76904 Federal Register / Vol. 71, No. 246 / Friday, December 22, 2006 / Rules and Regulations 

for rules concerning the allocation and 

apportionment of deductions for 

charitable contributions. In the case of 

corporate taxpayers, transition rules set 

forth in § 1.861–13T provide for the 

gradual phase-in of certain provisions of 

this and the foregoing sections. * * * 

(3) Expiration date. The applicability 

of the paragraphs (a)(5)(ii), (b)(3), (e)(4), 

(f)(4)(i), and paragraph (g) Example 17, 

Example 18, and Example 30 of this 

section, expires on or before July 31, 

2009. 

■ Par. 8. Section 1.6662–6T is amended 

by revising paragraph (d)(2)(ii)(B), first 

sentence to read as follows: 

§ 1.6662–6T Transactions between parties 

described in section 482 and net section 

482 transfer price adjustments (temporary). 

* * * * * 

(d)(2)(ii)(B) A taxpayer’s selection of 

the services cost method for certain 

services, described in § 1.482–9T(b), and 

its application of that method to a 

controlled services transaction will be 

considered reasonable for purposes of 

the specified method requirement only 

if the taxpayer reasonably allocated and 

apportioned costs in accordance with 

§ 1.482–9T(k), reasonably concluded 

that the controlled services transaction 

meets the conditions of § 1.482–

9T(b)(3), and reasonably concluded that 

the controlled services transaction is not 

described in § 1.482–9T(b)(2). * * * 

* * * * * 

Cynthia Grigsby, 

Senior Federal Register Liaison Officer, Legal 

Processing Division, Associate Chief Counsel 

(Procedure and Administration). 

[FR Doc. E6–21908 Filed 12–21–06; 8:45 am] 

BILLING CODE 4830–01–P 

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. 

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 §§ 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, § 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, § 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, 


jlentini on PROD1PC65 with RULES
Federal Register / Vol. 71, No. 246 / Friday, December 22, 2006 / Rules and Regulations 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 § 1.1561–3(b)(2)(i) (a whollyowned 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 § 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, § 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 § 1.1563–1 

A. Reformatting the Regulation 

For the sake of consistency, the IRS 

and Treasury Department are 

reformatting § 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 

§ 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 BrotherSister 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 brothersister controlled group if just the morethan-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 § 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, § 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 

§ 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, § 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 § 1.1563–1(b)(2)(ii)(c) of 


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76906 Federal Register / Vol. 71, No. 246 / Friday, December 22, 2006 / Rules and Regulations 

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 § 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 

§ 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 § 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 

§ 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. § 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. § 1.1502–47 

Section 1.1502–47 provides rules for 

a life-nonlife consolidated group to 

calculate its consolidated taxable 

income. Paragraph (s) of § 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: 

§ 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 

■ Accordingly, 26 CFR parts 1 and 5 are 

amended as follows: 

PART 1—INCOME TAXES 

■ 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. * * * 

§ 1.108–1 [Removed] 

■ Par. 2. Section 1.108–1 is removed 

and reserved. 

§ 4.342–1 [Removed] 

■ Par. 3. Section 1.342–1 is removed. 

§ 1.371–1 [Removed] 

■ Par. 4. Section 1.371–1 is removed. 

§ 1.371–2 [Removed] 

■ Par. 5. Section 1.371–2 is removed. 

§ 1.372–1 [Removed] 

■ Par. 6. Section 1.372–1 is removed. 

§ 1.374–1 [Removed] 

■ Par. 7. Section 1.374–1 is removed. 

§ 1.374–2 [Removed] 

■ Par. 8. Section 1.374–2 is removed. 

§ 1.374–3 [Removed] 

■ Par. 9. Section 1.374–3 is removed. 

§ 1.374–4 [Removed] 

■ Par. 10. Section 1.374–4 is removed. 


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Federal Register / Vol. 71, No. 246 / Friday, December 22, 2006 / Rules and Regulations 76907 

§ 1.924(a)–1T [Amended] 

■ 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 

The fifth sentence of § 1.924(a)–1T(j)(2)(i) ....... a statement ....................................................... completing the form (i.e., Schedule O or any 

successor to that form). 

The fifth sentence of § 1.924(a)–1T(j)(2)(i) ....... § 1.1561–3(b) .................................................... § 1.1561–3T. 

The sixth sentence of § 1.924(a)–1T(j)(2)(i) ...... § 1.1561–3(c) .................................................... § 1.1561–3T(a).

§ 1.1018–1 [Removed] 

■ Par. 11. Section 1.1018–1 is removed. 

■ Par. 12. Section 1.1502–43 is 

amended by revising paragraph (d) and 

adding paragraph (e) to read as follows: 

§ 1.1502–43 Consolidated accumulated 

earnings tax. 

* * * * * 

(d) [Reserved]. For further guidance, 

see § 1.1502–43T(d). 

(e) [Reserved]. For further guidance, 

see § 1.1502–43T(e)(1). 

■ Par. 13. Section 1.1502–43T is added 

to read as follows: 

§ 1.1502–43T Consolidated accumulated 

earnings tax (temporary). 

(a) through (c) [Reserved]. For further 

guidance, see § 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. 

■ Par. 14. Section 1.1502–47 is 

amended by revising paragraph (s) and 

adding paragraph (t) to read as follows: 

§ 1.1502–47 Consolidated returns by lifenonlife groups. 

