Federal Register / Vol. 80, No. 44 / Friday, March 6, 2015 / Proposed Rules 12097 

(i) For airplanes with a Thales pitot probe 

having P/N C16195AA or P/N C16195BA 

installed: After accomplishing the 

replacement required by paragraph (g) of this 

AD. 

(ii) For airplanes without a Thales pitot 

probe having P/N C16195AA or P/N 

C16195BA installed: As of the effective date 

of this AD. 

(2) As of the effective date of this AD, no 

person may install on any airplane a Thales 

pitot probe having part number P/N 50620– 

10. 

(k) Other FAA AD Provisions 

The following provisions also apply to this 

AD: 

(1) Alternative Methods of Compliance 

(AMOCs): The Manager, International 

Branch, ANM–116, Transport Airplane 

Directorate, FAA, has the authority to 

approve AMOCs for this AD, if requested 

using the procedures found in 14 CFR 39.19. 

In accordance with 14 CFR 39.19, send your 

request to your principal inspector or local 

Flight Standards District Office, as 

appropriate. If sending information directly 

to the International Branch, send it to ATTN: 

Sanjay Ralhan, Aerospace Engineer, 

International Branch, ANM–116, Transport 

Airplane Directorate, FAA, 1601 Lind 

Avenue SW., Renton, WA 98057–3356; 

telephone 425–227–1405; fax 425–227–1149. 

Information may be emailed to: 9-ANM-116- 

AMOC-REQUESTS@faa.gov. Before using 

any approved AMOC, notify your appropriate 

principal inspector, or lacking a principal 

inspector, the manager of the local flight 

standards district office/certificate holding 

district office. The AMOC approval letter 

must specifically reference this AD. 

(2) Contacting the Manufacturer: For any 

requirement in this AD to obtain corrective 

actions from a manufacturer, the action must 

be accomplished using a method approved 

by the Manager, International Branch, ANM– 

116, Transport Airplane Directorate, FAA; or 

the European Aviation Safety Agency 

(EASA); or Airbus’s EASA Design 

Organization Approval (DOA). If approved by 

the DOA, the approval must include the 

DOA-authorized signature. 

(l) Related Information 

(1) Refer to Mandatory Continuing 

Airworthiness Information (MCAI) EASA 

Airworthiness Directive 2014–0237R1, dated 

December 5, 2014, for related information. 

This MCAI may be found in the AD docket 

on the Internet at http://www.regulations.gov 

by searching for and locating Docket No. 

FAA–2015–0250. 

(2) For service information identified in 

this AD, contact Airbus, Airworthiness 

Office—EIAS, 1 Rond Point Maurice 

Bellonte, 31707 Blagnac Cedex, France; 

telephone +33 5 61 93 36 96; fax +33 5 61 

93 44 51; email account.airworth-eas@

airbus.com; Internet http://www.airbus.com. 

You may view this service information at the 

FAA, Transport Airplane Directorate, 1601 

Lind Avenue SW., Renton, WA. For 

information on the availability of this 

material at the FAA, call 425–227–1221. 

Issued in Renton, Washington, on February 

19, 2015. 

John P. Piccola, Jr., 

Acting Manager, Transport Airplane 

Directorate, Aircraft Certification Service. 

[FR Doc. 2015–04495 Filed 3–5–15; 8:45 am] 

BILLING CODE 4910–13–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[REG–100400–14] 

RIN 1545–BM14 

Guidance Regarding Reporting Income 

and Deductions of a Corporation That 

Becomes or Ceases To Be a Member 

of a Consolidated Group 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: This document contains 

proposed amendments to the 

consolidated return regulations. These 

proposed regulations would revise the 

rules for reporting certain items of 

income and deduction that are 

reportable on the day a corporation joins 

or leaves a consolidated group. The 

proposed regulations would affect such 

corporations and the consolidated 

groups that they join or leave. 

DATES: Written or electronic comments 

and requests for a public hearing must 

be received by June 4, 2015. 

ADDRESSES: Send submissions to: 

CC:PA:LPD:PR (REG–100400–14), Room 

5203, Internal Revenue Service, P.O. 

Box 7604, Ben Franklin Station, 

Washington, DC 20044. Submissions 

may be hand-delivered Monday through 

Friday between the hours of 8 a.m. and 

4 p.m. to CC:PA:LPD:PR (REG–100400– 

14), Courier’s Desk, Internal Revenue 

Service, 1111 Constitution Avenue NW., 

Washington, DC, or sent electronically 

via the Federal eRulemaking Portal at 

http://www.regulations.gov/ (IRS REG– 

100400–14). 

FOR FURTHER INFORMATION CONTACT: 

Concerning the proposed regulations, 

Russell G. Jones, (202) 317–6847; 

concerning the submission of comments 

or to request a public hearing, 

Oluwafunmilayo (Funmi) P. Taylor, 

(202) 317–6901 (not toll-free numbers). 

SUPPLEMENTARY INFORMATION: 

Background and Explanation of 

Provisions 

1. Introduction 

This notice of proposed rulemaking 

contains proposed regulations that 

amend 26 CFR part 1 under section 

1502 of the Internal Revenue Code 

(Code). Section 1502 authorizes the 

Secretary to prescribe regulations for 

corporations that join in filing a 

consolidated return, and it expressly 

provides that those rules may be 

different from the provisions of chapter 

1 of subtitle A of the Code that would 

apply if those corporations filed 

separate returns. Terms used in the 

consolidated return regulations 

generally are defined in § 1.1502–1. 

These proposed regulations provide 

guidance under § 1.1502–76, which 

prescribes rules for determining the 

taxable period in which items of 

income, gain, deduction, loss, and credit 

(tax items) of a corporation that joins in 

filing a consolidated return are 

included. Section 1.1502–76(b) 

provides, in part, that if a corporation 

(S) becomes or ceases to be a member 

of a consolidated group during a 

consolidated return year, S must 

include in the consolidated return its 

tax items for the period during which it 

is a member. S also must file a separate 

return (including a consolidated return 

of another group) that includes its items 

for the period during which it is not a 

member. 

2. Prior and Current Regulations 

On September 8, 1966, the IRS and 

the Treasury Department promulgated 

regulations under § 1.1502–76 in TD 

6894, 31 FR 11794 (1966 regulations). 

Section 1.1502–76(b) of the 1966 

regulations was silent regarding the 

treatment of S’s tax items that accrued 

on the day S became or ceased to be a 

member of a consolidated group (S’s 

change in status). Thus, whether S’s tax 

items for the day of S’s change in status 

should have been reflected on S’s tax 

return for the short period ending with 

S’s change in status, or whether these 

tax items should have been reflected 

instead on S’s tax return for the short 

period beginning after S’s change in 

status, was unclear under the 1966 

regulations. 

