeeding December 31 by checking the box to that effect
on its form;
(ii) The controlled group ceases to remain in existence (within the
meaning of section 1563(a)) during the calendar year ending on such
succeeding December 31;
(iii) Any corporation which was a component member of such group on
the particular December 31 is not a component member of such group on
such succeeding December 31; or
(iv) Any corporation which was not a component member of such group
on the particular December 31 is a component member of such group on
such succeeding December 31.
(d) Effective date--(1) Applicability date. This section applies to
any taxable year beginning on or after December 22, 2006. However,
taxpayers may apply this section to any Federal income tax return filed
on or after December 22, 2006.
(2) Expiration date. The applicability of this section will expire
on December 21, 2009.
Sec. 1.1562-0 [Removed]
0
Par. 24. Section 1.1562-0 is removed.
[[Page 76909]]
Sec. 1.1562-1 [Removed]
0
Par. 25. Section 1.1562-1 is removed.
Sec. 1.1562-2 [Removed]
0
Par. 26. Section 1.1562-2 is removed.
Sec. 1.1562-3 [Removed]
0
Par. 27. Section 1.1562-3 is removed.
Sec. 1.1562-4 [Removed]
0
Par. 28. Section 1.1562-4 is removed.
Sec. 1.1562-5 [Removed]
0
Par. 29. Section 1.1562-5 is removed.
Sec. 1.1562-6 [Removed]
0
Par. 30. Section 1.1562-6 is removed.
Sec. 1.1562-7 [Removed]
0
Par. 31. Section 1.1562-7 is removed.
Sec. 1.1563-1 [Removed]
0
Par. 32. Section 1.1563-1 is removed.
0
Par. 33. Section 1.1563-1T is amended by revising paragraphs (a), (b),
(c)(1), (c)(2)(iv), (d) and (e) to read as follows:
Sec. 1.1563-1T Definition of controlled group of corporations and
component members (temporary).
(a) Controlled group of corporations--(1) In general. For purposes
of sections 1561 through 1563, the term controlled group of
corporations means any group of corporations which is either a parent-
subsidiary controlled group (as defined in paragraph (a)(2) of this
section), a brother-sister controlled group (as defined in paragraph
(a)(3)(i) of this section), a combined group (as defined in paragraph
(a)(4) of this section), or a life insurance controlled group (as
defined in paragraph (a)(5) of this section). For the exclusion of
certain stock for purposes of applying the definitions contained in
this paragraph, see section 1563(c) and Sec. 1.1563-2.
(2) Parent-subsidiary controlled group. (i) The term parent-
subsidiary controlled group means one or more chains of corporations
connected through stock ownership with a common parent corporation if--
(A) Stock possessing at least 80 percent of the total combined
voting power of all classes of stock entitled to vote or at least 80
percent of the total value of shares of all classes of stock of each of
the corporations, except the common parent corporation, is owned
(directly and with the application of Sec. 1.1563-3(b)(1), relating to
options) by one or more of the other corporations; and
(B) The common parent corporation owns (directly and with the
application of Sec. 1.1563-3(b)(1), relating to options) stock
possessing at least 80 percent of the total combined voting power of
all classes of stock entitled to vote or at least 80 percent of the
total value of shares of all classes of stock of at least one of the
other corporations, excluding, in computing such voting power or value,
stock owned directly by such other corporations.
(ii) The definition of a parent-subsidiary controlled group of
corporations may be illustrated by the following examples:
Example 1. P Corporation owns stock possessing 80 percent of the
total combined voting power of all classes of stock entitled to vote
of S Corporation. P is the common parent of a parent-subsidiary
controlled group consisting of member corporations P and S.
Example 2. Assume the same facts as in Example 1. Assume further
that S owns stock possessing 80 percent of the total value of shares
of all classes of stock of T Corporation. P is the common parent of
a parent-subsidiary controlled group consisting of member
corporations P, S, and T. The result would be the same if P, rather
than S, owned the T stock.
Example 3. L Corporation owns 80 percent of the only class of
stock of M Corporation and M, in turn, owns 40 percent of the only
class of stock of O Corporation. L also owns 80 percent of the only
class of stock of N Corporation and N, in turn, owns 40 percent of
the only class of stock of O. L is the common parent of a parent-
subsidiary controlled group consisting of member corporations L, M,
N, and O.
