Source: https://www.federalregister.gov/documents/2009/12/28/E9-30547/apportionment-of-tax-items-among-the-members-of-a-controlled-group-of-corporations
Timestamp: 2018-02-19 19:03:15
Document Index: 797942930

Matched Legal Cases: ['§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', 'art 1', '§\u20091', '§\u20091', 'art 1', '§\u20091', '§\u20091', 'art 1', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', 'art 1', '§\u20091', '§\u20091', '§\u20091', '§\u20091', '§\u20091', 'art 1']

A Rule by the Internal Revenue Service on 12/28/2009
68530-68537 (8 pages)
TD 9476
1545-BG39
1545-BI62
https://www.federalregister.gov/d/E9-30547 https://www.federalregister.gov/d/E9-30547
Effective Date: These regulations are effective on December 28, 2009.
Applicability Date: For dates of applicability, see §§ 1.1502-43(e), 1.1502-47(t), 1.1561-1(d), 1.1561-2(f) and 1.1561-3(d). In accordance with section 7805(b)(1), respective portions of this Treasury decision are applicable to consolidated Federal income tax returns due on or after December 21, 2009 or to taxable years beginning on or after December 21, 2009, as the case may be.
On December 22, 2006, the IRS and the Treasury Department published several temporary regulations, including temporary regulations under sections 1502 and 1561. See TD 9304 (71 FR 76904), 2007-1 CB 423. Also on December 22, 2006, the IRS and the Treasury Department issued a notice of proposed rulemaking cross-referencing those temporary regulations. See REG-161919-05 (71 FR 76955), 2007-1 CB 463. For administrative reasons, these regulations were relocated in REG-113688-09. See TD 9451 (74 FR 25147), 2009-23 IRB 1060.
On December 26, 2007, the IRS and the Treasury Department published several temporary regulations, including an additional temporary regulation under section 1561. See TD 9369 (72 FR 72929), 2008-6 IRB 394. Also on December 26, 2007, the IRS and the Treasury Department issued a notice of proposed rulemaking cross-referencing those temporary regulations. See REG-104713-07 (72 FR 72970), 2008-6 IRB 409.
This Treasury decision adopts the proposed regulations (§§ 1.1502-43, 1.1502-47, 1.1561-0, 1.1561-1, 1.1561-2 and 1.1561-3) with no substantive changes. However, this Treasury decision makes clarifying changes to §§ 1.1561-2 and 1.1561-3. These changes are discussed in the following portion of this preamble.
1. Only the Positive Taxable Income or Positive Alternative Minimum Taxable Income of the Component Members of a Controlled Group of Corporations Shall Be Combined for Purposes of Determining the Amount of Start Printed Page 68531the Additional Tax Imposed by Section 11(b)(1) and the Reduction in the Alternative Minimum Tax Exemption Amount Under Section 55(d)(3), Respectively.
Section 1561(a) provides that in computing the amount of additional tax imposed by section 11(b)(1) (the additional tax), and the phase-out of the alternative minimum tax exemption amount under section 55(d)(3) (the exemption amount), the component members of a controlled group of corporations (as defined in section 1563) shall, as a first step, combine their taxable incomes (or alternative minimum taxable incomes) for their tax years that include the same December 31st date. This taxable income (or alternative minimum taxable income) is for the entire tax year of a component member, even if it was not a member of the group for each day of that tax year. In the case of the determination of the additional tax, the calculation is limited to the taxable incomes of those component members to which any part of the tax bracket amounts are apportioned.
The question has arisen whether a component member that incurs a loss for a tax year may apply that loss to reduce the amount of the combined taxable income (or combined alternative minimum taxable income) of the controlled group for purposes of determining the amount of the additional tax or the reduction in the exemption amount, respectively. This Treasury decision clarifies that, for these purposes, only the positive taxable incomes (or positive alternative minimum taxable incomes) of those component members can be combined.