On August 15, 1994, the IRS and the 

Treasury Department published final 

regulations (TD 8560; 59 FR 41666) 

under § 1.1502–76(b) (current 

regulations) that revised the 1966 

regulations to eliminate uncertainty 

regarding the treatment of tax items 

recognized by S on the day of S’s change 

in status. Under the general rule of 

§ 1.1502–76(b)(1)(ii)(A)(1) of the current 

regulations (current end of the day rule), 

S is treated for all federal income tax 

purposes as becoming or ceasing to be 

a member of a consolidated group at the 

end of the day of S’s change in status, 

and S’s tax items that are reportable on 


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12098 Federal Register / Vol. 80, No. 44 / Friday, March 6, 2015 / Proposed Rules 

that day generally are included in the 

tax return for the taxable year that ends 

as a result of S’s change in status. 

The notice of proposed rulemaking 

that proposed the current end of the day 

rule (57 FR 53634, Nov. 12, 1992) (1992 

NPRM) indicated that the current end of 

the day rule was intended to provide 

certainty and prevent inconsistent 

reporting of S’s items between the 

consolidated and separate returns. Prior 

to the 1992 NPRM, some taxpayers had 

inferred (based upon the administrative 

practice of the IRS) that the inclusion in 

a particular return of a tax item of S 

incurred on the day of S’s change in 

status depended on a factual 

determination of whether the 

transaction occurred before or after 

noon on the day of S’s change in status 

(the so-called ‘‘lunch rule’’). 

There are two exceptions to the 

current end of the day rule. The first 

exception (in § 1.1502–76(b)(1)(ii)(A)(2)) 

provides that if a corporation is an S 

corporation (within the meaning of 

section 1361(a)(1)) immediately before 

becoming a member of a consolidated 

group, the corporation becomes a 

member of the group at the beginning of 

the day the termination of its S 

corporation election is effective 

(termination date), and its taxable year 

ends for all federal income tax purposes 

at the end of the preceding day (S 

corporation exception). The S 

corporation exception was added by TD 

8842 (64 FR 61205; Nov. 10, 1999) to 

eliminate the need to file a one-day C 

corporation return for the day an S 

corporation is acquired by a 

consolidated group. No additional rule 

was necessary with respect to a 

qualified S corporation subsidiary 

(QSub) of an S corporation that joins a 

consolidated group. See § 1.1361– 

5(a)(3). 

Added at the same time as the current 

end of the day rule, the second 

exception (in § 1.1502–76(b)(1)(ii)(B)) 

provides that if a transaction occurs on 

the day of S’s change in status that is 

properly allocable to the portion of S’s 

day after the event resulting in S’s 

change in status, S and certain related 

persons must treat the transaction as 

occurring at the beginning of the 

following day for all federal income tax 

purposes (current next day rule). The 

current next day rule was added in 

response to comments to the 1992 

NPRM suggesting that the current end of 

the day rule created a ‘‘seller beware’’ 

problem with respect to S’s tax items 

arising on the day of S’s change in status 

but after the event causing S’s change in 

status. Commenters suggested that, for 

example, if consolidated group A sold 

the stock of S to consolidated group B, 

and group B caused S to sell one of its 

divisions on the same day it was 

acquired by group B, the gain from the 

sale of the division would be 

inappropriately allocable to group A’s 

consolidated return. Commenters 

recommended that final regulations 

adopt rules substantially similar to the 

current next day rule to protect the 

reasonable expectations of sellers and 

buyers of S’s stock. Commenters 

suggested that a rule providing this type 

of protection was most appropriate with 

respect to extraordinary items, and some 

commenters suggested that a rule 

similar to the current next day rule 

should operate unless the seller and 

buyer of S agreed otherwise. 

3. Proposed Regulations 

A. Overview 

The IRS and the Treasury Department 

have determined that changes should be 

made to the regulations under § 1.1502– 

76(b) due to uncertainty regarding the 

appropriate application of the current 

next day rule. These proposed 

regulations address this concern as well 

as additional concerns with the current 

regulations, as summarized in this 

section 3.A. and discussed in greater 

detail in sections 3.B. through 3.K. of 

this preamble. 

To provide certainty, the proposed 

regulations generally clarify the period 

in which S must report certain tax items 

by replacing the current next day rule 

with a new exception to the end of the 

day rule (proposed next day rule) that 

is more narrowly tailored to clearly 

reflect taxable income and prevent 

certain post-closing actions from 

adversely impacting S’s tax return for 

the period ending on the day of S’s 

change in status. The proposed next day 

rule applies only to ‘‘extraordinary 

items’’ (as defined in § 1.1502– 

76(b)(2)(ii)(C) of the proposed 

regulations) that result from transactions 

that occur on the day of S’s change in 

status, but after the event causing the 

change, and that would be taken into 

account by S on that day. This rule 

requires those extraordinary items to be 

allocated to S’s tax return for the period 

beginning the next day. The proposed 

next day rule is expressly inapplicable 

to any extraordinary item that arises 

simultaneously with the event that 

causes S’s change in status. 

The proposed regulations further 

clarify that fees for services rendered in 

connection with S’s change in status 

constitute a ‘‘compensation-related 

deduction’’ for purposes of § 1.1502– 

76(b)(2)(ii)(C)(9) (if payment of the fees 

would give rise to a deduction), and 

therefore an extraordinary item. The 

proposed regulations also clarify that 

the anti-avoidance rule in § 1.1502– 

76(b)(3) may apply to situations in 

which a person modifies an existing 

contract or other agreement in 

anticipation of S’s change in status. 

The proposed regulations also add a 

rule (previous day rule, described in 

section 3.C. of this preamble) to clarify 

the application of the S corporation 

exception. In addition, the proposed 

regulations limit the scope of the end of 

the day rule, the next day rule, the S 

corporation exception, and the previous 

day rule to determining the period in 

which S must report certain tax items 

and determining the treatment of an 

asset or a tax item for purposes of 

sections 382(h) and 1374 (as opposed to 

applying for all federal income tax 

purposes). 

Additionally, the proposed 

regulations provide that short taxable 

years resulting from intercompany 

transactions to which section 381(a) 

applies (intercompany section 381 

transactions) are not taken into account 

in determining the carryover period for 

a tax item of the distributor or transferor 

member in the intercompany section 

381 transaction or for purposes of 

section 481(a). Furthermore, the 

proposed regulations provide that the 

due date for filing S’s separate return for 

the taxable year that ends as a result of 

S becoming a member is not accelerated 

if S ceases to exist in the same 

consolidated return year. 

The proposed regulations make 

several other conforming and nonsubstantive changes to the current 

regulations as well. Finally, the 

proposed regulations add several 

examples to illustrate the proposed 

rules. 

The IRS and the Treasury Department 

note that neither the current regulations 

nor the proposed regulations are 

intended to supersede general rules in 

the Code and regulations concerning 

whether an item is otherwise includible 

or deductible. 