Example 4. X Corporation owns 75 percent of the only class of
stock of Y and Z Corporations; Y owns all the remaining stock of Z;
and Z owns all the remaining stock of Y. Since intercompany
stockholdings are excluded (that is, are not treated as outstanding)
for purposes of determining whether X owns stock possessing at least
80 percent of the voting power or value of at least one of the other
corporations, X is treated as the owner of stock possessing 100
percent of the voting power and value of Y and of Z for purposes of
paragraph (a)(2)(i)(B) of this section. Also, stock possessing 100
percent of the voting power and value of Y and Z is owned by the
other corporations in the group within the meaning of paragraph
(a)(2)(i)(A) of this section. (X and Y together own stock possessing
100 percent of the voting power and value of Z, and X and Z together
own stock possessing 100 percent of the voting power and value of
Y.) Therefore, X is the common parent of a parent-subsidiary
controlled group of corporations consisting of member corporations
X, Y, and Z.
(3) Brother-sister controlled group--(i) In general. The term
brother-sister controlled group means two or more corporations if the
same five or fewer persons who are individuals, estates, or trusts own
(directly and with the application of the rules contained in Sec.
1.1563-3(b)) stock possessing more than 50 percent of the total
combined voting power of all classes of stock entitled to vote or more
than 50 percent of the total value of shares of all classes of stock of
each corporation, taking into account the stock ownership of each such
person only to the extent such stock ownership is identical with
respect to each such corporation.
(ii) Additional stock ownership requirement for purposes of certain
other provisions of law. For purposes of any provision of law (other
than sections 1561 through 1563) that incorporates the section 1563(a)
definition of a controlled group, the term brother-sister controlled
group means two or more corporations if the same five or fewer persons
who are individuals, estates, or trusts own (directly and with the
application of the rules contained in Sec. 1.1563-3(b)) stock
possessing--
(A) At least 80 percent of the total combined voting power of all
classes of stock entitled to vote or at least 80 percent of the total
value of shares of all classes of stock of each corporation (the 80
percent requirement);
(B) More than 50 percent of the total combined voting power of all
classes of stock entitled to vote or more than 50 percent of the total
value of shares of all classes of stock of each corporation, taking
into account the stock ownership of each such person only to the extent
such stock ownership is identical with respect to each such corporation
(the more-than-50 percent identical ownership requirement); and
(C) The five or fewer persons whose stock ownership is considered
for purposes of the 80 percent requirement must be the same persons
whose stock ownership is considered for purposes of the more-than-50
percent identical ownership requirement.
(iii) Examples. The principles of paragraph (a)(3)(ii) of this
section may be illustrated by the following examples:
Example 1. (i) The outstanding stock of corporations P, Q, R, S,
and T, which have only one class of stock outstanding is owned by
the following unrelated individuals:
[[Page 76910]]
Corporations
--------------------------------------------------------------------------------------------------------------------------------------------------------
P Q R S T
Individuals (percent) (percent) (percent) (percent) (percent) Identical ownership
--------------------------------------------------------------------------------------------------------------------------------------------------------
A............................................... 55 51 55 55 55 51.
B............................................... 45 49 .......... .......... .......... (45% in P & Q).
C............................................... .......... .......... 45 .......... ..........
D............................................... .......... .......... .......... 45 ..........
E............................................... .......... .......... .......... .......... 45
-------------------------------------------------------------------------------------------------------
Total....................................... 100 100 100 100 100
--------------------------------------------------------------------------------------------------------------------------------------------------------
(ii) Corporations P and Q are members of a brother-sister
controlled group of corporations. Although the more-than-50 percent
identical ownership requirement is met for all 5 corporations,
corporations R, S, and T are not members because at least 80 percent
of the stock of each of those corporations is not owned by the same
5 or fewer persons whose stock ownership is considered for purposes
of the more-than-50 percent identical ownership requirement.
Example 2. (i) The outstanding stock of corporations U and V,
which have only one class of stock outstanding, is owned by the
following unrelated individuals:
------------------------------------------------------------------------
Corporations
-----------------------
Individuals U V
(percent) (percent)
------------------------------------------------------------------------
A............................................... 12 12
B............................................... 12 12
C............................................... 12 12
D............................................... 12 12
E............................................... 13 13
F............................................... 13 13
G............................................... 13 13
H............................................... 13 13
-----------------------
Total....................................... 100 100
------------------------------------------------------------------------
(ii) Any group of five of the shareholders will own more than 50
percent of the stock in each corporation, in identical holdings.