Only if the members of an affiliated group of corporations, as defined in section 1504, elect to file a consolidated return, as defined in section 1502, may these members offset their income and losses in determining their consolidated Federal income tax liability. See, for example, Woolford Realty Co. v. Rose, 286 U.S. 319 (1932). Since the members of a controlled group have not elected to file a consolidated return (even if such controlled group meets the section 1504 definition of an affiliated group), they may not offset their income and losses in determining their combined Federal income tax liability. Hence, they cannot offset such income and losses to determine their combined additional tax liability or their combined alternative minimum taxable income for purposes of determining the reduction in the exemption amount.
2. A Component Member That Has a Short Taxable Year That Does Not Include a December 31st Date Calculates Its Additional Tax and Alternative Minimum Tax Liability on Just Its Own Income.
Section 1561(b) and § 1.1561-2(e) provide rules for apportioning the tax bracket amounts and accumulated earnings credit to a member with a short taxable year that does not include a December 31st date (a short-year member). However, § 1.1561-2(e) does not provide guidance to a short-year member for determining its additional tax liability. This Treasury decision clarifies that such a member determines its additional tax liability on its own income for such short taxable year. Further, such income is not combined with the taxable incomes of the other component members of the same controlled group for purposes of determining the additional tax liability of such other component members.
In addition, for purposes of a short-year member determining its alternative minimum tax liability, this Treasury decision includes a reference to section 443(d). Section 443(d) provides that if a taxpayer has a return of less than 12 months (whether or not the tax year of that taxpayer includes a December 31st date), its alternative minimum tax liability is determined on an annualized basis.
3. Clarification of the Rules Under Which an Apportionment Plan Is Terminated.
Section 1.1561-3(c)(3) provides the circumstances under which an apportionment plan is terminated. Paragraphs (iii) and (iv) of § 1.1561-3(c)(3) of the proposed regulations provided:
It is often not feasible for the members of a controlled group to know for the current tax year whether a corporation will or will not be a component member of such group for the succeeding tax year. Accordingly, this Treasury decision clarifies these paragraphs by rewriting them to refer to the previous tax year and the current tax year, instead of the succeeding tax year. In addition, this Treasury decision clarifies that the fact that a corporation is joining or leaving a consolidated group, when such consolidated group is treated collectively as constituting one component member of the controlled group, will not serve to affect the ongoing status of such controlled group, provided that, after that corporation has either left or joined such consolidated group, such consolidated group remains in existence within the meaning of § 1.1502-75(d).
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. Therefore, 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, the notices of proposed rulemaking preceding these regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.
Paragraph 1. The authority citation for part 1 is amended by adding entries in numerical order and removing the entries for §§ 1.1502-43T and 1.1561-2T to read as follows:
Section 1.1502-43 also issued under 26 U.S.C. 1502. * * *
Section 1.1561-2 also issued under 26 U.S.C. 1561. * * *
(d) Consolidated accumulated earnings credit—(1) In general. [Reserved]
(2) Special rule if a consolidated group is part of a controlled group. If a consolidated group is treated collectively as being one component member of a controlled group, or if each member of a consolidated group is treated as being a separate 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/applicability date. This section applies to any consolidated Federal income tax return due (without extensions) on or after December 21, 2009. However, a consolidated group may apply this section to any consolidated Federal income tax return filed on or after December 21, 2009. For returns due before December 21, 2009, see § 1.1502-43T as contained in 26 CFR part 1 in effect on April 1, 2009.
(s) Filing requirements—(1) In general. To file a consolidated income tax return for a life-nonlife consolidated group, the common parent shall—
(i) File the applicable consolidated corporate income tax return: a Form 1120-L, “U.S. Life Insurance Company Income Tax Return,” where the common parent is a life insurance company; a Form 1120-PC, “U.S. Property and Casualty Insurance Company Income Tax Return,” where the common parent is an insurance company, other than a life insurance company; or a Form 1120, “U.S. Corporation Income Tax Return,” where the common parent is any other type of corporation;
(ii) Indicate clearly on the face of this return that such corporate tax return is a life-nonlife return;
(iii) Show any set offs required by paragraphs (g), (m), and (n) of this section;
(iv) Report separately the nonlife consolidated taxable income or loss, determined under paragraph (h) of this section, on a Form 1120 or 1120-PC (whether filed by the common parent or as an attachment to the consolidated return), as the case may be, of all nonlife members of the consolidated group; and
(v) Report separately the consolidated partial Life Insurance Company Taxable Income (as defined by paragraph (d)(3) of this section), determined under paragraph (j) of this section, on a Form 1120-L (whether filed by the common parent or as an attachment to the consolidated return), of all life members of the consolidated group.