B. Proposed Next Day Rule 

The current next day rule provides 

that S and certain related persons must 

treat a transaction as occurring at the 

beginning of the day following S’s 

change in status if the transaction 

occurs on the day of S’s change in status 

and is ‘‘properly allocable’’ to the 

portion of that day following S’s change 

in status. The IRS and the Treasury 

Department believe, however, that the 

standards provided in the current next 

day rule for determining whether a 

transaction is ‘‘properly allocable’’ to 

the portion of S’s day after the event 

resulting in S’s change in status have 


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Federal Register / Vol. 80, No. 44 / Friday, March 6, 2015 / Proposed Rules 12099 

been inappropriately interpreted by 

taxpayers. The current next day rule 

provides that a determination of 

whether a transaction is ‘‘properly 

allocable’’ to the portion of S’s day after 

the event resulting in S’s change in 

status is respected if it is ‘‘reasonable 

and consistently applied by all affected 

persons.’’ In determining whether an 

allocation is ‘‘reasonable,’’ certain 

factors enumerated in the current 

regulations are to be considered, 

including whether tax items arising 

from the same transaction are allocated 

inconsistently. Some taxpayers have 

interpreted these rules as providing 

flexibility in reporting tax items that 

result from transactions occurring on 

the day of S’s change in status so that 

those items can be allocated by 

agreement to the day of, or to the day 

following, S’s change in status. The IRS 

and the Treasury Department view this 

interpretation of the current next day 

rule as inappropriate because it 

effectively would permit taxpayers to 

elect the income tax return on which 

these tax items are reported and 

therefore may not result in an allocation 

that clearly reflects taxable income. This 

electivity is inconsistent with the 

purpose of § 1.1502–76(b) to clearly 

reflect the income of S and the 

consolidated group. Further, the IRS 

and the Treasury Department have 

observed that the current regulations 

create controversy between taxpayers 

and the IRS as to whether certain of S’s 

tax items that become reportable on the 

day of S’s change in status are properly 

allocated to S’s tax return for the period 

ending that day rather than to S’s tax 

return for the period beginning the next 

day. 

The proposed next day rule is 

intended to eliminate the perceived 

electivity and the source of these 

controversies. Under the proposed 

regulations, the application of the 

proposed next day rule is mandatory 

rather than elective—if an extraordinary 

item results from a transaction that 

occurs on the day of S’s change in 

status, but after the event resulting in 

the change, and if the item would be 

taken into account by S on that day, the 

transaction resulting in the 

extraordinary item is treated as 

occurring at the beginning of the 

following day for purposes of 

determining the period in which S must 

report the item. 

The proposed regulations also provide 

that the proposed next day rule is 

inapplicable to items that arise 

simultaneously with the event that 

causes S’s change in status. Under the 

end of the day rule (as revised by these 

proposed regulations), those items are 

reported on S’s tax return for the short 

period ending on the day of S’s change 

in status. The proposed regulations are 

expected to afford taxpayers and the IRS 

greater certainty regarding the period to 

which S’s tax items resulting from such 

a transaction are allocated. 

C. Previous Day Rule 

As noted in section 2 of this 

preamble, the special rule for S 

corporations provides an exception to 

the end of the day rule if an S 

corporation joins a consolidated group. 

To avoid creating a one-day C 

corporation tax return for the 

termination date, the S corporation 

exception provides that S becomes a 

member of the group at the beginning of 

the termination date, and that S’s 

taxable year ends for all federal income 

tax purposes at the end of the preceding 

day. 

Although these proposed regulations 

retain the S corporation exception, the 

proposed regulations add a previous day 

rule that mirrors the principles of the 

proposed next day rule. Whereas the 

proposed next day rule requires 

extraordinary items resulting from 

transactions that occur on the day of S’s 

change in status (but after the event 

causing the change) to be allocated to 

S’s tax return for the short period that 

begins the following day, the previous 

day rule requires extraordinary items 

resulting from transactions that occur on 

the termination date (but before or 

simultaneously with the event causing 

S’s status as an S corporation to 

terminate) to be allocated to S’s tax 

return for the short period that ends on 

the previous day (that is, the day 

preceding the termination date). 

D. Revised Scope of the End of the Day 

Rule and Related Rules 

Under the current end of the day rule, 

S becomes or ceases to be a member at 

the end of the day on which its status 

as a member changes, and its tax year 

ends ‘‘for all federal income tax 

purposes’’ at the end of that day. 

However, applying the end of the day 

rule for purposes other than the 

reporting of S’s tax items could yield 

results inconsistent with other 

consolidated return rules. For example, 

under §§ 1.1502–13 and 1.1502– 

80(d)(1), if a member contributes 

property subject to a liability in excess 

of the property’s basis to a nonmember 

in exchange for the nonmember’s stock, 

and if the transferee becomes a member 

of the transferor’s consolidated group as 

a result of the exchange, the transaction 

is treated as an intercompany 

transaction and section 357(c) does not 

apply. However, if the end of the day 

rule applies ‘‘for all federal income tax 

purposes,’’ it may be unclear whether 

the transferee becomes a member 

‘‘immediately after the transaction,’’ 

whether the transaction is an 

intercompany transaction, and whether 

section 357(c) could apply to the 

transaction. 

To eliminate possible confusion 

arising from application of the current 

end of the day rule and related rules, 

these proposed regulations provide that 

the end of the day rule, the proposed 

next day rule, the S corporation 

exception, and the previous day rule 

apply for purposes of determining the 

period in which S must report its tax 

items, as well as for purposes of sections 

382(h) and 1374 (discussed in section 

3.I. of this preamble). 

E. Extraordinary Items 

The proposed next day rule 

mandatorily applies to extraordinary 

items that result from a transaction that 

occurs on the day of S’s change in status 

but after the event that causes the 

change. In contrast, the previous day 

rule mandatorily applies to 

extraordinary items that result from a 

transaction that occurs on the day of S’s 

change in status but before or 

simultaneously with the event that 

causes S’s status as an S corporation to 

terminate. 

One category of extraordinary items, 

set forth in § 1.1502–76(b)(2)(ii)(C)(9) of 

the current regulations, applies to any 

‘‘compensation-related deduction in 

connection with S’s change in status.’’ 

The proposed regulations clarify that 

this category of extraordinary items 

includes (among other items) a 

deduction for fees for services rendered 

in connection with S’s change in status. 

For example, if payment of a fee for the 

services of a financial adviser is 

contingent upon a successful 

acquisition of S’s stock, to the extent the 

fee gives rise to a deduction, the 

deduction for the accrual of that 

expense is an extraordinary item, and 

the deduction is allowable only in S’s 

taxable year that ends at the close of the 

day of the change. 

The IRS and the Treasury Department 

request comments as to whether the list 

of extraordinary items set forth in 

§ 1.1502–76(b)(2)(ii)(C) should be 

modified to include any item not 

currently listed or whether any item 

currently included should be deleted or 

modified. Specifically, the IRS and the 

Treasury Department are considering 

whether the item in § 1.1502– 

76(b)(2)(ii)(C)(5) (‘‘[a]ny item carried to 

or from any portion of the original year 

(e.g., a net operating loss carried under 

section 172), and any section 481(a) 


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12100 Federal Register / Vol. 80, No. 44 / Friday, March 6, 2015 / Proposed Rules 

adjustment’’) should be modified to 

include ‘‘any section 481(a) adjustment 

or the acceleration thereof,’’ and 

whether the item in § 1.1502– 

76(b)(2)(ii)(C)(6) (‘‘[t]he effects of any 

change in accounting method initiated 

by the filing of the appropriate form 

after S’s change in status’’) should 

continue to be included in the list of 

extraordinary items. 