However, U and V are not members of a brother-sister controlled
group because at least 80 percent of the stock of each corporation
is not owned by the same five or fewer persons.
Example 3. (i) Corporations X and Y each have two classes of
stock outstanding, voting common and non-voting common. (None of
this stock is excluded from the definition of stock under section
1563(c).) Unrelated individuals A and B own the following
percentages of the class of stock entitled to vote (voting) and of
the total value of shares of all classes of stock (value) in each of
corporations X and Y:
----------------------------------------------------------------------------------------------------------------
Corporations
Individuals ------------------------------------------------------------------------
X Y
----------------------------------------------------------------------------------------------------------------
A...................................... 100% voting, 60% value.... 75% voting, 60% value.
B...................................... 0% voting, 10% value...... 25% voting, 10% value.
----------------------------------------------------------------------------------------------------------------
(ii) No other shareholder of X owns (or is considered to own)
any stock in Y. X and Y are a brother-sister controlled group of
corporations. The group meets the more-than-50 percent identical
ownership requirement because A and B own more than 50 percent of
the total value of shares of all classes of stock of X and Y in
identical holdings. (The group also meets the more-than-50 percent
identical ownership requirement because of A's voting stock
ownership.) The group meets the 80 percent requirement because A and
B own at least 80 percent of the total combined voting power of all
classes of stock entitled to vote.
Example 4. Assume the same facts as in Example 3 except that the
value of the stock owned by A and B is not more than 50 percent of
the total value of shares of all classes of stock of each
corporation in identical holdings. X and Y are not a brother-sister
controlled group of corporations. The group meets the more-than-50
percent identical ownership requirement because A owns more than 50
percent of the total combined voting power of the voting stock of
each corporation. For purposes of the 80 percent requirement, B's
voting stock in Y cannot be combined with A's voting stock in Y
since B, who does not own any voting stock in X, is not a person
whose ownership is considered for purposes of the more-than-50
percent identical ownership requirement. Because no other
shareholder owns stock in both X and Y, these other shareholders'
stock ownership is not counted towards meeting either the more-than-
50 percent identical ownership requirement or the 80 percent
ownership requirement.
(iv) Special rule if prior law applies. Paragraph (a)(3)(ii) of
this section, as amended by TD 8179, applies to taxable years ending on
or after December 31, 1970. See, however, the transitional rule in
paragraph (d) of this section.
(4) Combined group. (i) The term combined group means any group of
three or more corporations if--
(A) Each such corporation is a member of either a parent-subsidiary
controlled group of corporations or a brother-sister controlled group
of corporations; and
(B) At least one of such corporations is the common parent of a
parent-subsidiary controlled group and also is a member of a brother-
sister controlled group.
(ii) The definition of a combined group of corporations may be
illustrated by the following examples:
Example 1. Smith, an individual, owns stock possessing 80
percent of the total combined voting power of all classes of the
stock of corporations X and Y. Y, in turn, owns stock possessing 80
percent of the total combined voting power of all classes of the
stock of corporation Z. X, Y, and Z are members of the same combined
group since--
(i) X, Y, and Z are each members of either a parent-subsidiary
or brother-sister controlled group of corporations; and
(ii) Y is the common parent of a parent-subsidiary controlled
group of corporations consisting of Y and Z, and also is a member of
a brother-sister controlled group of corporations consisting of X
and Y.
Example 2. Assume the same facts as in Example 1, and further
assume that corporation X owns 80 percent of the total value of
shares of all classes of stock of corporation T. X, Y, Z, and T are
members of the same combined group.
(5) Life insurance controlled group. (i) The term life insurance
controlled group means two or more life insurance companies each of
which is a member of a controlled group of corporations described in
paragraph (a)(2), (a)(3)(i), or (a)(4) of this section and to which
Sec. 1.1502-47(f)(6) does not apply. Such insurance companies shall be
treated as a controlled group of corporations separate from any other
corporations which are members of a controlled group described in such
paragraph (a)(2), (a)(3)(i), or (a)(4). For purposes of
[[Page 76911]]
this section, the common parent of the controlled group described in
paragraph (a)(2) of this section shall be referred to as the common
parent of the life insurance controlled group.
(ii) The following examples illustrate the definition of a life
insurance controlled group. In these examples, L indicates a life
company, another letter indicates a nonlife company and each
corporation uses the calendar year as its taxable year.