* * * * * 

(s) [Reserved]. For further guidance, 

see § 1.1502–47T(s). 

(t) [Reserved]. For further guidance, 

see § 1.1502–47T(t)(1). 

■ Par. 15. Section 1.1502–47T is 

amended by revising paragraph (s) and 

adding paragraph (t) to read as follows: 

§ 1.1502–47T Consolidated returns by lifenonlife groups (temporary). 

* * * * * 

(s) Filing requirements. Nonlife 

consolidated taxable income or loss 

under paragraph (h) of § 1.1502–47 shall 

be determined on a separate Form 1120 

or 1120–PC, and consolidated partial 

LICTI under paragraph (j) of § 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 

§ 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 

§ 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. 

■ Par. 16. Section 1.1502–90 is 

amended by: 

■ 1. Removing and reserving the entry 

for § 1.1502–95(e)(8). 

■ 2. Removing and reserving the entry 

for § 1.1502–95(f). 

■ 3. Reserving an entry for § 1.1502–

95(g). 

■ 4. Adding entries for § 1.1502–95T. 

The additions read as follows: 

§ 1.1502–90 Table of contents. 

* * * * * 

§ 1.1502–95 Rules on ceasing to be a 

member of a consolidated group (or loss 

subgroup). 

* * * * * 

(g) [Reserved]. 

§ 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. 

§ 1.1561–0 [Removed] 

■ Par. 17. Section 1.1561–0 is removed. 

§ 1.1561–1 [Removed] 

■ Par. 18. Section 1.1561–1 is removed. 

■ Par. 19. Section 1.1561–1T is added to 

read as follows: 

§ 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. 


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76908 Federal Register / Vol. 71, No. 246 / Friday, December 22, 2006 / Rules and Regulations 

(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 § 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 

§ 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. 

■ 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: 

§ 1.1561–2 Determination of amount of tax 

benefits. 

* * * * * 

(c) [Reserved]. For further guidance, 

see § 1.1561–2T(c). 

* * * * * 

(f) [Reserved]. For further guidance, 

see § 1.1561–2T(f)(1). 

■ Par. 21. Section 1.1561–2T is added to 

read as follows: 

§ 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 § 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. 

§ 1.1561–3 [Removed] 

■ Par. 22. Section 1.1561–3 is removed. 

■ Par. 23. Section 1.1561–3T is added to 

read as follows: 

§ 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. 

§ 1.1562–0 [Removed] 

■ Par. 24. Section 1.1562–0 is removed. 


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§ 1.1562–1 [Removed] 

■ Par. 25. Section 1.1562–1 is removed. 

§ 1.1562–2 [Removed] 

■ Par. 26. Section 1.1562–2 is removed. 

§ 1.1562–3 [Removed] 

■ Par. 27. Section 1.1562–3 is removed. 

§ 1.1562–4 [Removed] 

■ Par. 28. Section 1.1562–4 is removed. 

§ 1.1562–5 [Removed] 

■ Par. 29. Section 1.1562–5 is removed. 

§ 1.1562–6 [Removed] 

■ Par. 30. Section 1.1562–6 is removed. 

§ 1.1562–7 [Removed] 

■ Par. 31. Section 1.1562–7 is removed. 

§ 1.1563–1 [Removed] 

■ Par. 32. Section 1.1563–1 is removed. 

■ 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: 

§ 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 parentsubsidiary 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 § 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 

§ 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 § 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 parentsubsidiary 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 parentsubsidiary 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 parentsubsidiary 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 

§ 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 § 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: 


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CORPORATIONS

Individuals P 

(percent) 

Q 

(percent) 

R 

(percent) 

S 

(percent) 

T 

(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: 

Individuals 

Corporations 

U 

(percent) 

V 

(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: 

Individuals 

Corporations 

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 morethan-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 morethan-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 brothersister 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-than50 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 parentsubsidiary 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 parentsubsidiary 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 

§ 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 


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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 parentsubsidiary 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 

§ 1.1502–47(f)(6). 

(6) Voting power of stock. For 

purposes of this section, and §§ 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 

§ 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 

§ 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 


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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 § 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 

§ 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: 

Individuals 

Corporations 

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: 

Individuals 

Corporations 

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-than50 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 


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Federal Register / Vol. 71, No. 246 / Friday, December 22, 2006 / Rules and Regulations 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 brothersister 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. 

§ 1.1563–3 [Amended] 

■ Par. 34. In § 1.1563–3, at the end of 

paragraph (d)(3) Example 3, add the 

phrase ‘‘for purposes of paragraph 

(a)(3)(ii) of § 1.1563–1T’’. 

§ 1.1564–1 [Removed] 

■ Par. 35. Section 1.1564–1 is removed. 

PART 5—TEMPORARY INCOME TAX 

REGULATIONS UNDER THE REVENUE 

ACT OF 1978 

■ Par. 36. The authority citation for part 

5 continues to read as follows: 

Authority: 26 U.S.C. 7805. 

§ 5.1561–1 [Removed] 

■ 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 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Parts 1 and 31 

[TD 9278] 

RIN 1545–BB31, 1545–AY38, 1545–BC52 

Treatment of Services Under Section 

482; Allocation of Income and 

Deductions From Intangibles; 

Stewardship Expense; Correction 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 


jlentini on PROD1PC65 with RULES