The IRS and the Treasury Department 

also request comments as to whether 

any extraordinary item should be 

excluded, in whole or in part, from 

application of the next day rule and the 

previous day rule. In particular, the IRS 

and the Treasury Department request 

comments as to whether the 

extraordinary items set forth in 

§ 1.1502–76(b)(2)(ii)(C)(5) and (6) of the 

current regulations should be excluded, 

in whole or in part, from application of 

these rules. 

F. Ratable Allocation 

Rather than require S to perform a 

closing of the books on the day of its 

change in status, the current regulations 

under § 1.1502–76(b)(2)(ii) permit S’s 

tax items, other than the extraordinary 

items, to be ratably allocated between 

S’s two short taxable years if certain 

conditions are met. The IRS and the 

Treasury Department request comments 

as to whether S no longer should be 

permitted to elect to ratably allocate its 

tax items between the periods ending 

and beginning with S’s change in status. 

G. Certain Foreign Entities 

Solely for purposes of determining the 

short taxable year of S to which the 

items of a passthrough entity in which 

S owns an interest are allocated, 

§ 1.1502–76(b)(2)(vi)(A) of the current 

regulations generally provides that S is 

treated as selling or exchanging its 

entire interest in the entity immediately 

before S’s change in status. This rule 

does not apply to certain foreign 

corporations the ownership of which 

may give rise to deemed income 

inclusions under the Code. In addition, 

a deemed income inclusion from a 

foreign corporation and a deferred tax 

amount from a passive foreign 

investment company under section 1291 

are treated as extraordinary items under 

§ 1.1502–76(b)(2)(ii)(C)(11). The IRS and 

the Treasury Department request 

comments as to whether such deemed 

income inclusions or deferred tax 

amounts should continue to be treated 

as extraordinary items, whether rules 

having similar effects to the rule in 

§ 1.1502–76(b)(2)(vi)(A) relating to 

passthrough entities should be adopted 

for controlled foreign corporations and 

passive foreign investment companies 

in which S owns an interest, and 

whether any other changes should be 

made to § 1.1502–76(b)(2)(vi) of the 

current regulations. 

H. Anti-Avoidance Rule 

Under § 1.1502–76(b)(3) of the current 

regulations, if any person acts with a 

principal purpose contrary to the 

purposes of § 1.1502–76(b) to 

substantially reduce the federal income 

tax liability of any person (prohibited 

purpose), adjustments must be made as 

necessary to carry out the purposes of 

§ 1.1502–76 of the current regulations 

(anti-avoidance rule). The proposed 

regulations clarify that the antiavoidance rule may apply to situations 

in which a person modifies an existing 

contract or other agreement in 

anticipation of S’s change in status in 

order to shift an item between the 

taxable years that end and begin as a 

result of S’s change in status if such 

actions are undertaken with a 

prohibited purpose. The IRS and the 

Treasury Department request comments 

regarding this proposed amendment to 

the anti-avoidance rule. 

I. Coordination With Sections 382(h) 

and 1374 

1. Section 382 

For purposes of section 382, the term 

recognized built-in loss (RBIL) means 

any loss recognized during the 

recognition period on the disposition of 

any asset held by the loss corporation 

immediately before the date of the 

section 382 ownership change (change 

date), to the extent the loss reflects a 

built-in loss on the change date. Section 

382(h)(2)(B). The term recognition 

period means the five-year period 

beginning on the change date. Section 

382(h)(7)(A). 

Section 382(h)(1)(B) generally 

provides that if a loss corporation has a 

net unrealized built-in loss (NUBIL), 

then any RBIL taken into account in a 

taxable year any portion of which falls 

in the recognition period (recognition 

period taxable year) is treated as a 

deduction subject to the loss 

corporation’s section 382 limitation as if 

the RBIL were a pre-change loss. The 

amount of RBILs subject to the section 

382 limitation in any recognition period 

taxable year is limited, however, to the 

excess of the NUBIL over total RBILs in 

prior taxable years ending in the 

recognition period. (The amount of such 

excess is referred to in this preamble as 

the outstanding NUBIL balance.) In 

other words, the amount of the NUBIL 

limits the amount of RBILs that are 

treated as pre-change losses, and any 

built-in loss treated as an RBIL further 

reduces the outstanding NUBIL balance. 

In many cases, the event that causes 

S’s change in status for purposes of 

§ 1.1502–76(b)(1)(ii) also causes S to 

undergo an ownership change for 

purposes of section 382. Thus, an item 

of deduction or loss that becomes 

reportable on the day of S’s change in 

status falls within the recognition 

period beginning that day, even if the 

item is allocated to S’s short period 

ending that day under the end of the 

day rule. As a consequence, an item that 

should be a pre-change loss is treated as 

an RBIL that reduces the outstanding 

NUBIL balance. For example, assume 

consolidated group A sells all of S’s 

stock to consolidated group B. If on the 

day of S’s change in status (but before 

the event causing the change), S 

recognizes a loss on the sale of an asset, 

under the end of the day rule the loss 

is reported on group A’s consolidated 

return. However, notwithstanding that 

the loss may not be claimed by group B, 

the loss may be treated as an RBIL and 

reduce the outstanding NUBIL balance. 

To prevent such an outcome, these 

proposed regulations provide that, for 

purposes of section 382(h), items 

includible in the short taxable year that 

ends as a result of S’s change in status 

(including items allocated to that 

taxable year under the end of the day 

rule) are not treated as occurring in the 

recognition period. Rather, only items 

includible in S’s short taxable year that 

begins as a result of S’s change in status 

(including items allocated to that 

taxable year under the proposed next 

day rule) are treated as occurring in the 

recognition period. Therefore, the 

beginning of the recognition period for 

purposes of section 382(h) would 

correspond with the beginning of S’s 

short taxable year that begins on the day 

after S’s change in status. 

2. Section 1374 

Section 1374 generally imposes a 

corporate-level tax (section 1374 tax) on 

the recognition of gain by an S 

corporation that formerly was a C 

corporation (or that acquired assets from 

a C corporation in a transferred basis 

transaction) during a recognition period 

specified in section 1374(d)(7) (section 

1374 recognition period), but only to the 

extent of the corporation’s net 

recognized built-in gain (as defined in 

section 1374(d)(2)) for a given taxable 

year. The section 1374 tax also applies 

to certain tax items attributable to the 

corporation’s C corporation taxable 

years. In addition, regulations under 

section 337(d) extend section 1374 

treatment to (1) a C corporation’s 

conversion to a real estate investment 


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trust (REIT), regulated investment 

company (RIC), and certain tax-exempt 

entities, or (2) certain cases in which a 

REIT, RIC, or tax-exempt entity acquires 

assets in a transferred basis transaction 

from a C corporation. 

As with the application of section 

382(h), the event that causes S’s change 

in status for purposes of § 1.1502– 

76(b)(1)(ii) may be the event that results 

in S being a corporation that is subject 

to the section 1374 tax. Therefore, it is 

necessary to determine in which return 

(the group’s consolidated return or S’s 

separate return beginning the day after 

S’s change in status) S’s tax items for the 

day of S’s change in status are included. 