Example 1. Since January 1, 1999, corporation P has owned all
the stock of corporations and Y, and L1 has owned all the
stock of corporation X. On January 1, 2005, Y acquired all of the
stock of corporation L2. Since L1 and
L2 are members of a parent-subsidiary controlled group of
corporations, such companies are treated as members of a life
insurance controlled group separate from the parent-subsidiary
controlled group consisting of P, X and Y. For purposes of this
section, P is referred to as the common parent of the life insurance
controlled group even though P is not a member of such group.
Example 2. The facts are the same as in Example 1, except that,
beginning with the 2005 tax year, the P affiliated group elected to
file a consolidated return and P made a section 1504(c)(2) election.
Pursuant to paragraph (a)(5)(i) of this section, L1 and
L2 are not members of a separate life insurance
controlled group. Instead, P, X, Y, L1 and L2
constitute one controlled group. See Sec. 1.1502-47(f)(6).
(6) Voting power of stock. For purposes of this section, and
Sec. Sec. 1.1563-2 and 1.1563-3, in determining whether the stock
owned by a person (or persons) possesses a certain percentage of the
total combined voting power of all classes of stock entitled to vote of
a corporation, consideration will be given to all the facts and
circumstances of each case. A share of stock will generally be
considered as possessing the voting power accorded to such share by the
corporate charter, by-laws, or share certificate. On the other hand, if
there is any agreement, whether express or implied, that a shareholder
will not vote his stock in a corporation, the formal voting rights
possessed by his stock may be disregarded in determining the percentage
of the total combined voting power possessed by the stock owned by
other shareholders in the corporation, if the result is that the
corporation becomes a component member of a controlled group of
corporations. Moreover, if a shareholder agrees to vote his stock in a
corporation in the manner specified by another shareholder in the
corporation, the voting rights possessed by the stock owned by the
first shareholder may be considered to be possessed by the stock owned
by such other shareholder if the result is that the corporation becomes
a component member of a controlled group of corporations.
(b) Component members--(1) In general. For purposes of sections
1561 through 1563, a corporation is a component member of a controlled
group of corporations on a December 31 (and with respect to the taxable
year which includes such December 31) if such corporation--
(i) Is a member of such controlled group on such December 31 and is
not treated as an excluded member under paragraph (b)(2) of this
section; or
(ii) Is not a member of such controlled group on such December 31
but is treated as an additional member under paragraph (b)(3) of this
section.
(2) Excluded members. (i) A corporation, which is a member of a
controlled group of corporations on the December 31 included within its
taxable year, but was a member of such group for less than one-half of
the number of days in such taxable year which precede such December 31,
shall be treated as an excluded member of such group on such December
31.
(ii) A corporation which is a member of a controlled group of
corporations on any December 31 shall be treated as an excluded member
of such group on such date if, for its taxable year including such
date, such corporation is--
(A) Exempt from taxation under section 501(a) (except a corporation
which is subject to tax on its unrelated business taxable income under
section 511) or 521 for such taxable year;
(B) A foreign corporation not subject to taxation under section
882(a) for the taxable year;
(C) An S corporation (as defined in section 1361) for purposes of
any tax benefit item described in section 1561(a) to which it is not
subject;
(D) A franchised corporation (as defined in section 1563(f)(4) and
Sec. 1.1563-4); or
(E) An insurance company subject to taxation under section 801,
unless such insurance company (without regard to this paragraph
(b)(2)(ii)(E)) is a component member of a life insurance controlled
group described in paragraph (a)(5)(i) of this section or unless Sec.
1.1502-47(f)(6) applies (which treats a life insurance company, for
which a section 1504(c)(2) election is effective, as a member (whether
eligible or ineligible) of a life-nonlife affiliated group).
(3) Additional members. A corporation shall be treated as an
additional member of a controlled group of corporations on the December
31 included within its taxable year if it--
(i) Is not a member of such group on such December 31;
(ii) Is not described, with respect to such taxable year, in
paragraph (b)(2)(ii)(A), (B), (C), (D), or (E) of this section; and
(iii) Was a member of such group for one-half (or more) of the
number of days in such taxable year which precede such December 31.