(2) Cross reference. See § 1.1502-75(j), regarding the inclusion in a corporate tax return of the required statements and schedules for subsidiaries.
(t) Effective/applicability date. Paragraph (s) of this section applies to any consolidated Federal income tax return due (without extensions) on or after December 21, 2009. However, a consolidated group may apply paragraph (s) of this section to any consolidated Federal income tax return filed on or after December 21, 2009. For returns due before December 21, 2009, see § 1.1502-47T as contained in 26 CFR part 1 in effect on April 1, 2009.
This section lists the table of contents for §§ 1.1561-1 through 1.1561-3.
Allocation of the section 1561(a) tax items.
§ 1.1561-0T
(a) In general—(1)—Limitation. Part II (section 1561 and following) of subchapter B of chapter 6 of the Internal Revenue Code (Code) (part II) provides rules to limit the amounts of certain specified tax benefit items of component members of a controlled group of corporations for their tax years which include a particular December 31st date, or, in the case of a short taxable year member (see section 1561(b) and § 1.1561-2(e)), the date substituted for that December 31st date. The amount of the tax items enumerated in section 1561(a) available to any of the component members of a controlled group shall be determined for purposes of subtitle A of the Code as if the component members were a single corporation. Certain other tax items also set forth in section 1561(a) (for example, 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 positive taxable income or positive alternative minimum taxable income of the component members of such a group and then allocating the amount of such items among those members.
(2) Definitions. For certain definitions (including the definition of a controlled Start Printed Page 68533group of corporations and a component member) and special rules for purposes of this part II see section 1563.
(b) Special rules—(1) S Corporation. 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) 52-53-week taxable year. 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.
(d) 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 § 1.1561-1T as contained in 26 CFR part 1 in effect on April 1, 2009.
(2) Apportionment—(i) General rule. Any additional tax determined under paragraph (a)(1) of this section shall be apportioned among such members in the same manner as the corresponding tax bracket of section 11(b)(1) is apportioned. For rules to apportion the section 11(b)(1) tax brackets among the component members of a controlled group, see § 1.1561-3(b) or (c).
(i) Facts. A controlled group of corporations consists of three members: X, Y and Z. X owns all the stock of Y and Z. Each corporation files its separate return on a calendar year basis. For calendar year 2007, the component members of the controlled group have an apportionment plan in effect. The members apportioned 80% of the 15 percent tax-bracket amount ($40,000) to X and the remaining 10% ($10,000) to Y. The members apportioned 100% of the 25 percent tax-bracket amount ($25,000) to Y. However, these members have not adopted the FIFO method for apportioning the additional taxes. Therefore, they must follow the proportionate method. For 2007, X had taxable income (TI) of $40,000, Y had TI of $60,000 and Z had TI of $100,000. Thus the total TI of the group is $200,000.
(2) The tax-benefit amount inuring to the group from using the 15 percent tax bracket. Start Printed Page 68534A tax benefit inures to those members of the group who avail themselves of the 15 percent tax bracket. That tax benefit results from having the first $50,000 of its income taxed at the 15 percent tax rate, instead of at the 34 percent tax rate. Thus, the tax-benefit amount inuring to this group from using the 15 percent tax bracket is $9,500 ($17,000 (34% × $50,000) minus $7,500 (15% × $50,000)).
(i) Facts. The facts are the same as in Example 1, except that on August 31, 2007, X of the X-Y-Z controlled group sold all of the stock of Z to M of the M-N controlled group, a pair of corporations unrelated to the X-Y group. Pursuant to the terms of the sales agreement, the members of the M-N group properly notified the members of the X-Y group on a timely basis that Z's taxable income for its 2007 tax year, as based on the group's December 31st testing date, was $100,000.
(i) Facts. The facts are the same as in Example 2, except that in 2012, pursuant to an IRS audit, Z's 2007 taxable income was re-determined. It was adjusted by an income increase of $10,000. Pursuant to the terms of the sales agreement, the members of the M-N group timely notified the members of the X-Y group of Z's income adjustment.