Similarly, if the event that causes S’s 

change in status for purposes of 

§ 1.1502–76(b)(1)(ii) is the event that 

results in S ceasing to be a corporation 

subject to the section 1374 tax, it is 

necessary to determine in which return 

(the group’s consolidated return or S’s 

separate return for the period ending the 

day before S’s change in status) S’s tax 

items for the day of S’s change in status 

are included. The proposed regulations 

thus provide that if S ceases to be a 

corporation subject to the section 1374 

tax upon becoming a member, or if S 

elects to be a corporation that is subject 

to the section 1374 tax for its first 

separate return year after ceasing to be 

a member, S’s items of recognized builtin gain or loss for purposes of section 

1374 will include only the amounts 

reported on S’s separate return 

(including items reported on that return 

under the previous day rule or the next 

day rule). 

J. Intercompany Section 381 

Transactions 

Under the current consolidated return 

regulations, if a member distributes or 

transfers its assets to another 

corporation that is a member 

immediately after the distribution or 

transfer in an intercompany section 381 

transaction, and if the distributor or 

transferor member has a net operating 

loss carryover or a net capital loss 

carryover, the distributor or transferor 

member will not be treated as having a 

short taxable year for purposes of 

determining the years to which the loss 

may be carried. Sections 1.1502– 

21(b)(3)(iii) and 1.1502–22(b)(4). 

These proposed regulations would 

amend current law by moving these 

rules to § 1.1502–76(b)(2)(i) and making 

conforming changes to §§ 1.1502– 

21(b)(3)(iii) and 1.1502–22(b)(4). In 

addition, these proposed regulations 

would expand these rules by providing 

that a short taxable year of the 

distributor or transferor member by 

reason of an intercompany section 381 

transaction is not counted as a separate 

taxable year for purposes of determining 

either the taxable years to which any tax 

attribute of the distributor or transferor 

member may be carried or the taxable 

years in which an adjustment under 

section 481(a) is taken into account. No 

inference should be drawn from the 

proposed changes to these rules as to 

whether a short taxable year of a 

member resulting from an intercompany 

section 381 transaction is counted under 

current law for purposes of determining 

the years to which a tax credit may be 

carried or in which a section 481 

adjustment is taken into account. 

K. Due Date for Filing Tax Returns 

The proposed regulations also 

eliminate a provision that could cause 

taxpayers to inadvertently miss a return 

filing deadline. Under § 1.1502–76(b)(4) 

of the current regulations, if S joins a 

consolidated group, the due date for 

filing S’s separate return is the earlier of 

the due date (with extensions) of the 

group’s return or the due date (with 

extensions) of S’s return if S had not 

joined the group. If S goes out of 

existence during the consolidated return 

year in which S joins a group, its taxable 

year would end. Under section 6072, the 

due date for S’s short period return 

would be the 15th day of the third 

month (ninth month, with extensions) 

following the date on which S ceases to 

exist. Accordingly, if S ceases to exist 

during the same consolidated return 

year in which it becomes a member, the 

due date for S’s tax return for the short 

period that ended as a result of S 

becoming a member could be 

accelerated. To prevent a taxpayer from 

inadvertently missing a filing date and 

being subject to potential penalties for 

filing a late return, the proposed 

regulations provide that if S goes out of 

existence in the same consolidated 

return year in which it becomes a 

member, the due date for filing S’s 

separate return is determined without 

regard to S’s ceasing to exist. 

L. Non-Substantive Changes 

In addition to the changes described 

in this preamble, the proposed 

regulations make several nonsubstantive changes to the current 

regulations, including moving an 

example concerning § 1.1502–80(d) 

from the text of § 1.1502– 

76(b)(1)(ii)(B)(2) of the current 

regulations to § 1.1502–13(c)(7)(ii), 

Example 3(e). 

Effective/Applicability Date 

The amendments to §§ 1.1502– 

21(b)(3)(iii), 1.1502–22(b)(4)(i), 1.1502– 

76(b)(2)(i), and 1.1502–76(b)(4) will 

apply to consolidated return years 

beginning on or after the date these 

regulations are published as final 

regulations in the Federal Register. The 

other amendments to § 1.1502–76(b) 

will apply to corporations becoming or 

ceasing to be members of consolidated 

groups on or after the date these 

regulations are published as final 

regulations in the Federal Register. 

Special Analyses 

It has been determined that this notice 

of proposed rulemaking is not a 

significant regulatory action as defined 

in Executive Order 12866, as 

supplemented by Executive Order 

13563. Therefore, a regulatory 

assessment is not required. It is hereby 

certified that these regulations will not 

have a significant impact on a 

substantial number of small entities. 

This certification is based on the fact 

that the regulations apply only to 

transactions involving corporations that 

file consolidated federal income tax 

returns, and that such corporations tend 

to be larger businesses. Accordingly, a 

Regulatory Flexibility Analysis under 

the Regulatory Flexibility Act (5 U.S.C. 

chapter 6) is not required. Pursuant to 

section 7805(f) of the Code, these 

regulations will be submitted to the 

Chief Counsel for Advocacy of the Small 

Business Administration for comment 

on their impact on small business. 

Comments and Public Hearing 

Before these proposed regulations are 

adopted as final regulations, 

consideration will be given to any 

comments that are submitted timely to 

the IRS as prescribed in this preamble 

under the ‘‘Addresses’’ heading. The 

IRS and the Treasury Department 

request comments on all aspects of the 

proposed rules. All comments will be 

available for public inspection and 

copying. A public hearing may be 

scheduled if requested in writing by any 

person who timely submits written 

comments. If a public hearing is 

scheduled, notice of the date, time, and 

place of the hearing will be published 

in the Federal Register. 

Drafting Information 

The principal author of these 

proposed regulations is Russell G. Jones 

of the Office of Associate Chief Counsel 

(Corporate). However, other personnel 

from the IRS and the Treasury 

Department participated in their 

development. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 


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Proposed Amendments to the 

Regulations 

Accordingly, 26 CFR part 1 is 

proposed to be amended as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 continues to read in part as 

follows: 

Authority: 26 U.S.C. 7805 * * * 

Section 1.1361–5 also issued under 26 

U.S.C. 1361. * * * 

Section 1.1362–3 also issued under 26 

U.S.C. 1362. * * * 

Section 1.1502–13 also issued under 26 

U.S.C. 1502. * * * 

Section 1.1502–21 also issued under 26 

U.S.C. 1502. * * * 

Section 1.1502–22 also issued under 26 

U.S.C. 1502. * * * 

Section 1.1502–28 also issued under 26 

U.S.C. 1502. * * * 

Section 1.1502–76 also issued under 26 

U.S.C. 382(m) and 26 U.S.C. 1502. * * * 

§ 1.1361–5 [Amended] 

■ Par. 2. Section 1.1361–5 is amended: 

■ 1. In paragraph (a)(3), by removing 

‘‘§ 1.1502–76(b)(1)(ii)(A)(2) (relating to a 

special rule’’ and adding ‘‘§ 1.1502– 

76(b)(1)(ii)(B) (relating to special rules’’ 

in its place. 