(4) Examples. The provisions of this paragraph may be illustrated
by the following examples:
Example 1. Brown, an individual, owns all of the stock of
corporations W and X on each day of 1964. W and X each uses the
calendar year as its taxable year. On January 1, 1964, Brown also
owns all the stock of corporation Y (a fiscal year corporation with
a taxable year beginning on July 1, 1964, and ending on June 30,
1965), which stock he sells on October 15, 1964. On December 1,
1964, Brown purchases all the stock of corporation Z (a fiscal year
corporation with a taxable year beginning on September 1, 1964, and
ending on August 31, 1965). On December 31, 1964, W, X, and Z are
members of the same controlled group. However, the component members
of the group on such December 31 are W, X, and Y. Under paragraph
(b)(2)(i) of this section, Z is treated as an excluded member of the
group on December 31, 1964, since Z was a member of the group for
less than one-half of the number of days (29 out of 121 days) during
the period beginning on September 1, 1964 (the first day of its
taxable year) and ending on December 30, 1964. Under paragraph
(b)(3) of this section, Y is treated as an additional member of the
group on December 31, 1964, since Y was a member of the group for at
least one-half of the number of days (107 out of 183 days) during
the period beginning on July 1, 1964 (the first day of its taxable
year) and ending on December 30, 1964.
Example 2. On January 1, 1964, corporation P owns all the stock
of corporation S, which in turn owns all the stock of corporation S-
1. On November 1, 1964, P purchases all of the stock of corporation
X from the public and sells all of the stock of S to the public.
Corporation X owns all the stock of corporation Y during 1964. P, S,
S-1, X, and Y file their returns on the basis of the calendar year.
On December 31, 1964, P, X, and Y are members of a parent-subsidiary
controlled group of corporations; also, corporations S and S-1 are
members of a different parent-subsidiary controlled group on such
date. However, since X and Y have been members of the parent-
subsidiary controlled group of which P is the common parent for less
than one-half the number of days during the period January 1 through
December 30, 1964, they are not component members of such group on
such date. On the other hand, X and Y have been members of a parent-
subsidiary controlled group of which X is the common parent for at
least one-half the number of days during the period January 1
through December 30, 1964, and therefore they are component members
of such group on December 31, 1964. Also since S and S-1 were
members of the parent-subsidiary controlled group of which P is the
common parent for at least
[[Page 76912]]
one-half the number of days in the taxable years of each such
corporation during the period January 1 through December 30, 1964,
P, S, and S-1 are component members of such group on December 31,
1964.
Example 3. Throughout 1964, corporation M owns all the stock of
corporation F which, in turn, owns all the stock of corporations L-
1, L-2, X, and Y. M is a domestic mutual insurance company subject
to taxation under section 821, F is a foreign corporation not
engaged in a trade or business within the United States, L-1 and L-2
are domestic life insurance companies subject to taxation under
section 802, and X and Y are domestic corporations subject to tax
under section 11 of the Code. Each corporation uses the calendar
year as its taxable year. On December 31, 1964, M, F, L-1, L-2, X,
and Y are members of a parent-subsidiary controlled group of
corporations. However, under paragraph (b)(2)(ii) of this section,
M, F, L-1, and L-2 are treated as excluded members of the group on
December 31, 1964. Thus, on December 31, 1964, the component members
of the parent-subsidiary controlled group of which M is the common
parent include only X and Y. Furthermore, since paragraph
(b)(2)(ii)(E) of this section does not result in L-1 and L-2 being
treated as excluded members of a life insurance controlled group, L-
1 and L-2 are component members of a life insurance controlled group
on December 31, 1964.
(5) Application of constructive ownership rules. For purposes of
paragraphs (b)(2)(i) and (3) of this section, it is necessary to
determine whether a corporation was a member of a controlled group of
corporations for one-half (or more) of the number of days in its
taxable year which precede the December 31 falling within such taxable
year. Therefore, the constructive ownership rules contained in Sec.
1.1563-3(b) (to the extent applicable in making such determination)
must be applied on a day-by-day basis. For example, if P Corporation
owns all the stock of X Corporation on each day of 1964, and on
December 30, 1964, acquires an option to purchase all the stock of Y
Corporation (a calendar-year taxpayer which has been in existence on
each day of 1964), the application of Sec. 1.1563-3(b)(1) on a day-by-
day basis results in Y being a member of the brother-sister controlled
group on only one day of Y's 1964 year which precedes December 31,
1964. Accordingly, since Y is not a member of such group for one-half
or more of the number of days in its 1964 year preceding December 31,
1964, Y is treated as an excluded member of such group on December 31,
1964.