The facts are the same as in Example 1, except that the members elected in their apportionment plan to adopt the FIFO method for apportioning the additional tax. Under the FIFO method, the 5 percent additional tax amount of $5,000 will be apportioned entirely to those members who would benefit from using the 15 percent tax bracket, by reason that $5,000 of the group's Start Printed Page 68535additional tax is less than $9,500, which is the full tax-benefit amount inuring to a controlled group from having a 15 percent tax rate applied to the full income bracket subject to that rate. Since X derived 80 percent of the group's tax benefit by its use of the 15 percent tax bracket, its share of the group's 5 percent additional tax is $4,000 (80% × $5,000), and Y's share of the group's 5 percent additional tax is, therefore, $1,000, which is the remaining amount of the group's 5 percent additional tax, attributable to the 15 percent tax bracket.
(2) Apportionment. Any reduction to the exemption amount shall be apportioned to the component members of a controlled group in the same manner that the amount of the exemption (provided in section 55(d)(2)) to the alternative minimum tax was allocated under section 1561(a). For rules to apportion the section 55(d)(2) exemption amount among the component members of a controlled group, see § 1.1561-3(b) or (c).
(i) Facts. A controlled group of corporations consists of three members: X, Y and Z. X owns all of the stock of Y and Z. Each corporation files its separate return on a calendar year basis. For calendar year 2007, the component members of this controlled group have an apportionment plan in effect. The group has chosen to apportion the entire section 55(d)(2) exemption amount of $40,000 to Z. For 2007, X had alternative minimum taxable income (AMTI) of $40,000, Y had AMTI of $60,000 and Z had AMTI of $100,000. Thus the total AMTI of the group is $200,000.
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 tax-bracket 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 parent-subsidiary 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.
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 S1, S2 and S3 (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 S1 and S2 are each entitled to 40% of the 15 percent tax-bracket amount ($20,000), and P and S3 are each entitled to 10% of the 15 percent tax-bracket amount ($5,000). On May 31, 2007, S1 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, S2 liquidates and therefore files a return for the short taxable year beginning on January 1, 2007 and ending on July 31, 2007. P and S3 each file a return for their 2007 calendar tax years.
(ii) Apportionment of the 15 percent tax bracket to S1 for its short taxable year. On Start Printed Page 68536May 31, 2007, S1 is a component member of the P group composed of P, S1, S2 and S3. Pursuant to paragraph (e)(1) of this section, the group may not apportion any amount of the 15 percent tax bracket to S1's short taxable year ending on June 30, 2007. Rather, S1 is entitled to exactly 1/4 of such bracket amount, or $12,500.
(iii) Apportionment of the 15 percent tax bracket to S2 for its short taxable year. On July 31, 2007, S2 is a component member of the P group composed of P, S2 and S3. Pursuant to paragraph (e)(1) of this section, the group may not apportion any amount of the 15 percent tax bracket to S2's short taxable year ending on June 30, 2007. Rather, S2 is entitled to exactly 1/3 of such bracket amount, or $16,667.
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 S2 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, S2 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 S2 had liquidated.
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.
(a) Filing of form—(1) In general. For each tax year that a corporation is a component member of the same controlled group of corporations on a December 31st (its testing date), or, in the case of a short-year member (see section 1561(b) and § 1.1561-2(e)), the date substituted for that December 31st date (its testing date), such corporation and all the other component members of such group each must file the required form (that is, Schedule O or any successor form) with the Federal income tax return for that component member's tax year that includes a particular testing date. Each such corporation must file that form with its return whether or not—
(ii) A consolidated group is treated collectively as one component member of such group. This treatment occurs even where a member of that consolidated group has joined or left the group, if after such corporation joins or leaves the consolidated group, that group remains in existence, pursuant to § 1.1502-75(d); and
(i) Each member of such group consents to the termination of such a plan for the current December 31st by Start Printed Page 68537checking the box to that effect on its form;
(d) 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 § 1.1561-3T as contained in 26 CFR part 1 in effect on April 1, 2009.
[FR Doc. E9-30547 Filed 12-22-09; 4:15 pm]