■ 2. In paragraph (a)(4), Example 4, by 

removing ‘‘§ 1.1502–76(b)(1)(ii)(A)(2)’’ 

and adding ‘‘§ 1.1502–76(b)(1)(ii)(B)(1)’’ 

in its place. 

§ 1.1362–3 [Amended] 

■ Par. 3. Section 1.1362–3 is amended 

in paragraph (a) by removing ‘‘§ 1.1502– 

76(b)(1)(ii)(A)(2)’’ and adding 

‘‘§ 1.1502–76(b)(1)(ii)(B)’’ in its place. 

■ Par. 4. Section 1.1502–13 is amended 

by adding Example 3(e) to paragraph 

(c)(7)(ii) to read as follows: 

§ 1.1502–13 Intercompany transactions. 

* * * * * 

(c) * * * 

(7) * * * 

(ii) * * * 

Example 3. * * * 

(e) Liability in excess of basis. The facts are 

the same as in paragraph (a) of this Example 

3, except that S and B are not members of the 

same consolidated group immediately before 

S’s transfer of the land to B, and the land is 

encumbered with an $80 liability. 

Immediately after the transfer, S and B are 

members of the same consolidated group. 

Thus, the transfer is an intercompany 

transaction to which section 357(c) does not 

apply pursuant to § 1.1502–80(d). 

* * * * * 

■ Par. 5. Section 1.1502–21 is amended 

by revising paragraph (b)(3)(iii) and 

adding paragraph (h)(1)(iv) to read as 

follows: 

§ 1.1502–21 Net operating losses. 

* * * * * 

(b) * * * 

(3) * * * 

(iii) Short years in connection with 

intercompany transactions to which 

section 381(a) applies. If a member 

distributes or transfers assets in an 

intercompany transaction to which 

section 381(a) applies, see § 1.1502– 

76(b)(2)(i). 

* * * * * 

(h) * * * 

(1) * * * 

(iv) Paragraph (b)(3)(iii) of this section 

applies to consolidated return years 

beginning on or after the date these 

regulations are published as final 

regulations in the Federal Register. For 

transactions occurring before the date 

these regulations are published as final 

regulations in the Federal Register, see 

§ 1.1502–21(b) as contained in 26 CFR 

part 1, revised as of April 1 preceding 

the date these regulations are published 

as final regulations in the Federal 

Register. 

* * * * * 

■ Par. 6. Section 1.1502–22 is amended 

by: 

■ 1. Revising paragraph (b)(4)(i). 

■ 2. Revising the heading of paragraph 

(h). 

■ 3. Adding paragraph (h)(1)(iii). 

The revisions and addition read as 

follows: 

§ 1.1502–22 Consolidated capital gain and 

loss. 

* * * * * 

(b) * * * 

(4) Special rules—(i) Short years in 

connection with intercompany 

transactions to which section 381(a) 

applies. If a member distributes or 

transfers assets in an intercompany 

transaction to which section 381(a) 

applies, see § 1.1502–76(b)(2)(i). 

* * * * * 

(h) Effective/applicability date— 

(1) * * * 

(iii) Paragraph (b)(4)(i) of this section 

applies to consolidated return years 

beginning on or after the date these 

regulations are published as final 

regulations in the Federal Register. For 

transactions occurring before the date 

these regulations are published as final 

regulations in the Federal Register, see 

§ 1.1502–22(b) as contained in 26 CFR 

part 1, revised as of April 1 preceding 

the date these regulations are published 

as final regulations in the Federal 

Register. 

* * * * * 

§ 1.1502–28 [Amended] 

■ Par. 7. Section 1.1502–28 is amended 

in paragraph (b)(11) by removing 

‘‘§ 1.1502–76(b)(1)(ii)(B)’’ and adding 

‘‘§ 1.1502–76(b)(1)(ii)(A)(2)’’ in its place. 

■ Par. 8. Section 1.1502–76 is amended: 

■ 1. By adding a sentence at the end of 

paragraph (b)(1)(i). 

■ 2. By revising paragraphs (b)(1)(ii)(A) 

and (B). 

■ 3. By adding paragraph (b)(1)(ii)(D). 

■ 4. By adding a sentence at the end of 

paragraph (b)(2)(i). 

■ 5. By revising paragraph 

(b)(2)(ii)(C)(9). 

■ 6. By removing the last sentence of 

paragraph (b)(2)(iii). 

■ 7. By removing the last sentence of 

paragraph (b)(2)(v). 

■ 8. In paragraph (b)(2)(vi)(C) by 

removing ‘‘paragraph (b)(2)(v)’’ and 

adding ‘‘paragraph (b)(2)(vi)’’ in its 

place. 

■ 9. By revising paragraph (b)(3). 

■ 10. By adding a sentence at the end of 

paragraph (b)(4). 

■ 11. By adding Examples 8, 9, and 10 

to paragraph (b)(5). 

■ 12. By revising paragraph (b)(6). 

The revisions and additions read as 

follows: 

§ 1.1502–76 Taxable year of members of 

group. 

* * * * * 

(b) * * * 

(1) * * * 

(i) * * * If a corporation (S) becomes 

or ceases to be a member in a stock 

disposition or purchase for which an 

election under section 336(e) or section 

338 is made, paragraphs (b)(1)(ii), 

(b)(2)(ii), and (b)(2)(iii) of this section do 

not apply to the transaction. 

(ii) * * * 

(A) In general—(1) End of the day 

rule. If S becomes or ceases to be a 

member during a consolidated return 

year, S’s tax year ends, and (except as 

provided in paragraph (b)(1)(ii)(A)(2) or 

paragraph (b)(1)(ii)(B) of this section) for 

purposes of determining the period in 

which S must report an item of income, 

gain, deduction, loss, or credit, S is 

treated as becoming or ceasing to be a 

member at the end of the day on which 

its status as a member changes (end of 

the day rule). 

(2) Next day rule. If an extraordinary 

item (as defined in paragraph 

(b)(2)(ii)(C) of this section) results from 

a transaction that occurs on the day of 

S’s change in status as a member, but 

after the event resulting in the change, 

and the item would be taken into 

account by S on that day, the 

transaction resulting in the 

extraordinary item is treated as 

occurring at the beginning of the 

following day for purposes of 

determining the period in which S must 

report the item (next day rule). The next 

day rule does not apply to any 

extraordinary item that becomes 


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includible or deductible simultaneously 

with the event that causes the change in 

S’s status. 

(B) Special rules for former S 

corporations—(1) Beginning of the day 

rule. If an election under section 1362(a) 

is in effect for S immediately before S 

becomes a member, S is treated as 

becoming a member at the beginning of 

the day the termination of its election 

under section 1362(a) is effective 

(termination date), and S’s taxable year 

ends at the end of the day preceding the 

termination date. See § 1.1361–5(a)(3) 

for the treatment of certain qualified S 

corporation subsidiaries. 