(c) Overlapping groups--(1) In general. If on a December 31 a
corporation is a component member of a controlled group of corporations
by reason of ownership of stock possessing at least 80 percent of the
total value of shares of all classes of stock of the corporation, and
if on such December 31 such corporation is also a component member of
another controlled group of corporations by reason of ownership of
other stock (that is, stock not used to satisfy the at-least-80 percent
total value test) possessing at least 80 percent of the total combined
voting power of all classes of stock of the corporation entitled to
vote, then such corporation shall be treated as a component member only
of the controlled group of which it is a component member by reason of
the ownership of at least 80 percent of the total value of its shares.
(2) Brother-sister controlled groups.
* * * * *
(iv) The provisions of this paragraph (c)(2) may be illustrated by
the following examples (in which it is assumed that all the individuals
are unrelated):
Example 1. (i) On each day of 1970 all the outstanding stock of
corporations M, N, and P is held in the following manner:
----------------------------------------------------------------------------------------------------------------
Corporations
Individuals -----------------------------------------------
M (percent) N (percent) P (percent)
----------------------------------------------------------------------------------------------------------------
A............................................................... 55 40 5
B............................................................... 40 20 40
C............................................................... 5 40 55
----------------------------------------------------------------------------------------------------------------
(ii) Since the more-than-50 percent identical ownership
requirement of section 1563(a)(2) is met with respect to
corporations M and N and with respect to corporations N and P, but
not with respect to corporations M, N, and P, corporation N would,
without the application of this paragraph (c)(2), be a component
member on December 31, 1970, of overlapping groups consisting of M
and N and of N and P. If N does not file an election in accordance
with paragraph (c)(2)(i) of this section, the Internal Revenue
Service will determine the group in which N is to be included.
Example 2. (i) On each day of 1970, all the outstanding stock of
corporations S, T, W, X, and Z is held in the following manner:
----------------------------------------------------------------------------------------------------------------
Corporations
Individuals ----------------------------------------------------------------
S T W X Z
----------------------------------------------------------------------------------------------------------------
D.............................................. 52 52 52 52 52
E.............................................. 40 2 2 2 2
F.............................................. 2 40 2 2 2
G.............................................. 2 2 40 2 2
H.............................................. 2 2 2 40 2
I.............................................. 2 2 2 2 40
----------------------------------------------------------------------------------------------------------------
(ii) On December 31, 1970, the more-than-50 percent identical
ownership requirement of section 1563(a)(2) may be met with regard
to any combination of the corporations but all five corporations
cannot be included as component members of a single controlled group
because the inclusion of all the corporations in a single group
would be dependent upon taking into account the stock ownership of
more than five persons. Therefore, if the corporations do not file a
statement in accordance with paragraph (c)(2)(ii) of this section,
the Internal Revenue Service will determine the group in which each
corporation is to be included. The corporations or the Internal
Revenue Service, as the case may be, may designate that three
corporations be included in one group and two corporations in
another, or that any four corporations be included in one group and
that the remaining corporation not be included in any group.
(d) Transitional rules--(1) In general. Treasury decision 8179
amended paragraph (a)(3)(ii) of this section to revise the definition
of a brother-sister
[[Page 76913]]
controlled group of corporations. In general, those amendments are
effective for taxable years ending on or after December 31, 1970.
(2) Limited nonretroactivity. (i) Under the authority of section
7805(b), the Internal Revenue Service will treat an old group as a
brother-sister controlled group corporations for purposes of applying
sections 401, 404(a), 408(k), 409A, 410, 411, 412, 414, 415, and 4971
of the Code and sections 202, 203, 204, and 302 of the Employment
Retirement Income Security Act of 1974 (ERISA) in a plan year or
taxable year beginning before March 2, 1988, to the extent necessary to
prevent an adverse effect on any old member (or any other corporation),
or on any plan or other entity described in such sections (including
plans, etc., of corporations not part of such old group), that would
result solely from the retroactive effect of the amendment to this
section by TD 8179. An adverse effect includes the disqualification of
a plan or the disallowance of a deduction or credit for a contribution
to a plan. The Internal Revenue Service, however, will not treat an old
member as a member of an old group to the extent that such treatment
will have an adverse effect on that old member.
