[Federal Register Volume 77, Number 60 (Wednesday, March 28, 2012)]
[Rules and Regulations]
[Pages 18686-18687]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-7533]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1


Apportionment of Tax Items Among the Members of a Controlled 
Group of Corporations

CFR Correction

    In Title 26 of the Code of Federal Regulations, Part 1(Sec.  1.1551 
to End of Part 1), revised as of April 1, 2011, on page 24, in Sec.  
1.1561-2, paragraphs (c) through (f) are added to read as follows:


Sec.  1.1561-2  Special rules for allocating reductions of certain 
section 1561(a) tax-benefit items.

* * * * *
    (c) Accumulated earnings credit. The component members of a 
controlled group of corporations are permitted to allocate the amount 
of the accumulated earnings credit unequally if they have an 
apportionment plan in effect.
    (d) [Reserved]
    (e) Short taxable years not including a December 31st date--(1) 
General rule. If a corporation has a short taxable year not including a 
December 31st date and, after applying the rules of section 1561(b) and 
paragraph (e)(2)(i) of this section, it qualifies as a component member 
of the group with respect to its short taxable year (short-year 
member), then, for purposes of subtitle A of the Internal Revenue Code, 
the amount of any tax-benefit item described in section 1561(b) 
allocated to that component member's short taxable year shall be the 
amount specified in section 1561(a) for that item, divided by the 
number of corporations which are component members of that group on the 
last day of that component member's short taxable year. The component 
members of such group may not apportion, by an apportionment plan, an 
amount of such tax-benefit item to any short-year member that differs 
from equal apportionment of that item.
    (2) Additional rules. For purposes of paragraph (e)(1) of this 
section--
    (i) Section 1563(b) shall be applied as if the last day of the 
taxable year of a short-year member were substituted for December 31st; 
and
    (ii) The term short taxable year does not refer to any portion of a 
tax year of a corporation for which its income is required to be 
included in a consolidated return pursuant to Sec.  1.1502-76(b).
    (3) Calculation of the additional tax. A short-year member (as 
defined in paragraph (e)(1) of this section) for its short taxable year 
calculates its additional tax liability imposed by section 11(b)(1) 
only on its own income, and therefore the subsequent calculation of the 
additional tax liability with regard to the remaining members of the 
group will not include the income of this short-year member.
    (4) Calculation of the alternative minimum tax. If a component 
member has a tax year of less than 12 months, whether or not such tax 
year includes a December 31st date, see section 443(d) for the 
annualization method required for calculating the alternative minimum 
tax.
    (5) Examples. The provisions of this paragraph (e) may be 
illustrated by the following examples:

    Example 1. Formation of a new member of a controlled group-- (i) 
Facts. On January 2, 2007, corporation X transfers cash to newly 
formed corporation Y (which begins business on that date) and 
receives all of the stock of Y in return. X also owns all of the 
stock of corporation Z on each day of 2006 and 2007. X, Y and Z have 
an apportionment plan in effect, apportioning the 15 percent 
taxbracket amount as follows: 40% ($20,000) to each of X and Y and 
20% ($10,000) to Z. X, Y and Z each file a separate return with 
respect to the group's December 31st, 2007 testing date. X is on a 
calendar tax year and Z is on a fiscal tax year ending on March 31. 
Y adopts a fiscal year ending on June 30 and timely files a tax 
return for its short taxable year beginning on January 2, 2007, and 
ending on June 30, 2007.
    (ii) Y's short taxable year. On June 30, 2007, Y is a component 
member of a parentsubsidiary controlled group of corporations 
composed of X, Y and Z. Pursuant to paragraph (e)(1) of this 
section, the group may not apportion any amount of the 15 percent 
tax bracket to Y's short taxable year ending on June 30, 2007. 
Rather, Y is entitled to exactly \1/3\ of such bracket amount, or 
$16,667.
    (iii) The members' subsequent tax years. On December 31st, 2007, 
X, Y and Z are component members of a parent-subsidiary controlled 
group of corporations. For their tax years that include December 
31st, 2007 (X's calendar year ending December 31st, 2007, Z's fiscal 
year ending March 31, 2008 and Y's fiscal year ending June 30, 
2008), X, Y and Z apportion among themselves the full amount of all 
of the applicable tax brackets pursuant to their apportionment plan. 
For example, 40% of the 15 percent tax-bracket amount, or $20,000, 
was apportioned to each of X and Y, and the remaining 10%, or 
$10,000, was apportioned to Z.
    Example 2. Allocating a tax bracket to the short taxable year of 
a liquidated member of a controlled group-- (i) Facts. On January 1, 
2007, corporation P owns all of the stock of corporations 
S<INF>1,</INF> S<INF>2</INF> and S<INF>3</INF> (the P group). Each 
of these four component members of the P group, with respect to the 
group's December 31st, 2007 testing date, files its separate return 
on a calendar year basis. These members have an apportionment plan 
in effect (the P group plan) under which S<INF>1</INF> and 
S<INF>2</INF> are each entitled to 40% of the 15 percent tax-bracket 
amount ($20,000), and P and S<INF>3</INF> are each entitled to 10% 
of the 15 percent tax-bracket amount ($5,000). On May 31, 2007, 
S<INF>1</INF> liquidates and therefore files a return for the short 
taxable year beginning on January 1, 2007, and ending on May 31, 
2007. On July 31, 2007, S<INF>2</INF> liquidates and therefore files 
a return for the short taxable year beginning on January 1, 2007 and 
ending on July 31, 2007. P and S<INF>3</INF> each file a return for 
their 2007 calendar tax years.
    (ii) Apportionment of the 15 percent tax bracket to 
S<INF>1</INF> for its short taxable year. On May 31, 2007, 
S<INF>1</INF> is a component member of the P group composed of P, 
S<INF>1,</INF> S<INF>2</INF> and S<INF>3</INF>. Pursuant to 
paragraph (e)(1) of this section, the group may not apportion any 
amount of the 15 percent tax bracket to S<INF>1</INF>'s short 
taxable year ending on June 30, 2007. Rather, S<INF>1</INF> is 
entitled to exactly \1/4\ of such bracket amount, or $12,500.
    (iii) Apportionment of the 15 percent tax bracket to 
S<INF>2</INF> for its short taxable year. On July 31, 2007, 
S<INF>2</INF> is a component member of the P group composed of P, 
S<INF>2</INF> and S<INF>3.</INF> Pursuant to paragraph (e)(1) of 
this section, the group may not apportion any amount of the 15 
percent tax bracket to S<INF>2</INF>'s short taxable year ending on 
June 30, 2007. Rather, S<INF>2</INF> is entitled to exactly \1/4\ of 
such bracket amount, or $16,667.
    (iv) Apportionment of the 15 percent tax bracket to P and 
S<INF>3</INF> for each of their calendar tax years. On December 
31st, 2007, P and S<INF>3</INF> are component members of the P 
group. Accordingly, for P and S<INF>3</INF>'s 2007 calendar tax 
year, they are each apportioned $25,000 of the 15 percent tax 
bracket, pursuant to the applicable P group plan.
    Example 3. Liquidation of member after its transfer to another 
controlled group-- (i) Facts. The facts are the same as in Example 
2, except that P, on April 30, 2007, sold all of the stock of 
S<INF>2</INF> to the M-N controlled group. At the time of the sale, 
M and N are both unrelated to any members of the P group. As in 
Example 2, S<INF>2</INF> liquidates on July 31, 2007, and therefore 
files a tax return for its short taxable year beginning on January 
1, 2007, and ending on July 31, 2007. Pursuant to the sales 
agreement, the N-M group timely notified P that S<INF>2</INF> had 
liquidated.
    (ii) Controlled group analysis. On April 30, 2007, the date of 
the sale of S<INF>2,</INF> the P group reasonably expected that 
S<INF>2</INF> would be treated as an excluded member with respect to 
its December 31st, 2007 testing date. On that April 30th date, 
S<INF>2</INF> had been a member of the P group for less than one-
half the number of days of what it expected would be a full 2007 
calendar tax year preceding December 31st, 2007 (120 days (January 
1-April 30) out of 364 days (January 1-December 30)). Yet, as a 
result of S<INF>2</INF>'s subsequent liquidation by the M-N group 
prior to December 31st, 2007, S<INF>2</INF> became a component 
member of the P group with respect to the P group's December 31st, 
2007 testing date. With respect to that

[[Page 18687]]

December 31st testing date, S<INF>2</INF> thus was a member of the P 
group for more than one-half of the number of days of its tax year 
ending on July 31, 2007, which days proceeded December 31st, 2007 
(120 days (January 1-April 30 of 2007) out of 211 days (January 1-
July 30 of 2007)). The allocation of the 15 percent tax-bracket 
amount to the P group members is determined in the same manner as in 
Example 2 and, therefore, the bracket amounts allocated to P, 
S<INF>1</INF>, S<INF>2</INF> and S<INF>3</INF> are the same as 
determined in Example 2. The allocation of the bracket amounts would 
be the same if, at the time P sold all of the S<INF>2</INF> stock, 
the parties had made a section 338(h)(10) election.
    Example 4. Short tax year including a December 31st date. 
Corporation X owns all of the stock of corporations Y and Z. X, Y 
and Z each file separate returns. X and Y are on a calendar tax year 
and Z is on a fiscal tax year beginning October 1 and ending 
September 30. On January 2, 2007, Z liquidates. Because Z's final 
tax year (beginning on October 1, 2006 and ending on January 2, 
2007) includes a December 31st date, that is, December 31, 2006, it 
is therefore not subject to the short taxable year rule provided by 
section 1561(b) and paragraph (e) of this section. Accordingly, Z is 
a component member of the X-Y-Z group, for the group's December 
31st, 2006 testing date. Thus, the rules of this paragraph (e) do 
not limit the amount of any of the tax-benefit items of section 
1561(a) available to Z or to this controlled group.
    (f) Effective/applicability date. This section applies to any 
tax year beginning on or after December 21, 2009. However, taxpayers 
may apply this section to any Federal income tax return filed on or 
after December 21, 2009. For tax years beginning before December 21, 
2009, see Sec.  1.1561-2T as contained in 26 CFR part 1 in effect on 
April 1, 2009.

[FR Doc. 2012-7533 Filed 3-27-12; 8:45 am]
BILLING CODE 1505-01-D