(2) Previous day rule. If an 

extraordinary item (as defined in 

paragraph (b)(2)(ii)(C) of this section) 

results from a transaction that occurs on 

the termination date, but before or 

simultaneously with the event resulting 

in the termination of S’s election under 

section 1362(a), and the item would be 

taken into account by S on that day, the 

transaction resulting in the 

extraordinary item is treated as 

occurring at the end of the previous day 

for purposes of determining the period 

in which S must report the item 

(previous day rule). See § 1.1361–5(a)(3) 

for the treatment of certain qualified S 

corporation subsidiaries. 

* * * * * 

(D) Coordination with sections 382 

and 1374. If the day of S’s change in 

status is also the date of an ownership 

change for purposes of section 382, the 

rules and principles of this section 

apply in determining the treatment of 

any item or asset for purposes of section 

382(h). Accordingly, if the day of S’s 

change in status is also a change date, 

the determination of net unrealized 

built-in gain or loss will reflect the 

application of both the end of the day 

rule and the next day rule, to the extent 

each applies. Moreover, items 

includible in the taxable year that ends 

as a result of S’s change in status are not 

treated as occurring in the recognition 

period described in section 382(h)(7)(A), 

and items includible in the taxable year 

that begins as a result of S’s change in 

status are treated as occurring in the 

recognition period. If S ceases to be a 

corporation subject to the tax imposed 

by section 1374 upon becoming a 

member of a consolidated group, or if S 

elects to be a corporation that is subject 

to such tax for its first separate return 

year after ceasing to be a member, S’s 

items of recognized built-in gain or loss 

for purposes of section 1374 will 

include only the amounts reported on 

S’s separate return (including items 

reported on that return under the 

previous day rule or the next day rule). 

* * * * * 

(2) * * * 

(i) * * * If a member distributes or 

transfers assets in an intercompany 

transaction to which section 381(a) 

applies, a short taxable year of the 

distributor or transferor corporation is 

not taken into account either for 

purposes of determining the taxable 

years to which any tax attribute of the 

distributor or transferor corporation may 

be carried or for purposes of 

determining the taxable years in which 

an adjustment under section 481(a) is 

taken into account. 

(ii) * * * 

(C) * * * 

(9) Any compensation-related 

deduction in connection with S’s 

change in status (including, for 

example, a deduction for fees for 

services rendered in connection with S’s 

change in status and for bonus, 

severance, and option cancellation 

payments made in connection with S’s 

change in status); 

* * * * * 

(3) Anti-avoidance rule. If any person 

acts with a principal purpose contrary 

to the purposes of this paragraph (b) to 

substantially reduce the federal income 

tax liability of any person (including by 

modifying an existing contract or other 

agreement in anticipation of a change in 

S’s status to shift an item between the 

taxable years that end and begin as a 

result of S’s change in status), 

adjustments must be made as necessary 

to carry out the purposes of this section. 

(4) * * * In addition, if S ceases to 

exist in the same consolidated return 

year in which S becomes a member, the 

due date for filing S’s separate return 

shall be determined without regard to 

S’s ceasing to exist in that year. 

(5) * * * 

Example 8. Allocation of certain amounts 

that become deductible on the day of S’s 

change in status—(a) Facts. P purchases all 

of the stock of S, an accrual-basis, standalone C corporation, on June 30 pursuant to 

a stock purchase agreement. At the time of 

the stock purchase, S has outstanding 

nonqualified stock options issued to certain 

employees. The options did not have a 

readily ascertainable fair market value when 

granted, and the options do not provide for 

a deferral of compensation (as defined in 

§ 1.409A–1(b)). Under the option agreements, 

S is obligated to pay its employees certain 

amounts in cancellation of their stock 

options upon a change in control of S. P’s 

purchase of S’s stock causes a change in 

control of S, and S’s obligation to make 

option cancellation payments to its 

employees becomes fixed and determinable 

upon the closing of the stock purchase. 

Several days after the closing of the stock 

purchase, S pays its employees the amounts 

required under the option agreements. 

(b) Analysis. P’s purchase of S’s stock 

causes S to become a member of the P group 

at the end of the day on June 30. Under 

paragraph (b)(2)(ii)(C)(9) of this section, a 

deduction arising from S’s liability to pay its 

employees in cancellation of their stock 

options in connection with S’s change in 

status is an extraordinary item that cannot be 

prorated and must be allocated to June 30. 

The next day rule is inapplicable to this 

deduction because S’s liability to pay its 

employees becomes deductible on the day of 

S’s change in status simultaneously with the 

event that causes S’s change in status. 

Consequently, a deduction for the option 

cancellation payments must be reported 

under the end of the day rule on S’s tax 

return for the period ending June 30. 

(c) Success-based fees. The facts are the 

same as in paragraph (a) of this Example 8, 

except that S also engages a consulting firm 

to provide services in connection with P’s 

purchase of S’s stock. Under the terms of the 

engagement letter, S’s obligation to pay for 

these services is contingent upon the 

successful closing of the stock purchase. The 

stock purchase closes successfully, and S’s 

obligation to pay its consultants becomes 

fixed and determinable at closing. To the 

extent S’s payment of a success-based fee to 

its consultants is otherwise deductible, this 

item is an extraordinary item that cannot be 

prorated and must be reported under the end 

of the day rule on S’s return for the period 

ending June 30. (See paragraph (b)(2)(ii)(C)(9) 

of this section.) The next day rule is 

inapplicable to the deduction because S’s 

liability to pay its consultants becomes 

deductible on the day of S’s change in status 

simultaneously with the event that causes S’s 

change in status. 

(d) Unwanted assets. The facts are the 

same as in paragraph (a) of this Example 8, 

except that, after closing on June 30, S sells 

to an unrelated party certain assets used in 

S’s trade or business that are not wanted by 

the P group. Gain or loss on the sale of these 

assets is an extraordinary item that results 

from a transaction that occurs on the day of 

S’s change in status, but after the event 

resulting in the change. Consequently, under 

the next day rule, the gain or loss must be 

reported on S’s tax return for the period 

beginning July 1. 

Example 9. Redemption that causes a 

change in status—(a) Facts. P owns 80 shares 

of S’s only class of outstanding stock, and a 

person whose ownership of S stock is not 

attributed to P under section 302(c) owns the 

remaining 20 shares. On June 30, S 

distributes land with a basis of $100 and a 

fair market value of $140 to P in redemption 

of all of P’s stock in S. 

(b) Analysis. As a result of the redemption, 

S ceases to be a member of P’s consolidated 

group on June 30. S will recognize $40 of 

gain under section 311(b) on the distribution 

of the land to P. The next day rule is 

inapplicable because S’s gain becomes 

includible on the day of S’s change in status 

simultaneously with the event that causes S’s 

change in status. Consequently, S’s gain must 

be reported under the end of the day rule in 

its taxable year ending June 30, during which 


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S was a member of the P group. Under 

§ 1.1502–32(b)(2)(i), P’s basis in its S stock is 

increased to reflect S’s $40 gain immediately 

before the redemption of S’s stock. 