(ii) Section 7805(b) will not be applied pursuant to paragraph
(d)(2)(i) of this section to treat an old member of an old group as a
member of a brother-sister controlled group to prevent an adverse
effect for a taxable year if, for that taxable year, that old member
treats or has treated itself as not being a member of that old group
for purposes of sections 401, 404(a), 408(k), 409A, 410, 411, 412, 414,
415, and 4971 of the Code and sections 202, 203, 204, and 302 and Title
IV of ERISA for such taxable year (such as by filing, with respect to
such taxable year, a return, amended return, or claim for credit or
refund in which the amount of any deduction, credit, limitation, or tax
due is determined by treating itself as not being a member of the old
group for purposes of those sections). However, the fact that one or
more (but not all) of the old members do not qualify for section
7805(b) treatment because of the preceding sentence will not preclude
that old member (or members) from being treated as a member of the old
group under paragraph (d)(2)(i) of this section in order to prevent the
disallowance of a deduction or credit of another old member (or other
corporation) or to prevent the disqualification of, or other adverse
effect on, another old member's plan (or other entity) described in the
sections of the Code and ERISA enumerated in such paragraph.
(3) Election of general nonretroactivity. In the case of a taxable
year ending on or after December 31, 1970, and before March 2, 1988, an
old group will be treated as a brother-sister controlled group of
corporations for all purposes of the Code for such taxable year if--
(i) Each old member files a statement consenting to such treatment
for such taxable year with the District Director having audit
jurisdiction over its return within six months after March 2, 1988; and
(ii) No old member--
(A) Files or has filed, with respect to such taxable year, a
return, amended return, or claim for credit or refund in which the
amount of any deduction, credit, limitation, or tax due is determined
by treating any old member as not a member of the old group; or
(B) Treats the employees of all members of the old group as not
being employed by a single employer for purposes of sections 401,
404(a), 408(k), 409A, 410, 411, 412, 414, 415, and 4971 of the Code and
sections 202, 203, 204, and 302 of ERISA for such taxable year.
(4) Definitions. For purposes of this paragraph (d)--
(i) An old group is a brother-sister controlled group of
corporations, determined by applying paragraph (a)(3)(ii) of this
section as in effect before the amendments made by Treasury decision
8179, that is not a brother-sister controlled group of corporations,
determined by applying paragraph (a)(3)(ii) of this section as amended
by such Treasury decision; and
(ii) An old member is any corporation that is a member of an old
group.
(5) Election to choose between membership in more than one
controlled group. If--
(i) An old member has filed an election under paragraph (c)(2) of
this section to be treated as a component member of an old group for a
December 31 before March 2, 1988; and
(ii) That corporation would (without regard to such paragraph) be a
component member of more than one brother-sister controlled group (not
including an old group) on the December 31, that corporation may make
an election under that paragraph by filing an amended return on or
before September 2, 1988. This paragraph (d)(5) does not apply to a
corporation that is treated as a member of an old group under paragraph
(d)(3) of this section.
(6) Refunds. See section 6511(a) for period of limitation on filing
claims for credit or refund.
(e) Effective date--(1) Applicability date. Paragraphs (a), (b),
(c)(1), (c)(2)(iv) and (d) of this section apply to taxable years
beginning on or after December 22, 2006. However, taxpayers may apply
these paragraphs to any Federal income tax return filed on or after
December 22, 2006. Paragraphs (c)(2)(i) through (iii) of this section
apply to any original Federal income tax return (including any amended
return filed on or before the due date (including extensions) of such
original return) timely filed on or after May 30, 2006.
(2) Expiration date. The applicability of paragraphs (a), (b),
(c)(1), (c)(2)(iv) and (d) of this section will expire on December 21
2009. The applicability of paragraphs (c)(2)(i) through (iii) of this
section will expire on May 26, 2009.
Sec. 1.1563-3 [Amended]
0
Par. 34. In Sec. 1.1563-3, at the end of paragraph (d)(3) Example 3,
add the phrase ``for purposes of paragraph (a)(3)(ii) of Sec. 1.1563-
1T''.
Sec. 1.1564-1 [Removed]
0
Par. 35. Section 1.1564-1 is removed.
PART 5--TEMPORARY INCOME TAX REGULATIONS UNDER THE REVENUE ACT OF
1978
0
Par. 36. The authority citation for part 5 continues to read as
follows:
Authority: 26 U.S.C. 7805.
Sec. 5.1561-1 [Removed]
0
Par. 37. Section 5.1561-1 is removed.
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
Approved: December 12, 2006.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 06-9758 Filed 12-21-06; 8:45 am]
BILLING CODE 4830-01-P