(c) Partial redemption. The facts are the 

same as in paragraph (a) of this Example 9, 

except that S distributes the land to P in 

redemption of 20 shares of P’s stock in S. 

Thus, immediately after the redemption, P 

owns 75% (60 shares/80 shares) of S’s 

outstanding stock, and S’s minority 

shareholder owns 25% (20 shares/80 shares). 

The redemption does not satisfy the 

requirements of section 302(b) and is treated 

under section 302(d) as a distribution to 

which section 301 applies. The end of the 

day rule does not apply for purposes of 

determining whether P and S are members of 

the same consolidated group immediately 

after the redemption. Because P owns only 

75% of S’s stock immediately after the 

redemption, the distribution is not an 

intercompany distribution described in 

§ 1.1502–13(f)(2)(i). Thus, P may not exclude 

any amount of the distribution that is a 

dividend, and P’s basis in S’s stock is not 

reduced under § 1.1502–32(b)(2)(iv). P may 

be entitled to a dividends received deduction 

under section 243(c) (but see section 

1059(e)). For the reasons discussed in 

paragraph (b) of this Example 9, S’s gain 

under section 311(b) must be reported under 

the end of the day rule in S’s taxable year 

ending June 30, during which S was a 

member of the P group. 

(d) Distribution of loss property. The facts 

are the same as in paragraph (a) of this 

Example 9, except that the land distributed 

by S to P has a fair market value of $60 rather 

than $140. The end of the day rule applies 

for purposes of determining the taxable year 

in which S must take into account its 

realized loss on the distribution of the land. 

Thus, under the end of the day rule, S’s loss 

on the distribution of the land, which occurs 

simultaneously with S’s ceasing to be a 

member, is taken into account in S’s taxable 

year that ends as a result of the redemption. 

However, the end of the day rule does not 

apply for other purposes; for example, the 

rule does not apply in determining whether 

the transaction is an intercompany 

distribution or in determining the attributes 

(as defined in § 1.1502–13(b)(6)) of the loss. 

Therefore, because S is not a member 

immediately after the distribution, S’s loss on 

the distribution is not recognized under 

section 311(a). Under the end of the day rule, 

the loss is taken into account as a noncapital, 

nondeductible expense on the P group’s 

consolidated return, and under § 1.1502– 

32(b)(1)(i), P’s basis in its S stock is 

decreased by $40 immediately before S 

leaves the group. 

Example 10. Extraordinary item of S 

corporation—(a) Facts. On July 1, P 

purchases all the stock of S, an accrual-basis 

corporation with an election in effect under 

section 1362(a). Prior to the sale, S had 

engaged a consulting firm to find a buyer for 

S’s stock, and the consulting firm’s fee was 

contingent upon the successful closing of the 

sale of S’s stock. 

(b) Analysis. To the extent S’s payment of 

the success-based fee to its consultants is 

otherwise deductible, this item is an 

extraordinary item (see paragraph 

(b)(2)(ii)(C)(9) of this section) that becomes 

deductible on July 1 simultaneously with the 

event that terminates S’s election as an S 

corporation. Under paragraph (b)(1)(ii)(B)(2) 

of this section, S’s obligation to pay the fee 

is treated as becoming deductible on June 30 

under the previous day rule. 

(6) Effective/applicability date. 

Paragraphs (b)(2)(i) and (b)(4) of this 

section apply to consolidated return 

years beginning on or after the date 

these regulations are published as final 

regulations in the Federal Register. 

Otherwise, this paragraph (b) applies to 

corporations becoming or ceasing to be 

members of consolidated groups on or 

after the date these regulations are 

published as final regulations in the 

Federal Register. 

* * * * * 

John Dalrymple, 

Deputy Commissioner for Services and 

Enforcement. 

[FR Doc. 2015–05123 Filed 3–5–15; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF JUSTICE 

28 CFR Part 15 

[Docket No. CIV 150; AG Order No. 3504– 

2015] 

RIN 1105–AB37 

Determination That an Individual Shall 

Not Be Deemed an Employee of the 

Public Health Service 

AGENCY: Department of Justice. 

ACTION: Proposed rule. 

SUMMARY: The proposed rule proposes 

criteria and a process by which the 

Attorney General or designee may 

determine that an individual shall not 

be deemed an employee of the Public 

Health Service for purposes of coverage 

under the Federal Tort Claims Act. 

DATES: Written comments must be 

postmarked on or before May 5, 2015, 

and electronic comments must be sent 

on or before midnight Eastern time May 

5, 2015. 

ADDRESSES: To ensure proper handling 

of comments, please reference ‘‘Docket 

No. CIV 150’’ on all written and 

electronic correspondence. Written 

comments being sent via regular or 

express mail should be sent to James G. 

Touhey, Jr., Director, Torts Branch, Civil 

Division, Department of Justice, Room 

8098N National Place Building, 1331 

Pennsylvania Avenue NW., Washington, 

DC 20530. Comments may also be sent 

electronically through http://

www.regulations.gov using the 

electronic comment form provided on 

that site. An electronic copy of this 

document is also available at the 

http://www.regulations.gov Web site. 

The Department will accept attachments 

to electronic comments in Microsoft 

Word, WordPerfect, Adobe PDF, or 

Excel file formats only. The Department 

will not accept any file formats other 

than those specifically listed here. 

Please note that the Department is 

requesting that electronic comments be 

submitted before midnight Eastern Time 

on the day the comment period closes 

because http://www.regulations.gov 

terminates the public’s ability to submit 

comments at midnight Eastern Time on 

the day the comment period closes. 

Commenters in time zones other than 

Eastern Time may want to consider this 

so that their electronic comments are 

received. All comments sent via regular 

or express mail will be considered 

timely if postmarked on the day the 

comment period closes. 

FOR FURTHER INFORMATION CONTACT: 

James G. Touhey, Jr., Director, Torts 

Branch, Civil Division, Department of 

Justice, Washington, DC 20530, (202) 

616–4400. 

SUPPLEMENTARY INFORMATION: 

Posting of Public Comments. Please 

note that all comments received are 

considered part of the public record and 

made available for public inspection 

online at http://www.regulations.gov 

and in the Department’s public docket. 

Such information includes personal 

identifying information (such as your 

name, address, etc.) voluntarily 

submitted by the commenter. 

You are not required to submit 

personal identifying information in 

order to comment on this rule. 

Nevertheless, if you want to submit 

personal identifying information (such 

as your name, address, etc.) as part of 

your comment, but do not want it to be 

posted online or made available in the 

public docket, you must include the 

phrase ‘‘PERSONAL IDENTIFYING 

INFORMATION’’ in the first paragraph 

of your comment. You must also place 

all the personal identifying information 

you do not want posted online or made 

available in the public docket in the first 

paragraph of your comment and identify 

what information you want redacted. 

If you want to submit confidential 

business information as part of your 

comment, but do not want it to be 

posted online or made available in the 

public docket, you must include the 

phrase ‘‘CONFIDENTIAL BUSINESS 

INFORMATION’’ in the first paragraph 

of your comment. You must also 

prominently identify confidential 

business information to be redacted 


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